The chart below is showing the distribution of homeowners and what rates they currently have versus PMMS or the Primary Mortgage Market Survey of current rates and points for their most popular mortgage programs offered.
At first glance this would be a boon as most homeowners have locked in rates under 4% with the largest number at or below 3.5%. But what does that really mean in today’s changing rate environment.
If inflation takes a long time to come down then they are trapped unable to refinance or create any savings. The Fed would (and is planning to) continue to raise rates increasing household payments on all other debts they hold and can take on (cars, college, credit cards, personal loans, HELOCs). Any savings created by lower mortgage rates would be eaten away by other debt payments and higher inflation that is slowly eroding their purchasing power and disposable income.
If the economy goes into a soft or hard landing can the Fed help many of them? Any small rate cut would be ineffective as a large subset of homeowners would not see any savings from refinancing (quite the opposite most are below 4% so refinancing at 5% or 6% makes 0 sense).
Even a moderate drop of 200 or 300bps points in mortgage rates would be insufficient to help the majority of homeowners (more homeowners under 4% than above). It would also require large fiscal spending and the resulting monetizing of the national debt through QE to bring rates lowers. Without a significant injection of QE and purchases of MBS the Fed would be ineffective again. It would also require a split Congress today and embroiled in a Presidential election in 2024 to actually pass significant spending and stimulus spending (probabilities anyone?).
Probabilities are low as the Fed hasn’t yet controlled inflation, they fear a second bout of inflation if more liquidity is injected and as their balance sheet is already bloated.
So what happens if unemployment rises, wages are cut, more homeowners fall behind? Well, the Fed knows it will be ineffective with small rate cuts and large cuts could draw in more risky behavior, and higher inflation, and would be difficult to do without major deficit spending and ballooning the balance sheet even more.
Simply put the Fed might have to sit it out and watch the Greeks come out of the Trojan Horse and lay waste to Troy through dezombification of the economy.
The Fed is in an impossible situation. Do one thing and the repercussions are extreme. Do the opposite and the results would be the same if not several degrees worse.
If we get into trouble, homeowners facing economic hard times could be left alone to fend for themselves. One shock and low rates would be a trap, not a boon.