Interest-Rate Outlook: Low As Far as the Eye Can See
Residential servicers, brace yourselves: interest rates are likely to stay low for a long, long time. How low and for how long? That's a tough call...
Most of you already realize (without quite admitting it) that rates aren't going anywhere. Of course, the industry-myself included-was expecting some type of spike in mortgage rates when the Federal Reserve and Treasury stopped buying Fannie Mae and Freddie Mac MBS in late March. (The reigning estimate was a spike upward of 25 to 50 basis points.) But the mortgage "witching hour" came and went, and as I write this the yield on the 10-year Treasury is at 3.47% and looking quite benign. The lesson learned here is simple: maybe socialism isn't so bad after all.
Yes, it would appear that all is well in mortgageland, at least when it comes to rates. And we can thank Greece's debt crisis and the fear of a European debt contagion for the good news. As investors charge more for the risk of the "PIIGS," they realize that Uncle Sam's problems don't look so bad in comparison. Hence, investors are more willing than ever to snatch up U.S. Treasuries. The more they snatch, the lower rates will go. (Wall Street analysts like to call this phenomenon "flight to quality.")
(Then again, some bears might look at the PIIGS-Portugal, Ireland, Italy, Greece and Spain-and surmise that Uncle Sam has plenty to worry about as well. Our debt loads are massive and our elected officials have no inclination to throw politics aside and come up with a workable plan to control spending and raise taxes.)
For servicers, low rates have always been a mixed blessing. Refinancing booms wreak havoc on residential servicing portfolios as "run-off" throws a monkey wretch into all those fancy cash flow projections made by the math majors working in the basement accounting office. Hedging run-off can only go so far. The best way to block and tackle against a refi boom is for a servicer to hit the airwaves and local business section with ads about the wonders of refinancing. (Direct mail and phone calls work nicely, too.)
And let's face it: some servicers are really good at refinancing their own portfolios and stealing business from others (the old Countrywide franchise under Angelo Mozilo comes to mind as a firm that was quite good at the refi game) while others are not.
It should be noted that today's refi market is vastly different than those of the past. With home values down 25% to 50% in some once-red-hot markets, and the national delinquency rate at 10% (depending on your tool of measurement) refis are no longer an easy way to make money. It's all about "home equity," isn't it? A consumer either has it, or he doesn't. Complicating the whole "value" equation is the issue of HVCC, which has thrown the appraisal industry into disarray with lenders and Realtors alike complaining about the poor quality of work being done under the regulation. (But that's a column for another time.)
Also complicating the refi picture is the poor jobs market. A consumer-no matter how much equity he has-cannot refi without employment. The good news is that the economy, finally, is adding new jobs (especially manufacturing positions) at a healthy clip. Then again, manufacturing and the export of goods will be hurt if the PIIGS get sicker. Crazy world, isn't it? For now, sleep tight knowing that low rates are our friend. At least, I think they are.