Mortgage Market Updates

The Fed’s outright purchases of Agency MBS are having the desired effect: rates are down and staying down. Even the Fed’s immense power cannot force rates to 4.50% or lower (not quickly), but it has removed up-side volatility. Mortgage rates should have run back way above 5.00% in a week like this -- a big bear-market stock rally and immense refinance demand -- and instead held near 4.75%.

The chatter all week long, especially among the stock-happy adolescents at CNBC: bottoming is in process, and the worst is over. In the blogocracy, doom is predominant: the credit fixes and stimulus either won’t work in time or were the wrong things to try.

Reality is in the middle somewhere. The thing to hope for is decline in the rate of decline (yeah, we’re in that much trouble).

Housing first. Mortgage rates are down, which should stimulate consumer spending and aid a housing turn. Good try. In recent weeks, 80% of new mortgage applications have been for refinance, and purchase applications have not increased significantly since rates broke in December. Given suicidal credit and qualifying restrictions, still tightening, the only households that can refi are ones that least need to, and are most likely to save the monthly benefit and not spend.

Home sales appear to have slowed their numerical decline (pending sales rose 2.1% in February), but the overall numbers are very low, and the market distorted by a silent freeze on foreclosures. More are “continued,” instead of sold at auction; and servicers are required to use the new but non-operational refi and mod programs before foreclosing -- hence a lot of foreclosure water is building behind a weak dam.

The unemployment rate has slowed its rate of increase: to 8.5% in March, the .4% rise half the rate of February. However, payroll contraction is steady at minus 650,000 monthly, as are new claims for unemployment insurance at 660,000 weekly. That stable rate of loss is hardly reassuring.

Business and consumer conditions here and around the world are murky. In the US we junk thirteen million cars each year, but production and purchase have collapsed from sixteen million to nine; when might we see a bounce in demand for replacement, no matter how feeble? The global supply chain went to standstill in winter (Japan’s exports fell 49% in February); at some point some business will buy just to re-fill an empty pipeline, and that might produce a bottoming event. Many pointed hopefully at a 1.8% rise in February factory orders, but they barely offset a January negative revision.

The purchasing managers’ indices have flattened, manufacturing to 36.0 in March from February’s 35.8, but an end to economic contraction would require a reading clear up in the high 40s. Internal readings on inventories still show business’ determination to sell them off. Gasoline prices are little more than half a year ago, but driving miles are down, and refineries are operating at only 82% of capacity.

Some good news. Grim, but good. Mr. Obama’s tough-mindedness has begun to show. Last Thursday, the Automotive Working Group decided to fire Rick Wagoner as GM CEO (one group member: “It wasn’t the hardest decision we made”). Stephen Rattner, head of the group, asked Wagoner to fly back to DC on Friday, and fired him.

Fired him at roughly the same moment that the top 13 bank CEOs were meeting with the President. The announcement did not come until Sunday night. Wishful thinking on our part, but... do you suppose the small-caliber hole in the back of Wagoner’s head made an impression on the bankers? Might Obama have been silently measuring a few for shrouds and coffins, as object lessons to the others upon completion of bank stress tests later this month?

One person made this grisly observation: “China knows how to do some things right. After an execution, they send to the family of the departed a bill for the cost of the bullet.” To your heirs, Lewis, Dimon, others? Maybe, just maybe... act like public servants, restore some credit and leverage... or else.

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.