Mortgage Market Updates

A big week ahead will bring the best chance to touch mortgage lows just under 5.00%, and also the best chance for chaos during the last 20-months’ falling-apart.

On Monday, Secretary Geithner will tell us what sort of financial system we may look forward to, if any. The details are secret; hence no idea how markets will react. On Tuesday, Perfesser Bernanke will begin two-day testimony to Congress (we don’t know who we would least like to be: the Perfesser, a Senator, or out here watching). On Thursday, the Treasury will complete the three-day sale of $67 billion in new bonds, and spasms like that are often followed by a modest rate decline.

To set the stage: today’s job data were awful, unemployment to 7.6%, but very uneven regionally, the worst in the Bubble Zones (California may have hit 10%). Press reports emphasize the number of jobs lost compared to the worst post-war recessions, but stick with percentages: there are one hundred million more Americans today than in ’74 and ’82, and we’re still a long way from those prior crests at 9.0% and 10.8%.

We’re also a long way from the top of this cycle. The 50% decline in Big-Three car sales guarantees assisted bankruptcies before summer.

Our government is not set up for crisis management -- in fact, it was designed to stop quick reaction to almost anything. Founders fearful of emotional lurching thought checks, balances, and deliberation were worthwhile sacrifices.

So, we have emotional lurching without action. First thing: forget about 4.00%. We’ll be happy to apologize if wrong. This factoid began as a push-rumor at the Realtors’ and builders’ associations (“Maybe if we get this whisper rolling, they’ll have to do it!”). This week, Mitch McConnell, Senate Republican leader, pushed 4.00% in a purely cynical effort to create the appearance that his party has ideas other than “No.”

The near-term impossibility of 4.00% is not a matter of choice or policy, just arithmetic. In the last month, markets confronted with $2-trillion-plus new Treasury borrowing this year have pushed the 10-year T-note yield up almost a percent (2.07% to 2.94%), and the 30-year T-bond to 3.65%.

Meanwhile, there are $10 trillion in US 1st mortgages outstanding. If the Treasury is struggling to sell IOUs, how can anyone honestly propose to refinance five times as much 30-year mortgage paper at about the same rate as 30-year Treasurys?

This collision between borrowing need and market capacity exposes more than just these deceitful four-flushers. The primary unanswerable challenge facing policy-makers on stage next week: having borrowed our way into trouble, how do we borrow our way out? The Keynesian rulebook, and principal could-a-been lesson from the Depression says we must borrow to spend whatever is necessary to support aggregate demand. Probably correct -- despite even Harry Reid (D, NV) stuffing in home-state goodies. Theory says it doesn’t matter how we spend, just spend, even if all we’re doing is throwing pillows into an elevator shaft. No jump-start, just cushion the landing.

We get all of that, but the itchy spot at the nape of my neck says that aggregate demand is not the problem. The problem is an unwind in asset values; overvalued and over-leveraged to be sure, to begin with, but credit withdrawn in such haste, asset-decline and lender-panic in self-reinforcing spiral for two years -- we don’t see aggregate stimulus stopping the spiral. This is not the 1930s; this is different. And, if massive borrowing pushes up interest rates, then the spiral will worsen, or force the Fed to buy the paper (might work, might not; brings its own hazards).

Narrow, pinched, and punishing Liquidationists, Libertarian types, and Mr.-Market fix-its insist that all weak banks be closed, that surviving ones should not be forced to make “bad loans,” and that there isn’t any loan demand from good borrowers, anyway.

They are mistaken. The only way to stop the asset spiral is irrational banking: take the risk of higher defaults by hosing credit into the worst of a recession. If not, the ultimate losses will be vastly larger, maybe unstoppable. Good luck, Mr. Geithner.

Economic Notes is published weekly by the Economics Department of Crestline Mortgage a division of Universal Lending Corporation as a service to Colorado Real Estate professionals. © 2009, all rights reserved.