Mortgage credit is tight, and extremely so.
Romney and Obama were even questioned about it in their first debate. Think of all the potential issues that presidential candidates might address–fiscal cliffs, budget deficits, mass unemployment. That they were even asked about this matter illustrates how much government sponsors and supports the nation’s housing market.
People want to borrow and government wants them to borrow. Ben Bernanke wants everyone to refinance, like he did in 2011 when rates were around 4.25% (and likely will again now that mortgage rates are in the 3.5% range).
But if you’re not the Chairman of the Federal Reserve, making a $200,000 a year in salary and $150,000 a year in book royalties, it’s tough to convince mortgage lenders to lighten up and give you a loan.
The banks are still licking their wounds from the credit crisis and regulators are breathing down their necks.
Mitt Romney puts the blame on provisions in the Dodd-Frank bill requiring that lenders obtain sufficient evidence proving that borrowers can actually afford the mortgage for which they are applying. If loan files lack this evidence lenders face stiff penalties.
Lenders would rather be safe than sorry, especially since, as Romney pointed out, “It’s been two years. We don’t know what a qualified mortgage is yet,” he said. “So banks are reluctant to make loans.”
Federal Reserve Governor Elizabeth Duke on Friday said she was “really, really worried” about the cumulative effect of having one mortgage lending regulation on top of another. She fears that “you’ll get to the point where the only loans that get made are the loans that fit in every single angle of the box, and that’s going to be a very small number of loans.”
Some question whether the threat of more regulations is really stifling loan production. But the proof is in the numbers.
The cleverly named Ellie Mae, a mortgage software provider, says the average loan applicant denied for mortgage credit in August had a credit score of 734 and was willing to put just shy of 20 percent down towards the purchase.
At any other time in history, this would be a slam dunk. Not so today. Lenders are too skittish. If something goes wrong, the potential penalties are extreme. Therefore, the average citizen can’t get a loan.
Here’s the interesting question. How does the government stack up with the credit scoring agencies?
Nick Colas with ConvergEx went to www.myfico.com and he checked this out. He tried to figure how the U.S. government would come out if lenders scored its credit report. There are 10 questions to answer.
To the question of how many credit cards the applicant has, Colas answered “5 or more.” When did the government receive its first loan? He answered, “More than 20 years ago.”
How many loans or credit cards have you applied for in the past year? Colas was conservative and answered “6 or more.”
He answered “more than 6 months ago” to the question, “How recently have you opened a new loan or credit card?” Nine or more is the answer to how many loans and credit cards have balances.
Colas checked the box denoting the highest possible amount of credit card debt–$20,000. Uncle Sam can check the box indicating that he’s never missed a payment and can indicate he has no loans past due.
With federal government borrowing so close to the statutory debt limit, Colas checked the 90-99% box for what percent of credit limits do your balances represent.
And finally “no” was the answer to whether the applicant had filed bankruptcy, had property foreclosed on or repossessed, or had an account referred for collection.
The fact that the Federal Reserve can create money out of nowhere to pay the government’s bills makes many of these positive responses possible. Forget about China and Japan, last year the central bank bought 61% of the U.S. Treasury market.
Besides the money-out-of-nowhere advantage, FICO places a big premium on past payment history. Plus, less than a third of a credit score is determined by the amount of debt owed. The government’s total debt of $16 trillion should give FICO pause. Also, FICO doesn’t subtract from the government’s score for its preponderance of short-term borrowing. This on-going rollover risk should subtract a few points but doesn’t.
Also, if Uncle Sam were in front of a lender, he would have to explain, somehow, that he can only makes ends meet by borrowing a third of his annual outflow. Any typical mortgage applicant would be laughed out of the lender’s office with such an admission.
Based upon the answers to the ten questions, the U.S. government credit score came out in a range between 630 and 680. That’s a bit below the average American’s credit score of 690. Uncle Sam might qualify for a car loan. But he can forget about qualifying for a mortgage. Yet, the U.S. government is borrowing money for 30 years at 2.93%.
The U.S. government is a borrower whose operation Boston University professor Laurence J. Kotlikoff refers to as a Ponzi Scheme. Using CBO data, Kotlikoff calculates a fiscal gap of $202 trillion, which is more than 15 times the official debt. He goes on to explain,
We have 78 million baby boomers who, when fully retired, will collect benefits from Social Security, Medicare, and Medicaid that, on average, exceed per-capita GDP. The annual costs of these entitlements will total about $4 trillion in today’s dollars. Yes, our economy will be bigger in 20 years, but not big enough to handle this size load year after year.
When the fiscal chickens come home to roost, the results won’t be pretty. Kotlikoff predicts “dramatic increases in poverty, tax, interest rates and consumer prices.”
Bankers are thought to consider credit requests considering the 5 C’s of credit:Cash Flow, Collateral, Capital, Character, Conditions. While creditworthy John Q. Publics pass the 5 C’s with flying colors, they’re getting no respect from their local banks.
Meanwhile, the U.S. government has a negative cash flow. It provides its lenders no collateral. It’s capital is eroding. Character? Oh please! Plus, economic conditions are terrible.
Turning a blind eye to the 5 C’s, bond buyers can’t get enough of America’s government paper. But rest assured, as Kotlikoff writes, “Uncle Sam’s bond traders will kick us miles down our road once they wake up and realize the U.S. is in worse fiscal shape than Greece.”
In our economic world of illusion, from time to time we get a dose of reality. The government can’t protect itself from reality forever.
Douglas E. French