Our current view on housing is that the market has bottomed and the slow recovery is underway. But now the question we are often asked is, “What does that recovery look like?”
While we could make a bull case for a roaring recovery based on overcorrected prices, great affordability, low construction, declining resale listings, and rising rents – our exuberance dampens a bit as we think about financing’s role in the future of housing, particularly over the next 12-18 months.
Even in a down market, the mortgage industry remains a multi-trillion dollar business and our takeaway is that a full-fledged housing recovery won’t completely take hold until housing finance begins to rebuild itself.
We’ve been frustrated by the lack of data and analytics around this issue, so in order to keep our clients informed we spend a lot of time talking with government officials, advisors to government officials, servicers, originators, lawyers (from foreclosure specialists to Attorney’s General) and investors about this business environment.
A few of today’s fundamental challenges include:
- The fact that the government is underwriting 90% of all credit risk. Since most private credit has evaporated over the last 3 years, we have effectively nationalized the mortgage industry.
- The fact that the mortgage industry runs on an archaic technology infrastructure. New layer after new layer of regulatory change continues to smother its ability to create progress toward a new dynamic industry.
- Paralyzing fear of litigation and put-back on reps and warranties, particularly among the large banks.
- Homeowners that have learned to game the system to an unprecedented degree.
- Investor frustration that the marketplace needs their money, but makes it tough to find a profit worth the risk.
- Lenders are so overcome by what they feel is a Draconian regulatory environment that some such as MetLife have completely retreated from this line of business.
We are comforted by the fact that there are many incredibly smart people focused on housing finance.
- In the short-term, it’s clear that the politics of an election year will impact anything dramatic in the way of policy.
- But moving into the end of the year and 2013, we expect to see more positive action that will impact the systemic challenges of housing finance. We are likely to return to reasonable underwriting that will be too conservative for mortgage brokers, yet still far more aggressive than some have called for.