Last week’s long-term rates spent another week in relative stability: mortgages about 6.25 percent, held by the 10-year T-note near 4.7 percent.

However, this stability is an illusion. I think the Wall Street end of the mortgage business is entering an episode of distress at this moment, and we will see pricing and availability do some strange things in the next week or two.

The economic situation got a fright check on Wednesday when CPI rose .2 percent and the core rate jumped .3 percent — that after months of well-behaved .1 percent gains. CPI is the least reliable of all the measures of inflation, and there is no sign of trouble from any of the other ones, but the whole rate structure is built on belief that inflation will moderate in the year ahead. Fear comes easily.

The upward tilt in rates was offset by a soggy stock market, a consumer-dampening run of oil prices above $60, saber-rattling by Sen. John McCain and Vice President Dick Cheney (at Iran), and by the mortgage developments below.

The most secret and lucrative operations on Wall Street, weighted for volume, is the process of securitizing and derivatizing mortgages. Nothing leaks, not until markets yank off the covers. They are off, now.

The money world has since 2005 watched for a blowing bubble in housing above all other economic possibilities, but it’s been watching the wrong thing. Close, but wrong. Housing is in a long-term correction, still looking for bottom, but the correction is orderly. Foreclosure rates are likely to rise clear through 2008, but there is no evidence of recession-inducing spillover into the economy as a whole — dampening growth but not drowning it.

The party most vulnerable to the retreat of housing exuberance is not housing, it’s the mortgage profiteers, at this moment the Wall Street co-dependents even more so than their Main Street lender-accomplices.

Since the 1980s the ultimate source of mortgage credit has been the Street, at first because of its ability to handle interest-rate risk. “Handle” is the civilian term for hacking up mortgage-backed securities into derivative securities and spreading the interest-rate risk all over the world. In roughly 2000 the Street figured out how to handle credit risk, and the junk mortgage was born. Usedta hafta go see the neighborhood kneecapper.

Junk is very, very lucrative. However, as a kindly man explained to me near the end of my brief career as a junk-bond salesman, “Mr. Barnes, there is a difference between junk and trash.”

Every financial reporter and news outlet has for a month been all over the demise of the subprime mortgage, the accent on foreclosures. In the mortgage market, everybody has been blaming everybody: it’s only the 2006 originations, it’s only the bad actors … big guys stuffing faulty paper back down the throats of little guys until they fold, giant guys taking big losses (HSBC $10 billion so far), but not giant losses.

As of Friday there are not enough buyers of subprime risk to cover loans recently closed or in process. In panicky conditions, no buyers at any price. Subprime loans this week from time to time may be unobtainable until their rates move high enough and credit standards tighten enough. Trash, like other things, rolls downhill: Alt-A loans are closer to junk than trash, but high loan-to-value-ratio Alt-A loans are still trash. By next week there will be few buyers of Alt-A risk, and that market may lock up just like subprime.

A sudden withdrawal of mortgage credit is a new hazard to vulnerable housing markets, but I think (hope) the damage will no more than prolong the correction. One leading reason: the price of good, mainstream loans may well improve in this rapidly flapping flight to quality.

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

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