The strength in consumer nondurables today is conspicuous.
The Beige Book was no surprise (it rarely is!) and pointed to a domestic economy that is sputtering and close to stalling.
Here are three additional factors that are adversely impacting mortgage refinancings.
1. The mortgage origination business has changed in the last six months. Most mortgage brokers now get paid a salary plus a small commission. I have read that those that remain in the business are making one quarter, at best, of what they used to make in the last cycle. They no longer want to bother with smaller and more complicated loans.
2. The transformation from low- or no-documented mortgages has moved back to the old days, when credit scores, incomes and net worths were actually documented, and many are no longer qualifying for mortgages (as their loan to values are too high and incomes/credit scores too low).
3. The appraisal process is much longer, more conservative and much more stringent since lenders do not want to make any errors, be sued or face additional rep and warranty issues.
Refinancings have not improved in response to easing rates; in fact, the opposite has occurred.
The mortgage data is another blow to the easy-money crowd.
Applications for new mortgages were flat.
More importantly, mortgage refinancings, despite historically low mortgage rates, have now dropped for three consecutive weeks (-1.7%, -12.2%, -6.3%).
Ben Bernanke, a proponent of more cowbell, sees lower interest (and mortgage) rates as fuel for the consumer, as lower-rate refinancings, in theory, assist in individuals' cash flows and expenditures. But refinancings have not improved in response to easing rates -- in fact, the opposite has occurred!
There are several explanations for the broken relationship:
* The pool of available refinancing applicants are diminished importantly by the number of homes that are still underwater and the weight of a heavy supply of shadow inventory of unsold homes (which keeps home prices down).
* The weak jobs market is still keeping homeowners on the sideline (especially after a 30%-plus drop in home prices over the last five years).
* Because of the above, many homeowners that are considering refinancing are being required to raise their equity investment before banks agree to lower mortgage rate terms.
Whatever the reason for the recent weakening in refinancings, the logic behind more Fed easing continues to grow less compelling -- and perhaps this helps to explain the recent dissents among voting Fed members.
It is not the time to be glib; it is the time to be opportunistic and conservative (regardless of view). So, do not be swayed by the confident projections you see in the media.
The proximate cause for the strength this morning was the decision by the German constitutional court to uphold the European bailout. Also, Germany's industrial production rose by a better-than-expected 4%, the highest rate of increase since early 2010.
