Oct 25, 2021

A Conversation on Lending Standards and Access to Housing

Kevin Erdmann Visiting Fellow, Alan Cole, Logan Mohtashami, Karl Smith

The following is a lightly edited transcript of a recent discussion featuring Alan Cole, Karl Smith, Logan Mohtashami, and the Mercatus Center’s Kevin Erdmann. Click here to listen to the discussion, which begins at the 5:00 minute mark of the recording. 

Kevin Erdmann: All right. Thanks, everybody, for coming. I think we've got everybody here. Welcome. We're going to have about an hour-long discussion about lending standards. How it's affecting the housing market. We've got two co-hosts here or moderators, Alan Cole and Karl Smith. Logan Mohtashami from HousingWire's also here. I'm going to hand things off to Alan to get us started and we'll go from there.

Alan Cole: All right. Hello, everyone. I'm excited to have a conversation with Karl and Kevin and Logan. I've been a fan of three of them for quite some time. Particularly, what I like about them is their evidence base on what's going on with housing. I thought maybe we'd start a little bit with some things where I think Kevin, Logan, definitely agree. One of those is, there are a lot of people who are bearish on housing.

I mean that in the sense that they think there are housing bubbles. They think that housing prices are going to go down. In practice, that hasn't happened and hasn't happened for a very long time. Well, let's start a little bit with talk about some, let's say, why do people bid up the price of houses? Kevin, I'll start with you.

Kevin: My main thesis, I have one book that's already out called Shut Out, and another book coming out in January called Building from the Ground Up. They basically build on the thesis that our problem, which is widely recognized, I think, and more so all the time that we have especially in certain urban centers: We have a real lack of very inelastic supply, a real lack of adequate housing in places where people are especially motivated to live.

I think that, as I said, is becoming more widely appreciated. I would say that was actually the main factor pushing up home prices before the financial crisis in 2007 and 2008. We mistook a lot of what was happening as a credit boom. There was a credit boom that happened at the same time that I think gets a lot of the blame for high prices that were really just … at most, credit at the time was accelerating the segregation of households into and out of those cities where they bid up the price of those houses because their rents are going up because the cities are in high demand.

The financial crisis was really a result of us solving the wrong problem by trying to bring prices down by tamping down credit. We've been doing that for a decade and a half. Now I would say that prices are going up because rents are going up everywhere. In the end, by tamping down on credit, we actually ended up tamping down on the supply of new entry-level homes. The families that would be buying those homes can't get the mortgage to fund to push prices up to a level that the builders can profitably build those neighborhoods.

We've cut out in the middle of the market. We're tapping out a supply at the top end with people that can still get mortgages for owner-occupied houses. Builders building multiunit houses are building as much as they can with their regulatory limitations. This middle part of the market is, in the end, actually making prices go up because rents are going up. The people that would make marginal financial decisions in those markets can't make those decisions because there are obstacles in place to prevent them from getting funding.

Alan: Thank you, Kevin. Logan, I'm going to kick this over to you. You've taken on the label of the bear crusher, which I think is a great name. Certainly, the bears on housing have been crushed over the last 10 years. I think you bring a different perspective than Kevin. I'd like to hear where you agree and where you disagree?

Logan Mohtashami: Hello everyone. Logan Mohtashami, lead analyst for HousingWire. Just a brief background on me: I started my financial blog in 2010. I've been writing about housing, but before that, I had been in the financial lending industry since 1996. Our family has been in the mortgage business since 1987. In general, our family has been in lending since the late 1950s. My different take from 1996 to 2005 is that jobs have been growing. Mortgage rates have been falling. If you actually look at housing data post-1996, as mortgage rates made another push lower, home prices started to deviate from historical norms. We had a lot of demand. Prices went out.

However, where I disagree with Kevin is that from 2002 to 2005, we had a four-year period where credit just expanded and the debt structures, and that's been my work really for 10 years. The debt structures … were not designed for fixed low debt costs versus rising wages or what we call Band-Aid loans. There were loans that were just created for a very short amount of term. That then created home prices to go above per capita income. Real home prices took off. Home sales took off. Housing stats took off. New home sales took off. The sales levels were not sustainable because the credit was not sustainable.

Then in 2005, that was the peak of housing. 2006, foreclosures and bankruptcy started to happen. 2007, more foreclosures and bankruptcy started to happen. Then in 2008, the great financial recession happened. You had a perfect wave of credit creating a very short-term, which all bubbles are usually from leverage in credit. Then we had 2008 to 2019, people who know my work for years, I've always said it would be the weakest housing recovery ever. It wasn't the fact that we had an 82% crash in new home sales; it was the fact that we had the weakest new home sales cycle ever recorded in history.

We had missed sales in 2013 and 2014 and in 2015. What happened was everybody says the same things. I think we all hear this every day: "We have to build more homes." The builders do not operate that way. The builders are going to protect their margins at all costs. In 2018, their stocks were down over 30% and in total as a group. Why? Because mortgage rates started to perk up a little bit. Monthly supply for new homes went above 6.5 months. That's my red line in the sand. One of the builders in the fourth quarter of 2018 said it was the worst quarter since the great financial crisis.

Now, I argued back then that, "Hey, it's new home sales are too low. Housing starts are too low to call for a peak, even though on paper it looked like a peak." Because credit is stable, we're about to hand it off into an unbelievable, once-in-a-lifetime, five-year period in U.S. history that has the best housing demographics ever recorded in history ages. Currently, 27 to 33 are the biggest in history. Then you add move-up buyers, move-down buyers, cash buyers, investors, you put it all together with the lowest mortgage rates ever recorded.

You see the market we have right now, sales are rising in 2020 and 2021. 2021 sales are higher than what we saw in 2008 to 2019. That looks normal, but we have a supply crunch right now. Because that's a supply crunch, it's what we call forced bidding. That is creating almost a vertical pricing and housing because Americans always buy homes. Post-1996 it’s actually really rare in the U.S. to have under 4 million home sales.

Now we have this big demographic patch on both the middle, high, and lower end, and mortgage rates are really low. This is a very unique structural period that is still going to be good because everybody thought that forbearance was going to be the next wave of foreclosures and home prices going down. That's not how housing works. Housing demand is stable. You don't have crashes when demand is stable. The housing bubble boards or what I termed them last year, the forbearance crash bros, were not going to be correct.

Where I disagree with Kevin entirely is that credit is very liberal, but it's not psychotic. Anybody in America with a 3.5% down payment, 625 FICO scores, in theory, can get a loan. As you saw last year, originations were very high. It's just that when you lend to the capacity to own a debt 30-year fixed product, very low FICO scores do not simply apply. We see it in the origination scores.

This is something that I took on the Urban Institute in 2014 and said that "How lending standards are now, they're never going to see a rebound in a lower FICO-score Americans." There are many years that I've used this presentation to actually prove this point. Toward the end of this discussion, I will take my two ace cards and put them on there. Hopefully, I could explain to you why tight lending was going to be one of the biggest false narrative discussions we have in American economics today.

Alan: Thank you, Logan. I have a quick follow on one of the things you mentioned. You mentioned that the builders want to protect their margins. Traditionally, it's hard for a dispersed industry with a lot of different firms to protect margins by limiting supply. I was wondering how you think that happens.

Logan: If you look at new, home sales data, and what I've always tried to get people to focus, look at monthly supply of new homes. If you see it from 2008 to 2019, it's always been above 4.3 months. Demand simply wasn't good enough to bring it down like what we saw from that 1996 to 2000 rise. The builders just basically build off their own demand curve. They don't in a sense; listen to a columnist or people that say you have to oversupply a market. It's a very sensitive market to mortgage rates as well. 5% mortgage rates created that industry to have a mini slowdown.

Even this year, currently, the builders had lumber prices to deal with. They didn't care. They passed it on to the consumer. They pushed it up. Their margins are great, but they've paused a little bit too. I understand what they're seeing. Currently, right now monthly supply is over six months. It's not the existing home sales market. For me, trying to explain this bigger theory, the builders are going against this massive existing home sales market that has millions of more homes, cheaper inventory. They have to be mindful. This is why they're not very gung-ho.

In the previous expansion, people said, "Why aren't the builders building more?" I said, "Listen, they're only going to build on what they think they can sell, and it's not cheap." What is the one sector in the economy that has terrible productivity? It's construction. It's the worst sector we have. We still build homes primarily in ways that we used to build homes in the '50s and '60s. The builders are at a disadvantage. No matter how many times we keep on saying they should build more, they will only build on what they can sell because that's how they make their money. I think it's easy for us, actually to say that they should be building more, but they've never proven it.

I encourage everyone, just post-1996; you will want to look at housing data pre-1996, with a grain of salt. You look at new home sales. You look at housing stats. You put them together on a FRED chart; they're in perfect symmetry. They will only build what they think they could sell them in the current pause right now is because they don't want to push the limits on the new home sale market.

Alan: Thank you, Logan. That was informative. Kevin, I'd like you to respond to the idea that, at least in theory, people with credit scores as low as 600 or 625 should be getting loans. You contend that they aren't, and if not why is that?

Kevin: I would say Logan has a point that builders only build to the demand. I don't think anybody's asking them to initiate a bunch of starts that they don't expect to sell. I think where I would tweak that is that their demand has been artificially low because tenants who on the margin would like to be new home buyers are prevented from making that marginal financial decision. You can really go on Zillow across the country and find houses that would have traditionally been owner-occupied neighborhoods that the rent is far above what the monthly mortgage payment would be.

Those households just can't jump through the hoops that they have FHA and the CFPB have put in front of them to be qualified for a mortgage. I think what I'd like to hear Logan respond to is … potential 620 FICO score borrowers. I think there's an old Yogi Berra saw that he says … "In theory, theory and practice are the same, but in practice, they're different." I think that's the case today with lending standards that the tightening has really pushed far up into what would have normally been considered conventional or prime borrowing.

One of the indicators we can look at is the New York Federal Reserve Household Credits Report, which tracks credit scores of borrowers on new mortgages each quarter. If you go back to the pre-financial crisis housing boom, a lot of these indicators, again, I think Logan and I would probably come to some agreement that in a lot of cases it was the terms of those loans that became disruptive. A lot of these indicators don't really show that much of a shift in borrower quality. That's what you see in the New York Federal Reserve numbers is that the proportion of loans back then going to sub-720 or sub-760 or even sub-700 borrowers was about the same in 2004 or 2005 as it had been in say 1999.

If you look at borrowers back then with 760 scores and above, they were borrowing about $250 billion worth of mortgages a quarter. You could call those the pristine borrowers--the ones with credit scores above 760. They never actually had a downturn in borrowing activity. They pretty much from 2003 or 2004 to 2018, on average, were borrowing about $250 billion worth of new mortgages a quarter. The 720 to 760 borrowers which would be above-average borrowers, were borrowing about 300 billion a quarter back then, which again wasn't really any higher proportion than it had been a few years earlier.

By the time we get to the post-financial crisis period, there's been periods of time where they're down below $100 billion a quarter. They're down two-thirds from what had been their boom period borrowing. Now we've seen, and this is all in 2021 dollars. Now we've seen an uptick in borrowing. It's a very strong borrowing market now because of low-interest rates having to do with the COVID pandemic. This new borrowing is still very heavily sensitive to credit scores in a way that it never had been before the crisis. Now those pristine borrowers are borrowing more than $800 billion worth of mortgages a quarter.

They've more than tripled the amount of borrowing that they're doing compared to the pre-boom or the pre-crisis period. There's been an uptick in the above-average borrowers, but they're still under 200 billion a quarter. They're still down say, a third compared to their pre-crisis levels. Pristine borrowers have quadrupled the relative activity of above-average borrowers. I just don't see how we could have that divergence in activity without one of the main explanations being a tight lending standard that is reaching well into what would have traditionally been considered prime borrowers.

Alan: Thank you, Kevin. Karl, how are you? Good to have you. Karl was one of my favorite Bloomberg columnists, actually, my favorite. I'm glad to have him as a co-host. I want to give him some time to introduce himself and ask some questions.

Karl Smith: I'm Karl Smith, a columnist at Bloomberg. I was a professor at UNC. I was a vice-president at the Tax Foundation. Now I'm a full-time journalist. When I was actually at UNC, one of the theories that I pushed was that what we were seeing in the housing market wasn't psychotic as Logan was saying. We were seeing liquefaction. I didn't quite appreciate the long-term housing crunch that was coming. I understood there were jobs on the coast. There's water on the coast and so people can't go. So far, I didn't fully appreciate how much zoning would affect it. What did seem to me to be the case is that credit was making houses more liquid, easier to sell.

A phenomenon that's called liquefaction basically just means that the exact same asset is really worth more if it's easy to sell than if it's hard to sell. When we saw credit in the housing market comes such that a transaction could occur within days, buyers could go into a house live for six months and come out of the house, that's the kind of thing where you would expect the baseline price of every single house to double. You would see that when companies go public. The value of the company is expected to double. Because now it's traded on the stock exchange, it's a liquid asset instead of a granule asset.

That's my basic thing. With that, I would push back against what Logan is saying in saying, "What you saw in say 2004, or when the housing bubble was started up was something more akin to what you saw in dotcom, which was there was a new radically important asset part of the economy." That was urban housing on the coast. People didn't really understand what the factors were, but they did see that this thing was going to be rising for a long time. Banks didn't really know how to finance it. Logan's right, they used products that they had for other purposes, but they were fundamentally irrational. The same way that dotcom crashed, it came back.

If you said, "Well, what we need is never to have a rapid investment in tech after that,” … that would be really foolish. I think the same thing is true of housing. It was awkward and it was cumbersome because investors didn't really understand what was happening, but the phenomenon they saw was real. It was not fake. It was not just generated by credit. I think that turns Logan's thesis on its whole head because saying that "Yes, things are tight relative to the 2004 period," but that's insane. That's no real comparison. Logan, maybe you could respond to that.

Logan: Here's going to be one of my ace cards that I throw out here. I'll explain this in totality. Kevin and Karl, and a lot of people over the years have talked about housing. One of the things that I've dealt with is that people that talk about credit and lending actually don't have a background in residential lending or in banking. What I'm going to explain to you here is a ton of data, but the core product is that debt structures were created to fail in 2002 to 2005. They were around, but since the credit boom leveraged debt on debt, and not a lot of people know this, the cash-out refinance boom actually created more loan delinquencies than the purchase market.

About 32% to 35% of the loans back then during 2002 to 2005 were ARM loans, which were exotic loan debt structures that typically went to lower FICO score households. Those loans would have never been made today or post-2010 because the structures behind them were not solid. One of the things that happen is people want to say, “Why are low FICO score Americans not buying homes?” We go to the original question: Why does somebody have a low FICO score? Number one, they typically have a missed payment history. Number two, they have too much credit card balance compared to their available credit limit.

Number three, they don't have a lot of liquid assets to make their payments on time or push down their credit card balances. How do I know this? Because being part of a family that's been in banking since the late 1950s, we've seen credit profiles over and over and over again. The same three factors always come up with low FICO score households. These are not authentically home buyers, especially when you lend to the capacity to own a debt. Why would somebody buy a house if they can't even make their credit card payments?

Third and most importantly is that when we look at the 1996 to 2005 period, about 20% of all credit was through what we call subprime or a lower quality credit factor. When we go past 2010, this information came from Sam Khater, who is right now the economist for Freddie Mac, but he was working for CoreLogic. Less than 3% of people with 640 or 620 FICO scores even applied for mortgages. This was my argument against Laurie Goodman and the Urban Institute: They're not coming back because they already have household issues to deal with already.

People who miss credit cards, people who have a hard time keeping their balance low, do not apply for loans. The data from 2010 to 2018 shows they weren't even applying. You can't have, "Well, why aren't low FICO score Americans buying? Because the banks are tight." No, they're not even applying because all of us would be in the same position. If we can't make our credit card payments, if we don't have enough liquid assets to even push down the credit card balances, how are we going to have 3.5% or 3% or 5% down with closing cost to be paid in?

Every lower FICO score, a household has to pay a higher mortgage rate. That's the credit risk premium out there. In that context, it's also more expensive as well because typically, you don't have a big down payment. You're borrowing more. You have mortgage insurance. You have all those factors that people who work in residential lending would know. That's one of my ace cards. I have another one later on, but I'll let everyone else reply.

Karl: Logan, real quick, I want to use one example you brought up to push back. You said that the adjustable-rate mortgages were an exotic product that never should have been used. We can go through that, but I heard that criticism at the time. Actually, people did get caught on adjustable-rate mortgages in 2006, 2007, but they did because the Fed raised rates. We think, Alan thinks we can go through this, that the Fed did that prematurely. They should not have done that. You can see that by the fact that what they were afraid of was excess inflation and we haven't had that. We've had inflation that was too low. They were too tight.

In fact, interest rates have gone consistently down. If people had had adjustable-rate mortgages, they would have seen the safest period for adjustable-rate mortgages in history. That comes again to the fact that in 2000, something was happening and people could see this. Interest rates were persistently going down. Inflation was persistently going down. Hard assets are persistently going up. There's just ever-increasing demand for people to live in the city.

They were grasping for some way to invest in that. People make mistakes. They do that. I think the kind of vehicles that people used during dotcom, in some cases, weren't smart. Nonetheless, what they were going after was--and I'm not sure that we can make the claim that these vehicles were--some vehicle like that is completely irrational. What it did was to create a situation where you could roll in some of the cost that you had, that you're talking about, they're standing in people's way now. That produced a really liquid market which is, in fact, even safer for those borrowers because if they get into trouble, they can sell. If you had a liquid market, that's always your way out.

The credit of the individual borrower is not so important. What's important is that houses trade in a liquid manner because not being able to afford your mortgage anymore just means you have to sell to somebody else who can. That's a very different paradigm. I think if we build products, or we build an industry that can live in that paradigm, it's actually a much better one in general. Getting deep liquid markets is a principal goal in expanding the availability of capital in any industry. If that can happen in housing, again, you saw what builders did when it happened, they built more houses. That's precisely what we need now. With that, I'll stop.

Logan: You set it up perfectly for me. Alan, I thank you for that. One of the things that people, if you go back to the credit profiles--especially with the New York Federal Reserve--people started to file for bankruptcy and foreclosures in 2005. Why? Because the fixed debt structures of option ARM loans or 80/20 loans were not sustainable, that the total payment levels, even if two people were working full-time, would cause that foreclosure and bankruptcy to happen.

Not only was the debt structure unsustainable, you could have people not even have an economic impact by their jobs. Historically what happens in housing is that a job-loss recession happens, we call this late-cycle lending. [inaudible 00:34:56] except in 2002 to 2005, the debt structures, I call it EWOM, an Economic Weapon of Mass Destruction. The loans were just trigger bombs. Once the recast rate was done, the total payment levels were too high.

Now, why were people falling for foreclosures a bankruptcy? Because inventory started to creep up in late 2005 and 2006. Home prices weren't going as fast. The amount of debt that was being leveraged up in the system in 2002 to 2005, especially on cash-out loans, meant there wasn't a lot of equity being built in. Then it was 2006, more people were foreclosing on their homes. More people are filing for bankruptcy. How is this happening? Because the loan itself, the structure of the debt was a ticking time bomb. Then we go to 2007. Now we're in year three of this and more people are filing for foreclosures, and more people are filing for bankruptcies. We’ve all seen the data. I use this chart all the time.

There's no job loss recession in 2005, 2006, or 2007. How are these people starting to foreclose on their homes and filing for bankruptcies? Because of the structure of the debt. This is why if you're in the residential lending business or if you understand how the debt is even structured for recast payment, especially option ARMs, 80/20 loans, you can see that the total payment levels. This is the adjustment we made in America after 2010. We basically made sure that in any ARM, and by the way, ARMs are not even any kind of big part of the market. They're less than 5%. Now, everybody gets 30-year fixed loans right now.

We make sure that people are qualified based on the ARM payment after the recast. Before 2002, none of that was happening but the credit leverage and I--if everybody goes back to the Federal Reserve debt products, if you look at debt inflation-adjusted, the boom in 2002 to 2005 is historic so much that even today, inflation-adjusted mortgage is still negative to the peak that we saw in 2005 and '06. That's the kind of credit boom it was because it's also speculative. A lot of these loans needed home prices to go up 10% to 15% to either sell out of it or refinance out of it. This is why we call them Band-Aid loans. They are not designed for people to stay in their house.

They're just designed as vehicles, very short-term. All those products are gone. They're never coming back. The borrowers in that sense--and I'm not just talking about purchase but cash-out loans as well. Not lot of people still to this day know this. The cash-out loans were the biggest delinquencies. It wasn't even the purchase loans because you had multiple refinance or we call serial cash out households that kept on refinancing. They spent everything on their credit cards. They did it again and did it again. Once home prices started to fall, they didn't have the ability to sell.

Where people might think it was the Federal Reserve hiking rates. We all know Richard Fisher and all those guys did. There was no real big inflation boom or anything like that happening. The problem already started in 2005, 2006, 2007. 2008 was the job loss recession. If the credit was stable like it is now--now it's just very vanilla. It's 30-year fixed products. Every time rates go down, people refinance. What do we have today? We have the most pristine balance sheets ever recorded in history of mortgage payments as a percentage of disposable income all-time lows, household debt payments as a percentage of income all-time lows. Why? Because we lend to the capacity to own the debt.

There is zero, absolutely no exotic loan debt structures. Now, there are very liberal lending standards, FHAS. Liberal VA loans are very liberal. You could get zero-down loans even from VA. They're all based on the fixed low debt products. You have to qualify for them. Third, this is the other ace card. If you look back, and I encourage everyone to do this, you go back to 2000 to 2005. We had a lot more bankruptcies back then. 2005 it stopped because of the bankruptcy laws that were changed.

In general, Americans' FICO scores are much better because of the bankruptcy laws. If you guys can see the data, we never even got to the peak of bankruptcies even during the housing crisis as we did back then. Everybody's a little bit better with credit now. The FICO scores are much better. Just in general, everyone's scores are better because everyone's cash flow is so much better. You don't even have the pool of homebuyers applying. That goes back to the Freddie Mac economist, Sam Khater.

They're not even applying for loans because what is left in the low FICO score household are stressed cash flow American households that have a problem making their credit card payments or, let's say, they have a student loan debt that they're behind in or an installment loan. Again, it goes to the liquid assets. They don't have enough liquid reserves to bring down their credit card balances or make sure they can make their payments on time. These are not households that typically buy homes. Of course, with home prices, breaking out again, it just means that this group which is already stressed has to put more down, has to make sure to get the closing costs.

They're never coming back. This is the same thing I told the Urban Institute in 2014. We're going to go through this very long expansion. They're not coming back. 10 years from now, we could have this discussion. They're not coming back unless you create an exotic loan debt products, which the CFPB has banned and no bank is going to risk their capital or their name on this again. Time proved me right from 2010 to 2021, and from 2021 to 2031, it'll prove me right again. Households that are distressed already will not be buying homes ever. You'll get some marginal 620, 640, but in general, the whole country has better FICO scores, and we lend to the capacity to [crosstalk]

Karl: Logan, I want to jump in, and then let everybody else say something. Just because you gave that timeline or whatever, and that's so perfect because you're like, "We started in 2005." We didn't even have a recession. The fed started to raise rates in June of 2004 with the intention of extracting liquidity from the market. You were saying people had these teaser loans and they could pay the teaser, but they couldn't pay when it reset. If you're thinking in terms of a liquid housing market, the question is, why could they not A, get another loan with a low teaser or B, sell the house rather than going bankrupt to someone else who can?

Well, the reason they couldn't do that is because the Fed was extracting liquidity from the market. It was de-liquidfying houses. They were returning back to the granular asset that they were before. You're saying these people never qualified before, I think because that was under a different paradigm. That was under a paradigm when effectively a homeowner is like a small businessman. They need to be able to think about their long-term cash flows are going to be, how they're going to pay for this, how they're going to keep up with this, rather than an investor in a liquid asset who doesn't need to know any of that.

The reason the mortgage is secure has very little to do with the borrower unless the borrower really falls on the hard times rapidly or has divorced or emotional problems that they can't just address their house. If they don't have enough money, they can sell their house in a liquid market. That's I think ultimately, a good thing. You talked about how pristine balance sheets were, how low everything was, but to me, that's a slight sign of dysfunction. I know people who are upset in this view, but I'll bring back. Larry Summers said, "If you never miss your plane, you're going to the airport too soon."

In a capital market, which is expanding and taking risk, you should not see those type of pristine balance sheet. That is a sign of a barrier to entry. That is a sign that risk-takers, that people who will be pushing for more supplies, people who will be pushing for more production are not able to make it into the market. It's been gated off into like a rent-seeking group of people who have the right characteristics to be allowed in. Now I'll shut up for a while.

Logan: I will always refer back to the data that shows that people with sub 640 FICO scores aren't even applying for loans. You can't even have a debate if people aren't even applying. It goes back to the debt structure well before the Federal Reserve started raising rates. I think what? 2004. We still had below 3% Fed fund rates. The product was not designed for sustainability. Even if the Fed didn't raise rates, the recast payment was never going to work for any of those loans. That's why they call them Band-Aid loans. You can't have a lending system based on the fact that this loan is going to fail within two years. Now what had happened is home prices kept rising and rising.

People were able to refinance out of them and create another two-year period. Those days are over. They're never coming back. 10 years from now, we could have this same discussion. It's just that when you lend to the capacity on a debt, you have to look at the credit profiles. The credit profiles are positive cash flow Americans, which a lot of FICO scores are fine now compared to what it used to be, especially pre 2005 are much better. The people that are still struggling, which is a smaller pool of the households out there, are not even applying for loans.

It makes complete sense because you're asking people who are struggling, their credit cards or their installment loans, or don't have enough liquid assets to push any of those credit card balances down to buy a house. They're not, and they haven't applied for that previous decade. Their CoreLogic's data actually shows this. What happened from 2002 to 2011 is completely different from what is happening from 2012 to 2021. You cannot get two different economic housing cycles as we saw.

One was fueled by leverage credit based on exotic long debt structures, and the other one is based on simply fixed low debt cost. Over time, every year wages rise, the household looks great, we made American lending great again. This is the main reason why forbearance has dropped over 3 million. The only housing crash data we have in America right now is forbearance, near 5 million at the peak of the COVID crisis.

We're well under 1.6 million. We're going to be under 1 million because all of these homeowners were legit. They had good cash flows. Even the ones that were at 640, 660, they still had ability to own a debt once they got their jobs back, their incomes, they got off forbearance. We should never change this because this really kicked in better for American households. 10 years from now, we'll have the same discussion, and we'll have the same debates on this time after time after time.

Alan: I'd like to bring in Kevin for a moment, and then also bring in Adam Ozimek, who is the chief economist at Upwork and known mostly for labor economics, but actually wrote his dissertation on housing stuff. If I remember right. To Kevin, I would say, Mercatus, the think tank with which you're affiliated, has often argued that nominal GDP, people's incomes expressed in dollar terms, was deeply below its pre-recession trend all throughout the 2010s.

This had bad effects on household balance sheets, household incomes. Arguably, that hit the lower and lower-middle-income households the worst, and they were only really able to start repairing towards the end of it. Do you think that it's possible that the tight lending standards that you're really seeing in the housing market don't come from mortgage lenders themselves, but really come more from macroeconomic policy? The lending standards of the Fed as it were and fiscal policy.

Kevin: I would say that that framework, the nominal GDP growth framework, I think, has a lot to teach us about what led up to the crisis. If we're looking at, say a 5% or 6% target for nominal GDP or a 2%-ish target for inflation, since 2010 or 11 that the Fed may have been slightly missing their targets or are slightly under trend. I'm not sure. I think once we got to 2009 and 10, it was actually the tight lending that was making it harder for nominal growth to continue growing. I think one side of that is one of the things that I don't think I've heard Logan respond to which is we're just in the market today.

If it was a matter of incomes and balance sheets and all that, as I admitted earlier, we're in a market today where you can click on Zillow in the middle of the market, in any typical city, from Phoenix to Omaha to Dallas. You can find houses that would typically be owned by their tenants that have a rental value of say $2,000 a month and conventional mortgage payment that would be $12 or $1,300 or something. If those families were hurting for income, they wouldn't be able to afford the $2,000 a month rent. I think that actually a big headwind for the last decade of just general economic growth, this keeps construction employment from growing. It makes real incomes lower because a higher portion of their incomes are going to rent. That's actual cash going out the door if they're renting a place. The CPI is measuring it as rent going out the door, even if they own their house.

These lending standards, at least until recently, were keeping their home values low. They couldn't cash out the value of that higher rental value, even if they owned the house, if they were in a low-tier part of a market in their city. I would put the NGDP, I think that's a very important aspect of it, but it's much more important for the 2006 to '08 period than for the periods since.

Alan: Thank you, Kevin. Do we have Adam Ozimek here?

Adam Ozimek: Hi, Alan. I'll be quick. I don't want to take up time here. A question for Karl and Kevin, I think one of the issues about the sustainability of the bubble era, you can look today and say, "Well, look, the price to income ratio back then wasn't that crazy." We're back there now, but what about the expectations of home buyers back then at the peak of the bubble? The house prices are still going to continue growing at 10%, 12%, 15%. That just wasn't sustainable. They were making purchases based on the assumption that it was. Wasn't that doomed to come crashing down? You can say price to income ratios were going to stay high, but were they going to keep growing and growing?

Karl: I think people say that, and of course, there were speculators in the market. There are always speculators in the market, but you didn't need to think that housing prices were going to grow at those rates forever to justify what was happening. You did need to think that they were going to move up to a new range, but if they're moving up to that new range because of liquid faction, you don't need to think that it's going to keep going forever. Because the underlying mechanisms of how the housing and housing finance markets work should also change.

I think what I hear Logan saying is he doesn't want it to change, he doesn't want it to go back. To me, I hear that is the voice of stagnation and that is why people can't afford to buy a house that rents for more than the mortgage is because people are pushing to like squeeze out any effort to find a product that will work for these people, find a mortgage product that works for these people.

I agree the types of products that they used that had teaser and then reset were not designed correctly for that because they had been created in a world that was not liquid. The reason brokers were giving them is because they had this idea that you can sell a refinance. You can sell a refinance, this is a liquid market, when you really wanted to structure the product so it works in a liquid market.

You might even structure the product that if illiquidity happens, things tighten for some reason just to bank, automatically took back the house and became the landlord, or something like that. You can think of ways to design this product, but we can't think of ways to design these products now because they basically pushed out in the band. Because DAG bringing other rules have come in and said, "All of the stuff you guys were doing in financial innovation was bad."

I just don't think that's true. I think that they were pushing forward in a market where it was clear that things were fundamentally changing. They were trying to use the tools that they had previously, and then the rug was pulled out for one reason pushed by the Fed raising rates and then causing some of the armed products to go up.

When, in fact, if you look at the economic fundamentals, the broker is right--this arm should never go up. If you look out 10 years, it should be this low. Again, rates are this low. That was a correct assumption about the world or people who said, "The market has a long way to run. The costs are going to be twice as expensive, three times as expensive, therefore making a little right. I think we blamed them at the time, but their expectations were not irrational.

It was confusing. There was a lot of uncertainty that happens when you open up a new market, people stumble, but there wasn't, I think, a deep irrationality going on there. That's my thesis and I understand that's a radical thesis and was just, basically, people didn't know what to say, as you were saying, man, 2010, 2011. Kevin and some other people I think are pushing or that looking back, well, maybe that is true.

Logan: Just one thing about credit expansion. You have to remember, a lot of these loans were qualified on no income documentation. When people like to use price to rent or real adjusted home prices versus real media incomes, there were a lot of loans where there was no income added into the equation. You couldn't even get a verified 4506T printed by the IRS to even verify the person was even getting a partial of that income.

Some of these data lines that you look back in 2002 to 2005 are going to look completely out of whack because the loans were so horrible. The debt structures were so bad. I could point out one thing, if you look at home prices and per capita income, I love this chart. I've used it for many years. The only time in recent history, where home prices exploded above per capital income was 2002 to 2005.

The only time where credit inflation-adjusted credit expanded from 2002 to 2005. The only time where home sales really deviated from a recent trend was 2002 to 2005. Housing stats, new home sales. Everything was there. Bring lending back to just a simple, boring, vanilla-fixed product, none of that is happening. Existing home sales peaked out at 7.26 million in 2005, got as low as 3.45 million in 2008.

The problems already started even before the fed was really getting aggressive into the rate because in 2005, those arms that were 2002, 2003, were already recasting. Logan, those things aren't coming. They're not coming back. The debt structures of those. If I had all of you in a classroom that had a chalkboard, I could actually draw exactly how the debt structures were and what the payment levels were. This is never returning.

Now, if you want to use nominal GDP, everything, remember the prime-age labor force was growing from 1979 to 2007. It declined. We had a very slow recovery. That was going to be the case because demographics weren't there. Housing, part of my work, a lot of my work, was that 2008 to 2019, housing was never going to be strong. Millions and millions of people buy homes, but we're never going to have that demand curve except when years 2020 to 2024, that household formation kicks in and right on queue, February 2020 housing data broke out, looks pretty normal to me.

That 2002 to 2005 period, go back to all the charts, you can see it. There was a clear credit leverage bubble that facilitated home prices to go way above and people needed 10 to 15% home price appreciation to do the cash outs. Because the cash out loans were the real bad ones as well. People forget that. People think it's all purchases. No. The cash out loans had the higher delinquency rates. That's gone.

None of that. The cash out loans now are so much better. On paper, they look great. We aren't going back there again. It's never going to happen. Don't expect struggling cash flow. When we like to use cities, you got to remember like for example, Los Angeles, 50% of the working population are dual renters in one household. It isn't like a single household is actually renting that property in Los Angeles.

Right now we have what we call DICE, Double Income College Educated households. Remember household formation, economics, demographics, dual household incomes facilitates home sales. It's not the case for renters. There's a reason. One, a barbell economy, a lot of income on one side, a lot of income on the other side. Renters that have low FICO scores are struggling cash flows.

Our liability to income ratios, if you actually look at them, are at 60% to 70%, where a household buying a home is probably running out 25 to 31% debt to income ratio. These things matter when we talk about why can't people with struggling cash flow homes buy houses, it's not an apples to apples argument. This is why I guarantee, 10 years from now we'll have this same conversation just like I did seven, eight years ago, nothing's really going to change because lending is back to boring, and boring is very sexy.

Karl: This is actually a good point. What I would argue is that in a deep liquid housing market with guardrails, but without the impositions that we have now through regulation, every loan should be no dire. Every loan should be made on credit score only. Every loan should probably be an ARM. That is an efficient, deep liquid capital market in the strongest economy in the world, in a sector as important to economic growth moving forward as housing would look like. The reason is, is because safety of that loan is not based on the ability of the borrower to pay. The safety, that loan is based on the liquidity of the market for housing. The reason the credit score matters is you need the homeowner to be responsible enough to get their stuff together to actually sell the house if they're in trouble. Your credit score tells you that. You don't need to do anything about the individual borrower because that's what liquidity gives you.

It gives you an atomized system where assets can switch from one owner to another owner and it doesn't matter, right. That's deeply foreign, I think, to the world that you're talking about, but my point is that we're moving to a new economy. We're moving to an economy where location is so important, we're moving to an economy where glomeration effects are so important.

That is exactly where you would want your deep liberal capital markets to be in housing, be facilitating those levels of transactions, be allowing builders to just build as much as they could profitably assemble the factors of production. That's the economy that we want. You're right, it's not coming back and that's what we mean when we say that credit is too tight, regulations are too high. You're strangling this mark, you're strangling this part of the American economy, which I think in the freest sense, we will see all kinds of innovation, right.

We would see quadplexes owned by four people being traded out, people would move in, they take it, they move out, the loan is gone in eight months. We see all kinds of innovations, all kinds of new ways that people being able to fluidly come into a house, come into a neighborhood, a builder to be able to easily see the need for extra supply and supply it. That is what a fully realized housing market would look like.

We cannot have that with the regulatory structure. I know we cannot have that with the financial policy we have now, and that is why in America and throughout the Anglophone world, you're seeing this barbell effect. If you see that in the data going back through history, you're looking at some sort of classic sort of rent seeking mechanism that is cutting out people from an expanding market.

That's exactly what you see here, just people who are on one side of the gate, and people who are on the other side of the gate. That will continue so long as you have intense in positions into the market that is attempting to solve that barbell.

Logan: I go back to ace card number one: They're not even applying for loans, and that's the thing. If you had the same propensity in the data for people with sub 645 FICO scores applying for the loans, then you can make the argument that … these loans were being denied by the bank. Because in essence, all lending, everyone is a loan processor for the government. It's really the government agencies. Freddie, Fannie, Jeannie, FHA, BA, everyone's just working on them.

Remember, originations [were] really good last year. Anybody who's buying right online, they're buying a home, they're refinancing, it is a very fluid efficient safe capital market. Housing let us out of the crisis because demographics is economics. The capital markets are, we all remember what the SEC did in 2004. Because we wanted to have more capital, they went from 10 to 1 leverage ratio to 20, or excuse me, to 40 to 1, which basically was a doomsday time machine for Bear Stearns.

Innovation sometimes is not the best thing. Sometimes just being boring works. Here, 30 years you can make your payments right now, but every year that goes by because of housing tenure, this is another thing that is really big in the United States housing market. From 1985 to 2007, housing tenure was five years. From 2008 to 2021, it's actually gone 10, some even argue it's 13 years.

People just want to buy a home, stay there, and live. The days of moving around or anything are done. Boring works, boring is what saved us, right? Because everything is household debt, household debt. Expansion is, basically, mortgages. That data line looks better than ever.

Why ruin anything that will take away from our best financial profiles? And they won't happen, unless the CFPB comes and changes some kind of exotic loan disrupts. We have bank statement loans, you have one year tax. We have all these loans out there, non-QM loans to facilitate any of those trouble basis, and still they're not applying and they won't apply.

Because right now, generally, FICO scores are better for Americans, so the pool of the sub-64, our homebuyer is even smaller than it was from 1996 to 2005. 10 years from now, we could all come back here or whatever, Twitter will be back then and we could have the same discussion, I promise you. Just like I told the Urban Institute seven, eight years ago, they're not coming back and the data shows they're not even applying.

Kevin: I'll jump in here. We've got a couple of minutes. There's a lot that I would push back against Logan on in terms of the time frame of the cash-out loans happened. Those were happening. The ones that defaulted were happening in places like Arizona and Florida, in 2006, '07, when those markets were well into not only collapsing local NGDP growth, but collapsing building markets construct.

By the time we really hit mid to late 2007, those places’ building rates are half of what they had been in 2005, and not because they were oversupplied, because people stopped moving there because of lack of liquidity. All those things were happening much later in the cycle and have very little to do with a bubble. There's a lot I would push back on that.

One thing I'll throw out there that I go into in the book coming out in January is that, well before we had any foreclosure or default increases, the home builders by 2006 were experiencing really high cancellation rates. Now, these are qualified buyers. In fact, the builders at the time had been really working hard to sort of try to keep out speculators because speculators are going to tend to leave the lead the home with the builder.

Builders back then had pretty lenient terms and in terms of canceling orders. Cancellations even by mid-2006, went from what would normally be in the teens to the high 30s and 40s. Well before you see significant upticks in defaults and foreclosures, you see this turning from the market, which goes back to what Karl is talking about, that the Fed really did try to contract the market and they succeeded better than they should have.

The seeds of this collapse were slowly being set into place, and all these things, the defaults and everything else, tended to be happening, even the synthetic CDO boom and all that, all that was happening during the Alany points of the collapse, really had very little to do with rising prices or with bubbles and rising activity and building.

One thing I want to throw out there that is probably a data point that listeners will not have seen, because I dug this myself out of Fannie Mae SEC filings, is as a sign of talking about how normal credit markets really actually were up through the boom, and how much that turned as we entered into the recession. Fannie Mae publishes the average FICO score, the average credit score of their borrowers that they're making originations on.

As with the New York Fed data that I described, their average credit score from 2000 to 2007, was pretty level. It was in the 710 range, give or take a few points throughout that entire period. Some of its following along the similar pattern to the broader market that the New York Fed is measuring, and then it jumped 40 or 50 points from 2007 to 2009, again, in sympathy with the New York Fed market. We're not seeing much of a compositional shift that the credit score of the average borrower at Fannie Mae is moving up along in a very extreme fashion, a multi sigma change in the market, very quickly along with the rest of the market.

Now, what's interesting is you can also infer market values from the Fannie Mae filings and you can go back. If you go back to 1996, the typical house that in the past had received a Fannie Mae mortgage in 1996 had a market value of about $130,000. The average house that got a new Fannie Mae mortgage in 1996 had a market value of about $130,000. Houses across the country were increasing in value over that time, but those two numbers move in lockstep through those years. By the time we get to 2006, the typical house that has in the past received a Fannie Mae mortgage is up to about $250,000. The average house that Fannie Mae made a loan for in 2006 is about $250,000. In other words, if you look at the credit scores and you look at the houses, Fannie Mae is serving the same borrowers in the same homes that they've been serving for at least a decade.

Now, those homes are going up in value and whether you think some of those values were right or wrong or whatever, they were still the same houses with the same borrowers that they had been serving for years. Now, suddenly there's a break. There's a divergence in these measures that coincides with the break in credit scores. By 2009, from 2006 to 2009 across the country, homes were losing value.

Regardless of what measure you say, say the Zillow median home or figures from the federal reserve, home prices from 2006 to 2009 on average went down about 16%, 17% on average. The book of homes that Fannie Mae had made mortgages by 2006, followed that same track. The typical house on Fannie Mae's books lost about 17% of its value between 2006 and 2009. New originations in 2009 from Fannie Mae, the average home value of those houses was up 29% from 2006, it was $327,000.

Between 2006 and 2009, Fannie Mae changed the borrowers and the houses they were serving to an extreme. That's a difference of almost 50% in relative value. The homes they were servicing in 2009 compared to what they had serviced for years before then. That treated the credit scores have remained pretty close to where they shot up to in 2009 and '10. We've seen a little bit of a convergence between originated mortgages at Fannie Mae and prices of typical homes, but there's still a wide divergence.

Again, going back to 2006, from 2006 to 2019, the typical home across the country had gained about 15% in value. From 2006 to 2019, the typical home that Fannie Mae was giving a new mortgage to in 2019, was 35% higher than the typical home it gave a mortgage to in 2006. Even in 2019, Fannie Mae is serving a market that is 20% higher in the price distribution than they had at any time before 2007.

Comparing their credit scores to the New York federal reserves credit scores that's for the broader market, doesn't really show any compositional change there. They're following the same pattern. The market as a whole has stopped serving large sections of the lower part of the market, the entry level parts of the market that had been served in a stable fashion for years before the financial crisis.

Logan: Kevin, I know we're working out time here, but Kevin just made a great point for me. I'm going to explain why Freddy and Fannie were only into Alt-A products in 2006. They didn't provide any liquidity or anything in that nature to the loans that were given in 2002 to 2005. That was Wall Street. If we want to talk about liquidity markets, let's list off all the companies that went under. Washington Mutual, dead, Countrywide, dead, Downey Savings, dead. All those were the loans that had exotic loan debt structures.

Freddy and Fannie, while they were over leveraged, were not providing those loans. They only got into the Alt-A section in 2006. The bankruptcies and foreclosures already started in 2005, because the loan quality from 2002 to 2005, those four years, were done by Wall Street firms. Everyone likes to blame Freddy and Fannie, but in essence, they're in conservatorship, they wouldn't have had a liquidity problem, but those loans were the exotic loans.

They tend to have lower FICO Scores. They tend to be the more aggressive cash out loans, but also it's the debt structure. We always talk about FICO Scores. You can have a 780 FICO Score and still have a terrible loan going back to the debt structure. Now, I visually can't show you it here, but if I had a chalkboard, I could show you exactly what it means.

Freddy and Fannie to me are not big parts for the housing bubble, it was the exotic loan debt structures that Wall Street created, those aren't coming back, which means that the pool of sub 640 FICO Score bars aren't coming back. The data from 2010 to 2018 shows this as they haven't been applying for loans.

Karl: The reason they're not applying for loans is not simply that they're going to get denied at the loan offer. They're not applying for loans because there's not a liquid market in their income band. The Wall Street firms are not there. The houses are not trading as easily as houses for upper income people. I think crucially, Kevin reminded me this point, home builders aren't building low income houses because liquidity has been taken away from that part of the market.

I think that's why you're seeing this effect. I know you feel like that's a really good thing, but how you can see that's perverse is exactly the examples that Kevin brought up where people are paying more rent than their landlord--significant rent than their landlord is paying in the mortgage on the property.

Well, why couldn't they be paying that? Well, they can't be paying that because they can't access liquidity. The liquidity doesn't exist for them, and even the landlord is probably operating out of cash. Which is precisely why he's earning an above market return because he had to give up liquidity to get into this lower income house. That's showing you that what capital markets are supposed to do, which is facilitate beneficial transactions, is not happening. I think you're right and that isn't coming, but that's not a good thing, that's a bad thing. I think that's it.

Logan: This is where not having a residential background hurts, because FHA took over a big market share. This is the third ace card I'm using. Okay. They allowed low FICO Score Americans to buy homes from 2008 to 2011. Those DBA down payment assistant loans were--guess what? Because they lent into a job-loss recession, those loans didn't work out well. There is liquidity there because FHA had a 33 to 1 leverage ratio that was allowed to occur.

Again, going back to, well, they only have 3.5% down. They could upfront mortgage insurance onto the loan balance, but they're borrowing almost, basically, 97% plus of the house and they have mortgage insurance. We're looking at a household that already has a stressed balance sheet, having to borrow almost a 100% of financing, having to put a mortgage insurance on top of that.

Since 2008, anybody could have with a 620 FICO Score, 3.5% down, 43% debt to income ratio, some of them could go even to 50%, they can buy, just aren't applying. FHA was there primarily for that. Their market share went from 5% to 40%. Then one spread in Fannie, 5% loans down, their market share had gone down, but they had been here 2008 all the way to 2021. Still today, low FICO Score Americans aren't applying like they did from 1996 to 2005 because the debt structure's not there to facilitate that loan and also the cash is a struggle, so they're not applying.

Karl: Couldn't the cashflow also be a struggle for rent? That's my point. They're not applying. They don't have products that work for them, but if the--

Logan: Rent wouldn't go on to your credit profile. Usually, it's a credit card balance, a credit card missed payment, an auto loan or installment loan that's missed payment, or--this is the big thing is that when we're seeing--low FICO Score credit reports, the credit card balances to the limit that they can have are very high. That's a big reason why the FICO Scores are low. Typically that means your cash flow is bad, you're borrowing too much. You're putting some of your costs, your traditional normal costs on your credit card. You don't have enough liquid assets to pay down that. What does a home buyer typically have? They typically have good cash points-- [crosstalk]

Karl: Look, my point is that, in fact, they are sending money out the door for housing that is in excess of what the mortgage payment would be. I understand that from your criteria, you think that they're a bad borrower, but they are supporting the mortgage on this home through their landlord by their income. They have to use that method of getting a house because there's no product that is available for them, and because the market isn't liquid enough to facilitate fast transactions, which you're right, they don't have excess cash to be able to hold a house for eight months and not sell, they don't have that. In a liquid market-- [crosstalk]

Logan: In 2002 and 2005, some of them bought in. Why? Because the debt structure that they created for these households was a ticking time bomb, which led to the great financial crisis, which led to home sales from 2005 to 2008. The great recession was a secondary impact onto housing. The party was over really by 2004, but by 2005, sales peaked, home prices, rate of growth was going to peak because inventory was building up because people were foreclosing and filing for bankruptcy, in 2005, ‘06 and ‘07, then 2008 came.

Go back to the 2000 period, once the bankruptcy laws were changed, we had much higher bankruptcy numbers back then, but now it's different. People's cash flows are better now, and the pool of sub 64 home buyers aren't even there. The whole nation has gotten better, one, from the 2005 bankruptcy laws and, two, post-2008 there's no exotic loan debt. This is a wonderful thing for the United States of America. It's one of the reasons why we have the longest experiments in history, cash flow budget.

Adam: You're basically making a NIMBY argument--everyone in this neighborhood is really rich. The loans are great and that is the best neighborhood we could possibly have, why would you want to go back to letting poor people in here? That's essentially the argument that you're making.

Logan: Because FHA was here to create for any kind of loan for sub 64 and they're applying. Not everyone has the cashflow to buy a house.

Karl: [crosstalk] sell a house in days.

Logan: Not everyone has the cash flow to buy a house, especially service sector workers in big cities.

Karl: I think we're going round in circles. I don't know, Alan, what do you want to do?

Logan: I think time's up. They wanted this to be an hour, so we're going over really long.

Alan: We've gone over, that happens when people have a lot of data and strong opinions. I'd say, let's do a one sentence wrap up from each of you, then call it a night. I'll start with Kevin.

Kevin: I would just say that, really what I've been trying to talk about tonight is above-average borrowers with above-average credit scores, trying to get conventional mortgages, the same sort of people in the mid-'90s, the late-'90s, that would have been getting mortgages that weren't part of the housing bubble. The data seems pretty clear to me that--and experiences, I'm sure many of the listeners have experienced the way the mortgage markets are today--those mortgages aren't happening.

I don't think we really need to talk about 640 FICO scores with option arms or whatever. I think there's a lot of room that can be for improvement for loosening up in the markets with above-average borrowers in normal houses that they've been buying for decades with conventional lending.

Alan: Thank you, Kevin. Logan, one or two sentence wrap up from you too please. Thank you.

Logan: American economics is demographics, productivity. Housing is demographics, mortgage rates. Originations had one of the best years ever last year because we made lending great, fixed low debt costs, rising wages, households fine, because lending is boring. Boring is a good thing. Appreciate it and realize that the next 10 or 20, 30 years, nothing's going to change on this side. They will not revert back to sub FHA financing--those days are over, those banks are finished. The capital leverage ratio rules of 40 are not coming back, so the marketplace will not even exist for this.

Alan: Karl, I'll leave it to you to wrap up. Thank you.

Karl: I guess, I was going to be back on this, but I was going to say, I think ultimately, at least my view and Logan's view are completely compatible, but it's just a different framing on it. I think a gated, boring housing finance market is good and great for America and I was seeing that, yes, it produces all those effects, but it cuts a lot of people out.

It prevents innovation and it also prevents messy innovation, and it also prevents people from making the kind of mistakes they made when they were first trying to figure this out. How do we do this new thing? As long as it stands, you're going to have the same sort of effects you have with NIMBY zoning in a not-quite NIMBY, but gated, housing finance sector.

I think Kevin's point underscores that … the fact that liquidity has been rushed out of the small market borrowers. Even for people who were in the middle, they have to go through harder hoops in order to qualify for loans or to make these loans and the traditional loan organization of America are increasingly serving higher income borrowers, higher credit score borrowers. It's strengthening that barbell effect. It looks pristine, but it looks pristine because you've cut out all of the messy people. Sorry, I don't know if you really want to wrap up, Alan.

Alan: Thank you, everyone. Thank you to Kevin Erdmann of Mercatus, thank you to Logan Mohtashami of HousingWire, and thank you to Karl Smith of Bloomberg. Thank you also to the audience. Good to have you all here. Good night, everyone.

Kevin: Thanks, everybody.

 

Photo credit: Busà Photography/Getty Images.

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