Mortgage Credit News – September 25, 2009

Long-term rates are again approaching four-month lows, 10-year T-notes just above the magic 3.28% level; break that and low-fee mortgages will cross just under 5.00%.

If that blessed moment should arrive, do not wait for lower, or expect sub-5.00% to last more than a few hours: surviving mortgage lenders will yell, “Now!” to a few million boat-missing refinance candidates, and that renewed demand must be worked off before any deeper drop.

The moment will be a blessing for us, but caused by bad news for the economy. The “V”-recovery Green Shooters lost a lot of ground to the “L” non-recoverists this week, the few growth items offset by flatteners and an unsettling statement from the Fed.

The good stuff: new claims for unemployment insurance fell to a cycle-low 530,000 last week, still double a healthy level and not a confirmed trend, but crawling down 25,000 or so every couple of months.

August figures pancaked a tentative up-trend: sales of existing homes fell 2.7%, and sales of new ones eked out a .7% gain on bottom-price building. Orders for durable goods were supposed to rise on the last of cash-for-clunkers, but dropped 2.4% (clunker swaps now gone, September auto sales are running 38% below August).

The Fed’s statement led with a cheery preamble, “Economic activity has picked up,” but on further review was tweedley-deeting past the graveyard. A confident Fed would not have extended mortgage-purchase commitment into next spring, nor confirmed the entire $1.25 trillion commitment, nor have left the door open to more if necessary, nor forthrightly renewed “exceptionally low rate… for extended period.”

I think the Fed properly took a wait-to-see timeout since last spring, after massive intervention, but is now nervous about a stall. And should be.

“Massive” is not an adequate adjective. There are $10 trillion in US 1st mortgages outstanding — have been ever since 2007. All categories except Fannie, Freddie, and Ginnie (the “GSEs”) have shrunk, and those three have increased from $4.2 trillion to $5.5 trillion. By next spring, the Fed will have bought 90% of the increase, and own 20% of the GSE total. This operation is the sole source of new mortgage credit.

More from the Fed’s statement: “Conditions in financial markets have improved further, and activity in the housing sector has increased.” I assume that some of that sentence is designed to induce confidence, and some to display pleasure at the absence of new dominoes and Depression two-point-oh. How much is self-deception, how much is reluctance to speak directly, I do not know, but the sentence does not accurately describe these markets.

Credit is desperately short, partly at the Fed’s own hand in its very foolish insistence that banks raise capital when they cannot — few investors willing to provide, and new earnings constantly wiped out by new losses. Catch-22: losses won’t stop until the economy recovers, but it cannot recover without credit, and credit is limited by losses.

At any delicate moment, the political world naturally seizes the opportunity to do the wrong thing. The surge in GSE lending is their new target, specifically the FHA. FHA loans last week rose to 47% of purchases, and FHAs outstanding have doubled in a year. Meanwhile, FHA losses threaten to require Treasury support, and red hot demands are rising that the FHA jack up its down payments and restrict other criteria, these people claiming that the FHA has loosened to become the “new subprime.” It hasn’t eased requirements at all, of course, and FHA demand has exploded because other sources have collapsed. The FHA is the last resort, just as intended since 1934.

Any period of credit excess is inevitably followed by a time of zealous purification. Only believers in hair shirts and self-flagellation would think that cutting credit would solve a problem made worse by too little credit. The FHA is now the object of a moral treasure hunt: “Look! Look! I found people making loans! Stop them!”

That righteous idiocy is the principal obstacle between predicament and recovery.