Even after years of painful drops in housing prices, the turnaround for the real estate market that so many homeowners have hoped for still remains elusive. Yet while some are pointing to a few recent changes among lending practices as potential game-changers for housing, they raise a key question: Will the fix for falling housing prices simply return us to the same mistakes that created the housing bubble in the first place?
Supply and demand
SmartMoney reported over the weekend about three signs indicating the mortgage market may finally have hit bottom. First, banks are starting to make loans for jumbo mortgages again, with Wells Fargo (NYSE: WFC ) and JPMorgan Chase (NYSE: JPM ) among lenders seeing big rises in the volume of loans on high-priced homes. Second, borrowers are again starting to find ways to get mortgages without making big down payments, with some options letting them put down as little as 5% up front to get a loan. Finally, lenders are starting to lower their credit-score requirements for mortgage loans, reversing a situation that made it almost impossible for many with mid-range credit scores to buy homes a year ago.
The immediate reason that this is good news is that it implies there could be higher demand for homes in the future. With more access to mortgage loans, potential buyers that were formerly locked out of the housing market can actually buy properties, which could help the entire market reach a new equilibrium faster than it otherwise would.
On the other side of the coin, the supply of homes on the market may decrease, at least temporarily. With Bank of America (NYSE: BAC ) , JPMorgan Chase, and Ally Financial's GMAC Home Mortgage temporarily halting foreclosure proceedings, fewer homes will go into foreclosure, keeping them off the market until the banks decide to lift their moratoriums.
These white clouds have dark linings
Concluding that all this means that rosy days are ahead for the housing market is completely backward. Even if some of these events do manage to lift home prices out of the basement, they show that the housing market is stepping back onto the road to ruin.
Take the foreclosure moratorium, for instance. Despite what sounds like positive news, it's clear that lenders have little choice. Scandals over fraudulent loan processing have led Old Republic International's (NYSE: ORI ) title insurance unit to stop issuing new policies on homes foreclosed by lenders with questionable documentation. Shares of title insurers First American Financial (NYSE: FAF ) and Fidelity National Financial (NYSE: FNF ) have fallen sharply since news of the problems broke as concerns over liability and costly court battles loom over the industry.
It's one thing if the moratorium leads to actual renegotiation of loans, as B of A, Wells, and Citigroup (NYSE: C ) have all tried in the past. But if all it does is push inevitable foreclosures into 2011 and 2012, then it will simply extend the pain.
Similarly, higher demand for housing sounds like good news. But if it's inflated by the same tactics that created this mess in the first place, it won't help anyone in the long run.
Consider: Interest rates are at record lows. Mortgages have never been cheaper for those who can qualify for loans. Yet rather than inspiring potential buyers to be prudent and save up for a sizable down payment before committing to the financial burden of home ownership, we're again counting on marginal buyers who don't have the financial stability to inspire trust that they won't prove just as unable to meet their obligations than their mortgage-meltdown predecessors.
The pain's not over yet
You'd think that after years of declines, policymakers and mortgage industry executives would have realized that reopening the floodgates to easy credit, while perhaps attractive in the short term, raises the risk of the same disastrous problems that we've seen in recent years. Instead, it seems that even a history that's still fresh in everyone's minds is doomed to repeat itself.
Contrarian investor Jordan DiPietro wants to get rich at your expense. That's why he's begging you: Please hate the stock market.