Many have speculated the Federal Reserve policy of quantitative easing, otherwise known as QE-2, would mean lower mortgage rates. Nothing could be further from the truth.
First, a little background.
The economy has been non responsive or sluggish for several months now with 9.8% unemployment. The US economy is largely based on consumption with consumer spending accounting for 71% of our GDP.
When consumer spending and confidence are at or near all time lows people are not fueling the economy, they are not spending like we need them to. To get our economy growing again we need consumer spending and lots of it to grow out of our current predicament. How does the FED stimulate consumer spending and turn the economy with what appears to be little help from Joe consumer?
The FED's answer is to pump cash into the system, by selling bonds which in turn inflates the money supply and the markets. The stock market is the biggest benefactor of this stimulus. The logic is when Joe Public sees his 401k or investments go up (inflate) he feels a sense of renewed wealth and will begin to spend money more freely. Hence it’s the 71% of consumer spending I mentioned which drives our economy and has a large impact on the overall economic growth.
One of the side effects though is that the inflation of the stock market may actually prove to be a mirage and with the stock market inflation brings the inflation for good and services. Among these services are the financial services, in this case mortgage rates.
Why you may ask? Let's say I am a larger institutional investor interested in buying US government bonds. The FED has just announced another round of stimulus spending (Read Printing Money). As an investor I will demand a higher return for my investment due to increased inflationary risk the FED just announced.
Hence mortgage rates will continue to climb slowly as we move through this round of stimulus. Those of you sitting on the fence waiting for the rates to come back down may be very disappointed. Today’s rates are beyond what many of us ever thought we would see and having stated the obvious if you are in the market to refinance or purchase, now is the time to act.
While the days of Sub-Prime lending are behind us, the aftershock is still being felt in the market place today. Many of the foreclosures and delinquencies are a result of the liar loans, also known as, stated income loans. While many feel the worst is over there are those who believe we have merely kicked the can down the road a bit and another round of mortgage defaults will surface.
Those following today’s market see the effect in both the GSE’s (Fannie & Freddie) and FHA. Fannie and Freddie continue to bleed red. Until an alternative market driven source for secondary lending emerges we will continue to pump tax payer money into a failed system. What most of the general public is not aware of is the fact that FHA is also having issues with dramatically increasing delinquencies and rising default rates from loans taken out less than a few years ago.
The most recent information from the FHA shows delinquencies are over 10% and climbing. Many believe this is based on the deteriorating economy. While this is a contributing factor, it seems apparent the low down payment requirements or even no money down options are the true drives of this recent deterioration.
Today a new home owner can put as little as 3.5% down and qualify for an FHA loan. The same homeowner may also receive up to 6% of seller concessions towards their closing costs. This guideline has been around for years. It’s when you combine this with a 55% debt to income ratio and the ability to receive up to 6% gift funds which can be used as the actual down payment.
There was a time when this was referred to as, layering the risk or stacking one risk factor on top of another. Given the current economic climate this trend will continue and within the next 12 months we will see the FHA before congress asking for bail out money to shore up their balance sheets. (Politically correct: additional Congressional Funding)
