The views expressed in this column are those of the author and not SVB Financial Group.
If you're going through hell
Keep on going, don't slow down
If you're scared, don't show it
You might get out
Before the devil even knows you're there
-Rodney Atkins
In February 2007, HSBC shocked the analyst community when it put aside $10.6 billion to cover future losses on bad mortgage debt. Other lenders were in a similar situation and a cascade of dour mortgage market predictions kicked off the - take your pick of names - liquidity, consumer leverage, credit quality, stock market, bond market, CDS market, sovereign debt, mismatched funding, euro, trade deficit, currency reserve, and interest rate crisis (whew!).
In response, Washington focused on health care legislation. For the life of me, I still can't find a significant connection between health care and any of the crisis descriptors above or others used to describe the last three and a half years. But this week, our elected representatives and their associates launch into debate regarding the structure of the mortgage market. Specifically, Tuesday brings President Obama's Conference on the Future of Housing Finance.
A quick glance at the link above should prove that nothing significant will actually come out of this conference except perhaps attention. But that is really all this problem needs. The issue of the day is whether and how the government will interact with the $13 trillion mortgage market. Eventual decisions will be made regarding which types of borrowers the government will assist and how it will set the ground rules for this sector going forward. Once these decisions are made, the private sector will fill in the gaps of needed financing alternatives leading to a stable and effective mortgage market where capital is allocated based on risk and reward.
Perhaps as a reminder of why this is so important, last Thursday, the Obama administration announced two new, so-called "foreclosure-prevention" programs designed to keep unemployed homeowners from defaulting. It's exactly the multitude of ever-changing support programs that is keeping the private sector on the sidelines. However, only with a broad and, unfortunately, long-lasting debate will we come to conclusions on how Washington will support the homeowner. We must go through what will feel like an extended period of bureaucratic debate before a new, improved mortgage market can emerge.
Like the old adage that you can only walk halfway into the woods (after that, you are walking out!), I am hopeful this significant step forward kicks off serious debate on the issue most important to the economy. Perhaps we can get out of this hell before the devil knows we're here.
Key Developments
On Aug 10, the Fed left rates unchanged at zero to 0.25 percent, noting that the pace of recovery in output and employment has slowed in recent months. Federal Reserve officials decided to reinvest principal payments on mortgage holdings into long-term Treasury securities. "The pace of economic recovery is likely to be more modest in the near term than had been anticipated," the Federal Open Market Committee said in a statement in Washington. "To help support the economic recovery in a context of price stability, the Committee will keep constant the Federal Reserve's holdings of securities at their current level." The Fed retained a commitment to keep its benchmark interest rate close to zero for an "extended period." Voting against this action was Thomas Hoenig, who judged that the economy is "recovering modestly, as projected."
Sales at U.S. retailers rose less than forecast in July, indicating Americans lacked confidence in the economy and their finances to boost spending. The 0.4 percent increase, led by autos and gasoline, followed a revised 0.3 percent drop in June, according to figures from the Commerce Department in Washington. Economists projected a 0.5 percent gain, according to the median estimate in a Bloomberg News survey. Excluding auto dealers and gasoline stations, purchases fell 0.1 percent.
On August 11, the Obama Administration announced two additional support programs targeted at those out-of-work homeowners having trouble making their mortgage payments. Also, on August 12, the Obama Administration announced additional details about its August 17 Conference on the Future of Housing Finance, This event will provide a forum for public input as the administration continues its work developing a comprehensive housing finance reform proposal for delivery to Congress by January 2011.
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