While the Fed and the administration insist that recovery is moving forward, the pattern of in-bound data produces the same, queasy sensation as their denial in the fall of 2007 and the summer of 2008.
The definitive 10-year T-note broke last weekend from the 2.70s to 2.59%, still there, but mortgages are under upward pressure from refinance volume doubled since April, and the Fed no longer buying MBS, just Treasurys. Purchase apps are dead flat.
The apparent failure of all traditional recession-fighting measures has unleashed a policy free-for-all. Absent any tested theorem for what-to-do-next, the gates of every economic lunatic asylum are wide open, the rational indistinguishable from the mad.
Crazy people are often cheerful, giggling sorts, but this crowd ambling through the countryside conceals a homicidal fraction bent on settling old scores. The oldest feud in finance festers between the No Government and Interventionist mobs, and the former have out the long knives, hoping to finish off forever the hated twin Frankensteins of intervention: Fannie and Freddie.
The long knife of choice is propaganda, Big Lie leapfrog, dezinformatsiya, demanding a return to the good old days of a private-only mortgage system, 20% down, and the end of all Federal involvement, the sole source of our current trouble.
The last all-private mortgage system in the US had been in place until 1929. Down payments were 20% or more, but the loans were short-term, often callable or balloons, and only about 40% of Americans owned homes. In the greatest financial collapse of all time, from 1929-1932, the combination of mortgage default, foreclosure, and falling values collapsed half of the nation’s banks and extinguished deposits, money and credit. Private markets were utterly unable to stop their impulse to liquidate.
That self-reinforcing downward spiral was stopped by government-guaranteed restoration of credit: the Federal Home Loan Bank system in ’32 began to provide liquidity to S&Ls, the FDIC in ’33 guaranteed deposits, the FHA in ’34 brought the first 30-year fixed-rate mortgages, and Fannie in ’38 became the “secondary” conduit.
The “20% down” fable sold by deceitful Wall Street Journal op-eds does not survive the facts. GI loans, 1944 to today, have been 0%-down; the FHA since then in a range of 3%-5% down, both with rigorous underwriting. In 1972 the private market brought the innovation of mortgage insurance, and 5%-10% conventional down payments.
The S&L disaster was a government failure in two stanzas: the clumsy deregulation of deposit costs put all loans underwater as to rate in 1979 (they were good loans, though); then the grant of commercial/development lending powers, instead of “growing-out” of trouble caused the credit disaster of the ’80s. All bi-partisan work, by the way. As was allowing private interests to seize control of the Fannie-Freddie public-private partnership: bloated portfolios never intended, and governance by theft.
The no-government disinformation says that leftish Community Reinvestment and affordable housing loans wrecked Fannie and Freddie, and in turn caused the whole current disaster. Not so: the deed was done by private-motive overextension. However, the political drive to extend home ownership to the unprepared was a terrible mistake.
The Big Lie conceals the really big truth: the worst mortgage losses — subprimes, Alt-As, option ARMs, and 2nds — were all private creations. FHA and VA still stand. Lehman and Bear do not. BofA, Chase, and Wells still choke on their private trash.
There are right and wrong ways to rebuild government support for mortgages. However, just as war is too important to be left to generals, mortgages are too necessary and too dangerous to be left to nouveau Lehmans, Bears, and Countrywides.