There's been a lot of very confusing news recently concerning residential mortgage underwriting and new regulations. Various regulatory actions are being taken or being considered by the U.S. Treasury, Federal Reserve, U.S. Department of Housing and Urban Development (HUD), Securities and Exchange Commission (SEC), Federal Deposit Insurance Corporation (FDIC), and Federal Housing Finance Agency (FHFA).
The changes involve esoteric issues concerning the alignment of the qualified mortgage (QM) rules with the qualified residential mortgage (QRM) rules in order to clarify risk retention requirements for mortgage lenders. Also, the FHFA is considering additional changes to Fannie Mae, Freddie Mac, and Federal Home Loan Bank residential underwriting guidelines.
I'm not going to directly address any of these changes here because they are not relevant to this column. If Real Money subscribers have any questions about the specifics of the changes I am happy to respond in the comments section below this column.
Capital market participants, however, have expressed optimism that the regulatory changes will make access to residential mortgage financing easier and thus boost housing activity, mortgage originations, and the economy overall. This is most evident in the surge in the positive performance of the sectors most closely aligned with the housing: builders, mortgage lenders, servicers and insurance providers.
Yesterday alone, shares of Wells Fargo (WFC) and Bank of America (BAC) were up 2.5% and 2%, respectively, as a result of the announced changes. The largest home builders with business geared toward first-time buyers, DR Horton (DHI) and PulteGroup (PHM), advanced about 1.75%. The largest and dominant mortgage insurance provider, Genworth Financial (GNW), was up 4.5%. (The largest non-bank mortgage servicers did not participate in this enthusiasm because of actions taken against Ocwen Financial (OCN) by the New York Department of Financial Services on matters unrelated to the new regulatory changes.)
Equity buyers are seeing the potential for the housing and mortgage industries to experience increased business, revenue, and earnings as a result of the regulatory changes. This optimism is misplaced, however. This observation was unexpectedly offered as well by the President and CEO of the Mortgage Bankers Association (MBA), David Stevens, at its annual convention yesterday:
"But it is important to realize that this rule will not have a significant impact in making mortgage credit more available, as there remain structural and market barriers that need to be addressed for the private label securities market to fully return."
There are also financial pundits claiming that the changes will reintroduce subprime lending to the mortgage industry and create future problems similar to those that were the catalyst for the housing bubble and subsequent broad market financial crisis that culminated in 2008.
They too are wrong.
The announced regulatory changes amount to little more than some minor paper pushing by bureaucrats, very similar to what has occurred over the past six years with the 12 federally mandated residential mortgage loan modification programs, which have produced nothing of any positive substance for the mortgage or housing industries.
To ascertain what the prospects for housing are, the two most critical issues to be aware of are what caused the previous housing bubble and what is different about the housing environment today.
I addressed the causes of the previous mortgage rules that gave rise to the housing bubble in the 2012 column, "How the Housing Crisis Started", and suggest reviewing that column again.
The regulatory changes enacted since the 2008 financial crisis, including the most recent concerning QM, QRM, and risk retention, are indicative of a continuing lack of understanding by decision makers about what caused the previous problems.
More importantly, however, as the MBA's Stevens eluded to in his comments, the environment that exists today is substantially and structurally different than the economic environment that existed 10 years ago.
Simply loosening residential mortgage underwriting guidelines in incremental steps is not going to cause demand for housing to increase and lead to a broad resurgence in consumption and economic activity -- even though that has been the path that's been followed by the U.S. government in response to economic malaise since the 1930s.
It's based on a simple idea that states "as goes housing, so goes the U.S. economy."
In his column earlier this week, "Housing Is Not Happening", Tim Melvin referenced the fundamental structural issue that Mr. Stevens was also eluding to: the key first-time home buyer demographic, the 25-34 year olds, do not have income security.
The private and public sectors are not creating entry-level jobs that allow for an increase in demand for housing. And I don't see anything on the horizon indicating that will change.