MORTGAGE LENDING: “LET’S TAKE IT NICE AND EASY, IT’S GONNA BE SO EASY…”

10/22/14

Two developments on the mortgage regulatory front warrant serious consideration and spawn one insightful observation and draw two conclusions.

Federal Housing Finance Agency Director Mel Watt announced yesterday that Fannie Mae and Freddie Mac will guarantee mortgages with down payments as low as 3%.  Previously, though there were exceptions, Fannie and Freddie required 20% down payments on mortgages they guaranteed.

At the same time, the Dodd-Frank requirement that banks retain 5% of the risk in the mortgage loans they originate and sell to investors or require a 20% down payment on such loans was watered down.  Under the new rules, banks can avoid retaining risk in the mortgages they originate and sell by merely “verifying a borrower’s ability to repay” and ensuring that their debt levels remain below certain predetermined thresholds.

Both moves are part of a general thrust toward easing home lending requirements and are seen as a response to a continued sluggish housing market that is characterized by home sales’ being down 2% from last year and still below pre-recession levels of seven years ago.

One can make one observation and draw two conclusions from these regulatory developments.

First, the observation:  At the expense of sounding like a heretic in the church of new age financial innovation, when you have put down only 3% of the value of “your” home, you don’t own the home; your lenders do.  Many have pointed out that only a slight change in housing prices would wipe out one’s equity under such a structure, and that is true.  But even more fundamentally, one doesn’t have to be as atavistic as yours truly to realize that you don’t own anything when you have borrowed just about its entire purchase prices.

Now, the first conclusion.  Wall Street must have gotten to the regulators.  Mortgage backed securities issuance is down 50% year to date from last year.   This of course hurts the trading profits of banks and other Wall Street institutions.   The regulators and their political masters are following their usual “Yes, sir, you’re right sir, what else can I do to make your life easier, sir?” approach to Wall Street and to anybody else capable of writing brobdingnagian “campaign” checks and providing other sources of lucre to our selfless public servants.  That the taxpayers and others not within the vortex of Washington may wind up with the bill for such service is inconsequential to the political class.

Finally, the second conclusion.  Regulators have to have concluded that our Potemkin housing market, and maybe our Potemkin economy, cannot survive without massive debt extension and creation.  That a large chunk of such debt may be unserviceable, and thus will have to be picked up by the taxpayers is, again, inconsequential to the political class or to the special interests it services.