Housing Market Hindsight

Low Interest Rates -- Then & Now

Three (four?) years into the housing market downturn, what conclusion is it possible to draw?

In retrospect, it seems obvious (at least to me) that it was a liquidity-driven phenomenon.

Add a tsunami of cash, subtract any vestige of underwriting standards, and real estate will go up.

Subtract liquidity, and tighten lending standards . . . and it goes down.

No Pop from Low Rates

Astute market watchers will point out that, if cheap money drives real estate upwards, it should be positively flying now, because mortgage rates are at record lows.

What that analysis ignores is: 1) the cheap money is itself a symptom of the downturn, as the Fed is using cheap money (free to the banks) as its weapon of choice to support housing (the so-called "hair of the dog" cure); and 2) to qualify for a cheap mortgage, you must have good credit and a job.

If you're a move-up Buyer, you also need some equity for a downpayment.

Goldilocks Approach to Mortgage Modification

Stopping the Runaway Foreclosure Train

The [mortgage modification] rules now being applied . . . have a Goldilocks quality. To get a modification a borrower has to need it a lot, but not too much. If the home is “underwater” — worth less than the balance of the loan securing it — but the borrower can still afford the payments, there is to be no modification. If the borrower is in such bad straits that default is likely even with a modification, again that borrower is supposed to be turned down.

Modifications [go] to those who come up with the right income number, neither too high to qualify nor too low to be likely to meet the modified payments.

--Floyd Norris, "Why Many Home Loan Modifications Fail"; The New York Times (12/3/09)

The low percentage of successful mortgage modifications says volumes about (non-existent) underwriting standards in many parts of the country a few years ago.

In the language of another children's story, the "Three Little Pigs," mortgages are like homes made of straw, wood, and brick in their ability to withstand adverse financial conditions (the proverbial "wolf at the door").

Even straw is too generous in the case of millions of subprime and Option-ARM loans made to already marginal borrowers.

The material that comes to mind is paper -- as in all the Triple A, mortgage-backed "paper" sold by the trillions to investors world-wide.

How ironic.