Yesterday we documented that the by now widely bashed Operation Twist has been a failure before it was even launched as confirmed by recent trends in mortgage refinancing, or more specifically, lack thereof. Today, none other than market (and alleged bar) veteran Art Cashin confirms precisely what we said: that the one goal of the Twist - to get mortgage rates lower and refinancing higher - is and will be a failure. Again, it is very unfortunate that what is by now glaringly obvious to all will never become clear to the Fed until after the economy has finally been pushed over the precipice.
From UBS' Art Cashin
Mortgage Input From A Guru (And A Friend) - On Tuesday, I had suggested in the Comments that I might be writing about the possibility that, as a substitute for QE3, the Fed might decide to target the 10 year Treasury, hoping to drive mortgage rates to super-historic lows that would ignite an explosion in refinancing and maybe inspire home buying.
To gain a solid background on both the relationship between 10 year yields and mortgage rates, and the current mortgage outlook, I turned to a friend and well-respected guru, Barry Habib. I asked Barry for a few points on the topic. What I got instead was a well thought-out analysis that Barry generously passed along. So, to avoid “reinventing the wheel”, here’s some of Barry’s thoughtful notes:
Frustrated by the slow economy and fearing a possible recession, both the Fed and the Administration have been exploring ways to stimulate the economy. The housing market has significantly underperformed, and acted as a drag on the overall economy. So finding a way to help housing could do a lot to improve overall conditions. But with previous stimulus having lackluster effects and there also being very little appetite for additional spending, there are difficulties in finding ways to accomplish this.
Enter “Operation Twist” – a plan once used in the early 1960’s where the Fed purchases 10-year Treasury Notes, which would – in theory – cause mortgage rates to drop, and therefore, cause an upswing in housing activity. And better still, the funds to purchase these would come for the Fed selling its holdings of shorter term maturities, so there would not be a need for additional money. Sounds interesting, but there are many flaws. If the plan is successful, short term yields would rise and longer term yields would fall, creating a flatter yield curve. The banking industry would see profits erode, and many businesses would see short term borrowing costs rise.
But the real problem with “Operation Twist” is, like other plans we have seen in recent years, it could still fail even if it works. Mortgage rates are already so low…really historically, ridiculously low. So why would making rates even lower solve the economy’s ills? It won’t, and it will not fix the housing market either. The problem is not that rates are too high, it is that individuals can’t take advantage of the low rates that are already on the market. Most people want to refinance but can’t. In many cases it’s because they owe more on their home than the acceptable appraised value. This actually causes many of them to become frustrated and to stop paying their mortgage, which exacerbates the problem. A better idea would be for the Fed to step in and take a second position so that individuals can refinance and lower their payments.
So “Operation Twist” would reduce the yield on the 10-year Note and likely even cause mortgage rates to decline a little. But it would do nothing to help the housing market or the economy. It would not stem the tide of foreclosures…it may even cause more frustrated homeowners to stop paying their mortgage as the only way out. The same individuals who refinanced these past few months would refinance again…saving a few more dollars, but not making any significant improvements in the economy.
Given Barry’s well-deserved reputation as a top mortgage maven, Mr. Bernanke may be working with wet tinder.
Mortgage rates are already at 50 year lows and there is no great rush to either buy or refinance. In fact, mortgage applications have actually been falling recently. Some feel that in addition to the problems Barry cited, there may also be a problem of perception.
Say you read that 30 year fixed mortgages are selling at 3.75%. You decide you want to lock that rock bottom rate in. But, when you go to the bank, you find the rate to you is, maybe, 4.25% (credit ratings, etc.). Not a big deal, but folks apparently see it as a large “percentage” difference in these low, low rates. Reports are that many folks just walk out. Warm up that helicopter, Ben!
Bonus: Here is today's trivia corner from Art:
Today's Question - I'm thinking of two numbers. When I add them I get a result which is the exact same result I get when I multiply them. What are these two numbers?