U.S. Mortgages Made In China?

On November 20, the Wall Street Journal reported that China’s government gave the green light for the creation of privately-owned Chinese banks. Although no timeline was announced on when this first wave of non-state-owned banks would emerge in China, the news was still fairly jolting because it offered nothing less than a total realignment of how the Chinese banking system operates.

It is not clear if these new privately-owned Chinese banks will only operate in China, or if they will be able to focus on other markets. If the latter is the case – which would make perfect sense if one understands how Chinese business leaders strategize – I would be willing to wager that these nascent lenders will find their way across the Pacific and take aim at the U.S. housing market. After all, the Chinese banks would find themselves in the right place at the right time.

How did I come to this conclusion? Well, let’s do some elementary economic formulations and see how it all adds up.

For starters, it will be upwards of 10 years before the Chinese banks have been organized at home and are able to receive approval from Washington to operate in this country. That may seem like a long way down the road, but time is the ally to the Chinese – at least in terms of the U.S. economy and the housing market.

I freely admit being pessimistic in believing that there will be no substantial improvement in the U.S. economy until Barack Obama leaves the White House. And I believe things would get worse if the Democrats get control of both the House and the Senate in the 2014 elections – that would enable a return of the political power set-up that gave us the two biggest drags on the economy, Obamacare and Dodd-Frank. (Having the Republicans controlling both the House and the Senate will result in an endless skein of anti-Obama legislation that will be immediately vetoed by the White House, so nothing will get done in Washington.)

Thus, from now through early 2017 and the arrival of new national leadership, we can easily assume the economy will continue along its current anemic path. The current woes that weigh down the country – a deficit of decent paying employment opportunities and a new wave of college graduates burdened with atrocious job prospects and manacled into student debt – will not abate. And there is no evidence to imagine that the housing market will be roaring back – endless talk of a recovering housing scene is strictly an expression of excessive optimism and not measurable facts.

The mortgage industry will most likely continue to constrict, as the major lenders move out of this area and smaller lenders find themselves smothered in regulations that make it very difficult to sustain profits. Between now and 2017, I will not be surprised if many community banks and independent mortgage lenders seek out mergers or go out of business. There will be no serious GSE reform during this period, too, which translates into private capital looking elsewhere to reap a financial harvest.

Working under the assumption that a change for the better will slowly take root in 2017 – and recovery will be slow, due to a variety of issues – there will be a need for new lenders to come into the market to finance home loans. After all, the major lenders will not come back as long as the restrictive regulatory regimen stays in place, so the new flush of money for home loans will have to come from a different source – in this case, a trans-Pacific source.

By the time the new Chinese banks are able to arrive in the U.S. and begin operations, they will find a country that is inching to better fiscal health. The Chinese will face less competition to elbow them aside, but they will also benefit from the ability to hire American originators that either lost their jobs during this period or are eager to seek stability after having worked in unstable and precarious situations for too long.

But you may be asking: Hey, would the Chinese banks be willing to put up with Dodd-Frank, the CFPB and an alphabet soup of regulatory agencies and guidelines? Well, put it this way: if they can put up with the Communist leaders in Beijing and still wind up making a profit, do you really think they’ll be scared of the CFPB?

Ultimately, it seems to make sense. After all, it is hard to buy anything in this country without a “Made in China” attached to it. Why should mortgages be any different?

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