Mary Kladde
Last week the Wall Street Journal, this week a couple of articles in the National Mortgage News – the calls for attention to the need for liquidity in the primary market are getting louder. For those of us impacted by the myopic focus on “giveaways” to the large financial institutions without consideration of the impact of credit availability for the primary market and small businesses, we need to stay vigilant and continue to speak out.
At the risk of being redundant, I have to reiterate:
Continuing to fund lenders on the secondary side does nothing to shore up the primary market and help lenders and consumers capitalize on today’s low interest rates. By not addressing warehouse line lending shortages for smaller and mid size lenders, the market is eliminating the competition for the large retailers such as Wells Fargo, Citi, Bank of America, US Bank, etc… No wonder Wells Fargo published a statement that “Mortgage Share Is Up” as a headline in National Mortgage News on Monday, February 2, 2009.
This elimination of competition allows the large lenders to keep interest rates higher due to current demand and the lack of ability to supply services to accommodate increased application rates.
Don’t be fooled into thinking that there is going to be a mass rehiring of employees to accommodate increased volumes.
Large lenders are just going to keep staffing levels static and do their best to service demand while maximizing profit and minimizing overhead. Suffering from massive losses, there is no upside for a large bank to invest limited resources in mortgage lending. With the mercurial nature of a market savaged by depreciation, illiquidity and a loss of investor confidence, it is financially and politically unwise to invest in personnel and infrastructure only to cut again at the whim of the market.
The real losers in all this continue to be the consumers/taxpayers. Small to mid size lenders are the ones who tend to offer personalized service to consumers in a difficult market. They are more likely to shop rates between lenders and must respond to the unprecedented competition from other lenders trying to survive. Skeptical, jaded borrowers, keen to pare every additional cost from their monthly budget, allow little room for fluff fees or higher than market rates. More than ever before, the market needs to foster competition and choice for borrowers rather than narrowing choices. If the intent of the Fed is to lower rates, then they need to ensure that the market climate can support that. When borrowers do not receive the savings in long term interest rates intended to stimulate the economy, it is just failed policy.
Now — Let’s talk real numbers and savings for the borrowers and others:
For every percentage point lowered on a borrower’s interest rate per $100,000 in loan amount, you are looking at a savings of approximately $65 per month. For 2 percentage points, it will run about $128 dollars per month. This being said, an average borrower that lowers their interest rate from 7% to 5% holding a $200,000 mortgage is looking at increased household cash flow for expenditures and debt relief in the amount of approximately $256 per month. This is real money!
If capitalism still rules our economy, then competition is only healthy. If we are tampering with the market by cutting rates to unprecedented lows with the intent of averting economic disaster, we owe it to ourselves as an industry of taxpayers to ensure that we maximize the impact of those cuts. With competition, interest rates aren’t completely wedded to supply and demand, making a 4% 30 year mortgage a possibility. We’ll see on that point….where’s my lender’s number?
Regardless, you can do the math on the additional savings and the increased cashed placed in the hands of homeowners. Lowering homeowner’s interest rates also means lowering mortgage interest deduction supporting government revenue. I can’t be the only one capable of adding, subtracting, and coming to this conclusion. Does this make sense to anyone else?
More household income means more potential spending or at least the possibility of making the monthly mortgage payment to prevent foreclosure. With states struggling against declining values and loss of property tax revenue and looking to the federal government for relief, we have to serve all of our interests. I am a “good capitalist” small business owner talking about common sense and simple math. Maximize the effect of the Fed, increase tax revenues on the federal level with smaller interest deductions while providing immediate monthly relief to the borrower, increase property tax revenues by avoiding foreclosures, keep people employed… we have to be squeezing every opportunity to mitigate the losses and deficits of the Stimulus Package and TARP Spending Allocation.
