Calm before the storm image via Shutterstock.
Long-term rates have been unchanged for a month and a half, the 10-year T-note between 2.5 and 2.7 percent, mortgages near 4.5 percent. That stability is an illusion.
Trading desks now labor in deafening toe-tapping, pencil-drumming, fidgeting and superstitious desk-rearranging (and sock selection) as everyone waits for the economy to declare itself. Will the Fed’s acceleration appear? Or another false dawn?
It’s going to take months to know, hence the rate paralysis. A thin week for data supported acceleration: The ISM service-sector jumped to 56 in July, way above expectation and one of the best readings in five years. Stocks are sliding, the fear of Fed withdrawing stimulus trumping a better economy — which seems odd, but so has the stock market run.
Do not believe news of a European bottom, let alone turn. Germany is doing better, but its improvement reveals the fatal problem: Its trade surplus is still 7 percent of GDP. Its weak partners trapped in the euro must be able to run surpluses of their own, including in trade with Germany.
The zone cannot turn until Germany imports from the others, or subsidizes the others with its winnings from a euro undervalued for Germany’s productivity and overvalued for all the others.
President Obama delivered his third speech of five on the economy. May the saints preserve us. Only two to go.
This one was about mortgages, and the Fannie-Freddie badminton underway, swatting around feathered but no-fly proposals.
The speech was designed in part to head off the rockheads on the right who want to close the agencies and shut off any government support for mortgages. Hence a long song and dance about protecting taxpayers.
A second purpose was to demonstrate the president’s knowledge of the subject and engagement with the economy and housing. Better not to have tried. Technical speeches are better delivered by technical officers — the secretary of the Treasury, or of HUD, charged with running the show.
The speech contained errors of fact and perspective, common to speakers cold to contrary ideas or correction. The first described his grandfather after World War II and the GI Bill helping him to get a loan from the FHA, and then the need for citizens to “save up to buy a home.”
Savings are a good and necessary thing for families and the economy. But the president’s granddaddy got a VA loan, not FHA (created in 1934, not by the GI Bill in 1944), and VA loans then and ever since have not required down payments.
Accompanying White House fact sheets attempting counter-right propaganda advocated “bright lines” in underwriting standards, and the president ridiculed “liars’ loans.”
There are no bright lines. All is grey. Rigor should increase as down payments fall, and decrease as they rise. Some people can be trusted with nothing down, some can’t.
In a 1912 congressional investigation, an attorney asked J.P. Morgan if he would make loans only to those who already had money. Morgan: “The first thing is character. A man whom I do not trust could not get a loan even if secured by all the bonds in Christendom.”
Local housing authorities with their mandatory counseling have made the same discovery, and exceptionally low rates of default.
Bulletin: Fannie and Freddie in the last 90 days rebated $20 billion in net income to the Treasury, on the road to repaying all assistance by 2015.
Late in the speech: ” … We’re simplifying overlapping regulations; we’re cutting red tape. … We’ve got a Consumer Financial Protection Bureau … designing a new, simple mortgage form.”
Politics is politics. Puffery is part of the game. Still, I wonder what compels politicians to rise to trumpet things that everyone knows are false.
Fannie and Freddie will be around for quite some time, if only because they guarantee $6 trillion in mortgage-backed securities. Total first mortgages outstanding are about $9 trillion inclusive of the agencies, in the range of total assets in the entire U.S. banking system.
There is no conceivable source of private capital, not even at significantly higher rates, to replace the liquid and government-guaranteed supply. Safe for now.
Over time, as the bubble fades, true history of the agencies and lending will come forward.
Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at email@example.com.