Housing: Highly Leveraged Borrowers Leave the Currently Strong Economy Vulnerable
Business Week, BizzyBlog’s favorite business magazine to dislike (hence its name Biz Weak), has useful, apparently unslanted (for a change), and troubling info about the mortgage market (link requires subscription; bolds are mine):
How much leverage are buyers taking on these days? Surprisingly, the Mortgage Bankers Assn. doesn’t keep track. The best numbers come from a soon-to-be-published study provided to BusinessWeek by SMR Research Corp. of Hackettstown, N.J. The debt-research firm collected data nationally on 2 million debt-financed purchases of owner-occupied homes from 2004 and more than 600,000 through roughly May of this year. It found that 95.1% or more of the purchase price was borrowed in 38% of all transactions so far this year. That was up from 34% of sales in all of 2004. In other words, over a third of buyers have little or no equity in their homes at the time of their purchase.
Blame the leveraging trend on the easy availability of so-called piggyback loans, says Stuart A. Feldstein, SMR’s president and founder. In the past, many people made 20% downpayments to avoid paying private mortgage insurance, for which the annual premium can be half a percent of the loan amount. The insurance is required on loans of more than 80% of a home’s value that are sold to Fannie Mae (FNM) or Freddie Mac (FRE). Now, instead of paying for the (private mortgage) insurance, buyers often take out a first mortgage for 80% of the purchase price and a piggyback loan for anywhere from 10% to 20% more. SMR’s forthcoming study reveals that 48% of home purchases this year, by dollar volume, involved piggyback loans, dramatically up from 20% in 2001.
I’ve been saying for months that the overleveraged homeowner/consumer is the best reason not to break out the champagne about the currently and undeniably strong economy. The above makes it clear that though most of the (largely underreported) news has been good, the economy’s vulnerability to a cooling housing market or sharply higher overall interest rates remains very real.
An aside: If lenders are so obviously breaking their 20%-down requirements by making piggyback loans so frequently, and are willing to take on the obvious extra risk involved, why does private mortgage insurance exist?
I agree.. mortgage holders are on a pretty slippery slope. They’ve got a great deal of juggling to do. If unemployment rates go up, or if interest rates go up.
There are a number of things that could start the domino effect, that starts to tumble the economy with regards to mortgage holders.
Assuming that the level of highly leveraged mortgages is unprecendented, wouldn’t it be hard to tell the effects on the economy if a percentage of mortgage holders default on their loans?
It’s a pretty broad topic.
Financial Maturity Blog
Comment by Monty Loree — August 16, 2005 @ 12:39 am
Here’s a link to a press release on a study conducted by National City Bank:
31 Percent of the Housing Market ‘Extremely Overvalued’ According to New Economic Analysis.
Comment by Porkopolis — August 17, 2005 @ 3:19 pm