Mortgages are in the process of breaking below the 6.75 percent-6.875 percent range, as credit-panicked money has pulled the 10-year T-note below 5 percent for the first time in six weeks.

Given a choice between the economy-predictive powers of a frightened bond market and stocks in Dow-14,000 hysterics, pick bonds. The housing/mortgage mess has dominated everything this week, even $75 oil; both suggest slowdown ahead, at last.

At this moment in past housing-credit cycles, as lenders discovered overextension and regulators snorted to wakefulness, a few people in authority rose to the fore, some distinguished by surprising ability, others by ineptitude.

We have our men already.

Federal Reserve Chair Ben Bernanke made his best speech by far in testimony to Congress. He was at ease in demeanor for the first time, and also for the first time displayed quick adaptation to unpleasant news, in particular signals from markets. He acknowledged that the subprime matter is serious, not confined to that market, and housing will get worse before better — both revisions of near-term previous thinking.

It is tremendously refreshing to watch a man carrying the world on his shoulders change his mind in response to new developments.

It takes guts to make a public estimate of losses in the mortgage fiasco (“$50 to $100 billion”), knowing for sure that it’s too early to be correct, that losses are likely to be larger but unpredictably so, willing to run the risk of spooking a crowd already jammed in the exits but placing high value on plain speaking. Bernanke knocked .25 percent off forecast GDP (now mid-2 percent range through 2008), and stuck with a forecast for increasing unemployment. He’s going to lean into the economy long enough and hard enough to keep inflation in the box, and housing is on its own.

A good show save one thing: He’s still lost in the source of the Great Mortgage Credit Party, still talking about “…Deterioration in underwriting standards and in some cases, by abusive lending practices, and outright fraud.” I hope he’ll get the right answer soon, before he and his minions do real damage (see below). Suction from Wall Street created the Credit Party, not pushing from Main.

In a very different performance across town at the Exchequer Club, James B. Lockhart III, director of OFHEO, the regulator of Fannie and Freddie, reminded us all how much damage can be done by a regulator in a job beyond his talent. Lockhart’s speech was seven pages of demand for consolidation of all housing and mortgage regulation under his command. The press release included his PowerPoint slides, in Early Sesame Street style, posted at (buy “The Cognitive Style of PowerPoint,” Edward Tufte, and free yourself forever from these stiffs and their points).

Lockhart took time out from his power play to crow about his Friday, July 13, announcement forcing Fannie and Freddie to adopt absurdly restrictive underwriting of all “A” loans containing any interest-only or pay-option feature — no matter what the down payment, borrower strength, 10-year adjustment, all to be treated as toxic subprime. Effective in Fannie and Freddie software Monday, July 22, may the Saints preserve us.

I shouldn’t be surprised. Each day this mortgage/housing mess more resembles the S&L disaster of the ’80s (when it’s done, I bet this one is bigger and more painful), and the regulatory boobism of that episode. First the plan that S&Ls would “grow their way out” of bankruptcy, then the years of denial of loss magnitude, and last the retroactive disallowance of tax deductions that made the hole twice as deep. Lockhart’s timing is excellent: what a perfect moment for an energetic dope to decide that the country should cut the supply of “A”-quality mortgage credit.

The problem here, since 2001, has been to fail to document the qualifying income of low-down-payment borrowers. Maybe the challenge of this mess will produce another courageous and clear-thinking hero-regulator, as Bill Siedman rose last time, who will begin by reversing Lockhart’s triumph, and then get to the heart of the matter.

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

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