Private-label mortgages, blamed by some for helping cause the Great Recession of 2008, are on the rise, accounting for 4% of mortgage bonds issued last quarter were private-label mortgages according to the Wall Street Journal.
Private-label mortgages are packaged and sold to investors without the guarantees of payment provided by Freddie Mac or Fannie May, and were pivotal in the last financial crisis. The private-label market had more than $42 billion of issuance in the second quarter, more than almost any quarter since 2008.
The left-leaning Center for American Progress says private-label lending fed the private-label securities market (PLS) which in turn caused the 2008 market crash. Defenders of the mortgages note private-label mortgage loans are made to people who can’t access loans guaranteed by Freddie Mac and Fannie Mae, including for investment properties and those for self-employed borrowers.
As a result, these loans charge higher rates of interest and pay more to investors willing to take the risk.
“Because of the growth in the market and the growth of issuance, they view it as a viable market,” Mike Fania, head of residential credit at Annaly Capital Management told the WSJ.
Loans issued using alternative documents to verify income, such as bank statements instead of pay stubs, have also increased. Unconventional loans made a tepid comeback in 2019 before the pandemic scared potential investors off, but they are reemerging in 2021. They now make up almost one-third of loans from San Diego firm Griffin Funding.
The increase comes after Freddie Mac and Fannie May began capping second home and investment property purchases earlier this year.
Goldman Sachs Group Inc., Morgan Stanley, and JPMorgan Chase & Co. are among the issuers, and the number of banks and real estate firms involved continues to grow.