by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
Ken Montville asked the nagging question about the future of the mortgage market:
Unfortunately, even Congress — that bastion of liberalism and home of the bailout — is tiring of pouring good money after bad into the two mortgage giants that have been sucking up all the mortgages — good and bad — that private industry is willing to create. To paraphrase one-time third party Presidential candidate, Ross Perot: That giant sucking sound you hear is taxpayer money subsidizing home mortgages.
Now, the big questions remains: What will happen next? If there is no Fannie and Freddie to buy up all the mortgages, who will do it? Will the lenders who originate the mortgages be forced to keep them on their books and won’t this further inhibit an already tight credit market?
I outlined, a year ago, how the government is retarding a private mortgage banking recovery but I said it again for Ken’s benefit:
“If there is no Fannie and Freddie to buy up all the mortgages, who will do it?”
Nobody will…or everyone will. I’m a “lowly retail mortgage originator” with some formal education (and lots of informal education) in economics so consider my opinion with that qualification.
To use a BawldGuy axiom, lenders lend. Unfortunately, the government, through TARP and artificially subsidized mortgage rates, is creating a situation where lenders prefer arbitrage to lending. It doesn’t take a rocket scientist to borrow guaranteed money at 1% and lend it (with a guaranty) at 4.5%. This is the systemic problem that is distorting the market and arresting any chance of a recovery in lending.
If the GSEs were allowed to fail, and FHA disappeared, lending would halt…for about 3-4 months. The recovery would be robust, sustainable, and at rates somewhere in the high 5s or lower 6s. Wall Street is taking chances on 5.75%-6% non-guaranteed, mortgage yields right now; there is interest in betting on the American homeowner. Low down payment loans would most likely be gone for about a year. As prices got stupendously cheap, niche lenders might offer lower down payment loans for 100 BP higher.
You are right to criticize those who cry “Socialism” at the big government moves yet gladly lobby for subsidized residential real estate finance. The National Association of Realtors are a great example of that hypocrisy. It proclaims to be a bastion of the free market but asks for handouts.
I, like some colleagues, think the GSEs and agencies have wrecked residential real estate finance. Why would I originate loans for them? It’s my job. If I didn’t seek the best possible rate for my customers, I’d be derelict in my duty and certainly out of business. Still, one can explain how the recovery of private mortgage banking will happen when this folly finally blows up.
Then, I realized I hadn’t really answered Ken’s question. My take:
Let me answer the nagging questions in everyone’s mind: when and what?
When?
Probably not for another year. Even the party of “hell no” loves their housing subsidies and the party of “do it now” sees it as an opportunity to buy votes. We’ll find out about the latter on August 17 or 18. We’re really safe until 5-6 months into the New Congress. If the party of “hell no” successfully lets Fannie/Freddie die, and the FHA premiums rise yet again, liquidity will dry up. Call it sometime between May and September of next year.
What then?
Hand wringing, vociferous debate, name calling, and outright bribes to “restart” the GSEs. It won’t work. Meanwhile…YOU should keep your eyes on the small, regional banks. Moreover, keep your eyes on the regional mortgage bankers. Really sharp cookies will have access to private lenders (READ: Hard Money) Start developing relationships with these local banks today. When prices get to the point that all cash deals scooping up everything, those local banks will make 80-90% loans.
Until then, save up your money for a 4-6 month stoppage. There will be a bonanza when the pent-up demand comes bac,k after Halloween of next year- you just have to survive for six months. This means you have 12 months to make 18 months worth of income- do it, be prepared, and profit immensely in the Fall of 2011. If you’re still around, you will have earned it
It might be ugly for a while but you can plan for it and profit from it. Y’all ready for the desert?
Genuine Chris Johnson says:
Brian,
VV nice post/summary. It’s wishful thinking. I wish the party of No had principles/scruples here. Each party is given over to making different messes, and the mess that the GOP will make will probably exasperate the mess that the Obamanauts are makin’.
August 10, 2010 — 2:41 pm
Taylor White, PHD says:
You gotta´ let all the bad stuff happen…so we can move on already.
All we are doing is delaying the inevitable.
Lets get this party started.
August 10, 2010 — 4:10 pm
Broker Bryant says:
I’m ready for it. I just listed my 3rd property this month where the seller is offering financing. Seller financing is going to be very popular over the next few years. I’ve also been marketing to foreign investors with cash to spend. Once they purchase a home we turn right around and offer it for sale with financing. It’s a win all the way around.
August 10, 2010 — 4:33 pm
Brian Brady says:
“I just listed my 3rd property this month where the seller is offering financing.”
Oh my! The arbitrage move is just brilliant, Bryant. They buy at X for cash, sell at x+25% with financing. Very smart thinking
August 10, 2010 — 5:59 pm
Mike says:
In the 1930’s the banking system had collapsed (i.e. it wasn’t bailed out) and people weren’t able to get mortgages even though buying was cheaper than renting. At this time it made sense for the government to provide financing – there was no alternative. Helping renters become owners also lowered their monthly expenses which helped the housing market and the overall economy.
Once things got back to normal, these GSE’s should have been phased out.
August 11, 2010 — 8:10 am
Brian Brady says:
I think there were some 15,000 banks that survived “the collapse” Mike. Why weren’t they lending on residential real estate?
August 11, 2010 — 9:27 am
Mike says:
There’s no simple answer to that question Brian, is there? In fact, economists still don’t agree completely.
My (oversimplified) take is this. When the rampant speculation of the roaring twenties (stock market bubble, investment trusts, the florida land bubble that made Charles Ponzi famous) stopped, it led to a recession (sound familiar?). The recession led to bank failures. Since there was no deposit insurance, this led to bank runs, which led to yet more bank failures. From 1929 to 1933 the money supply fell 40% and incomes fell 50%.
In that environment, those who still had money probably weren’t too keen on lending it out.
Now I’m expecting someone will tell me I’m full of it and it was all the governments fault. But do I at least get partial credit?
August 11, 2010 — 2:56 pm
Brian Brady says:
“There’s no simple answer to that question Brian, is there?”
I think there is.
“In that environment, those who still had money probably weren’t too keen on lending it out.”
They were. Banks lent at 50% LTV (which drove Hoover nuts). Hoover’s discontent is what eventually led to the formation of the Federal Home Loan Bank Board. Still, that didn’t work because the FHLBB leadership thought 50% LTV was a safe number. Eventually, Hoover hired a socialist to run the FHLBB to “get things moving” because…
Both the bankers and the bureaucrats thought…prices still had room to fall, which is banker talk for “the houses were too damned expensive”.
Admittedly, the “animal spirits” probably contributed to that puckering fear in the (healthy) banking community but prices weren’t compelling enough to risk depositors money on the deals.
“But do I at least get partial credit?”
🙂 That was one of the funnier questions Ive answered today. Sorry if the tone insults your intelligence, Mike. That was never my intention.
August 11, 2010 — 3:31 pm
Brian Brady says:
“From 1929 to 1933 the money supply fell 40% and incomes fell 50%.”
I want to build on this, Mike. What do 50% lower incomes portend for property values?
August 11, 2010 — 3:34 pm
Kevin Dwyer says:
When the money dries up, it will be an owner financing market.
August 17, 2010 — 11:08 am