In another sign of a returning bubble, mortgage lenders Fannie Mae and Freddie Mac are going to start loosening their lending standards, allowing borrowers to spend up to half of their pre-tax income on mortgages. It’s a worrying move, leading to fears that we’re seeing a repeat of the subprime mortgage debacle that made the 2008 financial crisis so intense.
Federal Reserve Monetary Policy to Blame
This loosening of lending standards is brought about through the Federal Reserve’s loose monetary policy. Having flooded financial markets with trillions of dollars, partially through purchases of Fannie and Freddie’s debt-backed securities, all that money is looking for a return. There is only so much lending that could be done under the old lending standards, so putting that new money to use requires loosening of standards so that new loans can be made.
Let’s take a look at a family of four with a household income of $60,000 a year. Let’s assume they live in a state like Tennessee, with no state income tax. Monthly take-home pay after taxes and health care costs we’ll assume to be around $3800. Property taxes might take another $200 a month, leaving them with $3600 a month. Under Fannie Mae’s old lending standards, that family would have been allowed to make maximum mortgage payments of $2250 a month. Now they will be allowed to pay up to $2500 a month. That’s almost 70% of their after-tax income and leaves only $1100 a month to pay for food, clothing, gas, utilities, car insurance, etc.
Previously, Fannie approved mortgages that cost between 45 and 50 percent of a person’s income if there were extenuating circumstances, such as a 20% down payment or if the borrower had sufficiently high savings or investments. Those additional requirements will no longer apply. Not everyone who applies at those income ratios will necessarily be accepted, however. But the trend within the mortgage still is tending towards a loosening of lending standards and an increased willingness to loan to subprime borrowers.
Expensive Houses Playing a Role
Part of Fannie and Freddie’s move may also be because housing prices are so expensive. One old rule of thumb was that a household should spend no more than 30 percent of its income on housing. House prices in urban areas such as the Bay Area in California or in the Washington, DC metropolitan area have become so inflated, though, that those numbers just aren’t feasible for the vast majority of households. Many either move out to more affordable suburbs, driving prices up there, or move away to smaller cities.
An increasing number of households are spending at least 50 percent of their income on housing, including 10 percent of homeowners and 25.5 percent of renters. Of course, the increase in housing prices is itself cause by the Federal Reserve’s inflationary monetary policy. That was the intent of quantitative easing, to keep housing prices high since houses are the prime source of household wealth in the United States.
As prices get higher, consumers have to borrow more to buy. When they start not being able to borrow, lenders loosen credit limits. That allows more people to buy, pushing prices up even higher through bidding wars. It’s a vicious cycle that leads to a housing bubble, and at its root is easy monetary policy. Loosening lending standards are a symptom of a housing market that’s out of control, and it’s only a matter of time before things will crash.
Investors who can see this bubble sign flashing are in great position to move out of risky investments before things go haywire. Protecting assets by investing in precious metals is one good strategy to help ride out a financial crisis. Gold and silver have acted as safe havens for investors for centuries, protecting wealth by acting as hedges against inflation and financial calamity. They still work the same way today, and with the development of products such as gold and silver IRAs they are even easier to invest in than ever. If you want to protect your retirement savings with gold and silver, it’s worth looking into today before it’s too late.