When borrowers need not even qualify for it, better be fearful!

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Remember subprime-mortgage crisis in 2008? In brief, the banks were lending to borrowers who SHOULD NOT have gotten the loan in the first place. Then, everything collapsed when the borrowers really could not pay. This is the reason why I would not want the banks to lower their lending standards here in Malaysia. Buyers just have to buy something cheaper so that they get approved, that’s all. There is little need to stretch the Debt Service Ratio (DSR) to the limit and then get a rejection for the loan application from the bank. How does this DSR affect us?

According to my good friend Mr. Miichael Yeoh, conservatively, for working people with an monthly income below RM5,000 the Debt Service Ratio for some banks may be around 40-50%. In other words, banks may approve loans as long as the repayment for all loans do not exceed 50 percent of the monthly income. For those with a monthly income of RM8,000 or higher, the DSR can go up to 85 percent. Note, this is dependent on banks and does not mean every bank has the same set of criteria. Now, imagine if the banks lends even when the buyers actually no longer qualify for the loan based on DSR. Yeah, we start to have a market with a certain percentage of risky owners. When this group becomes big enough, next mortgage crisis will happen sometime in the future. Some signs yeah. 

According to a report in CNBC, some lenders are expanding their loans to borrowers with”less-than-perfect credit.” For example, California-based Carrington Mortgage Services. However, this is what Rick Sharga, executive vice president of Carrington Mortgage Holdings says, “We’re not going back to the bad old days of ninja lending, when people with no jobs, no income, and no assets were getting loans.”  Basically, Carrington will assess individual risks but will allow borrowers to have FICO credit scores as low as 500. The typical average for agency-backed mortgages is in the mid-700s. This is FICO score in the U.S. The higher the score, the lower the risk.  Besides Carrington, another lender Angel Oak began offering and securitizing nonprime mortgages two years ago and has done six nonprime securitizations so far. Recently, it finalized its biggest securitization yet — $329 million and slightly over 80 percent are under nonprime.

Lending standards are also being relaxed. Fannie Mae said last summer that it would relax its lending standards for prime loans, allowing borrowers with higher debt and lower credit scores to obtain loans without additional risk overlays, such as large down payments and a year’s worth of cash reserves. The report also says that there are many borrowers who wanted to become homeowners but are currently frozen out of the mortgage market. It says that millennials, the largest home buying group today have much higher levels of student debt than previous generations. Please do read the article in CNBC in full here. This is not the only article about subprime mortgage market. Here’s another one from Financial Times.  And another one from CNBC about how banks are also moving back into the subprime market. 

As of now, I did not find any article giving an estimated date as to when the next mortgage crisis may happen. However, I personally do not support banks lending to borrowers who do not qualify. I support the state and federal government doing MORE to ensure affordable homes are there for homebuyers. Let’s hope everything is under control yeah. For Malaysia, it’s not that easy to get a loan but as everyone noted, another mortgage crisis would still dent confidence all over the world and not just affect the housing market in one country. Happy borrowing.

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written on 15 April 2018

Next suggested article:  Flipping is still possible in that 2008 mortgage crisis market. Interesting.

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