More mortgages will drive more housing starts, which is good news for concrete producers.
The subprime mortgage debacle that precipitated the Great Recession in 2008 was one of the greatest financial bubbles since tulipmania hit Western Europe in the 1630s. An egregious culture had mortgage lenders plucking migrant workers out of fields in California’s Central Valley, borrowers who could hardly read or write, and loaning them hundreds of thousands of dollars for homes they could not afford. This ready supply of sketchy mortgage money fed the housing market to 2.2 million new home starts in 2005. Then the world blew up; by 2012, Standard & Poors’ chief credit officer estimated total global losses at as high as $15 trillion, a staggering sum that pushed economies around the world over a cliff.
Subprime mortgage bond issuance has been almost nonexistent in the 10 years since those securities brought the world economy to its knees, but recent data from mortgage tracking sources show that the risky bundled loans are making a comeback in a big way. These reports indicate 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 is predicted 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 securitized, 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.
This has led to a sellers’ market, where competition is fierce for the homes that are available, and moderately priced homes end up getting bid up to the point of unaffordability. Expansion of mortgage credit into subprime territory won’t alleviate the problem of an inventory shortage, but exacerbate it, as people with shaky credit might now have options to buy. This increases demand, pushes prices higher, and makes subprime lending even riskier.
The idea that Wall Street would flirt with bad habits just 10 years after the same habits rocked the global economy is just the latest example of the United States trying to unlearn the lessons of the catastrophe. Last month, Congress deliberated a bill that would roll back parts of the Dodd-Frank regulation that sought to restrict risky lending practices and limit the impact of too-big-to-fail banks. Negotiations on the bill were interrupted by the omnibus budget that Congress has repeatedly kicked down the road.
The subprime business scares me, but it the meantime, more mortgages will help drive more housing starts, which is good for ready mixed concrete producers.
About the Author
Pierre G. Villere has been a contributing editor for The Concrete Producer for over a decade, and serves as the President and Senior Managing Partner of Allen-Villere Partners, an investment banking firm with a national practice in the construction materials industry. He has a career spanning more than four decades, and volunteers his time to educating the industry through his regular articles and presentations. Contact Pierre via email.