What Do We Really Want?

The recent news that Fannie Mae and Freddie Mac have nearly paid back their bailout debt to the U.S. Treasury after just five years and will soon be paying a positive return is certainly great news for taxpayers. It’s also a stark reminder of just how profitable the mortgage business can be if done right, i.e., when lenders make safe, secure, fully documented loans, like they have been doing for much of the past five years, in direct opposition to what they had been doing in the 10 years or so before that.

Unfortunately, that idea goes against the desire of many in the industry to make as many loans as possible, which almost always means a lot more than the business can responsibly handle.

It seems we either have to have a safe, sustainable mortgage market with a huge government presence, or we have a fast growing market, but we can’t seem to have both.

The industry has to decide if it wants to make good, smart, profitable loans that consumers can pay back, or lots of loans, many of which will eventually go bad.

This has always been the dilemma in consumer lending: either the marketing people have the upper hand, or the credit quality people do. Since the meltdown, the credit quality people have had the advantage, and things have improved measurably, but it’s been at the expense of growth.

We have to decide which is more important.

Going forward, the mortgage and housing markets don’t seem poised for growth in any event, given future demographics and the prospects for the economy. So the only way we’ll be able to grow is through dangerous, artificial means, like lowering lending standards and raising loan-to-value ratios. But we’ve already seen how that has played out.

Lenders can get away with reckless lending for a while, sometimes a long while, but eventually it catches up, and the results are usually ugly.

I’m rooting for the CFPB and the other mortgage regulators to make sure that doesn’t happen again. It will benefit all of us in the long run.

Therefore, people and companies in the business are going to have to decide if they want to stay in an industry that will grow slowly, but they can make a nice, steady if boring income from making good, solid loans. That’s not for everybody. If not, they probably need to find another line of work. That will leave a lot of business for those who remain.

Recent statistics on the mortgage and home-buying markets point to an increasingly restrictive market. It also points to a solid, financially sound industry, like it used to be before the recklessness of subprime mortgages and high LTV lending.

The National Association of Realtors recently came out with its annual Profile of Home Buyers and Sellers report. It found that the overall market share of single buyers declined from 32% in 2010 to 25% in both 2012 and 2013.

I say that’s a positive sign for mortgage credit. The growth in the number of single buyers was one of the biggest reasons why credit quality deteriorated so badly during the mortgage bubble.

Similarly, the home ownership rate has dropped to the levels of the mid-1990s. That, too, should be a positive sign, not a negative. Some people are just not cut out for home ownership.

I’m sorry if this sounds insensitive, but the industry is going to have to learn whether or not it wants to be a growth industry or a safe and sound one, a high-flyer or a utility. The past has proven that it can’t be both.

That’s why this idea of getting rid of Fannie and Freddie is so ludicrous. Who are we kidding? The U.S. mortgage market could not survive a minute without federal assistance any more than the banking industry could survive without the FDIC.

That being the case, the industry is just going to have to accept the idea of a slow growing, but safe, profitable and sustainable, business. Would that be so bad?

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