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Dumb & Dumber: Relax Mortgage Rules, Financial Crisis 2.0?

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Dumb & Dumber: Relax Mortgage Rules, Financial Crisis 2.0 by Tony Sagami, Mauldin Economics

Mortgage credit is too tight. They should have changed that a long time ago. —Jamie Dimon, CEO JPMorgan

Today’s rule is an important step forward in creating an environment where good lenders and good borrowers can work together without reservation. —Julian Castro, HUD Secretary

Geez, I can’t decide who is dumber when it comes to repeating the same mistakes. The profits-at-any-cost crowd on Wall Street or the do-anything-for-votes politicians in Washington, DC?

I can’t decide; they’re both dumber than dirt and often in bed when it comes to lining each other’s pockets.

What I’m talking about today is the new regulations for mortgage qualification rules a.k.a. “qualified residential mortgage” (QRM) rules.

Some background first.

After the 2008 financial crisis and subprime mortgage implosion, governmental agencies led by the Federal Housing Finance Agency enacted a series of tougher rules to clean up the overly easy mortgage qualification process.

Of course, tighter lending standards and higher down payments squeezed a lot of marginal buyers out of the real estate market, and that meant fewer dollars for big banks that package the loans and members of the National Association of Realtors that sell the homes.

The drop in income bothered them so much that they formed a big organization called the Coalition for Sensible Housing Policy to push the noble goal of helping first-time homebuyers with a return to the good old days of easing credit.

Big surprise. The lobbying efforts (and no doubt large political contributions paid off. The 20% down payment requirement has disappeared and Fannie Mae and Freddie Mac will now guarantee some loans with down payments of as little as 3%.

Bye-bye credit standards.

These new QRM rules make it possible for mortgage applicants to do away with pesky things like good credit and a down payment.

“The QRM rule is a win-win for consumers, Realtors and the housing finance industry,” said Steve Brown, the President of the National Association of Realtors.

I don’t know about the consumers, but the new Brown is absolutely right about the new QRM rules being a win for realtors and mortgage lenders. But heck, two out of three ain’t bad… right?

By the way, the three politicians most responsible for the new QRM rules are Senators Johnny Isakson (R-GA), Kay Hagan (D-NC), and Mary Landrieu (D-LA).

Senator Isakson of Georgia, by the way, was president of Northside Realty for 22 years before going into politics. Yup, enough to make you puke, but that’s standard operating procedure for Washington, DC.

Will these relaxed lending rules light a fire underneath the real estate market? So far… no!

The last new MBA mortgage application survey for the week ending November 28 showed the New Application Index stuck at 168, roughly the same level as shown in the mid-1990s.

Dumb & Dumber Mortgage Rules, Financial Crisis

Of course, mortgage rates are a lot lower today than they were in the 1990s.

What’s the problem then?

Not only are wages stagnant in nominal terms, wages are actually lower—a lot lower—in real, purchasing-power terms.

Just in October, the median household income in the US dropped by -0.6%, or $318.

Dumb & Dumber Mortgage Rules, Financial Crisis

And Americans seem to be less inclined to abuse credit as they have in the past. The total amount of revolving credit (credit cards) has plunged.

Dumb & Dumber Mortgage Rules, Financial Crisis

You see, people make borrowing decisions based on their confidence in future earnings and perceived strength of the economy, and Americans are clearly not confident about their economic futures.

The new QRM rules aren’t going to give the big banks and realtors the jump in income they’re hoping for.

So what does this mean for investors? The real estate food chain is so deep that there’s no shortage of potential trouble spots, but I’d be particularly leery of the giant bond guarantors, like MBIA and Assured Guaranty, as well as big mortgage lenders.

Dumb & Dumber Mortgage Rules, Financial Crisis

Who are the biggest mortgage lenders? Wells Fargo, US Bancorp, JPMorgan, Bank of America, and Quicken.

If you’re more of an ETF investor and want to play the “short” side, take a look at ProShares Short Real Estate (REK), an ETF that is designed to profit from falling stock prices of publicly traded companies involved in the real estate industry.
Tony Sagami
30-year market expert Tony Sagami leads the Yield Shark and Rational Bear advisories at Mauldin Economics. To learn more about Yield Shark and how it helps you maximize dividend income, click here. To learn more about Rational Bear and how you can use it to benefit from falling stocks and sectors, click here.



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