Sunday, August 28, 2016

Fed’s Dislike of Negative Interest Rates Points to Limits of Stimulus Measures

Federal Reserve officials are content to watch others’ experience of negative rates from a distance 

Federal Reserve Chairwoman Janet Yellen arrives for a reception on the opening night of the annual meeting of the world's central bankers at Jackson Lake Lodge in Grand Teton National Park, north of Jackson Hole, Wyo., on Thursday.
Federal Reserve Chairwoman Janet Yellen arrives for a reception on the opening night of the annual meeting of the world's central bankers at Jackson Lake Lodge in Grand Teton National Park, north of Jackson Hole, Wyo., on Thursday. Photo: Associated Press
JACKSON HOLE, Wyo.—Federal Reserve officials are turning a cold shoulder to a controversial idea being tried in Japan and much of Europe to boost anemic economies: negative interest rates.
Fed officials don’t think negative rates are needed in the U.S. because the economy and job market are improving, and they are hoping they will never have to use them in the future given their uncertainty about whether the policy works.

Fed Chairwoman Janet Yellen didn’t even mention the idea in a discussion of the Fed’s options for the economy should recession hit the U.S., and other officials speaking on the sidelines of the Fed’s annual retreat here over the weekend made clear it is an approach they would like to avoid.
“I’m treating [negative rates] as an experiment that we have the luxury to watch from a distance,” Dennis Lockhart, president of the Federal Reserve Bank of Atlanta, said in an interview at the Fed’s annual Jackson Hole conference in the Wyoming mountains.
The Fed’s aversion to negative rates shows how central bankers are confronting the limits of their efforts to stimulate the slow-growing global economy.
Negative rates are like a central bank’s version of the children’s game of hot potato—the potato being money nobody wants to get left holding. Commercial banks are charged for leaving funds on deposit with the central bank. By imposing a cost on parking money safely there, the policy aims to induce banks to lend their money elsewhere, to consumers and businesses, where they can earn higher returns. That risk-taking, in turn, is meant to spur economic growth.
Central banks in Japan, the eurozone, Denmark, Sweden and Switzerland have adopted negative rates with mixed effects. The Swiss National Bank ’s policy rate is -0.75%, the Bank of Japan ’s is -0.1% and ECB’s is -0.4%.

Negative rates are highly unpopular in many places because households are unhappy they earn such low returns on their savings and banks worry it squeezes their profit margins.
Subzero rates also have had some unintended effects. In Japan, negative rates were accompanied by a rising currency, the opposite of the central bank’s expectation.
In Switzerland, banks responded to negative rates by making mortgage borrowing more expensive and not less as hoped. Consumers are saving more in Germany, Japan, Sweden, Switzerland and Denmark, even though the aim is to prod consumers to save less and spend more.
Still, central bankers here said negative rates showed signs of working in many of their intended ways.

Yields on 30-year Japanese government bonds dropped from about 1.5% before Japan adopted negative rates in January to less than 0.5%. That could in turn drive borrowing, spending and investing in Japan, as intended.
“Declines in long-term borrowing costs have stimulated firms’ demand for long-term funding and households’ demand for mortgage loans, thereby benefiting a wide range of borrowers,” BOJ Governor Haruhiko Kuroda said here. “A significant increase in issuance of corporate bonds with a maturity of 20 years or even longer has been observed.”

European Central Bank data released this week showed loans to households were up 1.8% from a year earlier in July and loans to nonfinancial corporations up 1.9%. That is modest but still reverses a contraction in lending in the months before negative rates were introduced.
Some worry that negative rates squeeze bank profits. However net income at European banks rose to 51 billion euros in 2015, compared with 31 billion in 2014, according to the ECB.
“Negative rates work and are nothing extraordinary or immoral or absurd,” European Central Bank executive board member Benoît Coeuré said of the eurozone’s experience of negative interest rates so far. Still, speaking to the lingering trepidation about the policy among central bankers here, he said he is cautious about pushing rates “to much deeper negative levels .”
At a panel here, academics wondered whether central banks could push interest rates more deeply into negative territory by doing away with cash or imposing costs on households holding it. Cash is an impediment to imposing negative interest rates. Households and businesses can hoard it to avoid paying the penalties imposed when depositing funds in banks.
Central bankers here were reluctant to embrace the idea of pushing the policy much further, even as they defended its effects.

“There are many outstanding issues,” Marianne Nessén, who heads the Swedish central bank’s monetary policy department, said during a discussion at Jackson Hole. “Even if the experience with mildly negative interest rates has been roughly as expected, I’m not sure that we conclude that deeply negative interest rates will work in the same manner.”
“At the heart of all this lies concerns that future growth prospects are lower than we have seen in the past decades, but the remedy for that does not lie with monetary policy. It must be found elsewhere,” she said.

One growing source of uncertainty is the effect of negative rates on household saving behavior. Low and negative rates aim to induce households to spend, but critics of these policies say the effect is the opposite. People who are trying to stockpile funds for retirement might be induced to save even more if the funds they’ve got are bleeding returns.

“The idea that low interest rates are punishing savers is a very ripe issue,” said James Bullard, St. Louis Fed president. “Everyone is doing a lot of soul-searching about these issues.”
For now the Fed doesn’t need to contemplate negative rates because the U.S. economy is improving and officials are looking to gradually raise rates from exceptionally low levels.
Ms. Yellen in her talk Friday sought to lay out a roadmap for how the Fed will proceed the next time there is an economic downturn and it turns back to rate cuts to stimulate growth.
She said the Fed would seek to lean on tools it used during the postcrisis period. This includes purchases of Treasury or mortgage bonds to drive long-term interest rates lower. Ms. Yellen suggested the Fed might even expand its purchases beyond these conventional investments. The Fed would also turn to assurances that rates will stay very low far into the future, she said.
On negative rates Ms. Yellen was silent.


Sunday, August 21, 2016

Mortgage Rates: Good News -- For Buyers With Good Credit

Mortgage rates dipped this week, averaging 3.43% for a 30-year, fixed-rate loan, down from 3.45%. At this time last year, rates averaged 3.93%, according to Freddie Mac.
Rates have held below 4% for 33 weeks, the second-longest run of cheap borrowing the U.S. has ever had. The record was set from March 2012 to June 2013, when the cost of a 30-year loan held below 4% for 65 weeks.
That’s great news — for people who can get a loan. The reality is that many borrowers can’t qualify for a home loan at all, much less get approved at rock-bottom rates, which are reserved for buyers with pristine credit and big downpayments.
Even though the credit collapse is well behind us, there’s no sign lenders are loosening up, either. Last month, the average credit score on a new mortgage was 727, the highest since June 2015, according to Ellie Mae. By comparison, the average consumer has a credit score of 699, according to Experian, which issues FICO scores.
An April survey by Experian found that 45% of homebuyers were delaying a purchase while they improved their credit profile. Thirty-four percent feared their credit score would prevent them from buying.
In short, too many credit-worthy consumers are being turned away from homeownership, which remains one of the best tools for building wealth and financial security. Data from ComplianceTech shows that black Americans, for example, areless likely than whites to get approved for conventional, low-cost mortgages.
mortgage rates
Source: Freddie Mac
On the plus side, this low-rate environment probably will stick around for a while, even though job growth and strong consumer spending has traders betting the Federal Reserve will raise its own short-term interest rates this year, possibly in December.
The Fed doesn’t control the cost of home loans, but it can affect them. In 2013, rates shot up after Fed Chairman Ben Bernanke hinted that the Fed would buy less mortgage debt. His remarks sent financial markets into a “taper tantrum” that pushed interest rates up and threw housing off course.
That’s not likely to happen this time. The Fed is cautious and global economic woes have made investors cautious, too. That has the effect of keeping mortgages cheap, which is welcome news forhomebuyers and sellers.
bobby darvish, Robert Bobby Darvish, Platinum Lending Solutions, Orange County

Monday, August 15, 2016

What Two Years of Negative Interest Rates in Europe Tell Us

Credit Angus Greig
Hoping to kick-start European economies, the European Central Bank took the extraordinary step two years ago of lowering one of its key interest rates to below zero. The idea was to discourage banks from stashing their money in the central bank by charging them a modest rate for doing so. Since the banks would lose money rather than earn interest on their deposits, it was hoped they would be prompted instead to make more loans at lower rates to businesses and consumers.
It hasn’t worked very well. As many experts predicted at the time, the policy has had only a modest impact on growth. It is also increasingly clear that pushing rates down further wouldn’t help much and could, in fact, increase risks to the global financial system.
The European Central Bank, or E.C.B., sets monetary policy for the 19 countries that use the euro. In June 2014 it became the world’s first major central bank to adopt so-called negative interest rates. Monetary officials in Denmark, Switzerland and Sweden adopted similar policies in the following months; the Bank of Japan joined them in January.
Negative rates have helped to push down the cost of borrowing, but that has not provided a big lift to the euro area. The E.C.B. expects growth of 1.6 percent this year, about the same as last year. This is not surprising, because lower rates don’t address the real economic problems of many European countries: weak consumer demand and weak business investment. Companies are less likely to borrow for new investments when demand for their goods and services is not increasing — even if the cost of borrowing is cheaper than ever.
Of course, growth might have been even lower without negative interest rates. But there are limits to the benefits of such unconventional monetary policies. It would be far better if European governments used fiscal policy to increase demand by investing in roads, bridges, railroads, ports and other infrastructure. Government spending would create jobs and stimulate economic activity, and would not cost much. Bond investors are willing to lend money to the German government for 30 years at a rate of just 0.38 percent; in France, the rate is only 0.878 percent.

Meanwhile, continuing to rely on negative rates could be dangerous. The worry among many experts is that banks, institutional investors and even individuals desperate for higher returns might be seduced into taking foolish risks. They might also be tempted to make big investments overseas, driving up the price of stocks and bonds in the United States and Asia and creating bubbles that expose the global financial system and economy to another crisis. Some analysts are already worried about high prices for real estate, stocks and other assets.
In addition, persistently negative rates could well force European banks to raise fees on checking and savings accounts to recoup the rising cost of depositing reserves at the central bank. This, in turn, would encourage individuals and businesses to take some of their money out of banks and stash it in safes, or under mattresses. And that would not be good for the stability of European banks.
Mario Draghi, the president of the E.C.B., clearly understands the risks of negative interests rates, which is probably why he did not lower rates further last month. But there is only so much he can do. The political leaders of Europe need to help him revive Europe’s economy.

Sunday, August 7, 2016

Mortgage rates are low. Time to refinance?

If you’re ready for a lower interest rate or shorter term for your mortgage, now could be a great time to consider refinancing. Rates available to consumers are low right now and probably aren’t going to go any lower in the foreseeable future, according to Scott Sheldon, a senior loan officer and consumer advocate based in Santa Rosa, California, as well as a contributor.
And while, on the flip side, he doesn’t see rates increasing dramatically either, he suspects they’ll be up to 4% by the end of the year.
“The borrowers that would stand to benefit from a refi are those who bought a house last year, number one, because they probably scooped up something at 4% or 4.25% on a fixed-rate loan last year, and that same product, or maybe a shorter-term loan, whether it’s a 20-year, 15-year or a 30-year is probably half a percent lower right out of the gate,” Sheldon said.
But, as Sheldon also pointed out, every homeowner’s situation is different, so before you decide to refinance, it’s good to weigh the costs and benefits of refinancing. Here are some other considerations you’ll want to keep in mind when considering refinancing.
What are your goals?
If you’re looking to reduce your monthly payments, and free up some of your income for other expenses or savings, now might be a good time to consider refinancing, Sheldon said.
Or, perhaps you’d like to pay down your mortgage more quickly. A shorter-term debt structure could help you do that.
“Maybe you’re making more money in your job now, your income is higher … maybe you want to go to a 20-year loan at a 3.3% rate and it won’t be a burden on your cash flow because you’re making more money,” Sheldon offered as an example.
And even if you refinanced at some point over the last few years “you owe it to yourself to at least explore what could be attained in this environment,” Sheldon said.
What you’ll need to refinance
Before you reach out to a lender to discuss refinancing, there are a few things you should take care of, Sheldon said, starting with your credit.
“No. 1, unequivocally, is get your credit in check,” he said. “Make sure that if there’s anything on your credit that needs repairing or correcting, or if you need to pay down debt, make sure you put your best foot forward for the loan.”
You can start that process by checking your free credit report summary, updated monthly, on It’s also a good idea to take a look at your free annual credit reports, which you can get at
Next, he recommended getting all of your necessary paperwork in order, including W2s and tax returns for the last 2 years, plus your pay stubs for the last 30 days, bank statements for the last 60 days, and keep digital copies of those in a secure, but readily available, location.
“If you want to be opportunistic with interest rate movement, always have your tax returns and your W2s quickly available so you can quickly retrieve them for a lender,” Sheldon said. “That way, if you’re timing the market and you’re chipping away at your loan you can do that and it’s not going to be a burden for you to put together all of that stuff from scratch.”
Make sure your house is ready
Getting your home ready for refinancing isn’t as strenuous as it is getting it ready for sale. Home improvements aren’t really going to matter, but safety issues will — a deck that has deteriorated to the point of being unsafe, faulty wiring, an empty pool, or any construction that does not meet code, it could hinder your ability to refinance.
“Obvious health and safety stuff is going to affect any loan, it doesn’t matter if it’s FHA, conventional, VA, jumbo, it doesn’t matter,” Sheldon said. “Any appraiser is going to call that stuff out.”