People (including loan officers) have a tendency to expect things to remain more or less the same. It's understandable; you're busy going about your day-to-day business and you don't have a lot of time to be thinking about where the major trends may be leading us. Call it the Black Swan effect, or the triumph of hope over experience, but when seismic shifts happen, they tend to take most people by surprise.

In my Sept 13th webinar, I said the following about the future of the mortgage business as it affects originators:

The other day, I came across this website, created by a new division of Peoples Bank, out of Kansas City. Check it out:

http://www.closeyourownloan.com/

It's aimed at people looking for a mortgage loan, and the headline says, "Skip the salesman, Keep the Commission!"

I was talking to a client yesterday who works for a well-established lender in a major city. He told me that his company, in anticipation of the CFPB's proposed rule changes on compensation (all 369 pages of it), "is preparing for a radically different business model for the coming years. They are gearing up for a massive internet presence, with salaried type originators (The new compensation expectation). They don’t feel that they will be able to keep their current producers based on what they have heard will be the coming comp plans. Their plans call for lots of small offices that will feed a very cost advantaged internet processing and delivery system."

If you'd like to be out in front of the next big wave of change in your career, you might want to consider pre-registering for the next group of The League of Extraordinary Loan Officers.

In a news conference last week, Fed Chairman Ben Bernanke explained his theory behind committing the Fed to expanding the money supply in order to purchase an additional $40 billion per month in mortgage-backed securities:

“If house prices are rising, people may be more willing to buy homes, because they think that they’ll, you know, make a better return on that purchase. One of the main concerns firms have is that there’s not enough demand.”

So, if I understand Mr. Bernanke correctly, he is saying that in an environment of rising home prices (which will be rising largely due to an inflationary Fed policy designed to lower mortgage interest rates even further than they already are) people will be more willing to buy homes because they think the value of those homes will continue to increase, so that when they sell that home, they will get a better return on their purchase. Sounds like deja vu all over again.

This is not much different from the thinking that gave us the Homebuyer Tax Credit – an earlier brainchild from the good folks at Central Planning, Inc. You'll remember that the tax credit gave buyers the equivalent of an extra $8000 with which to buy a home. But since sellers and other market movers were also aware of this $8000 boon(doggle), the artificially increased "demand" -- instead of resulting in people having more money to spend on a home -- instead resulted in homes costing more. Look at the data: during the height of the Homebuyer Tax Credit, home prices rose. As soon as the tax credit ended, home prices dropped like a rock.

We can expect this policy to help keep interest rates low. Will they go much lower than they already are? That depends on whether banks will pass those lower rates on to borrowers. Personally, I'm skeptical. Banks already have avoided fully passing on lower rates to borrowers because, from their perspective, they have more business than they can (or are willing to) handle. We may see rates go down a quarter to a half a point, but I doubt it will be much more than that.

Will there be a resurgence of refinance applications? There will certainly be a lot of inquiries from consumers, but it would take a fairly significant reduction in rates (below where they are today) in order for a refinance to make much sense to a borrower who already has a 3 1/2% loan.

Besides, mortgage rates aren't really the problem – for either purchase or refinance customers. To paraphrase James Carville, "it's the restrictive credit overlays, stupid." Banks and mortgage companies continue to be rather bearish on the idea of doing more mortgage loans.

And from their perspective, you can understand why. During the last decade, they responded to pressure to lower lending standards, which helped give us the housing boom and bust. Then, they got blamed for it – and the government, in an effort to offset the cost of taxpayer bailouts of Fannie and Freddie, pursued an aggressive policy of forcing lenders to buy back loans that had been made in good faith. Once burned, twice shy.

Moreover, as Jack Micenko, an analyst at Susquehanna Financial Group (quoted by the Wall Street Journal) said, "Will lower rates make banks less risk-averse? Unlikely, because it's even harder to get paid for that risk."

Action Plan for Originators.
We may or may not like or agree with government policy or the unwillingness of banks to take risks with their shareholders' money. But those decisions are beyond our ability to influence much anyway.

Here's what we can know with some certainty:

• Interest rates will continue below for the near future, probably for at least the next quarter or two.
• The release of shadow inventory by asset managers will probably continue to be disciplined, and designed to produce maximum return for the owners of distressed properties. That, and continued Fed policy of low mortgage interest rates, will put upward pressure on home prices.
• There are people who will benefit (or at least can benefit) from this set of conditions. Loan officers should focus their marketing efforts on these people/groups. (See the video of last week's seminar, New Opportunities for Mortgage Originators.)

The Fed on Thursday said it would spend $40 billion each month buying mortgage-backed securities  until it saw a sustained upturn in the weak jobs market.

Of course, the Fed will not be using taxpayer money to buy bonds. Instead, it will expand the U.S. money supply and electronically credit banks with more funds. To understand how this works, imagine that you wanted to buy shares in an investment, but you don't have the money to do it. Instead of borrowing money against your line of credit to buy into the investment (which would be risky enough on its own), you decide to hack into your bank and credit your account with the money to buy the shares. The only difference is that if you were to do this, you would be locked up as a thief. No one's going to be putting Mr. Bernanke behind bars for this.

Almost immediately after the announcement, ratings firm Egan-Jones cut its credit rating on the U.S. government to "AA-" from "AA," adding that quantitative easing from the Federal Reserve would hurt the U.S. economy and the country's credit quality, that issuing more currency and depressing interest rates through purchasing mortgage-backed securities does little to raise the U.S.'s real gross domestic product, but reduces the value of the dollar. This increases the cost of commodities, which will pressure the profitability of businesses and increase the costs of consumers -- thereby reducing consumer purchasing power.

I can't really disagree with that.

Why does the Fed need to buy mortgage-backed securities? Maybe it's because the yield on them is so low that investors don't consider the risk-reward ratio to be prudent. The Fed is betting that this will keep mortgage interest rates low (it probably will, for now), and that low interest rates will stimulate more homebuyer activity, which will stimulate the economy and create jobs.

But rates have been low for some time now, and demand has remained flat. See the video my latest online seminar, New Opportunities for Mortgage Originators.

Yesterday's jobs report, expected to show 150,000 new jobs created in August, came in at a disappointing 96,000 instead. The official unemployment rate actually dropped from 8.3% to 8.1% (because 119,000 people stopped looking for work in the same month) .

Fed Chairman Bernanke has already been hinting that the Federal Reserve is ready to begin a third round of Quantitative Easing, in an attempt to prevent the stagnant US economy from slipping into another recession. Quantitative Easing, in which the Fed buys US debt, is another way of saying that the Fed is planning to monetize the debt – which is a euphemism for printing a bunch of money and inflating our currency and making our money worth less.

There is some possibility that the Fed will wait to take action until after the election, in order to try to avoid making Fed policy a political issue during the campaign.

Chairman Bernanke's term ends in 2014, and Republican presidential candidate Mitt Romney has already indicated that he will not renominate Mr. Bernanke as chairman.

In the short term, a QE3 policy could temporarily help to keep interest rates low – a result which many in the mortgage and real estate industries would no doubt welcome.

At the same time, quantitative easing is, by definition, inflationary. QE2 seems to have had the effect of doubling the official inflation rate from 1.5% to 3%. Price inflation will affect virtually everything, including house prices. Again this is something that many people in our industry would welcome, but we should be careful what we wish for. When the cost of something goes up but its value does not, our money buys less of it.

What effect would a QE3 likely have on home sales? Average household income (in inflation-adjusted dollars) has fallen by $4000 in the last 4 years. An inflationary monetary policy would further exacerbate that problem. People are paying more, relative to their incomes, for basics like food and energy, reducing their ability to save to buy a home. Home price inflation would make it worse for buyers, and wouldn't even help sellers -- because the value of higher prices would be negated by inflation.

More importantly, the US debt now stands at $16 trillion – a number which exceeds the size of our entire economy – and it is growing every day. We are "fortunate" that, largely because of the problems of the European economy, U.S. Treasury debt is still considered a relatively safe haven, which means the Treasury Dept. is able to borrow at very low interest rates. Another round of quantitative easing may temporarily make us feel better (when the Fed buys Treasuries, the Treasury Department does not have to sell as much of its debt on the open market), but after the party ends, the inevitable hangover comes. A 10 year treasury currently pays 2.78%. But in 2000 -- just 12 years ago -- the rate was 6.03%. If the Treasury's cost of borrowing were to return to 2000 levels, it would raise our interest payments on the today's national debt by a breathtaking $520 billion annually.

As Friedrich Hayek (Nobel Prize winner in Economics and awarded the Presidential Medal of Freedom) warned, "I do not think it is an exaggeration to say history is largely a history of inflation, usually inflations engineered by governments for the gain of governments."

As I said, we in the mortgage industry should be careful what we wish for.