Mortgage Rates Are Too Damn Low

This post previously appeared at the author’s blog, Matrix

S&P downgrade aside, one of the things that is very apparent today: banks aren’t excited about mortgage lending and credit isn’t easing keeping the pressure on the housing market. To be clear, credit has slowly begun to ease in many sectors except for residential lending.

Banks continue to require AAA AAAA quality residential mortgage applicants and they are few and far between.

But banks are in the business of lending so why does credit remain so tight?

Despite the bank bailouts in our post-credit crunch world, a compromised Dodd-Frank financial reform law and a host of pro-banking hat tips from Washington in the name of stabilizing the financial system, lenders are still not compelled to lend.

For the past two years it has been nothing less than surreal to hear the political establishment beg banks to lend, plead with them to ease their underwriting standards, cajole them to modify existing mortgages, try to be more flexible with short sales, attempt to be more hands-on with foreclosures. All this posturing after they (the federal government) had bailed the banks out. Crazy.

Bailouts and government stimulus aside, who can blame the banks for being reluctant to lend? They are confronted with a legacy of bad or non-existing underwriting standards from mid-decade that they know all too well – because they created it.

At the same time, the Federal Reserve continues to provide near 0% free money to lenders in order to “prime the credit pump” by keeping interest rates artificially low. The hope is to stimulate the economy by providing lenders with access “free” money to lend and “enjoy the spread.”

It sure looks like banks are faced with an economic choice that the Fed and Washington doesn’t seem to understand:

Banks can…

a) issue mortgages at 4% to borrowers who are face:

  • Unemployment stuck in the 9’s % with more layouts to come – little improvement expected over the next few years.
  • Housing prices sliding in many markets.
  • GDP slipping, a weakening economy with rising concern about a “double dip.”
  • A tidal wave of foreclosures that have been held back as a result from the “robo-signer” scandal last fall.


b) borrow money for free from the Fed, invest and make 4% virtually risk free.

“b” seems like a fairly obvious choice, no?

Mortgage rates remain at record lows yet the housing market remains weak. Low mortgage rates aren’t helping the housing market anymore. Low mortgage rates are the problem. Sure home affordability declines as mortgage rates rise, but rates are at record lows and the economy is sliding and the housing market remains stuck.

The missing ingredient for a housing recovery is consumer access to credit, NOT low mortgage rates.

Let mortgage rates rise to their natural levels so lenders will be incentivized to lend and credit will ease. Until the Fed changes its view, there is no incentive for banks to change their behaviour and housing will continue to suffer.

UPDATE: Looks like at least 2 more years of low rates – Its Forecast Dim, Fed Vows to Keep Rates Near Zero [NYTimes]

Inspiration for the post title