My Mortgage Blog

It has been a quiet week in the markets, shortened by Good Friday. Oh, S&P created a tempest with its threat to the AAA rating of Treasurys, but as the week wore on, more and more people asked, “How would they know?”
    
Stocks regained all losses, but Treasury bond yields stayed low, the 10-year 3.39%, mortgages under 5.00%. Bill Gross, famously dumping all of PIMCO’s Treasurys last month, has lost money on the trade. A Federal budget deal is now likely; Europe is in trouble (again, Greek 2-year bonds paying 22%), and domestic data is weakening.
    
Sales of new and existing homes are flat, but distressed inventory is rising; and the FHFA found that home prices fell 1.0% in January and another 1.6% in February.
    
The fascinating thing about housing, now: it’s no longer news. It’s so yesterday, boring. For seven months, media attention has focused on ForeclosureGate, loan servicers allegedly foreclosing on innocent homeowners. The reality is clear now, as then: the servicers have mistreated borrowers by inattention, and have run around  antique local-level foreclosure procedures. Servicers will be fined, and newly regulated.
    
Media have found a handful of wrongly foreclosed families, but that preoccupation has missed wisdom attributed to Uncle Joe Stalin (if he didn’t say it, he should have): “The death of a man is a tragedy; the death of a million is a statistic.” The search for human-interest has abandoned the real victims: another two million households will be foreclosed this year, 11 million underwater -- and government help is going... gone.
    
Imagine if in 1937 FDR had said, “I see one-third of a nation ill-clothed, ill-housed, and ill-fed... but if we wait long enough, they’ll get over it.” Everybody understands the basics: more houses for sale than buyers. However, even those in pain often don’t believe me when I say that credit is too tight and too scarce. Today, two examples.
     
Fannie, Freddie, and FHA are the only remaining significant sources of mortgages, and they are frantically trying never to make another bad loan. One cause of default is fraudulent borrower documents. Early in the 1990s, minutes after the invention of  desktop publishing, the first borrower fabricated tax returns showing more income than the ones filed at the IRS. Minutes after that, FF&F required form 4506T, to pull transcripts from the IRS. For a while we actually checked, but so few fraudulent returns were found that the signed 4506T became a threat, but not an immediate act.
    
Since 2009 -- as never before -- every borrower must bring tax returns (not just the self-employed), and we must run a 4506T every time. May a merciful Almighty save us this time of year, when the IRS could not find its behind with the help of a proctologist. Transcript delays have run six, even eight weeks.
    
How many fraudulent returns and defaulted loans are we really preventing? In a billion dollars of loans through here, I know of one case of fraud (a CPA applicant!), hundreds of innocent but odd 1040s questioned with red-hot tongs, and thousands of delays. Think FF&F are tracking cost/benefit? Uh-uh. Just tighten, baby, tighten.
    
Second example: the Dodd-Frank Qualifying Residential Mortgage, qualifying for capital exemption in securitization. QRMs will require 20% down to buy, 25% equity to refi, forbid 2nd mortgages... a belt tightened right through the backbone. An FHFA study (April 14 www.fhfa.gov) found annual rates of 90-day delinquency pre-bubble (1997-2003) clustered between 2.50% and 3.00% for all loans -- which is why FF&F charge to securitize loans, or require mortgage insurance. QRM-equivalent defaults ranged 0.31% to 0.55%, but were barely 20% of all loans.
    
By 2009, standards had so greatly tightened that all new purchase loans had a 0.30% default rate, and the QRM fraction 0.07%. No one need fear the wind-down of government supported lending: it’s already done -- although the 80% of supply, non-QRM loans are going to be expensive and scarce. This self-defeating political backlash against FF&F has turned them into insurance companies offering hurricane coverage, but only for homes 200 miles from an ocean.