Setting Up Another Crash

Feb 20, 2017

Since the financial crisis of 2008, banks have stepped back from issuing mortgages designed to lure people into a risky contract. That doesn’t mean those mortgages have gone away–“nonbank financial institutions” like Quicken Loans have stepped in.

These nonbanks now dominate the mortgage market. In 2012, banks issued 65 percent of mortgages for newly purchased homes. By 2016, the banks issued only 18 percent of these loans, while nonbanks issued 73 percent. According to one commentator, “the market has moved to the nonbanks because the nonbanks’ appetite for risk is much higher.” This means they’re willing to issue the adjustable rate mortgages that are more likely to end in foreclosure.

Nonbanks are willing to issue these “risky” loans because their mortgages are insured by the government’s Federal Housing Authority. So if someone defaults on a mortgage for whatever reason, the government picks up the tab–though of course, the people who defaulted still get foreclosed on, and still get kicked out of their house.

The biggest nonbank, Quicken Loans, operates like an assembly line. Workers make hundreds of calls a day, hoping to get a customer on the line. If they get someone to agree to take out a mortgage, the call is passed to a licensed mortgage banker, who completes the application, and then passes it to processing. This is how Quicken can launch something like Rocket Mortgage, with its slogan “Push Button. Get Mortgage.” The company admits you have to push multiple buttons, but this is literally an app on your phone that you can use to get a mortgage.

Does any of this sound familiar? It should. Once again, someone is playing huge games with the mortgage market. More than two trillion dollars in mortgages were issued in 2016–not as much as the peak before the last crash, but growing. Someone is laying the groundwork for a new crash.