Last week’s meeting of the Federal Reserve Board of Governors suggested that mortgage rates might remain low. In August, I wrote a column suggesting the same thing but cited recent gloomy economic reasons for low rates.
I’m no economist, but the basic premise is that slow economic growth leads to weak spending, which leads to weak hiring, which leads to high unemployment, which completes the vicious circle because high unemployment leads to slow economic growth.
Producers and employers have a hard time raising prices and wages in this kind of environment. In fact, it might appear logical that, in times of weak spending, a producer might lower his price to make a sale.
The Fed’s official statement after its meeting included an interesting sentence: “Measures of underlying inflation are currently at levels somewhat below those the Committee judges most consistent, over the longer run, with its mandate to promote maximum employment and price stability.”
Deciphering FedSpeak, I interpreted this sentence to mean the Fed is more worried about deflation than inflation. Looking up deflation on the Internet, I found this definition: “A general decline in prices, often caused by a reduction in the supply of money or credit.”
A reduction in the supply of money or credit? Well, that explains it, considering the U.S. economy is experiencing the worst credit crunch in history. Apparently, one way to alleviate a tight credit market is to make money cheap. Cheap money will entice consumers to borrow money. Last time I checked, rates for 30- and 15-year mortgages were in the mid-4 percent range with few or no fees. That’s cheap money.
It seems to me, however, as a mortgage broker of 18 years, that the other side of the coin is being ignored. Just because lenders are offering low mortgage rates doesn’t mean they’re lending the money.
The underwriting criteria has become so strict that perfectly qualified homeowners either have to jump through major hurdles to get their loan approved or they simply cannot get approved for a refinance. I know I’ve written about this subject before, and I don’t want to beat a dead horse, but here are a couple real-life examples:
- “Layered conditions” is my term for the underwriting practice of approving a loan with certain conditions, satisfying the requested condition, only to be given more conditions based on the conditions already fulfilled.
- In downtown historic Charleston, S.C., I’m having trouble approving a refinance with a 40 percent loan-to-value. The borrower has perfect credit, income and savings. The problem is that the house, like most on the Charleston peninsula, is a “horizontal regime.” These are detached homes that are legal condominiums, usually consisting of just two homes. The two homes share a fence and a driveway as common elements, hence the “horizontal regime.”
Both homes have more-than-adequate independent insurance coverage, but the lender is balking because a condominium association (consisting of just the two homeowners) doesn’t have a “master policy.” The lender says Fannie Mae won’t buy the loan. Ridiculous.
- A retired corporate executive is trying to refinance his $400,000 loan secured against his $800,000 home. He has $2 million in retirement funds, which he begins to tap into next year. He has an additional $500,000 cash in the bank. The lender refuses to approve the refi until he has a history of at least two months’ retirement distribution because he currently has no income stream.
Apparently having $2.5 million in income already earned and in the bank doesn’t cut the mustard.
The Fed needs to understand one thing: Mortgage rates can be at 2 percent, but that’s not necessarily going to make lenders loosen their purse strings. A representative from one of my wholesale lenders sums up the problem in one sentence: “Fannie Mae is looking for every excuse to turn down a loan.”
In reality, despite my bellyaching, more than 90 percent of my refi applicants are getting approved - but not without all of us banging our heads against the wall.
Henry Savage is president of PMC Mortgage in Alexandria, Va. Send e-mail to firstname.lastname@example.org.