January 7, 2012

Normal Is Hard To Define After A Period Of Excess

Readers suggested a topic on the latest Federal Reserve actions. “Posted last night: U.S. NEWS, Bank Warns Congress That Tight Lending Standards Threaten Wider Economy. The Federal Reserve, in an unusual foray into housing policy, expressed alarm over the battered home market and called for more aggressive action from Congress and other policy makers. In a 26-page paper sent to top lawmakers on congressional banking committees, the Fed warned that tight mortgage- lending standards threaten to hold back the economy. The Fed also signaled support for more aggressive use of Fannie Mae and Freddie Mac to support a housing recovery.”

One said, “I think these people really believe that if you repeat something enough times it will just magically “become true”. Lending standards are NOT tight. They just aren’t ‘insane’ anymore, no more lending 500K to a strawberry picker with a 10K/yr W2 income. Qualified borrowers are having very little/no trouble finding loans for all kinds of things (houses, cars, boats, RVs, etc) at historically the lowest interest rates in a generation.”

“When interest rates are 18% and the banks will only lend 1X income on a house; that’s tight credit. This is just ‘normal’, banks are qualifying borrowers based on income and credit scores, and, also, banks are trying to keep people from killing themselves by making sure that assets they are lending against (house) is actually worth what the loan amount is for.”

A reply, “Lending standards are not tight if you don’t need to borrow money but they are very tight if you do. If one ‘needs’ to borrow money then the bank will probably not loan him any. Payday stores are there for those who ‘need’ to borrow money. If one ‘wants’ to borrow money then that is a different story. Banks want to to loan money to borrowers who ‘want’ to borrow (as opposed to ‘need’ to borrow). In a contracting economy the reason to ‘want’ to borrow has to be compelling, and these reasons are hard to find.”

One said, “This goes to the heart of the problem with the FED and why it needs to be abolished. They have illegally injected themselves worldwide into the workings of financial markets to ‘play god’ with the direction of the economy. People are becoming more frugal. Rates are ridiculously low, completely manipulated by the FED. Playing with lender of last resort to the world has not worked to get people back to massive borrowing and spending, so the games of old are dying out.”

“But, Bernanke and the boyz at the FED just can’t stand the fact that their manipulations aren’t working, as promised (in an election year), so they are desperate. Now they need to meddle some more with mortgages and housing. What is their job? Keeping the dollar strong? Isn’t that it? Why are they meddling with housing?”

One added, “It might be hard for FOMC members, who entirely missed the ginormous housing bubble that formed right under their proboscises, to objectively judge whether mortgage lending standards are tight or loose.”

Another said, “I must’ve missed when the banks started hanging on to their own mortgages. There is only one lender around me that holds onto their loans and even that loan officer is quick to share that could change at any time. There is just too much pressure on their small bank when everyone else in the area is passing on risk to someone else.”

“Btw, there is usually a basket of potential buyers of our local mortgages. Some were sold on to other investment banks that I’m assuming would do the securititzation. Everyone but that one small bank seemed to sell to BAC. Chase’s name came up often and sometimes Wells Fargo. Then there were those unknown names I always assumed were warehouse lenders.”

One had this, “Most banks don’t have the capital to actually make and hold on to the loans, even with fractional reserve lending. They are still selling the loans. They are just being required to provide better loans for the securitization pools.”

One observation, “Are they actually requiring down payments now? 20% down on a 150k house is still 30 grand. How many people have that kind of money layin’ around?”

“I can only surmise from the prices I see that down payments still must not be a thing, because some of these 150k houses are in really sketchy neighborhoods, and anybody with 30k in cash ready for a down payment wouldn’t want to live there.’

And finally, “Normal times are hard to define after a period of excess.”

Bits Bucket for January 7, 2012

Post off-topic ideas, links, and Craigslist finds here.