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MDO: Its Not How Much You Have, Its How Much You Can Borrow, And Other Observations

In Berson’s Weekly Commentary: Mortgage Debt Outstanding (MDO) growth in 2005 — exactly the same as 2004 [Fannie Mae] [1] he reviews the Fed’s Flow of Funds statistics for 2005 and he found the following:

Warning: Berson’s link lasts one week. For an acrhive of stories including this one go here. [2]

What’s expected for 2006?

In other words, property owners are expected to continue to borrow against their properties in significant numbers this year. This makes the direction of mortgage rates a significant barometer for national economic health. Fannie Mae is (obviously) pro-lending, so I would think that lending will (and has) dropped significantly, reflective of the lower number of sales and less attractive refi terms.

Its not clear to me how mortgage origination can sustain nearly double digit growth in 2006. Its not logical, unless mortgage rates fall, which is hard to imagine with the Fed projected to raise short term rates 1-2 more times.

Its unlikely to expect long terms rates to fall in the immediate future, so the best-case scenario for the housing market is to hope for Goldilocks Not too hot, Not too cold [Matrix] [3] and have rates remain where they are.

Fed Chairman Bernanke was quoted today as saying [CNN] [4] essentially that the economy remains strong, despite what is happening to housing which probably means the Fed will continue with belt-tightening 1-2 more times. I think low bond yields (low mortgage rates) are more about our balance of trade with China than anything.

…long-term rates could suggest the level of short-term rates consistent with holding the economy at full employment had declined, perhaps reflecting a lasting drag on the economy from high energy costs, slower growth in house prices and the possibility consumers will begin to save more.

But he also noted long-term rates were low around the globe and said “an explanation less centered on the United States might be required.” One other factor that Bernanke raised, but downplayed, was that large official holdings of U.S. Treasury debt accumulated by countries intervening in currency markets was doing much to push U.S. long-term rates down.