Despite the lowest interest rate on the 30 year fixed in six months, mortgage applications to purchase a new home fell last week, over 3 percent. In fact, purchase application volume has been falling, on average, for the past four weeks, which is particularly troubling in this, the supposedly busiest season of the year for home buying.
So what's going on?
I'm not going to boil it down to some generalization that there is no demand for housing out there, and everyone's afraid of falling prices. There is demand. Homes are selling. But an historically high number of these purchases are to all-cash buyers, because the mortgage market is just so tight. Fannie, Freddie and FHA rule the roost, and their new rules and fees are pricing some buyers out while disqualifying many more.
Don't get me wrong, I'm all for stricter underwriting, given the brutal effects of the opposite. I do, however, believe that as government tries to shut the door on Fannie and Freddie, it must open the door to private mortgage investors.
That's why I was particularly interested to see the testimony today from the CEO of the only player in the private label game. Redwood Trust President and CEO Martin Hughes boiled the situation down pretty clearly.
"The consequences of failing to attract sufficient private-sector capital to this market include a contraction in the availability of credit to home buyers, an increase in mortgage rates, and continued decreases in home prices. Furthermore, these problems in the housing market may have broader negative effects on the overall economy."
Redwood was the first and only company to sponsor a securitization of newly originated residential mortgage loans without government support since the market froze in 2008. Its first was worth $238 million and its second, which happened at the end of March, was worth $295 million. Hughes says they are hoping to do two more this year.
The problem is that triple-A investors have lost confidence; Redwood gained their trust, Hughes says, though transparency and "skin in the game." That last part is the "risk retention" that regulators are now readying to implement for all lenders.
"Investors responded with significant demand to acquire the triple-A rated securities, as evidenced by the fact that the first offering of those securities was oversubscribed by a factor of six to one," Hughes told a Senate Banking Committee panel.
But the outlook for private label MBS right now, "remains very weak," he adds, noting that investors in commercial real estate, credit card and car loans have largely returned, while the residential mortgage market, "barely has a pulse."
Yes, Hughes wants to see the market return, because he's in that game, but others agree. "
"Unless, and until, we fix the private mortgage securitization market, the housing sector will not stabilize and the chance of further deflation will remain a threat to economic recovery," writes Christopher Whalen of Institutional Risk Analytics in an article titled, "Putting "trust" bank in American housing finance."
The money is out there; the trust is minimal. We can talk all we want about supply and demand and home prices and consumer confidence and foreclosures and mortgage servicing, but housing doesn't recover until trustworthy, investible credit is restored.