Scary

The Financial Times keeps good tabs on the leveraged loan market.  Last summer the FT had an article (the article was published July 4) that stated that 80% of US loans are structured as "covenant-lite," compared to 20% in 2008 and 2009, which was during the Credit Crisis.  Covenant-lite means loans have been stripped of features to protect lenders, like coverage requirements, reporting requirements, and restricted payment clauses.  Restricted payment clauses prevent firms from borrowing money and then taking the money out of the business to pay big dividends.   Private equity firms, which are big leveraged loan borrowers, have been behind the push for weaker covenants. 

The Washington Post had an article last week about Fannie Mae, Freddie Mac, and FHA's exposure to risky loans.  The three government firms now guarantee $7 trillion of mortgages, 33% more than before the Credit Crisis.  Many of these mortgages are to borrowers that have high income to mortgage payment ratios, which are deemed risky as a large portion of borrowers' income is going to mortgage payments. 

The stock markets always get the headlines but I am watching the loan market, and some of the articles I am reading scare me.