Turning The Corner: Private Mortgage Lending Returns

 

An interesting article out of Housingwire reports good news from the mortgage market.  Here is an excerpt:

 

Wells Fargo finalized a new division built to originate mortgages outside of Fannie Mae and Freddie Mac guidelines.

-snip-

The bank promoted Brad Blackwell, formerly a sales manager in charge of West Coast operations, to lead the new business. He will work with Wells Fargo community banks, wealth brokerages and retirement groups, and the non-agency, jumbo and home equity loans will be kept on the Wells portfolio.

If this isn't a clear indicator that we have entered the bottom of the current market cycle, I don't know what is.  Banks don't like to lend on collateral that is falling in value.  It follows the maxim: Never Try To Catch a Falling Knife.  When house prices stop falling, lending becomes a much safer bet for banks.  This is just the latest evidence that we have entered a turning point in the market.

For those of you waiting to buy a home, I would highly recommend that you take a look around the market.  Bargains abound and interest rates are ridiculously low.  Let me show you where the bargains are.   

Photo of the Day: Visions of Blue

I went shopping in Riverdale with a client today and we stumbled upon this interesting scene:

Blue walls, blue ceiling, complimented with blue carpet.  My client and I both agreed it's the only room we have ever been in where we felt like we were drowning.  Needless to say...we didn't write an offer on this home.

Climbing Out Of The Abyss: Weber County Sales Data

I reviewed sales data from Weber County for the past several months.  There is some good news.

Queue chart please:

This chart records home sales since the inception of the online MLS system for Weber County back in 1995.  From 1995 to 2003 sales volume grows slowly but steadily, likely mimicking population growth.  Then, in 2003, sales start to climb significantly.  That surge in sales never stops until 2007... just as the mortgage meltdown starts.  Then we see a precipitous and painful correction.  The downward trend is choppy as government intervention gooses sales in 2009 only to have the market recoil further in 2010.

But alas, there is hope.  Just looking at the patterns, it appears that 2011 was the first "normal" seasonal cycle we have experienced since prior to the market collapse.

Our trendline is also showing signs of improvement.  After 2010's dismal performance, we appear to have bottomed out and are now climbing out from a sales volume trough.

Another thing to consider is what the long term trend should be based on population growth.  If we draw a line following the average growth that occurred ending in 2002, we should be selling just under 300 homes a month on average.  Right now we are floating around 200.  If we have truly troughed, then look for sales growth to trend toward the 300 mark over the next couple of years.

Brighter days may be upon us.  

Uncle Sam's New Mortgage Tax

Headlines today report of a discouraging new tax being levied on new purchase loans and refinances.

Here is a video from CBS:



This is what happens when government spends more than it generates in revenue. If they will tax mortgages, what else will they tax? Your auto loan? Your student loan?

The dark cloud that looms is that the Feds have now created a dependency on Federally backed financing to help generate tax revenue. That can create all kinds of mischief, including an incentive to increase government's involvement in its already near-monopoly in residential lending. However, there is a silver lining.  If the taxes increase to a substantial level, it may be an incentive for private lenders to step in and provide a more affordable option to borrowers.

The best policy decision would be to get the government out of the mortgage and housing business.

HARPooned: Fed Mortgage Mods Let Owners Spear Self In Foot

Headlines showed up recently praising a revamped Mortgage Modification program proposal coming out of Washington.  The official acronym is HARP.  Here are some highlights courtesy of Housingwire:

The plan...allows borrowers in privately funded loans to refinance into a lower rate Federal Housing Administration mortgage. The program would be expected to cost between $5 billion and $10 billion through a tax charged on the banks.

A separate option under the program would apply to borrowers in Fannie Mae and Freddie Mac loans as well. Anyone who refinances could reduce the term of their mortgage to less than 20 years. If the borrower commits to keeping the monthly payment where it is, the GSEs or the FHA would cover the closing costs estimated at roughly $3,000 per refinance.

This is government intervention in the market at its worst.  To understand how bad this policy is, you have to follow the money chain.  Currently, many banks own loans issues to homeowners during the housing bubble.  Many of those loans went bad over the past few years and those banks are now licking their wounds trying to rebuild capital and stay afloat.  For the good loans that are left, the bank receives a monthly payment that includes interest and a portion of principal.  This is income to the bank.

What the HARP program proposes is to refinance the bank's good loans (i.e. eliminate its income source) and lend the homeowner money from FHA (a loan insured by my tax dollars and yours). At prevailing rates which are far lower than rates on loan issues several years ago.

So what kind of crazy consequences could come from this kind of policy?  There are several.

First, the program has the potential to handicap the banks even further.  By holding good loans that have interest rates above prevailing interest rates today, the banks can make use that money to repair their balance sheets and return to health.  If those loans are refinanced, it means that the bank looses that income and must reissue those funds in new loans at todoay's lower rates.  This reduces their income stream and postpones their return to health.

Even more sinister however is the effect that future inflation could have on these banks.  If the bank reissues its entire portfolio at today's record low rates, when rates increase, it means that the banks will be loosing money again hand over fist as borrowers have no incentive to refinance at punitively higher rates.  Inflation could drag banks back into insolvency at interest payments on savings and deposits exceed interest income on loans.   

Think about FHA and all these government owned loans.  What does it mean to the taxpayers if their money is sitting in super low interest loans as inflation pushes interest rates up?  These loans become a loss on the public balance sheet.

Add interest rate risk to the fact that the Feds want to tax banks to pay for a forced divestiture of their assets and you have a recipe for gross unintended consequences.  It's the equivalent of thugs ransacking your house, taking your valuables, and then sending you a bill for their efforts.

It might be tempting to say, "Hey, those slimy banks deserve it!".  Well, not all banks are slimy.  Unfortunately, this policy proposal will affect the good as well as the bad. How much better off will the public be when their good banks whither? The public should not be surprised when their local bank gasps for air after having been HARPooned by the Feds.