How will the Fed pullout of the mortgage-backed securities market affect interest rates for residential as well as commercial property loans? The Treasury has already stopped purchasing these securities at the end of 2009. The Fed has promised to exit the market by March. Rates during 2009 dropped about a full percentage point from their lows. This was a great help to struggling homeowners as well as those new to the market looking to buy a home at both historically low mortgage rates and tumbling home prices.
The government feels that the market is now stable enough to take this risk. Many in the industry think that interest rates will jump back to the 2008 levels. On top of that, the tax credit incentive is also supposed to go away in the first half of the year. This could be a double whammy to the slow recovery in the housing market.
Foreclosures are still on the upswing. Total loan modifications are still negligible and the terms being offered to homeowners do not address the problems in the market such as loans being larger than the value, leaving the homeowner in a precarious position. Job creation is still slow. Wages with the new jobs are usually less than the ones they are replacing. Inflation is up, healthcare costs are up. How is this a more stable economy?
The government points to the fact that the banks paid back their TARP funds. Well, those are the big banks that have active trading desks that speculate with depositor money to bring profits to the banks for bonuses. The shareholders don’t share in these profits. Their dividends and stock equity continue to erode because the banks continue to add contingency funds for bad mortgage loans and bad credit card debt. The administration tried to get tough with the banks last week and the market dropped 300 points. Oops?
The small banks do not have these trading desks. They make their money on the spread and when they sell their loans in the market. Investors are going to want more money for the risk associated with mortgage loans. They can look at the economy and the shaky housing market as well as I can, and they will demand higher coupon rates, hence, higher rates for consumers. If the market rates take off and the lenders have home loans on their books and can’t sell them then money for other loans such as business and commercial property loans will also suffer. Mortgage loans are first, small business loans and commercial property loans seem to be lower down on the food chain and these areas are critical to the stabilization of the economy because they create jobs for the consumers. We don’t have long to wait and I hope that the government is right, or at least willing to jump back in quickly if their assumptions are proved incorrect.