Mortgage industry and government officials may not want to hear this, but the resumption of a non-conforming mortgage market is a key factor in the normalizing of housing finance, and, by extension, the national economy.
Does anybody think that resuming the type of nonconforming lending that led to the housing crash is a good idea? Of course not. But isn't it true that a thriving mortgage market is what lenders and borrowers want and is also a component of a more robust national economy?
Right now we have a mortgage business tied to the apron strings of the federal government. While Freddie Mac, Fannie Mae and Ginnie Mae certainly saved the industry from total collapse in 2008, we need more than a federal effort to have a thriving mortgage business. (The Federal Housing Administration, for instance, wants to sharply reduce lending in the next year or two.)
What would originations look like in a thriving mortgage market? Certainly nowhere near the almost $4 trillion that was the market high in 2003. But current estimates of $1.1-$1.25 trillion for 2012 don't seem like a thriving market either. $1.5 trillion to $2 trillion a year would seem reasonable. To get there, the business needs more arrows in its quiver.
Subprime, B&C, and alt-A lending are dirty words now, but it is instructive to go back and take a look at what happened. The subprime market as we know it was invented by mortgage brokers after the 1993 refi boom died off. Until then, brokers had been prime mortgage refinancing specialists. When that market dried up, they looked to find another.
There was no disaster in subprime lending in the early stages of it, say from 1994-2000. Market share was reasonable, rather than rampant. It would be interesting to compare the loss severities of those books of business with the later ones (which are horrendous).
Affordable housing as well should not be a bugbear. Back in the 1990s the secondary agencies and the mortgage insurance industry came up with prime 97% loan-to-value mortgages supported by automated underwriting. These were derided at the time as “instant REO,” and while losses on them were higher than other product types this was not disaster lending either.
All modern-day presidents have encouraged home ownership and affordable lending: Reagan, George H.W. Bush, Bill Clinton, George Bush, Barack Obama. There haven't been five housing disasters, just one. With smarts and savvy the industry can avoid another one while still ramping up to a more reasonable output.
