Amy Crews Cutts is SVP and Chief Economist at Equifax. A recognized industry expert, Amy brings more than 17 years of economic analysis and policy development experience. She is responsible for analytics and research relating to the consumer wallet–assets, income, credit, and spending, along with macroeconomic factors affecting the consumer. She previously worked at Freddie Mac for 14 years, the last eight of which were spent as Deputy Chief Economist from 2003 to 2011. She has published numerous studies in academic journals and books on topics such as the economics of subprime lending and the impact of technology on foreclosure prevention. Amy recently spoke with MReport about the impact of the recent spike in first mortgages as reported by Equifax.
What is the significance for the industry of the increase of first mortgages that Equifax reported, which were 10.3 percent and 1.86 million for the first quarter this year?
We haven't seen the full benefits yet of the Brexit crash on interest rates. That'll really hit just at the end of second quarter. The Brexit vote happened, then the markets crashed and then interest rates went down, and mortgage rates came within 10 basis points of their all-time low. That effect of that will really hit in the third quarter. That said, the interest rate environment has defied economists’ expectations for a very long time. This is great for consumers that economists are wrong, because the trend in interest rates has been to stay very low for a very long time. Ask any economist walking down the street, “What are interest rates going to do?” They're going to say, "They're going to go up." Why are they going to go up? Because their models say they're going to go up. Why does their model say it's going to go up? Well, because the path of interest rates for the last 65 years was basically to rise for 30 years and to fall for 35 years. Your forecast, and where we are today, is below that starting point. Your model is going to say, "Well, I have to forecast the average so rates should go up because you're well below average." It doesn't matter what historical time period you take, that's what your model's going to tell you. The path of interest rates looks like Mt. Kilimanjaro—this vast peak rising above a plain. It's very difficult to forecast what comes next when for 30 years it rises and for 35 years it falls. I can tell you all the reasons it's supposed to rise--we've got a great economy, or not so great depending on who you talk to, but the point is steady economic growth and steady employment growth. At some point you would say inflation's supposed to rise, so interest rates should rise to take advantage of that.
The paradigm's policy change though is rather significant. Is that Basel III capital rules, for banks and financial institutions that are adopted globally and then with some extra bells and whistles put in place by our prudential regulators, so it'd be the Fed, the OCC and similar, require banks to hold much more capital today than prior to the financial crisis. The quality of the capital assets has also gotten better. In the past you could hold certain other instruments. Your choice set is pretty limited. All of that basically says interest rates are being kept low because banks need to hold these treasuries on the balance sheet for capital purposes.
Then you add to that things like Brexit that cause the markets to panic. You get flight to quality and you get these lovely volatility gyrations going on in the marketplace. When we look finally at what does that mean for the mortgage market, it means that people like me who are not yet in the money have hopes of being in the money for a refinance. People looking to buy a house, who maybe we're not happy when rates went out to 4 percent are really happy because rates are back down actually all the way to 3.4 percent, 0r 3.5 percent perhaps.
The point is, if you want to buy house, you haven't missed the boat yet. There's still plenty of time to buy a house at very low interest rates. The mortgage originations have gone up, and part of the reason they’ve gone up is because it's seasonal. Home buying happens in the second quarter.
The second part of that, though, is that refinance activity, despite what I tell my senior leadership every quarter, is not dead yet. We have the steadiness of refinance activity with a push of home purchase activity driving up mortgage originations at a pretty nice pace. Last year they went up 66 percent, but that had to do with refinancing. We got a little refinance boom earlier in the year. Then it died out at the latter half of the year and now it seems to be reborn again. We'll see how that takes off.