In the last few weeks, information came out that the fastest growing bank asset of 2017 was the Non-QM. This innocent sounding acronym stands for Non-Qualified Mortgage. These are mortgages that banks make to borrowers who are not able to qualify for traditional loans thanks to lack of a down payment and poor credit.
If this sounds eerily familiar, it should. The dangerous part of these NQM’s is that they are simply a new name for an old threat to world markets. They are subprime mortgages under the disguise of a different label.
Now they have again become among the most rapidly growing forms of investments for American banks. In the last year, the volume of subprime mortgages has literally doubled. It looks certain it will double in 2018 as well.
Ten years ago, world markets went into a viscous downward spiral in the Global Financial Crisis. You may not remember what ultimately caused both U.S. and global equity markets to meltdown. In fact a leading early contributor was the collapse of the subprime mortgage bonds and market.
It started out innocently enough with bankers in the early to middle 2000’s. They parked their own depositors’ funds into loans on overly expensive houses. The craziest part was that the borrowers were high risk and made no down payments. To call this a short-sighted and destructive practice would be a gross understatement.
The problem was made worse when other bankers created ways to package up many thousands of such subprime mortgages into enormous bonds. Bankers could then sell and trade them. The bankers were not alone in the inventive scheme.
Mortgage brokers realized enormous fees in closing such subprime loans. Next investment bankers cashed in when they sold them packaged and labeled as subprime bonds. Revered ratings agency firms (including Moody’s and Standard and Poor’s) earned fees for rating them as AAA highest investment grade possible.
These ratings assured investors that there was no risk to the subprime bonds. They provided cover for every player in the financial world to participate with an alibis. In hindsight the subprime mortgage pools were far from risk free.
Banks were simply issuing loans to borrowers whose history revealed that they would not pay their debts. Some of these loans even turned out to be fraud. The key idea was that the home values would always go up so that the buyers could sell the property and repay the loan.
After housing prices began falling in 2007, the entire house of cards collapsed towards the end of 2008. The carnage wiped out trillions of dollars in equity and investment values. Ten years later, the bankers believe that by altering the name of the investments to non-QM’s they somehow will get a different outcome.
Is Your Retirement Portfolio Prepared for the Return of Subprime Mortgages?
The appearance and rapid growth of non-Qualifying Mortgages is nothing but the return of subprime mortgages under a new and less threatening sounding name. As the category increases in size, they gain greater and more ability to wreck global markets once again. The good news is that you do not need to suffer sleepless nights over the dangerous loan bundles.
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