Mortgage Market Updates

The Fed has succeeded in holding down Treasury and mortgage rates, but that is the only clear accomplishment by government so far this year.

A grand debate began last week between those who see Perfesser Bernanke’s “green shoots” and those who don’t. The Fed’s “beige book” summary described a “moderation in the pace of decline... some sectors stabilizing at a low level.” The Shooters pointed to better-than-expected bank earnings, slightly improved consumer confidence, a possible turn in unemployment claims, and flattening ISM surveys.

The no-bottom counter-data: the small-business NFIB survey hit second-worst in its 35-year history (not by coincidence, the 2Q’80 worst was the only credit crunch comparable to this in modern times). Industrial production fell 1.5% in March, and capacity in use dropped to 69.3%, the lowest measured in the 60-year series.

We think the Shooters are spinning. They have no case -- not yet.

The mechanics of bottom are slippery. A claimed “reduction in the rate of decline,” is often sophistry. Example: home sales have fallen from 7 million to 4.5 million. We will not fall another 2.5 million, hence a lesser rate of decline, but a silly observation in the face of foreclosures rising toward one million. Another: auto sales have fallen from 16 million to 9 million, and will not fall another 7 million, but soon ahead lies the bankruptcy of the majority of US-owned production and associated layoffs.

“Stabilizing at a low level” (we read the whole beige book, and the details do not support the summary) happens at some point in every recession. However, at this moment stability is illusion: more and more businesses are running at revenue below sustainability, unable to cover fixed costs, downsizing dominoes just beginning.

The key to all of this, of course, known to every Main Street businessperson and consumer, is CREDIT. Availability continues to contract sharply. The smaller the bank, the more demented threats by examiners against making loans; the larger the bank, the faster its CEO is running from government capital and pressure to make loans.

The entire commercial banking system is quickly curling into fetal position around remaining capital. If we make no loans, we won’t have new bad ones, and won’t need capital. We’ll raise our rates, sit with immense net-interest margins, and grow our own capital slowly -- anything but take government capital and surrender control.

Jamie Dimon, CEO of JPMorganChase, the most self-satisfied human in banking, without any embarrassment or awareness yesterday provided the low point in the crisis thus far. Dimon called his TARP capital “A scarlet letter, the TARP baby... We could pay it back tomorrow.” Would he participate in the Fed’s flagship PPIP effort to auction and clear bad assets? “No. We manage our own assets.”

In all public appearances, this Dimon creature has insisted that Chase is making lots of loans and satisfying the few qualified borrowers extant. Uh-huh. Sure. The Treasury reported that the 21 largest banks reduced lending across all categories by 2.2% in February; that reduction would have been far, far larger without the spike in mortgage refis, which are not bank loans, just “conduit” processing off into the Fed’s purchases.

Worse, everywhere: bankers un-making loans. A new FICO study found that 11% of Americans, good-credit performers on their loans, have had lines cut or closed. The NFIB says 28% of small firms have had lines cut, and 69% face worse terms. Ask your friends, and they’ll tell you the top closer of lines, arbitrary and blind... Chase.

There is a fight on for control of the banking system. We are losing. In a first-class national emergency, one without credit then without bottom, the first duty of banks is to provide adequate credit. That’s why we have guaranteed their liabilities since 1933.

We can theoretically limp along until banks restore capital internally, and then re-bloated crawl out to offer loans to whatever borrowers remain. However, we don’t know what’s worse: the risk of such a passive strategy, or the awful sense of moral soil at allowing the likes of Jamie Dimon to raise his finger to the nation.

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.