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The speaker argues that the mortgage and housing markets are being distorted because underwriting relies heavily on credit scores, while lenders and brokerages aren’t focusing on debt-to-income ratios or credit quality. They note that credit scores were inflated due to reporting gaps and moratoriums during forbearance, which hid delinquencies. A Federal Reserve study indicated that student loans can cause drops of over 180 points in credit scores overnight, because student loan reporting to credit agencies occurs only when you are 90 days delinquent, with no earlier indicators like 30- or 60-day delinquencies.
The speaker mentions that many people thought loans wouldn’t be collected, but the contracts were signed. They point out that Department of Education data show about 20% delinquency on student loans, contradicting a claim that delinquency was minimal. Additionally, around 4.5 million people are currently in payment plans (through PAYE or SAVE) that involve paying nothing, and if a broad new repayment plan passes, millions could be required to start paying around $600 a month. Since GDP is about 70% consumption, the speaker warns that many people unable to spend $600 could have a large negative impact on the economy.
Affirm, a major buy now, pay later lender, began reporting to credit on May 1, which could affect credit scores as people stack multiple small loans (e.g., for shoes and groceries). This stacking behavior would be viewed negatively by lenders, yet the impact may not appear in Fed numbers until after Q2. The speaker asserts ongoing inflation in everyday items, rising property taxes, insurance costs due to widespread events (including tornadoes and floods across the country), and higher replacement costs, all contributing to financial strain. Appraisals were previously inflated; Fannie Mae analyzed 7,000,000 comparables and found that 55% did not list seller concessions properly, inflating values. Consequently, many homeowners may believe they are wealthier than they actually are, leading to increased borrowing against perceived equity via buy now, pay later or credit cards.
The Fed reported a February 2023 spike in mortgage refinance rejection rates, at 41.8%, the highest since tracking began in 2013; the prior month was 27%. The speaker concludes that the doors of credit are closing across the system, affecting individuals who previously qualified based on current payments rather than long-term affordability. They emphasize that people qualified for credit because they could make a payment at the time, but now broader credit constraints are emerging.