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Mortgage Stimulus Can't Beat the Housing Slide

Applications for residential mortgages fell sharply at the end of June, down 19 percent week-to-week, reports the Mortgage Bankers Association. In the mid-five percent range, interest rates aren't at the bottom, but they're still very low, so that alone shouldn't be the problem.

Most of the weakness was in applications for refinancings, down 30 percent to the level reached after the Lehman Brothers bankruptcy last fall. Rates have been up a bit in the last few months, but settled back to 5.3 percent last week. Refinancings were also weak despite federal programs to expand the loan-to-value ratios allowed in government agency-insured mortgages.

And those programs are becoming more generous, perhaps because they have spurred little activity. The Federal Housing Finance Agency (FHFA) announced on July 1 that a program for refinancing government-guaranteed mortgages, the Home Affordable Refinancing Program, or HARP, would be expanded, allowing 125% of current home value to be refinanced, up from 105%.

"The higher LTV refinancings will allow more homeowners to strengthen their finances by taking advantage of lower mortgage rates. [Fannie Mae and Freddie Mac] are also incenting these borrowers to combine a lower mortgage rate with a faster amortization schedule, which will enable them to get 'above water' on their mortgages more quickly. This program could assist many homeowners who otherwise would have difficulty refinancing due to declining house prices," FHFA Director James Lockhart said.
But Bloomberg reports that the lack of interest is due to flaws in the design of the HARP program:
Paul Miller, an analyst with FBR Capital Markets in Arlington, Virginia, said mortgage brokers have told him that many aren't sending borrowers through the program because it's cumbersome and the loan applications "still have a lot of bells and whistles, which makes them difficult to do."

"I don't think it's going to have much of an impact because you still don't have enough qualified borrowers," Miller said, referring to today's announcement. "It will help on the margin, but the issues with Obama's plans is that they all focus on affordability and not principal writedowns and at some point they're going to have to address" that, he said.

As if we needed a reminder, Federal Reserve Bank of San Francisco President Janet Yellen today stated that the weakness in the economy may require the Fed to keep short-term interest rates near zero for several years.

But consider Ms. Yellen's comments in view of this graph comparing U.S. housing starts and 30-year fixed mortgage rates over 40 years. (Click on the graph to see a larger version.)

Two points jump out at me. First is that the annual rate of housing starts fell to about 400,000 in the recessions of 1970, 1975, the 1980s, and today. And that a sharp rebound was a part of every recovery (to a lesser extent, though, in 2003).

The second point is how low mortgage rates are compared to their levels of the last 40 years. Can the housing environment, and thus the economy, turn around simply by making rates lower? That doesn't seem to be happening.

And if a general recovery instead requires higher employment, how can we achieve that without the usual rapid turn in housing?

In this video, I discuss the conundrum with MoneyWatch editor-in-chief Eric Schurenberg: