Pete the Banker: Where’s Our Economic Recovery?

February 26, 2015

The fundamentals of the industry are far from solid. Where's the recovery?

I guess I am just tired of hearing how good it is when most Americans and Oregonians have yet to experience an economic recovery.

Image Credit: Wall Street Journal
Image Credit: Wall Street Journal
 We are constantly besieged by news that the economy is in recovery, that economic growth is accelerating, that housing is finally emerging from a long slumber.  Politicians and the Rah- Rah -Rah trade association crowd continually proclaim that better times and utopia are just ahead.  Just be patient and trust us.  Jobs will pick up and everything will be fine.  Six years and still waiting!

Yet the economy has been plagued by slow growth the so called new normal.  Demand has been tepid and intermittent.  Jobs clip along at a rate of increase of 200,000 to 250,000 per month, when in recovery economists suggested just a few years ago that we needed at least 300,000 to 350,000 per month during recovery to get us to true full employment. 

The slow recovery has been blamed on a number of factors (Bush of course) with weather and jobs being the main culprits.  Like weather hasn’t been around since man emerged from the hunter-gatherer stage. And with jobs we are just fine with waiters and hotel clerks replacing higher paying executive and engineering jobs.  And the middle class, we just sort of rediscovered them after they finally decided the new normal was a good excuse for a new Senate.

Most troubling from my perspective is the housing industry.  The headlines continuously proclaim housing is in recovery.  Their main focus has been on housing prices which have been increased given the incessant Federal Reserves QE “infinity” programs and Federal initiatives like HAMP, HARP which have spent $billions to modify mortgages and prevent foreclosure.  But continuous rumors of recidivism hampering foreclosure prevention programs undermine Administration claims of success.

Yet the fundamentals of the industry are far from solid.  Sales of homes remain at 2009 -2010 levels.  Existing sales announced this last week were at 8 month lows.  Financing is nebulous. Applications have declined massively and purchase applications are dismal. Lack of financing is a primary concern with dependence on government sources dominant.  Underwriting standards are unrealistic and dictated by the CFPB, requiring credit ratings in the 700 – 750 range as a minimum.

More recently given the flailing real estate sales market, Fannie, Freddie, and the FHA have reverted to “sub-prime” financing in an effort to revive the failing residential capital markets. Sub-prime financing, this time exclusively at the hands of government controlled lending sources has returned.  Mortgage Financing provided is 95% of value and higher, with little regard for the risk of default. Worse, the Federal Government is on the verge of re-instituting European Accounting and Banking Standards (Basel Accords) which at best amplified the financial crisis in 2008.  These International Standards seem more an attempt to liquefy the international monetary system than provide security to the domestic real estate industry and mortgage financing system.

This has been to little avail.  Applications continue to fall and private lenders have little appetite for the risk involved in low interest rate, long term mortgages.  The Feds are no longer subsidizing mortgage market through quantitative easing and price increases are beginning to slow.  Fannie Mae and Freddie Mac continue to sell portfolio loans.
This Administration, has not let the market correct.  Is frightened by the lack of demand in housing and the by lack of response of housing market/housing financing markets to government intervention.  As a result the Administration has thrown caution to the wind and through HUD and the FHFA returned to reliance on the very lending factors that caused the 2008 financial collapse, subprime lending.  Nor despite repeated assertions does the Administration have any intent of reforming the residential capital markets, inclusive of Fannie Mae and Freddie Mac.
The Administration  talks a good game, but its actions are at best ineffectual.  Consumer demand and housing demand continue to suffer, the result of uncertainty created between the continual promises an emergent vibrant economy and actual muted results.

Pete the Banker is a Banker who wishes to remain anonymous after what happened to Joe the Plumber by the President and his shock troops in the 2008 election. He is a member of the Victoria Taft Blogforce.