Summary
Monday morning quarterbacking is the new pasttime of regulators, community activists and lawmakers. Indignity over the abuses that unscrupulous mortgage lenders heaped on unsuspecting homebuyers is rampant. There were some abuses; most of it, however, was stupidity. And consumers, investors in housing as well as mortgage lenders--they ALL are to blame. But only the lenders and owners of the loans and their resulting securities will be penalized--in the short run; long-term, mortgage credit will be less available, higher-priced, and will decrease the homeownership rate in the U.S.
Analysis
Like the ad featuring Peyton Manning second-guessing the actors in the ad, being a Monday-morning quarterback is always the result of negative events--in this case, mounting foreclosures--which, in many articles, are depicted as "targeted at the poorest and the minorities."
When housing was booming and homeownership was hitting record levels, not one lawmaker, community activist or regulator complained that mortgage lenders were being irresponsible. Now, the cacophony from these groups strikes the ear as an orchestrated response to the open barn door. The horses have escaped, and now it's time to hold hearings, point fingers, assess blame, and "make sure it never happens again."
When rates began rising and homebuilders kept building, Realtors kept selling, and home prices kept increasing--often at double-digit annual rates--lenders obliged. They created loan products that, in retrospect, were ill-thought-through in many respects. "Option ARMs," "NINA" loans, "Stated Income" loans--all of these can be good products IF they are applied properly. But even the "gold standard" 30-year fixed-rate loan can result in disaster if housing prices decline and the borrower(s) get one of the "D's"--disease, divorce, death, or discharge (employment).
The losers in most cases are not the homebuyers being foreclosed--they got their dream home, often with little or no money down; they got "free rent" for all the months they did not make house payments; and they can move into an apartment or rental home tomorrow.
Who are the real losers? Well, the 200+ mortgage companies that have gone broke are a good start. The several thousand mortgage brokers who have closed up shop add to the wreckage. Realtors and mortgage brokers who now are selling something else, from cars to time shares, certainly have felt the effects. Ferrari and Benz dealers have been affected. But they aren't the big losers.
On July 10 and 11, S&P and Moody's downgraded 1,011 mortgage bond issues, and these were not the first downgrades of mortgage bonds. More will follow, and losses by bondholders will do damage to our mortgage credit system--indeed our nation's balance of payments--as China and others say, "And we thought mortgages in the U.S. were rock solid."
Banks, thrifts, Fannie Mae, Freddie Mac and other owners of loans that go bad will lose, on average I'm told, about $60,000 per loan.
Former homeowners who are foreclosed will have that stain on their credit report, but their cash losses will be minimal or none. Moreover, since so many foreclosures thus far have been on sub-prime loans, most of these borrowers had foreclosures or bankruptcies to begin with, not to mention poor credit--otherwise they wouldn't be "subprime."
What will happen? Regulators and Congress will be righteously indignant and will outlaw some loan types, will toughen credit underwriting, and will add a lot more paperwork, much of it in the way of disclosure (which is done now at painstaking levels--the average mortgage loan file is about 2" thick).
Finally, this will happen: Homeownership rates in the U.S. will fall; people with borderline credit will have to rent because they won't be able to qualify for a loan; the inventory of unsold homes will overhang the market longer because the pool of eligible buyers will shrink due to tougher lending standards. Home prices around these foreclosed homes will fall, generating yet more foreclosures.
And the regulators, community activists and Congressmen and -women will declare victory over the unprincipled lenders who caused all of this.
And the Law of Unintended Consequences will be enforced yet once again.
I will part with a factual example of why what is written above is true: I lived in Houson all of the 1980s (during the "oil bust"). I ran the largest mortgage company in Texas and in Houston for that period of time. We did not, in that decade, offer a single loan type remotely like those now being blamed as irresponsible; indeed, most of our loans were 30-year, fixed rate mortgages. Yet from 1983 until 1987 Houston had more than 90,000 foreclosures. Why? It wasn't the loans; it was the market. When housing prices cease rising, then start to back off, delinquencies increase. When prices fall, foreclosures increase--people can't sell their homes for what they owe. We had keys to homes mailed to us from borrowers who had not missed one payment. Why? you ask. Because they kept their payments up, bought an identical or larger home nearby for much less than they owed on their current home, and then simply walked away.
If housing prices continue to increase, there will never be a foreclosure. There may be delinquencies, but never a foreclosure.
