A Decade After the Crash

In 2008 the housing bubble popped, triggering a financial crisis that has not faded from the memories of homeowners and potential homebuyers. As agents we still see “bubble houses”, homes that are available currently at a price less than the current owner paid. Because the history of the home is readily available to consumers, these “bubble houses” invariably become concerning for individuals seeking to purchase a home, and sometimes entire neighborhoods become questionable for the buyers. The true value of the property becomes a concern, especially the likely future value for a future sale.

In the lead-up to the crisis a housing surplus motivated lenders to approve loans to nearly anyone who applied. Buyers who should have been denied loans, or approved for lower values, were approved for homes well beyond their means. Adjustable rate mortgages (ARMs) compounded the issue by providing an affordable rate for the first few years before “resetting” to a higher rate that was ultimately unaffordable.

Lenders, which typically do not make money holding a mortgage over time, sold mortgages to banks or government-sponsored entities such as Fannie Mae and Freddie Mac. The proceeds of the sale were used to originate another mortgage. Banks and federal entities then bundled the mortgages into bonds (“mortgage-backed securities” or MBSs) and sold them on to investors such as hedge funds, pension funds or even wealthy individuals. The homeowner’s monthly payment was then paid to the bondholder.

The sheer scale of the process kept money flowing, and thereby made credit available to nearly anyone who wanted to purchase a home. Lending standards eroded and the housing market became a bubble; the resultant burst in 2008 impacted every financial institution that bought or issued mortgage-backed securities. The resultant bank failures were historic, as long-tenured banks like Bear Stearns and Lehman Brothers were sold for a bargain or left to implode, respectively. The concept of “too big too fail” became a popular topic of discussion. And, as foreign entities also did business with American financial institutions, the crisis spread across the world economy.

Has mortgage finance changed since the crash? The securitization chain remains intact as lenders still sell mortgages to Fannie Mae and Freddie Mac, which still bundle mortgages into bonds and sell them to investors, which are still spread across the financial system. But, there is one key difference: the riskiest mortgages (no down payment, unverified income, teaser rates that reset) are not being written at nearly the same volume. The “qualified mortgage” provision of the Dodd-Frank reform bill gives lenders legal protection if their mortgages meet certain safety provisions, discouraging lenders from issuing risky mortgage loans. Mortgage delinquency rates have dwindled since the crisis.

After a decade of recovery the average U.S. home price is 1% higher than 2008; however, not all states have recovered. Nevada is -23% peak-to-current price, and has recovered 93% trough-to-current price. Maryland is -17% peak-to-current price, and has recovered 21% trough-to-current price. Delaware is -9% peak-to-current price, and has recovered 20% trough-to-current price. Peak-to-current price change reflects how far underwater homeowners who bought at the peak still are on their homes, and trough-to-current price change reflects how much prices have recovered from the worst point of the crisis.

Owning a home is an intimate decision, and one of the few true major life events for an individual. While the crisis has left lasting scars, researching a market, taking the time to understand the terms of the mortgage, and trust in post-crisis lending practices can be sources of confidence for homebuyers.

 

Header image sourced from The Motley Fool.