The Federal Reserve has put out a white paper on the housing market.
There’s a lot in there to digest so I’ll be picking out points and writing up posts as I go through it.
One point that shows up early on in the Fed’s analysis is that lenders are hesitating to make home loans even when they face no credit risk because the loans are eligible for guarantees from Fannie Mae and Freddie Mac.
Why aren’t banks making these “safe” loans? The Fed cites three reasons: 1) mortgage servicing costs in the post-robo signing era, 2) uncertainty over the capital treatment mortgages will get under Basel III, and 3) the put-back lawsuits filed by the GSE.
To put it slightly differently, what the Fed is arguing is that making banks follow the rules for mortgage lending results in far less lending.
We want banks to be more diligent about reviewing loan delinquency filings. We want them not to foist losses off on the taxpayer through the GSE’s. We want stricter capital requirements.
As it turns out, we cannot get these things without paying for them in the form of far less mortgage lending.
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