Wednesday, July 25, 2012

The Mortgage Lending Problem in A Nutshell

The New York Times had a quirky story giving notoriety to long-time bank analyst Richard X. Bove.  We see him getting upset about not getting good customer service from his bank, Wells Fargo.  I think that's like expecting a Big Tofu burger from McDonalds.  No big surprise. 

The story had this innocuous sidebar:
"He (Bove)  decided to write Tuesday’s note when Wells Fargo rejected his application to refinance his mortgage, even though he had already withdrawn the application."

Think about that for a minute.  Bove started on Wall Street in 1965, and has been a bank analyst and research director at firms like Shearson and Wertheim, and now Rochdale Securities.  He can't get a refi?

All of the talk about record low mortgage rates is just that, talk.  On the refinancing side, we've probably had burnout already.  Banks are very reluctant to lend to formerly conventional customers.  Fees are being added to formerly free services, and existing fee levels are being raised.  Lower provisioning for loan losses on the existing portfolio, expense reductions, and share buybacks can help to generate decent earnings without taking risks associated with mundane tasks like lending.

Housing is said to be recovering.  There is still a very large shadow inventory of existing homes which have not yet come on to the market, but there will be very few potential buyers who can qualify to absorb them given the disincentive for banks to change their underwriting stance.

This is a by-product of the distortions arising from monetary policy which has lost its rationale and focus. 

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