Banking analyst Dick Bove of Rafferty Capital Markets warned that the mortgage markets in the United States are in “more disarray than they were in 2008.”
“In my view, the mortgage market in the US is now broken down. And it’s causing an impact on the ability to sell houses, and through that, the economy,” Bove told Yahoo Finance in a telephone interview on Tuesday.
He went on to cite three key reasons as to why he thinks the mortgage market has broken down.
First, there was a breakdown in the mortgage rules at the origination level. Specifically, he pointed to the new qualified mortgage rules (QMR) established by the Consumer Financial Protection Bureau (CFPB).
“The new qualified mortgage rules (QMR) put in place by the Consumer Financial Protection Bureau demand that banks follow underwriting guidelines that effectively eliminate low-income home buyers from purchasing a home. This is particularly true if one is a first time home buyer or if one is still paying down a student loan,” he wrote in a recent note.
Second, he thinks there was a breakdown in the mortgage insurance function.
“The refusal of the FHA to make good on its insurance in the 2008 housing crisis caused most of the nation’s biggest banks to lose faith in dealing with this agency and possibly the VA, also,” Bove wrote.
“FHA has always, and during the recession, paid every claim to investors. It operates under permanent and indefinite authority by the US Treasury Department to fund all claims. There was never an unpaid claim,” David Stevens, CEO of the Mortgage Bankers Association and former commissioner of the FHA, told Yahoo Finance.
More recently, President Donald J. Trump, on his first day in office, reversed a decision made in the final days of the Obama administration for the FHA to cut its mortgage insurance premium fee.
“The combination of the QMR and loss of faith in the FHA has resulted in big banks withdrawing from portions of the conventional mortgage markets. They have been replaced by mortgage brokers who now are believed to originate more than 50% of the home mortgages in the country,” Bove wrote in a recent note.
These days, mortgage brokers now originate more mortgages than banks do and that’s a “really bad situation,” Bove said.
“Mortgage brokers do not have capital backing of any size. Thus, they must sell virtually all of their production to Ginnie Mae or with guarantees placed on the loans by Fannie Mae or Freddie Mac,” he wrote in the note.
This means that Ginnie Mae, which is wholly owned by the US government, is adding a staggering amount of mortgages and taxpayers are on the hook if they go bad, according to Bove.
“The government argues that it is not backing the loans guaranteed by Fannie Mae and Freddie Mac. This is not accepted by anyone since neither Fannie Mae nor Freddie Mac have the capital to back their guarantees and the marketplace rates the debt of these companies as if they are government guaranteed issues,” Bove wrote.
Bottom line: Bove sees these elements of the mortgage market breaking down. Therefore, he doesn’t think the mortgage sector will be able to thrive and housing will not be able to grow and that will have a significant impact on the economy.
Update: An original version of this article stated the QMR rule required a down payment of 20%. The original proposed Qualified Residential Mortgage rule did suggest a 20% down payment. That rule was modified and no minimum down payment was required. This article has also been updated to include a quote from former FHA commissioner David Stevens.
Julia La Roche is a finance reporter at Yahoo Finance. Follow her on Twitter.
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