So, When is the Next Mortgage Crisis?

Should it be safe to assume that our legislators and elected officials have identified not only the root causes but also the remedies for our fiscal nightmare of the past four years? There have been plenty of arguments about the true cause(s) of our mortgage and financial meltdown. It’s been blamed on corporate greed, individual greed, banks, The Community Reinvestment Act, Fannie Mae/Freddie Mac, sub-prime lenders, the Federal Reserve, Reagan, Bush Sr., Clinton, Bush Jr., Obama, Iraq, Afghanistan, China, and even Global Warming… the list goes on.


 
Today, as we paddle through the first quarter of 2013, we see signs of recovery, optimism, and hope. Yes, many regions of the country are seeing home values uptick. Many are seeing increases in new housing starts and there has even been some strong revitalization in the refinance markets. As we wait and we hope that these trends continue we have to use caution and we absolutely have to ask ourselves what is the driving force behind these trends? Is it increased government oversight? Is it that the markets finally bottomed out? Is it programs such as HARP and HAMP? Is it the natural and typical resilience of our American spirit? Is it new consumer education initiatives? Is it the Federal Reserve’s stance on interest rates? It’s quite possible that the positive trends are a result of many of these things but it’s more likely concentrated on the latter.

 
It’s important to remember that Americans are creatures of habit and we are, as a whole, a society that that thrives on rhythm, consistency, and the establishment of “norms”. This is why I believe we need tight discretion, open discussion, and fiscal caution. Over the last 48 months our economic society has seen interest rates go down, down, and down. The Fed seems reluctantly afraid to even mention the word “increase”. The prospect, or even the mere whisper of an interest rate increase would likely send the markets tumbling and only God knows what domino effects would follow. We Americans are currently enjoying the hell out of these historically low interest rates. Mortgage rates between 3% and 5% have become the “norm” and by golly they have become our comfort zone, our pride, and even our global trademark. Truly, these historically low rates have made the largest impact on what so far seems to be a modest housing recovery.
So, what happens when The Fed (our economic groundhog) dares to see its shadow again and begins preparing us for a rapid rise in interest rates? Will we care if they throw out key warning signs such as inflation? Will we be attentive and understanding and just take it in stride? Remember, the days of the adjustable rate loan products and sub-prime money schemes are pretty much over. So any increase rate actions by The Fed won’t have the same effect that it did back in 2007. Right?

 
Unfortunately such rate actions would likely have an even bigger negative impact. Perhaps we would not be plagued by jumping adjustable mortgage payments, but we will have lost our comfort zone. We will lose our new “norm”. Existing home sales will fall, new construction will fall, and home values will once again decline. Those declining values will spawn a new rash of foreclosures. The bubble will burst one more time.
Well OK then Mister negative!! Can we avoid all this or is it just a horrible inevitable truth?

 
The best path and the only solace I can suggest is that our government officials and our Federal Reserve are going to have to avoid any kind of knee-jerk reactions over the next 5 years. If there are economic signals ahead that suggest a rate increase they will need to over-communicate the facts and they will need to make the increases small, slow, and non-dramatic. They will also need to placate and pay homage to the American Media by making them a communicative partner. We all know that the media can spur its own knee-jerk reactions even if it’s just in our minds. As long as we Americans perceive that our comfort zone and our “norm” are intact there is a good chance that we will absorb any small rate changes without panic and without drastic impact.
If none of this happens we can always argue about something else.