Wednesday, May 29, 2013

A Guide To Fixing The Housing Market

Step 1, the federal government has to stop implementing creative mortgage financing solutions to help consumers buy or refinance homes.  Step 2, everybody, everywhere should channel all thoughts, conversation and energy towards creating jobs, political people, entrepreneurs, corporate soldiers, ma and pa, everybody. And Step 3, eliminate the insanity and chaos in the afraid-to-make-a-mistake mortgage industry.
Starting with a robust housing market as the desired result, and working backwards through the maze of barriers to achieve that end, we need to establish a framework from which we can launch this initiative.  Last, we will need an efficient and reliable mortgage financing industry to provide a means to facilitate home purchases.  Mostly, since quality mortgage loans require a predictable income stream as a source of repayment, most commonly from wages from permanent or reasonably permanent employment, jobs will be vital to this framework for getting the housing market back on track.  But first, foremost and  undeniably paramount to a housing market firing on all cylinders is the unconditional necessity for federal  mortgage and financial politicking to stand down and not engineer the kind of policy that has caused so much bad for so many for so long.
Everybody in the mortgage business and everybody in every industry that supports mortgage business are terrified of making mistakes. Mistakes could render a loan unsellable in the secondary markets or if for some reason a loan defaults and a supporting document is missing or a guideline was incorrectly interpreted, the loan could become a buy-back candidate. Mortgage lenders want nothing to do with preventable loan losses and as a result, a policy and procedural quagmire has cast a long shadow over how mortgage loans find their way to closing tables.  The fact is that mortgage financing today has little to do with identifying qualified home buyers and everything to do with chasing documents.
Truth and consequences shone a painfully bright light on a mortgage financing industry that was unruly and haphazard, a patch-work of high risk, high return motivated lending practices that failed Risk Analysis 101 and led to catastrophic failure. With ample room for improved policy changes, all of which were desperately needed and long overdue, the rush to implement these fail safe transformations sacrificed consistency and efficiency and left the mortgage industry awash in risk averse defense. In other words, lenders are interpreting underwriting guidelines and documentation requirements far more conservatively than a sustainably robust housing market would require. We are drowning in over-documentation and the people charged with keeping mortgage lenders safe have no clear and consistent mandate to implement, they are interpreting policy as they see fit.  There is no detailed instruction manual from Fannie Mae and Freddie Mac, there is a picture of what the finished product should look like, and every lender is left to their own devices to find a way to get there.
What we need is structure, across the board, same for everybody, blessed by Fannie and Freddie, no buy-back guideline structure.  And it should be simple, follow the directions on the box, not open to individual interpretation structure tied to a culture of make sense directives.  Correctly and accurately documented loans with a clear path to proving employment, income and assets.  There will be prospective borrowers eliminated as a result of the new structure, but this is the cost of correcting what needs correcting.  I submit that this process will result in a reduction in defaults commensurate with the increase in prospective borrowers eliminated from consideration.

Lenders need a single blueprint for creating loan files, detailed, comprehensive, even evolving, but only one, not the myriad of interpretations by every underwriting manager in every lender in the vast mortgage lending universe. That is what characterizes mortgage lending today, a cacophony of clarifications for what the secondary markets consider a sell-able loan file. We have chaos, underwriting, processing and documenting mayhem.So the last step in fixing the housing market is to create a structure for mortgage lending guidelines that is clear, concise and effective for vetting borrower risk.  Lenders are busy chasing documents they believe will overwhelmingly satisfy scrutiny, to construct bullet proof loan files.  The primary goal is loans that are sell-able and not “buy-back-able,” default potential is a secondary consideration.  The reason being, if extraordinary measures are taken to create perfect loan files, fewer loans will default and fewer will become preventable loan losses.
Out of chaos comes order, or so says Nietzsche or the Freemasons or whoever, but we do have chaos when what we need is order.  A common sense, real world financial instruction manual for constructing loans, that will safeguard lender processing and underwriting, even if a loan defaults.  The instructions should be inclusive and be specific about what constitutes proper and complete documentation and when it is needed.  There should be clear and definite plug and play constructs for each part of a loan file; credit, assets and income.  Lenders have to be confident that using this new model will eliminate the threat of arbitrary buy-back decisions, attesting to the integrity of the construct of the loan file should be the litmus test.  If a lender knowingly violates agreements and attestations, and develops a history of loan defaults, they can be black balled from selling loans to the secondary markets.
Remember, the goal is a reliable and efficient mortgage financing industry as a means to facilitate the housing markets.  Right now we have countless varieties of guideline interpretations and secondary market dictates that have created a moving target for what is necessary and appropriate.
Before we bring order to chaos in the mortgage financing industry, we need to be able to make loans to people so they can buy houses.  The nature of a loan is that it has to be repaid, so people will need a means to generate income so they have money to pay back their mortgage loan.  A job is a great source of income because it generates regular and recurring income and it is verifiable.  So we will need to create jobs, lots of jobs, lots more than are being created now.  The employment picture has been so bad for so long that we have re-interpreted what is acceptable for a healthy employment report.  The first Friday of the month brings a tenth of a percent drop in the unemployment rate and church bells ring out as the equity markets rally.  Nobody is listening to the whispers about how all of the people who have given up the chase for a job and left the work force as the reason for the new and improved unemployment rate, we just like to hear that things look like they are getting better.   Financial talking heads spin anaemic job creation results into marching, full throttle recovery.  And then the jobs conversation goes quiet until next month’s employment report.
The people we elect to manage America are busy fixing everything but the one thing we need fixed the most, jobs.  Make no mistake, social issues are important, they are culture shaping, compelling and need to be addressed now issues. I get it that we need to engage in these conversations but nobody is talking about jobs and that I don’t get.  The passion and the activism that we see every day about alternative energy,  gun control, immigration reform, same sex marriage, abortion, global warming and on and on, smothers the practical, needs to be addressed even sooner jobs issue.
I do not have the answer to fixing the jobs problem, I am a mortgage guy, but we are a nation of really smart people who manage our entire existence with our smart phones. There are people in our midst who can find the answer and we need to engage them in conversation, employ their resources, employ our resources, listen to their ideas and implement their strategies.  We have witnessed titanic innovation in every industry but government, and we need the kind of better ideas that government has proven impotent to conjure.
The left and the right are so perpetually locked in a steel cage death match to exert the will of one over the other that both sides have forgotten that what we need is jobs.  The mom or dad that is struggling to make ends meet with unemployment benefits or underemployed wages cares little about social reform, they want a job, they want to take care of their families and they want to not be afraid about their financial future.  Effective management listens to customers and finds ways to fulfil identified needs, our managing leaders need to hear what we customers are saying and focus on job creation.
Consumer spending and a robust housing market will accelerate our economic recovery like nobody’s business.  Job creation is the key that unlocks consumer spending and the housing markets.  All political and leadership conversation should focus on this single issue, all day, every day until the sustainable solution is divined.  Go ahead and have side conversation about pressing social issues but keep job creation as important as armament creation during World War 2, everybody’s list should have jobs at the top.
First and foremost, we need to recognize that the Federal government does not have the answer for fixing the housing markets, but they do have a tendency to implement lots of good-idea-run-amok initiatives in an attempt to engineer healthy home ownership.  The Community Reinvestment Act of 1977 was designed to encourage banks to help meet the needs of borrowers in all segments of their communities, including low and moderate income neighbourhoods.  This was long overdue and a critical measure for the economic development of purposely forgotten sections of the population.  CRA though included the caveat that lending practices should be “consistent with safe and sound operations” of the lending community.  The spirit of the CRA, the endorsement of the Federal Reserve and the growth of the sophisticated secondary mortgage markets, along with the absence of “safe and sound operations,” somehow morphed into the everybody-gets-a-loan sub-prime mortgage bonanza that ultimately collapsed and left us in ruins.
All the while, the federal government was championing the virtues of home ownership and endorsing real estate lending practices that gave opportunity to anyone wanting to finance the American Dream.  As home ownership percentages climbed, even the mighty chairman of the Federal Reserve himself, became a cheer leading, chest pounding advocate of this too good to be true opportunity.
And then in 2008, it was over.
But fear not, the Federal government was there to save us from ourselves once again.  In 2009, HAMP (Home Affordable Modification Program) was launched and 3 or 4 million people stood on the threshold of mortgage refinancing salvation.  Originally, the idea was to relieve consumers of the dreaded “option ARM” and replace it en masses with an affordable fixed rate mortgage.  Problem was, by the time this initiative filtered down to the lenders, consumers with option ARMS simply were not eligible, and those 3 or 4 million people needing help shrank to less than 1 million.  Sounded good on TV though.
Astonishingly, this government designed mortgage financing program has a 30% to 40% re-default rate and is proudly defended by a HAMP program architect and former Assistant Secretary for Financial Institutions at the US Treasury, citing theses re-default rates as “below industry averages and below the conservative case used in program design, which was the then existing rate of 50%.”
I cannot imagine proposing a lending initiative to the lending executives at the company I work for and include the caveat that almost half of the people we make loans to will never pay us back.  The decision makers at my company would never endorse this lending strategy and chances are, I would end up unemployed for even proposing it.
HUD has been raising FHA mortgage insurance premiums for years, to finance the now rescinded payroll tax cut and replenish the $16 billion dollar deficit in the Mutual Mortgage Insurance Fund, and who pays?  Low-to-moderate income borrowers, FHA’s primary customers, the consumers who can least afford it.  FHA mortgage insurance premiums have become prohibitively expensive and consumers are looking at maximum financing alternatives that allow for a minimum down payment without the life-of-the-loan financial burden that is FHA mortgage insurance.  Mortgage business is being redirected to Fannie Mae and Freddie Mac and HUD seems to have no other answer but to continually raise the insurance rates.
And of course there is the new Consumer Financial Protection Bureau (CFPB), and the “Ability-to-Repay” rule which addresses issues that the mortgage industry has already fixed.  The Ability-to-Repay rule may help protect mortgage consumers from themselves more than anything else, but it is the market correcting threat of having to buy back a less than completely vetted loan that will keep lenders honest.
The Federal government has catastrophically mismanaged the mortgage financing landscape and has no clear plan for a balanced policy.  Lenders have lost billions of dollars in bad loans and have no appetite for losing any more. Oversight regulation is essential to an efficient, consumer-centric mortgage industry, but lacking a clearly defined formula for loan construction, the dreaded “buy-back” will continue to paralyse the mortgage finance process.  And until we stop all of the noise and focus on putting people back to work, none of this really matters.