Betting On the Easing Camp Over the Tight Money Crowd

Just who is the avatar of the mortgage business these days? Is it Consumer Financial Protection Bureau director Richard Cordray, hard at work re-regulating the industry? Or Fed chair Ben Bernanke, who has eased on interest rates for years to help the housing industry jumpstart an economic recovery? Or are the two of them hitched together in opposition like a character from a classic childrens story?

It occurred to me recently that a character from the Doctor Doolittle series of childrens tales, the pushmi-pullyu, would make a good avatar for the Feds whipsaw policy that has hurt mortgages in recent months. And, at a panel I participated on at the American Enterprise Institute, the Washington, think tank, one of the other panelists took my idea even farther.

The pushmi-pullyu is an animal with two heads, one on either side of its body (it is supposed to be a hybrid between a gazelle and a unicorn). As you might expect from such an arrangement, the two heads are often in disagreement on which way to go, and can head out in separate directions while negotiating course corrections.

The Fed engaged in a similar bit of tug-of-war recently, I told the AEI panel (which was televised on CSPAN, see it here). In June, the Fed signaled that it might begin to back off buying Treasuries and mortgage-backed securities. It has been doing this for years, with the effect of keeping mortgage rates low. The logic for it is clear. The housing industry can be a powerful economic stimulant and jobs creator. A boom in the field can lead to jobs for all sorts of people: construction workers, closing attorneys, do-it-yourself retailers, realty agents, appraisers, classified ad salespeople and the many technology vendors that supply the electronic juice to make it all go.

The taper announcement helped spark a boost in interest rates that, in turn, choked off the refinancing niche of the mortgage industry that has been dominant since the sector collapse in 2008. The industry was hoping that the purchase mortgage market, boosted by increased home values, would take up the slack. It didnt.

The results were apparent as soon as the big banks started releasing third-quarter numbers. Mortgage revenue was down 67% at JPMorgan Chase, and down 63% at Wells Fargo. And even before the earnings releases, firms like Wells and Bank of America laid off thousands of mortgage workers.

This bloodletting was unnecessary, if the Fed had stayed the course.

Industry employment had been rising steadily from its sector low below 250,000 (the all-time high is more than 500,000). Thats been reversed. An August drop of 4,000 jobs brought mortgage payrolls down to 290,000, the Bureau of Labor Statistics announced on Oct. 22.

Just for perspective, if the mortgage industry was a U.S. city, it would now be about the size of St. Paul, Minn. Twenty years ago when I first started doing this comparison it was about the size of Albuquerque, N.M.

More recently, in a classic pushmi-pullyu, the Fed has signaled it wont be so hasty to do the taper. Mortgage rates have stabilized and even dropped a bit. Does that mean there will be a new boom in refinancings? Well see. The fired people remain fired.

After I went through all of this at the AEI panel, one of the other panelists noted there is a pushmi-pullyu going on at a more macro level than just contending factions inside the Fed.

Alex Pollock, fellow at AEI and the moderator of the panel (also a former president of the Federal Home Loan Bank of Chicago), took my metaphor wider, and made Cordray and Bernanke into a pushmi-pullyu wrestling for control of the direction of the industry.

Cordray has been moving aggressively to tighten mortgage risk and starve off the riskier types of mortgage lending. Bernanke (at least at the current writing) is back to goosing the mortgage market by buying Treasuries and MBS (other panelists noted the Fed never actually stopped buying securities, just thought out loud about it).

So, who is the current avatar of the mortgage business? Is it the tightener, Cordray, the loosener, Bernanke, or the pushmi-pullyu they create in the clash of their visions? I could cop out and say Im of two minds (as the pushmi-pullyu always is). But I wont. Two points off for the reversal that hurt the industry over the summer. But as Bernanke exits and his like-minded colleague Janet Yellen prepares to take over, it remains time to ease on down the road.

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