Mortgage Credit News - August 15, 2008

Mortgage rates are falling, almost 6.50% with the lowest fees. All other interest rates are headed down as well, on glide path parallel to the global economy: the 10-year T-note to 3.83% (traded 4.10% only a week ago), and the 2-year down to 2.37% acknowledges zero probability of a Fed rate hike from its current 2% overnight rate.

Domestic data are sliding at shallow slope, but the stuff from overseas is dramatic.

Here, claims for unemployment insurance have sustained the jump to the 450,000 range, a decisive deterioration from the 375,000 in the first half of the year. Consumer confidence has been lousy for a while, but is now lousier: the lowest values have been for the, current conditions better, but sinking now. July retail sales were flat, but adjusted for 5.6% year-over-year CPI a substantial real decline.
The negative news has been inevitable, and is perverse good news. There is no way to win an inflation fight without destroying demand, and the very good news is the Fed and other central banks are winning. At a price.

Japan’s 2nd Quarter GDP fell 2.4%, and the Eurozone minus .2%. Going lower. Asian results are not in, but the global-trade engine has entered a sharp reversal, everyone’s exports declining. The most immediate impact is a run to the dollar: the euro is $1.47 today (down $.03 in a week), oil is $112 (was $116), and gold $791 (was $858, the March top $1033). That’s a deflationary pattern. To buy the dollar you have to buy dollar-somethings, Treasurys the favorite, and maybe, just maybe, soon... mortgages.
Sidebar. The Russian adventure in Georgia is a help to the dollar, but is not a big deal. The Russians do not want NATO to proceed any further eastward (and it should not), and Georgia’s aggressive president crossed a bright tripwire that the US had warned him not to. Russia already controls Europe’s energy supply, and there is little additional advantage in whacking Georgia. The uniquely clumsy and brutal effort by the Russian kleptocracy hurts them far more than helps: the world is reminded that the US does dumb things with good intentions; the Russians poison your tea on purpose.

Fannie’s Mudd and Freddie’s Syron continue to whitewash their false fronts (Russians would appreciate their Potemkin villages), raising fees, tightening credit, freezing loan purchases, looking after their stockholders instead of the nation, unimpeded by their comic-book regulator, Lockhart, and utterly oblivious to pending nationalization. A rising unemployment rate will in some cases bring justice.

There is a place for government in the mortgage market: uniform underwriting standards are a Good Thing, leading to uniform and liquid mortgage-backed securities; and guarantee-for-fee is a good public/private business. Recreating a mortgage buyer-of-last-resort for emergencies like this one can wait.

The model for a proper mortgage agency already exists, but it’s not the Effing twins. Fannie owns $723 billion in loans and has corresponding borrowing (the problem!), and guarantees another $2.1 trillion; Freddie, respectively, $710 billion and $1.4 trillion. Fannie employs 6,400 people, Freddie “nearly 5,000” (FAQ on Freddie’s website: Is Freddie a risk to the taxpayer? “No.”).

Consider the Government National Mortgage Association, Ginnie Mae, born in 1968, carrying the full faith and credit of the US Treasury, guarantor of MBS holding FHA and VA loans. Outstanding Ginnie MBS are just short of a half-trillion dollars, growing $27 billion per month now, triple last year’s rate as the FHA is one of the last games in town. Ginnie owns no loans and does not borrow. It lost a little money in the ‘80s, the only time, the result of an FHA experiment with lunatic loan types (planned negative amortization above purchase price, the legendary 245 GPM, “Gyp ‘em!”) and some simultaneous regional housing meltdowns.

Ginnie employs 62 people. It has asked Congress for money to hire 14 more, but the ever-watchful, never-wasteful, green-eyeshade guardians of the budget have allowed seven. Parts of this credit crisis are tough to solve. This? Good grief.