(photo: Images of Money)
I think there are two key factors generating the failure of the residential investment sector to enjoy a recovery. One is the dismal outlook for demand growth, which has had a particularly relevant impact on household formation (there are lots of people doubling and tripling up at the moment). And another is the failure to get mortgage markets working again: despite rising rents and rock-bottom interest rates, mortgage lending remains at very low levels [...]
It's striking; you still hear many, many people argue that America can't count on housing, traditionally a leading cyclical sector, to help it out of a dismal recovery. These folks seem to be neglecting the remarkable, unprecedented collapse in housing construction over the past few years. The country may have had too many housing units at one point during the boom, particularly in certain outlying areas in especially bubbly markets. Whatever national excess there was has vanished. Once growth triggers a rise in household formation, housing demand will soar, and if the government can't clear up the lending channel, rents will begin soaring too.
I think Avent misses something here. One of the big reasons why mortgage markets aren't working, at the risk of redundancy, is that mortgage markets don't work. I participated in a call with the Acting Director of the Consumer Financial Protection Bureau today, Raj Date. And he made this excellent point: the increase in delinquencies started around the last quarter of 2006. It's now the last quarter of 2008. "It's been five years, and we're still seeing difficulties and deficiencies with mortgage servicing," Date said. And that's because the servicing model simply doesn't work, and for the regulator with oversight over the servicing industry to say that, it has an impact. But it's true. [cont'd.]
"Servicer compensation doesn't work. It's not in a servicer's incentive to do a good job on loss mitigation," Date said. "I find that people generally do what they get paid to do." In addition, he noted that servicers, by selling the servicing rights, can fire the borrower, but the borrower cannot fire the servicer. This leads to a major lack of focus on consumer needs.
And this is true right down the line in the mortgage industry. During the bubble years, the origination was crooked, the securitization was crooked, the recording was crooked, the servicing was crooked and the foreclosure operation was crooked. Maureen Tkacik has a great series at Reuters this week about how the Federal Housing Finance Administration finally came around, after many years, to the fact that the entire mortgage process was fraudulent. As Date put it today, "Consumer finance is supposed to make life better, but lately it's been making life worse."
So I don't know how you end up with a working housing market when the same players who committed the same crimes are in position at the same points. A lot of the crooked originators have been rooted out, though none of them have had to go to jail for their crimes. But much of the rest of the system remains in place. Hoping for a market fix won't work. Date described this on today's call as an Econ 101 undergraduate problem. "Somewhere there is an undergraduate in an econ seminar being told that the market finds a way to correct stuff…. If you hope for the best, you're not going to get good policy outcomes."
And given that statistic of low residential investment, and what that means for the economy, the only way to return to a respectable growth level is to root out and prosecute those who have wronged the country and broken the market, which happens to be the largest market in the world. Accountability for fraud in the mortgage industry isn't just a moral imperative, it's an economic imperative.
No comments:
Post a Comment