Nationalize Mortgage Lending

Bill Gross, you know the big PIMCO guy, came out at a government sponsored idea-fest and recommended a novel idea - "full-nationalization" of the mortgage finance system. Now I agree with Bill much more than I disagree and I like to think that the feeling is mutual (or that he has ever read anything I have written), but on this one I am a bit mystified.

http://noir.bloomberg.com/apps/news?pid=20601010&sid=aQrLLpgud3rI

I am mystified because I thought our mortgage finance system was already pretty much nationalized. Seriously, there is no securitization market outside of Fannie Mae and Freddie Mac and banks simply are not lending unless they can pass the risk on to the Fannie or Freddie or they have insurance against loss from FHA. Fannie, Freddie and FHA represent 90-95% of all mortgages now being given and these entities are all government based mortgage finance. This will change in time but right now it appears that Gross has what he wants. Now he may want these government institutions to lower lending standards to support more mortgage lending, but that ain't happening, and it should not. Housing, whether the government supports lending or not, is going to take a few years to rebound. It is over-built, inventory is soon to go back to over a year, foreclosures are near all time highs, unemployment is a problem, underwater homes prevent people from selling and moving up (or down) and lending standards are much tighter than they used to be (including very conservative - newly so - folks doing appraisals). A housing recovery is not, and should not be, in the cards.

And let me add one more factor I have NOT read about; I do not think most people (other than investors) want to buy a house. Now I know housing prices have fallen drastically, interest rates are at record lows and it is in many respects an ideal time to buy. But there are some respected folks predicting a further decline in prices, foreclosures are at very high levels, folks see nightmares (not American dreams) among those that bought before and lending standards are much more conservative. For buyers on the edge who see what has happened financially to a large percentage of the population who are underwater, I have to think they are saying to themselves they are better off to rent. This seems to be proven in part by low home sales, I might add. Sure there are plenty of reasons to dispute this and say it is a good time to buy, but I am not about to argue with them. After all, rental rates are low too and with housing prices down they will need to continue to drop to compete. We will see.

Industrial Production Up

So the markets in the U.S. and, as I write, in Asia are up on unexpectedly high U.S. production numbers, not to mention decent results by WalMart and Home Depot. Add in a little bump by a purchase bid for Potash (I thought about buying some months ago, darn it) and you get a good bounce. Now I admit I would not expect a U.S. production bounce, not with poor economics, low consumer spending, the EU in doldrums, unemployment and inventory corrections largely done, but hey, what do I know. I do know that fundamentals, while gradually improving or at least stabilizing, have a couple of years to get there. Maybe a melt-down is not in the cards (though I predict a pretty big down-turn this fall absent major stimulus delaying same), yet even with no down-turn I do not see any real support for a major bounce or sustained rally from here either. Friday, with options expiring, should be interesting.

Disclosures: None.