Rebuilding household wealth starts with the housing marketby Peter Miller
If your wallet seems a little lighter these days it’s not surprising. The latest Federal Reserve Board’s Survey of Consumer Finances, conducted every three years, shows that a typical household had a net worth of $77,300 in 2010, down from $126,400 in 2007.
That’s a huge drop, but it’s not the entire story
Equally important, the report also said, “If primary residences and the associated mortgage debt are excluded, the median of families’ net worth is reduced from $126,400 to $42,300 in 2007 and from $77,300 to $29,800 in 2010.”
In other words, when we look at the wealth of a typical household, a big chunk is in the form of real estate. If there is less real estate equity, then the ability of households to borrow also declines.
Even though mortgage rates are at historic lows, many borrowers have no access to such low-cost funding.
Bernanke weighs in
“Since its peak, U.S. home mortgage credit outstanding has contracted about 13 percent in real terms, said Federal Reserve Chairman Ben Bernanke.
Bernanke said the lack of credit has been caused by a number of factors including, “the lack of a healthy private-label securitization market, and cautious attitudes by lenders.”
Actually, the private label securitization market is quite healthy, if by “healthy” we mean that major lenders are not once again begging for bailouts. Sure, we could have a lot more activity–and thus bigger profits on Wall Street—buying and selling securities not created or guaranteed by Freddie Mac, Fannie Mae and Ginnie Mae; if only we could go back to the toxic loan era before 2008 and seed the marketplace with option ARMs, interest-only loans and mortgages created without full documentation…
But would such a vigorous–and profitable–marketplace be good for the country? If recent history is any guide the answer is obviously no.
Cautious attitudes are justified
As to those “cautious attitudes by lenders,” they are justified to a very large extent.
Had lenders been cautious in the first place, they would not have underwritten the absurd mortgages which are behind not only much of the housing crisis but also much of the banking crisis. To their credit, many lenders refused to reduce their underwriting standards and the result was their portfolios were less risky but there profits were reduced. In effect, prudent lenders were penalized for acting responsibly.
Bernanke explains that even with 20 percent down, many banks are refusing to originate loans for qualified borrowers. “Most banks indicated that their reluctance to accept mortgage applications from borrowers with less-than-perfect records is related to ‘putback risk’–the risk that a bank might be forced to buy back a defaulted loan if the underwriting or documentation was judged deficient in some way,” said Bernanke.
One lender I spoke with told me that putback risk was real. As an example he pointed to a loan which was rejected in the secondary market because the gift letter to the borrower had been unsigned. To me, this is not a minor or “less-than-perfect” clerical error. If the mortgage file does not contain a valid gift letter then who is to say that in the future the borrower may be hit with surprise loan claims from the alleged donor? Or who is to say that the “gift” is not really a secret loan? Lastly, how did this loan ever get through underwriting and go to closing with such a significant error?
One way to increase household wealth is to rebuild the real estate market. That surely isn’t going to happen if we go back to the standards and practices which got us into the mortgage meltdown in the first place.