The collapse of Bear Stearns this morning has pulled the 10-year Treasury yield to 3.42 percent, but lowest-fee mortgages are still stuck above 6 percent. Mortgage improvement was inhibited by fire sales elsewhere (Thornburg and Carlyle), and by Bear’s mortgage exposure, the Street’s largest. As one of the Fed’s 20 "primary dealers," Bear has received instant bailout, but its mortgage portfolio still overhangs the market.
Best news in a long while: CPI for February was unchanged. Other economic data continue to slide, but at a shallow slope. February retail sales fell 0.6 percent versus hope for a small gain; however, new claims for unemployment insurance are still within recent range, near 360,000 weekly, and consumer confidence is low but stable.
Foreclosures continue to receive hysterical coverage, but even in Bubble Zones are no worse than in prior regional cycles — roughly 2 percent of households now versus common peaks at 4 percent. The cycle is nowhere near an end, but here is a striking sign of resilience: Home-listing inventories grew hardly at all last month (1.2 percent).
The new jumbo-conforming loans are available now, separate limits for each micro-region (no help at all in many places — our backyard, Denver, for example). We feared a substantial surcharge in rate, but it is negligible: a 0.25 percent fee, equivalent to 1/16th percent in rate. However, underwriting standards are miserly: We had hoped to roll piggyback second mortgages into these mini-jumbos … not allowed.
That was the good news. Meanwhile, FHA/HUD/Ginnie are hopelessly tangled in their underwear, unprepared for new FHA limits, now so critical as other low-down-payment lending is disappearing. All legal approvals are in place, but no applications can be taken until these agencies figure out what to do with the loans (NOT hard). A rant to your Congressperson is in order.
While on that rant, continue: Fannie has just rolled out "risk-based pricing" — which is no such thing. It is a set of punitive pricing not reflective of default risk and transparently designed to raise capital. Example: If you put less than 40 percent down and have a FICO score below 720, you’ll suffer damage — not a lot, maybe 0.125 percent in rate — but more than you should. Assistance agencies should raise capital in good times, and in tough times revert to original charter.
In deepening market dysfunction in the last three weeks, common 5-year ARM rates have moved from 5 percent without loan fee to 6.5 percent with at least a point.
The public-policy response thus far is unfortunate, and it is impossible to tell who, if anyone, is in charge.
The Fed one week ago and again on Tuesday executed $200 billion, quadruple somersault, two-and-a-half-twist backflips — anything to avoid "bailout" — but nothing more than fancy versions of the traditional liquidity measures that have failed since last August. The Dow went 362-points goo-goo at Tuesday’s announcement, but all markets soon realized that the new efforts would do nothing for the fundamental problem: Financial system capital is too impaired to support the financial assets in the market and on balance sheets, let alone to support new lending.
It is past time for the Fed and other agencies to enter the market as buyers, and to deploy any of several reliable methods of recapitalization. Although the Fed is theoretically an independent entity, it cannot enter as buyer without the assent of the White House and congressional leaders.
Instead, Treasury Secretary Henry Paulson on Wednesday delivered a long-awaited White House plan. It would have been a good speech in 2004, recommending risk-limitation and regulatory reform. The stock market fell throughout the speech. Paulson may be hamstrung by oblivious market-solution types in the White House, but at this late date I find it hard to avoid the conclusion that he is a boob.
As I write, President Bush is delivering an all-OK, we’ve-got-it-figured speech — right out of the post-victory playbook for Baghdad.
Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@boulderwest.com.
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