Record Low Mortgage Rates Are No Magic Pill

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by: Markos Kaminis

Recent European fears helped mortgage rates to their lowest mark of 2011, according to the latest Weekly Applications Survey from the Mortgage Bankers Association. Yet, in the same period, mortgage application activity dropped and also marked lows against the prior year. Yet, it’s the same old story; despite what propaganda pushers have said about housing this week, you just can’t put lipstick on this pig and make me kiss it.

According to Freddie Mac’s weekly survey just reported, mortgage rates moved even lower in the current period, to 3.91% on average. By now, it should be clear that broader economic recovery will be necessary to restore the real estate market, along with improved consumer confidence and resolved global uncertainty. The road back, therefore, will be long.

Looking at housing, mortgage rates were at yearly lows across the spectrum of loan types last week. The average contracted rate on FHA sponsored fixed rate 30-year mortgage loans dropped to 3.93%, from 3.94% the week before. Even as mortgage rates dipped to their lows for the year, the MBA reported that its index measuring mortgage application activity dropped by 2.6% week-to-week in the seasonally adjusted period ending December 16. It was down 2.8% before adjustment for the paralyzing holidays.

Furthermore, despite all the hoopla around housing data this week, the MBA’s Purchase Index, which measures applications tied to the purchase of a home, fell by 7.5%. Even more telling, the Purchase Index was 6.9% shorter than the same week from one year ago. This information is not consistent with the argument made by housing cheerleaders these days.

It should be clear by now that without real economic improvement there will be little benefit from these remarkably low interest rates. Just look at refinancing activities for example. The benefit of low rates seems to be exhausted in the refi market. The Refinance Index decreased 1.6% last week despite the level of interest rates.

Yet, refinancing activity represented the year’s highest percentage of total activity, at 80.7% of total applications, versus 79.7% the week before. But when this occurs because of a sharper decline in purchase activity, it’s not a sign of economic value added. We will give the holidays their due though, and look towards January for more telling information here. But there’s a limited amount of powder in the belt of the Federal Reserve, and that should be evident by now.

That said, a great deal of loans remain underwater, the result of the housing frenzy toward the end of the bubble. This makes refinancing difficult if not unwise for some. Mitigation efforts are underway on that front though. On December 16, Bank of America (NYSE:BAC) affirmed its support for the extension of the Home Affordable Refinance Program. Vijay Lala, Bank of America’s mortgage product executive managing HARP, said, “We believe this an important, well constructed program that will help homeowners who have remained current on their mortgage payments despite declining property values.” These kinds of measures add value.

The regulatory environment and the operating fluidity of the home finance market is much different now than the good ole days, and for good reason. The evidence is clear. Stories of sanctions and settlements littered the wires of the big banks over the past few weeks. The likes of BofA, E-Trade (NASDAQ:ETFC), Barclays (NYSE:BCS), JPMorgan Chase (NYSE:JPM), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC) and others have come to settlement agreements. The environment is forever changed, and so the ladder to recovery is stacked more steeply.

Meanwhile, statistically significant unemployment and underemployment, consumer discomfort and investor uncertainty weigh on the economy. Furthermore, the shifting of debt from private sector to public threatens once solid sovereigns. Important economies in Europe labor under the burden, and threaten a globally entangled marketplace. Thus, dear friends, the road back will be long and record low borrowing rates will offer no magic pill.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.