Mortgage Market Updates

This has been a strange week, marked by extreme divergence in evaluation of incoming economic data and disconnect between Main Street reality versus Washington proclamation. Mortgage and Treasury rates were stable; we no longer have markets, just the Fed -- damned glad to have ‘em, too.

The stock market began badly as solid, blue-collar bank analysts said the obvious: recession losses will soon overtake toxic dithering. Then wise assistance for life insurers gave support, and players turned on the stock-market horsefeathers machine.

A 20,000-person decline in unemployment claims was misread as a turning point, ignoring the other 654,000 claimants. Great news!: Only eight of the top ten retailers’ sales slid, instead of all ten. A gain in February exports was twisted into GDP floor: the $2 billion rise, 1.6%, is the kind of money Wall Street uses to light cigars; imports collapsed 23%, reflecting the actual drop in US demand. The NFIB small business study for March described conditions as bad as any in the 35-year history of the survey.

The Fed’s March meeting minutes again revised down the staff forecast, GDP decline “...expected to flatten out gradually over the second half of this year.”

Stocks rose happily throughout, and into glee at the sight of bankers in Easter Bunny suits. Wells Fargo announced positive earnings and a rosy forecast, which is certainly partly true, given its excellent mortgage franchise running hot. However, banks always make money if they limit write-offs of old loans gone bad.

The “stress test” of big banks was the object of spinners from all sides: the tests are a fraud designed to reassure the people... the tests will provide an excuse to nail a few bank CEOs... they are too tough... they are not tough enough. Bunny bankers say their banks are just fine. Give us cash and guarantees and leave us alone. Have an egg.

History books are filled with the cardinal symptom of empires in trouble: orders given in the capitol don’t make it to the countryside, and real information from the countryside fails to arrive in the capitol.

Bloomberg today reports that the Fed has instructed banks and examiners to keep secret the stress test results, for fear of revealing which banks are in trouble. Nothing is more important now than transparency, but as fine a job as the Fed has done it is still afraid of reality. Nobody trusts the banks’ balance sheets. Nobody. Big stock market rally, and 90-day T-bills still trade at Great Depression 0.17%.

Mr. Bernanke has his “green shoot” in resurrection of commercial paper, but only because the Fed still guarantees 20% of the market. Mr. Obama, today “Starting to see progress,” is either trying to boost morale or has been spun by an oddly optimistic Larry Summers and odd Sheila Bair. Mr. Obama’s new refi and loan-mod programs are off to an undetectable start, and won’t have a quarter the impact he’s been told.

Mr. Geithner’s babies, TALF and PPIP are DOA. The newest TALF round last month supported the sale of $1.4 billion in securitized loans (see “lighting cigars,” above). Banks don’t want to tender bad assets for auction, and private investors are not interested in buying, even with 94% Fed financing.

Meanwhile, no credit. Banks are busy canceling existing lines and refusing to roll over maturing ones. BofA is jacking rates on carried credit card balances from 7% to 13% -- which will be illegal next year, but it needs earnings now to save Ken Lewis.

Geithner’s effort to hold banks together as-is for future market recapitalization has its first serious challenge. The Congressional Oversight Panel was created to monitor TARP. Its Chairman, consumer rights lawyer/professor Elizabeth Warren, has jumped mission to full-scale second-guessing of Geithner’s plan. That kind of lawyer and jump usually drives us crazy, but Ms. Warren is dead-on (over-long, heavy with political code, but the April 7 report at http://cop.senate.gov is absolutely worth your time).

“The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous.” And more. Lots more.

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.