Banks as Owls

A centipede was foot-weary from all the walking it had to do to get to work and back.  It stopped near the owl’s tree, kicked off its many shoes, and asked the owl for wise advice.  The owl looked thoughtful and replied, “Hmm… you should fly.”  The centipede asked “Well, how should I do that?”  The owl replied – “I do policy – not implementation.” 

The US housing market is in a dire slump.  There are too many homes for sale and home values are sometimes are below what’s owed in mortgage.  This problem chokes new construction and maroons many current owners.  Correcting this mess will require home prices to rise.  That could happen if willing buyers (as owner-occupant or as landlord) were able to purchase the oversupply.  Affordable mortgages are an important prerequisite, but despite published mortgage rates running historically low, too few applicants can get one, even those who seem well qualified.

When major banks talk about their mortgage practices, they impersonate an owl; they wisely say “yes, consumers deserve low mortgage rates” but they distance themselves from implementation failures, which they blame on underwater home prices or a less than spotless credit or employment record of the owners.

The banks have been masters of denial.  They often don’t make mortgage loans to high credit score applicants who could repay the full loan within a week from a personal cash pile, such as money held in an IRA.  Banks are much happier if you regularly take far more than you need from the IRA, and incur unnecessary tax liabilities.  Some question whether the only mortgages that banks will routinely approve are those for purchase of their own foreclosed properties.

Federal Reserve Bank Chairman Bernanke’s latest housing stimulus, Quantitative Easing part 3 (QE3), was launched a week ago.  The effects are already being felt; it is drying up the supply of high grade mortgage securities, pushing down yields, dis-incenting new mortgage issuance and pushing investors into higher-yield, higher-risk assets such as corporate junk bonds.   So far, QE3 is not fixing the housing market.  Mortgage rates are dropping, but investors are dissuaded from investing in mortgages.  So, another owl wisely says mortgage rates must drop but fails to make those mortgages available to willing buyers.

Alan Daley is a retired businessman living in Florida and following public policy from the consumers’ perspective.

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