ABU DHABI // Economists are warning that a sudden surge in US home loan applications last week may not be as hopeful a sign as some first believed. Falling mortgage rates in the wake of the US government's US$800 billion (Dh2.93 trillion) credit stimulus package sparked a record wave of home mortgage applications last week. According to the Mortgage Bankers Association in Washington, mortgage applications more than doubled from the week before after the government programme pushed rates to their lowest in more than three years.
The glimmers of life in the US housing market sparked hopes that the US government's bombardment of the economy with cash might finally be producing results. They come amid reports that the US Treasury is working on plans to push mortgage rates even lower. Optimism on the housing market pushed US stocks up last night, with the Dow Jones Industrials Average rising more than 2 per cent and the S&P 500 lifting almost 2.6 per cent, its seventh rise in eight sessions.
"It means people's monthly payments will be cut which means they will have more money to spend on other things," said David Wyss, the chief economist at Standard & Poor's in New York. But economists warned that the week-long surge was not enough to arrest the long slide in US home prices. "They're still fishing around trying to find some way to relieve households," said Michael Spencer,an economist at Deutsche Bank in Hong Kong. "Making it easier for people to avoid defaulting on their existing mortgage doesn't make the idea of buying a house any more attractive."
Even as the mortgage lending news filtered through markets, the Federal Reserve released its latest update on economic conditions in the world's largest economy. The outlook was bleak. The Fed reported that the recession worsened in October and last month with falling wages, rising job cuts and reduced consumer spending. The Fed's report was accompanied by more negative news from the Institute for Supply Management, which said US service industries shrank in November at the fastest pace since it first started keeping records in 1997. Only the health care industry reported growth last month, it said.
The gloom in the US economy has now reverberated around the globe, prompting co-ordinated monetary action and fiscal stimulus. Earlier in the week, Australia's central bank cut its benchmark interest rate by a full percentage point to its lowest level in six years. The Bank of England answered on Wednesday with a one percentage point cut of its own. Falling US housing prices are at the centre of the global financial and economic crisis. With a negative savings rate, home prices have long underpinned American consumer spending, which has been the primary engine of global economic growth. The collapse of the market in subprime mortgages has created a spreading credit crunch that has exacerbated the drop in US home prices and choked off mortgage lending to the point that even creditworthy borrowers cannot get loans.
The Fed and the Treasury have been struggling for weeks to revive the mortgage market and arrest the slide in US home prices. After first trying to guarantee bank lending, and then investing in banks directly, the government has now embarked on a plan to buy new loans itself, a move that essentially puts it into the banking business. Last week, the Federal Reserve and US Treasury announced an $800bn plan to inject funding into the country's mortgage and consumer finance market. The plan called for the Fed to buy $600bn in mortgage-backed securities from Fannie Mae, Freddie Mae and the Government National Mortgage Association, or Ginnie Mae. It will lend another $200bn to institutions that in turn make student loans, car loans or issue credit cards.
As government-sponsored enterprises, or GSEs, Fannie and Freddie have long enjoyed lower funding costs. But amid rising defaults on subprime-related securities, the US government in September stepped in to rescue the two lenders, essentially guaranteeing their securities, which were widely held by central banks in Asia and the Gulf. By offering to buy new loans, the government is going even farther, betting it can coax banks into making them. News of the plan sent mortgage rates tumbling.Rates for a 30-year home loans dropped as low as 5.47 per cent, their lowest since mid-2005, according to the Mortgage Bankers Association. That move sparked a rush by homeowners to refinance existing mortgages, the association said.
"When rates plummeted following the Fed's announcement that it would buy GSE debt and MBS, many of those on the sidelines decided to quickly jump in and take advantage of lower rates before they began to rebound," said Orawin Velz,the associate vice president of economic forecasting at the association. The Mortgage Banking Association said applications for home purchases loans rose 37 per cent last week, which economists said was an encouraging sign. Amid falling home prices and growing job losses, many Americans have been reluctant to borrow at any rate.
Lower rates may spark some buying, but a property revival could remain distant, economists said. "We're getting to a bottom in terms of sales, not in terms of prices," said Mr Wyss. "There's still a big inventory of unsold homes out there." Now, the Treasury is said to be devising a plan aimed at pushing rates down even further. The new plan would reportedly work through the government-backed mortgage giants Fannie Mae and Freddie Mac to encourage banks to lower rates on 30-year mortgage, though details have yet to emerge.
warnold@thenational.ae
