Mortgage Rates Are Falling But Will Loan Activity Increase?
The Federal Reserves plan to purchase mortgage securities from GSEs Fannie Mae, Freddie Mac and Ginnie Mae have helped push mortgage rates below 5%. Despite the fact the Fed has lowered interest rates to practically zero, consumer rates have been slow to follow suit.
The Federal Reserve earlier this week began purchasing $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac and Ginnie Mae to help lower mortgage costs. While the lower rates may lead more borrowers to refinance, it may not spur home buying in the second year of the recession after more than 2 million jobs were lost in 2008.
Coupled with the fact that Treasury rates are at record lows, the large spreads from consumer rates remain a big problem. The joint effort by the Fed and Treasury to switch it’s focus to the consumer side are starting to chip away at those spreads but the big question is, when will loan activity return to normal?
The thing is, with the government about to sell massive amounts of debt, those low Treasury rates won’t last for long. The Fed is going to have to be a buyer for years to come, providing demand in a fixed income market that is about to be flooded with supply.
The Fed appears willing to take those measures, having committed an estimated $8.5 trillion already in effort to unfreeze credit markets. Lending activity though, has been slow to return despite re-capitalization efforts from TARP, the program in charge of releasing funds from the $700 billion bank rescue plan.
Lending standards remain tight and banking institution are continuing to hoard capital. This will most likely remain the case until there is a general consensus that we’ve finally hit the bottom.
It’s an endless downward cycle between the credit and housing market that the government is trying to throw trillions of dollars at, in an attempt to jump start a recovery. Until lending volume returns to normal, the economy will continue on this long road downward.
