Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
S&P 500 Stuck at 2,900, Still No Clear Direction - 17th June 19
Is Boris set to be the next Conservation leader? - 17th June 19
Clock’s Ticking on Your Chance to Profit from the Yield Curve Inversion - 17th June 19
Stock Market Rally Faltering? - 17th June 19
Johnson Vs Gove Tory Leadership Contest Grudge Match Betfair Betting - 17th June 19
Nasdaq Stock Index Prediction System Is Telling Us A Very Different Story - 17th June 19
King Dollar Rides Higher Creating Pressures On Foreign Economies - 17th June 19
Land Rover Discovery Sport Tailgate Not Working Problems Fix (70) - 17th June 19
Stock Market Outlook: is the S&P today just like 2007 or 2016? - 17th June 19
US China War - Thucydides Trap and gold - 16th June 19
Gold Stocks Bull Upleg Mounting - 16th June 19
Gold Price Seasonal Trend Analysis - Video - 16th June 19
Fethiye Market Fruit, Veg, Spices and Turkish Delight Tourist Shopping - 16th June 19
US Dollar Gold Trend Analysis - 15th June 19
Gold Stocks “Launch” is in Line With Fundamentals - 15th June 19
The Rise of Silver and Major Economic Decline - 15th June 19
Fire Insurance Claims: What Are the Things a Fire Claim Adjuster Does? - 15th June 19
How To Find A Trustworthy Casino? - 15th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match - Video - 14th June 19
Gold and Silver, Precious Metals: T-Minus 3 Seconds To Liftoff! - 14th June 19
Silver Investing Trend Analysis - Video - 14th June 19
The American Dream Is Alive and Well - in China - 14th June 19
Keeping the Online Gaming Industry in Line - 14th June 19
How Acquisitions Affect Global Stocks - 14th June 19
Please Don’t Buy the Dip in Nvidia or Other Chip Stocks - 14th June 19
A Big Thing in Investor Education is Explainer Videos - 14th June 19
IRAN - The Next American War - 13th June 19
Boris Johnson Vs Michael Gove Tory Leadership Grudge Match Contest - 13th June 19
Top Best VPN Services You Can Choose For Your iPhone - 13th June 19
Tory Leadership Contest Betting Markets Forecast - Betfair - 13th June 19
US Stock Market Setting Up A Pennant Formation - 13th June 19
Which Stocks Will Lead The Cannabis Rebound? - 13th June 19
The Privatization of US Indo-Pacific Vision - Project 2049, Armitage, Budget Ploys and Taiwan Nexus - 12th June 19
Gold Price Breaks to the Upside - 12th June 19
Top Publicly Traded Casino Company Stocks for 2019 - 12th June 19
Silver Investing Trend Analysis - 12th June 19
Why Blue-Chip Dividend Stocks Aren’t as Safe as You Think - 12th June 19
Technical Analysis Shows Aug/Sept Stock Market Top Pattern Should Form - 12th June 19
FTSE 100: A Top European Index - 12th June 19
Gold Surprise! - 11th June 19
How Forex Indicators are Getting Even More Attention in the Market? - 11th June 19
Stock Market Storm Clouds on the Horizon - 11th June 19
Is Your Financial Security Based On A Double Aberration? - 11th June 19
What If Stocks Are Wrong About Interest Rate Cuts? - 11th June 19
US House Prices Yield Curve, Debt, QE4EVER! - 11th June 19
Natural Gas Moves Into Basing Zone - 11th June 19
U.S. Dollar Stall is Good for Commodities - 11th June 19
Fed Running Out of Time and Conventional Weapons - 11th June 19
Trade Wars Propelling Stock Markets to New Highs - 11th June 19
Best Travel Bags for Summer Holidays 2019, Back Sling packs, water proof, money belt, tactical - 11th June 19
Betting on Next British Prime Minister Tory Leadership Betfair Markets Forecast - 10th June 19
How Can Stock Market Go Up When We’re Headed Towards a Recession? - 10th June 19
If You Invest in Dividend Stocks, Do This to Double Your Returns - 10th June 19
Reasons for the Success of the Dating Market - 10th June 19
Gold Price Trend Analysis - Video - 10th June 19
US Stock Markets Rally Hard – Could Another Big Upside Leg Begin? - 10th June 19
Stock Market Huge Cosmic Cluster Ahead: Buckle Up! - 10th June 19
Stock Market Higher To Go? - 10th June 19
The Gold Price Golden Neckline… - 10th June 19
Gold Price Seasonal Trend Analysis - 9th June 19
The Fed Stops Pretending - 9th June 19
Fed Rate Cuts Soon; Bitcoin Enthusiasts Join Wall Street in Bashing Gold - 9th June 19
1990s vs. 2010s - Which Expansion Will be Better for Gold? - 9th June 19
Gold Price Trend Analysis, MACD, Trend Channels, Support / Resistance - 8th June 19
Gold Surges Near Breakout - 8th June 19
Could Gold Rally Above $3750 Before December 2019? - 8th June 19
5 Big Lies About Precious Metals Investing Exposed - 8th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

The U.S. Housing Market's Biggest Hurdle

Housing-Market / UK Housing Mar 23, 2012 - 06:45 AM GMT

By: Money_Morning

Housing-Market

Best Financial Markets Analysis ArticleShah Gilani writes: Forget about optimistic headlines on the housing market.

Whether it's record low mortgage rates, improvement in the Case-Shiller Index, higher housing starts, or any other report, the headlines don't tell the whole story - and the story matters.


The real story is that the housing bubble was inflated by cheap and abundant mortgage financing and a sustainable recovery is only possible if that story has a second chapter.

But, that's not happening.

In fact, structural changes in the mortgage industry are about to make buying a home loan a lot tougher than it has been in the last quarter century.

Let's start with the premise that no matter how cheap a house is, and no matter how low interest rates go, nobody is buying anything if they can't qualify for a mortgage.

Or, if lenders decide to charge too high a rate because they're either not constrained by competition or they can't offload the mortgages they underwrite, how can there be a housing recovery?

The Changing Landscape in Mortgage Finance
Let's look at what's happening in terms of buyer qualification standards, competition in the mortgage industry, and lenders' ability to package and offload mortgages.

Lenders have been consistently raising standards for borrowers. Long gone are the days of the famously named NINJA loans, as in: no-income, no-job, no-assets, no-problem.

The primary reason standards have risen is that buyers of securitized loans crammed with mortgages have "putback" rights that force mortgage lenders to buy them back.

Fannie Mae and Freddie Mac, who ultimately bought hundreds of billions of dollars of mortgage-backed securities, have been forcing lenders to buy-back billions of dollars of non-performing mortgages.

In 2011, Fannie and Freddie demanded $33 billion in mortgages be bought back. That was a 10% increase over what they putback to lenders in 2010.

Basically, the standards by which lenders were supposed to judge borrowers were overlooked or fraudulently misrepresented. Other factors, like faulty appraisals, are also a factor in accessing the covenants that lenders have to abide by when they sell mortgages.

I'll come back to higher borrower standards in a moment, but the standards issue flows immediately into what's happening on the competitive landscape today.

Big banks not only got heavily into the mortgage origination business during the boom, they also bought mortgages that were already underwritten from "correspondent" lenders.

Correspondent lenders have contractual relationships with bankers that allow them to sell the mortgages they make to the banks, thus freeing up correspondents' invested capital to underwrite more loans.

Correspondent lenders are not depository institutions.

They are usually private companies that have their own capital to make loans or borrow money through what's called a warehouse line of credit.

Here's how it works.

A mortgage broker (an originator) will take an application for a mortgage and pass it along to an underwriter (who reviews the documents and approves the loan). The underwriter, usually a mortgage banker, will fund the loan from the warehouse line of credit he has, make the mortgage, and then sell it to a bank where he is a correspondent lender.

Fewer Correspondent Lenders Means Less Competition
But, a lot of big banks are getting out of the correspondent lender business because the loans they bought from these lenders are being putback to them by institutions like Fannie, Freddie and insurance companies.

It is why Bank of America is winding down its correspondent relations and recently said it wasn't renewing "certain contractual delivery commitments" it had with Fannie Mae.

Fannie says that it cancelled the arrangement because Bank of America wasn't honoring its demands to buyback some $5.45 billion in non-performing mortgages. That spat is playing out in full public view and will have ramifications for the entire industry.

CitiMortgage, a division of Citigroup and the nation's sixth-largest residential mortgage wholesaler, on Feb. 1 said it would cease table-funding loans as it prepares to exit the wholesale origination business.

Metlife recently shuttered its home lending business after unsuccessfully trying to sell it.

Also, Ally Financial, which is in serious trouble, is presumably looking to get out of the mortgage business altogether, that is if it can't sell pieces of itself or itself entirely.

And just this week Wells Fargo, which has a 34% share of the correspondent market, sent around an internal memo (which was leaked to National Mortgage News) that it was dumping 86 third party originators they used to buy mortgages from.

That's bound to have an effect on the third party originating business since in the fourth quarter of 2011alone Wells bought almost $55 billion from third party originators.

These structural changes in the mortgage industry will reduce competition and ultimately increase the cost of money to buy a home.

It's not because there will be less money to lend. The end game is to eliminate the middlemen so the big lenders can fatten their profit margins.

And once there are only a handful of big players left offering mortgages, their pricing power will be almost monopolistic and undoubtedly raise the cost of borrowing for homebuyers.

Tighter Standards in the Housing Market
Back to buyer standards.

There's currently a heated battle going on to determine what a qualifying mortgage "QM" is and what a qualifying residential mortgage "QRM" is.

What the general guidelines need to be for each of these are being debated by regulators and industry insiders to make it easier for lenders to package "standardized" and qualified mortgages into security pools.

But, there's a huge problem with establishing a QM standard.

If the new standards are more restrictive, they will limit credit access to a wide cross-section of would-be homebuyers.

As a result, regulators are having a hard time determining what percent of defaults in the future might be prevented, as opposed to what percent of loans would be excluded under QM standards.

The QRM issue is all about an even higher standard of loan, that if met, wouldn't require the originator to retain a 5% interest in those loans as an additional reserve.

But these issues aren't even the industry's biggest problem.

Even now, there's still no resolution about the future of Fannie and Freddie.

They're supposed to be wound down, but they can't be. They are the ultimate buyer of the majority mortgages made and there is no private solution that is capable of replacing them.

And until there is, the battle over government intervention in the housing market will continue.

Yes, everyone wants to fix housing.

But, in an election year, are people going to be screaming for more taxpayer breaks for banks that originate mortgages and sell them to Fannie and Freddie so they can make more loans and profits while putting taxpayers at risk?

No matter what the headline news is about housing, the truth is unless there's an assemblyline-like fix down at the financing factory, don't count on a sustainable recovery in housing any time soon.

Source :http://moneymorning.com/2012/03/23/the-housing-markets-biggest-hurdle/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules