United States Economics
The Mortgage Industry
In the United States, the mortgage market has successfully and efficiently extended home buyer credit for generations. This business has enabled millions of families to achieve the American dream of owning their own home. The use of subprime mortgages contributed to record numbers of individuals or families with different levels of income, who were previously less than credit worthy now gained greater opportunities to buy a home. Unfortunately, the use of subprime mortgages, however well intentioned, went horribly wrong by practices of poor risk management, lax government oversight, and many assets that are funded by too low ...view middle of the document...
“It remains to be seen whether this is the beginning of a real downturn.” (WSJ May 2012). These conditions are contributing to high unemployment, dissatisfaction, anger; occupy movements such as Wall Street with popular hostility directed to the mortgage banking industry including organized litigation, (Washington Business Journal, April 2012) “The Federal Reserve on Tuesday said it would seek damages from Morgan Stanley due to "a pattern of misconduct and negligence" in the handling of home loans by one of the investment bank's mortgage servicing units”. As further stated by “WASHINGTON (Reuters) The Fed's action seeks unspecified monetary damages in addition to changes in mortgage-servicing practices. Morgan Stanley acknowledged it would be responsible for any monetary penalties assessed by the Fed”.
Monetary policy is hinging on what is going to happen in the housing market. The numbers when you look at them are almost unbelievable. Housing starts have been so helpful in leading the economy in and out of troubles we have been in the past. Housing starts are about 6% of GDP, if you look at how much production is there, and this has disappeared. In 2006 there were 2.3 million housing starts per year. To illustrate, consider 2.3 million housing starts and multiply by $300,000 that puts in perspective the economic activity.
Contributing to a stagnant housing sector is the negative wealth effect, the impact of falling wealth on consumer spending, it is quite significant. Housing starts use to be a tail wind driving the sector and got things going in the past, and very helpful getting us out is the current housing market crisis, has now disappeared. The effect of creating housing stock between 2000 and 2006 was $10 Trillion in wealth created, and the current economy has given $6 Trillion of this back. The risk is we don’t know who is going to bear those losses.
After the 1991 recession housing prices did not go up for about 6 years. Currently prices have been flat for about 3 years. The government can’t leave well enough alone because they have taken over Fannie and Freddie and almost all mortgages are now government, Fannie and Freddie and FHA constitute the bulk of the market. The most probable actions of the government would be to arrange a principal reduction that is to get people’s mortgage balances down. The risk is if a sub-prime solution where to be legislated, the effect would be to effectively build into mortgages a preplanned work down, in the event of another national crisis. Planning for the future of the mortgage business to assist homeowners who have existing mortgages may gain political strength after the elections, but the problem is housing starts.
Government policy continues to support housing as a major source of income resulting from owning a house, tax free flow of income, subsidies, tax deduction of mortgage income, property tax. This effect is driven by Fannie and Freddie whose job is to channel resources into...