Recent news out of the home finance industry has been rather sombre.

The results of a survey by the Mortgage Bankers Association showed that mortgage applications declined 7.2% in the week ending September 5, 2014 compared to the preceding week, as measured by the Market Composite Index which tracks mortgage loan application volume. On a seasonally adjusted basis this index was down 7.2% versus the previous week, and touched its lowest level since December 2000.

Fannie Mae Mortgages application-vs-intt-rt-arrows

The above chart, courtesy of Mortgage News Daily, plots the Market Composite Index versus the 30 Year Fixed Mortgage.  Note that mortgage volume as evidenced by the index has trended inversely to the 30 Year Fixed from 2010 through mid-2013. Subsequently, however, both have tended down as shown by the red arrows. That could be partly explained by the fall in refinance volumes, but other factors are probably at work, judging from a recent survey result from Fannie Mae.

Fannie Mae’s August 2014 National Housing Survey

“The August National Housing Survey results lend support to our forecast that 2015 will likely not be a breakout year for housing,” said Doug Duncan, senior vice president and chief economist at Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA). “The deterioration in consumer attitudes about the current home buying environment reflects a shift away from record home purchase affordability without enough momentum in consumer personal financial sentiment to compensate for it. To date, this year’s labor market strength has not translated into sufficient income gains to inspire confidence among consumers to purchase a home, even in the current favorable interest rate environment.”

As a result, total home sales during 2014 may actually turn out to be lower than they were in 2013, primarily due to a weak performance the first half of the year.

In the survey, only 64% of respondents thought it was a good time to buy a house – an all-time low reading for this survey.

Richard Bove: the government’s volte face on housing

One of the issues (out of four) that keep renowned banking analyst Richard Bove awake at night is the fear that falling home prices could destroy Americans’ wealth, curtail retail spending and thereby plunge the country into a new recession.

Richard Bove is Vice President Equity Research at Rafferty Capital Markets, and said in his research note of September 8, 2014 that a “massive reversal in the government’s view of the housing market and what the nation’s role should be in supporting housing” would cause a far-reaching and adverse impact.

According to Bove, the great financial crisis of 2008 propelled the government into a regulatory overdrive aimed at the housing market that is, effectively, throwing the baby out with the bathwater.

As a result, Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC), the GSEs which backstopped the entire residential mortgage market over the past five years are now out of reckoning – effective Q1 of 2014, they have in fact turned net sellers of mortgages.

Fed will cease to buy its weekly quota of mortgage-backed securities

Compounded with the fact that the Fed will cease to buy its weekly quota of $ 10 billion worth of mortgage-backed securities with effect from October 2014, there now exists a significant vacuum in the purchase/guarantee of residential mortgages. According to Bove, commercial banks are unwilling to assume the interest rate risk on 30 year fixed-rate loans unless GSE’s bought these off their books.  The banks are in the market primarily to make shorter duration loans at variable rates of interest.

“To my knowledge there is no one entity or group of entities capable of replacing the GSE’s and the Federal Reserve providing funds to the residential mortgage markets,” says Bove.

In a domino effect, scarcer government mortgage funds and the withdrawal of Fannie Mae / Federal National Mortgage Assctn Fnni Me (OTCBB:FNMA) and Freddie Mac / Federal Home Loan Mortgage Corp (OTCBB:FMCC) from the mortgage market will cause monthly housing costs to rise. This will impinge on housing sales thereby causing home prices to fall.

A new crash in the housing market could therefore lead the nation into yet another recession.