Exclusive Interview: A Brief Update on Housing and Consumer Credit

David Proman is a Fixed Income Portfolio Manager for a boutique Investment Fund. Yesterday I caught up with him to get a brief update on housing and consumer credit …

Damien Hoffman: David, housing seems to be stabilizing and consumer credit is continuing to deleverage. Can you give us an update from your professional view?

David: I am scared to see there is virtually no non-government mortgage funding going on today. Non-agency loans now account for around only 1.5% of mortgages being originated. This means that unless a bank can turn around and sell a loan to Fannie or Freddie the day the loan is made, the bank will not make the loan. The banks cannot afford any more risk on their balance sheets.

This country will not experience any kind of real growth until we find a way to spur the private credit markets again. Securitization of mortgages, credit cards, small business loans, and just about any other type of debt, created an incredible expansion of credit over the last decade. Unfortunately, greed took its place and leverage ruined the game for everyone.

Now we are back to square one and taxpayers are carrying the burden. It is extremely painful to withstand the massive de-leveraging, but the government is doing as good a job as possible to ease the pain. The big question is how do we transition back to private lending?

Stricter lending guidelines will need to be set and enforced. Investors need to regain faith in lending money/buying loans. The only way that can happen is if lending is truly safe again. Lenders/investors will need to know that their rights are protected and they don’t need to fear hasty foreclosure proceedings, servicers not doing their jobs, cram downs, and the erosion of contract law in America. To achieve success, a high standard of servicing will need to be set in place and enforced, foreclosure procedures and time lines must be created, and a much more efficient and trustworthy loan underwriting process must be established.

In addition, demand for housing must catch up to supply. This could take a long time — especially in areas like California, Nevada, Arizona and South Florida. Until this happens, a very large quantity of housing values will still be below the loans held against them. High LTV (loan-to-value) ratios are eliminating any chances for refinancing and in turn creating a slew of homeowners that are just walking away from their obligations. Many people have little to no equity in their homes.

As it stands, the big banks are hoarding government money and finding any way to screw customers. Interest rates on credit cards are soaring even though the banks can borrow money pretty much free of cost. This country needs to fight back and form a habit of saving money. Consumption is great for the growth of the economy, but only hurts if it is bankrupting citizens. For credit to work, it needs to be provided in a way that is not egregious.

In short, consumer credit cannot truly be restored until the housing crisis is fixed. This could take many years. In the meantime, we need to get back to basics. Save money, invest wisely, and figure out different ways to create organic growth from new ideas and technology.

Read more at Wall St. Cheat Sheet