Does Surge In Mortgage Activity Mean More Defaults Down The Road?

Lower interest rates on home loans are causing people to run to the banks. Thirty-year fixed-rate mortgages are as low as 5.2%.

According to several media accounts, banks cannot handle the influx of new mortgage business, especially as they work on helping people with troubled home loans bring down interest rates and monthly payments.

The FT reports that "Applications for home loans more than doubled in the two weeks after the Federal Reserve said it would buy mortgage bonds to help stabilise the market."

While all of the people hitting the banks to get loans for new homes or lower costs on current mortgages may look promising, the activity could be counterproductive and may well do nothing to stop falling home prices over the next two or three years.

Home buyers attracted by rates which have not been seen in several years are more likely to stretch their buying power and get houses at the upper end of their budgets. That may work out fine while they still have jobs, but what happens when they no longer do? Many of the new mortgages will default and the housing market will be faced with more downward pressure and banks will be faced with more write-offs.

The falling cost of buying a house casts a false shadow. The economy cannot support hundreds of thousands of people rushing to buy new homes with personal income faltering and unemployment heading to levels which have not been seen in six decades.

Douglas A. McIntyre