Banks Fail to Lower Mortgage Rates as Bernanke Cuts Money Costs
March 27 2008 - Marjorie Killian is eager to buy a home in San Diego and is pre-approved for a mortgage. She won’t make an offer on a property until she can get a fixed rate of 5.5 percent, she said.
Killian is just the kind of buyer that Federal Reserve Chairman Ben Bernanke needs to entice to revive the U.S. housing market and halt its drag on the economy. Lenders aren’t helping the central bank even after they’ve been given seven interest rate cuts and a new program designed to jumpstart borrowing.
The difference between the 10-year government bond yield and the average U.S. fixed mortgage rate was 2.7 percentage points last month, the widest spread since 1986, data compiled by Bloomberg show. Banks are defying Bernanke and hoarding cash after writing down the value of more than $200 billion of mortgage-related securities since July. The banking industry’s earnings fell to a 16-year low of $5.8 billion in the fourth quarter of 2007, ending six years of record profits, according to the Federal Deposit Insurance Corp. in Washington.
“The Fed is trying to drive a car with only slight control of the steering wheel and no control of the gas or the brakes,” Clive Granger, the 2003 Nobel laureate in economics and professor emeritus at University of California, San Diego, said in an interview. “In order to stabilize the economy, people need access to mortgages at rates they can afford, and so far the Fed hasn’t been able to do much about that.”
Nervous Banks
Banks are rebuilding their battered balance sheets and are likely to remain “skittish” about passing on lower borrowing costs to homebuyers until their capital levels improve, said Henry Savage, president of PMC Mortgage Corp., an Alexandria, Virginia-based lender that serves seven states.
“For the moment, fixed mortgage rates seem to have disconnected from the 10-year Treasury bond,” Savage said. “Lenders are nervous.”
Fed policy makers have made seven rate cuts since September, shaving 3 percentage points off borrowing costs, and the effort has failed to spur a recovery. The average rate for a 30-year fixed mortgage dropped half a percentage point during that period.
Bank of America Corp., the second-biggest U.S. bank by assets, and JPMorgan Chase & Co., the third-largest, were offering a 30-year fixed rate of 6.13 percent on March 25 for borrowers in New Jersey who put down 10 percent of the purchase price and have the best credit.
Empty Homes
Falling prices helped sales of existing homes in the U.S. unexpectedly climb in February for the first time in seven months. Purchases rose 2.9 percent to an annual rate of 5.03 million, the National Association of Realtors said on March 24 in Washington. The median price of single-family homes dropped 8.7 percent since February 2007, the most in four decades of record keeping.
The national vacancy rate increased to 2.8 percent in the fourth quarter, matching 2007’s first-quarter rate that was the highest in records going back to 1956, the U.S. Census Bureau reported Jan. 29. That translates into 17.8 million homes standing empty, the bureau said. Of those, 2.18 million were year-round homes for sale, more than half of the average 4 million properties on the market during the period.
Home sales probably will fall to 4.46 million in 2008, bringing the three-year decline to 37 percent, said Molly Boesel, an analyst at Washington-based Fannie Mae, the world’s largest mortgage buyer. Prices may drop 5.8 percent in 2008 and 4.7 percent in 2009, she said.
Further Declines
Standard & Poor’s of New York predicts U.S. home prices may decline as much as 20 percent by the end of 2008 from their peak in 2006, according to a March 20 report.
In California, the most populous U.S. state, home resales fell 29 percent in February from a year earlier. The Fed’s interest rate reductions are having “little near-term direct effect on the housing market,” Leslie Appleton-Young, chief economist for the Los Angeles-based California Association of Realtors, said in a March 24 report. The state has about 36.5 million residents, or about one out of every eight Americans.
The last time U.S. home sales fell, the 0.2 percent dip in 2000, Fed cuts helped revive the market. Policy makers slashed 4.75 percentage points off their benchmark rate in 11 moves during 2001, pulling the economy out of recession and boosting demand for houses.
Mortgage Rates
The average U.S. 30-year fixed-rate mortgage rate dropped to 5.93 percent in the final week of 2002, the lowest in almost four decades, after the Fed cut another half a percentage point off its benchmark rate in the prior month.
The lowest 30-year fixed rate ever recorded was 5.21 percent in June 2003, the same month the 15-year fixed-rate loan fell to an all-time low of 4.6 percent. Last week, the 30-year rate was 5.87 percent and the 15-year rate was 5.27 percent.
The average U.S. rate for an adjustable mortgage with an initial fixed period of five years, a so-called hybrid loan, was 5.03 percent in January 2005 when Freddie Mac began tracking it. Last week, it was 5.56 percent. The lowest rate on record for an annually adjusting mortgage was 3.36 percent in March 2004. Last week, it was 5.15 percent.
Boosted by the Fed rate cuts, home sales jumped 5.5 percent in 2002 to a then-record 5.63 million, beating the prior year’s 3.1 percent gain, and set new annual highs until 2006, according to data from the National Association of Realtors.
Staying Put
Now it’s a different picture, said Gerard Leary, a broker with Black River Mortgage Co. in Chester, New Jersey. After hovering near 6 percent for most of the past four years, rates have to fall to 5.7 percent or less to start a wave of home buying or loan refinancing, he said.
So far this month, the average fixed-rate in the U.S. northeast region, where most of Leary’s clients are located, has been 6.1 percent, according to McLean, Virginia-based Freddie Mac, the world’s second-largest mortgage buyer.
“I can write almost half a year’s worth of business in 30 days” if rates in the New Jersey area drop another quarter of a percentage point, Leary said. “Rates have been very sensitive to negative news. They’ll jump in a second, and they’re very slow to respond to anything positive.”
Marjorie Killian could get a 6 percent rate if she decided to lock her mortgage this week, according to her broker, Austin Bunn of Mission Home Mortgage in San Diego. She’s waiting for another half-percentage-point decrease.
Where’s the Bottom?
“Mortgage rates should be dropping more, because of how bad the economy is,” said Killian, 53, who now rents an apartment and wants to buy a house or a condominium in San Diego for $350,000 to $400,000. “I’m going to sit tight and see what happens.”
Vernon Eagle, of Cambridge, Massachusetts, is among the many move-up buyers who are waiting out the housing decline. He owns a three-bedroom house near Harvard University and wants to move to a larger home in a Boston suburb. His plan is on hold until prices and rates reach bottom.
“I don’t see us moving to a bigger place until the shakeout ends,” said Eagle, 59, a Harvard doctoral candidate.
His real estate agent, Debbie Lewis of Coldwell Banker Residential Real Estate Brokerage, said that strategy may not work.
“The problem with waiting for the bottom is: you don’t know you’re there until it’s gone past, and prices and rates start to rise,” Lewis said.
Bernanke vs. Banks
The U.S. economy has been in a recession for about four months, according to Granger, who won the Nobel prize for his theories on economic data analysis. The economic contraction could last for an additional two to six months, depending on what happens in the financial and housing markets, he said.
Bernanke, chief regulator of U.S. commercial and savings banks, has no direct influence over fixed mortgage rates, Granger said.
“While Bernanke may be trying in private to use his power of persuasion, he really has remarkably little control over the situation,” Granger said. “He’s somehow got to lead the banks in the right direction, because he can’t push them.”
Banks Fail to Lower Mortgage Rates as Bernanke Cuts Money Costs
By Kathleen M. Howley | Bloomberg