Interest rates, mortgages and you

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Remember those old Loony Tunes cartoons, in which Wile E Coyote rushes ater the Road Runner, only to find that as the dust clears, the solid ground is no longer beneath him? He turns to the camera, blinks, and drops like a stone.

As the dust finally clears from our long economic winter, the once-impervious mortgage banking industry is beginning to show some cracks and some companies are experiencing a sinking feeling.

Though our economy is strongly on the mend, I am beginning to think there is a growing chance that rising mortgage interest rates could dampen future growth in an uncomfortable way.

The importance of the U.S. housing market can’t be underestimated. When the world’s economy swooned in 2001, it was the strength of the U.S. consumer, flush with cash from the then-growing home refinancing boom, that is generally credited with holding the world economy aloft.

Spurred by low interest rates and a desire to get out of stocks, investors flocked to real estate in 2002 and 2003, pushing up prices.

The Economist magazine ran a cartoon on the cover of its March 30, 2002, issue that depicted hot-air balloons in the shape of houses. Instead of baskets, these balloons held globes. The headline read, “The Houses that Saved the World.”

“In this global economic recovery, however, homes have done much more than shelter people from wind and rain,” the Economist wrote at the time. “They have helped shelter the whole world economy from deep recession.”

Now, the tide is turning. Already, rising interest rates and the corresponding drop in mortgage activity has led West Des Moines-based Nationwide Advantage Mortgage Co. to announce plans to fire 32 employees, or about 10 percent of its workforce.

Shares of Washington Mutual Inc. dropped about 13 percent last week after the company, one of the nation’s largest mortgage originators, warned that fourth quarter earnings will be less than expected because of flagging loan demand. Other big mortgage originators, such as Countrywide Financial Corp., have announced job cuts.

The Mortgage Bankers Association of America said in early December that applications for mortgage loans were down 33.6 percent from a year earlier and that refinancing activity was slipping as well. The group’s weekly survey covers about 40 percent of all U.S. retail residential mortgage applications.

What more does this mean for Des Moines? The mortgage banking business is cyclic, and the potential exists for more job losses at any company that has exposure to the mortgage industry as the cycle turns. The biggest player in Central Iowa – indeed the country – is Wells Fargo Home Mortgage Inc., and there is a chance, however slight, that the company’s plans for a new building in West Des Moines could be slowed if lending activity continues to drop.

Folks who work there suggest that Wells Fargo would be hurt less than rivals because it holds more secure debt and bond ratings from the major credit rating agencies. That would help Wells Fargo keep borrowing costs down.

The bigger picture is the growing balancing act that Alan Greenspan and the Federal Reserve Board must manage between the inflation that will happen if interest rates are left too low for too long versus the stagnation or recession that will take place if rates are raised too quickly.