Put Back

The Mortgage Industry has dominated the financial headlines in recent days. At first the financial press and market participants were focused on the mortgage moratorium and the missed revenues (from servicing mortgages), higher operating costs and potential fines which could arise from this debacle. However, my attention was immediately drawn to the possibility that investors may request that banks take back securities backed by trouble mortgages at par due to a lack of due diligence, faulty underwriting procedures, lack of disclosure, etc. After a few days of the so-called “put back” story taking a back seat, it finally popped today.

Put back has a much greater potential for losses for the banks. Estimates from around the street range from about $60 billion to almost $200 billion. This has investors concerned that some large banks will not be long for this world. This should not be the primary concern, at least not for the large money center banks. The large banks should be sufficiently well-capitalized to survive this. The real question is: Can the economy survive this?

Oh, have I frightened you? If I have it is with good reason. The housing market to which we have become accustomed was predicated on high-volume, “efficient underwriting” (speed was paramount) and securitization. If it becomes more difficult to foreclose on properties, if it becomes more expensive for banks to do underwrite and process mortgages (more people instead of robo-signers), if securitization becomes more difficult (investors may want high-quality mortgages, rather than simply having first claim on a pool of dubious assets), the housing market has little chance of a speedy recovery. The same would be true for the broader economy.

The number one question asked since September 2008 is: How to we get back to where we were in 2006 or 2007? The answer is we don’t (or at least we shouldn’t). Cutting corners, packaging mortgages into nearly indecipherable structures and granting credit to anyone who could fog a mirror is not a recipe for success. Those who whish to return to the past are either selfish or hopelessly stupid. Unfortunately, there is no shortage of stupid and / or selfish people. Look for continued policies designed to avoid accepting the reality that home values rose too far, too fast and that lending standards are a good thing. I say, let home prices reset and let people bargain hunt. That is the only way to fix the housing market and economy, structurally.