The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or Silicon
Valley Bank, or any of its affiliates.
I'm not the only soul
Who's accused of
Tire tracks all across your back
I can see
you had your fun
But darlin' can't you see my
Turn from green to red?
And with you I can see a
Straight up ahead!
- Jimi Hendrix
A few years ago, I was driving in San Francisco when someone
ran a red light, hitting me in the driver's side. Luckily, we both were
uninjured, but this had become such an epidemic throughout the city that the
mayor eventually took action.
After proclaiming that "too many people are running red
lights," he decided to remove them. Yes, he just took them away!
If you've driven in a downtown area lately, you can imagine
trying to treat every intersection as a four-way stop, which would slow movement
to a crawl. So it's not hard to predict what happened next: people sped through
intersections and accidents continued to rack up.
Given the tremendous number of people showing up in emergency
rooms, the mayor decided to proclaim a special "commuters holiday" to "reduce
traffic and the risk of injury" from commuting. Unfortunately, after the holiday
ended the accidents resumed.
Finally, realizing the issue demanded more attention, the mayor
reinstated the traffic light system but set all traffic lights to green so there
wouldn't be any confusion from the distracting, blinking lights. As you might
imagine, this did not help reduce the number of accidents either.
As I'm sure you've figured out by now, this story is fiction —
an allegory for the mortgage market. The following, however, is true.
The mortgage market became overleveraged as both borrowers and
lenders ran "red lights" and other warning signs when laying their financial
well-being on the line.
The government then expanded (yes, expanded) the role
of Fannie Mae and Freddie Mac as well as encouraged private sector lenders to
increase their activity through many actions, including dropping interest rates
dramatically. Accidents continued, unemployment rose and economic activity
In response, the government turned its attention to 18 percent
of the economy by focusing on a prolonged debate of healthcare reform. This is
not exactly the same as removing stoplights from a large city, but it does seem
to have had the same focus and effect on solving the problem. In any case,
accidents continued, employment remained a problem and economic activity
The government also created several programs to help
home-buyers who were supporting the housing market. The $8,000 first time
home-buyer tax credit (as well as the "cash for clunkers program) smells a lot
like the "commuter's holiday" mentioned in the story above.
Once that credit expired, accidents continued, employment
remained a problem, and economic activity remained unstable.
Finally, Washington turned their sights toward the original
cause of the problems: finance. But instead of zooming in on mortgage finance,
where the original accident occurred, they enacted an enormous financial reform
bill after purposely leaving mortgage reform out, to be debated another
day. Reinstate the traffic lights, but set them to green.
Last week, confirmation that all these efforts were not working
came in three forms:
- Home prices declined by the largest margin since late 2008
when the liquidity crisis reached its zenith. As measured by Zillow.com, there
was a 3 percent drop in home values during the first quarter which included a
1.1 percent drop in the month of March alone.
- Fannie Mae asked for another $8.5 billion to cover losses.
Though Freddie did not come hat in hand this quarter, the two together have
pulled down a total of over $100 billion so far.
- Rent rates are rising. As more people are converted from
homeowners to renters, upward pressure heightens on this measure. The Market
Tightness Index, which measures vacancies and rents, rose to a record level of
90. Any measure over 50 indicates upward price pressures exist.
Unfortunately, Washington has not received the message.
Democrats and Republicans are gearing up to rein in Fannie and Freddie's
activities after pushing them into a market-dominating position over the past
few years. Now that they account for some 95 percent of new mortgage
originations, it seems our government wants them to cut back — before there
are other players to take their place and at a time when mortgages are far less
Forcing the players with 95 percent market share to cut back
will reduce overall mortgage availability from where it is today. You don't have
to read Ayn Rand to understand that. Instead, Washington should be addressing
the problems faced by both borrowers and lenders.
Borrowers, in addition to the specter of potential
unemployment, are having a difficult time securing a realistic mortgage at a
realistic rate and LTV. This is likely directly due to the problems face by
Lenders face an incredible amount of uncertainty today. From
Dodd-Frank implementation to Basil III, no banker today has a full understanding
of capital and liquidity requirements they will face in a mere five years. They
only know the reins are being pulled.
How can financial institutions be expected to pick up the slack
for Fannie and Freddie under these circumstances?
Today, there are many negative forces working against economic
activity. From extremely high unemployment to an uncertain inflation outlook,
the economy is facing challenges it hasn't seen in a long time.
Lack of clarity in financial regulation is just one of these
factors, but it is a factor that is manageable. The more unclear the rules of
the road are, the more difficult it is for financial companies to navigate a
route that promotes financial safety, profitability and at the same time, serves
The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or SVB Asset Management, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.
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