The Family Firm

The mortgage market is something I have been thinking a great deal about lately (haven’t we all??).

I have been trying to apply what little I grasped from undergrad and graduate economics courses to the market today. I seem to remember something about demand being inversely proportional to price…in English, when the price of something goes down, the quantity demanded will go up and the quantity supplied will fall.

And this is what recent mortgage data is showing. The price (interest rate) for mortgages is very low on a historic basis. Not surprisingly, DEMAND for mortgages, both for purchase and refis, is quite strong these days. It is the supply that is being limited. What does this mean – supply limited? Underwriting standards have stiffened (albeit from an extremely slack level). So my elementary economics does seem to be working here….lower prices leads to higher demand and lower supply, the market finding its equilibrium.

What are the implications? The more the Fed and politicians (the difference is becoming less and less apparent to my eyes) try and push mortgage rates lower, the stiffer underwriting standards will become. Shouldn’t this be obvious?? Shouldn’t any rational banker want to be much more cautious on a 5% mortgage than a 7% mortgage?? Apparently it isn’t obvious in Washington. And what is the solution?? As this article implies, a heavier hand from government is likely to be applied to lenders. After all, they have taken TARP money and now are quite vulnerable to being coerced to act against their economic interests. As we see over and over and over again, government interference in private enterprise is a very sticky business, the quasi-socialism that has resulted from the TARP/bailout system leaves everyone unsatisfied and a dysfunctional system. I keep trying to envisage a way out of this that doesn’t involve a nationalization of the mortgage business; unfortunately that unhappy outcome seems to become more likely by the day.

Posted January 26, 2009 by Nathan Gendelman