Long & Short term Interest

The relentless raising of short-term interest rates by Greenspan & Co.
could not make the long-term rate to rise. The long-term rate remained
to be as sluggish as sea cows by the economy's trouble spots. The gap
between the two rates has reduced to nearly nothing. When this difference
was very wide (in years 2001-04), mortgage banks raked in profits by
borrowing at super-low short-term rates and then lending at high long
term rates to potential home-buyers.

When this spread started narrowing over the last 8 hikes in interest rates
by Fed, their margins started getting pinched. Now they have less
incentive to lend. Also, they have now much less extra cash to cover
defaults. As a result the mortgage banks have started scrutinizing new
borrowers more carefully.

This could be a potential problem for first-time home buyers. On the
other hand, less number of available loans could mean less number of
buyers especially in hot home markets. Who knows? That could turn out
to be one of the possible factors that can finally put a rush on rising home
prices ... to some extent at least!