The U.S. mortgage market has experienced an “irrational restriction” of credit as lenders and regulators overreact to the loose lending during the bubble that burst in 2007, mortgage-bond pioneer Lewis Ranieri said.
“If this legacy persists the consequences will be more profound for the country than the economic losses” caused by the bust, Ranieri said today at an annual conference hosted by the Mortgage Bankers Association in Washington.
Ranieri, the chairman of Uniondale, New York-based Ranieri Partners, helped expand the mortgage-securities market in the 1980s at Salomon Brothers Inc., where he was vice chairman. His firm’s investments include Selene Finance LP, which targets soured debt, and home lender Shellpoint Partners LLC.
Tight credit and foreclosures pushed down the U.S. homeownership rate to 65 percent in the first half of this year from a peak of 69.2 percent in June 2004, according to Census Bureau data.
Most lenders no longer offer borrowers the ability to qualify without fully documenting their incomes and assets. Starting next year, qualified mortgage rules, known as QM, will expose originators to higher legal liabilities on loans carrying risky features or when payments exceed 43 percent of the borrower’s pay.
Borrowers from ethnic minority groups, women, young people and newly married couples are being harmed by excessive concern over whether loans will be repaid and the potential need to repurchase mortgages with flawed underwriting, Ranieri said.
“The most truly unacceptable legacy of the market collapse is the legacy of the irrational restriction and contraction of credit that we have today,” he said. “Fear and not fact is making credit tighter than it should be.”
Qualified mortgage rules will also send more business toward government programs, which are exempted from some requirements, even as policy makers are seeking to reduce their role, Ranieri said. Taxpayer-backed lending accounts for more than 85 percent of new mortgages.
The market for new home-loan securities without government backing is “amazingly fragile and amazingly thin” and probably won’t exceed $13 billion this year, he said.
While non-agency issuance has grown this year after halting five years ago amid tumbling home values and soaring defaults, sales have slowed since July. About $12.5 billion in deals tied to new loans have been completed this year, up from $3.5 billion in all of 2012, according to data compiled by Bloomberg. Issuance peaked at $1.2 trillion in each of 2005 and 2006.
There are only about five to 10 “consistent buyers” for the top-rated portions of the debt and “it used to be hundreds,” Ranieri said.
“Somebody sneezes and spreads widen by hundreds of basis points,” he said. A basis point is 0.01 percentage point.
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