My transition from renter to mortgager comes as the U.S. slogs its way out of the Great Recession, which was largely triggered by the collapse of the housing market. While the stock market has rebounded nicely (at least until the current revolution in Libya), and while consumers are finally showing signs of renewed confidence, housing remains in the tank. Home prices are depressed, many homeowners are underwater with their loans, tens of thousands of families face foreclosure, and the backlog of unsold (and rotting) homes weighs heavily on the market.
Many experts say it could take another decade before the collapse of the housing bubble is fully resolved. Frankly, given this climate, I'm surprised I found a bank willing to do business.
When a fair history of the bubble is written, there will be plenty of blame to spread around. Lots of people speculated, betting the farm that home prices would go up indefinitely. Lots of mortgage brokers enticed innocent families into buying homes they couldn't afford on loans they couldn't pay back. Banks made and sold mortgages they knew were dodgy. Financial companies sliced and diced pools of bad mortgages into products that risk rating companies, fearful of losing future business, knowingly overvalued. Politicians pushed this game along because Wall Street's tidal wave of cash meant more campaign funds. In the end, a lot of people, institutions, and nations were left holding worthless paper. And as so often happens, the American taxpayer picked up the tab.
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| From Wikipedia's article on mortgage backed securities |
Mortgage backed securities are so complex that many of the people who profited most from the housing bubble did not understand the products they sold, and did not correctly estimate the risk these products entailed. I'm sure some readers of this blog understand these matters far better than I do. However, for everyone else, I commend Andrew Ross Sorkin's book on the financial meltdown, Too Big To Fail. It left me wondering how so many smart, well-educated, and highly experienced bankers, traders, and politicians could have been so careless of their own interests and so heedless of the danger their decisions posed for the nation.
Can another housing disaster be averted? One piece of this puzzle is the Dodd-Frank Act of 2010 which entails making a new rule, i.e., setting new standards, for mortgages. If you are interested, you might want to read the article posted yesterday on the AmericanProgress.org web site. This piece is rather technical, but one brief section helps explain the problem:
What are qualified residential mortgages and why is their definition so important?
The Wall Street Reform and Consumer Protection Act of 2010, known more commonly as the Dodd-Frank Act because of its two chief sponsors, Sen. Christopher Dodd (D-CT) and Rep. Barney Frank (D-MA), seeks to prevent a repetition of the housing market collapse of 2008. The new law forces financial institutions that bundle home mortgages together into mortgage-backed securities to retain at least 5 percent of the "credit risk of any asset." This risk retention requirement is designed to ensure that the "securitizers" have some "skin in the game," thus aligning their interests with investors as well as mortgage lenders and borrowers — resulting in both mortgages and securities that are paid according to their terms.
The Dodd-Frank Act, however, exempts from the risk-retention requirements securities backed exclusively by "qualified residential mortgages," or QRMs — mortgages with "underwriting and product features that historical loan performance data indicate result in a lower risk of default." By exempting QRMs from the risk retention requirement, the cost of securitizing these mortgages is reduced, thus providing a market incentive for the wide origination of responsible loans.For the full article, go to: http://www.americanprogress.org/issues/2011/03/qrm_term.html
The question here, I think, is whether we can reestablish sound rules for mortgage lending without, at the same time, hobbling the housing market and making it difficult, if not impossible, for average Americans to buy homes. Properly defining a "qualified residential mortgage" seems to be a key element. But note that the conservative tide in Washington, D.C., is now running strongly against government's rule-making function, while liberals believe that in the absence of strong lending rules, another housing bubble looms in the nation's future. This discussion — this argument! — will be upon us shortly. It's time for intelligent voters to educate themselves. •••
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