Where Have All The Lenders Gone?

Where Have All The Lenders Gone?

One of the defining characteristics of the current recovery has been a widespread risk-aversion; in fact this has been the most risk-averse recovery ever.

This in turn has led to significant deleveraging and increases the money demand. Households, investors, Wall Street and Main Street are all stockpiling massive amounts of reserves (cash). The asset-to-liabilities (cash-to-loan) ratios of many financial institutions are approaching record levels. This has translated into a tight credit market… has anyone tried to get a loan recently?

On the residential front, the leverage of the household sector, as a % of assets has fallen by almost 25% in just over four years. This takes us back to the mid-1990s. There has never been such a dramatic deleveraging of household balance sheets in the past 70 years.

Households have the lowest financial burdens in the past 30 years. Alongside this the average delinquency rate on credit cards and other consumer loans have declined through Q3/13. Both of these measures are at a 20-year low and this is good news for consumers and banks alike.

Not surprising, banks’ profit margins are up, and households’ financial health is greatly improving. All of this is due to a dramatic increase in risk aversion.

Since the 2008 downturn, the Fed has injected bank reserves by $2.7 trillion and more than 97% of these funds are being held by banks as “excess reserves.” These are not needed or required to back up new loans or deposits which have soared by over $3 trillion since 2008. In this environment, banks should be aggressively lending.

In this same time period after-tax corporate profits have hit all-time highs, doubling since the end of 2008 and tripling since the end of 2000.

So the question is: Where have all the lenders gone and where are the jobs, higher wages and economic expansion? Reference Brian Peitz

Ben Bernake Cant Get A Loan

Ben Bernanke Can’t Refinance Because Credit Is Still Ridiculously Tight

By Peter Coy  October 03, 2014-Business Week

Ben Bernanke Can’t Refinance Because Credit Is Still Ridiculously Tight

Photograph by Andrew Harrer/Bloomberg

Things have come to a pretty pass when even Ben Bernanke can’t refinance his mortgage, as he lamented at a conference in Chicago on Thursday. It’s likely that the former chairman of the Federal Reserve can’t refinance his mortgage because most of his income comes from 1099 sources rather than W-2s. Never mind that these are very large 1099s—he gets at least $200,000 per speech, Bloomberg reported last month.

This is not the chart that shows what Bernanke and the rest of us are up against. It shows that mortgages are actually easier to get these days. The Mortgage Credit Availability Index has risen to around 116 as of last month from around 100 in 2012. Hard to see what all the fuss is about.

Mortgage Banker Association

It’s when you pull back and look at a longer period that the problem becomes apparent. The chart below is the one that shows why even Ben Bernanke can’t refi his mortgage. It shows mortgage availability going from normal around 2004 to extremely lax in 2006, to extremely tight ever since. The increased availability that seems so prominent in the first chart is barely visible on the second.

Mortgage Bankers Association

The kind of loan that Bernanke is presumably trying to get is actually easier to obtain than the ones most Americans go for. It’s a jumbo–that is, too big to be bought by Fannie Mae or Freddie Mac, the two mortgage-finance giants. The last time he refinanced, in 2011, it was into a $672,000 loan. That’s above the 2014 conforming loan limit of $625,500 for the District of Columbia, where he owns a townhouse. Fewer regulations apply to jumbo loans because the wealthy people who apply for them are presumed to be more financially savvy. Even so, “the underwriting process is still more thorough, more stringent than it used to be,” says Joel Kan, economic forecasting director for the Mortgage Bankers Association.

The risk pendulum has clearly swung too far, from reckless to fraidy-cat, which is (not) the technical banking term. “I don’t blame this on Bernanke per se. I think it’s mostly Congress,” says Christopher Whalen, senior managing director at Kroll Bond Rating Agency in New York. Whalen says the Dodd-Frank Act of 2010 went too far in tightening mortgage-lending standards in response to the abuses that led to the 2008-09 financial crisis. “These are the same people who [before the crisis] were talking money from Fannie [Mae] and Freddie [Mac] with both hands,” Whalen says. “Now they want to act like Calvinists and punish everybody. We need to find a middle ground. It will take time.”

The heavy fines and settlements that banks have paid over past lending have contributed to banks’ reticence to lend. Plus, banks have been forced to buy back billions of dollars’ worth of loans they sold to Fannie and Freddie. Add it all up, says Whalen, and, Bernanke—along with plenty of other people—“is suffering here from a very broad, systemic shift.”

How to turn Millennials into Homebuyers

On Tuesday, Fannie Mae released its latest contribution to a seemingly unending stream of research on one of the biggest problems facing the housing industry: What is preventing millennials from buying homes?

The thrust of Fannie’s report said that millennials have reasonable access to affordable housing but are not buying, largely for reasons already known: high unemployment, not enough access to downpayment capital, lots of student loan debt and subpar median incomes.

Fannie found that if the homeownership rates of 2006 had continued uninterrupted, there would be 2.4 million more young homeowners today. At the same time, some three-quarters of young people are now spending 30 percent of their income on housing, less than at other times over the past decade.

Good news found in Fannie Mae’s report: Homeownership rates among millennials are falling, but moderating. Between 2012 and 2013, the homeownership rate fell 0.8 percent, the first time it declined more slowly than the homeownership rate for all households.

“Multiple factors — including labor market conditions, housing costs, the length of educational careers, decisions related to marriage and childbearing, student loan debt, mortgage credit accessibility and cost, and lifestyle preferences — affect the magnitude and nature of housing demand among young adults,” the report stated.

“Absent a more robust labor market rebound, housing demand among young Americans, who traditionally represent potential first-time homebuyers, is likely to remain subdued,” added the report.

Millennials, however, will eventually begin buying homes. According to National Association of Realtors (NAR) estimates, they represent 31 percent of all homebuyers in the U.S., the largest share of any age group. To prepare the next generation’s entry into housing, experts say, mortgage lenders and other real estate professionals must make several changes.

Educating millennials

Call it the 20 percent problem — the recent revelation that most millennials think they need a 20 percent downpayment to qualify for a mortgage, which means they may not know about low- or no-downpayment mortgage programs offered by the Federal Housing Administration (FHA), the U.S. Department of Agriculture or the U.S. Department of Veterans Affairs (VA).

“I think there is potentially a gap in knowledge,” NAR Chief Economist Lawrence Yun told Scotsman Guide News. “Many young people believe that a 20 percent downpayment is the minimum needed to buy a home. If they don’t have savings to that magnitude, the idea of homebuying does not even appear on their radar screen.”

The NAR recently mapped the median age of homebuyers in every state. The national median age was 31 for first-time buyers, lower than Yun expected. “I anticipated the age would have risen a bit. The first-time buyer presence has been less than normal in recent years, due to slower job creation, student-debt load, and generally, people who are younger having less chance to develop a credit history,” said Yun.

The median age is now much older for all homebuyers, including second-time buyers and buyers of second homes. In California, for example, one of the biggest housing markets in the country, the median age of all buyers is 44 (compared to 34 for first-time buyers).

Yun suggested that the housing industry take into account the attitudes of young buyers. Younger buyers may perceive a barrier to owning because of having to pay taxes or pay for repairs — things that landlords take care of. Countering those negative attitudes might help millennials buy more.

“People just don’t want to be owners because of the responsibility that goes with it,” Yun said. “[Millennials] enjoy the current, more flexible lifestyle.”

Changing perception

Ryan Christensen helps run the popular Web-based real estate television channel, TheREsource.tv. The channel covers everything from mortgages to motivation, and attracts younger real estate industry employees.

Christensen, 27, is unlike typical millennials because, at age 18, he got his real estate broker’s license, flipped a home and used the profits to pay for his college education. His views about the industry, however, come from a typical millennial’s perspective.

Christensen said that if millennials are not getting good information on homebuying — whether it’s online or from a real estate industry source — they will probably turn to their peers. There may be a domino effect if their peers are not educated, or if their peers are not interested in buying.

He said that each previous generation had a good reason to buy a home. Boomers did it as an investment and because they were told renting was a waste. When Generation X was ready to buy, houses were seen as an asset with almost unlimited appreciation potential.

So, what reason do millennials have for buying? They grew up as the housing industry was collapsing, so convincing them that buying is a good investment may be hard.

Some millennials have told pollsters that they want to own simply to own. A big, overarching reason for millennials to buy the way generations past have, however, may not be there yet. Replacing the memory of the housing collapse with something more palpable may be an ongoing challenge for the housing industry —  mortgage professionals in particular.

“We need to focus on why millennials should make [the decision to buy],” Christensen told Scotsman Guide News. “The hesitation we see a lot of is [millennials] don’t want to get locked down; they fear if they want to move in five years, they’re going to be stuck there.”

Reference Scottsman Guide-Neal McNamara Oct 1,2014