Jun 8 2006 12:00AM | Permalink | Email this | Comments (0) |
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I just got great news. In the last three days I was told I am “prequalified” for a 1.5% mortgage loan by seven different mortgage brokers. I don’t know these companies but they seem to be solid financial institutions. They all had words like “capital”, or “funding” in their company names. All I have to do to get this great rate is to call the 800 number in the computer generated voice mail left on my answering machine.

It was a tough decision but I decided not to call. I’ll stick with my fixed rate mortgage just a little over 5%. That many homes get a dozen or more solicitations a week for teaser rate mortgages is evidence both that mortgage brokers are smart marketers and that some people will take desperate risks to become homeowners. The combination of aggressive mortgage brokers and desperate mortgage applicants means that the mortgage market is fundamentally different than in earlier housing cycles and can not be as easily manipulated by the Federal Reserve Board as it once was.

When I got my first mortgage I went to the main office of a Savings and Loan Association (remember them?) in the most imposing building in town. A receptionist granted me an appointment a week later. I met with a man in a suit in a huge wood paneled office. He told me the terms of “the” mortgage the S&L offered and told me not to bother visiting his competitors because mortgage rates were effectively set by the Federal Home Loan Bank Board and that other S&L’s would not accept an application if I did not have an account with them.

Today, mortgage brokers and desperate would be homeowners are fighting back against the fed’s efforts to slow housing starts by raising mortgage rates. Every time the fed raised short-term interest rates in the last few years, some mortgage applicants decided they could accept a higher monthly payment and some mortgage brokers decided they could accept more risk and lowered their introductory period interest rate. Regulatory restraints prohibited these actions by applicants and brokers in earlier housing cycles. People have not changed but the rules have.

Clearly, some of the fed’s monetary restraint has gotten through applicants and brokers and has begun to slow housing starts. What happens next? Suppose the fed stops raising credit costs but brokers get even more aggressive and applicants even more desperate? Will housing starts rise again? Probably not. But the fed’s move to slow the housing market will be fiercely resisted which will provide a high floor to housing starts during 2006-07 and drag out the slowdown period longer than the fed would like.

Mortgage brokers have enjoyed a very profitable five-year run. Their employment has more than doubled. They do not want the good times to end. The brokers will keep approving ever more risky loans as long as they can pass on the loans and the risks to Freddie Mac and Fannie Mae. And the ongoing financial scandal at the mortgage giants suggest that their managers are reluctant to stop buying risky loans for fear of trimming their own bonuses.