Printer Friendly

Boardroom view.


When you have more than one economist in a room there is bound to be some disagreement on where the market's going. But at the recent National Secondary Market Conference in New York there were three economists assembled to scope out the outlook and at least two agreed that mortgage rates have probably hit their peak for the year and are headed slightly lower by year-end.

Fannie Mae's Chief Economist David Berson told the conference that 30-year fixed-rate mortgages may be in the range of 10 1/4 to 10 1/8 by the end of this year. That would be down from a current level of roughly 10.4 percent. He blamed a market overaction to bad inflation numbers for the jump up in rates during the first quarter. But he said the inflation numbers early in the year overstated the actual core inflation rate, which he said has been tracking steady on 4.5 percent for the past two years and will continue at that level. He concluded that "the first quarter upward push in rates is likely to be it for the year."

Berson sees the second half of this year producing slower economic activity but he says a recession is unlikely "any time in the next six months or so." His recession outlook is shaped by a reading of the political crystal ball. He says there are two important dates that will affect monetary policy. The first is Spring 1991, which is the date by which Alan Greenspan will or will not be reappointed as Fed chairman. Berson says Greenspan "probably wants to be reappointed" so he "probably won't want to tighten if he can avoid it." The second important moment in attempting to read the tea leaves of near-term monetary policy is the Fall 1992 election campaign for President Bush. Berson says the "pressure will be on the Fed not to tighten and to try to avoid recession." Fannie Mae's economist concluded that this political climate makes him think "it's unlikely we'll have a recession before the 1992 election."

But getting back to this year, Berson sees total mortgage originations coming in at about $350-355 billion. He said it would take a sharp drop in rates to spark another great origination year and he doesn't see that happening until "we get to the next recession." He said there just is "no pent-up demand" that is left to be absorbed except for a strata of potential buyers who cannot qualify unless rates were to drop dramatically.

The other economist on the panel who concurred with Berson's outlook for rates was Joseph Hu, senior vice president with Nomura Securities International, Inc. Hu said that Nomura's forecast is "modestly bullish" on interest rates but "very bearish" on housing. He predicted that the Treasury's long bond will be "approaching 8 percent by the end of the year." The primary reason for his firm's downbeat outlook for housing is what's in the cards for household formations this decade. Hu said that in the eighties household formations went at a pace of 1.4 million annually. That rate is going to decline to an average 1.2 million a year in the nineties. That translates, according to Hu, to an average of 200,000 fewer starts per year in this decade than in the decade just passed. Hu told the secondary market conference audience that those demographics will set the tone for housing in the future.

Hu was slightly less rosy than Fannie Mae's Berson in his forecast for this year's origination volume. Nomura's forecast calls for $340 billion in total originations in 1990. That's a 10 percent drop from 1989, Hu said. On the issue of an ARM comeback, Hu said his firm is forecasting that ARMs "will be more popular this year than in 1989." He predicted that the ARM to fixed-rate mortgage spread will stay wide and that fixed-rate mortgages will "only touch 10 percent by the end of the year."

Hu stuck by his firm's aggressive forecast for tight spreads on mortgage-backed securities versus comparable Treasuries. Nomura has been consistently calling for a tightening of those spreads and Hu reiterated the forecast for a further narrowing of MBS yield spreads to within 100 basis points of Treasury yields. The economist said strong demand for MBSs has allowed those spreads to narrow at the same time that thrifts are unloading mortgage-backed securities in a big way. Hu said that during the last seven months thrifts together were net sellers of $45 billion in MBS. That amounts to roughly $6.5 billion a month that the market handily absorbed from just thrift sellers. Hu noted that during that timeframe the market continued to rally and yield spread of MBS to Treasuries narrowed from 160 to 140 basis points.

Hu said the RTC's expected sales of what he estimated to be perhaps $27 billion in mortgage-backed securities in addition to its whole loans that can be securitized has not caused Nomura to retreat from its forecast that the spread will close to 100 basis points by year-end. Hu also responded to a well-publicized remark made by "his mentor" Lew Ranieri, the former Salomon Brothers guru of MBS, suggesting that the Japanese demand for MBS investments was modest in the overall scheme of things. Hu differed with Ranieri who had remarked to an audience at a Fannie Mae institutional investor gathering in New York that Japanese MBS demand amounted to "a pimple on an elephant's back." Hu said the actual numbers show that Japanese demand is substantial--those investors purchased between $5-8 billion in MBS last year alone.

Rounding out the trio of economists attempting to shed some light on where the market was going was Freddie Mac's Chief Economist Robert Van Order. He focused on policy issues that are shaping the outlook for the economy. He said that in general Freddie Mac's forecast is for stability in the financial markets, but the lawmakers and regulators in Washington are the ones who have their hands on the controls that could produce some better or worse economic performance.

Van Order said among the issues of importance right now are the talks about an accord to hack away at the big federal deficits. He said that deficits do not cause recession or depression. But they do cause rates to be higher and they cause capital formation, productivity and savings to be a little worse than they would be absent big deficits. Van Order said "it would be a good thing to raise taxes to lower deficits and raise productivity."

On the thrift industry, the Freddie Mac economist said that current developments represent "more or less the end of a system of having dedicated lenders in the mortgage markets." Van Order said that with the passage of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) the value of a thrift charter has "gone to zero." He predicted that the market will see a "lot of consolidation" and ultimately the sum total of all banks and thrifts in the U.S. will be "something like 1,000 institutions."

On the rebound of the ARM market, Van Order estimated that adjustable-rate mortgages could reach perhaps 25 percent of the market. He estate prices in several markets and the demographically driven downturn in demand in the years ahead, "there is reason to worry about low downpayment loans."
COPYRIGHT 1990 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1990 Gale, Cengage Learning. All rights reserved.

Article Details
Printer friendly Cite/link Email Feedback
Title Annotation:mortgage loan rates
Author:Hewitt, Janet Reilley
Publication:Mortgage Banking
Article Type:editorial
Date:Jun 1, 1990
Previous Article:Servicing: a real cliff-hanger.
Next Article:Pretty packages: don't judge the value of a servicing package by surface appearances. All that glitters is not 14-karat.

Related Articles
Boardroom view.
Boardroom view.
Boardroom view.
Boardroom view.
Fine-tuning Price Waterhouse's model.
Raines bullish on housing: Fannie Mae CEO unconcerned about potential bubble. (Newsmakers).
Republic Mortgage Home Loans selects LION's tech suite.
Multifamily mortgage lender offers 40-year product.

Terms of use | Copyright © 2017 Farlex, Inc. | Feedback | For webmasters