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December 15, 2006
Good news for the economy all week long had mortgages headed for an up-side blowout until rescued by today’s word of zero change in November CPI. Do not be misled: for mortgages to hold near 6.00% -- let alone decline further -- the economy has to sink, and that’s not what it’s doing.
The killer this week was retail sales, up a solid 1% in November, and October revised up. Then came word of falling applications for unemployment insurance and a surge in ones for new purchase mortgages -- the first real gain in a year, up 15% in just three weeks in a usually quiet season.
The basis for belief in a substantial economic downturn, Fed easing, and justification for a 4.50% 10-year Treasury and six-flat mortgages has been the implosion of housing. Overall, housing is still some distance from bottom (prices may begin to stabilize, but loan defaults and foreclosures will rise for a year or more, and resumed price appreciation is a long way off), but there is no sign that housing weakness is undercutting consumers.
In time for the holidays, good cheer brought to you by Yer Govermint At Werk!
Back in September, johnny on the spot, the Fed rounded up every money-lending regulator who is anybody to issue a “guidance” to banks, S&Ls, credit unions, and Fannie and Freddie, ordering them to tighten underwriting and advertising standards for “Nontraditional Mortgages”, defined as any with interest-only or negative-amortization provisions of any kind. In the world of banking, a Fed guidance is a bolt of Jovian lightning -- fail to pay attention, and you will fry.
The events involved resemble policy-making in the Green Zone.
1. The guidance is about five years too late.
2. Its central demands are laudable and a significant tightening of credit. Thou shalt underwrite all interest-only loans as if amortized, and all neg-am loans by amortizing the highest potential balance. Thou shalt cease thy deceptive (and stupid) advertising: “ONE percent FIXED for THIRTY years!”
3. However, the guidance missed the big targets. To a nation in desperate need of reform of sub-prime lending: Thou shalt pay attention to our edicts of 1999 and 2001. The totally ineffective ones. Yes, those. Thy 100% piggybacks may continue, but thou shalt be careful or we shall warn thee again and again and again.
4. The entire mortgage industry ignored the guidance. Totally. Our firm has not received a single e-mail from any wholesaler even considering compliance with the i-only and neg-am requirements.
5. Yesterday, OFHEO, Fannie and Freddie’s regulator, apparently noticed the cold shoulder and sent to them a blistering letter demanding immediate compliance.
6. It is incredible to me that the Fed has not discovered that mortgage lending became a Wall Street business twenty years ago. The Fed can shoot all the lightning it wants at banks, but they aren’t lenders anymore, just originators and conduits like the broker working in the house next door.
7. Main Street underwriting standards are based on the terms of loans that Wall Street will buy. If an investment bank’s wholesale mortgage subsidiary will buy some piece of total mortgage crap because its back-office wiseguys can lay off the risk to a sucker in the credit-derivative market, then a nice, upstanding Main Street “lender” will accommodate the desire of a suicidal home-buyer or refinancer. Sign here.
8. The Fed will sooner or later figure this out (a rocket to the Street’s “primary dealers” will be required), and thereby do the one thing worse than to slam the door on an empty barn: slam it on the ankle of the housing market while it’s running for cover, the credit-burned bond market already swinging shut on its own.
9. It’s a great country. Really.
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