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. I’ll spare you the rant on how they play into the desire for instant gratification in an attempt to increase page views. 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 without 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. 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 that housing loan originations were slowing. So banks loosened their lending standards to increase the pool of people qualified to receive loans. This continued until it got to the point where banks would no longer even bother to verify a person’s income before granting a loan. You could literally get almost any sized loan for any size house regardless of your income. The brokers signing off on the loan didn’t care — they were getting commissions on the origination.
It’s a little different this time around. The story covered in the article was about a woman in nursing school who operated two Airbnb properties and worked some other side jobs. 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 2000’s. She owns 1/3 of the house outright — in theory that’d be $300,000 in equity on a $900,000 house. So worst case the bank, were the woman to default without paying a dime, only loses money if they can’t sell a $900,000 house for more than $600,000.
To wrap up: don’t jump to conclusions because of a title. The state of the US economy and housing loans in particular are nowhere near pre-recession levels. Don’t let “news” forecasting a supposed coming recession stop you from investing.