Albert Freeman Effect of gasoline shortage in Washington, DC 1942
Europe had hundreds of inspectors check 130 banks for a year in that stress test. Who do you think picked up the tab for that? And what did Europe’s taxpayers get in return? As I’m looking right now, they got falling stocks and 3 Italian banks in which trading was halted. What was the ECB’s goal with the tests again?
Oh right, to restore confidence in the markets … Well, with WTI oil falling fast below $80, I think we can now confidently say the Boys of Brussels are either not up to the job, or they’re letting the whole caboodle rapidly drift south on purpose. Probably a bit of both.
But don’t forget that if things continue on this present path, the next thing out of Draghi et al will be about the survival of the eurozone and likely the euro itself. Which means an outcome as awful as the one we’re seeing right now may be intended to be the final straw to break the Germans’ back, and make them give up their resistance to full blown outhouse paper purchases.
Meanwhile, the ECB bought a grand total of €1.7 billion in covered bonds last week, so at that pace it will take only 587 more weeks to get to the $1 trillion in purchases they aim for. Solid plan.
Sure, oil will rebound above $80 at some point today, the blows must be softened, and European stocks will cut losses on their plunge protection services, but if there was any idea of fooling the financial markets wit the tests, that went off the rails. Still, the people in the street, aka consumers, are still plenty fooled, and maybe that was all Brussels ever wanted. After all, Draghi is Goldman, so whaddaya know, right?
But I wanted to get back to some things I noticed late last week, about US housing. Though the call to not buy a home – at least one with a substantial loan attached – is a global one. Conditions in which you would own such a home, and pay for the loan, are set to change in radical ways, and the risks of the home becoming a trap are simply too high.
More importantly, you would be paying far too much. Fannie and Freddie and the rest of the US real estate five families will loosen requirements again soon, but they don’t do that because they want to do you a favor, they do it because they are looking to smoke out the last remaining greatest fools and suckers left out there. Don’t be one.
Leave the housing industry in your country alone, for five years or so, and allow for prices to come down to a level where homes become affordable again to young people. If the industry doesn’t get to that level, it has no future anyway. If the baby boomer generation can’t sell to their children at prices the latter can afford, US housing is dead. Already, a third of sales are cash only to investment companies, and that’s not a healthy development at all. Don’t go gently into that dark night.
Alexis Leondis and Clea Benson at Bloomberg had some major lamenting last Friday on how regulations stifle the US real estate business. And I’m thinking for once Washington bureaucracy has some positive side effects, but the authors don’t agree.
For me, US and many European housing industries have gone so far off track from, pick a date, 1997 to 2007, that it needs a major correction, something the industry itself, governments and central banks have only tried as hard and as expensively as they could muster, to prevent. We know that every bubble ends at a level below where it started, and housing is nowhere near that bottom yet.
Yes, builders and contractors and lenders and servicers and owners and borrowers will all be hit hard, but what’s the use of keeping up a virtual good face it that means killing off the future of the entire industry? Besides, don’t young people everywhere deserve a shot at a future, building a family etc., without having to bend over backwards just to be allowed to live somewhere?
And I don’t just mean the happy few kids, I want the 50% unemployed youth in southern Europe to be part of this as well, and the 25% or so in the US. You can’t just put out those kinds of numbers of people by the curb and expect to have a working society, let alone housing industry. Nor should you want to. Here’s that Bloomberg thing:
Clem Ziroli Jr.’s mortgage firm, which has seen its costs soar to comply with new regulations, used to make about three loans a day. This year Ziroli said he’s lucky if one gets done. His First Mortgage Corp., which mostly loans to borrowers with lower FICO credit scores and thick, complicated files, must devote triple the time to ensure paperwork conforms to rules created after the housing crash.
Question no 1: what’s wrong with doing ‘only’ one mortgage a day? Is Mr. Ziroli modeling himself after Angelo Mozilo?
To ease the burden, Ziroli hired three executives a few months ago to also focus on lending to safe borrowers with simpler applications. “The biggest thing people are suffering from is the cost to manufacture a loan,” said Ziroli, president of the Ontario, California-based firm and a 22-year industry veteran. “If you have a high credit score, it’s easier. For deserving borrowers with lower scores, the cost for mistakes is prohibitive and is causing lenders to not want to make those loans.”
[..] Federal rules put in place after the 2008 financial crisis attempt to prevent such reckless lending. The Consumer Financial Protection Bureau in January began implementing the qualified mortgage rule, a 52-page document mandating that lenders must take detailed steps to prove that borrowers have the ability to repay their mortgages. The measure also cracks down on risky loan features such as balloon payments and large fees by leaving lenders exposed to legal liability if they issue such loans.
So far, nothing that upsets me. Lenders have to be more careful about loans they issue, and that costs them a bit more, but not so much that they go out of business. So is that the problem, or is the problem that until 2007 they had thrown all caution to the wind? I think I have an idea.
“The industry as a whole did a terrible job of self-policing and they should not be shocked that there’s now more oversight than there was before,” Gordon said. The CFPB has issued eight rules since 2011 governing everything from appraisals to compensation for loan officers. Six regulators including the Federal Reserve jointly issued a 553-page document this week containing instructions for when lenders must retain a stake in mortgages that they package for sale to investors. [..]
The higher costs and concerns about buybacks are driving the decline in mortgages for home purchases. It will slow to $635 billion this year, a 13% drop from 2013, according to MBA estimates. Banks have constrained home lending to many borrowers deemed creditworthy by mortgage finance companies Fannie Mae and Freddie Mac. Applicants approved for mortgages to purchase homes had an average FICO credit score of 755 in August, according to Ellie Mae, a company that makes software used to process mortgage applications. In contrast, Fannie Mae and Freddie Mac guidelines allow for credit scores as low as 620 for fixed-rate mortgages in some cases. Lenders reported a 30% median increase in compliance costs this year from 2013 …
That’s a steep fall alright, but don’t let’s forget we came from a time of complete lunacy. And that banks are more cautious than the government agencies should perhaps tell you something about the latter. But what’s the real worry? Looks to me like a pretty normal comedown from an abnormally exultant high. Which cost everyone dearly.
Banks are passing some of the costs of compliance to borrowers. Initial fees and charges paid by consumers on agency fixed-rate purchase loans have increased 10% to 1.21% as of August compared with a year earlier [..] Smaller lenders may be hurt the most by compliance costs, said Guy Cecala, publisher of Inside Mortgage Finance, a trade publication. They have fewer resources to maintain records and train employees, which is essential to protecting lenders in the new regulatory environment, he said. “There’s no question in this newer market it’s harder for smaller lenders to survive,” Cecala said.
These lenders, which have smaller balance sheets, generally can’t hold the loans on their books and have to sell them to government agencies or investors. At 1st Priority Mortgage, based outside of Buffalo, New York, one investor who buys the company’s loans requires employees to fill out a seven-page form verifying compliance with qualified mortgage standards. Other investors each require different forms, said 1st Priority’s President Brooke Anderson Tompkins.
That last bit is typical of Washington ineptitude, but as I said, for once that works out well, and besides, US screw ups on the ebola file have far more serious implications.
Then, the same day, Barry Ritholtz whined about his own difficulties in getting a mortgage. Which of course, he got anyway, because Barry’s a Wall Street man, investor man, analyst etc. Just like Ben Bernanke got his loan refinanced after some much talked about ‘trouble’. Pardon me, but I’m much more interested in the people who don’t get things done, like anything at all.
I remember Barry as an astute guy at his Big Picture blog back when the crisis hit 7 years ago, and would have liked to see quite a bit more self-criticism, but there you go. Here’s the crux of Barry’s whine:
Under normal circumstances, approving my mortgage application should be a no-brainer: High income, no debt, good credit score. The missus also makes a good income, has an almost-perfect credit score and has been working for the same business for 28 years. But these are not normal circumstances. Let me jump to the end: Yes, we got our mortgage. We put 20% down, bought a house that appraised for more than the purchase price and got a 3.25% rate on a mortgage that resets after seven years. We moved in last month. But the process was surreal. Indeed, it was such a bizarre experience that I started hunting for explanations from people in the industry about why mortgage lending has gone astray.
I spoke to numerous experts, many of whom spoke only on background. Today’s column is about what I learned. By just about any measure, credit is tighter today than it has been in decades. Although former Federal Reserve Chairman Ben Bernanke’s inability to refinance a mortgage is merely anecdotal, consider instead the gauge CoreLogic developed. It used 1998 as a baseline and considered six quantitative measurements to evaluate how loose or easy mortgage lending is. By those metrics, this is the tightest credit market for mortgage lending in at least 16 years.
The absurdities of my experience are worthy of its own rant, but rather than do that, I wanted to focus on what went wrong. The factors that led to the financial crisis were many …
Do read the rest at the link. My take on this is that when Barry says “credit is tighter today than it has been in decades” and “this is the tightest credit market for mortgage lending in at least 16 years”, I’m thinking not long ago he would have agreed that’s a good thing. We can argue about why this has come to pass, and blame regulation, not banks, but we all agreed in 2007 that too loose lending was a problem (both Barry and the Automatic Earth warned back then that the crisis would come, before it did a year later).
And anyway, I’m not here to show compassion with Ritholtz, I’m here because of all the other people, the young who see their dreams of a decent future cut off cold because of unemployment, low wages etc., and the old who see their pensions evaporate like so much smoke. And for both young and old, a further correction and demise of real estate will, largely – though not in every case – be a blessing. So, you’re wrong, Barry, it should hurt at least this much for you and everyone else to get a loan, if only because the pendulum was that far off its equilibrium in the other direction for so long.
Which is why I’m much more partial to what David Weidner said at MarketWatch on Thursday:
After an extended drought of credit available to consumers, it’s going to get easier to buy a home. The Federal Housing Finance Agency this week polished off a new set of guidelines that will allow government backing of loans that it had shunned since the mortgage crisis. And in a surprise move, the guidelines include a provision to consider some mortgages without down payments.
The FHFA and the Obama administration are both worried about the amount of credit available to the average American. It’s an epidemic problem. About a third of housing sales were to cash buyers in the first quarter, according to the National Association of Realtors. As I’ve written before, this is extraordinarily high, indicative of a housing market that favors the wealthy. So by lowering the standards of what types of loans are acceptable to the big mortgage giants, it’s obvious that the FHFA’s effort is about encouraging banks to provide more loans. The government is essentially saying: “Go ahead and lend; we’ll hold the paper.”
But in trying to ease credit and turn a mythic housing recovery into a real one, the FHFA may be overreaching. That’s because you know exactly who’s going to be taking out those loans: people who can’t afford them. And because there will always be some people who believe that because they can borrow, they can afford these loans, you know how this new policy is going to play out.
Consider a study issued Oct. 13 by mortgage data provider HSH.com. It found that 80% of homeowners had a regret about their purchase. Surprisingly, most of the regrets weren’t about costs. They were about the size of the home, the neighbors, the schools and other gripes. Then again, this was a post-foreclosure wave survey of 2,000 homeowners. The more than 4 million borrowers who lost their homes to foreclosure since the crisis probably weren’t asked and would have different regrets.
So, while the FHFA is certainly opening the door to another mortgage problem, it’s not ultimately the one to blame. That falls to the home buyer who bites off too much. [..] borrowers can no longer depend on banks and regulators to measure creditworthiness.
Historically, it was difficult to get a home loan. And down payments weren’t an option. They were the price of admission to the lending officer’s desk. But a series of government programs, low interest rates and tax breaks along with loosening standards at banks eroded this institutional test. So today it’s incumbent on the borrower to ask himself if he can afford the American Dream.
For many, the answer is probably “no.” [..] The FHFA will, in the end, encourage more lending. And this will translate into more credit for people who have been denied. But that policy isn’t the one that matters. It’s my policy, your policy, based on what we truly can afford that does.
Before the US, and the UK, Netherlands, Ireland, Spain and many other countries can ever have a healthy housing industry again, that industry will first have to come crashing down to levels indeed not seen in decades. Hurtful for some, beneficial for many others.
So it’s not such a bad thing if regulators choke that market, and people can’t buy properties they can only ‘afford’ is they can borrow 90%+ of the purchase price. After decades of insanity, the only way to get back to health is a severely strict diet and fitness regime. The one ultimate goal must be to make homes affordable to young people, the future of every single community and nation.
Reading through these kinds of articles, I don’t get the idea that anyone at all is aware of that, or even thinking about it. Our societies face a major economic – and therefore overall – reset, and housing is a big part of that, simply because it’s a huge percentage of the real economy. And pumping it up in artificial ways is a short term ‘policy’ that can only end in tears. It’s not exactly rocket science. If you can make a cup of coffee, you can figure this one out.