In a considerable achievement, Treasury and mortgage rates held last week’s improvement: the 10-year T-note near 3.5 percent, mortgages 5.375 percent.

To have held during one of the thinnest trading weeks of the year, in which a butterfly wing-beat can blow up any market; in the week before the Treasury’s next borrowing wave ($109 billion new cash next week); stock market antigravity; and interpretation of all incoming data as "recovery" — quite an achievement.

That last upward force on rates — anticipation of recovery — is the most powerful of all at the end of any recession cycle. The decline in long-term rates from two tries at 4 percent 10-year T-notes since May, and trading now as though headed for lower — that pattern says that real players in actual markets disbelieve the daily cheerleading, with the Fed, White House and Treasury being indistinguishable from CNBC.

This week, housing got the optimistic pom-pom treatment. Yes, new construction starts improved again in July, but stabilizing, not really growing — builders shifting to low-end homes, the half-million annual aggregate less than half of health, one-quarter of 2005. Today the stock market took off again on the National Association of Realtors’ corner-turning report of a 7.2 percent gain in sales of existing homes, to 5.2 million annualized in July.

Everybody wants to see the turn and nobody wants to read the contrary data. Today’s aggregate sales numbers are indistinguishable from last July’s, and one-third off the 2005 peak. Median prices were distinguishable, 15 percent lower. Purchase loan applications did not increase enough in July to support the sales numbers.

NAR said that 31 percent of the sales were distressed (as opposed to zero in 2005); however, a mortgage-industry survey of real estate brokers found that 64 percent of sales were distressed in one way or another. The July 1 underwriting guidance by mortgage insurer MGIC, measuring conditions in 76 metro areas, found 29 "softening or weakening," one improving: in Rochester, N.Y., soft conditions were "stabilizing."

The heart of the data-interpretation struggle: Are we in recovery, or are we stabilizing temporarily in unsustainable conditions?

I think the supply of credit is central, and the best overall evaluation is the Fed’s quarterly Senior Loan Officer Survey. …CONTINUED

In 2007, banks began the most rapid and extreme credit tightening on record. In early 2008 and continuing each quarter of the year, 80 percent of banks reported tightening credit — a compounding phenomenon, a re-tightening by continuous ratcheting. Early in 2009, the fraction tightening began to fall, and in the newest survey for July only 40 percent of banks were still at it.

Many observers in the recovery group say this new survey, released this week, confirms improved credit conditions. They are mistaken.

Of 54 banks surveyed for business loan standards, two said they had eased. Prime residential terms? Zero had eased. Had the spread narrowed between rate charged and cost of funds? Zero. Minimum payment reduced? Zero. Eased credit score? Zero.

Asked why their lending had declined this year, banks replied, "Decreased loan demand and deteriorating credit quality." In this "Red Queen" logic, we are ready to lend, but you don’t like our new terms or qualify for our new standards. Your fault.

Fed Chairman Ben Bernanke’s keynote address this morning at the central bankers’ big conference in Jackson Hole, Wyo., spoke to financial "panic" last fall as the key cause of trouble and recession. There is some reason to hope that enough central-bank medicine will cause panic to fade and reverse. However, in the meantime, the Fed’s own evidence says that banks are trying not to make loans.

They can’t. Panic or no panic, without capital and still loaded with bad assets, they can’t make loans. Until they do, sustainable recovery will be in doubt.

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


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