Wednesday, September 22, 2010

It is all about perception.



Yesterday the majority of investors analyzing the Federal Reserve's post-meeting policy statement came to the collective conclusion the text and tone of the document indicated the day is closer that the nation's central bank will launch a new "quantitative easing" campaign featuring the aggressive open-market purchases of Treasury securities. The "quantitative easing" campaign, should it become a reality, will be made in an all-out effort to bolster the economy. Based solely on what they perceived the Fed's post-meeting statement to say -- euphoria swept the credit markets yesterday afternoon helping to propel mortgage note rates back down toward levels last seen just after the Labor Day Holiday break.



I don't want to rain on anybody's parade -- but there are a couple of points related to yesterday's Fed statement I think prudent pipeline risk managers should be aware of. (1) The Fed has made no promise to buy even one more dollar's worth of Treasury debt. They did imply that a weak economy could lead to further direct purchases of Treasury debt obligations if needed to support the economic recovery and to spur an uptick in the pace of inflation over time. (2) If the Fed does indeed initiate a new "quantitative endeavor" and is successful in achieving its objectives -- one of the residual credit market effects will be a notable increase in the upward pressure on mortgage note rates.



I also think it is worth noting that just prior to the conclusion of yesterday's Federal Open Market Committee meeting, the National Bureau of Economic Research, the largest economic research organization in the United States and the entity tasked with determining the economic cycles of recession and expansion, announced that according to their data, the worst recession since the 1930's ended in June 2009.




Look for strong debate to develop over the next couple of weeks focused on just how effective further direct Fed debt purchases will likely be at this juncture in the economic cycle. One of the center-point questions of the upcoming debate will be, "Is the benefit of expanding the Fed's $1 trillion dollar existing investment portfolio really worth the erosion of global confidence in the credit worthiness of the United States - not to mention the domestic inflation pressures another round of unrestrained dollar printing could ignite?" I don't pretend to have the answer to these questions -- but I certainly understand the stakes are high in terms of what, if anything, the Fed actually chooses to do in terms of providing further "accommodations" for economic growth. I sense this one of those situations where you have to be careful what you wish for.



Speaking of interest rates and mortgage loan demand - earlier this morning the Mortgage Bankers of America released their mortgage application index for the week ended September 18th. The index showed that even though mortgage interest rates matched their lowest level in 20-years during the reporting period - home loan demand fell for the third consecutive week. The aggregate demand for both purchase and refinance applications dropped by 1.4% with purchase demand down 3.3% and refinance requests off 0.9%. The clear story coming from the housing sector is that lower mortgage interest rates don't stimulate activity - the housing sector is driven by job creation. Until/unless the story improves significant in the labor sector - dramatically lower mortgage interest rates are not likely going to make a notable difference in home loan demand.