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[By
late-2006, after it had become clear that home prices don't necessarily rise
in perpetuity, government regulators began to take their first feeble steps
at, if not actually regulating the mortgage market, at least making it clear
that they've noticed what was going on. Below, five years ago in this piece
from October 10th, 2006 it was noted, "Once the default risk was shifted
from government sponsored enterprises to Wall Street, government regulators
hit the snooze button". As it turns out, that's a pretty good summary
of what happened.]
ooo
Amid
news that home prices are now falling across the nation, in some places
rather precipitously, comes word that a few government regulatory agencies
have arrived on the scene, ready to help the process along.
What
does this mean for the future retirees of America who have become comfortable
with the notion of spending more than they earn, sure that the rising value
of their real estate will provide for them, not only in the present, but in
the future as well – in their golden years?
It
looks like we’re going to find out.
According
to this LA Times story yesterday, mortgage lending standards
are being tightened and lenders are being advised to ensure that borrowers
can actually repay their loans.
A
Novel Approach
The
standards come in the form of “guidance” from the Office of the
Comptroller of the Currency (OCC), the Office of Thrift Supervision, the
Federal Reserve, and other regulators. This is the same regulation that has
been flopping around in seemingly endless review and comment cycles since
late last year.
Federally
chartered lenders are now strongly urged to evaluate borrowers’ ability
to repay their loans based on more than just the low payments enabled by
interest-only, option-ARMS, and low introductory interest rates.
A
minor detail here is that interest-only loans and option-ARMS don’t
normally result in the loan being repaid – perhaps this is one of the
reasons that the nation’s housing market is currently in such peril.
Further,
stated income loans, also known as “liar loans”, are only to be
used when the borrower’s situation warrants, rather than as a means to
get the deal done when income is not available as a mortgage repayment source
(see Casey Serin).
It
seems that all of these nontraditional mortgage products have been misused in
recent years.
Kathy
Dick, deputy U.S. comptroller for credit and market risk, said interest-only
loans and option ARMs originally were for a minority of savvy, well-off
people whose income was variable — the self-employed and those who
worked on commission or were paid intermittently.
“Now
they’re used to get someone into a home without a real analysis of
their ability to pay,” Dick said. “Lenders are qualifying
people for homes they can’t afford. We felt that wasn’t
consistent with prudent lending principles.”
No,
that doesn’t sound prudent. What took you so long?
It
remains to be seen how effective this “guidance” will be.
Regulators promise remedial action for those who don’t comply, however,
these types of loans have accounted for more than half of all first-time
mortgages and refinancings in recent months.
It’s hard to imagine how homes can be sold at current prices given the
new tougher qualifying standards.
Now
for the Bad News
That’s
where the bad news comes in and it may get a lot worse than just
“bad” when it’s all said and done. Some have been expecting
this sort of thing for a while now.
“Just
as the loosening of credit standards made the housing bubble go higher
and last longer, the tightening of standards is going to make it deflate
further and faster,” said Michael Calhoun, president of the
Center for Responsible Lending, a research and advocacy group that fights
predatory lenders. As borrowers find they qualify only for smaller loans,
Calhoun predicted, sellers will have to cut their prices.
“There’s
some pain coming,” he said, noting that California “is at ground
zero on this.”
That
Michael Calhoun sounds like a smart fellow. Maybe the federal regulators
should hire him, or a
least call him once in a while. Maybe they should have called him a couple
years ago.
An acceleration in the decline in home prices may put a
crimp in the current spending and future retirement plans of many homeowners,
particularly the 20 million or so in California. Realistically, most
Californians can do without a Hummer today, but many are counting on that
home equity later on in life.
That’s
what David Lereah at the National Association of
Realtors seems to think.
In
this Chicago Tribune story from last week, when asked to comment
on a study by Moody’s economy.com that house prices in some areas are
set to “crash”, Mr. Lereah remarked,
“I don’t think I would use the word ‘crash’. When you
use a word like that, it’s almost a self-fulfilling prophecy in the
housing market. These are people’s homes. Their retirement is
depending on it.”
Oops!
Maybe some thought should be given to a Plan B.
Hopefully,
there will be enough time for workers in their prime earning years to save
for their retirement if their homes let them down. That’s the way it
used to work – this home equity wealth always seemed a little too good
to be true. Maybe it will vanish as quickly as it appeared, and we’ll
all be better off for it.
Maybe
this new guidance is a sort of tough love that was never administered
during the Greenspan era.
An
Intervention
It’s
as if federal regulators are about to conduct an intervention for
America’s negative savings rate. It’s long overdue and it
won’t be pleasant, but someone’s got to do it. Maybe then people
will start to once again think of housing as a place to live, rather than a
place to get rich.
The
real question is what took them so long?
Wasn’t
it obvious a year or two, even three years ago, that regulation was needed?
Low interest rates are one thing, but when cheap money is combined with lax
lending standards, you’re asking for trouble. Problems arose with
Freddie Mac as early as 2002 and with Fannie Mae in 2003.
Once
the default risk was shifted from government sponsored enterprises to Wall
Street, government regulators hit the snooze button. Whenever you go from
zero to almost 50 percent of anything (see chart), someone should be paying
attention.
In
the last few years people have actually come to believe that their home will
provide for them, not only in the present (as evidenced by the last few
year’s $1 trillion in home equity withdrawal), but after they stop
working as well.
Mr.
Lereah certainly seems to think this way, and as a
result millions of homeowners do too.
As
it is, coming late to the game after home prices have soared for years,
regulating the risky loans that have supported astronomical home prices when
millions of homeowners are now counting on these prices to remain
astronomical far into the future, well, that just seems like a cruel joke.
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