Opinion

Felix Salmon

Why banks aren’t lending to homebuyers

By Felix Salmon
January 15, 2014

“Despite the confluence of promising signs,” write Peter Eavis and Jessica Silver-Greenberg today, “little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis, leaving a large swath of people virtually shut out of the market.”

This is absolutely true, and it’s a significant problem. To get a feel for just how sluggish the mortgage market is, my favorite chart comes from the Mortgage Bankers Association. Every month, the MBA releases its Mortgage Credit Availability Index, which makes it easy to concentrate on minuscule differences: in December, for instance, the index rose to 100.9, from 110.2 in November. But in order to see the big picture you need to zoom out and look at what credit availability was like before the financial crisis. And if you do that, the chart looks something like this:

Screen Shot 2014-01-15 at 11.49.43 AM.png

Of course, mortgage availability was way too lax in 2006-7, and the new index doesn’t have historical data going back before the end of 2010, so we can’t really see what was normal before things went crazy. But anecdotally, it’s much harder to get a mortgage now than it used to be. In the NYT article, the Center for American Progress’s Julia Gordon says that “a typical American family” with a credit score in the low 700s is “being left out”: that’s a very long way from subprime, which is what you’re considered to be when your credit score is below 620.

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

Why are banks so reluctant to lend? It’s not because of new rules about qualified mortgages, or anything regulatory at all, really. Instead, it’s much simpler:

fredgraph.png

To put it another way, would you lend money fixed for the next 30 years at a rate of less than 5%? Mortgage rates might still be well above the rates on mortgage bonds, but on an absolute basis, they’re still incredibly low. If you hold the loan to maturity, you’re never going to make very much money, and if you mark it to market, you run the risk of substantial losses if interest rates move back up to more historically-normal levels.

On top of that, the mortgage business is consolidating even more than the banking business more generally, with Wells Fargo being the big whale. It has the scale and the financial technology to manage all the risks and the regulations, as well as a big enough balance sheet that it can easily cope with being forced to repurchase loans it is currently selling. Most smaller banks have essentially zero competitive advantage over Wells, and it can make a lot of sense for them to get out of the game entirely, as Joe Garrett says:

One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships. With many people having their mortgage payment automatically taken from their checking account, a significant number of borrowers don’t even know who their mortgage lender is. And mortgage borrowers are much more interested in getting the lowest rate than in getting a mortgage from their primary bank.

There are many commercial banks that do just fine not offering mortgages. Some offer it through a private-label mortgage company. Some refer borrowers to local mortgage bankers, and most simply don’t offer it. Mortgage banking does not generate deposits from customers, and to the extent that customer deposits are a major part of what makes a franchise valuable, mortgage banking does not help.

I cannot think of a single banker who was ever criticized for getting out of mortgage banking, but there are plenty who stayed in too long and lost their job and even lost their bank. Yes, mortgage banking can be very lucrative when times are good, but bank executives must know when to cut back, and they must also have the courage to simply exit this business when it no longer adds value to the bank and its franchise.

There are a few possible solutions to this problem, none of which are particularly hopeful. One is to simply wait for mortgage rates to rise back to say 6.5%, at which point a lot more lenders will start coming out of the woodwork. Another is to phase out the 30-year fixed-rate mortgage entirely, since it’s a product no private-sector financial institution would ever offer, were it not for the distorting influence of Fannie and Freddie. Both solutions would probably be accompanied by a decline in house prices, which no one wants right now. And then of course there’s the risk of overshoot — that if conditions loosen up, that will only serve to precipitate another bad-loan crisis.

Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers. I’m in general a believer in renting rather than buying, but the US is a nation of homeowners, and in such a country, a liquid housing market is a necessary precondition for economic vitality. Right now, we don’t have one — and we don’t have much hope of getting one in the foreseeable future, either.

Comments
29 comments so far | RSS Comments RSS

“One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships. ”

I don’t think they — banks — even want this relationship, really. My mortgage got sold twice, to other institutions. After nearly a decade in the hands of Citi, they dropped my 20 year old credit card for disuse. In return, I’ve decided to accelerate my mortgage payments by 3x, if not faster. Free and clear from Citi, is my new motto.

Posted by GRRR | Report as abusive
 

Felix,

You mention phasing out the 30-year fixed-rate mortgage as a “solution” which would lead to lower house prices. But as you well know, most countries don’t have a 30-year fixed-rate mortgage, and do just fine. For some reason, Americans are terrified of ARMs, but that’s the standard in the UK, for example. And with rates as low as they are, ARMs make a lot of sense. (Yes, I know about the risks if and when rates start to normalise, but we’re talking about attracting banks back into the mortgage business here).

Bill

Posted by billsiesta | Report as abusive
 

Well, apart from rebuilding banking reserves and to a higher level than before (courtesy of Basel III) there is the very good point you made yourself but dismissed as quickly that loan criteria got sloppy. When you can pass the risk down the chain, who cares how much of it there is? Clearly, the mortgage market will be smaller now.

But five years later, basic economics suggests that in a Free Market Economy (if the US actually IS that, which it may not be due to the plutocracy that mostly seems to run things) supply and demand would balance out. But then, house prices are part of that equation too, and perhaps they really do need to come down to boost the market. Or, do what the UK government is doing by guaranteeing the top slices of mortgages to riskier borrowers so at least they only need a 5% deposit and not 20%.

Posted by FifthDecade | Report as abusive
 

Felix,

What you say is normally so smart that I am just confused when you write:

> To put it another way, would you lend money fixed for the next
> 30 years at a rate of less than 5%?

Hang on a sec. If creditworthy people want mortgages, and there is money to be lent (and god knows there’s plenty with $2.4T in excess reserves earning 0.25% with the Fed), then why won’t the market simply set the rate? The Fed does not control interest rates. It might conduct OMO (e.g. T-bill purchases) to keep the fed fund rate within target, and it might pay interest on excess reserves, and these levers influence a bank’s willingness to lend at a given rate, but this is not price fixing. The laws of supply and demand still apply.

I believe the reality is that there are not a lot of creditworthy people who wish to borrow, and there is plenty of money sloshing around in the money market, hence the market for mortgages clears at a low interest rate.

Kenneth Duda
Menlo Park, CA
kjd@duda.org

Posted by KennethDuda | Report as abusive
 

“Center for American Progress’s Julia Gordon says that “a typical American family” with a credit score in the low 700s is “being left out”

Well if you are lending money based on credit scores you are a moron, and the banks certainly don’t do so. The thing that prevents the “typical American family” from getting more credit is that they are already stuffed to the gills with credit, even today after massive paydowns.

If you have credit in the low 700s and money saved for a down-payment and your income isn’t being consumed by other debts then you will absolutely get a loan.

Posted by QCIC | Report as abusive
 

Felix thinks 1. Interest rates are too low. 2. 30-year-fixed loans are a “market distortion.” 2b. Fannie/Freddie=bad. 3. Renting is better. (But he bought a condo in the priciest town in the USA).

I don’t know what to think.

Maybe I should buy gold?

Posted by Eericsonjr | Report as abusive
 

When you factor in all the ancillary costs of home ownership, Felix makes more sense than you might think at first glance. There are, of course, psychological aspects to home ownership. Make no mistake though, owning a home is not an investment. It is owning an asset. In that respect Eericson, a little gold might not hurt you. Don’t buy too much though.

Posted by Missinginaction | Report as abusive
 

Owning a home is a consumption and financing choice. It has never been an investment.

I personally see a greater advantage for buying if you are in the market for a SFH than for a condo in an apartment building, but perhaps Felix understands the latter picture better than I do.

Posted by TFF | Report as abusive
 

I’m with QCIC on this one. I know several families that have bought new homes in the last 18 months with no problems whatsoever.

Why does a bank care what absolute rates are? If they’ve got money to lend, and they can do better than parking it at the Fed, then it seems to me they would start lending. Don’t tell me they all of a sudden care about the long-term!

My guess would be that very few people have cash savings anymore (outside of 401k type accts), and even less people have reasonable debt levels. That’s not going to change until we figure out how to bring income and wealth inequality back to a reasonable balance or get the economy growing much faster. Think about it, the mortgage market hasn’t worked right since the 90′s, which was also the last time the economy grew at a decent clip.

Posted by Harpstein | Report as abusive
 

Meanwhile, here in Manhattan, no one in my condo building has been able to sell or refinance for the past couple of years, thanks to an ever-shifting series of rules at various different banks, all of which are clearly designed to just give them a reason to say no.

-more details on this please? Could it be because the potential borrowers can qualify for GSE backed loans? Could it be that your condo association is intentionally difficult with lenders as to tilt the ownership profile of the building to more desirable cash or mostly cash buyers? Could it be that the big bank players in NYNY are getting a little sick of having GSE blessed loans shoved back down their throats at the first sign of trouble?

Here in Maine banks are falling all over themselves to write both conforming and non-conforming home loans to anyone with a decent income/credit profile.

People who want 100% financing, have recent credit issues, can’t illustrate that they earn a living are surely having a hard time getting loans done… but we mostly all agree that’s a good thing right?

Posted by y2kurtus1 | Report as abusive
 

“Mortgage rates are too low” is relevant insofar as it means “banks and the people who wish they had loans can’t agree to a higher interest rate”. If this is true, then why? Previous commenters have suggested that, credit score or not, the attempted borrowers don’t have enough down payment, and maybe there’s no interest rate at which a bank is willing to take on a high LTV right now. Maybe the point at which the banks would be willing to commit the funds is high enough that the good credits would decide they’d rather rent for a few years. Or maybe people are just anchored at too low a rate, even if there’s some deep coherent level on which they would “like” to have a loan at 7% (if it’s that or nothing). If the spread between mortgage rates and other investment opportunities is low, though, while there is apparent excess demand at that price, I want to know why the price is still low.

Posted by dWj | Report as abusive
 

Felix, as a lender I know we are lending money to those who qualify for the loan.
For your personal situation I have a feeling it’s not the lender, it’s your building that is stopping everyone from refinancing. Condo’s and Co-Op’s are special. You the home owner are not in control of your property. You are dependent on your neighbors as well as the condo board to make the owners decisions for them.
There are two big reasons for a condo to be rejected, the first is not having sufficient reserves for emergencies, and the second is too many investor owners. The second reason is the more important, a non-resident owner has a vote, they are making a profit when they rent their property. Why would an investor “vote yes” to raise fees and reduce their profit margin, even if it was for the betterment of all? The answer is they won’t. You also have to look at your fellow owners. Are they old? On a fixed income? If the answers are yes, they cannot afford higher fees, therefore they once again vote against higher condo fees which add to the building not meeting reserve requirements, proper insurance and disrepair.
So before you go out and blame the industry take a good look at why they are saying no.

Posted by mtgguy | Report as abusive
 

Hence the White Whale WELLS FARGO. Do to the reserves requirements and excessive cash the banks deposits are only yielding the fed rate in return. I the past the Bank would invest this money and see bigger returns on their deposits. So why is Wells the White Whale in my opinion, it becasue Wells has made the decision to portfolio mortgage’s that “make sense” (not much of common sense left in the mortgage biz anymore) and may not meet the QM requirements. Mortgage Brokers / Bankers do not have this option since they do not have the luxury of depositors $$. Why not lend your money at a 4.5 to 5.0% rate and increase your returns versus the alternative which at the FED rate..

Posted by kmac1116 | Report as abusive
 

dWj – The goverment (Fannie and Freddie) has set the lending barometer to adherence to QM regulations. (Qualified mortgages). Securing a mortgage loan is simply set on the borrowers ability to repay the loan, which is siply debt to income caluculation. Givne all you debt the government, Freddie and Fannie have set this marK (QM) at 43%. This includes all revolving, installent, credit report debt + the new mortgage.. If you do not meet this mark then Freddie and Fannie will not write the loan. The Banks hands are tied, they do not make the decision, however, in my last post, I mentioned Wells Fargo. If the borrower does not meet the QM requirements Wells Fargo has made the decision given all aspects of the borrowers financial / credit situation to portfolio the loan. This means Wells will use their depositors money to fund the loan and not utilize Fannie and Freddie. Hopefully this sheds some light on the mortgage business.

Posted by kmac1116 | Report as abusive
 

5% mortgage interest + 4-5% closing costs shoots the return on loan initiation in the 10%…The lender resells immediately, which can optimistically bring his annual return of above 100%, more realistically is above 50%.
That’s a lot of profit.
The truth is that US properties are extremely overvalued, i.e. expensive. Using AMR like in Europe will force property prices down. Example: a single house near a large city from 1 mln should become 150-200k. The “2007 crysis” was exactly such a correction, however FED stopped it by effectively supporting the system of 30-year fixed loans…FED’s problem is that the entire US economy relies on overvalued assets to function, and assets prices are harder to support without a broad base of consumers willing and capable of spending on them, i.e. we have a systematic problem and nothing has happened to resolve it. The only hope might be booming economy and fast income increase among vast population, which has not materialized yet…maybe because of the lack of cheap health and education systems and the competitive pressure due to world globalization.

Posted by Ananke | Report as abusive
 

Felix,
there’s a simple answer. The FED money is play money. Possibly there has been a serious intention in the beginning. But after a while, the QE-money exploded. If this giant amount of money touches the real economy, the experiment would end in disaster. For the time being the FED tries to save its ass.

Posted by google_pass | Report as abusive
 

“Make no mistake though, owning a home is not an investment. It is owning an asset.”

The distinction there would be lost on many, especially since investments are typically considered assets, be they cash, stocks, mutual funds, commodities. . .

Like all things, there are exceptions to the notion that buying a home is not an investment. Those who bided their time, and bought in at the bottom of the trough a year or so ago, are likely to consider their home (even if a primary residence) a good investment indeed.

Posted by Yashmak | Report as abusive
 

While the Fed has made cash cheap and readily available for lending, the government (O’bama administration)also has placed blame for the great recessison firmly at the feet of the banks with loose mortgage lending standards (ie. minimal equity, unverified credit worthiness, substandard borrowers)being the mechanism that banks (O’Bama administration would indicate) used to destroy the economy. Now banks have tightened up these practices and everyone is complaining the banks should loosen their standards. Populism at work!

Posted by CDA210 | Report as abusive
 

If the problem were low 30 year mortgage rates, then the banks would be lending at higher rates and lending preferentially via ARMs. There is no evidence for this. Most banks lend and resell the loan. They don’t maintain a long term relationship with the borrower. My guess is that the kind of investors who used to buy mortgage backed securities, in fact, the Freddy & Fannie customers, now have cold feet and are buying corporate bonds or lending to the government. Given the increasing number of retirees searching for “safe” investments, you would imagine a boom in mortgage backed income securities. In fact, we see no such thing.

My guess is that the secondary mortgage market has dried up. Alternatively, the banks can make more money borrowing from the Fed and lending the money to the federal government than from shuffling mortgages. In either case, our blinkered faith in the powers of the free market has once again led us into a cul de sac.

Posted by Kaleberg | Report as abusive
 

The US is in deep trouble and it is utter fantasy that we have fixed anything while the fed prints 1 TRILLION dollars per year. US finance + US government = one great big investor ponzi scheme lie. Anybody with a real brain is putting money away and planning to leave the country. And regarding 30 year mortgages, we don’t know if the US is going to survive 5 years at the current state of mismanagement let alone 30.

Posted by UScitizentoo | Report as abusive
 

Why would anybody stay in the USA? In one decade a certified fascist congress has destroyed our moral reputation with the NSA, destroyed our banking system with toothless regulations supporting wall street crime, fought two completely utterly useless wars to support the military industrial complex, opened our borders to thousands and thousands of temporary Indian tech workers, opened our borders to free trade with a military communist chinese regime and engaged in a policy to print multi trillions of dollars year after year in paper money to devalue everything we held dear. WHO would want to invest in this?

Posted by UScitizentoo | Report as abusive
 

I think Felix is just fishing for some kind of reaction. I had absolutely no problem refinancing to 30 years last year. As many mentioned – banks make money – no problem and they can leverage your loan to make more loans.

The banks though are hiding so much bad mortgages they are really gun shy and will not lend without – 20% down, excellent credit rating, excellent track record of unemployment and income level and very little outstanding debt. There a a myriad of ways people do not qualify in the above and this is the new normal for mortgages. Too funny – it is because of the low interest rate.

Posted by Butch_from_PA | Report as abusive
 

“One of the great myths of our industry is that a mortgage is the foundational product for consumer relationships.” I think that today maybe it’s the other way around. They figure that if they get you to open a checking account, one day you’ll ask the teller about a mortgage, whereas you would be less likely to ask the check out person at Trader Joe’s for one. That is, of course, if indeed as the writer suggests that they want to write you a mortgage in the first place. But let’s not forget, most people do not keep their house for 30 years, maybe only 3 or 7, plus there are always equity lines, and there are such things a discount points. And there are lots of reasons to refinance, maybe you want a yacht payment or a ski lodge to consolidate into one – or a business venture. You might consider a higher rate for a higher line if necessary. Also, the mortgage originators are only interested in writing the mortgage and selling it in order to remain liquid. Then it’s the Sultan’s problem to hold and service it. Yeah, there’s a certain amount of truth to Felix’s (or is it Felix’)argument, but it’s not the whole story.

Posted by TheRat | Report as abusive
 

Dear Felix,

“If you hold the loan to maturity, you’re never going to make very much money…”

That’s a pretty big assumption, amigo. Just how many homeowners hold to maturity? And if they don’t, how much is the bank making then? Take a minute, find an amortization schedule and calculate how much the bank makes if the mortgage holder sells after 5 or 10 years. Now tell me the banks aren’t making enough. And what about the substantial fees up front?

Posted by Glennn | Report as abusive
 

(quote):”“little in the vast system that provides Americans with mortgages has returned to normal since the 2008 financial crisis,”…
Does this sentence imply that prior to the 2008 crisis the situation was normal, I.E. healthy?
If it was, why did the crisis happen?
And if it wasn’t normal, what’s the point in lamenting the fact that things have changed since then?

Posted by reality-again | Report as abusive
 

Ah mortgages and horror stories

Mine is different. I am a geezer, retired low income hence low DTI, 800 credit scores $1m in cash, trying to refi with debt of 100K and value of 250k, pretty good debt to value relationship, and have bounced about four checks in 45 years,

But my DTI is no good b/c I live on investments and capital gains and appreciation, and live lower than modestly and do not fit into any algorithms. Mostly I live on borrowing money at 3% and using the non-liquidated assets to appreciate at 50 %– 75 %, annual, ETFs high beta, thereby improving Internal rate of return.

My nirvana is an interest only loan in perpetuity, I call this renting money secured by real estate. I’ll take an ARM and play craps with futures. I am on both sides of interest rates and thus have a ‘synthetic fixed rate,’ as it was once called. Poobah to DTI!

Mostly my DTI is no good b/c I an a deficit spender, and at this rate will run out of money after the sun cools or goes nova; last year my aggressive portfolio doubled the indices, my conservative portfolio only beat the indices by 50% – in a bull market everyone is a genius –

But my DTI is no good. DTI is crap. DTI is usually job income. Usually you lose your job overnight.

It takes an act of Democratic congress to destroy your assets, unless you zig left and zag right and plan for inflation, and then you beat the indices,

DTI is crap. It is a current accounts cash flow. It tells you nothing about next week or next year or next decade.

Credit scores tell quite a bit, they say – are you good for it.

DTI is illegal for geezers. Age is a protected category.

DTI discriminates against retired persons. B/c geezers have accumulated assets, some, and financial discipline, and have paid down most capital expenses, like mortgages except those we choose to refinance at 3%, geezers are superior low-risk borrowers.

B/c DTA discriminates against geezers, it has disparate impact against a protected category, and thus has a rebuttable presumption of illegality, and must show that alternate not discriminatory criteria do not work, but they do – credit scores, loan to value, and down payment, assets – for new financing or refinancing

One lender told me to fake DTI, take money from pre-tax retirement into current accounts, I said retirement was pre-tax dollars, transfer was a taxable event, the taxes outweighed the refinance gain, the lender said do this for three months ‘we have three month look back, get the loan, stop the transfer,’ I said this was fraud via anticipatory repudiation, and refused, and got yelled at, asked ‘didn’t you guys ever get tired of seeing your name in Indictment Weekly,’ and they yelled some more.

POOBAH!

It is the GSEs that were too rigid to understand ‘asset-draw-down loans,’ which I finally got, years later, NOT a reverse mortgage, rather a promise to pay based on assets, equity and credit scores. NO promise to keep having an income. No one can promise truthfully to keep having an income.

Posted by jacknyc | Report as abusive
 

Well, the first part of your post is pretty weak. You quotea think-tank saying the mortgage market is not returned to normal, then you follow that up with a chart that starts at time when the mortgage market was definitely not normal, then explain that the new figures don’t compare to the old (so the chart has no value), and we really can’t say anything about what “normal” was. So the first two paragraphs should have been cut, because they say nothing.

Then there’s the anecdote about our building. Hmmm. we’ve been seeing a lot of media coverage about how incredibly tight and crazy the NY market is right now. And, I will make a guess that you live in a building where the prices require non-conforming jumbo loans? Mtgguy is right. Cut that paragraph.

Banks hold loans to maturity? Bwahahahah. Please, banks are in it for the fees–they pass the loans to investors or the GSEs as fast as possible.

“One is to simply wait for mortgage rates to rise back to say 6.5%, at which point a lot more lenders will start coming out of the woodwork.”

And then watch all the buyers retreat to the woodwork.

“Still, one thing is clear: for all that the Fed has been pumping billions of dollars into mortgage securities as part of its quantitative easing campaign, all that liquidity has failed to find its way to new homebuyers.”

That’s funny, not very long ago you were extolling the virtues of QE and how we were getting all kinds of “market multipliers” out of it. But not for mortgages? The point of the Fed action is to keep rates low. And how could this not result in more loans? If the banks can sell more MBS because the Fed is buying, the can make more loans. (Oh, right, I forgot: they’re holding the loans to maturity, snerk.).

Posted by Moopheus | Report as abusive
 

“Well if you are lending money based on credit scores you are a moron, and the banks certainly don’t do so. The thing that prevents the “typical American family” from getting more credit is that they are already stuffed to the gills with credit, even today after massive paydowns.”

My credit sucks – but my income to debt ratio is excellent. But I don’t take on much debt, and avoid it – so maybe it makes sense my credit is bad.

Anyway, since I’m not wanting anymore debt; I really don’t care :)

I usually don’t get something if I don’t have the cash for it. I do have a mortgage and a car payment, but that’s about it.

No one really ever offered to extend credit to me – until I didn’t need it. So now… up yours, I don’t need it :)

Posted by Overcast451 | Report as abusive
 

“yours” – was directed to the lenders BTW, lol :)

Posted by Overcast451 | Report as abusive
 

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