How would you react if the Federal Reserve said no to NIRP and used the threat of plunging rates to get mortgage lenders to keep offering NINJA loans to their borrowers?
How about if the Fed warned lenders that NIRP was coming and they should start pricing mortgages more aggressively in an effort to lower their risk exposure?
That is NIRP to lenders – who can stay in business and not go out of business at the same time. And NIRP is going to cause them some real problems in the months ahead.
To understand why NIRP is a problem for lenders we need to look at the underlying fundamentals of the housing market. When major macroeconomic shock hits, it can cause major distortions in the housing sector and cause it to fall out of kilter. That is exactly what is happening with mortgage lending right now.
Lenders were not expecting a financial crisis and did not prepare for one. They also have little confidence in the ability of the Obama administration to support the housing market.
But now that we are experiencing what they call a “mini-crisis” in the housing market, mortgage rates are going to come down. These days, homebuyers do not want to wait around for the housing market to improve – they want to get into the market.
What are these lenders to do? Will they get together and create some kind of coordinated price war or will they try to protect their interests?
The answer to this question is: It is going to be very hard for them to keep rates low as borrowing costs start climbing. It is hard enough to keep borrowing costs low when the economy is expanding and there is no urgency to do so. When the economy is contracting, there is a sense of urgency to take action.
At this stage, the government is doing what it can to slow the growth in the national income and employment, but that may be more than it can handle. In fact, the possibility of more stimulus measures being put into place could mean more borrowing costs.
Lending costs are rising because there is more uncertainty in the future. Homebuyers know that the government will support them and that the economy will continue to grow, but that does not mean that they know how much faster it will grow.
Just think about how bad things were at the end of the last recession and compare that to the current state of affairs. You cannot afford to be short mortgage financing.
If you are thinking that the lenders will somehow make up the difference between current levels and mortgage rates that are higher, then you are wrong. In fact, the best they can do is to try to ride out the storm and make sure that their money stays in the bank.
They might even decide to launch a “let’s get out of here” campaign to try to convince borrowers that they are getting better rates and incentives than they would have if the NIRP rule had been in place. They just do not know how long it will take to recover from the last recession and cannot wait for the economic growth cycle to get rolling again.