Today’s payroll flop — only 20,000 real jobs created in May — will take some time to settle all the way in. Immediately: 10-year T-notes are 3.22 percent (from 3.36 percent yesterday and 3.99 percent six weeks ago), and mortgages are below 5 percent.

The payroll report has confirmation: New unemployment has held high for five months; May retail sales look soggy ("same-store" data); auto sales flubbed in May; and housing shows every sign of a serious fade, post-tax credit.

Purchase applications have hit a 13-year low; the unemployed do not apply, nor do the underwater, and the few, the brave, who think they are qualified often find themselves in the "rejected" pile.

In days ahead, the entire recovery camp from government to stock-pushers has more than explaining to do. It must change its mind.

All in one furball: How can mortgage rates be so low, and home prices so low, affordability the best ever measured, yet housing defies recovery? One unifying answer: credit. Not enough, and wildly too tight.

The credit dearth is perfectly rational. At default rates like these, nobody knows what new loan is safe to make, and underwriting has been overtaken by hand-shaking, eye-glazed panic. The horrifying conundrum: New loans will inevitably produce new losses, yet without enough new loans, losses on existing ones will be greatly higher.

Underwriting rules should be based on prior loss experience. That is, any borrower characteristic that generates an outsized loss rate should be excluded.

Example: credit score below a certain threshold. Early in the present disaster, in 2007 Fannie and Freddie ("the GSEs") began proper recalibration of underwriting, withdrawing their portion of the credit ease that led to the bubble.

In stage 2, 2008 defaults surging further, the GSEs began to throw defensible exceptions out with the bathwater. No matter how big your downpayment, no matter how much money you have, or how good your credit, or work experience, income underwriting will be 1040-or-the-highway. No exceptions. Hysterical blindness.

In 2009 stage 3, unemployment drove some defaults to a hundred times prior worst case, and impossible to tell if an underwriting flaw caused a default, or the 75-year-record recession.

GSEs began to issue rules having little to do with actual risk, tightening for the sake of tightening. The thunder of doors slamming on empty barns. The 2009 classic: If you have disputed a credit report item, the GSEs will block your closing until you prove that your dispute did not hide a debt outstanding. You prove.

Mortgage haiku: Every borrower looks like a concealed IED to people fried by PTSD.

(IEDs, or improvised explosive devices, are often used as roadside bombs in Iraq. Soldiers and civilians who are traumatized by these weapons may suffer from PTSD, or post-traumatic stress disorder.)

New for 2010, Fannie’s Loan Quality Initiative (LQI) demands a credit report rerun immediately before closing. Yes, once in a while a borrower will be found to have blown himself up by buying a new fridge and washer-dryer on credit. Many, many more times we’ll get a mistaken report, or an ambiguity, or an argument that will delay or kill closing.

What’s the likely ratio of defaults prevented versus useless meddling? 1 to 100? 1 to 1,000? 10,000? Nobody knows. Sounds tough, so do it.

Another: Under LQI, some creep is going to check to see if you really moved into your new primary residence. True, it is fraud to fail to do so, and misrepresented rental properties have much higher rates of default.

However, heaven defend the poor souls who let sellers stay an extra month, or who engage a house-sitter while traveling, or who want to renovate before moving in. No power on or off planet will protect the new owner who has taken down part of the house to add on and add value. The ratio of loss-prevention to pointless intrusion and punishment of technical offense? 

The GSEs have turned sensible and predictable mortgage closing into a field of open manholes, new ones popping open at each step. This effort at mortgage perfection — instead of rational, actuarial management of loss — has thinned the pool of eligible borrowers to the point that housing cannot recover. Not in time for the economy.

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


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