One More Blow

One More Blow

 

Fed policy, inflation pressures and other market forces may be conspiring to drive mortgage rates higher later this year and into next. Higher rates are the last thing the struggling housing market needs.

 

Mortgage Banking

September 2011

 

 

By Robert Stowe England

 

Don’t look now. But that small cloud on the horizon might just be the front edge of a market storm front bringing in higher 30-year fixed-rate mortgage (FRM) rates.  

 

If true, it could represent yet another challenge to the weakening housing sector that cannot seem to find a bottom and turn itself around.  

 

The dramatic downgrade of U.S. sovereign debt by Standard & Poor’s (S&P) August 5 from AAA to AA+ has set the stage for possible higher interest rates. 

 

In addition, on August 8, S&P lowered its rating for securities issued by Fannie Mae and Freddie Mac from AAA to AA+. The securities issued by the two government-sponsored enterprises or GSEs are backstopped by Treasury guarantees and funding since they were placed into conservatorship in September 2008.

 

In the immediate aftermath of the downgrades, the spread widened between Treasuries and mortgage-backed securities issued by Fannie Mae and Freddie Mac and backed by 30-year fixed-rate mortgages. The spread rose 182 to 200 basis points after the downgrades. 

 

The widening of the spread came mostly as yields on 10-year Treasuries fell from 2.58 to 2.35 percent, while yields on securities backed by 30-year fixed rate mortgages remained constant at 4.40.

 

While mortgage rates did not rise in the immediate aftermath of the downgrade, will the downgrades lead to higher rates in the mid-term and longer term?

 

Mike Fratantoni, vice president of research and economics at the Mortgage Bankers Association (MBA) in Washington, D.C., for one, expects higher rates. “In the next six months or so, there are going to be some investors around the world who are not going to be comfortable buying Treasuries if they are not Triple A, so that is going to move rates higher than they would have been – maybe half a percentage point higher that they would have been,” he says. This, in turn, will push up mortgage rates.

 

“It would not be enough to change the picture for the mortgage market and housing market in the medium term,” he added.

 

However, if policy makers in Washington are not able to reduce the trajectory of spending on entitlements and the trajectory of rising government debt in, “it will mean significant increases in rates over time and an increased difficulty in accessing credit,” Fratantoni says.

 

To be sure, mortgages rates seem to have nowhere to go but up. “With fixed-rate mortgage rates, I think we are pretty much at the bottom right now,” says Frank Nothaft, chief economist with Freddie Mac.  

 

Rates for 30-year fixed-rate mortgages averaged around 4.5 percent in mid-summer 2011. “I think that’s probably pretty much the low point not only for this year, but looking forward over the next 12 to 18 months,” Nothaft says.  

 

“I don’t expect mortgage rates to spike next week [or] next month—but looking over the next 18 months, there is going to be some gradual upward pressure on fixed-rate mortgage rates,” he says, pushing them higher to 5 percent by July 2012—or possibly as soon as January 2012.  

 

Nothaft expects higher rates for fixed-rate mortgages chiefly because he expects economic growth to pick up from its anemic pace in the first six months of 2011. He sees the pace rising to between 3 percent and 4 percent annual growth in the second half of the year and into 2012.  

 

If economic growth rises closer to 4 percent, that is likely to push fixed-rate mortgage rates a bit higher more quickly than if we have a 3 percent growth rate, according to Freddie Mac’s outlook.  

 

The economy grew a sluggish 1.3 percent in the second quarter of 2011 while it barely edged into positive territory at 0.4 percent during the first quarter, according to the Bureau of Economic Analysis’ revisions to its growth estimates in July 2011.  

 

Unlike some other market observers, Nothaft does not see the monetary policy of the Federal Reserve Board as an important factor in the direction of mortgage rates over the next year and a half. 

 

Nothaft points out that the Fed’s focus is on short-term rates, and notes that he does not see those policies affecting the direction of interest rates for fixed-rate mortgages, which rise and fall in tandem with yields on 10-year Treasuries, but at a higher yield. 

 

Instead, he says, “What is going to affect long-term yields more is market expectations and investor expectations about inflationary trends and pressure over the long haul.”

 

Nothaft contends that inflationary expectations over the next decade remain low, and he cites the Federal Reserve Bank of Philadelphia’s semi-annual Livingston Survey to back up his view. 

 

The Livingston Survey, started in 1946 by syndicated financial columnist Joseph Livingston, asks a panel of 35 economists their outlook on short-term economic growth and inflation, as well as their expectations for the average annual pace of inflation in the Consumer Price Index (CPI) over the next 10 years. In June, for example, the members of the panel reported to the Philly Fed that they expect an annual average CPI reading of 2.4 percent for the coming decade, down slightly from 2.5 percent in the prior survey of December 2010. 

 

The Livingston Survey asks about overall inflation and not core inflation. While it is core inflation that the Fed follows—the core inflation for personal consumption expenditures (PCE) as well as the core rate of the CPI.

 

Refinance volume to suffer

 

How would higher interest rates affect the mortgage market? Nothaft says, “It will lead to less originations because it would choke off some of the refinance activity in the marketplace.” 

 

More than two-thirds of all mortgage originations in 2010 were refinancings, according to Freddie Mac. And refis made up close to two-thirds of originations during the first half of 2011. “And so much of that has been driven by the fact we have historically low interest rates. Fixed-rate mortgage rates have not been this low since the 1950s,” Nothaft explains. 

 

“That provides a really exceptional opportunity for many homeowners to refinance their loans,” Nothaft says. 

 

Refinancing also got a boost from the Home Affordable Refinance Program (HARP), which is “specifically for homeowners whose loans are owned by Freddie Mac or Fannie Mae,” Nothaft points out. This has been especially helpful in neighborhoods where home values have declined and resulted in an elevated loan-to-value (LTV) ratio. 

 

Under HARP, homeowners who have been current on their Fannie or Freddie mortgage loan over the past year are eligible to refinance their mortgages up to 125 percent of current LTV (with no cash-outs). 

 

The Federal Housing Finance Agency (FHFA) reported in June that under the HARP program through May 2011, Fannie and Freddie had done more than 752,000 refinancings. 

 

Nothaft sees higher interest rates reducing overall origination volume in 2011 below 2010, and overall volume in 2012 to dip below 2011’s total.

 

Originations for home purchases, however, may pick up because overall affordability will remain very high, even if interest rates move to 5 percent, Nothaft explains. With expected higher economic growth, there will be job growth and, with it, more potential home sales.

 

Freddie Mac is forecasting that the pace of annual home sales will hit 5.15 million in the fourth quarter of 2011, slightly above the 5 million sales in 2010. The forecast for 2011 is for 5.4 million in home sales. He expects new-home sales to hit an annual pace of 650,000 in the fourth quarter of 2011, rising to 950,000 by the end of 2012. In the first half of 2010, the pace stood at 580,000.

 

Return of the 6 percent mortgage?

 

Other forecasters see interest rates rising above the 5 percent forecast by Freddie Mac.

 

For example, David Crowe, chief economist at the National Association of Home Builders (NAHB), Washington, D.C., expects the Freddie Mac commitment rate for the 30-year fixed rate to gradually rise to 5 percent by the end of 2011 and move up to 6 percent by the end of 2012.

 

Like Nothaft, Crowe sees an improving U.S. economy as part of the reason for higher interest rates—but also adds an improving global economy into the mix. “As economic activity increases, there will be competition for multiple funds from other investors,” Crowe says. Plus, he adds, there will be increasing housing activity in the United States pushing up demand for mortgage credit. 

 

NAHB is forecasting 580,000 new housing starts for 2011, about the same as 2010. Crowe forecasts a somewhat higher 775,000 housing starts for 2012. 

 

“We’ve been so far under demographic demand that sooner or later we have to start catching up producing houses for people who are going to form [new] households,” Crowe explains. 

 

Why, then, have new households been holding back on home purchases? “The reason we don’t see them buying right now has more to do with concern about the continuing fall in house prices,” Crowe says. New homes are also competing with lower-priced existing-home sales and foreclosures, he adds.

 

Crowe warns that his mildly improving outlook for new-home sales has to be tempered by the recognition that the most fragile part of the outlook is employment. “If [employment] doesn’t begin to grow, as I and most other economists expect it to, then we have to relook at even the modest optimism we currently hold,” he says.

 

A baffled Bernanke 

 

Given that Federal Reserve Chairman Ben Bernanke remains baffled at why low interest rates have not created new jobs, do housing economists also find the low job creation puzzling? 

 

“Many of us are [as baffled as Bernanke,]” Crowe says. “The situation is difficult to model. It doesn’t fit in the models. It doesn’t conform to our expectations of the sequence of events.” 

 

Are recoveries that follow a financial crisis particularly difficult and marked by low growth and job creation? “That’s my sense,” Crowe says. “My understanding is that a credit recovery is a lot longer and more precarious than a standard economic activity downturn.”

 

Fratantoni at MBA sees the policies of the Federal Reserve as an important factor in the direction of mortgage interest rates.

 

The Fed has been a primary factor keeping interest rates low, originally by targeting short-term rates at near zero. “Once they got rates down to zero, that was not an effective tool anymore,” notes Fratantoni, so the Fed turned to a program of purchasing mortgage-backed securities (MBS), agency debt and Treasuries “to bring down longer-term rates” to further stimulate the economy, he adds. 

 

The first round of Treasury purchases that began in early 2009 and went through the first quarter of 2010 was dubbed quantitative easing (QE). Mortgage-backed securities purchases continued through March 2011, when they peaked at $1.25 trillion, and have been declining since then to $909 billion by the end of June, according to an audit and 255-page July report of the Fed by the United States Government Accountability Office (GAO). The Fed also pursued a second round of quantitative easing—dubbed QEII by financial pundits—that began in the fall of 2010 and ran to the end of June 2011.

 

Fed ready to shift gears

 

The Fed is now ready to remove some of the stimulus it put in place with its quantitative easing and eventually will be raising short-term rates, Fratantoni says. 

 

Not any time soon, it would appear. Shortly after the downgrade on August 9, the Fed’s Federal Open Market Committee announced the Fed is prepared to keep the short-term Fed funds rate “exceptionally low” through mid-2013.

 

The Fed had indicated earlier how it will plan to move in stages to remove stimulus. “First they will stop reinvesting the proceeds from the portfolio,” he says; that is, stop using the proceeds of the run-off in mortgage-backed securities and expiring agency debt to buy Treasuries and, thus, “allow the balance sheet to shrink somewhat.”

 

The Fed wants to shrink the portfolio back from its $2 trillion in a range of assets to its “normal” level of around $800 billion, made up entirely of short-term Treasuries, explains Fratantoni. “That’s many years away.”

 

The second step, after the Fed stops reinvesting proceeds in Treasuries, is to start raising short-term interest rates. The third step will be to begin asset sales and to sell mortgage-backed securities to return to an all-Treasuries portfolio.

 

“We see mortgage rates increasing to 5 percent by the end of 2011 and roughly to 5.5 percent by the end of 2012,” Fratantoni says.  

 

The direction of the economy will also be a factor in the direction of interest rates. “A stronger economy brings with it higher long-term interest rates,” Fratantoni says. 

 

Inflation and other worries

 

Mark Calabria, director of financial regulation studies at the Cato Institute, Washington, D.C., expects a number of factors to work in tandem to push interest rates up to 6 percent by the end of 2012.

 

Monetary policy is at the top of Calabria’s list of reasons rates will rise. 

 

“I think we’ve got a combination either of one, the liquidity that the Fed has pushed into the system will show up in inflation, which will drive rates up, or [two], the Fed itself starts to raise rates to offset inflation,” Calabria says. “Either one of those gets you some combination of higher rates,” he adds. 

 

Calabria also expects that any new design for the mortgage finance system, which will not come online for several years, will also likely push up mortgage rates. 

 

Virtually every option being considered brings with it higher mortgage rates, according to Calabria. 

 

“Even if you go to some sort of government-provided backstop, that pricing gets passed on to borrowers,” he notes. 

 

In any new system, “some of the risk of the mortgage market will be transferred from taxpayer to the borrower. It’s just a matter of how much. That implies to me some increase of rates,” Calabria explains. “We’re talking anywhere from 20 basis points to maybe a full percentage point coming out of that,” he estimates. 

 

Calabria notes, however, that offsetting factors in any new system could mitigate the odds for higher mortgage rates. “If you require a higher down payment, lower debt-to-income ratios, then you can have lower rates. So, it’s important to keep in mind that there are moving pieces in all of this.”

 

Calabria also argues that over the very long haul, the future expected decline in the role of the dollar as the world’s reserve currency will drive up interest rates in the United States. “The fact that the dollar is the global reserve currency lowers interest rates in the U.S. by as much as a percentage point,” he contends. 

 

Calabria says that “the dollar’s role as the footprint of the world is peaking” and, as demand for the dollar declines, it could push up mortgage rates by a full percentage point over a 20-year period.

 

Like most other economists, Calabria sees mortgage rates rising as the economy gains strength and demand for borrowing grows.

 

Calabria also thinks that if huge deficits remain high and there is an ever-growing demand for funds to finance those deficits, that trend, too, will work to push up interest rates. 

 

“I think it’s a fairly safe bet that the United States will not get its fiscal house in order anytime soon. So, I do think it’s a question of when the markets start picking up on this,” he says. 

 

The Republican House and Democratic Senate reached a compromise to raise the $14.3 debt ceiling in two stages just hours from an Aug. 2 deadline set up by Treasury Secretary Timothy Geithner as a time when the United States would run up against the old debt ceiling and face possibly default—although few thought Treasury would actually default on U.S. bonds. 

 

There was an immediate increase of $900 billion, with an agreement on $917 billion of cuts in the deficits—which are not actually cuts in the budget, but reductions from the rate of growth in spending over the next 10 years. 

 

The debt-limit deal calls for another $1.5 trillion in cuts to raise the debt ceiling to $16.7 trillion. A special joint House-Senate special committee composed of 12 members—six from each party—would have to reach agreement on another $1.5 trillion in cuts by Thanksgiving. There would be an up-or-down vote, no amendments allowed, on the recommendations by Dec. 23.

 

The $2.4 trillion deal contained only $2 trillion in actual deficit reductions—$400 billion is saved through lower debt-service costs.

 

If the special committee cannot reach agreement on at least $1.2 trillion, the terms of the deal would trigger $1.2 trillion in automatic cuts in future deficits and President Barack Obama would be empowered to raise the debt ceiling by $1.2 trillion. The cuts would come equally from Medicare and defense spending.

 

Moody’s Investors Service and S&P, both based in New York, prior to the deal had warned they would like to see $4 trillion in cuts in projected deficits over the next 10 years in order for the United States to avoid a downgrade of its credit from its AAA status. The deal to raise the debt limit falls $1.6 trillion to $1.8 trillion short of that goal.

 

Moody’s, after the deal, reaffirmed the AAA rating but put the United States on a negative watch for a possible downgrade. 

 

S&P, however, announced its downgrade of U.S. credit after the markets closed on Friday, August 5, sparking a huge sell-off in global markets, sending the Dow down 634.76 points on August 8. S&P also warned of a possible further downgrade to AA. 

 

Decisions by banks on where they will lend available funds can also have an impact on the direction of interest rates and mortgage rates, Calabria argues. “It’s worth remembering over the last couple of years, bank balance sheets have not shrunk. They have simply lowered lending to the private sector and increased their holdings of Treasuries and agencies,” he says.

 

At some point, “does the banking system start to shift back its lending away from Treasuries and agencies and toward business lending?,” Calabria asks. “If that does indeed happen, you’ll start to see a creeping up of mortgage rates,” he predicts. 

 

Finally, there’s yet another trend that is pushing up interest rates—the evolution of the mortgage away from being clearly secured to less-secured lending. “It’s become increasingly hard, essentially, to foreclose—to take control of the collateral that underlies the mortgage,” he explains. “And as we know, mortgages are cheaper than credit cards because there is an asset underlying it. There’s collateral underlying it,” he says. 

 

“But we’ve certainly seen over the last couple of years it’s become increasingly difficult for a lender to actually take that collateral,” Calabria says. “As it becomes more and more difficult for mortgages to be fully treated as secured lending, rates will go up.”

 

The impact of QRM

 

What sort of premium might come for rates on loans that are not Qualified Residential Mortgages under the Dodd-Frank Wall Street Reform and Consumer Protection Act and, thus, are subject to risk retention? Calabria explains that it is difficult to compare on an apples-to-apples basis the QRM and non-QRM because, at least for now in the proposed rule, the QRM has characteristics decidedly less risky than many other mortgages, such as a 20 percent down payment and a low debt-to-income ratio.

 

“So the real question should be what is the pricing difference between a mortgage that is just QRM versus a mortgage that just falls out of being QRM? That’s still not apples to apples, but it’s closer,” Calabria says.

 

While some have estimated the rate difference could be as high as 300 basis points, Calabria thinks it would be closer to 100 basis points for those loans that fall just outside the QRM definition.

 

Will higher rates put more downward pressure on house prices? Calabria says “absolutely” they will. “And I think that’s a continued risk for housing prices going forward,” he says. Calabria, in fact, expects housing prices to decline another 5 percent to 10 percent from where they stood in July 2011.

 

House prices will not decline further just because of higher rates, but also because there is still too much “excess supply,” Calabria says. He also notes that in every previous boom and bust in the housing industry in the United States, “real prices after the bust have been lower than before the boom started.” Home prices still have not fallen below where they were before the bubble began, he explains. 

 

The equilibrium mortgage rate

 

Mark Zandi, chief economist for Moody’s Analytics, West Chester, Pennsylvania, sees the 30-year fixed-rate mortgage rate rising to 5 percent by the end of this year and to 6 percent by the end of 2012.

 

“In the long run, in a reasonably functioning economy that doesn’t have fiscal problems, the fixed mortgage rate should be somewhere around 6 percent,” Zandi says. “That’s what I call the equilibrium mortgage rate.” 

 

Concerns about the ability of the United States to address its huge deficits could drive rates higher, Zandi notes. “As investors grow worried about that, it could drive rates up higher [than 6 percent],” he says. 

 

Zandi expects that the housing market “should be able to digest” 6 percent mortgage rates. One reason that the rates will be higher will be an improving economy. “We are not going to get to higher interest rates unless the job market kicks in and the economy begins to gain momentum,” Zandi says. This will lead to more home sales and gains in home prices. 

 

There is likely to be at least one desirable benefit to slightly higher interest rates, and that would be the willingness of mortgage lenders to relax their very stringent underwriting criteria.

 

Sheila Bair, before she finished her term as the chairman of the Federal Deposit Insurance Corporation (FDIC), said in an interview that she thought higher interest rates might make banks a little less stringent because when rates are very low they feel they cannot make any mistakes. 

 

Zandi, when asked about Bair’s view, acknowledged her point was a valid one. “I do think banks are nervous about the kind of returns that they can get at a 4.5 percent mortgage rate,” he contends. “As rates move up in the future, I think there might be a bit of an inverse relationship between mortgage rates and underwriting criteria.”

 

Weak housing equals weak economy

 

The Federal Reserve will not countenance higher mortgage rates unless and until “the Fed believes that inflationary expectations are taking root,” according to Michael Youngblood, principal and co-founder of Five Bridges Advisors LLC, Bethesda, Maryland.

 

Youngblood sees rates remaining between 4.23 percent and 5.23 percent through mid-2012. The Fed, he explains, “will seek to defend its hard-won gains by means of monetary policy to promote a stronger economy and greater mortgage and housing activity.”   

 

Youngblood believes the Fed is acting on the assumption that the recovery of the housing sector is critical to the overall recovery of the economy. He believes that Fed current policy reflects at least in part the views of Edward Leamer, a professor of economics at the University of California at Los Angeles (UCLA).

 

“In the Jackson Hole, [Wyoming, annual meeting of the central bankers of the world’s largest economies] in August 2007,” Youngblood recalls, “Professor Edward Leamer presented a massive paper in which he argued cogently and, I think, with some passion, that the business cycle is the housing cycle,” he says. 

 

“I don’t think that [Fed Chairman] Bernanke would at all disagree that the business cycle is the housing cycle. And by dent of regulation and by dent of careful supervision of the [government-sponsored enterprises (GSEs)], we have effectively disassociated the two,” Youngblood contends. “And I would argue that the failure to revive housing is an important reason we have seen such weak economic growth to date.”

 

Youngblood adds, “The Fed has labored mightily to reduce interest rates and to reduce interest-rate volatility in order to fulfill one of its dual mandates of promoting employment and reducing household unemployment,” Youngblood says. The other mandate for the Fed is to keep prices steady. 

 

“So, having devoted so much energy and such vast sums of money to this purpose, it seems implausible that the Fed will not do everything within its power to maintain low and stable rates in the year ahead,” he adds.

 

What would prompt the Fed to raise rates?

 

“The only thing we can see that would provoke the Fed to raise interest rates would be what it would view as a systematic change in inflation expectations, which would be evidenced by a higher rate of so-called core CPI inflation rate, which is the CPI ex-food and energy components,” Youngblood adds.

 

If there are no signs of inflation in the core CPI, the Fed is likely to continue to pursue low and stable interest rates, he asserts.

 

“Having said this, I think the Fed has failed in one of its stated objectives, [and that is] to stabilize the mortgage and housing markets and to promote a revival of housing activity,” Youngblood says. 

 

“Clearly, we are at a historically relatively low rate of housing activity, measured by new- and existing-home sales. So, despite the affordability of housing, there has not been any material revival of housing activity,” he says.

 

The main reason the Fed has failed, according to Youngblood, is that “although the Fed has reduced the cost of mortgage finance, it has at the same time tightened the terms of mortgage finance,” he explains. 

 

“In conjunction with this, Fannie Mae and Freddie Mac have tightened their own underwriting criteria, and they have elevated their supervision of loan terms such that any loan that becomes delinquent is likely to be reviewed for conformity to the representations and warranties that the seller made. And if there are any material defects in those reps and warranties, the GSEs will request a repurchase,” Youngblood says.

 

“So, we have an odd situation where the banking regulators—and we can say in general the consumer-credit regulators—have promoted stricter underwriting criteria,” Youngblood says. “The Treasury and the [Federal Housing Finance Agency in] their oversight of the GSEs are seeking to minimize losses to the American taxpayer, and the [outcome of the] combination of those two initiatives has been to severely tighten the terms and conditions part of mortgage lending and to defeat part of the Fed’s intention in the two waves of quantitative easing,” he explains.

 

Tighter lending standards are also being promoted by the FDIC, the Office of the Comptroller of the Currency (OCC), the National Association of Insurance Commissioners (NAIC) and the National Credit Union Administration (NCUA), according to Youngblood.

 

Youngblood says that regulators were correct to conclude that imprudent underwriting standards materially contributed to the mortgage crisis and have responded by pushing regulated institutions to adopt tighter underwriting criteria.

 

“But it appears that the banking regulators have overshot their mark and, in conjunction with [FHFA’s] supervision of Fannie and Freddie Mac, has dampened the willingness of mortgage lenders to lend to any but the best credits,” Youngblood contends. 

 

“Weirdly enough, we are in a situation of credit rationing.” 

 

Since the advent of the Monetary Control Act of 1980, the Fed has “implemented its policy objectives by influencing the cost of credit”—that is, interest rates, Youngblood notes. “Now, the Fed has downwardly influenced the cost of credit but also downwardly influenced the availability of credit by mandating tighter underwriting standards,” he adds. 

 

Policymaker’s role in the Great Mortgage Recession

 

“I think it’s the double-impact of tighter underwriting criteria and stringent enforcement of repurchases by the GSEs that has left us in not merely a Great Recession but a Great Mortgage Recession,” he says.

 

Youngblood has compiled data that he contends illustrate the tightening of underwriting standards at the GSEs over the last year. 

 

In June 2010, for example, Fannie Mae purchased 192,829 loans with a notional value of $39.9 billion. By May 2011, Fannie purchased 150,016 mortgages valued at $29.1 billion. At the same time the average FICO® score rose from 708.1 to 728.9, while the average LTV has remained fairly low, ranging from 58.8 percent to 63.7 percent.

 

Similarly, in June 2010, Freddie Mac purchased 139,849 loans with outstanding principal of $28.2 billion. By May 2011, Freddie purchased 91,118 loans valued at $19.4 billion. The average FICO score rose from 752.3 in June 2010 to 758.2 in May 2011. The average LTV fell from 71.5 to 69.9 percent.

 

Youngblood also suggests that the terms of the Dodd-Frank Act of 2010 “have sharply reduced the ranks of mortgage brokers though the elimination of yield[-spread] premiums and eliminated what was, as recently as 2007, an [origination segment] by which one-third to two-thirds of borrowers sought and obtained mortgage credit—mortgage brokers.”

 

A basket of policies coming out of Washington have taken their toll. “So, we’ve undermined our system of housing finance by several legislative and regulatory initiatives; even as the Fed has worked mightily to simulate mortgage finance and revive the mortgage and housing markets by reducing the cost of credit,” Youngblood says.

 

The inability of low rates to generate mortgage and housing activity in recent years contrasts sharply with the impact of the Fed’s low rates early in the 2000s. “Our greatest repayment wave ever was 2003 and 2004, when the 30-year mortgage rate fell to 5.23 percent,” Youngblood says. “The Fed brought the mortgage rate to 4.23 [in this business cycle] with no refinancing wave and no revival of mortgage and housing activity,” he maintains.

 

Youngblood sees more barriers to mortgage lending—the onslaught of new rules under Dodd-Frank and possible new rules from the Consumer Financial Protection Bureau (CFPB). “We could be looking at more than a year of elevated mortgage uncertainty,” he says.

 

Litigation another impediment

 

The willingness of lenders to engage in mortgage lending is also being restrained by an onslaught of lawsuits over mortgage-backed securities. “The wave of private litigation directed [at] mortgage lenders who were active in the past decade is another inhibition to more active lending,” Youngblood says.

 

In sum, it seems that federal banking and monetary authorities have taken away with one hand what they have given with another. Low interest rates alone have not been able to play a sufficient role in reviving the housing sector.

 

Mortgage and housing sector analysts all seem to agree that pending gradual increases in mortgage rates will further dampen the housing sector. This, in turn, will continue to push down prices and delay the arrival of the long-awaited market bottom.

 

A robust recovery in housing now seems to be as far away as ever. At this point, even a meek recovery would be welcomed with open arms.  MB

 

 

Robert Stowe England is a freelance writer based in Arlington, Virginia. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

 

Copyright © 2011 Mortgage Banking Magazine. Reprinted With Permission.

 

 

Robert Stowe England is an author and financial journalist who has specialized in writing about financial institutions, financial markets, retirement income issues, and the financial impact of population aging.

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