Today I had two separate notifications for articles about the rise in so-called alternative loans. One had a very click-bait-y title that forecasted a coming recession. The other was more factual. Sensationalist article titles are a major annoyance of mine. Like swear off websites entirely annoying. I could bore you with a 1,000 word rant about how they play into the millennium desire for instant gratification in an attempt to increase page views (and studies have shown they do in fact increase page views – despite my hopes and efforts to the contrary) and detract from whatever piece of information is attempting to be conveyed. Don’t worry, I’m not a sadist, I’ll spare you that (but if you wonder why my post titles may seem boring – now you know. I like simple and to the point titles)

The article I did read was quite interesting. It noted that while “alternative” loans did increase by 24% in 2018, the entire banking industry has for the most part stayed away from them so it was rising 24% from a low base. In fact these alternative loans only accounted for 3% of all home loans that were originated in 2018. Certainly not a systematic concern.

Perhaps the most important contributing factor to the Great Recession was loans w/o income verification. You can argue that the convoluted leveraged securities that big banks created to package and sell these loans were what did us in. They certainly contributed. But at the end of the day, if people were able to continue making payments on their loans, those securities don’t implode.

What was happening immediately prior to the Great Recession was housing loan origination were slowing. So banks loosened their lending standards to increase the pool of people qualified receive loans. This continued and standard continued going down until it got to the point where banks would no longer even bother to verify a persons income before granting a loan. You could literally get almost any sized loan for any size house regardless of your income. Making $30,000 a year? Why not buy a $500,000 house? The brokers signing off on the loan didn’t care. They were getting commissions on the origination. What may or may not happen when 2 or 3 years down the road when reality inevitably set in and the person was no longer able to make payments was not their concern.

It’s a little different this time around. The story covered in the article was about a woman in nursing school – so not much in the way of income there. But she operated two air-b-n-b properties and worked some other side jobs – so she did have money coming in, with the prospect of a “normal” income in the near future after graduating. She had inherited a share of a family home and needed the loan in order to buy out relatives so as to not have to sell the family house. She was able to get a $600,000 loan at 6% to do just that.

This is obviously a unique scenario, but if the majority of alternative loans look something like this, we are light-years away from what was happening in the mid 00’s. First she owns 1/3 of the house outright. In theory that’d be $300,000 in equity on a $900,000 house. So now worst case the bank, were the woman to default without paying a dime, only losses money if they can’t sell a $900,000 house for more than $600,000. Throw in the fact she has any income at all coming in right now, it sort of makes it a no-brainer.

To wrap up. Don’t jump to conclusions because of a title. And the state of US economy in general and housing loans in particular are no where near where close to pre-recession levels. Don’t let “news” forecasting a supposed coming recession stop you from investing.

Categories: Current Events