The Fed’s purchases of agency MBS (mortgage-back securities) have succeeded in capping mortgage rates near 5 percent with the lowest fees (1 percent origination easily buys high-fours).

The Fed’s purchases of agency MBS (mortgage-backed securities) have succeeded in capping mortgage rates near 5 percent with the lowest fees (1 percent origination easily buys high-fours).

Those terms are limited to the best credits (80 percent or less, 740 FICO or better), which is why the Fed’s program is working. Of the nation’s $10 trillion in first mortgages, not more than one-third qualify, and more than half of those borrowers already have rates too close to 5 percent to consider refinancing. The remaining fraction "in the money" now, at least $1 trillion worth, without the Fed’s intervention would have choked what’s left of the mortgage and credit markets, with rates then rising to shut off demand.

The Fed may be able to buy rates down to the 4.5 percent promised land by spring or summer, but even at its $25-billion-per-week purchase rate the best short-term hope is for this lid to hold while we work off demand.

Not helping: obvious profiteering among the few remaining large mortgage wholesalers, expanding margins instead of reducing rates. With Fannie and Freddie out of the game, there is no cop to underbid the sharks.

Incoming economic data are lousy, which everyone knows. Instead of reciting the list, describe a pattern: The break in the global economy dates only to September, just four months ago. Yes, the official recession began a year ago, and the housing recession almost three years ago. However, this queasy off-the-table sensation, this shutdown in optional activity by consumers and businesses alike, and the credit-market snap from troubled to closed — are all just four months old.

The most pervasive sense throughout the economy, government and academia: Nobody has a good model for what happens next. The best-available outlook comes from the minutes of the Fed’s mid-December meeting. It is an unhappy document, forecasting substantial GDP decline in the first half of 2009, very modest growth in the second half, net-negative for the year, with risks to the downside.

So, what to watch for clues?

Obama has stuck to one-president-at-a-time in foreign policy, but this economic predicament and the Bush-Paulson vacuum forced him to an awkward policy speech Thursday. It should have been prime-time, with all the rhetorical thunder he can bring, to reassure the nation that for the first time in a dozen years the nation will be in capable and energetic hands. That’s still coming, and it will help us all.

We will begin to learn in two weeks what measures the Fed and New York Fed President Timothy Geithner wished to adopt but were roadblocked by Paulson and the White House. Geithner’s confirmation hearing will be painful theater, as yapping congressional cretins blame him for things he tried to fix (Bear, Lehman) but was not allowed to, and blame him for things he did save (AIG). Geithner is disciplined and tough, will take the punishment, and will not lay blame where it belongs. However, we will learn quickly what might have been done as this new team swings into action.

The Fed has begun emergency action with MBS, and the next will be to buy Treasurys to keep their rates from rising on a flood of new borrowing.

Watch closely how the new team treats big-bank leadership. Since the first day of deposit insurance, commercial banks have been public utilities, like sewer plants. It’s time to assert control, for the benefit of the society. Look for an effort to identify and segregate toxic assets still in the banking system.

The most difficult and essential task: to intercept the credit-default spiral. For bankers, and mothballed Fannie and Freddie, it is perfectly rational to refuse to make loans until they have reliable models for collateral value and income to support debt service. However, if they refuse, they know their losses will be ever-worse. The unanimous industry answer to that conundrum has been to freeze.

Look for the Obamanauts to give permission, encouragement and instruction to the credit world: err on the side of making loans. Now.

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

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