Why Today's Mortgage Market May Be Worse Than After the Collapse

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In some respects right now is as bad a time for the mortgage business as the aftermath of the disaster of 2008. Of course, the crash was terrible but the industry got the benefit of unparalleled subsidies. Now the business may lose its crutches before it's ready to keep its balance.

More than $100 billion of taxpayer money has been pumped into Fannie Mae and Freddie Mac to keep them on an even keel. And the Federal Reserve Board obligingly kept short-term interest rates low and bought enormous amounts of mortgage-backed securities, driving down long-term yields and enabling a refi boom that kept the business alive for four or five years. Though the term was coined for big financial institutions rather than industries, in some respects the mortgage business was marked as Too Big to Fail.

Unlimited taxpayer propping-up for the government-sponsored enterprises in the future is at least an open question. The Senate Banking Committee has passed a marked up Johnson-Crapo bill, and the full Senate will now consider reform that would make private entities liable for the first losses, in effect assigning them a 10% deductible. Even if it doesn't pass the Senate, it's the first significant step towards resolving the GSEs in many years.

And, the Fed has begun to taper off its buying down of the mortgage markets. Interest rates have gone up, though not as sharply as many had feared (and in recent weeks they've retraced some of those gains). But the rate rise has been significant enough that refinancings have tanked and the purchase market has not been able to take up the slack. And the cost of regulatory compliance is tracking north rapidly.

The Mortgage Bankers Association's forecast for originations this year is about $1.1 trillion, which is, frankly, a bad year. The Federal Housing Administration, one of the unlikely heroes of the bubble collapse, has seen its insurance fund dip into the red as it took up the slack from the weakened conventional market. And the re-emergence of a nonconforming secondary market, which is crucial to a healthy industry, is still in its infancy.

Mortgage delinquencies remain a big problem, although the trend is headed in the right direction. Some four million mortgages remain overdue or in foreclosure, and 8 to 10 million more are in danger of default because their equity is underwater. A pop in home prices would bail many of these folks out, but many think the real estate recovery of the past two years or so is slowing. If that slowdown continues, many of these folks will stay underwater.

The most recent Case Shiller numbers showed a nice jump in nationwide home prices, 11% for the fourth quarter. But the first quarter of this year looks as if it was a bad one for real estate. I sit on a "kitchen cabinet" for Alex Pollock at the American Enterprise Institute, and we meet every six months to talk about housing bubbles. This last time, the only real estate bubble we could see was in farm real estate.

The regulatory landscape offers little encouragement. The Consumer Financial Protection Bureau, Dodd-Frank, attorneys general suits, even Basel III are all crimping the industry's style. And perhaps, more to come: The Johnson-Crapo GSE reform, for instance, would add a new regulator, the Federal Mortgage Insurance Corp. That should mean we don't need the current GSE regulator, the Federal Housing Finance Agency, anymore. Actually, the FHFA would remain within the FMIC under Johnson-Crapo. Yes, another mortgage bureaucracy.

Not all is gloomy in this tough mortgage market. Fortunes have been lost presuming investors know what interest rates are going to do, and rates have not always just gone up. There have been times they have ratcheted down again.

Certainly there's nothing wrong with the current market that a long rate decline and refi boom can't fix. And it has always been an axiom that a little inflation is good for real estate. If home prices go up (within reason) it will be very good for the mortgage industry.

If rates decline and home prices accelerate, the fabulous invalid known as the mortgage industry will walk again.

Mark Fogarty, Editor at Large at National Mortgage News, writes analysis and commentary based on his 30 years covering the mortgage industry.