Good economic news all week long had mortgage rates headed for an up-side blowout until rescued by today’s word of zero change in November’s Consumer Price Index. Do not be misled: for long-term mortgage rates to hold near 6 percent — let alone decline further — the economy has to sink, and that is not what it is doing.

The killer this week was retail sales, up a solid 1 percent in November, and October revised up. Then came word of falling applications for unemployment insurance and a surge in applications for new purchase mortgages — the first real gain in a year, up 15 percent in just three weeks in a usually quiet season.

The basis for belief in a substantial economic downturn, Fed easing, and justification for a 4.5 percent 10-year Treasury and six-flat mortgages has been housing’s implosion. Overall, the housing market is still some distance from hitting bottom (house prices may begin to stabilize, but loan defaults and foreclosures will rise for a year or more, and resumed price appreciation is a long way off), but there is no sign that housing weakness is undercutting consumers.

Back in September, the Fed rounded up every money-lending regulator to issue a “guidance” to banks, S&Ls, credit unions, and Fannie Mae and Freddie Mac, ordering them to tighten underwriting and advertising standards for “nontraditional mortgages,” defined as any loan with interest-only or negative-amortization provisions of any kind. In the world of banking, a Fed guidance is a bolt of Jovian lightning — fail to pay attention, and you will fry.

The events involved resemble policy-making in the Green Zone:

1. The guidance is about five years too late.

2. The central demands, a significant tightening of credit, are laudable: Thou shalt underwrite all interest-only loans as if amortized, and all negative-amortizing loans by amortizing the highest potential balance. Thou shalt cease thy deceptive (and stupid) advertising: “ONE percent FIXED for THIRTY years!”

3. The guidance, however, missed the big targets. To a nation in desperate need of reform of subprime lending: Thou shalt pay attention to our edicts of 1999 and 2001. The totally ineffective ones. Yes, those. Thy 100 percent piggybacks may continue, but thou shalt be careful or we shall warn thee again and again and again.

4. The entire mortgage industry ignored the guidance. Totally. Our firm has not received a single e-mail from any wholesaler even considering compliance with the interest-only and negative-am requirements. 

5. Yesterday, the Office of Federal Housing Enterprise Oversight, Fannie and Freddie’s regulator, apparently noticed the cold shoulder and sent to them a blistering letter demanding immediate compliance.

6. It is incredible to me that the Fed has not discovered that mortgage lending became a Wall Street business 20 years ago. The Fed can shoot all the lightning it wants at banks, but they aren’t lenders anymore, just originators and conduits like the broker working in the house next door.

7. Main Street underwriting standards are based on the terms of loans that Wall Street will buy. If an investment bank’s wholesale mortgage subsidiary will buy some piece of total mortgage crap because its back-office wise guys can lay off the risk to a sucker in the credit-derivative market, then a nice, upstanding Main Street “lender” will accommodate the desire of a suicidal home buyer or refinancer. Sign here.

8. The Fed will sooner or later figure this out (a rocket to the Street’s “primary dealers” will be required), and thereby do the one thing worse than slam the door on an empty barn: slam it on the ankle of the housing market while it’s running for cover, while the credit-burned bond market is already swinging shut on its own.

9. It’s a great country. Really.

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

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