Cash Hoarding and Mortgage Rates
What does hoarding cash have to do with mortgage rates? Alot, when it's the banks that are stuffing the cash away. Most, if not all banks are in safety mode after the subprime meltdown of 2007-2008. Many banks and investors got caught up in a cash crunch due to the recent high foreclosure rates, and are now hoarding cash for loan-loss reserves. Lenders have tightened the reigns on mortgage and refinance lending, while increasing qualification requirements. This translates to less mortgage demand and higher mortgage rates, particulary for high loan-to-value home mortgages. Fortunately, those shopping for low mortgage rates are still in a good position as the bond market and 10-year treasury yields are still near all-time lows. If the mortgage premium risk spread were at it's historical average, we would be currently experiencing par 30 year fixed rates at 5.25% instead of 6.00%!
As a comparison, FDIC-insured banks set aside $37.1 billion in loan-loss provisions during the quarter - four times more than the $9.2 billion in the first quarter of 2007. The first-quarter provisions ate up 24% of the industry's net operating revenue in the quarter, up from only 6% a year ago. This reflects a drastic response to the subprime mess.
Mortgage rates are also coming under pressure from inflation. Prices for fuel and food keep moving higher and higher with no stabilization in sight. The fear is that prices for everything will creep higher and higher. This means that those investing, particulary in mortgages, need to get a higher rate of return to offset the increasing cost of money. Hence, mortgage rates creep up.
In my opinion, we are experiencing the two sides of over-reaction. We started out from 2004-2007 with people tripping over themselves to buy homes and lenders approving mortgages (over-reaction to not miss out on easy profit) for almost anyone who could sign their name. Home prices soared and the housing sector line went straight up. Mid 2007 to present, home-buyers are scarce and lenders are putting up the "Do Not Disturb" sign for mortgage shoppers. The housing sector line is going straight down.
So what's next? Well, what goes up, must come down, then we stabilize and begin a rational appreciation trend (relating to the housing market). I feel that we are getting closer to the stabilization mode, but still have a couple quarters to go. Until then, mortgage rates will likely continue the ride up and down with overall good value for those refinancing with good equity in their homes, or those qualified for FHA home loans.
May the Mortgage Rates be With You!
Refinance Tool Box
As a comparison, FDIC-insured banks set aside $37.1 billion in loan-loss provisions during the quarter - four times more than the $9.2 billion in the first quarter of 2007. The first-quarter provisions ate up 24% of the industry's net operating revenue in the quarter, up from only 6% a year ago. This reflects a drastic response to the subprime mess.
Mortgage rates are also coming under pressure from inflation. Prices for fuel and food keep moving higher and higher with no stabilization in sight. The fear is that prices for everything will creep higher and higher. This means that those investing, particulary in mortgages, need to get a higher rate of return to offset the increasing cost of money. Hence, mortgage rates creep up.
In my opinion, we are experiencing the two sides of over-reaction. We started out from 2004-2007 with people tripping over themselves to buy homes and lenders approving mortgages (over-reaction to not miss out on easy profit) for almost anyone who could sign their name. Home prices soared and the housing sector line went straight up. Mid 2007 to present, home-buyers are scarce and lenders are putting up the "Do Not Disturb" sign for mortgage shoppers. The housing sector line is going straight down.
So what's next? Well, what goes up, must come down, then we stabilize and begin a rational appreciation trend (relating to the housing market). I feel that we are getting closer to the stabilization mode, but still have a couple quarters to go. Until then, mortgage rates will likely continue the ride up and down with overall good value for those refinancing with good equity in their homes, or those qualified for FHA home loans.
May the Mortgage Rates be With You!
Refinance Tool Box
posted by Jim Bisnett at
2:44 PM
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