Visualizing The Impotence Of Bernanke's Wealth Transmission Channel

Tyler Durden's picture

We have discussed the apparent (though anecdotal) divergence between refinancing rates and interest rates a number of times. Furthermore, we have exclaimed at the significant drop in refi rates since QE3 (following the initial spike) noting the unintended consequence that US households are increasingly realizing that rates will never be allowed to rise and so every rate rise is not a signal to rush into refinancing but instead a signal to pause for lower rates. The chart below is somewhat surprising in its clarity as Goldman Sachs note that despite record low mortgage rates, borrowers are refinancing at a rate of just 20-30% per year - far lower than prepayment speeds we would expect. The great majority of 'in the money' mortgages are not being refinanced and while we suggest this is the unintended Bernanke conditioning, Goldman also opines that industry capacity and underwriting standards on the supply side; and consumer awareness and household behavior on the demand side.


Via Goldman Sachs:

In normal times, borrowers with high credit quality would have refinanced as soon as mortgage interest rates declined. The chart above shows that this is largely the case before 2009 for Fannie Mae 30-year fixed rate mortgages. The percent of loans that are “in-the-money” for refinancing (defined as the borrower’s mortgage rate being at least 100bps above the market rate) is highly correlated with the subsequent prepayment speeds. However, this relationship broke down in 2008. Nearly 80% of outstanding Fannie Mae 30-year fixed rate mortgages are currently in-the-money for refinancing, but the actual prepayment speeds are much lower than what the historical experience would predict.


Why aren’t more borrowers, especially those with stellar credit quality, taking advantage of today’s low mortgage interest rates and refinancing?


On the supply side, one obvious suspect is the fact that industry origination capacity is constrained. The capacity constraints are a symptom of both substantial industry contraction as well as uncertainties related to reps and warranties exposure, the future of the regulatory landscape, and the outlook for housing and economy. Nevertheless, capacity constraints imply tight lending standards and less refinancing originations. This is consistent with our finding that borrowers with the highest FICO and lowest LTV are prepaying relatively faster today. Due to the tightness of industry constraints, today’s mortgage lenders are doing less advertising, marketing, and outreaching to encourage refinancing. This is consistent with our finding that the baseline prepayment speeds of all mortgages are lower than it was in 2003.

On the demand side, we are harder pressed to think of reasons why borrowers, especially those with good credit and sufficient home equity, are not refinancing. One possibility is that many borrowers are not aware of how much the market rate has declined. Another possibility is that borrowers may think that lending standards are so tight today that they would be denied of refinancing, or that the process would be too much an ordeal. Lastly, household behavior such as inertia and procrastination that have been documented in the academic literature may be at play in the mortgage market, especially with industry solicitations having dropped off so substantially.


It would seem - once again - that the so-called raison d'etre for QE3 is entirely broken, whether easing to ZIRP of LSAP, Bernanke's wealth-building transmission channel via housing is entirely broken... and critically it is the banks once again that both benefit from the front-running capability as well as becoming the plug in the pipeline...

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Joebloinvestor's picture

The real reason the refinancing's are not as expected are because the FUCKING BANKS MAKE IT IMPOSSIBLE.

I had a line of credit with CHASE on my home which I own.

I told the bank to FUCK OFF when they demanded to see records of IRA withdrawals to re-qualify.

I told them they can't do shit about an IRA or 401K (ask OJ bout that) and that proof of net worth should have been enough.


Careless Whisper's picture

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jcaz's picture

...And that doesn't get fixed until 3/4's the banks in this country are off the Fed's teat and out of biz......

No big mystery when there is the "real" recovery in real estate- it's when prices go UP, even when interest rates go UP;

Until then, it's all just bullshit......

ilion's picture

I wonder what Bernanke thinks when he goes to sleep every night. Is he happy to have fucked up the largest economy in the world?

Joebloinvestor's picture

Ben is still wondering about that statue that the EU is gonna erect in his honor for those secret loans he should be in jail for, the cocksucker.

Karlus's picture

Ben actually has not idea what he is doing and prob stresses about being found out to be a fraud. He cant run off to Ivy-land like Roemer and others have.

Bam getting in for four more will just make it worse when the currency crisis hits. Bennie prob knows that the brake lines are cut and he is headed downhill quick...

vast-dom's picture

let's simplify this further: banks are no longer in the banking business. they get free money from the fed, don't need savings since there is no multiplier function any longer, don't give a fuck about clients. the only product, other than their gambling activities, that banks want to peddle is credit card debt -- this is their new mulitplier bc the discrepancy between how much free zirp money they take from the fed vs how much they give savers vs how much home interest is vs how much credit card interest is is fucking staggering. the banks only want to rape you on the most staggering multiple possible. that's the easy money world we live in today: easy for banks, impossibly difficult for their average "customer".

Quinvarius's picture

QE3 is in place only as a bank bailout.  It is not designed to help consumers any more than QE1, twist, or ZIRP.  It will never stop until the banks are solvent, and that will never happen. 

sablya's picture

You'r missing the obvious point.  I don't think the raison d'être for QE3 is to reduce mortgage rates but rather to take those MBS off the market and out of banks' portfolios forcing them to loan to the people who want to put the money to work.  The riskiest thing the banks can do in an inflationary environment is to hold cash.  It has to do with the velocity of money which is as low as it can go and only has one way to go.  With M2V so low and the rate of change of M2V negative, only a small influence is needed to produce a dramatic effect - the equation is basic and its derivative straight-forward.  Changing the sign of d(M2V)/dt must lead to increased GDP and inflation.  The only serious question that remains is how much inflation and how much GDP growth.

CrashisOptimistic's picture

You're almost right, but not quite.

The reason is indeed to get the MBS out of the bank portfolios, but that has nothing to do with stimulating lending.

The absence of mark-to-market means those banks are incorrectly listed as solvent.  If those MBS were properly valued, the bank balance sheets would crash.  The Fed is addressing that, and only that.

The core concept is the system is not saved.  It's still a single tiny event away from total disintegration.  The Fed is pursuing the process of trying to make the required size of that event larger.

Most of all, they won't admit it.

sablya's picture

I'm sure the banks would be happy to sell their non-performing loans to the Fed but that still leaves them with nothing reasonable to do with cash in an inflationary environment.  Why not take the Fed's positive statements at their face value and assume they are telling the truth (if not the whole truth) in what they say?  It's not naive to suppose that the Fed's plan actually involves an attempt at fulfilling their dual mandate, is it??  Unemcumbering the balance sheets of the banks and removing their highest returning assets will force banks to lend.  As I said, given such an enormous M2, even a small change to d(M2V)/dt can produce huge effects in inflation and GDP growth.

Dre4dwolf's picture

Because QE1 helped real people.... lol o wait maybe QE2 helped real people... NO? well QE3? what is that they say? about doing the same thing over and over again and expecting a different outcome?





Listen, the banks dont want to help consumers, or "debtors" because as soon as the "problem" is solved it puts an end to the banker bailout rollercoaster ride.

They dont want the bailouts to end, because they are taking that money and stealing EVERYTHING for free, and at the end they will own everything at which point they either 

a) Get bored and leave the company with billions hidden off-shore someplace in money that "vaporized"

b) Let the game end and have everything come crashing down just for fun

c) Rent people their own property that was unlawfully stollen from them in the first place.


My guess is they are thinking about going with C, but A and B are both very tempting for them.


If it was me, I would go with b) because, some people just wana watch the world burn.

tooriskytoinvest's picture

Walmart Workers to Strike on Black Friday


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Dre4dwolf's picture

Walmart actually cant have a black friday sale, they try it every year, but every year the same thing happens, 20 400 LB rhinos clog the door and they have to call a crane + ems to clear the blockage.

unununium's picture

Supermarkets put the old, about-to-expire meat in the front, and sell you the new stuff only when it's gone.

Those with a lot of questionable meat, or even a zero-cost factory capable of emitting rancid meat ad infinitum, naturally want to trade it for as much merchadise of real value before it expires.

In case you need help

Rancid meat = USD
Merchandise of real value = liens on real property; future obligations of taxpayers

The marginal effectiveness of new money and new debt are now close to or less than zero. 

Bad money crowds out good. [Gresham]


Orly's picture

The banks are making it very difficult to refinance a loan now.  I think this is because they believe that rates are going to rise eventually and there will be a sudden rush to re-fi at a higher rate, when, suddenly and miraculously, all these burdens will be removed.

Also, according to what I have heard on the radio (KSEV700 Houston, street talk live show with Lance Roberts...), despite the fact that 10 year Treasury rates have come down significantly, the major mortgage initiators like Wells-Fargo and JPMChase will not allow the re-fi rate to drop below ~3.5%.  They are getting to play both ends of the stick in this case by getting free money from the Fed and then telling refinancers that their loan is never going to go below 3.5%, even if and when the 1-year treasury note yield is below 1%!

Once again, the banks are having their way with us and there is no one there to watch our backs.  It's just disgraceful.  The Fed and the US government let them get away with it, so it is obvious that the cards are stacked against everyone with a pulse in this country.



moneybots's picture

I don't trust the system any more.  We have had mortage fraud and forclosure fraud in this country.  The bank holding my mortgage sent me an advertisement that under the latest government gimmick, i qualified for a one time rate reduction.  They then left a message on my answering macnine.  Then they sent me a different adverisement, offering to re-fi me for 10 years.



On the surface, it sounds fine that a re-fi can lower my monthly payment or allow me to pay down faster, but i now have to consider refinancing to be another banking fraud, which has not come to light yet.



Centurion9.41's picture

With rates ~3.25%, the shadow inventory and economic weakness simply create a situation where re-ifs lose their economic value - for homes at or near the 20% no PMI boundry.

The only reason rates are lowered is due to economic weakness. Which means, aside from some "locations", housing prices are stagnant to lower.

There is not enough room for rates to drop to make another re-if a smart move. If prices are stagnant or lower, then the owner must bring cash to the table to re-fi the prior 20% equity home.

Why throw cash after a decreciating asset with no real sign of appreciation when the cash flow saved by doing so is insignificant?

buzzsaw99's picture

i think many people who pay their mortgages are tired of paying origination fees every few years and starting over. they will just pay it off early instead of refinancing to a slightly lower rate again.

pfairley's picture

refi fees. yes. good point. plus some people want to sell and move so why refi now. I wonder how many people realize interest is front loaded in a new mortgage you would pay more in interest with less pay down in principal on a new mortgage... for an effective HIGHER interest rate over several years unless your rate is MUCH higher now.

Archon7's picture

The reason rates are so low, is because despite all the monopoly money the Fed gave the banks to balance their books, they still carry all those bad assets from 2008 on their books, and they still need cash.  They offer low interest rates, often with 20% down requirements, because they want the homeowners to give up their cash up-front in exchange for long-term reductions in mortgage payments.  The homeowners would rather keep their cash for the short-term than give it to the banks for the long-term.  The last time I looked at a refinance, my decision was basically driven by the logic that I would rather hold on to my 20% cash downpayment than save $200 a month on my mortgage for the next 12 years.  12 years is a long time in an economy like this, and a lot can happen, especially if all those homeowners holding on to their cash all decided at once that they need to start spending it on food, and gas, and guns...

ekm's picture

I don't know if you guys remember, but Hank Paulson informed a lot of people in advance that Lehman would not be bailed out. The market cleaned up.

Same thing with MFG, but the market did NOT clean up.


There is only one thing left:

When they have next meeting as to who they are NOT going to bail out, will it be BAC or will it be MS?


ViewfromUndertheBridge's picture

Refi fees, distrust, inertia plus the banks will perfect title and the MERS/REMICS FU possibility is lost to the refinanced homeowner.

Who owns the note? Nice to have it as a Plan B if needed.

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