My Mortgage Blog

The game of Grecian Chicken flaps and clucks on, Greece near default and leaving the euro, which would ruin its economy; and Europe withholding new money until Greece agrees to austerity that will ruin its economy.
     
The 10-year T-note yield needs no scary help from Europe to stay low. The Fed's "Operation Twist," swapping short Treasurys for long ones, has since November 1st kept the 10-year between 1.82% and 2.05%, and mortgages close to 4.00%. Zzzzzzzz.
     
Economic news didn’t amount to much this week, except the encouraging drop in weekly unemployment insurance claims, now below 375,000, half the worst of 2009.
     
Public policy follies and heroics dominate everything, economies and markets still in one ICU or another. For slapstick it's hard to beat the mortgage servicing settlement with states' attorneys general, a tasteless joke on people in trouble, and housing.
     
Eighteen months ago state AGs discovered they could hold foreclosures hostage to infinite litigation by accusing servicers of procedural shortcutting -- true, but not material error. Servicing banks have bought their way out for $26 billion (0.00251% of mortgages outstanding), which might as well be extracted directly from taxpayers (the banks' customers will pay) and deposited in the AGs' re-election campaigns. The only real effect of settlement, and question: now released by the protection payment to AGs, what will be the new volume of foreclosures and how soon?
     
The second policy matter is genuine good news: clear evidence is mounting that the Fed's extraordinary interventions are beginning to have effect. The Fed's rescue measures since 2008 are three times removed (maybe three orders of magnitude) from actual historical experience, supported only by theory… but working.
     
1. When Lehman failed, the Fed flooded the banking system with reserves, trying to keep credit flowing and to prevent an asset fire-sale -- the theoretical should-have-done in 1930, but never actually done. Brief injections at the '87 stock crash and 9/11 were hardly comparable. The $1 trillion injected in a week after Lehman… did nothing.  
     
2. Four months later the Fed began "quantitative easing," buying MBS and Treasurys, another $1.2 trillion. QE is the measure that Japan theoretically should have adopted in 1990 but did not. QE1 did knock down mortgage rates, but the idea was to create credit: pull safe investments from the market, and thereby force investors to take risk. Didn’t work. The world went to cash and stayed there through QE2.
     
3. Beginning in 2011 and through today, the Fed has "walked out the yield curve," a theoretical antidote to asset deflation described in a Bernanke speech 10 years ago. Translation: after holding cash yields at zero for three years and watching you idiots stay in cash, now we're telling you we'll hold them at zero for three more years. If you still stay in cash, we'll pull more of your safe investments and promise to stay at zero until somebody younger and smarter takes your job or inherits your assets.
     
This theory-based offensive has opened pot-shot season for every other theorist, and fear, and who-took-my-cheese. Please pay no attention to the inflationists, the shut-the-Feds and gold bugs, and the bond-fund managers and wealthy coupon-clippers who feel entitled to good yield on cash and no-risk investments.
     
To make some money you're going to have to take risk. And now we can see the first pin-stripers crawling from muddy bunkers, squinting into sunshine.
     
Consumer credit since November has rocketed at a 9% annual pace. Bankers in action! Paul Kasriel at Northern Trust has been one of the very few to understand the Fed's ops, and his newest analysis finds a sudden net increase in bank loans and securities held. Credit! The MBS/10-year spread is the narrowest in a year, fear fading for holding super-low mortgages. Yield hunger has junk bonds in a huge rally, and corporate finance of all kinds is cheap. New home equity lines of credit had rate floors at 5.00% and 6.00%, banks fearful of Fed reversal and rising deposit costs. No more! We see two-year specials just above 2.00%. Even mortgages -- halleluiah! -- collateral circulation is opening around throttled Fannie and FHA, banks actually making loans.

The Fed set out to cap the 10-year T-note, and capped it has been. Don't fight Mother Nature.