Long-term rates rose this week, mortgages up to 5.25 percent even with a 1 percent origination fee. Refinance demand, fear of massive sales of Treasury bonds ahead, and a new banking freeze combined to do the damage.

Refinance demand is big, but not comparable to 2003. Yes, the industry is 75 percent smaller, but this time only the very best applicants have access to good rates.

Long-term rates rose this week, mortgages up to 5.25 percent even with a 1 percent origination fee. Refinance demand, fear of massive sales of Treasury bonds ahead, and a new banking freeze combined to do the damage.

Refinance demand is big, but not comparable to 2003. Yes, the industry is 75 percent smaller, but this time only the very best applicants have access to good rates. Treasury cash-raising may be a problem, but spreads to mortgages are still very wide, near the 2008 record of 3 percent, and the Fed will begin to buy Treasurys shortly.

I think the central cause of the mortgage-rate rise is the new deterioration among banks. Rates rose simultaneously with news late last week that Citi and BofA are toast. By late fall, banks looked as frozen as frozen can be, but never underestimate the ability of frightened bankers to find new ways not to lend money.

Sometime between now and Valentine’s Day, in a Treasury conference room Tim Geithner, Larry Summers, Sheila Bair (Federal Deposit Insurance Corp.), Christina Romer (Council of Economic Advisers), Peter Orslag (Office of Management and Budget), Federal Reserve Chairman Ben Bernanke, and Paul Volcker will decide how — not if — to "go nuclear."

For the youth set, in the Cold War going nuclear was your last resort if you lost the conventional-weapon preliminaries. We had lost the conventional part of this financial combat even before Lehman’s collapse in September.

Tim Geithner to Congress this week: "In a crisis of this magnitude, the most prudent course is the most forceful course." He made clear his frustration with the incremental and ad hoc measures taken last year. The need for magnitude is a given, but this group will be most uncomfortable with the choice of means.

Nothing like this crisis has happened before. Japan’s economy is otherworldly, and Scandinavian mini-economy banking rescues are dollhouse models. The Great Depression was pre-electron. The "go nuclear" choice of weapons will have only academic and theoretical basis. Nearly everyone in the group will have a different preference, yet all will have to agree, then take the deal to President Obama, who will probe and test the preparation and then take the deal to a Troubled Assets Relief Program-burned Congress.

No one will ever know if it was the best or even right choice. Nothing will matter except that it works.

The economy is in freefall, headed for 1-million-per-week layoffs. Bank stocks have lost half their remaining value since Jan. 2. Commercial and residential real estate has entered a new level of weakness: home construction is on the lowest track ever measured; two months of 5 percent mortgages failed to increase purchase demand; and even nonhysterical measures of home prices show steepening decline (the Office of Federal Housing Enterprise Oversight price index, down 1.8 percent in November).

Events have overtaken the time for extraction of bad assets. Old bad ones? The ones we just found? Assets OK now but certain to go bad by July 4? Or by Christmas? I think we’re going to nationalize (might not use the word) some — or several — banks, and the test of nuclear success will be to get credit flowing immediately.

Several years ago, a lion of Virginia banking retired. At the convocation of bankers to honor him, pocket watch and all, he was asked what he thought was the greatest innovation in banking in his 50 years. Long pause. Furrowed brow. Then it came to him: He said, "Air conditioning."

Here’s a better one. The Federal Housing Finance Agency this week announced that by the end of this year, every home loan will be permanently tagged with the identity of the individual originating banker and employing company, and the name of the field and supervisory appraisers, together with the licensing status of all players. Individual histories will be tracked.

Fantastic! Borrowers and investors can look forward to vastly better performance. There’s nothing like sunshine to drive out the bad guys, and sharpen even the best.

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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