A Conversation About Congressional Meddling

I spoke at some length to Chris Cannon, one of Utah's Congressmen, the other day, and I wanted to report on that conversation. I've said in this forum many, many times that the thing that could make this economic downturn a complete catastrophe - the ONLY thing - is mucking about by Congress. Well, it appears that the mucking about is inevitable.

The topics were three, essentially: what's going on with credit markets, what the effect of the raising of conforming and FHA loan limits will be, and what is happening with housing in general. I reverse order, here was my report.

The housing market is weak. There is still too much inventory (houses for sale) for the demand (buyers) to absorb them all. But that number is getting better. We're down to 9.8 months of inventory, which is the lowest in some time, and average sale price has dropped record amounts. In other words, the market is working. Is there pain? Sure. Markets always cause pain, but they cause it the same way surgeons do - they cut what's necessary and allow the body to heal as rapidly as possible. ONLY markets can do this. No government can do this kind of surgery without making the disease worse.

Going forward, I expect the government to take dramatic action that will completely change how the mortgage market functions in this country. It will not be a change for the better. Yes, it will likely keep rates low, yes it will probably make loan limits higher permanently and get rid of the "jumbo" classification (a silly division anyway - what's the risk difference between $416,000 and $417,500?), but it will both restrict credit availability in the standard mortgage market (in other words, if you don't have at least 10% down and a 700+ credit score, forget buying a house) and force people into government loans, FHA and VA, which carry large upfront costs, effectively reducing sale prices and home equity by 1.5%.

Secondly, conforming and FHA home loan limits have been raised, but not nearly as much in some areas as in others. In Salt Lake County, Park City, and (no kidding) Tooele, the new FHA loan limit is $729,750, the maximum allowable. In Davis County, the limit is $397,500, and in Utah County, the limit is $323,750. This means that a small house in Alpine is not going to be FHA available, but a $700,000 mansion in Tooele is. Only the government could come up with numbers like this. Bluffdale houses are eligible up to $730k; Lehi houses less than half that. Really, really stupid.

Conforming limits haven't been announced yet, but they're going to be similarly idiotic. There's a really good dissection of the unintended consequences of this government tinkering here; suffice it to say that unless the government reins in FNMA and FHLMC, there just won't be any sanity to how this process works. And increasing the loan limits, while directly good for FHA borrowers, is NOT good for conventional borrowers - it raises everyone's rates, and the credit and rate restrictions in the $417k+ market (supposed to be affected by the conventional limit rise), which will NOT go away, will make it so that nobody can get those loans at attractive rates anyway.

And thirdly, the credit markets are screwed up. There is a big gap now between the 10-year bond yield and the 30-year mortgage rate, a larger spread than we've seen in forever, and that is a reflection of the fear in the market about the subprime "crisis" and mortgage foreclosures. Markets need time to figure out what the real exposure is to failing loans. This process cannot - CANNOT - be improved by government intervention. Already we have the entrance into the market of private firms that plan to buy failing loans and renegotiate them. Those loans are being dumped right now for pennies on the dollar; they can be restructured to provide 50 cents or better. The market sees an opportunity here, meaning that it will immediately generate business to take advantage of that opportunity. These new players will do two things: backstop the potential loss for regular lenders and discover very quickly how many of these losses there are, and how big they are. The only thing the government can do here is to relieve regulation on these companies, making it easier for them to raise capital and get working. Nothing else will help.

It reminds me a lot of the broadband explosion in the US. I remember government hearings on forcing companies to deploy broadband according to some bureaucrat's timetable for rollout. The companies that were there resisted this regulation, and managed to stall any major government action. Of the five companies that were there for the hearings only two of them are still in existence in their form at the time; two are gone altogether, and one was bought by Qwest. The major players in broadband are not only completely different now than they were, they've also deployed broadband about five times as fast as government was mandating. As in most things, the government's action was not only stupid, it was predictably stupid. It cannot react fast enough. No government, however constituted, ever could.

Bottom line, as we always say here: there are really smart people out there. Get the &#$%^ out of their way and let them work.

Cannon gets this stuff; I wish I were sure that he was going to be able to make a difference. The urge to tinker is just so strong in government. Most people what run for office do so because they love power, and what good is power if you don't use it to make yourself look important?