Woo-wooo! The Obama administration’s next train wreck after Obamacare is coming ’round the bend.
The administration and its Democratic allies in Congress are zealously trying to protect consumers from the crazy home-lending excesses that caused the Great Recession. Inadvertently, they are assuring that fewer Americans will qualify for home mortgages. This promises to speed-shrink the housing market, which constitutes an estimated 15% of the nation’s gross domestic product, versus 18.6% prior to the Great Recession. This, in turn, will ensure that the recovery remains anemic into the foreseeable future, with an average of about 190,000 or fewer jobs created each month – far short of the 300,000 required to make up for recession-related losses.
Crucial parts already are flying off the train. Banks are exiting from the mortgage business in large numbers, primarily because of the high operating costs and heightened litigation risks imposed by the Dodd-Frank financial-reform law.
This exodus reduces supply. Obtaining a home loan used to be a breeze for most people – even for those unprepared to weather a housing bust. Now the process is as agonizing as root-canal surgery, even for borrowers with the highest credit scores. Banks, in some instances, can be sued by a mortgage-loan customer if it turns out the customer has bad credit; so those banks remaining in the mortgage business view every loan applicant as a potential Bernie Madoff.
Access Mortgage Research & Consulting of Columbia, Md., points out in its most recent newsletter that pending home sales fell sharply over the summer from a three-year high and that economists who responded to a Zillow survey predict that annual home-price gains in the U.S. will slow to 4% in 2014 and dip even lower in the following four years versus an estimated rise of 7% this year. Freddie Mac’s economists see price growth of 5% to 6% in 2014. The U.S. Census Bureau says home ownership for the under-35 set was 36.8% in the third quarter, versus 42% in 2007’s third quarter.
The roll call of banks shrinking their mortgage footprints is stunning in length and breadth. Ally Bank, part of Ally Financial (ticker: GKM) left the market this month. In February, JPMorgan Chase (JPM) announced that it would fire 13,000 to 15,000 mortgage-banking employees through 2014. Bank of America (BAC) cut 2,100 mortgage workers in September. Citigroup (C) plans to lay off about 2,200 in 2014.
SunTrust Banks (STI) has said that it won’t make loans to mortgage brokers as of Dec. 31. EverBank Financial (EVER) and Cortland Bancorp (CLDB) have left the same markets. Wells Fargo (WFC), the No. 1 U.S. mortgage lender, ended joint ventures with mortgage brokerages this year, mainly because Dodd-Frank frowns on such relationships.
Increased capital demands from international banking regulators and new regulations from the U.S. comptroller of the currency and state banking regulators are causing banks with mortgage-servicing arms to sell them. The purchasers are unregulated nonbank competitors, which consequently are growing at explosive rates. Nationstar Mortgage Holdings (NSM), Ocwen Financial (OCN), and Walter Investment Management (WAC) all have undergone significant, potentially worrying, growth spurts.
Dave Stevens, the CEO of the Mortgage Bankers Association, says that the business risks of mortgage banking now outweigh the probable rewards because of heavy-handed new banking laws and regulations. Congress’s failure to resolve the future of mortgage giants Fannie Mae (FNMA) and Freddie Mac (FMCC) also is adding to banks’ exit from the business. The two mortgage-security issuers are operating under government conservatorship and enjoy a host of advantages and subsidies. They control two-thirds of the secondary mortgage market. (Ginnie Mae, which buys lower-quality FHA loans, has a 23% share.)
Firms that buy mortgages and issue high-quality private-label securities on both large conforming (no bigger than $625,500 in the contiguous U.S.) and jumbo nonconforming loans all but disappeared after the financial crisis, ceding a large chunk of the higher-end market to Fannie and Freddie. There’s no incentive for private money to make a comeback because Fannie and Freddie have become so dominant in the high end. And there’s no incentive for the government to return the companies to private ownership because it gets all their dividends and profits. Thus, they’ve become cash cows for it in an era of tight revenues.
But today’s profits might be fleeting. Stevens says it’s an elaborate Ponzi scheme: 75% of their “originations” are really refinancings, and at least 23% are underwater loans, exempt from costly Dodd-Frank rules. Another reason for the pair’s profits is because the Fed is buying 80% of this paper. Buyers for underwater mortgage securities might become scarcer when the Fed checks out. Woo-wooo!