Yesterday I wrote that the way economic actors -- investors, consumers, employers, lenders -- are currently interpreting the economy is in my view a big part of "the story," that is, a significant and necessary piece of the puzzle in explaining current events. As or more important, by way of comparison, than so-called fundamentals like interest rates, the money supply, or government stimulus. David Brooks has an interesting column in today's NY Times in which he makes a similar point. I don't love his article, but it tends in the right direction.
An article in yesterday's WSJ provides us with an example of what I mean. Headlined 'Rates Fall, but Refinancings Are Limited,' it reports that while interest rates are falling -- which theoreticaly would stimulate lending and borrowing -- very few potential borrowers are being deemed credit-worthy by lenders.
Interest rates on fixed-rate mortgage loans for prime borrowers have fallen to below 5%, the lowest level since the 1950s, triggering a wave of mortgage-loan inquiries from borrowers eager to refinance. But lenders and mortgage companies say that as many as half of the people who want to refinance can't meet the credit hurdles and won't get approved.
The average interest rate on new 30-year fixed-rate mortgages in the week ended Jan. 9 was 4.89%, down from 5.07% a week earlier and nearly 6.5% at the end of October, according to the Mortgage Bankers Association. Mortgage rates have been falling steeply since late November, when the Federal Reserve announced a plan to buy as much as $500 billion of mortgage securities. Demand for such securities has a major effect on rates mortgage lenders charge to consumers.
While the low rates haven't caused a stampede of people seeking loans to purchase homes, they have set off a wave of refinancing applications. An index measuring refinancings is at its highest level since June 2003, according to the Mortgage Bankers Association. At GMAC Mortgage, mortgage applications are up more than 75% in January from their levels two months ago, a company spokeswoman said.
But a large percentage of applications are being turned down. Only about a third of U.S. mortgage debt outstanding is likely to qualify for refinancing, said Doug Duncan, chief economist of Fannie Mae. Nearly 70% of borrowers don't make the cut, he said, most often because their credit isn't good enough or they don't have sufficient home equity. A significant number of homeowners owe more than the current value of their homes, a situation sometimes known as being "under water." Others can't profitably refinance, often because they hold jumbo mortgages, those above the $625,000 limit for loans that can be bought or guaranteed by Fannie Mae or Freddie Mac in the highest-cost areas.
"The refinance boom is mostly impacting the people who need help the least," said Scott Stern, chief executive of Lenders One, an alliance of mortgage bankers. "These are people who have good credit, who have had been in their homes a long time, people who already have conforming fixed-rate loans or government financing."
Fannie said in May that it planned to make it possible for some underwater borrowers to refinance into loans totaling as much as 120% of the current property value. But a Fannie spokesman said that program hasn't yet taken effect. The company is looking into ways to finance such loans in some cases, he said.
Lenders say that the "pull through" rate -- the percentage of loan applications that result in loans -- has declined as the housing market and economy have weakened and credit standards have tightened.
In sum, despite the fact of falling interest rates, lenders are interpreting their environment as one that requires caution. Two things. First, no one can say such caution is irrational. In fact, this behavior reflects a realistic reading of current events. We Americans are being forced to adapt to a world in which we aren't as credit-worthy, individually and collectively, as we thought and others thoughts we were.
Second, lenders continue to act in terms of their own interests, as they interpret them. So while our economy is structurally adjusting, and noticeable shifts will occur and are occuring, we can be confident that socially-situated, individually-interpreted interests will remain central to understanding and explaining economic events and outcomes. It's the nature of advanced capitalism.