Mortgage Credit News - July 25, 2008

Mortgage rates are still stuck near 6.75%, the financial markets confused and locked-up until a blast of argument-resolving data arrives next Friday.
Oil down to $123 and natural gas to $9.25 helped stocks for a while, but they still fell apart on no-bottom housing news and a sinking job market. The economy is obviously weakening, but rates are held up by fear that inflation is the greater risk -- even the stock market’s Thursday elevator-shaft could not hold down long-term rates.

Let us take time for silly-season recognition of government worthies and their efforts to combat our problems. Stagflation? Credit-binge? Housing ex-bubble? Financial-system insolvency? Energy crisis?
We’re hard at work on it. Whatever.
Highest marks to the Fed. In retrospect, Perfesser Bernanke figured out the 1930 risks back in January. Rarely do courage, fast action, and effectiveness meet so well as in the Bear Stearns intervention.
Treasury Secretary Paulson has been late to the game. Distracted by his China-trade offensive, the record shows his great and misplaced faith that the financial system would recapitalize itself. However, he’s up to speed now: his ”Bazooka Backstop” of Fannie and Freddie was prepared before confidence broke in the GSEs. His progress to out-in-front shows elsewhere: Fed examination teams now operate inside the big securities dealers and the GSEs. We may be in trouble, but we’re not going to be surprised again by indolence among lesser regulators (SEC, OFHEO...).

Both the Fed and Treasury indicate knowledge that mortgage supply and system capital are inadequate, and are engaged in slightly panicky floating of new ideas (European-style mortgage “covered bonds,” legal maneuvers to source bank capital from private-equity firms...) which will not work well enough or soon enough. Short of something big, like a nouveau RTC, the authorities are running out of ideas, forced to band-aids, and playing for time and miracles. However, the absence of illusion is good.
In the background the Fed has been working on new regulations: the first issued are a new set of mortgage rules, and a good job. However, early drafts included a proposal to force mortgage brokers to disclose their compensation -- just brokers, not bankers (commercial bankers have long hoped to squash competition). All mortgage retailers are paid and incentivized the same way, of course, no matter where they work, but brokers were guilty of a much higher fraction of defaulted loans.

In an astounding development -- unprecedented, unbelievable -- the Fed hired a market research firm to test the new disclosures on consumers. Repeated re-drafting and re-testing revealed counterproductive confusion among the public, and the Fed dropped the idea. Gold star, guys. Might test a few thousand other “disclosures.”

Then there is this week’s housing bill. Barney Frank and Chris Dodd’s egomaniacal dream is going fall flatter than Phoenix vacant land, so flat that it may convince Congress to let the pros handle this trouble. Barney Mae calls for $300 billion in foreclosure-intercepting mortgage re-writes, under-water balances to be cut to the reduced market value of the home -- if the owners don’t mind a 1.5% annual fee and giving back 50% of any appreciation they might earn after years of defending a home that still has no equity. Send your keys straight to Barney.

Help for broken mortgage markets? Goodness, no: make it worse for jumbos, the most badly broken of all. Super-Fannies got squashed by $125,000 to $625,500, and the secondary cap reduced from 150% of local median home price to 115%. Our home town, Boulder, with $650,000 median prices in a county with $350,000 median had briefly enjoyed $460,000 Super-Fannie money (the larger “MSA” controls, not the town) -- the only Front-Range county with any benefit at all. Forget that.

Thank you, Fed and Treasury. Congress, enjoy your August vacation. We’re safe while you’re there. Do enjoy what your constituents have to say.