Mortgage broker, lender plan too little too late
NEW YORK (Reuters) - The latest federal plan to restore confidence in mortgage bond and housing markets, promising strict home lender and mortgage broker standards, might thwart the next crisis but does little to quell this one.
Treasury Secretary Henry Paulson unveiled the President's Working Group plan on Thursday, recommending "strong nationwide licensing standards" for brokers and tougher oversight of all mortgage originators.
Slack lending practices that fostered record U.S. home price appreciation earlier in the decade are faulted for the housing bubble and its subsequent bursting.
Thursday's federal proposal, however, provides no relief to banks and investors currently overloaded with bad mortgages and loans backed by those loans.
With home mortgage foreclosures escalating, there is a dearth of investor demand for bonds backed by many mortgages. In addition, lenders are rejecting many more borrowers and house prices are falling in what is seen as the worst housing market since the Great Depression.
"The horse is out of the barn on this cycle and recession," said Phil Immel, broker at Prudential California Realty in Dana Point, California, and founder of RealEstateGuru.com.
Paulson's proposals "may be good for the next down-cycle in real estate, which happens every seven to 10 years, but it shouldn't have much impact of calming any markets, real estate or Wall Street, for years to come," said Immel.
Even mortgage bonds issued by government-chartered Fannie Mae FNM.N and Freddie Mac FRE.N, considered among the safest mortgage securities, are paying some of the highest yield premiums above U.S. Treasury bonds in more than two decades.
Taken together, each of a growing number of federal and private plans aimed at returning order to chaotic housing markets help, economists and investors said.
But one of the main flaws with the plan floated by Paulson is that it fails to address the burdensome stockpile of soured mortgages that are spurring corporate failures and stifling the willingness of banks to lend.
Greater scrutiny is probably good, but "Paulson's proposal doesn't on its face do anything about existing stock," said Gregory Miller, chief economist at SunTrust Banks Inc in Atlanta.
"The element of this current downturn that's most difficult to overcome is that the current stock of mortgages, those 2005-06 vintage mortgages where most of the problems have shown up ... are still on the balance sheets of financial institutions and in the portfolios of some investors," he said.
However, a Federal Reserve program unveiled on Monday to boost financial system liquidity is a step in the right direction, most analysts agree.
Even if short-lived, the Fed's plan to accept up to $200 billion in collateral from dealers using a broader base of mortgage securities is a way for dealers to push off some poorly performing assets and possibly stimulate lending.
Some analysts say the Paulson proposals may deepen the housing crisis, and may not even help prevent the next one.
"The goal is to prevent the next housing crisis, but in the short term, it will make this crisis worse," said Chris Low, chief economist at FTN Financial in New York.
"You are taking marginal home buyers right out of the market" by stiffening lending practices even further and choking off access to credit for more borrowers, he said.
Regulators, in fact, must themselves be held responsible for many of the problems in the mortgage markets, several strategists say.
"One of the reasons we are in this mess is the current regulations were not enforced," Low told Reuters.
In a separate E-mail to clients, Low said almost all of the worst offenses occurred outside of the banking system.
State regulators, who were supposed to enforce the same regulations on mortgage companies that federally regulated banks were forced to follow, "chose instead to let their charges run wild. The crisis never would have occurred if existing regulation had been enforced evenly throughout the financial system," he said.
Among the offenses, loans were often extended to borrowers unqualified to meet payments, without income checks or clear explanation about the costs. Fraud flowered.
"While Paulson seems to be moving in small steps toward greater regulation of the mortgage industry, this new plan seems to be too late for the existing subprime meltdown, and too little for the next one," Kurt Eggert, a law school professor at Chapman University in Orange, California, said in an E-mail.
National mortgage broker licensing standards are not enough, said Eggert, a former member of the Fed's Consumer Advisory Council. He says brokers "need to have some skin in the game, so that if they defraud borrowers, the brokers are worth suing."
While the many pieces of the regulatory puzzle are floated, the housing market continues its downward spiral.
"We're off the cliff," said Immel, the California real estate broker. "We think we have a parachute, but we can't find the ripcord to land safely. It really will get a lot uglier for the next year across America, and it should bottom out about a year from now."
(Additional reporting by Al Yoon; Editing by Dan Grebler)