Lou Ranieri on Mortgage

Long Lou Ranieri article on housing market from IDD

Ranieri's take on the current housing situation is pretty bleak, but it is a perspective that may have deeper resonance with investors and deal makers on Wall Street because Ranieri has seen previous real estate debacles, notably the real estate bust of the late 1980s that was felt into the early 1990's.

"When I look at the carnage in the housing market, the mortgage market looks like Berlin after the war," says Ranieri. "It is a pretty big mess. One that, I think, will take a number of years to work our way through."

Some of the problems, he says, are the lax lending standards at the mortgage banking firms, which initially, underwrote subprime or nonconforming mortgages using guidelines similar to those of the conforming loan market -- that is, home loans guaranteed by Freddie Mac and Fannie Mae.

In the early days, recalls Ranieri, "Even when you did a nonconforming loan, you always quoted Fannie Mae doc underwriting [standards] even though it was not [a conforming loan]. You wrote it to their specs and docs, their debt-to-income ratios and documentation. You had a standard for what is a good loan," he says. "When Fannie Mae and Freddie Mac got tied up in the politics of agency or no agency, or whatever, and the Street started to do more and more away from the agencies, one of the things that disappeared was this whole notion of standardization. That was the first series of things to go awry."

As Ranieri sees it, the current housing recession is being exacerbated by the mortgage crisis. "You were going to have a housing recession. What you're getting is a typical housing recession that is compounded by the mortgage crisis," he says. "But they are different. The overbuilding in Phoenix, Florida or Orange County has nothing to do with the mortgage crisis. Putting the two together, you get the hackneyed term of the perfect storm."

Ranieri adds that "the housing recession was not created by the mortgage crisis. It may have augmented it, but it was not created by it." The Root Markets chairman believes that the housing market was due for a correction because affordability for many buyers was "going out of the window."

Indeed, different measures of affordability, including one devised by a realtors' trade group, showed that fewer Americans in 2005 could afford homes amid the rapidly rising prices -- even though mortgage rates were low by historic standards.

Ranieri believes the current crisis differs from that of the early 1990s because the earlier one chiefly involved savings and loans. In that crisis, thrifts went broke, but in this case, families will feel the brunt of the crisis.

"Some people will argue, and to some degree fairly, that the financial technology pushed homeownership deeper into the population...than ever could have been done without it. That's fair. It's true. The trouble was some people took that same technology and in my opinion horribly abused it," says Ranieri.

Asked if the Federal Reserve should have raised rates earlier to temper the rise in home sales and the climb in home prices, Ranieri says "not necessarily. I am not sure that is the case."

Ranieri won't single out any mortgage industry professional for today's problems in housing finance. Instead, the blame falls on a wide range of participants in the mortgage industry, from brokers who underwrite the loans to firms that resell the loans into bonds.

For example, Ranieri notes that in recent years, bonds pooling home loans were created using less subordination -- so less of the monthly principle and interest payments that homeowners pay to bond holders were set aside for possible losses -- even as property prices rose and underwriting standards fell.

"The higher the property values, the more you used to beef it [subordination] up -- not the more you used to thin it," says Ranieri, adding that disclosure of risks in bond deals also has declined.

Posted on October 4, 2007 and filed under Finance.