Mortgage Credit News – August 28, 2009

In this last, drowsy week of summer, long-term rates were unchanged: the 10-year T-note held under 3.50%, lowest-fee mortgages about 5.25%.

Summer has another three weeks to run to solstice, but it’s all-hands-on-deck next week before a late Labor Day to deal with the first August data, especially Friday’s employment report. The change in payrolls announced that morning will clarify the dispute among the recovery camp, the stabilizing crowd, and the double-dippers.

The media and stock markets are a steady stream of recovery spin. If I can’t beat ‘em, I’ll join ‘em… but the following positive spin is an odd assortment of curveballs, sliders, changeups, and a knuckler or two.

Ben Bernanke got reappointed, damned good news. However, reluctance and delay were obvious, and it’s still hard to tell who is in charge. Most assume the shot-caller is Larry Summers, if only because… has anybody seen Tim Geithner?

July orders for durable goods jumped 4.9%, but only .8% ex-transportation, clunkers and such. Grim David Rosenberg found an authentic green shoot: orders for technology have surged for three-straight months to a 23% annual growth rate. That investment in tech reinforces a theory here: the biggest commercial and financial enterprises feel safer every day, secure in access to borrowing, and faithful that no more airplanes will fly into the likes of Lehman.

The second half of that theory is unpleasant: the big dominoes have been nailed up straight, but the little ones — households and small business — are still going down. July personal income: no growth. July personal spending rose .2%, but just clunkers robbing from the future. Consumers are 70% of the economy: confidence measures are flat, new unemployment claims still 575,000 weekly, above the early-July false bottom.

In a nationwide front-page “Hooray!”, both S&P/Case-Shiller and FHFA found rising home prices. However, pesky math is still a problem. The SP/CS guess has home prices down 15% in the last year, a $300,000 home now $255,000. The 1.4% gain found in this new report takes that house all the way back to $258,570. In a disaster zone like Las Vegas, a $300,000 home suffering a 50% loss requires a 100% gain to recover.

Substantial price appreciation is the only way to stop walkaways, by giving faith to the underwater that it is worth defending their ownership. Substantial appreciation is hostage to a circular question: an improving economy would help housing, but how to get a better economy before a housing recovery?

Credit. Just as always. And there is a flicker of genuine improvement. The Fed has insisted for months that credit markets are better, but little dominoes couldn’t feel a thing. Progress takes time and sequence: first, panic must stop. We’ve been through two years of banks refusing to lever securities, and a year afraid to lend on anything at all. Now the biggest three dozen banks have been given a capital pass: the stress-test baloney, market-to-market waiver, and cancelled toxic-extraction (the smaller 8,000 banks are still in irons, required to raise capital, real estate loans forbidden). The giants, peering from bunker periscopes, have noticed that all their competitors are alive and won’t be allowed to fail, and all are awash to the eyeballs in zero-cost cash.

Fed data, several analysts, and Bloomberg today report that banks are beginning to nibble at lending on debt securities, including mortgages. Hence we see reliable offerings of fixed-rate Jumbos near 6.00% — still a wide spread versus conforming, but only one-third the chasm of 2007-2008.

This restoration of credit, no matter how slow, is the beginning of a positive spiral: as loans are available, assets will begin to rise in price, market liquidity will return, and lenders will lose their fear of the downward spiral we have just suffered through.

Mr. Bernanke’s reappointment is crucial: he understands that we have suffered asset deflation, not general price deflation; and we require and can enjoy a period of asset appreciation long before worrying about general price inflation.