September 23, 2011
A Message from Jay Robertson – President of First Capital
The Federal Reserve wants consumers to apply for more mortgages and businesses to take out more loans, in order to boost the sluggish U.S. economy.
At least, that’s the thinking behind Operation Twist, a policy announced by the Fed Wednesday that’s meant to drive down long-term interest rates, thereby making it cheaper to borrow.
But will it really work? Industry experts have their reservations. “Interest rates will come down, but the effect won’t be what the Fed has envisioned,” said Mike Fratantoni, vice president of research for the Mortgage Bankers Association.
One reason: Mortgage rates are already at record lows. While that helps some homeowners refinance their existing mortgages, it has done little to boost new home sales so far.
That’s because credit standards are still tight, and even so, consumers don’t want them.
“Low rates can only do so much,” said Greg McBride, senior financial analyst with Bankrate.com. “Operation Twist will not prompt banks to make loans they’re not comfortable making. It won’t prompt people to buy houses if they’re worried about a job loss, and it won’t help homeowners refinance mortgages if they’re already unable to qualify.”
Even at record low rates around 4%, demand for new mortgages recently fell to a 15-year low, according to the Mortgage Bankers Association — not surprising considering Main Street is still being hit by high unemployment.
Low rates have at least led to an inflow of applications for refinanced mortgages, which gives a slight boost to the economy. The Congressional Budget Office estimates that for each 1,000 homeowners who refinance, 38 fewer homeowners default.
But here’s the catch: that option is only available to homeowners with pristine credit ratings and steady income, leaving out the roughly 22% of homeowners who are currently underwater in their mortgages, not to mention those struggling with unemployment.
www.firstcapitalmtg.com
