What Will The Next Housing Crisis Look Like?

On Monday I published a guest post on how mortgage lending standards have come full circle since the original housing crisis. In an effort to promote the American dream of home ownership regulators have once again eased up on the requirements for getting a mortgage. Meanwhile, it looks like Fannie Mae and Freddie Mac as we know them may actually go away in a few years, significantly reducing the government’s role in the housing market.
There are obviously a lot of moving parts here but a couple of weeks ago Dick Bove, equity research analyst at Rafferty Capital Markets, appeared on CNBC and wrote an editorial in which he presented his views on where he sees all of this heading: There’s a new mortgage crisis brewing.

In a nutshell Dick Bove’s points are:

  • Fannie Mae and Freddie Mac are bleeding cash because of their dividend payment requirements to the US Treasury
  • At the same time Fannie and Freddie are growing their assets despite a stated goal to shrink their role
  • Lending standards have loosened
  • With current mortgage rates and lending standards mortgage originators are unlikely to loan money without the involvement of Fannie and Freddie, which is precisely why their involvement is actually growing

So what does all this mean for the mortgage market? Well, Dick believes that without Fannie and Freddie the 30 year fixed rate mortgage will probably go away and he points to other countries as evidence that it may not be necessary. However, without the 30 year mortgage’s extended amortization schedule monthly payments would go up and home buyers wouldn’t be able to afford as much house. So that could put significant downward pressure on housing prices.
Despite the title of his editorial it’s not really a mortgage crisis that the is predicting but really a housing crisis. The question is how will the private market respond to the government’s exit from the mortgage market? I have to believe that if the consumer wants a 30 year mortgage someone will stand ready to provide them with it – at a price. And much of Dick Bove’s discussion really focuses on the 30 year FIXED mortgage. What about 7 year ARMs with 30 year amortization schedules? Will the private market find those attractive? Because the housing market can do just fine with those mortgages.
But suppose housing prices do come down? Well that solves the government’s housing affordability problem doesn’t it?
#mortgages #RealEstate #MortgageCrisis
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