Posted on 10/23/2011 5:24:00 PM PDT by Razzz42
Banks Not Wanting to Lend is a myth. It’s a trendy thing to blame the banks for not wanting to lend, but it’s not reality. Don’t get me wrong…most everything else might be able to be blamed on them, but not this. This is what makes the problem in mortgage and housing so fundamentally grave. It’s just not as easy as lowering rates, doing a mass refi event, or pulling Foreclosures off the market.
After nearly 5 years, if there was an easy fix (such as printing trillions of dollars in order to try to create inflation) housing would be experiencing a v-shaped recovery, plain and simple. Housing and mortgage are in a generational downturn for which the only cure is time. Anything done to prevent the market from clearing extends the duration and severity.
Below is a list of headline misperceptions and recently proposed intrusions — and my greatest pet peeves — aimed at mitigating the damage from a disaster lying directly ahead. Like everything else to date, they are quick fixes pundits think will patch the gaping hole in the side of the ship via kicking the can, protect the banks from resi whole loan and MBS price discovery, give something to millions of delinquent borrowers for nothing, and get votes. None of these things will promote a sustanable recovery in housing. The only true fix for this housing market is time. And this reality always leads to disappointment.
1) Mortgage rates are officially under 4%. Mortgage liquidity is abundant. Underwriting standards — while not easier than 2003 to 2007 (which is against what everybody benchmarks them in the most recent “movement” for further stimulus in the sectors) – are certainly the least volatile and most consistent today than at any time since 2007. If you have a job, income to meet credit obligations, and a credit score that shows you repay debt on time, you can easily get a loan. One of the primary differences between the bubble years and now is not the loan parameters; rather now you have to prove what you put on the loan application. In fact, even with an LTV to 125% you can get a loan through the HARP program. That was unheard of during the bubble years. Right now a good borrower can do a debt-to-income ratio over 60% through Fannie Mae…it’s pretty damn aggressive when Fannie will issue a loan approval to a borrower paying in excess of 60% of their gross income out to total debt.
2) Because 95% of all loans are sold Fannie and Freddie or insured by FHA, “banks not wanting to lend” is a myth, at least in the residential sector. It’s not even the bank’s decision by and large. They just provide armies of loan officers and underwriters and servicing for the GSE’s. Banks input the loan data, press a button and the GSE’s say yes or no. Portfolio lending — such as super jumbos — is a different story but that makes up such a small portion of overall lending those complaining about not being able to get a $2mm loan according to their personal terms probably shouldn’t be getting one in the first place. And if you are a credit worthy affluent borrower, there is no problem getting aggressive super jumbo financing. Again, not compared to 2003 to 2007 but certainly better than in 1990 or 2000.
3) The lack of refi activity is a demand problem, not supply. In short, without being able to lie about income, assets and house values like in 2003 – 2007 — lending to anybody with a heartbeat — half the eligible borrowers in the US suddenly disappeared. Those that can easily refi do it each time rates drop. But on this recent drop to 4% the benefit is too thin – relative to the Q410 QE2 drop to 4% — to make sense.
Moreover, a large percentage of Main Street is still in recession, critically over-levered, or have become poor credit risks for one organic reason or another over the past four years. We will never do the lending volume we did in 2003 to 2007. Benchmarking mortgage and housing activity to the bubble years is idiotic.
Trying to artificially create another 2003 to 2007 housing and lending environment through government intervention will lead to severe disappointment and push out the true bottom in mortgage and housing from a decade to several. Giving weak credits something for nothing — the same rates and terms through an insta-refi program as borrowers who really qualify for them — will do the same.
4) Preventing Foreclosures, another cry getting much louder as we go into election season, is another short sighted mistake that will set the ultimate housing recovery back years. It will stagnate housing related capital flows and make it so supply actually increases. This is because in the hardest hit states — also states that matter significantly to national GDP such as CA, FL, AZ and NV — Foreclosures and short sales (both are liquidations that remove borrowers from their houses) make up 50% to over 70% of all transactions. THEY ARE THE MARKET. Organic repeat buyers now make up a minority due to epidemic effective negative equity.
We use the term “effective” to mean those without enough equity to pay off the first (and 2nd) lien, pay a Realtor 6% to sell their existing property and put 10% to 20% down on the new property. For example, when you lower the negative equity threshold to 80% in order to quantify the pool of able repeat buyers, over half of all homeowners with mortgages are underwater.
Bottom line, sales volume precedes price. With rates at historic lows and first timers and investors still active in the market, anything done to prevent the flow of their desired target properties — Foreclosures and short sales — further prevents an ultimate clearing of the market. In fact, it is forcing first-timers into new home communities in recent months meaning even more supply.
5) Another call for the GSE’s to rent 250k Foreclosures will also cause much more harm than good. First, it cannabalizes the first timer buyer cohort and second it competes directly with investors, many of which are buying to rent…who wants to buy a Foreclosure as a rental property investment knowing the government is going to pound your market with 10s of thousands of rental units.
Be careful what you wish for…over history, first timers and investors have been known to disappear from the market literally overnight. If that happened now, housing would spiral lower in an uncontrollable fashion.
6) If borrowers don’t have good income, credit or equity then they could just default and get a loan modification. The rates are better than 4% anyway. Mortgage modifications are nothing more than the post-bubble years, exotic, high-leverage refi’s. This is what is such a joke about the benefits of an insta-refi program. Right now millions and millions are not making any payments at all or are in 2% loan mods. There is your refi boom. There is your stimulus. But now that the 2009 – 2011 mod bubble has deflated, pressure is building again and the market needs more juice. So, all of a sudden the old ideas come back out with different names.
7) Finally, it is extremely important to remember that ever since the mortgage and housing crisis began every last time a “movement” to artificially stimulate mortgage and housing gains momentum with the media, sell side, banks, NAR, builders and government it is only aimed at one thing…that is preventing a disaster lying directly ahead with a quick fix to patch the gaping hole in the side of the ship via kicking the can, protecting the banks from resi whole loan and MBS price discovery, giving something to millions of delinquent borrowers for nothing, and getting votes. None of these things will promote a sustanable recovery in housing. The only true fix for this housing market is time. And it always leads to disappointment. The most recent ‘movement’ to legislate easier bank lending standards; giving everybody in America with a mortgage something for nothing in the form of an insta-refi; principal balance reduction modifications in hopes of avoiding foreclosures and freeing up homeowners to re-buy (won’t help); and continued foreclosure prevention through things such as bulk REO sales with usage provisions and the GSE’s renting REO (crushing the independent investor and cannibalizing the all important first time buyer cohort) — will end in disappointment as well. Heck, without distressed sales over a third of activity would disappear making macro housing even weaker.
This confluence of panic-bred stimulus lunacy is a perfect recipe for a disaster in the mortgage and housing sectors that will push out an ultimate bottom longer than anybody, include us, is forecasting.
Mark Hanson is a seasoned mortgage banking veteran that during his career specialized in wholesale and correspondent sales, operations management, and bringing financial institutions into new lending markets. His primary focus was on residential mortgages working closely with most mortgage and Wall Street investors.
Since 2006 he has worked as an independent real estate, finance, and related sectors analyst, consultant, strategist, and risk ‘enlightener’ to the financial services sector.
His years of real-life experience, extensive on-the-ground research, and absolutely unique leading looking proprietary data has led him to make an extraordinarily large number of early and accurate predictions about the ‘great mortgage and housing meltdown’ and company-specific events. Coverage
Housing, finance, related sectors, long/short equities, distressed real estate, residential credit specializing in Subprime, Alt-A and Prime, analysis, and strategy, foreign housing.
...When Mark sees a trend, you might take note...
The banks lending to purchase homes?
The banks won’t even sell the houses on their books (that they probably don’t legally own anyway) for cash on the line.
Uncle Sugar won’t let them.
And pays his whores well enough to keep them in nice clothes and fancy cars.
So houses and neighborhoods rot, and the Rats rule.
Mark is full of it. Why are you shilling for him? Are you him?
The debacle that is the U.S. housing market is far from over. Before this mess is rectified, people like "Mark" will be lucky if they're not decorating lamp posts.
Just sayin'.
Right now the banks are only acting as brokers for Fannie & Freddie. What bank in their right mind would lend their own money long term at today’s interest rates?
We sold our home last year and moved to Palm Springs. I’ve never dealt with Wells Fargo in my life but went in to apply for a mortgage after putting 20% down on our offer. I’m on social security with a small pension as only income. We don’t have credit card debt or a car payment, and have paid our bills on time over the years. Our loan for 200K was approved in about 15 minutes. No appraisal was even required. I paid 1 point to get a 4% 30y fixed rate loan. It couldn’t have been easier.... and I’m just a regular guy.
Do the echoes in your empty head affect your thinking?
Read his past newsletters and see what he had to say and if it came true. The real estate industry relies on his findings on a cost basis. Occasionally he’ll release highlights of his reports, sometimes graphs.
Ditto. Had a buddy of mine who applied for loan. They want him to pay more points because on his credit history he had several hard credit checks in one month. He went to several mortgage companies to see if he can qualify for their mortgage products before he zeroed in a property he wanted to buy. Problem was each mortgage company first ran a credit check before they explored his options. All that mortgage shopping came back to hurt his credit history. Ironically all the companies he went to said he had the income, down payment and etc to qualify. No one told him that each credit check will show up on his record as a hard credit check which will bring down his credit score by several points and raise red flags with lenders later on.
I heard the same story from my kid about Wells Fargo. He's 23, but has a well paying job, has a good credit rating, and his wife is employed. They have no debt. He went to pre-qualify before they started looking at homes, and he went to Wells Fargo since his accounts are there. They pre-qualifed him for $200,000. He won't spend that much, because he's looking at foreclosures (which in our area are very inexpensive) and he doesn't have enough saved for a 20% down on a 200,000 dollar home. But they were not reluctant to lend and he's a first time buyer.
Your income is government guaranteed.
Some of us, admittedly fewer and fewer, don’t have that kind of sterling credit.
Government=Well Fargo=Government=Wells Fargo=Government.
I guaranteed that my government income is guaranteed! Hard work, started at very bottom. Paid my bills because that’s what I was raised to do, never over-extend.
Good rule for life...read “The richest man in Babylon”. I gave my son a copy when he graduated from school.
Good luck.
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