Investors don’t lend directly to homebuyers. They don’t walk down the street and issue mortgages to their neighbors. Between the borrower and the lender there stands a complex system of financial intermediaries. And right now there is a blockage somewhere in that system. The money is getting trapped, and the solution is to find that blockage and clear it.
Here’s where the problem isn’t: household wealth. Right now, household wealth is the strongest it has been in this nation’s history. Corporate profits are as strong as ever, too. Business has plenty of cash on hand.
It’s also not a borrower problem. Mortgage applications are up, not down. Personal income is up, not down. Mortgage interest rates are still relatively low. Default rates are up slightly, but still quite small.
It’s also not a sub-prime problem. You heard me right. The media has been obsessed with this theme, but even the media has to acknowledge that a 10,000 or 20,000 jump in the number of sub-prime foreclosures cannot possibly be responsible for the current credit crunch.
Where is the problem?
The chart above shows that loan officers are getting tougher and tougher on applicants. That’s contributing to the money crunch.
I’ve been hearing from mortgage brokers across America, and they’re scared. They don’t want to say “yes” to anyone. They believe they’re going to be scapegoated by Congress, regulators, lawyers, you name it. No, this does not represent much of a blockage in the credit pipeline. But it sure is hard for realtors to sell houses when mortgage brokers keep saying “no.” And it sure is hard for builders to keep building when houses aren’t getting purchased.
I wonder what the regulators doing right now? Are they playing hardball, or are they using a lighter touch?
And what about the Fed? Is it still seriously leaning toward further tightening based (as one might glean from the latest Fed statement) on the discredited Phillips-curve model of resource utilization? If not, it should say so.
And who has the standing to bring together these diverse parties — the regulators and the Fed — and get them talking to each other? There’s only one man who can do that: George W. Bush.
I’m not talking about a bail-out. And I’m not talking about further regulation. To the contrary, I suspect that when we find what’s blocking the credit hose, we’re also going to find a regulator standing on top of it. We need to find out for sure, though. And there’s only one person who can get all the right people in the same room at the same time.
I’ve always been glad that we have an MBA president. It’s time for him to step up.