Mortgage rates sink below 3% for first time; silver lining in loss provisions?

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How low can they go?

The average rate on a 30-year fixed-rate mortgage fell to 2.98%, “its lowest level in almost 50 years of record keeping, ” the Wall Street Journal said. “It is the third consecutive week and the seventh time this year that rates on America’s most popular home loan have hit a fresh low. The average rate on the 30-year mortgage stood at 3.72% at the beginning of the year and 3.81% a year ago, according to Freddie Mac.”

“The historic figure reflects how policy responses to the coronavirus pandemic have brought down borrowing costs, helping drive a recovery in the U.S. housing market even as other parts of the economy face a more uncertain recovery,” the Financial Times said.

“The reason rates have not fallen faster is that the demand for mortgage refinancing has overwhelmed the ability of lenders to originate new loans,” Fannie Mae chief economist Doug Duncan noted. “There is no point in lowering prices to gain business you can’t close anyway.”

“It was the latest in a string of record-low readings for the cost of home loans, and a rare bright spot for the U.S. economy,” the New York Times said. “For those who are still receiving a paycheck, the collapse in mortgage rates has suddenly made homeownership more affordable.”

Time will tell

While great for consumers, the drop in interest rates isn’t making it easier for banks to make money. “Banks’ core lending profit margin, measuring their cost to borrow versus what they earn in interest, took a beating across the board in the second quarter. That margin dropped an average of 0.34 percentage points at Bank of America, Citigroup, JPMorgan Chase and Wells Fargo from the first quarter.”

“But for some, there could be light at the end of the tunnel. Down the road, the real boost for banks would be if credit performance isn’t quite as bad as they have now prepared for. That would mean that some of their huge future-loss provisions could turn into reserve releases, adding to income. Proof of lending discipline will only be evident over time. But with banks taking their lumps now, investors at least can believe that should a rosier economic scenario play out, there could be some reward for their suffering.”

The “thesis that better-capitalized banks can make anything resembling steady profits through a recession already looks weak,” the Financial Times comments. “We are learning, once again, that no matter how solid and conservatively run the banks are, their net income is subject to big swings. So the dream of higher valuations remains just that.”

Wall Street Journal

Asleep at the switch

Germany’s top financial supervisor, the Federal Financial Supervisory Authority, or BaFin, “received detailed warnings about deceptive financial practices at Wirecard starting in 2008 but repeatedly declined to investigate the allegations, turning instead against the accusers,” the Journal reports. “Over more than a decade, investors, U.S. authorities, journalists and people close to the company warned of possible fraudulent accounting or money laundering, practices that are now at the heart of a criminal investigation into the disgraced fintech giant. But as the red flags piled up, Germany’s equivalent of the U.S. Securities and Exchange Commission played down the allegations, kicked the ball to other agencies and delayed examining the company’s accounts.”

“BaFin’s decadelong blind spot for Wirecard now raises questions about the country’s ability to enforce securities rules that protect investors. Under mounting political fire, the German finance ministry, which oversees BaFin, has announced a review of the agency’s powers and methods. On Thursday, the president of Germany’s federal audit court told the news magazine Der Spiegel it would examine how BaFin and the ministry had dealt with Wirecard, including ‘why BaFin apparently did not take up the evidence.’ ”

“Some of Europe’s largest lenders anticipate recovering as little as 20% of the almost $2 billion” they lent to Wirecard, the Journal also reports. “Meanwhile some banks seeking an exit from their portion of the loan are challenged to find buyers at cents on the euro even as Wirecard’s insolvency administrator seeks to sell the company’s assets to pay off debt.”

New York Times

Change of attitude

Some of the largest banks in the U.S. are taking the unusual step of asking the Department of Housing and Urban Development “to at least tap the brakes on weakening a regulation meant to curb racial injustice. Although the banks stopped short of saying no policy change should ever be made, the request for a delay was unusual in the world of finance, where firms regularly seek fewer regulations.”

“The proposed change would spare the banks from fines and legal fees by effectively reducing the number of lawsuits and government enforcement actions against them. It would also make it easier for banks to use algorithms and artificial intelligence to market, underwrite and price home loans without worrying whether those calculations accidentally discriminated against disadvantaged groups. But the banks may be realizing there’s more to the issue than the regulatory and legal considerations. Championing a change proposed by the Trump administration that could make it harder for Black Americans to get housing would be deeply unpopular. And there’s a chance they’d be backing a regulatory rollback that could be quickly reversed if President Trump loses his re-election bid in November.”

Quotable

“If you have your job, you’ve got your financial house in order — gosh, this is a great time to go and buy a home because mortgage rates are dirt cheap.” — Frank Nothaft, chief economist at CoreLogic, as the average rate on a 30-year fixed-rate mortgage dropped below 3% for the first time ever.