Bankers’ refusal to make bad loans hinders housing recovery
Home price appreciation and sales volumes in housing markets across the United States stalls out because lenders refuse to make bad loans.
The cycle of boom and bust is really over. Lenders steadfastly refuse to make loans to under-served borrower groups to provide the “escape velocity” of previous housing booms because lenders are unable to pass these losses on to investors or the US government.
The real estate industry and a compliant financial media portrays this behavior as a hindrance to the housing recovery, but that’s dangerous spin. The reality is that lenders are unwilling to make loans they know will go bad, causing them losses, in order to generate transaction income to realtors and homebuilders and to placate left-wing housing advocates who, despite the failure of federal home ownership policies, continue to push for more bad loans to minorities who can’t sustain the payments.
Bankers would be willing to make bad loans if they weren’t the ones who had to absorb the losses. If these losses could be passed to inventors or to the government, they would originate all forms of bad loans — we saw that during the housing bubble. Unfortunately for those who want to see these loans underwritten, investors aren’t buying this garbage today, and the government entities that insure these loans force loan originators to buy them back if they go bad, as they should.
The battleground is shifting to the “put back” policies of the GSEs and the FHA. The only way bankers will originate more bad loans is if the insuring entities won’t force them to buy them back. Of course, this puts the risk of loss — make that the inevitable losses — squarely on the backs of US taxpayers. Either that, or it will raise insurance costs for these programs so much that all future buyers and borrowers will share the insurance risk, similar to what we currently see at the FHA with its onerous costs.
The simple answer is for bankers to continue refusing to make bad loans that will inevitably inflate another housing bubble and many more foreclosures. This will limit house price appreciation, and when house prices get too high, sales will slow down due to affordability problems. That’s how a stable market for any commodity works, and that’s how it should be.
They’re not giving mortgages to a wide swath of America, hurting the economy
The U.S. economic recovery is being endangered by a slowing housing market, as prospective homeowners with lower incomes and credit scores are finding it nearly impossible to get a mortgage.
First, the contention that credit standards are tight for subprime borrowers is nonsense. (See: Despite industry spin, mortgage lending standards are not tight)
Six years after the collapse of home prices, the mortgage-lending industry is going through an upheaval. Wells Fargo & Co. has the largest share of the mortgage market, but CEO John Stumpf in an interview with the Financial Times last week said his company would be unwilling to lend to lower-income borrowers and those with relatively low credit scores. That is, unless regulators made it more difficult for investors to force banks to repurchase securitized loans.
“If you guys want to stick with this program of ‘putting back’ any time, any way, whatever, that’s fine, we’re just not going to make those loans and there’s going to be a whole bunch of Americans that are underserved in the mortgage market,” Stumpf said.
First, the notion that borrowers with poor habits about repaying debt are underserved is nonsense. It’s like saying thieves are underserved because new security measures make theft more difficult. Should we lobby banks to remove security sensors from its branches to make lives easier on thieves?
Second, lenders are responding as they should. Lenders shouldn’t make loans to groups of people they know won’t repay them. Someone has to eat these losses, and right now, nobody is willing to be a loser, not investors, not taxpayers, and not lenders.
He was referring to loan-repurchase demands by Fannie Mae, Freddie Mac, and private investors. …
“We want to help the consumers there, but we can’t do it at great risk to J.P. Morgan, so until they come up with some kind of safe harbors or something, we’re going to be very, very cautious in that line of business,” Dimon said.
Any safe harbor merely transfers the risk of loss from the banks, who are smart enough not to lose money, to the US taxpayer, who may be forced to absorb losses if left-wing political activists lobby for changes.
Even Federal Reserve Chairwoman Janet Yellen said in June: “It is difficult for any homeowner who doesn’t have pristine credit these days to get a mortgage,” which was one of the causes of the limp housing recovery.
The pace of home-price increases has slowed for the first time since 2008, according to the latest data from Case-Shiller released last week.
Hovnanian Enterprises Inc. which builds homes in planned communities, said today that for its fiscal third quarter ended July 31, net contracts for new homes declined 6.3% from a year earlier, and its cancellation rate increased to 22% from 18%. CEO Ara Hovnanian said “the housing industry remains in the early stages of a recovery,” which is a remarkable statement, considering how many years have passed since the financial crisis. …
It’s only remarkable to those who believe the spin put out by the financial media. The entire recovery is a manipulation of market conditions to drive up prices. From a homebuilder’s perspective, we are certainly in the early stages because they are still building far fewer homes than any time in the last 50 years.
”The lowest quarter of the housing market [by price] will see less demand, fewer sales, less increases in price and more decreases in price,” unless the big banks change their mortgage-lending policies, Blitzer said in a phone interview.
The pressure is mounting to return to the old cycle of lower and lower lending standards leading inevitably to a housing bubble, credit crunch, and housing bust.
Do you see how the pressure from both housing advocates and business interests reinforce the cycle?
Notice the language use in headlines: Opinion: When the next housing bust hits, blame the bankers and Is the government making it harder for the middle class to buy homes? Advocates aren’t subtle about their support for lower lending standards, despite where they inevitably lead.
Census Bureau information paints a picture that isn’t so pretty, at least to Washington policy makers who have tried to increase the share of Americans who own their own homes.
Lawrence Yun, the chief economist for the National Association of Realtors, said in a phone interview that 15% more mortgage applications are being denied this year than in 2000, which he described as a “relatively normal” year for the housing market.
Normal is what we saw before subprime lending took off in 1995.
The National Association of Realtors said last week that its Pending Home Sales Index for July was 105.9, increasing from 102.5 in June, but down from 108.2 in July 2013. The organization credited the steady increase in employment and a decline in long-term interest rates for the improvement.
Steady employment improvement resulted in a significant decrease in pending home sales from last year? WTF?
On Tuesday, Yun said: “A robust recovery is not occurring. We are projecting a slow recovery in home-sales activity because of the current tight underwriting standards.”
Sterne Agee chief economist Lindsay Piegza on Wednesday said that the negative effect of reducing the pool of potential home buyers “is going to be compounded because younger generations are burdened with such a large amount of debt.”
Even though credit quality is very strong for loans made since 2008, banks continue to shy away from the lower end of the mortgage market. This means that as we head through this economic cycle to the next recession (since they always come), there could be another sharp decline in housing prices, this time based on low demand rather than sloppy lending.
Ordinarily, I might be inclined to agree with her, but now that lenders know how to kick the can, its far more likely that transaction volumes will be allowed to plummet long before prices will be allowed to decline. Bold prediction here: the next recession will see home sales volumes fall to levels even lower than the Great Recession because lenders will keep prices artificially high with can-kicking policies.
Slow sales are the price we pay for stable prices
The purpose of the Dodd-Frank laws regulating mortgage lending was to prevent future housing bubbles and safeguard our banking system. This means stopping the cycle of shoddy lending and the proliferation of affordability products that’s required to maintain market momentum when prices get too high. As a result, when prices go up, sales go down, as they should for any commodity. Everyone who wants to see higher prices and higher sales volumes will whine and complain, but the societal good that results is worth the price paid. We should not permit lenders to make bad loans to reflate the old housing bubble or inflate a new one.