Fundamentals remain weak indicative of potential long-term consequences resulting from recession in the EU, inability to generate domestic jobs and declining growth in China and India.
With QE3 the Fed creates cash and uses it to buy MBS from whomever holds them. The sellers of the MBS now have cash instead of the MBS. The question then is "What do those people do with the cash they now have?" If the banks which get the cash generated by QE3 simply use that money to speculate in equities and commodities, sell at a profit and park that money as reserves at the Fed the the entire purpose of QE3 will be missed. QE's are useless unless they result in more lending and spending. The immediate effect of QE3 was higher prices of equities and commodities. This is not surprising because this is what happened in the first two rounds of QE.
This is not the consequence of some sinister conspiracy between the Fed and banks/Wall Street. This is the result of tossing money into the system when banks don't want to lend and consumers don't want to borrow. Confidence is required to be a borrower or a lender and it is confidence, not money, which is in short supply.
Self-correcting Markets
A few weeks ago I expressed here my reservations regarding Dodd-Frank. The following was written by Julian Hebron the owner of the RPM branch where I work. Julian has an excellent blog which I contribute to called The Basis Point. Julian notes that well before Dodd-Frank and the rules created subsequently, the home loan market had quickly self-corrected. Keep in mind that the Lehman Bankruptcy occurred in September 2008.
The mortgage industry actually collapsed a year earlier in August 2007, and within 12 months, loan approval guidelines were back to basics.
Here’s a sample of loan products and guidelines that U.S. lenders eliminated within this timeframe:
• Stated income: Loans that required no income verification
• Stated assets: Loans that required no asset verification
• Stated income/assets (SISA): Loans that required no income or asset
verification
• Option ARMs, which allow monthly payments for less than interest accruing
• Subprime loans, which are identified by sharp rate adjustments after
2 or 3 years
• Alt-A loans, a subprime euphemism allowing up to 100% financing for
risky borrowers
• Home Equity Lines of Credit (HELOCS) above 80% combined loan-to-value
ratio
• Fixed rate second home loans above 80% combined loan-to-value ratio.
And here’s a sample of minimum borrower documentation requirements in
the post-crisis years leading up to the signing of Dodd Frank into law on
July 21, 2010:
• 2-3 years personal and business tax returns. Filed taxes, not drafts
with extensions.
• Verification with IRS that filed returns match what borrower submitted
(4506-T)
• 1-2 months’ paystubs
• Verbal and written verification of employment for at least 2 years
• Income calculated off worst case scenarios of at least two years’
earnings
• Credit checks with all three bureaus in beginning AND end of loan process
• 2 months’ bank, brokerage and retirement statements
• Paper trails and detailed written explanations of all bank deposits
larger than $1,000
• 12-24 months’ canceled checks to verify on-time rental payment
history.
The critical point here is that lax loan products/guidelines -- not lax regulations
-- were the biggest source of the problem at the consumer lending level.
Then Wall Street, Fannie Mae, and Freddie Mac stopped demanding and buying
those loans, thus market forces corrected the worst problems at the consumer
end of the home loan industry years before any regulations came.
That is the end of Julian's piece. I would offer that what we now have is more regulations and more cost to the borrower to make it look as if the government were getting home loan lenders to do what they had started doing two years previous. This also conveniently ignores the fact that HUD set the home loan mess into motion with the National Homeownership Strategy which stated:
"For many potential homebuyers, the lack of cash available to accumulate the required downpayment and closing costs is the major impediment to purchasing a home. Other households do not have sufficient available income to to make the monthly payments on mortgages financed at market interest rates for standard loan terms. Financing strategies, fueled by the creativity and resources of the private and public sectors, should address both of these financial barriers to homeownership."
I by no means am alleging that it was solely HUD which created the home loan mess. Dumb lending practiced by WAMU, for example, was not caused by the National Homeownership strategy. The demise of FNMA and FHLMC were almost entirely driven by HUD's insistence they they make more loans to unqualified borrowers.
Regulations not only failed to stop bad lending (Stated Income, Option ARM's from WAMU) but encouraged bad lending (high-risk taxpayer guaranteed HUD mandated loans to those who do not have sufficient available income to to make the monthly payments. In effect everyone was doing their part to create a housing bubble by increasing the demand for homes faster than the supply and, worse yet, selling those homes to people who did not have sufficient available income to to make the monthly payments.
Dick Lepre
[email protected]
Web site: www.loanmine.com
Blog: economy.typepad.com
Phone: (415) 244-9383 | Fax: (866) 488-2051
1400 Van Ness Avenue, San Francisco, CA 94109
CA DRE # 01143973 | NMLS # 302379
California Department of Real Estate - Real Estate Broker License #01818035,
NMLS #9472. Equal Housing Opportunity Lender.
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