Dec182012

BofA’s Moynihan, “is homeownership the right solution for everyone?”

Everyone can’t own a house. We tried that during the housing bubble, and it didn’t work out very well. First, by pushing everyone into home ownership, it raised prices to unsustainable levels. Second, doing so by giving unqualified buyers dodgy loan products created instability in the market resulting in a credit crunch and a market crash. Increasing home ownership is a laudable goal, but there is always a segment of the population that isn’t cut out for home ownership. Some people need the freedom and flexibility of renting to pursue career opportunities. Some people simply don’t have the financial discipline to consistently make mortgage payments to sustain home ownership. The big lesson we should learn from the housing bust is that giving loans to people ill-prepared to consistently make payments may give home ownership rates a temporary boost, but when these people default, they lose their priviledges of home ownership and cause huge market disruptions and loss of wealth for everyone else.

U.S. Must Rethink Housing Ambitions, BofA’s Moynihan Says

By Clea Benson – Dec 14, 2012 8:58 AM PT

Brian T. Moynihan, Bank of America Corp.’s chief executive officer, said the U.S. government, lenders and borrowers need to reset their expectation that everyone can own a home.

“We need to look hard at some of the old assumptions and ask the question is homeownership the right solution for everyone?” Moynihan said today during a speech at the Brookings Institution in Washington.

Moynihan will undoubtedly be eviscerated by the political left for having the audacity to tell the truth. The fact is that home ownership is not the right choice for everyone. Those that need flexibility to move don’t benefit from it, and those that can handle the requirements don’t deserve it.

The reset should include a modified role for government in housing, Moynihan said. He called for an “orderly transition” in the role of Fannie Mae (FNMA) and Freddie Mac and said the Federal Housing Administration needs to return to its original focus on helping low- and moderate-income borrowers.

“FHA has been instrumental in sustaining the market the past few years, but they have come a long way from their original mission,” he said.

Moynihan is right. The GSEs and the FHA no longer fullfil their original missions. Now they are being used as tools to prop up house prices to bail out the banks. I am surprised to see the CEO of BofA, a bank benefiting from the new mission of these entities, being so honest about the need to change them.

The government mortgage insurer said last month it would raise premiums and sell off delinquent loans after disclosing it might need U.S. Treasury aid to balance its books for the first time in its 78-year history.

“Clearly, this is one area where a reset is needed,” Moynihan said.

The FHA has become a replacement for subprime lending. That isn’t how it’s supposed to function, and it explains much of why it will require a government bailout.

Overhaul Plan

Lawmakers and regulators should take several years to formulate a plan for overhauling the U.S. housing finance system so that markets are not disrupted, Moynihan said.

“It’s a three- to four-year decision to get it right,” he said. “You’re going to have to give lots of warning to America, lots of warning to the markets. You don’t want confidence to go back.”

Although those comments are self-serving, they are also right. Any abrupt changes will cause house prices to crater again. The transition must be measured to prevent another crash. Right now, the kool-aid crowd is ignoring the major market headwinds any changes to the GSEs or the FHA will bring with them. But the pressure to reform these behemoths will continue to mount along with the taxpayer losses.

Banks also need more clarity from the government on pending regulations to assign liability for risky mortgages and require them to hold capital against such loans before they and other private entities will play a larger role in housing credit, Moynihan said.

“We don’t want to end up with any unintended consequences that prevent private capital from returning or further restrict sound lending and ultimately go counter to the reset we’re trying to achieve,” he said.

Those comments are also self serving, particularly considering the huge lawsuits the major banks are all facing. However, he is correct that private lending will not come back until these issues are resolved.

‘Sustained Recovery’

The housing market is in the midst of a “real, sustained recovery,” Moynihan said.

That one is wishful thinking. A real recovery requires an increase in owner-occupant sales which is not occurring. Plus, the entire market is one giant market manipulation completely dependent upon government and lender policies to sustain itself — and those policies could change at any time.

At the same time, he said, unemployment is limiting the reach of mortgage modification programs and other aid that lenders and the government are providing for troubled borrowers.

Bank of America has provided such aid to about 1.5 million borrowers and has about 50,000 of its 270,000 employees dedicated to working on about 900,000 delinquent loans, down from a peak of 1.6 million delinquent loans at the height of the crisis, he said.

The bank modifies between 30,000 and 40,000 loans and approves about 20,000 short sales every quarter, he said. Bank of America has finished reducing principal on mortgage loans as required in a legal settlement with federal and state authorities over improper foreclosure practices, he said.

Can-kicking reduces delinquency temporarily whereas the short sale is a permanent solution. Most of the 30,000 to 40,000 modified loans will end up as short sales or foreclosures eventually.

Lenders need to carefully underwrite loans and ensure that borrowers have an incentive to maintain their payments.

Isn’t keeping the house incentive enough?

Still, he said, “I don’t think there is anything magic about a 20 percent down payment; 10 percent seems reasonable.”

Bullshit. Twenty percent down payments are the bedrock of a stable housing market. He wants to see a lower number becuase under Dodd-Frank’s qualified mortgage rule, BofA and other banks would be required to hold more capital on their books for future loan losses. Ten percent down payments shifts unnecessary risk to the US taxpayer.

Lenders need to consider “how do we strike the right balance between prudent underwriting, responsible down payments and access to homeownership?,” he said.

That question really isn’t that hard to answer. If we return to the underwriting standards in place prior to the housing bubble (20% down payments and 28% debt-to-income ratios), the market will regain the stability it had before. Lenders will originate fewer loans, which means less profits, but the taxpayer won’t be at risk, and homeownership will be in the hands of those who can sustain it. What’s wrong with that?