February 16th, 2011 9:16 AM by Mel Samick
Potential home buyers are watching rates climb in a short time-span as conforming mortgage rates crossed over the 5% mark this week. Investors are still anxiously awaiting clues that a better economic climate is forming, and that it is again safe to start to move money from safe-haven locations into riskier investments. Some positive economic news was released this week further supporting renewed optimism in the recovery. Borrowing by consumers rose in December by $6.1 billion, almost three times expectations, and for the first time since August of 2008, spending on credit cards rose. Taking on new debt is like making a commitment against expected future income and signals rising confidence about one's ability to pay; it is just one more signal that the economic tide is turning. Some confidence can be attributed to the beneficial effects of refinancing over the past year, which had freed up household income to allow for additional spending. Those lagged effects will probably show up over a period of perhaps three to six months, so we should enjoy at least some economic boost from them for a little while longer. Hopefully, as this impact fades, job growth and home buying will step in to power the economy forward.
Last Friday the Obama Administration and the Department of Treasury released their long awaited and overdue plan for housing reform. From a broader perspective, the government is clearly moving away from the decades-old U.S. mantra that everyone should own their home, as the three options presented all imply a much larger role for the private sector to be involved in mortgage finance, which is a development likely to lead to higher rates for homeowners in the future and hence, a lower homeownership rate. The details are still thin, even if the implications are not, that the markets will be reformed. Three concepts were outlined, including a no-GSE structured market, one with a GSE-concept limited largely to use in times of financial market crisis, and one which includes a model slightly different than the one in place today in that a risk-bearing insurance intermediary would be responsible for losses, before the taxpayer, for a fee, and that the government would backstop the insurer in the event of default. Moreover, rates can move up significantly as liquidity and mortgage futures provided by the government guarantee and GSE underwriting standards leave the market. We will have to wait and watch as the details of this reform process unfolds.
Information Provided by NYCB Capital Markets