Is Another Mortgage Crisis Coming Soon?

According to FHFA data, loans to borrowers with low credit scores have about six times the delinquency rates as borrowers with high scores. Should we be worried about lower credit standards?

Jul 20, 2014 at 1:44PM

According to recent data from the FHFA's monthly Foreclosure Prevention Report, nearly 4% of the 28 million mortgage loans owned by Fannie and Freddie are in some stage of delinquency.

While this sounds like a lot, and it is (about 1.1 million loans), the more troubling statistic is the impact of borrowers' credit scores on the delinquency rate. The report indicates that borrowers with low original credit scores have an incredibly high rate of mortgage delinquency, even more than you might expect.

Foreclosure Flickr Respres


Since many lenders have relaxed their credit standards this year, should we be worried about loose credit standards causing another real estate crash?

The data look pretty bad
Basically, the FHFA's report breaks borrowers into just two credit categories: those whose credit score (when the loan was originally issued) was 660 or above, and those who obtained their mortgage with scores lower than 660.

The vast majority of current borrowers (almost 90%) fall into the higher credit score category, and of that group only 2.6% of loans are in any stage of delinquency, and less than 1.5% are seriously delinquent (over 90 days).

However, of the more than three million loans whose borrowers started with lower credit scores, an alarming 14.4% are in some stage of delinquency, with more than 7% seriously delinquent (which are rather likely to turn into foreclosures or short sales).

Seeing data like that makes me think: maybe we shouldn't be loosening our credit standards.

But bear in mind...
Of these delinquent loans, you have to bear in mind that many were made during the real estate bubble of the 2000's. There is a right and a wrong way to do almost anything, and subprime lending is no exception.

In the current market, it's nearly impossible to get a traditional mortgage with a credit score below 620, or an FHA loan with a score below 580. However, this hasn't always been the case.

A lot of the delinquent loans were made with little or no down payment, with little or no documentation, and to borrowers whose credit scores were well under what is considered acceptable today. There was a time during the last decade when virtually anyone with a pulse could qualify for a mortgage, regardless of credit, income, or cash in the bank.

For a humorous (and somewhat frightening) trip down memory lane, take a look at these actual commercials for mortgages from before the crash. Or, how about this 2005 print ad from Chase Bank, offering mortgage loans with nothing but a signature. These are some of the loans that make up the bloated delinquency rate, even several years after the bubble burst.

Should we be worried?
Not yet, but the trend back toward mortgages for lower-credit borrowers is definitely worth keeping an eye on.

Wells Fargo, for instance, has lowered its minimum credit score for conventional financing from 660 to 620, and for FHA financing from 640 to 600.

However, in order to qualify for a loan with a low credit score, you'll be required to come up with a sizable down payment of at least 20%, pay a higher interest rate, and have a rock-solid employment history.

As I said a minute ago, there is a right way and a wrong way to do things, and until we start hearing things like "no money down, even with a 575 credit score", as in one of those old mortgage commercials, we should be all right.

The housing market needs subprime borrowers to create enough demand for homes, and with lenders acting responsibly, things are very different this time around.

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers