Mortgages have been remarkably stable in the 6.75 percent-6.875 percent area while the all-powerful 10-year T-note has run in a much wider range: 10 days ago touching 5.32 percent, on Tuesday trading briefly at 4.99 percent, and today an early burst to 5.22 percent.

Two lessons here. First, inject volatility into a system, as did the 10-year’s rocket in June from 4.6 percent to the levels above and you’ll have high volatility for quite a while. By “volatility” I mean true up-and-down action, not the Wall Street standard explanation to a client who has lost his shirt in a straight-line move.

Second, Treasury volatility versus stable mortgages is the signature of market uncertainty about the inflation/growth outlook, and grave concern about credit quality. In this week alone we’ve gone from strong buying of Treasurys in response to revelations of the magnitude of the mortgage-derivative mess to sell-everything-you’ve-got on news of a healthy economy.

The economic health is a bit of a puzzle. We’ve got the worst housing recession in at least 15 years (pending sales in May fell to the lowest level since September ’01, a tough month), but its effects are still confined. Mortgage rates jumped a half percent in June, yet applications for mortgages are rock steady. The twin surveys by the purchasing managers’ association appeared to be tailing, but both rebounded well in June, manufacturing to 56 from 55, services from 58 to a strong 60.7.

How are we pulling this off with oil at $70? Personal incomes are stagnant, in May a net loser after inflation. One big propellant in the early ’00s was home-equity extraction: the Fed’s newest numbers show home-equity-line-of-credit balances shrinking in the 1st quarter this year for the first time in modern memory. In Friday’s news, June payrolls gained an as-expected and healthy 135,000 jobs, but April and May were revised way up, driving credit-frightened money back out of bonds just bought.

I do not have an answer to the “why” in our still-good economy, except that the globe overall is in the best economic health ever and helping to float our boat.

In the housing-mortgage furball, one of the deep fears for this stage was/is that a rapid retrenchment in credit standards would make a bad situation worse. When the credit pendulum swings all the way to one side, the return move rarely stops on sensible center. However, this time may be a first-ever. Mortgage terms and pricing are tougher than six months ago, and underwriters are running scared (especially in appraisal review), but pretty much everything available then still is today.

If you want a subprime horror, you can still have it: the FICO bar has gone from the 500s to 620-ish, roughly the minimum range that experienced landlords will consider acceptable for a tenant. The off-the-shelf piggybacks are as they were, except the 1st-to-2nd rate spread is about 1 percent wider (2 percent for sub-680 FICOs), causing little damage because the 2nds are so much smaller than the 1sts. “No-Docs” are still out there, spreads to “A” paper about a half-percent wider.

Stated-income, interest-only, “option” ARMs with negative amortization feature — all unchanged except for FICO-rate relationship at the outer edge of applicant/deal strength. One hundred percent financing in general is harder to find, and pricey, but it should be.

Supply is still good for three reasons. First, most mortgages are good and safe investments. Second, the global credit markets are still desperate for yield and still don’t grasp the extent of risk in edgy mortgage product; FICO-rate re-pricing will continue as that risk comes clear.

Third, the regulators, bless them, have failed altogether to tighten standards. Whether wise inaction during pendulum-swing, or near-total ineptitude, the mortgage underwriting “guidances” promulgated in the last year by the Fed (at the head of a puzzled mob: OFHEO, the FDIC, the Comptroller, the Office of Thrift Supervision, the National Credit Union Administration) have been completely ignored by the mortgage industry. A reasonable response, given equally complete lack of enforcement.

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

Show Comments Hide Comments

Comments

Sign up for Inman’s Morning Headlines
What you need to know to start your day with all the latest industry developments
By submitting your email address, you agree to receive marketing emails from Inman.
Success!
Thank you for subscribing to Morning Headlines.
Back to top
Inman Connect is LIVE next week! Join us and thousands of your peers from wherever you are.Register Today×
Log in
If you created your account with Google or Facebook
Don't have an account?
Forgot your password?
No Problem

Simply enter the email address you used to create your account and click "Reset Password". You will receive additional instructions via email.

Forgot your username? If so please contact customer support at (510) 658-9252

Password Reset Confirmation

Password Reset Instructions have been sent to

Subscribe to The Weekender
Get the week's leading headlines delivered straight to your inbox.
Top headlines from around the real estate industry. Breaking news as it happens.
15 stories covering tech, special reports, video and opinion.
Unique features from hacker profiles to portal watch and video interviews.
Unique features from hacker profiles to portal watch and video interviews.
It looks like you’re already a Select Member!
To subscribe to exclusive newsletters, visit your email preferences in the account settings.
Up-to-the-minute news and interviews in your inbox, ticket discounts for Inman events and more
1-Step CheckoutPay with a credit card
By continuing, you agree to Inman’s Terms of Use and Privacy Policy.

You will be charged . Your subscription will automatically renew for on . For more details on our payment terms and how to cancel, click here.

Interested in a group subscription?
Finish setting up your subscription