In my last post, I talked about how the shortage of mortgage is the major reason for sluggish housing market. In fact, even the Fed Chairman Ben Bernanke has said “the pendulum has swung too far the other way” in his recent speeches referring to tight lending practices.

Based on my analysis, all other key indicators point to much faster growth potential for the housing market today. Without the mortgage drag, we would have seen around 1.3 million single-family housing starts in 2012. Instead, only a bit over 400,000 single-family housing projects started in 2011 and we are seeing some improvement over that in the past year. (National Association of Home Builders says “the long-run trend of 1.7 to 1.8 million new homes” are necessary to accommodate population growth and replacement of older housing stock.)

The single-family housing constructions not only mirrors the volume of housing transactions, but also is considered a very important driver of our economy. National Association of Home Builders claims 3 job creations for every new house constructed. That’s 4 million additional jobs a year if the mortgage pendulum swings back to the center. Solving today’s mortgage issue is the key to unlock economic growth.

So the key question is this. Why aren’t banks lending money especially to home buyers? Here are some of what’s going on in the mortgage industry today.

“Put-back” – Freddie Mac and Fannie Mae were instrumental in blowing the last housing bubble. But they themselves do not lend money. They buy loans from banks and other financial institutions to offer to the home buyers. When the borrower defaults and those banks are deemed to be at fault, Freddie and Fannie can force the banks to buy back those loans. This is called “put-backs”. When they buy back those loans, banks need realize loss on their books. So far there has been about $66 billion put-backs of loans made between 2006 and 2008. There are still a substantial amount of mortgage loans outstanding that have been made during the bubble years. Banks are extremely becoming conservative in qualifying loans today to avoid put-backs in future.

FHA in trouble – The Federal Housing Administration insures more than $1.3 trillion mortgages in the U.S. Last month, the media reported that the Federal Housing Administration has negative $13.48 billion in its mortgage insurance fund. This is an estimate of the difference between insurance premium the F.H.A collects on its mortgage insurance and the claims it has to pay in the future. This is a big uncertainty. If foreclosures continue because of bad lending practices during the housing bubble, the F.H.A.’s insurance money can dry up. That means the originators of those loans – i.e. banks – will suffer.

So banks are scared to death and they are tightening the belt beyond what is considered reasonable during normal times. Ben Bernanke is pumping money into the market by buying back mortgage backed securities to try and maintain the low interest rate to stimulate home buying in this country. But to his own admission, there’s limit to what the Fed can do. They cannot force banks to lend money even if the money is abundant.

Overly lax lending standard got us into this mess in the first place. And we still don’t have it right. These stories above are a clear indication that banks don’t feel confident about their ability to measure and take the risk of lending. This represents a very interesting opportunity.

There is a big pent-up demand for housing today as all other indicators of the housing market show. If someone has billions in capital and ability to take calculated risk more than today’s conventional lenders, that someone can reap big rewards.

Let’s see who is pouring money into the housing market these days. Hedge funds.  They participate in today’s housing market by buying up lots of foreclosed houses around the country. While they rent those houses to get returns now, often to the same residents who can no longer afford to pay the mortgages, and they will get more returns by selling them when the market picks up again. Who else? Foreign investors are increasingly investing in the U.S. housing. People with cash – those who don’t need to go to the banks are buying houses in the U.S. today.