Ranieri: Housing Could Sink Economy.

Source: The Wall Street Journal

RALEIGH, N.C.—The housing market’s problems aren’t going away, but policy makers and industry officials appear to be running away from them, mortgage-bond pioneer Lewis Ranieri told an audience of financial industry executives on Monday.

Mr. Ranieri, considered by many to be the godfather of the U.S. housing-finance market for his role developing the mortgage-backed security, didn’t pull any punches in an address to the North Carolina Bankers Association in Raleigh. The industry and policy makers are engaged in “self-interested bickering” over who will bear the cost of needed overhauls while the housing market is rotting, he said.

Mr. Ranieri warned that millions of bank-owned foreclosures and loans that haven’t paid mortgage payments in more than one year “are dragging the nation’s economy underwater,” he said. “Yet in truth we seem very paralyzed and slow to act.”

Failing to stimulate the housing market, he said, would be a serious mistake with grave implications for the economy and the country. “We let the word ‘5 million foreclosures’ roll off our tongues without the reality of what those words really mean,” he said. “Does anyone have any idea what the social implications are of that number of people being thrown out of their houses?”

The problem is that there isn’t a solution “which will make everyone love you and cost no money,” he added. “It would be nice, but it doesn’t exist.”

Instead, Mr. Ranieri called for a series of approaches to help deal with high volumes of both delinquent mortgages and foreclosed homes. He endorsed efforts to write down loan balances for more homeowners and to devise programs that would allow former homeowners who can’t afford even modified payments to rent their homes back from investors. He also called for more aggressive efforts to provide conservative financing to investors so that they will buy and rent out foreclosed homes, avoiding a painful downdraft in home prices.

Mr. Ranieri, who today runs a distressed debt firm and other mortgage-related enterprises, also backed new ways to allow more underwater borrowers refinance. In recent weeks, bondholders and some mortgage analysts have said that those proposals would force mortgage investors to bear heavy losses as loans pay off early, leaving investors with cash to reinvest at lower yields.

Mr. Ranieri scoffed at those concerns. As more underwater homeowners who are stretching to make payments realize they’re better off walking away, “they’re going to stop paying,” he said. To investors who are pushing for policy makers to prevent refinancing, he said, “I will do everything I can to make sure they come up losers.”

The former Salomon Brothers managing director, who was colorfully portrayed in Michael Lewis’ Liar’s Poker, warned against efforts to revive private markets for securitizing loans by increasing the cost of government-backed loans. “You will never starve the securitization market into existence, which is exactly what is going on now,” he said. (Separately, the White House and a top federal regulator on Monday called for raising fees that Fannie Mae and Freddie Mac charge for mortgages in a bid to bring back private capital).

He also criticized mortgage giants Fannie and Freddie for becoming too conservative. Many qualified borrowers, he said, are being denied loans, and he pointed to average credit scores for loans purchased by the firms that routinely exceed 750. “Why are we doing that?” he asked. Do policy makers think “if we price this thing so high, maybe the dummies in the private sector will come and do it? Nuh-uh.”

URL to original article: http://www.housingwire.com/2011/09/20/ranieri-housing-could-sink-economy

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