There’s always something to howl about.

That Giant Slurping Sound is the Mortgage Market Drying Up

Ken Montville asked the nagging question about the future of the mortgage market:

Unfortunately, even Congress — that bastion of liberalism and home of the bailout — is tiring of pouring good money after bad into the two mortgage giants that have been sucking up all the mortgages — good and bad — that private industry is willing to create. To paraphrase one-time third party Presidential candidate, Ross Perot: That giant sucking sound you hear is taxpayer money subsidizing home mortgages.

Now, the big questions remains: What will happen next? If there is no Fannie and Freddie to buy up all the mortgages, who will do it? Will the lenders who originate the mortgages be forced to keep them on their books and won’t this further inhibit an already tight credit market?

I outlined, a year ago, how the government is retarding a private mortgage banking recovery but I said it again for Ken’s benefit:

“If there is no Fannie and Freddie to buy up all the mortgages, who will do it?”

Nobody will…or everyone will. I’m a “lowly retail mortgage originator” with some formal education (and lots of informal education) in economics so consider my opinion with that qualification.

To use a BawldGuy axiom, lenders lend. Unfortunately, the government, through TARP and artificially subsidized mortgage rates, is creating a situation where lenders prefer arbitrage to lending. It doesn’t take a rocket scientist to borrow guaranteed money at 1% and lend it (with a guaranty) at 4.5%. This is the systemic problem that is distorting the market and arresting any chance of a recovery in lending.

If the GSEs were allowed to fail, and FHA disappeared, lending would halt…for about 3-4 months. The recovery would be robust, sustainable, and at rates somewhere in the high 5s or lower 6s. Wall Street is taking chances on 5.75%-6% non-guaranteed, mortgage yields right now; there is interest in betting on the American homeowner. Low down payment loans would most likely be gone for about a year. As prices got stupendously cheap, niche lenders might offer lower down payment loans for 100 BP higher.

You are right to criticize those who cry “Socialism” at the big government moves yet gladly lobby for subsidized residential real estate finance. The National Association of Realtors are a great example of that hypocrisy. It proclaims to be a bastion of the free market but asks for handouts.

I, like some colleagues, think the GSEs and agencies have wrecked residential real estate finance. Why would I originate loans for them? It’s my job. If I didn’t seek the best possible rate for my customers, I’d be derelict in my duty and certainly out of business. Still, one can explain how the recovery of private mortgage banking will happen when this folly finally blows up.

Then, I realized I hadn’t really answered Ken’s question.  My take:

Let me answer the nagging questions in everyone’s mind: when and what?

When?

Probably not for another year. Even the party of “hell no” loves their housing subsidies and the party of “do it now” sees it as an opportunity to buy votes. We’ll find out about the latter on August 17 or 18. We’re really safe until 5-6 months into the New Congress. If the party of “hell no” successfully lets Fannie/Freddie die, and the FHA premiums rise yet again, liquidity will dry up. Call it sometime between May and September of next year.

What then?

Hand wringing, vociferous debate, name calling, and outright bribes to “restart” the GSEs. It won’t work. Meanwhile…YOU should keep your eyes on the small, regional banks. Moreover, keep your eyes on the regional mortgage bankers. Really sharp cookies will have access to private lenders (READ: Hard Money) Start developing relationships with these local banks today. When prices get to the point that all cash deals scooping up everything, those local banks will make 80-90% loans.

Until then, save up your money for a 4-6 month stoppage. There will be a bonanza when the pent-up demand comes bac,k after Halloween of next year- you just have to survive for six months. This means you have 12 months to make 18 months worth of income- do it, be prepared, and profit immensely in the Fall of 2011. If you’re still around, you will have earned it

It might be ugly for a while but you can plan for it and profit from it.  Y’all ready for the desert?