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Quicken Loans: The ISMs of Corporatism

In a recent news release from CNBC, Quicken Loans CEO Jay Farner projects that the most recent quarter "will be the largest quarter in the company’s history." 

Farner anticipates the company’s best month yet: "I think June will be the biggest month we’ve ever had, and it’s both on the purchase side and the refinance side." 

According to CNBC, Quicken Loans, the nation’s largest mortgage lender, "has been posting record numbers for months." 



Data from the Mortgage Bankers Association indicate that mortgage applications jumped twenty-seven percent from the prior week, while volume shows a 41-percent increase over last year; this is after Quicken Loans "closed almost half a trillion dollars worth of mortgages across the country between 2013 and 2018."

While all of this might sound like cause for excitement, this is not a positive indicator for future home values ⁠— let alone economic investment ⁠— which will require unprecedented measures, amidst unprecedented circumstances, to induce further effective demand in order to sustain the facade of obese real-estate and mortgage industries. 

Farner apparently knows very little about economics, and his dishonesty, through omission or oversight, about the monetary and FOMC factors influencing his industry is disturbing. 

While these new or replacement mortgages may look good on Quicken Loans’ balance sheet now and — with their untested assumptions about future interest rates and the overall status of the economy — into the foreseeable future, the future prospects aren't remotely as rosy for the industry as Farner and Gilbert would have CNBC and their viewers believe. 

Of course, this ought to come as no surprise to any of CNBC’s viewers, who are accustomed to hearing salesmen and pump-and-dump presentations on full display, under the false pretense of objective guidance. 

In his interview with CNBC, Farner attempts to deflect from the question about interest rates by claiming that uncertainty is high "because words and tweets and things of that nature can really change the direction." 

He added that he’s "surprised" that there’s so much talk in support of the central bank cutting interest rates, because, according to Farner, "it feels like the economy is still very, very strong." 

These are just words, hot air to fill airtime. 

Farner is doubtless convicted in his rehearsed beliefs, as he’s paid well to produce that illusion. 

The unwitting observer hangs on his words instead of recognizing the gaps, the fallacies or the oversights. 

Of course, it would certainly appear that the economy is "very, very strong" to the CEO of a mortgage lender whose company just generated record sales volumes, whose interests depend upon that accepted belief

Farner obviously has every reason to blind his listeners to the uncertainty ahead. 

Since Farner failed to offer any meaningful insights on the subject of interest rates, I will pick up the slack for him. 

First, the latest rounds of refinancing and new mortgages follow from noted uncertainty regarding the direction of future interest rates after a recent decline in rates over the past year, and even more notably over latest quarter, placing rates at their lowest level in nearly two years: 

According to the Mortgage Bankers Association, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($484,350 or less) decreased to 4.12% from 4.23%, with points remaining unchanged at 0.33 (including the origination fee) for loans with a 20% down payment. That rate was 4.83% a year ago, 71 basis points higher.

What’s more, despite the increasing odds of a forthcoming rate cut, there's only limited space between the current rate and the zero bound, so again it makes sense that homebuyers would capitalize on the cheap credit while it lasts.

This doesn't mean that homeowners are making wise decisions with their purchases, but that the incentives are in place to encourage them to behave accordingly with their limited apprehension of the complete economic picture. 

Last week, the Federal Reserve sent a "very strong signal" that rate cuts are forthcoming. 

In the midst of economic uncertainty on the surface, from stock-market volatility to tariffs and the so-called trade war with China, there is even greater cause for concern beneath the surface. 

While the Fed appears set to continue to suppress their benchmark through their federal funds rate, a response that is clearly politically-motivated, the market will eventually pressure interest rates well into the double-digits; they will eventually go ballistic once it becomes abundantly clear that the Federal Reserve cannot and will never endeavor to execute the unwinding of its $3.865-trillion balance sheet; that those trillions of dollars of securities constitute an interminable inflationary policy that will predictably introduce another (far bigger) round of attempted quantitative easing as soon as they realize they cannot satisfy their obligations, let alone reflate the bubbles with a measly 200-basis-point reduction, while in turn telegraphing economic weakness to foreign creditors who have already grown wary of US dollar exposure and the insolvency of a US Treasury hopelessly mired in debt and frothy "economic growth." 

The news shared about the most recent quarter at Quicken Loans is equivalent to filling the tank with high-octane fuel after using regular, then attributing the performance gains to some other factor that can be easily replicated. 

In this case, where the real-estate and mortgage industries have been primed for perfection, so too has the turbocharged car in this analogy. 

In this particular case, the monetary stimulus has served to generate an unsustainable boost just as the high-octane fuel and turbochargers have improved the performance of the vehicle, which surely cannot sustain this rate into perpetuity without substantial modifications to the materials and mechanics of that vehicular system. 

What's more, the mounting pressures, in the case of the vehicle, serve to test the limits of parts and, in the case of the economy, the fidelity of the US dollar and the Treasurys denominated therein.

Thus, just as engineering modifications will thenceforth become the sole sources of performance improvements for the vehicle, as the fuel is already optimal in this metaphorical case, the American economy will require a reconciliation of debts, the development of savings and capital formation to offset its debt obligations and its fiscal and current account deficits, while purging of unproductive allocations of land, labor and capital, to boost real savings and purchasing power. 

In the case of this metaphor, savings (and valuable production) constitute the structural counterpart for the economy, and the average American is already stretched too thin, whereas the next wave of American homebuyers is already crippled with mortgage-level debt, while both are benefiting from artificially-high wages that will reset lower just as soon as American governments, businesses and consumers encounter a much narrower access avenue to credit. 

As that avenue narrows and squeezes out borrowers, governments and businesses will default on their obligations, unemployment will rise precipitously, renters will fall behind on rent, homeowners and car owners, who can no longer refinance, will fall into delinquency, and these assets will flood the market as banks foreclose and, joining desperate homeowners, rush to liquidate their assets before they become worthless. 

This will result in a collapse of the higher-order industries, among them real-estate investing, mortgage lending and the services around them.

This ostensibly won't keep the talkers at Quicken Loans from sounding optimistic and dismissing reality en route to closing. 

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