This is likely to be a bad week for housing and the economy, but not for the reasons you might suspect. The usual cast of characters in the Big Media wants you to believe that the rise in interest rates since last summer and/or the government shutdown are to blame for wilting lending volumes, disappointing corporate earnings and poor job growth in the US economy.
In fact, excessive regulation and some structural problems with the American economy are to blame for what looks to be flat housing and job markets for the next several years. The poor performance of the US economy with respect to employment and consumer income growth are largely the result of the growth of government – shown by the fact that half of national income now comes from transfer payments. Obamacare is just the latest layer of burdensome bureaucracy which American workers must carry. “It is a massive entitlement to end all entitlements,” says David Stockman, former director of the Office of Management and Budget in the Reagan Administration, of Obamacare.
Poor corporate earnings, especially for financials, are the direct result of a weak consumer sector. The shrinkage in the private sector job market is matched by equal reduction on the number of potential home buyers. Consumer income and jobs are the drivers of for housing, whether rentals or the purchase market, and neither is doing especially well. The precipitous declines in mortgage applications and lending volumes, however, finally are starting to get some attention in Washington.
Last week, no less than 63 members of the House and 13 Senators wrote to Financial Housing Finance Administration chief Ed Demarco demanding that he not lower the maximum loan limit for mortgages guaranteed by Fannie Mae and Freddie Mac. In earlier correspondence to DeMarco, first reported by National Mortgage News, National Association of Realtors (NAR) President Gary Thomas questioned the legality of FHFA reducing the loan limits at this time.
“Our nation’s housing market is still on the path to recovery. While there has been some return of private mortgage lending, without the benefit of a federal guarantee, it remains limited and available only to the most highly qualified borrowers,” the NAR letter said. Thomas then went on the attack: “You have not yet made public your legal authority for overriding the statutory prohibition against reducing conforming loans limits,” he growled.
DeMarco is the darling of conservatives because he has managed the GSEs cautiously since 2008, when both agencies collapsed during the subprime debacle. Democrats in Congress, however, view DeMarco as the anti-Christ because of his refusal to reflate the housing sector at taxpayer expense. His threat to lower the maximum amount of loans eligible for Fannie Mae or Freddie Mac is seen as a dire threat to the members of the housing industrial complex on Capitol Hill. But this current chapter of Kabuki on the Potomac with respect to housing is neither rational nor is it likely to end well for the US economy.
The FHFA wants to reduce the “conforming loan limits” by the start of next year to shrink Fannie Mae and Freddie Mac’s presence in the mortgage market and expand the role of private capital in mortgage finance, at least in theory. The trouble is, Congress and federal regulators have placed so many new obstacles to making private mortgage loans that are not government guaranteed that fully one third of all home owners are now frozen out of the market. Neither the banks nor the GSEs are willing to lend to low income consumers, who are forced to become tenants. Renting a home is now the definition of the American Dream. The chart above, which comes from my friend Rick Sharga at Auction.com, shows the changing trends in the number of home owners and renters in US economy.
Government-insured mortgages covered by Fannie Mae, Freddie Mac and the FHA now dominate the housing sector, supporting more than 95 out of 100 new home loans. But despite all of the fuss and bother from the housing industrial complex, the likelihood is high that Ed DeMarco will remain true to principle and his duty to reduce the footprint of the government in the mortgage market, and move to reduce the conforming limit for GSE loans by the end of this year. In the event, the already constricted volume of mortgage lending in the US will likely plummet – especially in high-priced, predominantly blue states represented by some of the most liberal members of Congress.
So when you see those decidedly poor results from the major banks this week and next, especially on the mortgage origination and litigation lines, just remember that the cause of the pain is too much regulation in the mortgage markets thanks to Senator Christopher Dodd (D-CT) and his pal Rep., Barney Frank (D-MA). When JPMorgan got up a couple of weeks ago at a conference sponsored by Barclays and confirmed, again, that it expects to lose money on its mortgage business in 2H 2013 because of falling lending volumes, more people should have paid attention. Other large banks delivered similar guidance regarding forward earnings. But remember that the economic pain being felt by business and consumers alike comes from one source, namely Washington.