An article in Barron's is predicting that title insurance business could be up by as much as 50% in 2009, mainly due to falling interest rates. That would certainly be very good news for all of us. However, I am skeptical of the prognostication. I do not think that falling mortgage rates will do much for our industry, and I do not expect things to get much better until the end of next year. Maybe I'm a glass-half-empty kind of guy, but, I'd rather not get my hopes up and be pleasantly surprised if I am wrong. Now let me explain why I think Barron's got this one wrong.
The average 30-year fixed rate now stands at 5.5%, down a full percentage point from five weeks ago. In the last week of November, mortgage applications jumped 112% from the prior week, according to data from the Mortgage Bankers Association. Refinancing activity rose at an even greater clip.
Basically, the good news is predicated on mortgage applications - not approvals. Applications certainly create more work for title professionals, but if the loan doesn't close it doesn't generate any revenue. The problem seems to be that banks still haven't made the influx of cash from the bailout available to borrowers, and there doesn't seem to be any mechanism in place to ensure that it happens.
[House Financial Services Committee chairman Barney] Frank said Monday that he was concerned about how Treasury had no plans to monitor whether the banks receiving the capital infusions were using the capital to hike lending. The statute approving the $700 billion fund requires Treasury to provide details about how banks are using their government capital.
"What troubles me is Treasury was asked by GAO, 'how much lending is going on?' and Treasury seemed to be saying we're not going to find out."
One of the problems that led to the mortgage crisis was irresponsible lending. On one hand, Congress is now telling the banks that they have to start lending money again. On the other, they don't want the banks to lend money to those who can't pay it back. So the question is, how do you lend more money when fewer people qualify for loans?
And, certainly, fewer people qualify for mortgage financing. What do you need to qualify for a mortgage: savings for a downpayment, assets with equity for collateral, a job with a steady income to make the payments, and good credit. Who has any of those... let alone all of them?
BusinessWeek cited a survey that indicated that people are saving less because of the economic downturn. That means coming up with a downpayment is more difficult for most Americans. To make matters worse, those who had savings invested in the market have probably lost a large portion of it. The Dow Jones Industrial Average has lost about 34% this year.
[P]rices continued to fall throughout 2008, with the bottom shimmering out of reach like a mirage in the desert. The National Association of Realtors, which tracks sales throughout the U.S.,
expects the national median home price for existing single-family homes to decline by 8% in 2008, on top of a 1.8% drop in 2007. That would be only the second time since the NAR began keeping records in 1968 that prices fell two years in a row. Our data supplier, Fiserv Lending Solutions, tracks 110 metro areas, where price changes have been even more volatile. Fiserv predicts a more dramatic decline of 15% in home prices for 2008 on top of 2007's 9% drop.
And, because downpayments were considered unnecessary, many people owe more than their home is now worth. Federal Housing Finance Agency Director
James Lockhart said that
some homeowners who need to refinance owe more than their property is worth and wouldn’t qualify for the necessary mortgage insurance.
The number of people continuing to collect unemployment rose to 4,429,000 in the week ended Nov. 29, the most recent week available, which was also a 26-year high. The measure was an increase of 338,000 from the preceding week's revised level of 4,091,000.
The economy is officially in a recession. So far this year, we have lost 1.9 million jobs.
Lastly, credit problems are mounting for many Americans. Although interest rates plunge, the credit reporting system prevents many borrowers from seizing opportunities.
When the Federal Reserve announced its plan to invest up to $600 billion in mortgage backed securities owned by Fannie Mae, Freddie Mac and Ginnie Mae, mortgage interest rates dropped to their lowest point since February 2008. However, few borrowers may actually qualify for these savings. In addition to tighter lending standards and declining home values, borrowers are also being plagued by the nation's credit reporting system.
The mortgage crisis has also caused a large barrier to refinancing. The Mortgage Banker's Association recently reported some alarming statistics.
- 1 in 10 home loans is in delinquency, 1 in 20 is seriously delinquent, and 1 in 33 is in foreclosure.
- At the end of September, the nation experienced foreclosures at an annual rate of 2.4 million. We estimate that those foreclosures alone will cause an additional 41 million American families who happen to live near these properties to see their own home values plummet by an additional $352 billion.
Sure... interest rates may be dropping. But, that doesn't help if you don't have a job, you don't have any equity, or you are currently in foreclosure. The real problem is the economy, not the cost of borrowing. Even people who still qualify may be waiting due to the uncertainty of their jobs or investments.
For all of these reasons, I do not think that lower interest rates can bail us out of our current situation. Conventional wisdom may tell us that lowering interest rates will spur more borrowing. But, there is nothing conventional about this crisis.
Robert A. Franco
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