Could Monetary Policy be affecting the Mortgage Default Rate?

With reference to How does monetary policy pass-through affect mortgage default? Evidence from the Irish mortgage market by David Byrne, Robert Kelly, and Conor O’Toole. 04/RT/2017

With the loosening structure of the monetary policy by central banks after the global financial crisis, which allowed the mortgage interest rates to be lower which could have led to a lower default rate on mortgages. This post will focus on two different types of mortgages the Standard Variable Rate mortgage (most commonly known as SVR) and the Tracker mortgage.

A SVR is a mortgage where the lender has the ability to decide when and if the interest rate on the loan will change while a Tracker mortgage is where the interest rate is set to a certain percentage above the European Central Bank interest rate. As the number of Tracker mortgages were increasing while the European Central Bank interest rate was decreasing, the banks started to lose money on them as the interest rate on the mortgage payments were not high enough to cover the cost of the loan. …

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Competitive devaluation?

Anybody who follows the well known finance blog Credit Writedowns will know that one of the trends coming about (according to author Ed Harrison) is that we are going to see a competitive devaluation, where USD and Euro purposely look to go lower, the other alternative is that the Chinese opt to float their currency and allow some appreciation. This is happening right now, it is no coincidence that the Yuan is going to see some rule loosening, it is that or face the alternative which is a move by USD as low as it can go to re-establish equilibrium between the surplus/deficit nations.

While competitive devaluation is not the subject, it is touched on by several different facets of the conversation, well worth viewing.

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ECB Zero? Will a 0% base rate fix anything?

There was an interesting article in which originated on Bloomberg which Nouriel Roubini said that the ECB should cut rates to 0% and increase quantitative easing to ease dysfunctional markets. I agree that a more accommodative approach would be beneficial, but a base rate of zero would likely not make much of a difference except on the margin.

The idea of a Central Bank is that they really wear two hats, there is a fiscal v.s. monetary balance to be struck, sometimes they act monetarily, other times fiscally depending on the inflation expectation. The best explanation I have seen of this so far is offered by PIMCO’s Paul McCulley where he states that ‘as the game changes so does the meaning of central bank independence’ and he is correct, if disinflation or deflation is a threat then priming the fire for some inflation is the correct approach, but you would be far better doing this with the money supply via quantitative easing than on the …

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Federal Reserve news

The Federal Open Market committee (FOMC) have decided to keep ‘exceptionally low levels of the federal funds rate for an extended period’. Below is a verbatim excerpt:

“Activity in the housing sector has increased over recent months. Household spending appears to be expanding but remains constrained by ongoing job losses, sluggish income growth, lower housing wealth, and tight credit. Businesses are still cutting back on fixed investment and staffing, though at a slower pace; they continue to make progress in bringing inventory stocks into better alignment with sales. Although economic activity is likely to remain weak for a time, the Committee anticipates that policy actions to stabilize financial markets and institutions, fiscal and monetary stimulus, and market forces will support a strengthening of economic growth and a gradual return to higher levels of resource utilization in a context of price stability.

With substantial resource slack likely to continue to dampen cost pressures and with longer-term inflation expectations stable, the Committee expects that inflation will remain subdued for some …

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Greenspan & Rogers

Here are some interesting videos, the first is Alan Greenspan (former Federal Reserve Chairman) and he is talking about unemployment and credit spreads. The next one is Jim Rogers who talks about the commodity markets and the risk of inflation.

The two men are on opposite sides of the same valley, Greenspan was an academic who worked primarily in private practice (despite being more well known for his 19 year tenure at the Fed), and he believes in [at least in practice] fairly accommodating monetary policy. Rogers on the other hand (while he has university degrees and did have guest professorships at Columbia) is almost a pure practitioner who made a fortune in the 1970’s and retired at age 37. So on one hand you have an economic thinker with policy practice and on the other you have a guy who perhaps doesn’t care about policy so much as outcomes. Personally I have always been a fan of the bottom line and for that …

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Why aren’t mortgages MORE expensive?

In looking at any product or service you will often hear people mention ‘supply and demand’, it is one of the foundations of Microeconomics.

Generally if supply increases prices drop, if it decreases prices rise. By how much is a question of how elastic the demand is versus supply.

We know from our day to day experience that there is still a high level of demand for mortgage finance, charting our figures back to 2005 has shown us that if we take out ‘noise’ of m/o/m figures that demand is still at relatively high levels.

However, we also know, from our daily interactions with banks that criteria is getting harder, conditions more restrictive, underwriting is more forensic, the supply of mortgages is decreasing rapidly.

Using a simple chart you would get something along the lines the one below, the blue supply and demand lines show  the situation at a certain point in time, we’ll say that is a year ago, the green line of supply shows the current situation – it has moved to the left because of the decrease.

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Why aren't mortgages MORE expensive?

In looking at any product or service you will often hear people mention ‘supply and demand’, it is one of the foundations of Microeconomics.

Generally if supply increases prices drop, if it decreases prices rise. By how much is a question of how elastic the demand is versus supply.

We know from our day to day experience that there is still a high level of demand for mortgage finance, charting our figures back to 2005 has shown us that if we take out ‘noise’ of m/o/m figures that demand is still at relatively high levels.

However, we also know, from our daily interactions with banks that criteria is getting harder, conditions more restrictive, underwriting is more forensic, the supply of mortgages is decreasing rapidly.

Using a simple chart you would get something along the lines the one below, the blue supply and demand lines show  the situation at a certain point in time, we’ll say that is a year ago, the green line of supply shows the current situation – it has moved to the left because of the decrease.

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European stimulus plans

The ECB meeting is due to meet this week on the 7th and a further 0.25% rate cut is expected which will bring European base rate lending to 1% which is the lowest it will go according to guidance given in the past by Jean Claude Trichet. For mortgage holders this will be a further advantage for those on tracker mortgages and for those who hold variable rates where the cut is passed on.

The question currently is whether or not there will be any stimulus packages mentioned or any idea on what to expect in the coming months, with very concise plans afoot in the US, UK, China, and elsewhere it is likely that the Eurozone will need to make some formal plan as well and move beyond the monetary options of only playing with interest rates.

The EU has a problem other currency zones don’t, that of political cohesion, the USA is all dollar denominated and all under one flag, the UK is the same, as is Japan, …

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MV=PT, quantitative easy in the UK, will it work?

The equation at the heart of prices, the ‘Quantity theory of money‘, centuries old but redeveloped by the likes of Irving Fisher, Ludwig Von Mises and Simon Newcombe, as well as being an equation restated by Milton Friedman which resulted in a Nobel prize. The equation, known as the “quantity theory of money” is MV = PT.

M is the quantity of money, V is the speed money flows round the economy, P is the level of prices and T is the number of transactions.

The formula has had one consistent feature, namely controversy. If you believe V and T are stable, then control of the money supply guarantees control of inflation. Quantitative easing (which they are talking about presently in the UK) raises M, so if V is fixed, it will push up P or T or both.

In today’s recessionary and deflationary world, that would be a welcome result. However, if …

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