Interest rates for traditional Fannie/Freddie/FHA/VA mortgages are still in the same place, roughly 6.75 percent for the lowest-fee deals. These loans are fully available, underwriting unchanged, funding for closing as reliable as ever.
The rest of the mortgage world … jumbos about 7.25 percent; Alt-A for big-down high-FICO, 9 percent. NINE. In three weeks’ time the clock has turned back to 1995.
Four things to keep separate here: a short-term crunch in the banking system; huge long-term credit losses by investors; a cooling economy still with an inflation problem; and a withdrawal of mortgage credit that will make a housing recession worse.
The credit crunch that began three weeks ago reached its end stage yesterday, the Euro-American banking system locked up altogether. Dramatic, but not dangerous: central banks are pouring cash into the system. Ice water will quiet a mob of hysterics, but will not solve the underlying problem.
Which is: massive credit losses in the aftermath of The Great Credit Party, 2000-2006 (R.I.P.). So far, market losses on mortgage and other derivatives merely anticipate the actual credit losses from default and foreclosure, whose magnitude markets cannot know until well into 2008.
So. What to do? The Fed has thus far done the obvious, liquefying markets. It should not cut its 5.25 percent interest rate until the economy cracks (I think that’s a when, not an if); to do so prematurely would compound its inflation problem. However, liquidity and rate cuts are not enough to fill in a credit crater quickly (it took three years of Fed ease in the early ’90s to replenish bank capital). Credit failures big enough to threaten the system require isolation and bailout (S&Ls); despite the extraordinary diffusion of this loss, the central banks will preserve the key institutions.
The big test: be certain that mortgage credit starvation does not turn a housing recession into a disaster in the bubble zones. Whatever those losses would have been based on mortgage availability three weeks ago … are larger now. Today’s Back To The Future mortgage world affects only new applicants, which means August sales, which means several weeks until we know the damage. “Hitting a wall” may be an overstatement, but not by a lot.
One good solution is available, suggested timidly by a few public officials: get the handcuffs off the Fannie and Freddie portfolios, and get them into the market as buyers — and not just their traditional product, but any well-underwritten paper of any size or type. Right now. Immediately.
Won’t happen, of course. Can’t expect the same people who ignored the most colossal credit FUBAR of all time to get the fix right. There are a few good people who understand (Richard Syron, CEO at Freddie, for one), but from the top down, too few.
President Bush reacted to the Fannie/Freddie suggestion by parroting the right-wing line: maybe they could enter the market “… after they are reformed.” The hard-heads who object to government-guaranteed mortgages forget the conditions that FHA and Fannie were created to resolve. Privatized markets are ideal, but philosophical zeal should not abandon California and Florida to a 1935 fate.
Presidential hopeful Hillary Clinton offered her mortgage fix this week: a national registry of mortgage brokers, disclosure of fees, a foreclosure time-out and a billion-dollar homeowner bailout fund. As the press asked questions exposing the absurdity of the plan (a billion bucks wouldn’t get you beyond Detroit’s city limits), the scene was surreal: she looked just like President Bush when sniped by surge skeptics, indignant and rigid.
We need a smart and brave bunch, like the ’98 Committee to Save the World (made up of then-Fed Chair Alan Greenspan, then-Treasury Secretary Robert Rubin and then-Deputy Treasury Secretary Larry Summers) immediately to secure the mortgage supply. One man may have turned up: to add cash, the Fed usually buys Treasurys, but this time it bought mortgage-backed securities. Well done, Fed Chair Bernanke. Nice to know that you’re scared, too.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at email@example.com.