Imagine an American homeowner who took out a conventional mortgage exactly 30 years ago and is making the last payment. One must imagine it, because only stunning financial ignorance would have dissuaded a borrower from prepaying or refinancing their loan over the years, probably several times. October 1981 was when mortgages were at their most expensive ever at 18.45 per cent, while last week they hit a record low below 4 per cent. The cumulative payments on an identical mortgage are less than a third as much today.
This flexibility has boosted house prices and consumer spending tremendously over the decades, which is why part of the rationale for Operation Twist is to milk the trend further. However, few people have asked what happens when falling rates stop or reverse, as they surely must.
Even though homeowners who refinanced at low rates would be “locked in”, there would be nasty consequences from rising rates. Home sales might freeze as buyers demanded lower prices to keep affordability constant, while sellers might be dissuaded by negative equity or as a result of finding their mortgages have become too cheap to abandon.