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Subprime No-Down-Payment Mortgages Surge, “Shadow Banks” Dominate

The value of the US housing market has ballooned to $26 trillion. In many markets, prices exceed even the peak of the prior house price bubble that blew up so spectacularly. This construct is weighed down by $14 trillion in mortgage debt, or about 76% of US GDP. Of that, $10 trillion is owed on one- to four-family residences. The numbers are big – and they matter.

But who’s doing the lending? More and more: nonbanks, evocatively called “shadow banks.” They have now overtaken commercial banks “to grab a record slice” of government-guaranteed mortgages, Attom Data Solutions reported in its housing report.

And these shadow banks are different:

  They typically borrow from Wall Street hedge funds, private investors, or banks to make loans, then quickly sell these mortgages to Fannie Mae and Freddie Mac and other buyers, so they can repay their loans and start the process over again.

  Nonbank lenders dominate the origination of mortgages insured by the Federal Housing Administration (FHA) and by the Veterans Administration (VA), the riskier corner of housing lending due to no down payment or low down payment loans and poor-credit buyers.

It is largely via this conduit of the shadow banks that the nationalization of the riskiest end of the mortgage industry is proceeding. It has now become completely dependent on government guarantees.

“The government is buying and insuring 60% to 70% of all mortgages,” said Richard X. Bove, vice president of equity research at Rafferty Capital Markets. “The government owns the mortgage market. It’s a nationalized market.”

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