NY Fed Warns about Booming Subprime Mortgages, now Insured by the Government
“Astronomical” default rates and losses.
The New York Fed just warned about the ticking mortgage subprime time bombs once again being amassed, and what happens to them when home prices decline. But unlike during the last housing bust, a large portion of these time bombs are now guaranteed by the government.
Subprime mortgages are what everyone still remembers about the Financial Crisis. They blew up has home prices fell. Folks who thought they were “owners with equity” found out that they were just “renters with debt.”
And they dealt with it the best they could: forget the debt and the rent and stay until kicked out. Cumulative default rates on subprime mortgages spiked to 25% in 2007, according to the report. Banks ended up with the properties and collapsed. Mortgage backed securities based on these subprime mortgages imploded. Bond funds that held them imploded. All kinds of fireworks began. While subprime mortgages didn’t cause the Financial Crisis by themselves, they were an essential cog in a crazy machinery.
Now, the machinery is even crazier, subprime mortgages are even bigger, and mortgage-backed securities, chock-full with subprime, are hotter than ever. Only this time, the taxpayer is on the hook.
During the prior housing boom, from 2000 through 2005, government mortgage insurance programs covered less than 3% of all subprime mortgage originations, while private mortgage insurers covered over 20%.
But during the housing bust, private insurance of subprime mortgages dropped to essentially zero. And the government – through various programs by the Federal Housing Administration (FHA), the Department of Veterans Affairs (VA), and the USDA’s Rural Housing Service (RHS) – stepped in to pick up the baton, plus some, insuring subprime mortgages with a vengeance. By 2009, the government insured nearly 35% of new subprime mortgages. More recently, it still insured about 22% of new subprime mortgages.
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