The Federal Reserve’s Discount window is one of the Central bank’s safety nets to help keep banks alive in the event of a run. The Fed was created as the ‘lender of last resort’ after the stark market crash in 1907 caused a run on the banks. They called it a ‘window’ because it was a physical window where people would go in person and bring physical collateral (bonds etc.) in exchange for cash. The cash they gave was at a ‘discount’ of the current market value of the bond. Once the bank has stabilized, they can re-purchase their bonds for the price they sold them plus an interest rate. At first this Discount Window was so attractive banks used it all the time and incorporated it into their business model. Eventually in the 70’s the Fed made a rule that banks had to prove they were denied a loan from everyone else before they could use their window. This created such a stigma (oh shit this bank needs help from the Fed, we better take our money out!) against using the window that in 2003 they removed this rule and simply raised their interest rate above market. The fed added additional ‘non discount window’ tools such as purchasing bonds at face value – a huge benefit to a struggling bank when interest rates have gone up recently. One final strategy the Fed employed during the pandemic and in the last few weeks is peer pressure. They got larger banks to take advantage of loans from the discount window to show other banks that it was okay to take money from the Fed – everyone else is doing it! This helped defeat the stigma of getting help and kept money flowing.
Mortgage Rates – improved again for the third consecutive week. The price of Mortgaged Backed Securities responded favorably to inflation reports that showed a moderation in inflation. Rates are up approximately 1.875% from this time last year.
Inflation – the Personal Consumption Expenditure Index (PCE) rose by 0.3% in February and is up 5% year over year which is down from last month’s reading of 5.3 (progress!). The core rate – which strips out food and energy – also increased 0.3% last month and has moderated to 4.6% (down 0.1%) year over year. Shelter costs have decelerated in recent months but their decline is not reflected in these inflation indices, so we expect to see additional slowdown in inflation when the delayed shelter reports catch up.
Loan Performance – CoreLogic Loan Performance Insights showed that between Jan 2022 and Jan 2023 the number of folks with late Mortgage payments (30 days +) declined by 0.5% percent from 3.3% to 2.8%. The number of homes in foreclosures remains incredibly low at 0.3% (remember that over 1/3 of homes are owned free and clear). During the housing crash delinquencies were more than 6 times higher (over 20%).
Home Values – declined by 0.5% in January but remain up nearly 4% year over year. Seasonally we expect moderation this time of year. From the peak of home prices in June of 2022 values have declined approximately 3%. The FHFA index reported that home prices rose 0.2% in January and are up 5.3% year over year. Why the discrepancy between the two indexes? FHFA only measures the value of homes with conforming loans on them, typically lower to middle priced homes. This shows that homes priced at the entry level to the $900K range are performing strongly and that higher priced homes have moderated in value.
Mortgage Applications to purchase homes increased by 2% last week marking 3 weeks of gains. Purchase applications are down 35% year over year. Refinances increased 4% for the third consecutive week and are down 66% year over year.