Before another adventure in my lab coat, the background to a squabble in a $7 trillion dollar sandbox, the spat determining the fate of the housing market and the economy.
The mortgage market fell into trouble in the first week of March, rates rising and whole categories of loans disappearing. Far too many refis and the virus panic had done the damage, but the Fed stepped in to buy more bonds and faster than QE in 2009, and panic and rates should have fallen.
And did not. On a fee-adjusted basis, Freddie Mac’s survey has for weeks had 30-fixed vanilla loans close to 3.60%. Our rates should be almost one percent lower. The benchmark is the typical two-point spread above the 10-year T-note, presently 0.606% and the spread to mortgages three points higher, wider even than after Lehman in 2008.
This dysfunction began in mid-March when Congress enabled “forbearance” of mortgage payments, 3.4 million loans so far, 6.4% of the total. When (if) we make a mortgage payment, it typically goes to a “loan servicer” who does not own the loan, and who forwards the payment to the owner of the mortgage-backed security (MBS), like as not a pension fund, life insurance company, mutual fund, or bank which in turn needs that payment to make good on its own obligations.
Who will make good the payment that we have skipped until we get caught up? Servicers can’t -- hell, they don’t have enough money to provide decent service -- but their contracts say that they must forward the payment even if we don’t make it. The owners of the MBS can’t cover, unless we would not mind missing pension payments due to us.
And one other tricky thing: if a mortgage retailer has made a loan and secured a commitment from Fannie (...Freddie and so on) to buy it, if the loan has a late payment in the first three months... no Fannie guarantee. Buy it back.
The mortgage agencies (the $7 trillion sandbox) were created to keep credit flowing during panics. The agencies were highjacked by stockholders, 1985-2008, bloated by lucrative investments in mortgages but foolishly financed. In 2008 the agencies had to be bailed out and seized by the government where they still are. They have paid back all of the bailout money, but any additional profit has been forfeited to the Treasury, and so the agencies have not accumulated a reserve which could carry today’s forbearance.
Opponents of government have wanted to shut the agencies, or at least to privatize them. The agency-haters have gotten nowhere because all roads lead to higher costs to consumers, and properly regulated as fee-for-guarantee insurers the agencies are not a hazard. But the haters have proceeded with their dead-end fantasies, hoping next year to flip the agencies back to stockholders. A top hater-dreamer last year became the regulator of the agencies, Mark Calabria at the Federal Housing Finance Agency (FHFA).
Today, unlike the run-in to 2008, nobody in mortgage space has misbehaved. Every lesson from pre-2008 has been learned or over-learned. Unlike 2008 or any prior US recession, we have been hit by a random comet. The mortgage agencies still exist, with duties to help in emergencies, and although without reserves do have Treasury credit lines over $200 billion. The solution to the current mortgage dysfunction is simple and consistent with the 1938 original purpose of Fannie: the agencies should draw on their line of credit to cover forborne payments until made good by homeowners.
Too easy. Marc Calabria refuses to play. He knows that if the agencies acknowledge a self-sacrificial duty to participate in an emergency rescue, then they can’t be privatized. The end of his hateful dream.
So we sit. Rates too high, loans disappearing altogether, forbearance frustrated, servicers and lenders damaged, and the housing market at risk of cascade into distressed sales. While the Sandbox King pouts and refuses to do his job.
After that, my lab coat is a relief.
To open up, or not... that’s not the question. We must open up and while still at risk and inadequately tested -- the issues are where, how, and how fast.
The protesters claiming that all of this is a hoax... please volunteer at a nursing home and without a mask. But the need to reopen is dire. Consider this ancient line from French farmers caught in price-collapse: “If this goes on much longer, I can shoot my cows. Or I can shoot myself. Or I can march my cows to Paris and bring down the government.”
Some aspects of our predicament are black comedy. Where are the tests? Who is in charge? Admiral Brett P. Giroir is the testing czar. Well, the Navy should know what it’s doing. But Giroir is not Navy. After an undistinguished career he was appointed in 2018 admiral of the US Public Health Service Commissioned Corps, and parades now in his Gilbert & Sullivan costume. “He polished up the handle of the big front door. Stick close to your desks and never go to sea, And you all may be rulers of the Queen's Navee!”
If you heard a heavy thump-thump in the night, that was Alex Azar, HHS secretary shoved under the bus by the White House. All his fault, misleading the president. White House fingerprints? The “leak” went to the WSJ, not to the leftie NYT or WaPo.
Covid-19 is full of puzzles, and some answers will soon arrive, many of them relieving fear that the virus is an invisible and unavoidable death ray.
Chloroquine is a bust (who knew), and the first trial of Gilead’s remdesivir failed (not done), but the medics are learning how to treat the virus. Ventilators seem more often a mistake than not; the virus is different from the ARDS initially assumed, instead with an odd pattern of symptoms. Treatment will improve. Meantime, please do not drink or inhale disinfectant. Sunshine is good, but if reluctant to go outside, it’s okay to paint on a tan.
Serology testing for antibodies has begun. Samples of only a few thousand people will tell us how many in a big city have actually been infected. The first tries have been bungled by haste. But a new study less questionable has found 21.7% of New York City has had the virus. That is getting close to “herd immunity,” especially if we consider the additional number of people who are naturally resistant -- not immune, just resistant.
Answers will come from the crew of the aircraft carrier Theodore Roosevelt (“The Stick”), 4800 sailors all tested, 840 positive, and soon to be tested for antibodies. Confined together tighter than on any cruise ship, the virus running free for at least three weeks, why were the other 4,000 not infected? Why a similar pattern on tested cruise ships, passengers older and less healthy, but half not infected? Geneticists are working on that like mad.
Most reports assume as many as half of any infected group will be asymptomatic. But are they contagious? I can’t help myself... Robin Williams as Adrian Cronauer interviewing a military intelligence officer: “We found out that we can't find them. They're out there, and we're having a major difficulty in finding the enemy. Well, we ask people, 'Are you the enemy? And whoever says yes, we shoot them.”
In a similar vein, Colorado health officials this week greatly revised our situation. They added 642 cases, our new total 11,262, and revised our total deaths up to 552 by adding 44 previously not reported, including 25 “probables.” All of the revisions came from nursing homes, now over 100 outbreaks in CO and in the big surprise, accounting for 64% of total Colorado deaths.
Sixty-four percent in those isolated spots, and only 12% of all cases, but late to the party and distorting the April case count. Based on that data and charts below, our governor announced a cautious and partial reopening beginning Monday. About damned time, but all fingers and toes crossed for the outcome.

The US 10-year T-note since January 1st. The only reason for mortgages to be north of 3.50% and in short supply: Calabria and the government-haters:

CO data reprinted here each week for several reasons: the CO Department of Public Health does a good job; I can keep track of this small place; and adjust for anomalies like nursing homes. With a good grasp of one state it is then possible to visit the many models asserting predictive ability and crosscheck what they say about CO. I have yet to find any of these “models” with remotely accurate reproduction of CO data. If they can’t get our inputs straight... better to snort disinfectant. The whole CO base of data is here, updated daily: One quirk: toggle from preset “date reported” to “date of onset.” The CO data confirm: this is a disease and hazard to the already ill elderly, and insane to shut down the economy instead of protecting the vulnerable.