NEW YORK (MarketWatch) -- Mortgage marketing campaigns have been changed from "Money? Free!" to "Last four years of W2's - notarized!", font sizes have been reduced in print ads, get-rich-on-real-estate infomercials have been moved from prime time to 2am, your brother in law has finally clammed up. Indications, all, that something has changed - really changed - in the housing market.
Official news over the last several weeks that lenders from Countrywide to Freddie Mac would be tightening their lending standards in the subprime sector of mortgage originations positively begs the question: what's changed?
"Do you have an income?" and "Can I see proof?" has one and only one effect on credit supply and demand: a decrease.
And that means liquidity is drying up in the mortgage market.
When home prices stopped going up 12-18 months ago, the frustration was palpable but hardly fear inducing.
But things are different now, measurably so. And that difference is not just that the demand for credit to speculate on housing has declined. It's that supply is now contracting. And when a credit cycle starts seeing supply contract (liquidity declining), all sorts of things start to happen: speculation gets robbed to pay a tax to prudence.
But, really, what has changed? What has really changed?
The bankers who sign the checks, the appraisers who value the property, the retiree who speculates on the property, the investment bank that pools the mortgages and tranches them, the rating agency that rates those pools, the other investment bank that securitizes the tranches, the rating agency that rates those securitized pools, the other investment bank that sells insurance on the securitized tranches, the pension/hedge fund that buys the pools/tranches/securitizations. All have the means to keep the game going - to effectively go back in time to the halcyon days of 2004 or the even the salad days of 2005. But that's not what's happening.
And it's not going to happen either. Whomever it was that first came to his/her senses in this credit madness is moot; it's the fact that his/her action -- that mortgage banker, that CDO trader, whoever -- catalyzed the opposite trend toward probity. After an orgy of credit-based risk taking, incented in almost every conceivable fashion by monetary and social institutions, the negative feedback effects of reduced liquidity are almost certain now to run their course in the opposite direction with potentially equal (or greater) costs. Booms turn to busts not because something 'happened.' They turn to bust because there is simply no other path.
It is said that when men go mad they do so all at once. But they gain their sanity slowly and one by one.
That credit supply is being tightened means we've passed the 'one-by-one' stage and we're approaching 'all-at-once.'
