Is debt inherently bad? Probably not. After all, most homeowners require a mortgage to afford the “American dream.†Indeed, most folks believe that financing real estate is a venerable wealth-building endeavor. They trust property appreciation more than they trust market-based securities like stocks.
Bear in mind, low mortgage rates in the 5.5%-6.5% range coupled with variable rate loans that were even lower sent property prices surging in the first five years of the 21st century; at the same time, the ownership rate rocketed to the 69% level (2004-2006). Unfortunately, the Great Recession displaced scored of homeowners in the latter half of the decade.
Since 2010, ultra-low mortgages in and around 3.5%-4.5% have boosted real estate speculation once more. What may come as a surprise to economic recovery advocates, however, is that Federal Reserve rate manipulation has reflated property price at the expense of the middle class. This time around, traditional lenders have been reluctant to provide mortgages to those with insufficient cash flow from wages and/or other resources.
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Traditional mortgage lenders currently appear to be diligent in assessment of credit risk. At least on the surface, they seem to be cognizant of the downside in “subprime.â€
On the other hand, the federal government may find creative ways to force traditional mortgage lenders to loosen up their underwriting standards. Remember the reemergence of the Community Reinvestment Act’s use in the late 1990s and early 2000s? Government leaders “strongly encouraged†lending to anybody in the name of equality. Common sense on a capacity to repay mortgage debt had been tossed out of the kitchen window.
Today, it may not be subprime borrowing households at issue. Subprime borrowing corporations have already gained too much access to other people’s money. Indeed, the last three times that the leverage ratio “corporate-debt-to-GDP†rose to these heights, a recession arrived shortly thereafter.
