The next mortgage crisis: Not if but when.

Dick Bove: another potential mortgage crisis on deck.

"...we are in 2015 looking at another potential mortgage crisis... only this time it is different. In 2008, funds flowed in waves into the mortgage industry. In 2015, it appears the funds are drying up."  Because of the state of affairs, FHA officials are telling mortgage originators to "ignore the Consumer Financial Protection Bureau's qualified mortgage rules and create mortgages with as high as 97 percent loan-to-value ratios. They ignored the Treasury Department's mandate to shrink Fannie Mae and Freddie Mac and required these two companies to increase the number of mortgages that they are guaranteeing.  Now some people are beginning to get concerned. They are worried that the taxpayer may be forced to provide Fannie and Freddie with more cash. They fear more large losses could be reported by these companies".

Here comes the housing crash folks but this time all the "smart money", all the cash buyers who hung back waiting for the first wave of the credit collapse to occur, they are now "all in" as well.  So who is left to buy all these homes that will have to be liquidated by FHA???  Liquidation will not be done on credit!  You won't be able to buy an FHA liquidation home with a mortgage.  FHA is the lender of last resort already, they do not want to lend money to someone to buy a home from FHA who just had to foreclose on the guy they loaned money to before on that home!  The people will be furious with government if the prospect of another prop up style bail out is floated.  The next crash will not get much in the way of bail outs.  It will be bail ins - the banks holding the notes will be taking the losses.  Our creditors will be taking the losses.  Japan will be taking the losses and so will China because they own so much GSE "safe" debt.

 

To all those people out there who bought homes as rental investment properties, I have a word of warning for you: you can and will lose money if you are left holding properties that you acquired as investments.

Those with cash in the game are not in it to lose money.  If they sense a structural change in things such as skyrocketing interest rates, they will rush to add their "cash" houses to those already on the  market.  The reason is simple: these guys got in at pretty low prices on the last crash but that was just the A wave.  When the C wave comes those with cash will be able to buy houses for even less than before.  That means they will undercut the current cash buyer's in rent prices.  

 

So the big delusion that these guys are under is that they can just hold onto the assets and collect high rents even if the value of the homes go down.  Nothing could be further from the truth!  They will end up losing huge amounts of their capital because their "cash" is really part of someone else's retirement funds which cannot be tied up forever as the rental income on assets bought with that cash fades.  Deflation hits everything.

I own a home because I need a place to live.  It is a consumption item, not an investment.  When people talk about propping up property values I say "let them fall" because high property value = high property taxes.  I want zero property tax and smaller government that does not use my taxes to do business deals (which all towns of any size are currently involved in).

The last time we had the housing crash, there was a great threat of default on the associated debt instruments.  The threat was that China was going to get stuck with hundreds of billions of dollars in losses.  The Chinese began making war threats and so we bought them off.  Hopefully the Chinese exited from all GSE debt and now hold only treasuries because it will take us longer to default on those but at the end of the day we certainly will default on them.