Since the beginning of the economic crisis, the hurdles imposed by Congress’ desperate attempt to speed-reverse the power and subsequent damage caused by the oligarchy of big banks, combined with the barbed wire effect of the much-abhorred Dodd-Frank bill has, as intended, made money-lending unrecognizable. Nothing like swinging the pendulum too far in the other direction while praying it spells “redemption”. The survivors in the lending business have had to adapt and morph their business model to meet every nuance and addendum to every incoherent word of every incomprehensible shape-shifting lending regulation (that incidentally seem to defy the laws of political physics when considering the speed and stealth with which they are passed). All while fielding vehement protests of disbelief from potential borrowers that refuse to accept as truth the minefield of regulations decreed by Dodd-Frank minions.
So, that all being said, this far into the aftermath of the crisis (are we there yet?) one can hardly be shocked by the ripple effect of each regulation, and its subsequent mutation as it manifests itself in the economy. However, the epidemic that erupted this week could potentially be the worst and most damaging of all. For those who doubted that crisis-imposed regulations would actually have the reverse effect of what they were intended for, this is your wakeup call.
All across the country this week, loans that had actually cleared the hurdles described above, granted to borrowers that had been vetted through a grueling process that questioned their very patriotism, were stopped after the moving trucks arrived. The banks were unable to fund the loans, as their ‘wholesale’ supply, endowed by the still-existing oligarchy Bank of America, were choked off. How could this happen? Bank of America, who provided liquid funds for almost 75% of all loans originated in the United States, announced earlier in the year their plans to shut down their “correspondent” channels to small and medium private lenders, instead to concentrate on their own retail operations. In other words, Bank of America’s money can only be acquired through Bank of America branches. Their theory is that borrowers will want Bank of America lines and products most, being so large and recognizable, and will thus sacrifice the much better rates that smaller private banks and brokers can offer readily. Not such a safe bet for Bank of America. Didn’t the lesson of the ATM fee revolt resonate upstairs? Haven’t they seen cities occupied by enraged victims of the banking industry? Denial is what got us into this mess in the first place Social media has served as a great conduit in expressing the ire of the consumer, and the line in the sand has been drawn. No consumer cares if their loan is brand name or generic. They are not willing to pay junk fees for a fancy label.
All is not lost. Thankfully, many medium private lenders had the foresight to be prepared for this inevitable fallout. Smaller lenders may not fair so well. They are faced with significant challenges since they relied primarily on the Big Four to replenish their funding warehouse lines. While Bank of America and Friends turn a blind eye to the harsh realities of the 21st century, private lenders are getting their own Fannie, Freddie, and HUD credentials so they can get replenished directly from government entities and (horrors!) Wall Street.
Final diagnosis of the banking repercussion du jour: the simple laws of supply and demand apply. As liquidity dries up, rates will rise due to scarcity of funds, thus causing a deeper slowdown of the overall housing market (higher rates, higher payments), refinances and purchases alike. However, with improved liquidity (hopefully something we will all live to see) the opposite applies. Lower rates, lower payments.
As we approach yet another election year, many would-be heroes will paint their vision of utopia to covetous voters. Let’s hope they have the sense to abandon the notion of prematurely privatizing Fannie and Freddie, and in the process investors’ confidence of mortgage-backed securities will be restored, keeping interest rates at current levels, maintaining affordability, and essentially keeping the American dream alive.