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:
“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.)
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