Low, Low Rates
Here’s yet another reason why the Fed should not be driving interest rates to zero: It helps out far less people inthe economy that they imagine.
From the NYT:
“Mortgage rates in the United States have dropped to their lowest levels since the 1940s, thanks to a trillion-dollar intervention by the federal government. Yet the banks that once handed out home loans freely are imposing such stringent requirements that many homeowners who might want to refinance are effectively locked out.
The scarcity of credit not only hurts homeowners but also has broad economic repercussions at a time when consumer spending and employment are showing modest signs of improvement, hinting at a recovery after two years of recession.”
Sure, refinancing could save home-owners lotsof money they could then plow back into the economy — or even avoid foreclosure. But not if bank lending standards are too tight.
That is the problem with an abdication of lending standards — as we saw from 2002 – to 2007. After the collapse, the over-reaction sends the pendulum swinging too far the other way. Lending standards become too tight.
If only we monkeys could learn anything from history . . .
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Source:
Interest Rates Are Low, but Banks Balk at Refinancing
DAVID STREITFELD
WSJ December 12, 2009
http://www.nytimes.com/2009/12/13/business/economy/13rates.html
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December 14th, 2009 at 5:33 am
Agree. Also, the signaling/information effect of low low rates is driving savers again into the illegitimate stepchildren of illiquid securities in an attempt to escape zero or negative real returns.
December 14th, 2009 at 7:43 am
Well some monkeys learn; just not those who become economists since they think they know everything.
December 14th, 2009 at 9:38 am
Not to mention that with interest rates so artificially low, it doesn’t make sense NOT to borrow as much as you can, even if you don’t need the money right now. Seeing as consumers are last in line at the credit trough, how much credit do you think is available to them right now? To put it another way, if your local Walmart is selling boxes of Kleenex for a nickel, how many boxes do you think will be left on the shelves by the time you make it down there? None.
December 14th, 2009 at 9:45 am
From the story:
“Mark Belvedere bought a condominium in a San Francisco suburb in early 2004 and refinanced it in 2005. He now owes $235,000 on a property that would sell for barely half that today.”
And he wonders why he can’t refinance into a fixed-rate mortgage. Did we swing so far that simple sanity in banking seems like an overreaction?
Incidentally, were the heck in the Bay Area can you buy a condo for $120K or a bit more?
December 14th, 2009 at 10:36 am
booga
Agreed. Who the hell would loan 117,500 unsecured, especially in this environment? More than that really if you were to include a good 20% pad to get to 80% LTV.
Of course, as the story says, if the bank held the mortgage it might make good business sense to refi this loan that is already in such terrible shape, if they determined that it would be meaningful in improving his ability to keep paying. Otherwise they’re better off keeping the rate there and waiting for the (almost) inevitable foreclosure to come.
Or they could give a principal reduction to avoid all that, realizing the (almost) inevitable loss. But we know that banks don’t have much incentive to do that right now. Not with “extend and pretend” the official policy of our govt.
December 14th, 2009 at 11:01 am
re: “It helps out far less people in the economy that they imagine.”
Who are you, and what have you done with BR? Zero percent loans are for the benefit of a few large banks, and the Fed acts first and foremost on behalf of those bankers. Who can pretend any longer that the Fed or the banks care one whit about helping people? (Bernanke, I know). If by helping people they can also help themselves, then sure, they’ll take actions to strengthen the economy and make loans to regular people. But those banks are too insolvent to lend, no matter how low the Fed lowers rates. Ordinarily they would want to profit from low rates, but are probably still insufficiently capitalized. We should not go along with the pretense that zero rates are designed to encourage lending. It’s apparently just a way to mask the insolvency of a few very large banks using the new imaginary accounting rules.
December 15th, 2009 at 10:50 am
“…it doesn’t make sense NOT to borrow as much as you can, even if you don’t need the money right now…” You must be kidding.
Lord have mercy on us all if we don’t learn from our mistakes. Need anyone remind us it was easy unearned borrowed money that got this nation into this mess? Supporting weaker lending standards to help the devastated economy breeds greed and is just absolute irresponsible economic nonsense. The ability to buy a home must be earned.