Mortgage Market Trends for week ending November 5, 2010



The Federal Reserve was front and center this past week. Everyone knew that would be the case, but the Fed ruled the financial pages anyway. First, Fed officials did the obvious: they announced that the federal funds rate – the lending rate between banks – would be held at 0 percent to 0.25 percent. Later, Fed officials did something else obvious: they announced that the Federal Reserve was going to pump even more money into our sluggish economy. 

On the latter, the Fed will purchase an additional $600 billion in long-term Treasury bonds over the next eight months. It will also reinvest up to $300 billion in Treasury bonds, using proceeds from earlier investments. This is the famous “quantitative easing” that has so preoccupied economists and the commentators for the past month. The purpose of quantitative easing is twofold: (1) to increase the money supply, and thus stave off deflation; and (2) to keep interest rates low and increase the amount of loanable funds. 

So what does this mean to us? The Fed is counting on more lending at lower interest rates. However, we wouldn’t necessarily count on it. As we’ve noted in past editions, increasing the money supply is inflationary. To date, most of the inflation has been in financial investments, namely stocks and commodities. Though the official consumer price measures say there is no inflation, most of us know otherwise – especially after a trip to the grocery store or gas station. In short, lower mortgage rates are not a given. 

Nor is it a given that lending volume will increase. Most of us have experienced the trials and tribulations of adhering to Fannie Mae’s and Freddie Mac’s underwriting standards, which are frustratingly (and we think unnecessarily) stringent. On the one hand, the Fed is encouraging homeowners to refinance; on the other hand, the Federal Housing Finance Agency – which oversees Fannie Mae and Freddie Mac – is making it difficult to refinance. Talk about a catch-22. 

The good news is that we could see a break in the logjam. A survey from the structured finance technology firm Principia Partners found that three out of five asset-backed and mortgage-backed securities investors plan to increase their activity in the securitization space over the next 12 months. That means more diversity in the mortgage market, which should increase mortgage offerings, and, just as important, increase offerings that are conflated with less stringent, more market-oriented underwriting standards.
In the meantime, mortgage rates continue to hold historical lows, but we think the risk that they won’t continue to hold these lows is increasing. Yes, more money can mean cheaper money, but it can also mean more expensive money if inflation takes hold in a serious way. At the least, we think interest-rate volatility will increase, making the waiting game more perilous. We see little upside in delaying refinancing or purchasing a home; there are simply too many unknowns lurking about that could spoil even the best-laid plans.

Base Building

The Census Bureau reported last week that the percentage of households that owned their homes has fallen to an 11-year low, at 66.9 percent. Homeownership had peaked at 69 percent in 2004. The historical norm, dating back to 1970, is around 65 percent. The drop in homeownership is actually good news, in that we are taking yet another step toward a more normalized market. With new home construction at a multi-year low, we could be forming a sturdy base from which growth can arise over the next decade. 

Of course, foreclosures remain the Damocles sword that could imperil any growth prospects by swamping the market with inventory. Some of the predictions are onerous (especially those from RealtyTrac), but we think we see a permanent reprieve nonetheless. Fannie Mae and Freddie Mac reported that the percentage of delinquent mortgages they hold continues to fall, with Fannie reporting a sixth-straight monthly decline and Freddie reporting a fourth-straight monthly decline. This news suggests that more mortgage holders have the financial wherewithal and the desire to service their loans and stay in their homes. 

We might be in the minority, but we think the positive data trend that has developed over the past couple months will produce a steady, if not significantly improved, housing market for 2011.

Graph Courtesy from NY Times in an article by Lynnley Browning  November 5, 2010.  Data and Commentary provided by Fred Ashe, from DE Capital Mortgage.

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