So what made President Barack Obama suddenly talk about housing reform this week? After literally years of ignoring the housing mess and allowing some of the worst perpetrators of securities fraud walk away scot-free, Obama is now starting to talk about reform. But the president’s speech may be remembered as the peak in the latest housing recovery. Obama’s prepared remarks delivered in Phoenix on August 6 read in part:
“A home is supposed to be our ultimate evidence that in America, hard work pays off, and responsibility is rewarded. I think of my grandparents’ generation. After my grandfather served in World War II, this country gave him the chance to go to college on the GI Bill, and buy his first home with a loan from the FHA. To him, and to generations of Americans before and since, a home was more than just a house. A home was a source of pride and security. It was a place to raise children, put down roots, and build up savings for college, or a business, or retirement. And buying a home required responsibility on everyone’s part – banks were supposed to give you a fair deal, with terms you could understand, and buyers were supposed to live within their means. In my grandfather’s America, houses weren’t for flipping – they were for living in.”
Obama sounds very conservative in this speech, almost nostalgic. He outlined a plan to reduce the role of the US government in the housing sector, embracing a mixture of private sector capital and government guarantees to underpin the more than a trillion dollars in new loans underwritten each year. But most observers dismiss the Obama speech as empty posturing.
“It’s a good step that the president endorsed the hybrid model, but he could have done it in 2011,” Phillip Swagel, an official in the Treasury Department under President George W. Bush, told The Wall Street Journal. “There are a lot of hard choices…and the White House hasn’t seemed to make progress on any of those.”
The WSJ notes that a bill introduced by Senators Sen. Bob Corker (R-TN) (R-TN) and Sen. Mark Warner (D-VA), envisions a system in which the government would provide an explicit guarantee of certain mortgages. Lenders would pay fees for that backing and face stiffer regulation, much the way the Federal Deposit Insurance Corp. regulates banks and insures their deposits. The House, on the other hand, supports a more radical change that would see an end to most government involvement in the housing market.
“The House plan is opposed by the real-estate industry, nearly all Democrats and at least a handful of Republicans,” Nick Timiraos and Carol Lee of the Journal note. “They say it would raise loan costs by degrading the deep, liquid credit markets Fannie and Freddie developed over several decades to attract investors to mortgage-backed securities.“
Now you might be tempted to think that the House Republicans are following conservative principal when they propose to eliminate most government support for the US housing sector — much of which dates back to FDR and the New Deal. Nothing could be further from the truth. What House Financial Services Committee Chairman Rep. Jeb Hensarling (R-TX) really wants to do is give complete control over the US housing market to the top four banks, which being “too big to fail” are really part of the US government anyway. Instead of a public-private cartel managed by the top banks and GSEs like Fannie Mae and Freddie Mac, the House bill would create a system whereby community banks would become loan production offices for the TBTF banks.
Even though this writer supports the conservative goal of reducing the role of the government in the housing market, conservatives and liberals alike need to be careful what they wish for. The US housing sector is already showing signs of slowing. Trulia, a leading online marketplace for home buyers, sellers, renters, and real estate professionals, reports that “asking home prices are now starting to lose steam as mortgage rates rise, inventory expands, and investor demand declines. Nationally, asking prices dropped 0.3 percent in July – the first month-over-month (M-o-M) decline since November 2012.” Any serious reform proposal will almost certainly cause lending and home prices to fall, at least initially.
With or without a government guarantee, mortgage originators face a daunting challenge in the second half of 2012. Loan refinance volumes are expected to fall rapidly, perhaps one reason that Obama is starting to pay attention. Lending for home purchases is simply not going to grow fast enough to pick up the slack. The Mortgage Bankers Association estimates that total originations for 2013 will be $1.6 trillion, including $950 billion in the first half of the year. This implies that we will see only $650 billion in new loan originations in the second half of 2013.
Whereas the mortgage industry averaged about $450 billion per quarter in total originations in the first half of 2013, the quarterly average for the second half will be closer to $350 billion and falling. For 2014, the MBA is projecting total new mortgage loan originations of just $1.1 trillion or an average of about $250 billion per quarter — half the volume we saw in the first half of this year.
Bottom line: By the fourth quarter of 2013, the pain threshold among the components of the “housing industrial complex” – including the realtors, home builders, bankers and other mortgage professionals — will be so high that any talk in Washington about reforming the housing sector will quickly be forgotten. When it comes to housing, we can all predict with confidence, the theme in 2014 will be all about supporting slumping home prices at any cost.