Mortgage Market Still Not A Free Market

Today’s Courier Herald Column:

My phone call Friday night was sadly too familiar. A good friend was seeking advice on refinancing his mortgage. His bank had determined that as a self employed individual, he didn’t demonstrate sufficient income to prove he could make his mortgage payments at a reduced interest rate below four percent. This, despite his track record of almost 100 consecutive on time payments with an interest rate closer to seven percent.

To say the least, he was a bit frustrated, but he is not alone. One of the many other examples is a friend who bought a high rise condominium in Atlanta just before the market crashed. He’s paying an interest only mortgage at just under 7%, but the value of his property is now worth less than one third of what he paid for it.

He frankly would be much better off if he walked away from his mortgage and had a “strategic default”. Yet, he feels morally obligated to pay his loan, but would like to refinance. His loan to value exceeding 300% has thus far precluded this, though yet another recently approved federal program may provide some help.

My background in banking, construction, and politics has put me in the middle of many such discussions. They usually end up with me trying to oversimplify a banking, credit, and housing market that has transcended dysfunction into the complete absurd. And there’s always a discussion of the bailouts.

We’re all well aware that the Federal Government passed TARP in 2008 to provide emergency liquidity to a financial market that was on the verge of collapse. I maintain the politically unpopular stance that this, and the literal trillions of emergency loans the Federal Reserve extended member financial institutions in short term lending during the period averted a total collapse of the western financial and economic systems. I also contend that TARP was implemented about as badly as this kind of policy could have been, and the methods that Treasury Secretary Paulson used to sell the measure to a skeptical Congress bordered on fraudulent. This debate, unfortunately, is now left to the historians.

The current debate, however, is how do we finally move forward from this financial and housing mess, three years into the “solution”. Many of my Republican and Libertarian leaning friends – and many of the current Presidential candidates – advocate a “let the market sort it out” approach, claiming the government can only do more harm. While that sounds ideologically consistent, it fails to appreciate the reality of the situation.

The current “market” is a total and complete function of government action and inaction. FHA, which is virtually the only way a purchaser can buy a home with less than 20% down, was responsible for 37% of all mortgages in 2009. Fannie Mae, which may end up needing a trillion of taxpayer funds to remain solvent, continues to underwrite just under half the country’s mortgage volume. The Federal Reserve owns over one trillion in the direct obligations outstanding from bonds backed by outstanding mortgages.

The government is highly involved in the sale side as well. With over half of the homes in Metro Atlanta and roughly one quarter nationwide worth less than owners’ owe on their mortgage, banks must sign off on the sales if there is a deficient balance. Yet the ever changing regulations in the post 2008 banking environment have everyone questioning what the rules are, with “short sale” seeming to be a four letter word for many in the real estate business. I can personally attest to having a rule change occur in mid-sale, with one large bank holding the mortgage on a home I was trying to buy signing a consent decree with the Department of Justice during my attempted purchase. The agreement forced the bank to re-review any customer file for anyone facing foreclosure or asking for a short sale. This started the process over, and subsequent rule and valuation changes scuttled the transaction.

The inability to complete short sales pushes many homes into foreclosure, with one third of the local housing market now composed of foreclosure sales. This continues to push home prices down, which puts even more homeowners underwater, perpetuating this cycle.

The University of Georgia now projects it will be 2020 before Georgia’s economy returns to pre-2008 employment levels, based largely on the lack of recovery in the housing market. With many homeowners trapped in homes they can’t sell but owe more than they are worth, it’s hard to argue with the assessment. It’s also difficult to watch the number of ways Government is involved in this market and accept that nothing can be done from a policy or regulatory standpoint to improve the situation.

Georgia is not likely to get a large focus during this presidential election. When it does, however, candidates and the current President must be forced to discuss what should or should not be done from their viewpoint to address the current state of the housing and mortgage markets. There are quite a few homeowners who have played by the rules, paid their mortgages, and are left as the only players not bailed out. They deserve better answers than I’ve been able to give them in my now too often conversations.


  1. saltycracker says:

    Well said. Checks and balances by lenders, particularly as it relates to sound business practices by government corporations were abandoned.

    Leverage buys one a feeling of prosperity they have not earned. I have mellowed on my position of personal responsibility and smugness for keeping my family from taking the bait.
    I can go into a long story where Wachovia told me I was stupid for paying cash and not taking a big loan out on a piece of property I planned to keep.

    When employers, “qualified” experts, actuarians and their government give expectations, most folks take the leap of faith. Granted it got a little stupid with zero or low skin in the game, loans 3 or 4 times annual income, no docs, plans for income gains, variable rates…….

    The banks are continuing to ignore non-performing assets, pay bonuses, hold large amounts of cash & hold the suckers (if you want to call them that) hostage. And this is occurring at historically low interest rates.

    In order to stay in the FDIC fold the regulators need to come up with some guidelines where the surviving banks participate in some ugly hits to work off these underwater mortgages.

    Maybe it is happening….. a friend of mine with a good net worth, after being turned down many times, recently had his bank agree to a very big hit on a short sale (about $300k). The bad news is he gets a 1099 & will owe the IRS taxes on the hit but it is better than the alternative.

    • saltycracker says:

      P.S. Locally, defined benefit government pension programs and around the world, sovereign nations, are on the same road…….and that will be much worse…..but it won’t be over until it is over – no one knows where the leverage peak is on adding paying players, lying about returns or borrowing money….

      • saltycracker says:

        PPS – sorry, this topic interests me –

        If your friend has made 100 payments at 7% and wants to stay in the home, part of the above solution for the bank to stay in the FDIC is they need to refi at some low interest say 4% & take some hit, suggested to be at least 20%, the down pymt. they should have gotten (regulatory guidelines needed to not totally blow the bank up on these deals). Each deal requires some oversight as matters vary.

  2. billdawers says:

    Great column, Charlie. Some of the recently proposed modifications to refinancing rules could help somewhat — but only if lenders are forced to accept key changes.

    While there are limited moves to be made at the state level, it sure would be nice to see Georgia lawmakers take a serious look at their options re policies that might boost the housing market. (I’m not talking about boosting prices, but about boosting the number of sales and reducing the number of foreclosures.)

  3. Dave Bearse says:

    I agree that TARP and the emergency liquidity were necessary to avoid a meltdown, and am angry that programs were largely limited to saving too big to fail banks that continue to be to big to fail. There are no easy solutions to the mortgage crises, but that’s not preventing the dismantling banks to bill to fail nad/or the restoration of Glass-Steagall. There’s no excusing six figure MBA bankers that made no equity loans when your average Nightline viewer could tell you the recipients lacked the ability to repay the loan.

    My perception when I moved to metro Atlanta from LaGrange in 1998 was that the Atlanta housing bubble was already began to inflate. Indeed my home is currently worth only the absolute value of what I paid for it then, i.e. it’s worth less that what I paid adjusted for inflation.

    I was on record with friends and family by early 2004 (when the economy was rebounding from the 2001 recession and 9/11) that banks were making reckless mortgage loans. I generally think purchasers that didn’t pony up closing costs plus 20% should be fully on the hook for those costs, as that’s what it has cost the prudent borrower. Likewise generally no relief for people for anything later borrowed against an increase in equity and not invested in the home. Indeed using that money for leverage or spending it was a major source of hot air filling th bubble.

    This won’t help the situation at hand, underwater mortgages, but I’d require originating banks be required to retain some minimum interest in the mortgages they write. Those six figure MBAs walking away from the loans they wrote, profits upfront and in hand, contributed mightily to this mess.

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