Dick Lepre is senior loan adviser for RPM Mortgage of Alamo,
California, a division of LendUS. He has been in the mortgage
business since 1992 and has been writing a weekly e-mail
newsletter on macroeconomics, mortgages and housing
since 1995. Lepre (NMLS #302379) is from New York City, but
he has lived in the San Francisco Bay Area since 1968. He has
a degree in physics from Notre Dame. Follow him on Twitter
@dicklepre. LendUS LLC (NMLS #1938) is licensed by the
Department of Business Oversight under the California Residential Mortgage Lending Act. Equal Housing Opportunity.
Reach Lepre at (415) 244-9383 or email@example.com.
What Happens in Emerging
Markets Doesn’t Stay There
Economic woes in nations like Turkey, Iran and
Argentina can impact the U.S. housing market
By Dick Lepre
Mortgage originators’ business is seri- ously affected by interest rates. Rates affect purchase business to some xtent and refinance business greatly.
Originators pay attention every day to rate movements. Mortgage rates move in harmony with the
yield of the 10-year Treasury note. Yields on Treasury
debt and other fixed-income securities typically move
with the perception of inflation in the United States.
Usually, it is domestic macroeconomic fundamentals that tend to drive U.S. Treasury and mortgage
rates. We may be entering a time, however, when
Treasury yields and mortgage rates will depend more
on what is happening outside the U.S.
The domestic fundamentals in recent years have
contained few surprises. What is happening in emerging markets is nothing but surprises. The important
point for mortgage originators to note is that, in the
near future, there may be a significant flow of money
from emerging-market nations to the safety of U.S.
Treasurys and mortgage-backed securities.
Why is this monetary trend on the horizon? The simple
answer is that many emerging market countries have
so seriously mismanaged their monetary policy that
they have caused inflation and debasement of the values of their currencies compared to the U.S. dollar and
the euro. That has led to social and political instability.
The consequences of this will be serious, and money
will likely leave emerging nations and seek the safety
of U.S. treasury and mortgage-backed securities debt.
To the extent that this happens, we should see lower
Treasury and mortgage rates.
The definition of emerging markets is somewhat
vague and flexible. It would be easier to enumerate
countries regarded as emerging markets: Argentina,
Brazil, India, Indonesia, Mexico, Poland, South Africa,
South Korea, Turkey, Egypt, Iran, Nigeria, Pakistan,
Russia, Saudi Arabia, Taiwan and Thailand.
An increase in investments in and lending to nations
and companies in emerging markets occurred after
2008, when central banks in the U.S. and the European
Union (EU) dramatically lowered short-term interest
rates. Investors needed or wanted larger returns.
Investing in and lending to emerging markets pro-
duced much higher returns on investments than
investments in the U.S. and the EU. Emerging-market
nations have faster growth in gross domestic product
than nations with established economies.
They also have a large majority of the world’s population. These were not only return-on-investment
decisions, but this also made strategic sense because
emerging markets were seen as the greatest source
of future demand. These investments and loans
were riskier, but were deemed to be offset by higher
Failed monetary policy results from a nation creating
too much currency. The value of a nation’s currency
is measured by its value when exchanged for the U.S.
dollar or the euro on foreign-exchange markets.
Nations with poorly managed economies often
create too much fiat currency. In these cases, the cen-
tral bank finances government overspending by pro-
ducing, out of thin air, money that the government
cannot get from either tax revenue or borrowing. In
essence, bad fiscal policy begets bad monetary policy.
If the supply of a nation’s currency increases, and
the foreign-exchange demand stays constant or drops,
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