Mortgage Rate Meltdown

The depth and breadth of the collapse in global interest rates has come as a surprise to many observers. Expectations of central bank easing, falling inflation, and risk aversion have all been proffered as explanations.  But whatever the root causes, American homeowners are grateful for the result.

A report from the Federal Reserve Bank of New York shows that U.S. mortgage debt reached a new all-time high of $9.4 trillion last quarter, the first new peak since 2008. Happily, the quality of the borrowing outstanding is much better today, with originations heavily weighted toward borrowers with strong credit scores. And the cost of servicing this debt is very modest.  Fears of another unhealthy mortgage boom are certainly premature.

The vast majority of American mortgage debt carries a fixed rate and offers the borrower the right to refinance these loans without penalty. (The United States is the only country in the world that allows this.) Thirty-year fixed mortgage rates have fallen precipitously in the last three months, prompting a corresponding rush to refinance.

Lower borrowing costs can save households hundreds of dollars each month. This will provide a boost to spending at a time when the global economy could use some stimulus. For some families, it will support long-overdue increases in saving.

Not everyone is happy about the resurgence of refinancing. Banks who made the original loans, and investors who purchased them as part of mortgage-backed securities (MBS), will see a decline in the yields they earn. They will be forced to find new long-term investments, which will add to already strong demand for bonds. Some analysts cite this effect as a key contributor to the flattening and inversion of the U.S. yield curve.

This trend may have some room to run. Mortgage rates have not fallen as quickly as Treasury rates have, and so they may fall even further in the months ahead. If they do, look for more homeowners to take the plunge.

Carl R. Tannenbaum is executive vice president and chief economist at Northern Trust. Ryan James Boyle is a vice president and senior economist within the Global Risk Management division of Northern Trust. Vaibhav Tandon is an associate economist within the Global Risk Management division of Northern Trust.

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