After some encouraging news last week, the market had a double-dose of bad economic releases today: this morning, the World Bank predicting a three percent drop in the global economy for 2009, and late in the day, the Mortgage Bankers Association (MBA) withdrawing its positive forecast for 2009, issued only in March. The MBA’s statement is especially chilling, explaining in detail how the government stimulus programs aren’t showing a lot of results.
Back in March, the MBA adjusted its view for expected lower interest rates from the Fed’s monetary policy, as well as a government program called HARP meant to to spur mortgage borrowing, and came out with a fresh forecast for home mortgage originations for 2009, up to $2.7 trillion from $1.9 trillion.
As I mentioned on June 15, to keep a lid on interest rates, the Fed has committed to buying $1.2 trillion of mortgage securities, and $300 billion of Treasury bonds (to drive bond prices higher and thus send yields lower).
And the Fed’s trading desk has been busy: Jay Brinkmann, chief economist at the MBA, notes in a press release today that the Fed has bought 85 percent of the new mortgage bonds issued this year by Fannie Mae, Freddie Mac and Ginnie Mae combined.
He also explains the reaction of interest rates:
While the Fed has been successful in reducing the spread between conforming mortgage and Treasury rates through its purchase of agency MBS, it has not been successful in maintaining lower Treasury yields. … Given the high issuance volume of Treasuries in June, the Fed is likely approaching its self-imposed ceiling of $300 billion and may be reluctant to increase its current commitment to purchase long-term Treasuries…
In late 2008, mortgage rates, the blue line, were more than two percentage points higher than 10-year Treasury yields, the red line, but that spread has been cut to something more like 1.5 percent today.
But the underlying Treasury rates are higher than the MBA expected, and as a result, mortgage rates, which were under five percent from mid-March to late May, now look like they’re headed for six percent.
What I find more disheartening is Brinkmann’s assessment on the Fannie Mae and Freddie Mac Home Affordable Refinance Program (HARP):
The second factor [leading to the March estimate] was the large volume of loans expected from HARP. While generally accepted estimates were that around 1.5 to 2 million borrowers might avail themselves of this program, with many more potentially eligible, to date only about 13,000 loans have been completed according to press reports. While the number of loans completed under this program is likely to increase, it is difficult to craft a scenario under which origination volumes would come anywhere close to reaching the numbers originally envisioned for the program, particularly under our higher rate environment.
Thirteen thousand loans? That’s less than a percent of the projection. What is the batting average of the other stimulus programs?
The MBA expects home prices to keep falling through 2009, and to level out in 2010. And they say home sales, both existing and new, will be down four percent or so to about 5.1 million.
