It has become clear to many stakeholders in the housing industry that the five fat years of the housing bubble have now ended, and will be followed by five or so lean years of steadily retreating house prices. They are radically changing their posture and reconfiguring themselves for hard times. Last Thursday and Friday it was revealed that Mortgage Industry Companies of America (MICA), the private providers of US mortgage insurance, had become alarmed by the situation and were pleading with regulators to rein in risky mortgages. In a letter [1] to the FDIC, the Fed, the Comptroller of the Currency, and the Office of Thrift Supervision, MICA called for a return to sanity in mortgage lending markets. Here’s a key phrase as quoted in the Washington Post article [2] that broke the story.

“‘We are deeply concerned about the potential contagion effect from poorly underwritten or unsuitable mortgages and home equity loans,’ Suzanne C. Hutchinson, executive vice president of the Mortgage Insurance Companies of America, wrote in a recent letter to regulators. ‘. . . The most recent market trends show alarming signs of undue risk-taking that puts both lenders and consumers at risk.’”

It is easy to see why MICA is sweating. The new exotic mortgage loan products offered low initial monthly payments in return for generally reduced equity and rising payments down the road. Falling house prices vaporize equity and threaten to turn masses of these silly loans “upside down” (i.e. homeowner has little or no equity in his house). MICA’s business is to protect the mortgage lender if the homeowner defaults. Their near panic at this point about loan quality indicates their recognition that house prices are indeed headed down.

Just in the first couple of days of this story, there has been considerable discussion on this issue, especially in the blogosphere. Notable are the discussions at Ben’s Blog [3] and Calculated Risk [4] [5] (the latter blog having picked out the key quote from the Post story I used above).

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Notes and References

[1]: Letter to FDIC, FED, Comptroller of the Currency, Office of Thrift Supervision, by Suzanne C. Hutchinson, Mortgage Insurance Companies of America, July 10, 2006.

[2]: “Insurers Urge Action On Risky Mortgages: Firms Want More Loan Restrictions”, by Kirstin Downey, Washington Post Staff Writer, Saturday, August 19, 2006; Page D01. All emphasis in the quotes is mine.

[3]: “A Potential Contagion Effect™ From Exotic Loans”, The Housing Bubble Blog, August 19, 2006. (Discussion of [2])

[4]: “Nontraditional Mortgage Guidance: ‘Within a Few Months’”Calculated Risk Blog, August 18, 2006.

[5]: “Mortgage Insurance Companies letter to FDIC: Help!”Calculated Risk Blog, August 18, 2006.

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