Mortgage Credit News by Louis S Barnes - February 19, 2021

Immediately after the holiday, long-term rates ramped up again, from last week’s close at 1.21% to 1.34%, and even a strong purchase mortgage is pushing on 3.00%. Trading is in a “technical” void, the next support clear up at 1.50%. Everybody wants to know why so far so fast....
Long squeeze. Game Stop publicized “short squeeze” but longs are just as vulnerable to flips in illiquid markets, the mortgage market worst of all. When consumers lock a rate, lenders of course hedge their risk. But there is no way to know what fraction of locked loans in “pipeline” will close -- deals die all the time in home inspections. But changes in market rates feed on themsleves; if a sudden drop, some fraction of consumers will abandon their locks and start over elsewhere, and the busted locks force lenders to buy MBS to cover busted hedges, which deepens the rate drop. When rates jump, and every borrower wants to close, lenders are under-hedged and have to sell loans in forward markets, lickety-split, which pushes rates up farther and faster. This week.
News? January retail sales were reported up by 5.3% from a lousy December on Tuesday, coincident with this new rate jump. Even more remarkable, sales rose 7.4% since January 2020. Do I believe that sales are that strong? Nope. Every economic datum is suspect. Most rely on seasonal adjustments calculated based on decades of prior experience, none of which apply during Covid.
Fed? Two issues. First, and most important in the years ahead: the Fed must explain how long-term rates will stay down while the Fed uses maximum force to induce inflation above 2%. In old Tales of the West, inflation is good for housing prices. Write it down somewhere: NOT. Low rates are good for housing. In the 1970s inflation appeared to be good for real estate, but only because mortgage rates were artificially low, tied to the Reg Q limit on the cost of deposits, and eliminated in 1979. In the late ‘70s, 30-fixed mortgages could be had at rates lower than inflation.
The second Fed issue is borderline conspiracy theory. Chair Powell let slip a few weeks ago that housing had “more than recovered.” Pure suspicion here, but the Fed is not only undisturbed by the modest rise in long rates thus far, but may have engineered it. Still buying vast quantities of bonds and MBS, but not bidding as aggressively in price?
Inflation? I know a skilled mom who when exhausted would forbid her children to say the word, “Mom” for one hour. She would retire to her bedroom for that hour while subdued children huddled outside her door.
Please. Do not mention inflation for one month, or until we see some. Also on the banned-for-boring list: bitcoin. Hush.
Demographic surprises. If we’re lucky, only about a half-million of us will die early of Covid. How early? Statisticians are all over it, working on years lost among the elderly 80% of casualties. Preliminary guesstimates suggest two-to-five years early on average. Said another way, if Covid largely ends in 2021, the death rate from all causes will fall for the next five years.
On the other side, births. Everyone tee-hees about the baby booms nine months after blackouts and blizzards. This time... proximity has inhibited fertility if not romance. Early guesstimates: 2021 births may stone-drop by more than one-third. We’ll know soon. Lockdowns intensified last April, and 40 weeks later begins about now. We have no way to know if the baby-dearth will give way to a post-Covid boom. It is churlish to suggest, but lockdowns and closed schools may suppress the desire for parenthood for a long time.
We do know that many people are scrambling to buy larger homes, but that’s just to deal with the kids they’ve got. If a durable birth dearth, within five years we’ll see lasting consequences for schools and housing.
Texas vortex. #CancunTed... not even the kings of late-night TV could make up that story. Or Texas authorities advising citizens to boil water. No power, no gas... how? Like our IT department sending e-mail to tell us the e-mail outage will be fixed in a few hours.
The polar vortex was first observed 70 years ago, perturbations routine. Climate warming is a big deal, sea level the principal risk. However, the true believers undercut support for action by claiming this cold spell is due to warming. It is also February. And a hundred-year record is not a force field.
How does schadenfreude translate into Texan? Trying German with a twang could gitcha misunnerstood an’ shot. My family has Texas roots, so ah’m qualerfied. During the 1970s energy crisis, New England Yankees refused pipelines and port terminals, and embraced Jimmy’s tax on “windfall profits” from oil. Then the most popular bumper sticker in Texas: “Let The Bastards Freeze In The Dark.” Gracious sakes alive, how the world do turn.
Texas authorities and the WSJ immediately blamed failure of wind generation. Haw. The true fact: all o’ that lone-star-we-know-what-we’re-doin’-an’-y’all-don’t. An underregulated system separate from the federal grid was underprepared. Up in the Dakotas, nuthin’ ‘tween thim an’ the North Pole but a three-wire fince in Saskatchewoon... they’re snug as bugs. Winterized. As any fool camping in winter with a butane stove will find out, gas freezes.
Tim Boyd, mayor of Colorado City TX found the vortex a good occasion for his retirement speech: "No one owes you [or] your family anything; nor is it the local government's responsibility to support you during trying times like this! Sink or swim it's your choice! The City and County, along with power providers or any other service owes you NOTHING! I'm sick and fired of people looking for a damn handout." (Full text below)
Multipartisan fairness. Texas has peers on the blue side of the aisle. Student loan forgiveness, $50,000 per customer? Imagine a family who struggled, but paid Egbert’s way through A&M without a loan. Next door, other parents scrimped, but paid off Matilda’s loans. Down the street, a 30-something couple still living on Salvation Army furniture paid off their own loans. Around the corner yet another family quit making payments years ago. If we forgive the balance owed by family number four, will we refund all the money paid by the other three?
Economic recovery from Covid will depend on our behavior reversing from fear back to business-as-usual. The only college basketball programs which are Covid-canceled? Eight of ten are the Ivy League ultra-blues (no shade offense to Harvard crimson, nor to my alma mater, Brown -- but blue is blue). These schools this week canceled all spring sports. The Ivies have more money than everybody else put together, enough to hire a Covid-watcher-tester for each athlete. Societies depend on their elites acting like elites. Elite moral values, setting examples -- such as courage. The elite response to Covid has been to hide under the sofa, mask-on when alone, and buy a bigger place in Bridgehampton.
If Covid had come and gone quickly, so might have fear and economic damage. New cases nationwide fell 44% in the last two weeks, but fear to shop, play, and party will last.
Rock on Perseverance! At your landing site in Jezero Crater and its ancient lake, may you find sea shells by the sea shore. And a whole generation of kids learn how to spell your name.

The 10-year T-note support is evident in this chart five years back. These patterns matter because everyone in markets acts on them, but that does not make them perfect predictors. I doubt the Fed right now wants to see long-term rates back where they were pre-Covid.

Total household debt through the end of 2020 did increase, but just mortgages, and even that increase is suspect. The NYFed uses credit report information, and in another 90 days we’ll get the Fed’s actual nose-counting in Z-1. So many mortgages are coming and going that credit reports are likely double-counting a few.

Mr. Boyd retired shortly after letting his town know what was on his mind:

In this image of the Perseverance landing site, it takes no imagination at all to see water flowing down a river from left to right, creating a delta on the edge of a small sea. A billion or two years ago: