Sunday, December 29, 2013

Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?

by Bill McBride on 12/29/2013 11:35:00 AM

Earlier I posted some questions for next year: Ten Economic Questions for 2014. I'll try to add some thoughts, and maybe some predictions for each question.

Here is a review of the Ten Economic Questions for 2013.

8) Housing Credit: Will we see easier mortgage lending in 2014? Will we see positive mortgage equity withdrawal (MEW) after six years of negative MEW?

There is no exact measure of the tightness of mortgage lending, and any change in lending may be hard to detect. During the bubble, there were essentially no standards ("fog a mirror, get a loan", "NINJA Loans: No income, jobs or assets", Alt-A, etc.). In recent years, lending has been very tight with only a few exceptions - and for the most part only the most credit worthy borrowers could get loans - and it was very difficult to do a cash out loan.  No one wants a return of NINJA and Alt-A loans, but a little looser mortgage credit would give the economy a boost.

Mortgage broker Lou Barnes wrote on Friday:

Credit: Next to incomes the most important thing to watch. We cannot accelerate, or even get off Fed life support without it. My very smart friend, Paul Kasriel, has detected an acceleration in bank credit, one strong enough to offset the gradual end of QE. I can't find it. I will look, early and often.
Mortgages. Under the heading, Everybody Gets Lucky, the White House has at last succeeded in replacing the Fannie-Freddie regulator. ... Now they've got their guy, Mel Watt [and] he may be just the man to lift the dead hand choking mortgage credit. At the top of the we'll-see list.
Even before taking over at the FHFA, Mel Watt has announced he will delay the recently announced fee hikes at Fannie and Freddie:
"I intend to announce that the FHFA will delay implementation" of the loan-fee increases "until such time as I have had the opportunity to evaluate fully the rationale for the plan,"
I suspect Watt will work to loosen lending standards a little at Fannie and Freddie.

Looser standards (combined with more confidence) might show up as positive mortgage equity withdrawal (MEW).   For Q3 2013, the Net Equity Extraction was minus $24 billion, or a negative 0.8% of Disposable Personal Income (DPI).   MEW has been negative for 22 consecutive quarters.

Mortgage Equity Withdrawal Click on graph for larger image.

This graph shows the net equity extraction, or mortgage equity withdrawal (MEW), results, using the Flow of Funds (and BEA data) compared to the Kennedy-Greenspan method.

There are smaller seasonal swings right now, perhaps because there is a little actual MEW (this is heavily impacted by debt cancellation right now).

The Fed's Flow of Funds report showed that the amount of mortgage debt outstanding increased by $10.0 billion in Q3. This was the first increase in mortgage debt since Q1 2008. Since some mortgage debt is related to new home purchases, net negative equity extraction was still slightly negative in Q3.

This is an indirect measurement of mortgage standards (and other factors impact MEW), but if standards are loosened a little - and debt cancellation via foreclosures and short sales, and modifications decline - it is very possible MEW will turn positive in 2014.  

Bottom line: I expect lending standards to loosen a bit in 2014 from the tight level of the last few years.   It will be difficult to measure, but I'll be watching what Mel Watt says, what private lenders say, comments from mortgage brokers, and MEW.

Here are the ten questions for 2014 and a few predictions:
Question #1 for 2014: How much will the economy grow in 2014?
Question #2 for 2014: How many payroll jobs will be added in 2014?
Question #3 for 2014: What will the unemployment rate be in December 2014?
Question #4 for 2014: Will too much inflation be a concern in 2014?
Question #5 for 2014: Monetary Policy: Will the Fed end QE3 in 2014?
Question #6 for 2014: How much will Residential Investment increase?
Question #7 for 2014: What will happen with house prices in 2014?
Question #8 for 2014: Housing Credit: Will we see easier mortgage lending in 2014?
Question #9 for 2014: How much will housing inventory increase in 2014?
Question #10 for 2014: Downside Risks

Last 10 Posts