|
Long-term rates are beginning
to trickle back down from the peculiar spike of the last two weeks. The
lowest-fee mortgages from 6.375% to 6.25%, the 10-year T-note from 3.90%
to 3.80%, the immense spread a measure of deepening crunch.
The data continued a pattern
going back to last fall. The job market is holding surprisingly well: new
claims for unemployment insurance have been steady for two months at an
elevated but non-recession 350,000 weekly. Inflation is real, the core
rate way out of bounds at 2.5% complicating the Fed’s life. The
Philadelphia Fed’s newest survey continued to indicate recession, this
time a longer-term slowdown.
The public policy response to the credit crunch here is paralyzed; not in
Europe, where outright bailouts of banks by the dozen are underway from
the UK to Germany. Secretary Paulson insists that this adventure is a
normal, cyclical re-pricing of credit; he must know otherwise, but does
not know what to do. Perfesser Bernanke might as well be on African safari
with Dubya -- and would rather be there than face Congressional music
Thursday and Friday in a required annual appearance.
Worse than paralysis: the
soap-opera focus on preventing foreclosures. The press is packed with
truly sad stories, scary forecasts, and grotesque misinformation about the
actual situation, cause, and possible resolution.
PREVIOUS ISSUE
NEXT ISSUE
2008 ISSUES
2007 ISSUES
RETURN HOME
|
Americans have deep residual
memory of millions of families unfairly foreclosed during the Depression.
Lost in today’s mass appeal to that memory: the great difference in
circumstance. In 1930, American mortgages were short-term renewable
affairs; borrowers had to re-qualify and survive re-appraisal as often as
every five years. Even those who still had jobs -- in a time of 25%
unemployment -- were often evicted. An Okie parents’ puzzled memory:
“Nobody had any money... the banks were gone, and there just wasn’t any
money....”
In that awful decade, most who
lost their homes did so for no fault of their own, financially healthy
households collapsed by external force. That is not today’s problem. To
get at the heart of today we must put aside blame and cries of greed and
predation among lenders, borrowers, Wall Streeters, investors, all. The
sad reality: the vast majority to suffer foreclosure today were weak
financial households to begin with.
Until roughly 2000, the
dividing line between prudence and foolishness had for 76 years been the
underwriting standards of the FHA -- the first long-term loan, invented in
1934 to stop the Depression foreclosures. The FHA allowed low-downpayment
loans, only 3%, but you had to prove your income. If your job history
looked weak (intermittent, or shaky by classification -- hourly
construction, new commissioned sales,
© 2008 - Economic Notes is published weekly by the Economics Department of
Universal Lending Corporation. |
seasonal), you would be
declined in underwriting. You didn’t have to have money in savings, but if
your new house payment would be higher than the rent you had paid, you
either had to prove increased income, or demonstrate by savings that you
had enough slack in your rental household budget to afford a higher
payment.
FHA market share fell by more than half in the last decade, as did loans
made with traditional mortgage insurance, because those lenders maintained
income and “payment shock” standards, and lost out to the foolish ease of
subprime and Alt-A.
The few households suffering temporary bad luck (job loss, health,
divorce) deserve all the “workout” help the system can provide. The
inherently weak households will defy every effort. Even extraordinary
re-writes will beget re-default, the poorly maintained house creating
deeper loss in the ultimate foreclosure, the troubled inventory
overhanging the marketplace and preventing recovery.
Policy makers should look forward, not to the last, lost battle: the
number-one-prime priority is restoration of an adequate supply of credit.
Not just to re-work existing loans, but to enable quality borrowers to
buy. If that means the Fed or Treasury entering the market to buy
top-quality mortgage-backed securities to drive down this absurd spread to
benchmark, then get on with it.
|
