Well-known banking analyst Dick Bove sounded alarm bells earlier this week after he warned of a mortgage crisis by winter. Yes, this winter, as in a few months from now.
And by crisis, he means the 30-year fixed mortgage may cease to exist. Why? Because the Federal Reserve is expected to halt its purchases of mortgage-backed securities, which means it could get difficult to unload the underlying home loans on the secondary market.
Last month, the Fed said it would add to its holdings of agency MBS at a pace of just $10 billion per month, down from the previous pace of $15 billion per month.
At one time not long ago, the Fed was buying as much as $40 billion in Fannie/Freddie-backed MBS via their QE3 program, an initiative designed to push down mortgage rates and reduce borrowing costs.
But Rates Are Better Today
The ironic part is that mortgage rates have actually fallen as the Fed has tapered purchases, due in part to other issues that dictate the direction of interest rates, along with the fact that mortgage origination volume has plummeted (they don’t need to buy as much).
But if there’s no willing buyer of long-term fixed mortgages (that happen to have really low rates that are unattractive to investors), banks and lenders may be forced to raise rates or offer short-term products instead, like adjustable-rate mortgages.
Bove claims that banks have boosted their purchases of mortgages this year, but aren’t willing to risk their money on 30-year fixed loans.
Instead, a lot of the non-QM stuff that banks are keeping in their portfolios consists of ARMs, which are generally only fixed for a few months or up to five years.
The situation is further complicated because Fannie Mae and Freddie Mac are expected to be shuttered and replaced with a new securitization system called the Federal Mortgage Insurance Corporation (FMIC).
As this all goes down, Bove expects less liquidity in the mortgage market, which should equate to higher monthly payments and lower home prices.
Is He Right or Just Being Dramatic?
I would argue that Bove’s fear mongering is a bit dubious seeing that mortgage rates have fallen even as major tapering has taken place.
Additionally, I don’t think anyone expects Fannie Mae and Freddie Mac to disappear overnight.
Any move to replace the duo will take a lot of time, many years in fact, and should be a deliberately slow process in order to not rile the markets.
There’s also a lot of money behind Fannie and Freddie (hedge funds and other shareholders), and Bove seems to be protecting these interests by making us all worry about the 30-year fixed going bye bye.
At the same time, you could easily make the argument to lock in a 30-year fixed at today’s low rates so you won’t have to worry about what happens in the mortgage world until the year 2045.
Sure, you can go with an ARM today and save money on your mortgage every month, and refinance to a fixed-rate loan in the future if you’re truly worried rates will skyrocket. Or that the 30-year will become extinct.
But there’s never a guarantee you’ll get approved for a mortgage in the future. Things change, you might lose your job or mess up your credit. Or banks may tighten underwriting guidelines.
So going with the guarantee today that’s in place for the next 30 years is a pretty good deal. It’s even sweeter if you really like your home and plan to stay in it until you grow old.
Throw in inflation and the monthly payment will eventually be really attractive, regardless of whether a crisis comes or not.
More importantly, we need home prices to stay the course or we could actually have a real crisis on our hands.
There are a ton of homeowners that remain underwater or just barely above water, and they’re probably only sticking around because there’s hope of higher home prices in the near future.
Personally, I’d be more worried about inflated home prices and resetting HELOCs than the future of the 30-year fixed. With the National Association of Realtors’ lobby in place, I doubt it’ll ever disappear. But it may never be this cheap again.