On his way out the door Edward DeMarco, the outgoing head of the Federal Housing Finance Agency, announced another round of loan-level pricing hikes and increased Fannie and Freddie’s securitization guarantee fee, now triple its pre-bubble percentage. The big housing question in 2014: will DeMarco’s successor, Mel Watt, begin to reverse the damage?

The terrible taper has begun! As with most long-feared events, little happened in the instance.

OK, two things. The 10-year T-note and mortgages — mechanisms of the Fed’s stimulus efforts, subject to tapering in January — rose close to their highs of the year. But they’ve since fallen back.

The Dow also jumped 292 points. The same Dow that had supposedly bubbled in the artificial stimulus of QE leaped in exuberance at its demise.

Psychological-financial oddities aside, take two things from Taper Week.

First, Clinton’s Law: “It’s the economy, stupid.” Second, a mortgage-themed version of Charles Dickens’ “A Christmas Carol.”

The Fed affirmed its 2014 forecast: an abrupt jump in GDP from 2 percent-ish to 3 percent-ish, and a rise in inflation from sub-1 percent to 1.5 percent. If the Fed is right, then we have entered a familiar business-cycle recovery and Fed tightening cycle.

The Fed strengthened its promise to keep as-is the Fed funds rate, the overnight cost of money, at least into 2015, which helped keep long-term rates under control. If the economy really does accelerate, long-term rates will rise no matter what the Fed funds rate.

Also helping long rates: The bond market is skeptical of acceleration. Bond people grasped the benefits of QE better than popular commentators, and wonder why the economy is going to do so much better without it.

The Fed knows the economy is fragile and does not want to end effective stimulus. But it seems to have concluded that QE has lost utility versus risk, done like a dry-breasted turkey.

The lone dissenter at this week’s Fed meeting was Boston Fed President Eric Rosengren, who in 2008 was the one person to grasp that a credit shortage had more than canceled the Fed’s rate cuts. The only sector capable of pulling the whole economy: housing. And housing depends on credit.

Concealed by all the taper twitter: the last acts of a modern Scrooge.

Since 2009 Edward DeMarco has been in charge of the Federal Housing Finance Agency and its duties as conservator of Fannie Mae and Freddie Mac. In DeMarco’s defense: No hotter potato was ever handed to anybody; Congress has been contradictory and undermining; and the White House and Treasury AWOL.

DeMarco correctly saw his job as protecting taxpayers, but like so many pinched denizens of counting houses thought the best policy was skinflint. But in a credit disaster, there’s one sure way to may it worse: Choke what little credit remains.

DeMarco has for five years recalibrated Fannie and Freddie underwriting to strangulation. Evidence: The default rate on new production has fallen 90 percent below pre-bubble levels.

In the well-intended effort to pay back Treasury assistance, and to risk-adjust loan pricing, DeMarco brought us the hated loan-level pricing adjustments. Fannie and Freddie now run large profits and have rebated their bailout to the Treasury.

On his way out the door, DeMarco announced another round of loan-level pricing hikes and increased Fannie and Freddie’s securitization guarantee fee, now triple its pre-bubble percentage.

From 1935 to 2000, the U.S. mortgage market performed flawlessly. There were no bubbles and no busts (the S&L meltdown was commercial loans), credit pricing was socialized. Whether you put 5 percent down or 50 percent down, everyone got the same deal, only mortgage insurance added for the lowest down payments.

Risk was calibrated by underwriting, not price: big down payment, relaxed scrutiny; 20 percent or less, we’re going to hold you upside down by the ankles and shake. Now we waterboard everybody, including supremely qualified investors, and in Libertarian zeal surcharge to death low-down borrowers.

DeMarco’s replacement, Mel Watt, has already been confirmed by Congress. Even post-taper the Fed is still buying nearly all net-new Fannie and Freddie production, trying to keep interest rates low.

Yet DeMarco, sitting in his chair as it is wheeled out to thankless retirement, gave orders to raise the cost of mortgages on the theory that if Fannie and Freddie loans become expensive enough, private markets will take over.

Total private-market securitization this year: about $13 billion, roughly one week of Fannie and Freddie’s production. The big housing question in 2014: Will Mel Watt begin to reverse DeMarco’s damage?

A Merry Christmas to one and all. Nothing religious, just felicitations from Charles Dickens, and wishes for redemption of any troubled soul nearby. DeMarco’s to start.

Lou Barnes is a mortgage broker based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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