Financial Times reports that subprime mortgage bond issuance doubled in the first quarter of 2018 compared to a year ago, going from $666 million to $1.3 billion. Furthermore, it quotes a financial analyst predicting that issuance for the year will hit $10 billion, which is more than double the $4.1 billion issued last year. For context, the value of American subprime mortgages was estimated at $1.3 trillion in March 2007.
Since the financial crisis, mortgage-backed securities have been almost entirely issued by government-sponsored mortgage facilitators Freddie Mac, Fannie Mae, and Ginny Mae. And since the financial collapse, those organizations have refused to insure subprime mortgages. The Dodd-Frank regulation passed after the collapse put tight rules around subprime lending that for awhile effectively killed the practice.
But over the last couple years, specialty firms have jumped back into the subprime market, rebranding it as “noprime.” Investors hungry for bonds with higher yields have generated enough demand for those loans to be secularized, just as they were in the run-up to the financial collapse. The result is a rapidly expanding subprime mortgage market.
That subprime mortgages would seep back into the market right now is curious, given the current state of housing. The slow pace of new home construction and few existing homes for sale has led to an inventory shortage that has pushed home prices well out of reach for many low- and middle-income prospective homebuyers.
Subprime mortgages could be lucrative for some, even if it is now widely recognized that they are not a good idea in general for potential homeowners or the broader market and society.
I think the bigger question is whether subprime loans could once again become a mainstream product. What if the housing market continues to be sluggish or potential buyers have a difficult time securing conventional loans or the market suddenly heats up and lots of people want mortgages? Even with the fallout and the long recovery after the burst housing bubble of the 2000s, someone within the next decade will make a public plea for loosening regulations on subprime mortgages or will suggest subprimes are a necessity for serving certain portions of the market.