Is Mr. Bernanke a Genius or a Goat?
By Louis S. Barnes Friday, April 29, 2011
We have a truly splendid outbreak of spring fever in the markets and media, the infected running about in circles, yelling “Inflation! Money-printing! Dollar crashing!”
Before rounding them up, a moment for the economy: inbound data are on the weak side. 1st quarter GDP, expected everywhere (until March) to be in excess of 4% growth, maybe 5%, arrived at 1.8%. Net of distortions, probably closer to 2.5%, but not going anywhere, certainly not fast enough to absorb labor or houses. Orders for durable goods did rise 1.2% in March, manufacturing continuing as the one bright spot.
Case/Shiller found falling home prices in February (Again. Duh.). The surprise of most concern is the rise in people filing new claims for unemployment insurance. At the peak of optimism last winter, weekly filings fell into the 380,000 range; last week were 429,000, the recent average above 400,000 for the first time in two months.
Okay, get out the butterfly nets, soothing voices, straightjackets, and a quart of whatever they used to give to Pat Nixon.
Principles and facts sometimes quiet the disturbed: any inflation problem will cause a jump in long-term Treasury yields. Instead, the 10-year T-note this week dipped to 3.31%; excepting Tsunami Day (“3/11″) as low as any since mid-December.
Second, you cannot have an inflation problem without rising wages. If people don’t have the money to pay higher prices, they won’t buy much of the stuff that got more expensive. In next Friday’s job data, expect wages to be flat for a fifth-straight month.
Third, there is an inflation problem — several of them, full-go wage-price spirals — not one of them here. China, India, Brazil, Russia, even parts of Europe, all “overheating,” meaning economic growth faster than capacity, all in the serious stages of inflation that everywhere previously have required a recession to stop.
“But GOLD, man! Don’t you SEE it?! $1,545!! FIFTEEN HUNDRED BUCKS!! Going straight up… are you BLIND!?! SILVER $47.50… time to melt all that crap we got at the wedding… inflationinflationINFLATION!!”
Better to rent “One Flew Over the Cuckoo’s Nest.” There is nothing to do with these people but shoot ‘em up with thorazine. At $1,545, gold is at last closing on that all-time money loser, $895 on April 25, 1980. In constant dollars that was $2,167.
Gold does not mean anything. Just a pretty, scarce, and emotional commodity.
Dollar principles are harder. First: the price of gold is the price of a thing; the price of a dollar is measured in other currencies, themselves relative to each other. Therefore, any time the booby-hatch begins this dollar-falling hollering, pinch yourself. Fall from what, relative to what? Beware of charts beginning at prior highs — in mathematic inevitability, they must show subsequent decline.
We have fallen versus the yen, now 81/buck. Which is very good news. The yen’s strength is a self-welded prison of deflation. We have fallen versus the commodity exporters — Australia and Brazil — themselves overheated by China’s insatiable appetite, and deeply vulnerable to any China slowdown. We have “fallen” versus the euro (now $1.48), but the dollar is still stronger than the euro-top in the summer of 2008, pre-Lehman ($1.59). The dollar has had no meaningful slide versus China’s yuan or Russia’s ruble, and has gained versus Swiss franc and Canadian loonie.
All of the nations whose currencies have risen recently, previously succeeded in devaluing versus us in the pit of the financial crisis, which cheapened their exports, and helped them to recover. Relative processes tend to self-correct, recurrently.
Last currency principle: the primary mover is interest-rate differential. Earn more there than here, money goes there. In Teutonic blockheadedness, the European Central Bank has begun to raise its cost of money, assuring the collapse of Club Med. Our cost of money is still zero, where it will remain until someone here decides to help housing. The day that Greece goes down, you won’t want to hold euros.
Some day we’ll have dollar trouble, but this day belongs to the Mad Hatter.
Notes to chart: The dollar has gradually declined ever since WW II, as it should have, the rest of the world gaining relative strength. The two huge runs up in value were bad things for us an the world: the early ’80s double-digit interest rates, fighting inflation, pulled cash to the dollar; and the 1997-2004 succession of Asian currency crisis, recession, and 9/11 did the same. The weakness since 2008 traces to suicidal strength in the yen, and a 0% Fed fighting deflation; when we finally recover and the Fed normalizes, the dollar will return to its 80-90 index value on the chart. The we’ll see how we do versus the new world’s largest economy, China, and how it does versus us.
Could the U.S. lose its AAA rating?
By Louis S. Barnes Friday, April 22, 2011
It has been a quiet week in the markets, shortened by Good Friday. Oh, S&P created a tempest with its threat to the AAA rating of Treasurys, but as the week wore on, more and more people asked, “How would they know?”
Stocks regained all losses, but Treasury bond yields stayed low, the 10-year 3.39%, mortgages under 5.00%. Bill Gross, famously dumping all of PIMCO’s Treasurys last month, has lost money on the trade. A Federal budget deal is now likely; Europe is in trouble (again, Greek 2-year bonds paying 22%), and domestic data is weakening.
Sales of new and existing homes are flat, but distressed inventory is rising; and the FHFA found that home prices fell 1.0% in January and another 1.6% in February.
The fascinating thing about housing, now: it’s no longer news. It’s so yesterday, boring. For seven months, media attention has focused on ForeclosureGate, loan servicers allegedly foreclosing on innocent homeowners. The reality is clear now, as then: the servicers have mistreated borrowers by inattention, and have run around antique local-level foreclosure procedures. Servicers will be fined, and newly regulated.
Media have found a handful of wrongly foreclosed families, but that preoccupation has missed wisdom attributed to Uncle Joe Stalin (if he didn’t say it, he should have): “The death of a man is a tragedy; the death of a million is a statistic.” The search for human-interest has abandoned the real victims: another two million households will be foreclosed this year, 11 million underwater — and government help is going… gone.
Imagine if in 1937 FDR had said, “I see one-third of a nation ill-clothed, ill-housed, and ill-fed… but if we wait long enough, they’ll get over it.” Everybody understands the basics: more houses for sale than buyers. However, even those in pain often don’t believe me when I say that credit is too tight and too scarce. Today, two examples.
Fannie, Freddie, and FHA are the only remaining significant sources of mortgages, and they are frantically trying never to make another bad loan. One cause of default is fraudulent borrower documents. Early in the 1990s, minutes after the invention of desktop publishing, the first borrower fabricated tax returns showing more income than the ones filed at the IRS. Minutes after that, FF&F required form 4506T, to pull transcripts from the IRS. For a while we actually checked, but so few fraudulent returns were found that the signed 4506T became a threat, but not an immediate act.
Since 2009 — as never before — every borrower must bring tax returns (not just the self-employed), and we must run a 4506T every time. May a merciful Almighty save us this time of year, when the IRS could not find its behind with the help of a proctologist. Transcript delays have run six, even eight weeks.
How many fraudulent returns and defaulted loans are we really preventing? In a billion dollars of loans through here, I know of one case of fraud (a CPA applicant!), hundreds of innocent but odd 1040s questioned with red-hot tongs, and thousands of delays. Think FF&F are tracking cost/benefit? Uh-uh. Just tighten, baby, tighten.
Second example: the Dodd-Frank Qualifying Residential Mortgage, qualifying for capital exemption in securitization. QRMs will require 20% down to buy, 25% equity to refi, forbid 2nd mortgages… a belt tightened right through the backbone. An FHFA study (April 14 www.fhfa.gov) found annual rates of 90-day delinquency pre-bubble (1997-2003) clustered between 2.50% and 3.00% for all loans — which is why FF&F charge to securitize loans, or require mortgage insurance. QRM-equivalent defaults ranged 0.31% to 0.55%, but were barely 20% of all loans.
By 2009, standards had so greatly tightened that all new purchase loans had a 0.30% default rate, and the QRM fraction 0.07%. No one need fear the wind-down of government supported lending: it’s already done — although the 80% of supply, non-QRM loans are going to be expensive and scarce. This self-defeating political backlash against FF&F has turned them into insurance companies offering hurricane coverage, but only for homes 200 miles from an ocean.
As The World Turns!
By Louis S. Barnes Friday, June 25, 2010
The world changed this week, big-time, as markets struggled to keep up with political shifts, then economic, then political again. Markets are still behind.
Sad reports on housing routed the recovery brigade: May existing-home sales fell 2.2%, and sales of new ones collapsed 32.7%. 1st Quarter GDP was revised down (again) from the original 3.5% gain to 2.7%, and two-thirds of that remainder was inventory re-building. May orders for durable goods were still strong (+.9%), but that was it for positives.
The Fed’s post-meeting statement had the feel of can’t-say-that. Prior statements have referred to “strengthening” recovery. This one said that recovery is “proceeding.” Wherever this procession is going, nobody will mistake it for the 4th of July parade.
Money ran to bonds for safety, the 10-year T-note to its 3.09% low, mortgages about 4.75%, for one fleeting instant 4.50%. Applications for loans faded anyway.
In the first political development, China announced last weekend that it would let the yuan float upward, and global trading sparkled in pleasure for four whole hours. Then Monday’s yuan-trading reality exposed China’s utter deceit, exchanging its credibility for escape from more yapping by Mr. Geithner at the G-20 summit (can’t blame them). China obviously will continue a weak yuan, which will undercut wages and recovery everywhere else.
The second political shift has been long in coming, but this week’s sudden, global, and concerted lurch came as a surprise: all of Europe and Japan are embarking on simultaneous fiscal contraction. Stimulus be damned, all are determined to get their finances in proper order. If they can.
Japan’s newest prime minister in its lickety-split turnstile, Naoto Kan, proposes a 5% national sales tax and capped spending to chip at a national debt double its GDP. Such measures guarantee recession, and 10-year yen bonds now pay barely 1.00%.
France is taking unthinkable steps to cut its welfare state, raising the retirement age to 62 (Incroyable! Citoyens aux barricades!!). All of Club Med is attempting spending cuts in the range of 4% of GDP for each of the next three years, recessions certain.
The one European nation that should not cut, already-austere Germany, will do so. Angela Merkel and those competing to replace her are unmoved by the need to buy something from the rest of Europe, or to offer fiscal support. Europe will get an export boost from the devaluing euro, but not enough.
The UK has thus far done everything right (devalue, semi-nationalize banks, force them to lend), and its new government has embarked on the last step, a budget fix, the right way: for each pound sterling in new taxes, four pounds in spending cuts.
Then there’s the United States.
Tim Geithner and Larry Summers have offered incoherent advice to the world for months: maintain fiscal stimulus while adopting restraint. Maybe take a little time with the restraint, but don’t stop the stimulus. As of this week, the world is done with that.
So are we, whether we do it to ourselves, or markets force us. An economy staggering forward somewhere between flat-bottom “U” and double-dip cannot possibly generate enough tax revenue to close the chasm to the Left’s social promises and Right’s dreams of low taxes and military adventure. Forty-five years of that, done now.
The arch-Keynesian of the hard Left, Paul Krugman, still in favor of big spending, this week abandoned the Obama platform. He wrote that our long-run budget problem “will require, first and foremost, a real effort to bring health care costs under control.”
Peter Orszag, talented director of the Office of Management and Budget, has quit.
Mr. Obama’s thinking is opaque. Words, words, words, more words… farther off-point every time he speaks. He seems annoyed that the real world has intercepted his agenda, and is unwilling to adjust. Combined with lunacy in the other party, markets face a leadership vacuum, and markets don’t like that one bit.
Jobs! Jobs! Where are the Jobs?
By Louis S. Barnes Friday, June 4, 2010
Today’s payroll flop — only 20,000 real jobs created in May — will take some time to settle all the way in. Immediately: 10-year T-notes are 3.22% (from 3.36% yesterday and 3.99% six weeks ago), and mortgages below 5.00%.
The payroll report has confirmation: new unemployment has held high for five months; May retail sales look soggy (“same-store” data); auto sales flubbed in May; and housing shows every sign of a serious fade, post-tax credit. Purchase applications have hit a 13-year low; the unemployed do not apply, nor do the underwater, and the few, the brave who think they are qualified often find themselves in the “rejected” pile.
In days ahead, the entire recovery camp from government to stock-pushers has more than explaining to do. It must change its mind.
All in one furball: How can mortgage rates be so low, and home prices so low, affordability the best ever measured, yet housing defies recovery? One unifying answer: credit. Not enough, and wildly too tight.
The credit dearth is perfectly rational. At default rates like these, nobody knows what new loan is safe to make, and underwriting has been overtaken by hand-shaking, eye-glazed panic. The horrifying conundrum: new loans will inevitably produce new losses, yet without enough new loans, losses on existing ones will be greatly higher.
Underwriting rules should be based on prior loss experience. That is, any borrower characteristic that generates an outsized loss rate should be excluded. Example: credit score below a certain threshold. Early in the present disaster, in 2007 Fannie and Freddie (the “GSEs”) began proper re-calibration of underwriting, withdrawing their portion of the credit ease that led to the bubble.
In stage two, 2008 defaults surging further, the GSEs began to throw defensible exceptions out with the bathwater. No matter how big your down payment, no matter how much money you have, or how good your credit, or work experience, income underwriting will be 1040-or-the-highway. No exceptions. Hysterical blindness.
In 2009 stage three, unemployment drove some defaults to a hundred times prior worst case, and impossible to tell if an underwriting flaw caused a default, or the 75-year-record recession. GSEs began to issue rules having little to do with actual risk, tightening for the sake of tightening. The thunder of doors slamming on empty barns. The 2009 classic: if you have disputed a credit report item, the GSEs will block your closing until you prove that your dispute did not hide a debt outstanding. You prove.
Mortgage haiku: Every borrower looks like a concealed IED to people fried by PTSD.
New for 2010, Fannie’s Loan Quality Initiative demands a credit report re-run immediately before closing. Yes, once in a while a borrower will be found to have blown himself up by buying a new frig and washer-dryer on credit. Many, many, more times we’ll get a mistaken report, or an ambiguity, or an argument that will delay or kill closing. What’s the likely ratio of defaults prevented versus useless meddling? One to one hundred? One to one thousand? Ten thousand?
Nobody knows. Sounds tough, so do it. Another: under LQI, some creep is going to check to see if you really moved into your new primary residence. True, it is fraud to fail to do so, and misrepresented rental properties have much higher rates of default. However, heaven defend the poor souls who let sellers stay an extra month, or who engage a house-sitter while travelling, or who want to renovate before moving in. No power on or off planet will protect the new owner who has taken down part of the house to add-on and add value. The ratio of loss-prevention to pointless intrusion and punishment of technical offense?
The GSEs have turned sensible and predictable mortgage closing into a field of open manholes, new ones popping open at each step. This effort at mortgage perfection — instead of rational, actuarial management of loss — has thinned the pool of eligible borrowers to the point that housing cannot recover. Not in time for the economy.
Mortgage Market Update
By Louis S. Barnes Friday, April 30, 2010
Several unusual forces are pushing and tugging at markets, making it hard to isolate actual changes in trend.
The all-defining 10-year T-note continues to fall in yield, a four-week straight-line decline from 3.99% to 3.66% this morning. 3.60% is the next key level, going all the way back to December. Maybe this drop reflects recovery skepticism among global bond investors, or maybe it’s a temporary flight from woes in Europe.
Mortgages are stuck at 5.125%, the spread to the 10-year at 1.45% the widest in six months — possibly widening because flights to quality are usually limited to Treasurys, or possibly because the Fed is no longer buying MBS and mortgages are gradually returning to a normal, 1.75% spread.
There were no good clues in the economic data, neither signs of stall nor acceleration. New claims for unemployment insurance in April have been a hair higher than in March, near 450,000 weekly. New mortgage applications are running 31% above February, confirming a remarkable spike in home sales, but we won’t know until mid-May how much is due to the expiring tax credit (bet on “a lot”).
1st Quarter GDP pulled up 3.2% in today’s release, the third-straight quarterly gain, but the stock market is down on the news. Consumer spending was a healthy component, which it sure as hell ought to be, given the Treasury hosing $150 billion that it doesn’t have into American pockets each month.
In one of the best measures of inflation, the GDP report had its annualized rate dropping from 1.5% in the 4th Quarter to 1.1%. Low inflation is good, too low is not.
Last, after its meeting this week the Fed tilted its description of the economy ever-so-slightly better, but is obviously still worried, maintaining its “exceptionally low… extended period” rate language. KCFed prez Tom Hoenig dissented again, his third-straight demand since January to toughen language; the Elmer Fudd of inflation hunters, he’s still blazing away at a Wascawy Wabbit now gone altogether.
Americans are properly pre-occupied with our own affairs, the more so the closer we get to our front doors. Most of us feel the weight of employment and housing, and flinch at thinking about the fiscal-repair sacrifices ahead.
Developments in Europe are incomprehensible to most civilians, but comparisons there to here should be reassuring, even confidence-building. Not the negative pleasure of watching somebody in more trouble than you are, but the positive discovery that you’re more capable than you thought.
Europe, roughly the same population and GDP as here, not even 15 years into a currency union is too fragmented to protect itself in a credit and budget wreck. We fear political polarization, and grapple with Bubble Zones, but the gulf between a Bostonian and an Arizonan is nothing compared to Lisbon versus Helsinki. In the euro zone, sixteen separate national governments, tax codes, treasuries, retirement systems, cultures… fourteen different languages… the US is a paradise of unity by comparison.
There are similarities in the financial problems here and there, but our ability to resolve them is without parallel. California could default on its debt without threatening the Union or the dollar. We wrestle with retirement and health costs, but 23% of people in the euro zone are older than 60, and only 18% here, the gap growing every day. Our youth has been replenished by immigration, legal and not, people who have seen the limits to opportunity elsewhere.
Our flexibility has no counterpart anywhere. As painful as it is to go through, no other nation would allow a housing bubble to deflate with such violence. We are making more progress than we know. We have retarded the rates of foreclosure and loan write-off, but nothing like the zombie-banks in Japan and Europe.
Nobody knows — can know — where we are in a cycle that we’ve never tried before. But we’re better than we were, and have the means to adapt.
Please share your thoughts on this article. Do you agree?
What does Mel Brooks and Wallstreet have in common?
By Louis S. Barnes Friday, April 23, 2010
Long-term rates — the ones guaranteed to rise — fell again. The 10-year T-note made it briefly to 3.73%, and to 5.00% before rising a bit yesterday.
The action was largely due to Greek default, the possibility of a failed bailout (see Fannie and Freddie and “Paulson’s Bazooka”, the dud in summer ‘08) and contagion to the rest of Club Med. Today’s Euro-zone assistance is holding, for the moment.
On the letter of the law, The SEC’s fraud lawsuit against Goldman is weak. However, the light shed by the filing is already a help to pros and civilians alike.
For three years Wall Street has tried to sell the idea that it was tricked by mortgage brokers into buying bad mortgages. Now everybody understands the suction machine that ran out of control on the Street, hungry for bad loans in volume so immense that the Street finally invented imaginary ones, “reference notes” and synthetics.
At the core: the Street’s discovery that it could make more money shorting bad loans than holding good ones.
In Mel Brooks’ 1968 fraud epic, “The Producers,” arch-promoter Max Bialystock (Zero Mostel) was struck by revelation: a Broadway show that went bust could make a lot more money than a hit. The scheme required two things: the chutzpah to sell a play many times to investors, and then finding a play so bad, so dreadful, that it was guaranteed to close after its first performance. Then keep the excess sales proceeds.
Thus Max and his frightened but greedy CPA (Gene Wilder) sat in an empty theater thumbing through piles of rotten scripts, until the grand, “ah-HAH!!” at discovery of awful perfection: the song-and-dance production, “Springtime for Hitler.”
Goldman Sachs helped to invent ABACUS 2007-AC1, a CDO which hedge-funder John Paulson wanted desperately to short via credit default swap. This CDO, parts rated AAA by idiots at Moody’s, its bad mortgages earnestly and cluelessly assembled by idiots at ACA, bought by idiots at Germany’s IKB bank (in springtime, no less), the CDS provided by ACA’s idiot sister company, ACA Capital, CDS re-issued by dolts ABN Amro Bank and the Royal Bank of Scotland back to Goldman. Upon the collapse of the CDO, valueless in five short months, the CDS through Goldman paid Paulson $840 million.
Part of Goldman’s defense: many SEC rules do not apply in dealings with sophisticated investors. Like these. Another defense, different deal: according to Goldman’s head of German operations, Alexander Dibelius, banks “do not have an obligation to promote the public good.” Ahhh… spring.
In an alternate Goldman script, CFO David Viniar might appear at Chairman Lloyd Blankfein’s door: “Lloyd, fixed income has come up with a new structure, huge volume and profit. The deals are going to crash, stuff we stopped doing last year, but AIG London and other dopes will CDS ‘em, the short-side swaps rich to us. Okay?”
Blankfein: David, how huge is ‘huge’ volume? “With copycats, a trillion or two, I guess.” How soon will they crash? “Oh, a year… some less.”
In that volume… would that crater AIG? “Oh, yeah [laughs], but we’re safe.” David, a hole that big, that fast… is that a risk to the system? “Yeah, maybe… could be.”
Well, then. A lot of money for us in those swaps. Damned shame. I’ve got two calls to make. To warn AIG’s chairman about his London boys. And Ben Bernanke… if it’s this big, then he doesn’t have much time to make his own calls. Tell our guys I’m sorry.
Impossible script, of course. In 1968, Wall Street normal. By 2007… never happen.
Without integrity writ large, without some sense of responsibility to society, then markets cannot function. All of this “moral hazard” and “too-big-to-fail” is just amusing noise. Neither reform legislation nor regulators can force good behavior upon those who intend to evade, edge, quibble, and prevaricate their way around integrity.
Integrity is a cultural matter, long in formation, not easily lost. But, when it is lost… that’s what we call a “failed nation.”
The Market? Your home? A what…?
- Cherry Creek Mortgage – A tradition of Trust
By Louis S. Barnes Friday, April 9, 2010
Just when everyone was certain that long term rates would rise, they fell. Wednesday’s 10-year T-note auction drew more bidders than any since ’94, and its yield thumped down from near 4.00% to 3.85%, mortgages back down to 5.125%. The improvement is gradually reversing, but for the moment we’re okay. An $11.5 billion dive in consumer credit in February more than wiped out a revised gain in January, the first in 11 months. New claims for unemployment insurance were supposed to continue improvement, dropping to 433,000, but jumped to 460,000. Careful with the hosannas to March retail sales: the measure that jumped 9% was a year-over-year comparison, and March last year was the pit of panic. The easy Treasury auction revealed the enormous gulf between the noisy sustained-recovery believers, and the quiet skeptics who elbowed to buy the bonds. Professor Bernanke laid it out this week: “We are still far from being out of the woods. Many Americans are still grappling with unemployment or foreclosure, or both.”
Along the whole length of disagreement, the widest spot in the canyon: those who understand the impact of housing on the economy, and those who do not. Many have believed with some merit that too many American resources have gone to housing: too much credit, too many tax benefits, too much consumption, houses too big, and too much assistance to undeserving wannbe owners. Others have believed the same things with little merit: those who think everybody should put more money into the stock market instead of those silly houses. Nothing like a blown bubble to create momentum for re-allocation. Certified good-guy, Fed vice-chair Donald Kohn in his most recent pre-retirement farewell: “Housing is almost certainly going to be a smaller part of the economy than it was when lax credit standards encouraged overbuilding and over-borrowing.” That’s fine: no more lax standards. However, Kohn went on: “Households need to continue rebuilding wealth. They became too indebted and too dependent on housing wealth to finance current purchases and provide for future events like the education of their children and their retirement. Now they need to repay debt and save more out of current income.” You hear some version of that every day, but not from senior policy makers. The reason: Americans have not saved significant sums since the 1970s, and have never “built wealth” by saving from current income. We build wealth just like everyone else on earth, by the rising values of our assets. From Kohn to the Fed’s loony bin… Minneapolis Fed president Kocherlakota on Tuesday: “Yes, the housing sector is important, but residential investment makes up just 2.8% of the country’s GDP. We can — I believe that we will — have significant growth in output without seeing a major turnaround in the housing market.” Wow. Sonny, don’t believe everything that pops into your head. Talk like that makes me feel like the alumnus who hears his college football team will be “de-emphasized.” The GDP contribution of residential construction is indeed minor. However, there are other accounts. From 2002-2008, “mortgage equity extraction” as measured by the Fed often contributed as much as 8% of disposable income — 10% in 2005. Without that addition (clearly with Greenspan’s assent, clearly overdone), every GDP analysis has shown that the US would not have emerged from the ’01 recession.MEW has been subtracting from income since the 2nd quarter of 2008, an overpowering headwind. Then there’s the consumption-crimping and demoralizing hit to household net worth, $7 trillion lost. And the huge, ongoing, and unrecognized losses to banks, impairing their ability to lend, and feeding a downward spiral in asset values. Housing will get help, sooner or later (credit!). And we’ll muddle, and adapt. Even if the housing de-emphasizers have their decade, we’ll still out-fox ‘em. It will take time, but one genetic imperative drives homo sapiens harder than any besides sustenance and reproduction: the determination next year to live in a better cave.
Please share your comments.
What role do you feel housing should play in a families financial plan of cash flow management and wealth building?
Mortgage Market update for 3/19/10
By Louis S. Barnes Friday, March 19, 2010
Long-term Treasury rates have remained stable, the 10-year T-note in a band 3.60%-3.75% for a whole month. However, mortgages are beginning to vibrate, trying to find an appropriate level as the Fed stops buying: in just the last week rates have moved between 4.875% and 5.125%.
Treasurys are getting buying support from the slow-motion chaos in Europe. Germany has at last refused to help to Greece, saying it’s an IMF problem and not the European Union’s, thereby putting the rest of the Club Med dominoes on notice. Germany never has graded better than a “C” for playing well with others. France today expressed dismay at Germany’s IMF proposal. Although dismay is a French specialty, it is correct: if Europe cannot look after its own, “union” is a fantasy.
As so often during fracture of a collective effort, all members overestimate their individual advantage, Germany in the lead. Actual breakup — even the departure of Greece — would cascade cash to the only remaining safe-haven. Us. Believe it or not.
The Fed’s post-meeting statement that “Economic activity continued to strengthen…” would get a poor reception in your average Main Street saloon. Improve, yeah, in places; but, “strengthen”?… nah. If it were truly strengthening, how come exceptionally-low-rate-for-extended-period?
The Fed also hit the end game of its housing-forecast. In November, “Activity in the housing sector has increased”; December, “Some signs of improvement”; January, no comment; this week, “Housing starts have been flat at a depressed level.”
Every administration must generate happy-talk forecasting. However, Tuesday’s Geithner-Orszag-Romer official report to Congress was either the most honest ever, or if happy-spun we’re in more difficulty than the Fed will acknowledge. We will not see 200,000 jobs created in a month until sometime in 2011, unemployment will still be 9% at the end of 2011, and 8% a year after that. Stranger than honesty, the report www.treas.gov/press/releases/tg589.htm recites mini-policies but is void of real stuff, nothing on what really ails the economy and inhibits recovery, or what to do.
With that backdrop, the Fed next week will stop buying MBS.
Play the tape all the way back. The housing Bubble Zones began to deflate at the end of 2005. The wholesale bank run and credit collapse began in July 2007, and the Fed began to cut the overnight cost of money. Market rates, mortgages included, did not follow, as global cash instead ran to somebody’s — anybody’s — Treasury paper. Early in 2008 mortgage rates rose almost to 7% and many classes of mortgages became unobtainable, some for good (toxics), some for ill (jumbos, sensible underwriting). That credit drought pulled the housing collapse beyond the Bubble zones before the recession really hit, post-Lehman, fall 2008.
Incredibly to me, the Fed did nothing to support mortgage markets until it announced its MBS-buying intentions at Thanksgiving 2008, and did not begin to buy until January ‘09. Yes, the Fed could argue that such dramatic action could not be taken until the precipice was clear to politicians. The counter: no American recessions in the last 40 years ended until a deep drop in mortgage rates ignited housing. We still don’t have a deep drop. The rate centerline during the Fed’s 2009 buys has been the same as 2002-2003, and barely more than 1% below the 2004-2008 average — and much of that benefit has been cancelled by hysterical tightening of credit standards at Fannie and Freddie (mercifully, the FHA has held constant, standards the same since WWII, no easier during the Bubble, no tighter now.)
The housing market has gradually fallen out from under the Fed’s support in the last year, demand flat at best versus increasing distressed inventory.
The utterly wacky, perverse good news: so far, perhaps due to diminished demand, perhaps because the Fed has not merely bought but removed altogether from the table $1.25 trillion in MBS… mortgage rates are holding. We’ll take that.
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