Is there another mortgage crisis unfolding that could trigger an economic collapse? Yes, and it is called the non-qualifying mortgage.
Bloomberg News is out with an interesting report that examines the state of non-qualified mortgages, a loan granted to borrowers who have terrible financial records who did not qualify for conventional mortgages. There has been a surge of these products, and lenders combined roughly $18 billion of these loans into bonds in 2019 and sold them to investors, which represents a 44 percent increase from 2018.
The problem? Delinquency rates on these loans are beginning to form, accounting for as much as five percent.
Today, there are approximately $28 billion of outstanding bonds that are supported by non-qualified mortgages. Although it is a small sliver of the near $10 trillion mortgage-bond market, it is still something to keep an eye out, especially in a low-yield world.
More from Bloomberg:
And while no one is saying these bonds are in danger of defaulting any time soon, their newfound popularity does reflect the growing risk that yield-starved investors are taking to boost returns at a time when the U.S. economy is slowing. It’s similar to the way demand for junk bonds and securities backed by fast-food franchises and private credit have all surged this year. In the case of non-QM bonds, coupons on the debt can be north of 5%. A typical Fannie Mae mortgage bond sold nowadays has a coupon closer to 3.5%.
“It’s obviously disturbing this late in the cycle to see originations for these loans at the kind of level they’ve kicked up to,” said Daniel Alpert, managing partner at Westwood Capital. “The housing market is not quite ready for a big infusion of this product.
The non-QM bond market is for now, at least, way too small to cause the kind of broader disruptions that subprime bonds did when they soured en masse a decade ago. Moreover, the bonds are built to withstand tougher housing downturns than they used to be, and the borrowers aren’t as risky. The securities may face some sort of hit if the housing market weakens, but it won’t be severe, Alpert said.
“It’s not the subprime we remember from 2006 to 2007,” said Mario Rivera, managing director of the Fortress Credit Funds business, which has bought non-QM bonds. “It’s more of a second or third inning of non-QM. We’re getting the best collateral before the more aggressive lending comes in.”
But fund managers’ willingness to plow money into these securities shows how the intense suspicion that met mortgage bonds after the housing bubble burst last decade is starting to slowly fade. The subprime mortgage crisis triggered hundreds of billions of dollars of losses for investors.
File this one away for future reference and another cause of the next financial crisis.
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