We may be headed toward another mortgage crisis, so says Keith Jurow, a real estate analyst who writes for MarketWatch. “These [subprime] mortgages are still dangerous and could soon undermine the housing recovery.”
Wikipedia reports that the last subprime mortgage crisis occurred between 2007 and 2010, and “had severe, long-lasting consequences for the U.S. and European economies.”
Experts believe that the 2007 debacle, which ended in 2010, was the result of a number of factors converging. These included: the dotcom-bubble-burst-led recession; mortgage lending industry hubris, saying that geographic distribution created sufficient diversification; excessive appetites for riskier deals by lenders and investors wanting higher returns; and irresponsible consumer demand for larger mortgages and multiple homes.
Investopedia reported, “The end result was increased foreclosure activity, large lenders and hedge funds declaring bankruptcy, and fears regarding further decreases in economic growth and consumer spending.”
Jurow believes future problems will come because the loan problem from the “bubble period” is still lurking. That is, there are far too many unpaid loans in this country. In November 2007 — the peak of the buying madness — researcher Black Box Logic’s database showed 10.6 million loans outstanding with a total balance of $2.43 trillion. (Black Box was sold to Moody in late 2015.)
And the problem is getting worse. Fitch Ratings data shows that repayment delinquency rates dramatically increased between 2012 and 2014. The data represents delinquent borrowers who have not paid their mortgages for more than five years. Prior to 2014, delinquency rates tended to hover below 4 percent, in most of the top 10 worst offending states (Hawaii, New Jersey, New York, Washington D.C., Florida, Nevada, North Dakota, Massachusetts, Vermont and Oregon).
While Colorado is not included in the top 10 worst states for delinquencies, a major price change in one area typically affects other regions, albeit to a lesser degree.
Since 2014 the rates have climbed dramatically. By 2018, the lowest rate in those highly delinquent states climbed to 26 percent and have gone as high as 67 percent. To put it another way, one in four people — or as many as 67 out of 100 — are not paying their mortgages in these states. That’s a lot of delinquency.
Jurow said, “According to the Securities Industry and Financial Markets Association (SIFMA), there are more than $800 billion of these bubble-era loans still outstanding as of the third quarter of 2018. If roughly 20 percent of them are seriously delinquent — many for five years or more — isn’t that a cause for concern?”
He goes on to describe “solid evidence” that most of these delinquencies will eventually have to be liquidated, which means there are huge losses looming on the horizon that will affect all of us.
There are several things you and I can do today to protect ourselves, should Jurow’s predictions for 2019 come true. The key is to act now for the long term.
First, try not to buy a home with less than 20 percent down. That will offer you some protection should house prices decline. (Even though it would be a little depressing to lose equity.) If you don’t plan to move in the next 20 years, you may be able to get away with less down. However, never buy with the expectation that prices will go up substantially. Consider any gains a bonus.
Another thing you can do is to take a financial management course to help you design a stronger financial position for yourself. Here are a few options:
• Sound Mind Investing
• Dave Ramsey
• Managing God’s Money
• Crown financial
All of these resources will teach money management principles, including how to minimize debt such as credit card and mortgage debt. While many blame the banks or investors or others for the mortgage crisis, the reality is many of us live with too much debt, as evidenced by this data from Value Penguin:
- Slightly more than 41 percent of all households carry some sort of credit card debt.
- As of April 2018, the average credit card debt for these card-carrying households is $9,333.
- Households with the lowest net worth (zero or negative) hold an average of $10,308 in credit card debt.
- Total outstanding U.S. Consumer debt is $3.9 trillion. Total revolving debt is $1.03 trillion
- Approximately half of Colorado residents carry student loan debt with an average of $26,530
Even though Colorado had some protection from the last downturn because of a strong job market and lower (at the time) real estate prices, personal debt is a problem here. According to ConsumerCredit.com, “Colorado ranks second in the nation for the highest average credit card debt per resident, at $5,625.”
And even though unemployment statistics are relatively positive for Colorado (lower than 4 percent) and our housing market remains strong mainly due to a continued net increase in population growth (seventh highest in the nation last year), it is best to heed the advice of the scouts: “Be prepared.”
If you have some ideas to add on how to be prepared, please leave a comment.