The Federal Reserve's Operation Twist might not have an immediate impact on the mortgage industry, but its aim to keep interest rates down could have a longer-term effect on originations, said one veteran industry observer.
The program started on Sept. 21. The Mortgage Bankers Association's weekly application survey for the week ended Sept. 30 showed a 4.3% decline on a seasonally adjusted basis for the group's overall index and a 5.2% nonadjusted decline for its weekly refinance application index.
Potential borrowers are “seemingly unimpressed by the lowest (by any measure) mortgage rates since the 1940s,” said Mike Fratantoni, MBA's vice president of research and economics.
But Jonathan Corr, chief strategy officer, at Ellie Mae, Pleasanton, Calif., said anything that is keeping the rates on the 10-year Treasury down is good for the market. However, he did note spreads between the 10-year Treasury and the 30-year fixed-rate mortgage at press time last month had been wider than normal. Typically the spread is 150 basis points, and at the time of this writing it was in the area of 200 bps.
Contrary to what the MBA indices show, Corr said he was hearing anecdotally that September was “a very large volume month” for originators and that October was looking to be “quite up” as well.
The pressure that has been keeping the 10-year Treasury rates down will help to sustain some level of refinance activity, well above what the industry had expected six months ago.
He noted consensus projections for total volume for 2011 have gone up to nearly $1.2 trillion from the area of $1 trillion earlier this year. This is mostly refis, as the purchase market is weak right now.
The strong refi market should carry over into the first quarter of next year. But Corr says the industry should not see this as a panacea.
“The issue right now is still qualification (of the borrower), but if rates stay where they are or they dip a little bit more, it could get a number of folks that have refied in the past refying again.
“That doesn't necessarily fix the problem of people that can't refi right now, but it does maintain some level of mortgage activity,” he commented.
As for the purchase side, even though values are down and rates are so low that people would be coming back into the market—Corr noted Operation Twist should keep the rates down on the 10-year into 2013—other well-known issues remain with the American economy that make them nervous.
Once those clear up, it is likely to release the pent-up demand in the purchase market.
He pointed out that industry economists are predicting growth on the purchase side in 2012 which should continue into 2013 and possibly beyond.
Without a solid view of where our economy is headed, consumers are likely to refi but not as apt to buy a home, he said. “That being said, once there is a little more clarity,” such as agreement in the federal government on a jobs bill, that clarity will bring buyers back.
Operation Twist will help to keep rates low enough for some of those clarifying events to take place.
However, investors worried about certain world economic events could flee to the 10-year Treasury, driving rates down significantly, which Corr pointed out is counter to signs for a healing of the economy.
As for the wider spreads between the 10-year Treasury and the 30-year FRM, he thinks that could be a result of industry capacity issues.
Many lenders cut back on origination staff and are afraid if they cut rates they could end up attracting more business than they can handle.
