Thirty-year fixed-rate mortgages continued to hover near 5.5 percent for the lowest-fee packages.

This week’s economic data were overshadowed by the mega-reports due on Monday from the purchasing managers’ association and next Friday’s news of February payrolls. There may have been a predictive glimmer in the Conference Board’s confirmation that consumer confidence fell hard in February, as confidence is heavily influenced by job market conditions. If that pattern holds, then February will have been another thin month for payrolls.

Alan Greenspan had a big week.

On Monday he told the world that the “…household sector seems to be in good shape…” and suggested that compared to adjustable-rate loans, “…the traditional fixed-rate mortgage may be an expensive method of financing a home…” Tuesday: Fannie Mae, Freddie Mac and the Federal Home Loan Banks have grown their balance sheets in an irresponsible way, and now pose “systemic risk.” On Wednesday he said the best way to repair the federal budget is to cut Social Security benefits (the Department of Homeland Security is still trying to revive the crowd). He took yesterday off, but will deliver a speech at Stanford University tonight, and a weekend visit to to check the text might be a good idea, as Fed chairpersons save their best bomb-droppings for market-closed weekends.

One at a time…

The household sector is in good shape if measured by net worth and debt-service-to-income ratio, and not by wage growth. Enormous appreciation in home prices has offset the slightly less enormous growth in household debt, and debt service has not risen as fast as debt because interest rates are so low. However, the rate of home-price appreciation is now declining nearly everywhere (in 47 of 50 major metro areas in PMI’s Winter 2004 survey), but there is no parallel decline in the average American’s need to borrow to maintain her or his standard of living.

Fixed versus adjustable? Beware the crocodile’s smile: the Fed has always been annoyed that households are impervious to its tightening campaigns because the fixed rates on existing mortgages don’t move up when the Fed does. The Fed would love to have households as floating-rate hostages. A Fed study concluded that consumers would have saved a lot of money with adjustable-rate mortgages in the last 10 years, but even Greenspan noted, “…this would not have been the case, of course, had interest rates trended sharply upward.” Fed-watchers don’t often get to say, “Well, Du-uh!” to the chairman.

The Gang of Effing Three is indeed out of control. Guaranteeing the credit of mortgage-backed securities is a safe business, and a sensible thing for government-sponsored agencies to be doing. However, owning a multi-trillion-dollar pile of securities with insanely risky trading characteristics, and financing that ownership with borrowing and hedging strategies that may or may not work in extreme situations…that is nuts. Congress cannot disable these greedy egomaniacs too quickly, but won’t: the three federalized fruitcakes are better at politics than finance. The Fed is, however, too sanguine that the Effs can be controlled without doing harm to mortgage rates: it will hurt, but the hedging of mortgage investment risk must be done in private markets, not swept under government carpet.

Cut Social Security benefits? This time, the “Du-uh!” goes to the doubters. To close the current gap between planned benefits and revenues, it would be necessary to reverse Dubya’s tax cuts (which will happen anyway), abandon reform of the alternative minimum tax (the multi-trillion-dollar prank to be played soon on the middle class), and eliminate the defense budget (all of it).

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at


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