When it rains, it pours, but we're looking at a hail storm in housing finance this week, as government starts the business of taking itself out of the housing business. Tomorrow morning the FDIC will release and vote on proposed risk retention rules for the mortgage market. This includes the "Qualified Residential Mortgage" definition. A QRM would be exempt from risk retention, where the banks have to hold on to 5 percent of the risk when securitizing loans.
The QRM will likely require a 20 percent down payment on the loan, as well as other underwriting criteria, and loans sold to Fannie and Freddie (while still in conservatorship), as well as FHA loans, would be exempt. At the same time, Fannie, Freddie and the FHA are making themselves more expensive, as they try to shrink their currently overwhelming market share.
Barely a few hours after the vote, House Republicans will introduce a slew of, possibly six, bills designed to reform/shrink/eliminate Fannie and Freddie. Then comes more at a hearing on Thursday on housing finance. All of this begging the question: Without Fannie and Freddie, does the 30-year fixed still exist in a fully private market? And what are the dangers if it doesn't?
"We continue to believe that low cost, 30-year fixed-rate mortgages are the best way to support the housing market and see anything that threatens this product as negative for those with housing exposure as it will slow the eventual housing recovery," writes Jaret Seiberg at MF Global. "That means negative pressure on the big banks, the mortgage insurers, and the home builders."
It also means mortgages get more expensive for you and me.
"There's no question if the government gets out of the business of backing mortgages, rates should go up, underwriting will be tougher, down payments will go up," Toll Brothers CEO Douglas Yearley Jr. said today on CNBC. "It’s going to affect all of us. It would be a head wind." (You can watch the full interview here)
A head wind is not exactly what we need in the midst of a hail storm. Am I seeming too gloomy to you? Given that the number of contracts signed for existing home sales rose a whopping 2 percent month to month in February? I don't think so. Home prices are falling again, negative equity is rising, foreclosure inventory is surging and consumer confidence in housing is non-existent. Add rising interest rates to that, and you really do have the perfect storm.