The Coming Mortgage Meltdown

If you think the HAMP and HARP were disasters, wait till you hear about the next mortgage mess barreling our way.

With stricter mortgage lending rules causing banks to leave the mortgage business, housing could take a major hit come Jan. 14, when stringent new federal lending rules imposed by the Consumer Financial Protection Bureau (CFPB) threaten to derail mortgage origination and residential home sales.

Come January, fewer Americans will qualify for home mortgages because of these heavy-handed lending rules. This, in turn, will put the brakes on home sales and rising home prices. Sadly, this is an overreaction by federal regulators to the loose lending standards that were commonplace during the bubble years in the early  2000s.

Starting next year, qualified mortgage rules, known as QM, will expose loan originators to higher legal liabilities on mortgages with  risky features and those with payments exceeding 43 percent of the borrower’s  gross or net income.

Bank Layoffs Rise as Refinances Fall
Signs of the coming mortgage collapse are everywhere. Banks, for example, are exiting  the mortgage business in droves, primarily because home mortgage origination — and refinancing — have nose-dived recently as interest rates have inched upward. Moreover, high operating costs and heightened litigation risks imposed by the Dodd-Frank Act has made it easier for bankers to throw in the lending towel.

The mortgage stampede is stunning. Financial firms are cutting tens of thousands of jobs because of the slowdown in mortgage business. The sector announced 57,591 layoffs since January of 2013, according to a report from Challenger Gray & Christmas.  Many of the recent job losses stem from the rise in interest rates and resulting decline in mortgage refinancing activity.

Ally Bank exited lending this month. Bank of America cut 5,900 mortgage-related jobs since August. Wells Fargo, the largest U.S. lender, trimmed 6,400 jobs. JPMorgan Chase announced it would fire 15,000 mortgage employees through 2014. Citigroup jettisoned 2,200 mortgage employees. Smaller regional banks are also firing employees. More layoffs will come next year.

The mortgage slowdown is already showing up in housing data.

Pending Sales Drop for Fifth Month
As of October, pending home sales in the United States have fallen five months in a row amid higher borrowing costs. The National Association of Realtors blames low inventory and affordability for the poor performance. Although this could be a seasonal decline, if pending sales continue to drop the housing recovery could stall in 2014.

“The government shutdown in the first half of last month sidelined some potential buyers,” Lawrence Yun, NAR chief  economist, said in a statement. “We could rebound a bit from this level, but still face the headwinds of limited inventory and falling affordability conditions.”

That argument is not convincing.

But the day of reckoning will come when the Federal Reserve starts to tighten its quantitative easing, or QE policy. Once the Fed telegraphs the move to taper QE everyone will front-end the Fed. Interest rates will shoot up and bond prices will fall. Banks will be left with depreciating assets (U.S. Treasuries) and stuck with low yielding loan-term home loans. As the rug is pulled out from under the banks, the housing and mortgage markets will collapse as well.

The Yellen Way: QE Forever
Economist Peter Schiff of Euro Pacific Capital, who got it right predicting the  mortgage and housing collapse in 2006, said once newly minted Fed chair Janet Yellen is confirmed she will ramp up QE next year.

“She going to take the QE program and expand it,” said Schiff in an interview with Yahoo! Finance. It’s going to be a lot more than $85 billion a month in bond buying. She actually believes that the Federal Reserve can create prosperity. She believes the Fed can create jobs and economic growth by creating inflation, by printing more money. And that’s what she’s going to do. Because it’s not going to work, because it’s going to make the economy worse, not better, she’s going to do more and more of it till ultimately there is a currency crisis and the dollar collapses and it brings an end to the madness.”

Only time will tell if Fed chair Yellen, or the Schiff’s of the world are right. My bet goes with Peter Schiff.

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