Why Is Mortgage Lending Still Restricted?

The Mortgage Corner

We can thank the Great Recession for most of it. Banks have become much more conservative, and builders are building approximately 50 percent fewer residences vs. the 2 million housing units at the height of the housing bubble.

And the very Great Recession was in some ways worse than the Great Depression, when FDR’s New Deal created jobs for those that couldn’t find work. Whereas conservative economic ideologies have triumphed since President Reagan under austerity policies (such as the 2011 government shutdown over raising the budget cap), which have restricted government spending at a time when the private sector has refused to reinvest in productive growth, even though corporate profits have soared to record levels as a percentage of GDP.

The Urban Institute has dug even deeper into the causes of tight credit. Since private sector lending dried up after the Great Recession, government GSEs, such as Fannie Mae, Freddie Mac, FHA and VA; all with some form of government guarantee, have had to step in to revive the housing market. So they account for more than 80 percent of all residential lending.

And because the US Treasury completely appropriated all the assets and profits of Fannie and Freddie in 2012, which account for 60 percent of all residential loans, they have imposed additional fees on any but the best credit risks to protect taxpayers. This in effect raised the cost of qualifying, which in turn reduces the pool of eligible home buyers and borrowers.

How much, asks the Urban Institute? “According to our estimates, an additional 1.25 million loans would have been made in 2013 if the cautious standards of 2001, rather than the severe standards of 2013, had been in place. Between 2009 and 2013, the number of “missing” loans grew from 0.50 million to 1.25 million annually, for a total of more than 4 million missing loans over the five years.”

Behind all this data lies another, more sobering fact—the record income inequality that occurred since the 1970s and was the major cause of the Great Recession. Incomes have flowed so fast to the upper income tiers since its end in 2009 that 96 percent of all income gained since then has gone to the top 1 percent.

This is in part because of the stock market rebound and loss of all those homes from the housing bust. It resulted in some $4 trillion in lost housing assets for middle-class homeowners in the main, the main source of their wealth.

It’s a phenomenon named Monopsony by economists, or the increasing monopoly power of Big Business in particular to control labor costs due to marked lack of competition. This is explained in lucid detail by Kate Bahn, an economist at the Center For American Progress, a progressive think tank.

“While overall the labor market looks fairly solid, it’s still lacking on measures of competitiveness that are giving employers outsized ability to set low wages,” says Prof Hahn. “They can reap higher profits by exploiting their workers who don’t feel confident enough to leave their current job in search of a better one. (It’s evidenced) by the historically low rates of people moving across geographies.”

Graph: BLS/Econoday

The Labor Department measures it as the quits rate in their JOLTS report (Job Openings and Labor Turnover Survey) that tabulates the number of Hires and Separations each month. There was a 1 tenth downtick in the quits rate to 2.1 percent, “a subdued reading that points to lack of movement between jobs and lack of wage pull for employees,” said Econoday. The separations rate also fell, down 1 tenth to 3.5 percent.

The gap between openings and hiring first opened up about 2 years ago signaling that employers are having a hard time finding people with the right skills, said Econoday. The current spread between openings and hirings is 429,000, the widest since September. But remember, the US economy is so large that more than 5 million jobs are created and lost per month.

One would think the high number of available jobs means higher wages for all, as employers bid up salaries to attract them, but not so; just for the highly skilled. Those blue collar and service jobs that require less skill don’t have the competitive advantage of higher education and training that would boost their salaries.

And that is why the credit and housing markets have skewed towards the highest income earners, and will remain so, unless more New Deal-type programs (such as promised infrastructure spending, universal health care, stronger labor laws) help to bring back the middle class.

Harlan Green © 2017

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen