Monday, August 06, 2007

Long Painful Road Ahead

A return to sanity in lending? Seems like it, at least for now, according to The Wall Street Journal:

As regulators and jittery investors force them to adopt more and more conservative lending standards, lenders are cutting more people out of the housing market. In what would strike most people outside the industry as a return to common sense, lenders now are shunning would-be borrowers who can't make a down payment, prove that they have a reliable income and show a record of reasonably regular bill-paying. They also are turning down refinancing requests from many people trapped by adjustable-rate loans that are proving too expensive after the initial feel-good period of low payments.

While the return to common sense lending and underwriting standards is going to be good for the housing market long-term, the Journal says short-term it's going to cause quite a few headaches:

"This week is going to be a nightmare," says Melissa Cohn, chief executive of Manhattan Mortgage in New York. Lenders are scaling back so fast that it isn't clear which loans are available or on what terms, and rates are jumping even on large loans, known as jumbos, for prime borrowers.

These stricter lending standards reduce demand for homes and nudge some people who can't refinance toward foreclosure. Higher foreclosures add to a glut of homes on the market in most of the country. And, completing the vicious circle, a weaker housing market comes back to bite the lenders by wiping out owners' equity in their homes and increasing the risk of even more foreclosures down the road.

"The market is in a panic," says Larry Goldstone, president of Thornburg Mortgage Inc., a lender in Santa Fe, N.M. He says he thinks the mortgage-bond market, which supplies most of the money for home mortgages, will calm down within a few months, but the housing market may need at least another year or two to heal.

The tougher lending standards are keeping 10%-15% of the people who would have qualified for loans last year out of the market this year.

In addition, potential buyers with good credit are staying on the sidelines because they think real estate prices are going to continue to fall for a while.

Finally, Moody's estimates that 2.5 million homeowners are expected to default on their mortgage loans in 2007 and 2008, resulting in many foreclosures (Moody's says about 1.7 million of those homeowners will ultimately lose their homes) and a glut of existing homes being added to the market.

The result - the real estate market is not expected to bottom out until at least the end of 2008 as home prices continue to fall and inventories continue to spike.

William Wheaton, a professor of economics and real estate at MIT, says Greenspan's Housing Bubble turned about 5 million renters into homeowners, but many of the loans that made that statistic possible have proven unsustainable.

Remember how Preznut Bush used to brag about how homeownership was at an all-time high and used to say that statistic proved how the American economy was "stronger and gettin' stronger."?

Well, it was easy to see even at the time that record homeownership had been driven less by a strong American economy and a rise in individual worth than by cheap money and Greenspan's creation of the Housing Bubble.

It was also easy to see that if interest rates went back up, many of the people who had taken out adjustable rate mortgages and other "exotic mortgage products" were not going to be able to make their bills.

I'm an English teacher (and frankly math illiterate), but I think this mess can actually be explained best in an equation:

cheap money + gullible Americans = all-time homeownership - higher inflation + higher interest rates + stagnant wages + exotic mortgage products = all-time home foreclosures.

Clearly Greenspan and the other architects of the Housing Bubble had to know it would end this way.

And yet, they went ahead with using the housing asset bubble to cure the ails that resulted from the bursting of the tech asset bubble.

And they still say Uncle Alan is a genius.

I guess he is, as long as you aren't one of the casualties.

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