There are a few reasons mortgage lenders are loosening regulations, one of which is a spike in late payments, but these roll backs won’t be the cause of the next recession.

I was asked on the radio last week if I thought mortgage lenders were loosening regulations too much. Steve Cochran, who hosts morning drive on WGN Radio (AM720 or, wondered if rolling back some of the lending restrictions could push us into another recession.

Steve had been reading a story about how Dana Wade, the acting Federal Housing Administration (FHA) commissioner, had testified that the agency had seen the number of FHA-insured borrowers who were late in making their monthly mortgage payments had jumped. More people were using down payment assistance programs and more FHA borrowers were spending more than 50 percent of their income on their total debt payments, including mortgage, car loans, school loans and credit card debt. In addition, more FHA borrowers were doing cash-out refinancings, to use the money for other purposes.

That’s the sort of bad mortgage behavior we saw just before the great recession. And combined with home values that are skyrocketing (as compared with the rate of inflation), you can understand why a lot of folks are nervous, especially when you start talking about allowing folks to spend 50 percent of their Gross Monthly Income on total debt payments.

After taxes, that could feel like 65 to 70% of your take home pay. Ouch!

While I do think another recession is coming sooner rather than later, it’s unlikely that rolling back lending restrictions is going to cause it. As Dick Lepre, a San Francisco-based lender with RPM Mortgage wrote in an email response he sent after receiving last week’s newsletter, “Unlike the pre-2008 price bubble, which was caused to a significant extent by increases in demand caused by relaxed lending standards, this bubble is cause by lack of supply. The lack of supply is especially evident in the SF Bay Area and is cause by land use regulations especially zoning which prevent the market from functioning. There are land owners, builders, banks to provide financing and would-be buyers but zoning prevents building close to where jobs are being created.”

I’d agree. The current pricing bubble we’re seeing is caused by a demand/supply imbalance. As I’ve previously written, you’ve got older Millennials starting to move into their (new) prime home buying years, but Baby Boomers aren’t selling and trading down. They’ve refinanced their homes so that it’s far less expensive to just stay where they are. Plus, they like their neighborhoods and their friends, and they don’t know yet where their kids (younger Millennials) are going to land, so they don’t want to sell and move, only to move again when their kids move. Plus, they’ve got another 10 to 15 years to work.

Household formation is currently (as of March 2018) at 1.3 million (average annualized pace), which is down from the high of 1.78 million in April 2015, but higher than the long-term average of 1.1 million. All of these new households need places to live. Unfortunately, new home construction is stuck at less than 700,000 new single-family homes per year, and few of those are being built for first-time buyers.

That doesn’t mean when a recession hits, housing won’t be an issue. If you have FHA borrowers spending 65% of their take home pay on their mortgage, taxes, insurance and other debt payments, they’ll be hurting . If they lose their jobs, a good chunk of them will lose their homes.

(Thanks to the Federal Reserve’s latest study, we know that at least 40 percent Americans don’t even have $400 in an emergency fund. So when the next recession hits, it’s going to hurt.)

What’s the solution? Don’t borrow more than you feel comfortable spending – even if someone says you can afford it. Everyone’s tolerance for what I call “overspending” is different, but it basically means that if you have to think about how much you have in your bank account and what the next month’s upcoming mortgage payment will do to that balance before you buy a sandwich at the local deli, you’re probably already in trouble.

I welcome all comments. Feel free to email me at [email protected] or leave a comment below.