Long-term mortgage rates are beginning to trickle back down from the peculiar spike of the last two weeks. The lowest-fee mortgages went from 6.375 percent to 6.25 percent; the 10-year T-note went from 3.9 percent to 3.8 percent — the immense spread is a measure of deepening crunch.
The data continued a pattern going back to last fall. The job market is holding surprisingly well: New claims for unemployment insurance have been steady for two months at an elevated but nonrecession 350,000 weekly. Inflation is real, with the core rate way out of bounds at 2.5 percent, complicating the Federal Reserve’s life. The Philadelphia Fed’s newest survey continued to indicate recession, but this time a longer-term slowdown.
The public policy response to the credit crunch here is paralyzed; not in Europe, where outright bailouts of banks by the dozen are underway from the U.K. to Germany. U.S. Treasury Secretary Henry Paulson insists that this adventure is a normal, cyclical re-pricing of credit; he must know otherwise, but does not know what to do. Fed Chairman Ben Bernanke might as well be on African safari with President Bush — and would rather be there than face congressional music next Thursday and Friday in a required annual appearance.
Worse than paralysis: the soap-opera focus on preventing foreclosures. The press is packed with truly sad stories, scary forecasts and grotesque misinformation about the actual situation, cause and possible resolution.
Americans have deep residual memory of millions of families unfairly foreclosed during the Great Depression. Lost in today’s mass appeal to that memory is the great difference in circumstance. In 1930, American mortgages were short-term renewable affairs; borrowers had to re-qualify and survive re-appraisal as often as every five years. Even those who still had jobs — in a time of 25 percent unemployment — were often evicted. My Okie parents’ puzzled memory: “Nobody had any money … the banks were gone, and there just wasn’t any money. …”
In that awful decade, most who lost their homes did so for no fault of their own, financially healthy households collapsed by external force. That is not today’s problem. To get at the heart of today we must put aside blame and cries of greed and predation among lenders, borrowers, Wall Streeters, investors, all. The sad reality is that the vast majority to suffer foreclosure today were weak financial households to begin with.
Until roughly 2000, the dividing line between prudence and foolishness had for 76 years been the underwriting standards of the FHA — the first long-term loan, invented in 1934 to stop the Depression foreclosures. The FHA allowed low-down-payment loans, only 3 percent, but you had to prove your income. If your job history looked weak (intermittent, or shaky by classification — hourly construction, new commissioned sales, seasonal), you would be declined in underwriting. You didn’t have to have money in savings, but if your new house payment would be higher than the rent you had paid, you either had to prove increased income or demonstrate by savings that you had enough slack in your rental household budget to afford a higher payment.
FHA market share fell by more than half in the last decade, as did loans made with traditional mortgage insurance, because those lenders maintained income and “payment shock” standards, and lost out to the foolish ease of subprime and alt-A.
The few households suffering temporary bad luck (job loss, health, divorce) deserve all the “workout” help the system can provide. The inherently weak households will defy every effort. Even extraordinary rewrites will beget re-default, the poorly maintained house creating deeper loss in the ultimate foreclosure, the troubled inventory overhanging the marketplace and preventing recovery.
The lesson from Denver is to get on with the foreclosure process. We are near the peak of a seven-year foreclosure cycle: Almost 4 percent of Denver metro households were foreclosed in 2007. Yet, average prices have been remarkably stable throughout; the local economy recovered from the blown technology bubble that caused the problem.
Policymakers should look forward, not to the last, lost battle: The number one prime priority is restoration of an adequate supply of credit. Not just to rework existing loans, but to enable quality borrowers to buy. If that means the Fed or Treasury entering the market to buy top-quality mortgage-backed securities to drive down this absurd spread to benchmark, then get on with it.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.