MORTGAGE CREDIT NEWS BY LOUIS S BARNES - March 13, 2020

This Friday the 13th is a good-news day, believe it or not.

First, traders on bond desks shouted this morning, “The Fed is in!” Instead of nibbling with short-term cash and waiting for its meeting next week, the Fed today bought bonds and instantly liquefied the mortgage market. It will be a while before we get under 3.50%, and in the rest of this Covid19 cycle may never break below 3.25%, but home buyers can get loans today.

Under the weight of too many refis too quickly, then panic overtaking even the Treasury market, which made it impossible to hedge interest rate risks, the mortgage market effectively closed from time to time this week. Why not go back below 3.25%, or even to it? It will take many months to refi all of the loans we made in the 4s since the second visit to the 3.25% all-time low in 2016 (the first in 2012). All-time lows are hard to break, the path blocked by masses of refis.

Which leads to the second good news: Covid19 seems to be cresting in several places, each about one month after serious reduction in social contact. Apple says it is reopening all of its China stores. South Korea, Singapore, Hong Kong -- all successes. Even Italy may be cresting, but at the highest shutdown cost outside China. Iran, Russia, the Third World... all opaque.

What lies ahead for the US? Study the virus and economy separately. First the virus, and its lessons from elsewhere. “Cresting...?” My son, Gus the mathematician proposes that the number of hospital admissions is a reliable measure of total infection, the very ill self-selecting in a consistent percentage. Crests have appeared faster and at lower levels of infection where testing has been aggressive, and not where not.

South Korea is about the size of Indiana with seven times as many people. Dense. South Korea has already tested a half-percent of its whole population -- 20,000 per day -- aggressively tracking and confining the contagious or exposed but not shutting down the nation. Its CDC reports about 8,000 cases, the count stabilizing and only 67 deaths, mortality about 0.8%. Italy, the poster child for fearmongers, reports about 15,000 cases, certainly an undercount because only one-quarter as many tested as in South Korea, and over 1,000 deaths. Of those, 55% were older than 80, and another 33% older than 70 -- which may be an artifact of triage, ventilators reserved for the young.

Here? Oh, my. The administration’s medical mouthpiece, Dr. Fauci, which rhymes with “ouchy” says we have failed at testing. Right. Way back in youth, our family physician was Dr. Meddler. I mentioned the incongruity to my dad, who replied, “Better than ‘Fiddler.’” Trump says today failure to test is Obama’s fault.

We are late, but our strength is local: with no help from the federal government we have begun a serious and nationwide self-reduction in social contact. It is amazing to watch rush-hour traffic in the last two days begin to look like Sunday morning. Nobody told the NBA to shut down. The Italian language has a word to describe the national pastime, furbizia, the unanimous avoidance of authority, bureaucracy, and inconvenient rules. Here in the US, we have not so much panic as serious citizenship, and despite the contagiousness of Covid19, reduced contact works. In about a month.

The virus ran in China unchecked since perhaps October, concentrated in ERs and re-spread, but draconian quarantine began only six weeks ago and China is already far past its crest. Because of testing failure here, we do not know how deep and broad the US infection may be. Our national self-quarantine began just this week, so perhaps three or four weeks to a crest, then something chronic and occasionally flaring until a vaccine.

Or maybe we get luckier. Roche labs yesterday got approval to mass-produce a test kit, reliable results in three-and-a-half hours. In our rich and mostly low-density land (Wyoming has one case, social distance inevitable), heroic local health departments are doing the grunt work of identifying, back-walking contacts and isolating. The virus has been loose here since at least January, but we still do not have a hot spot to compare to Daegu or the north Italian cities.

The economy... deconstruct. Credit markets are behaving like 2008, shutting down, but then we had something like $8 trillion in toxic IOUs wrecking the banking system. Today, banks are fine, getting all of the benefit of new rules since the bubble. The credit market problem may be nothing more than refi clogging and hedging breakdowns from panicked trading.

The stock market ran up to Dow 29,000 in just the last six months, from a stable zone near 26,000 which had prevailed since the end of 2017. Overbought by any measure. It’s early, but the Dow seems to be stabilizing near 22,000, thanks to the Fed, and pending future understanding of economic damage. Losing 15% is painful, but look backwards. The crash of 1987 was weird, down by one-third in a few days, but that had been the year-to-date gain -- and recaptured in 22 months despite a Fed-tightening cycle. When hit by 9/11 stocks were already 18 months into decline, the loss about the same percentage as this one and recovered in six months. When Lehman went down in September 2008, stocks lost half of their value and took five years to get it back -- but it took that long to get banks back in business.

The stock market loss is jarring, but not enough by itself to do lasting economic damage. Panic and incompetence can cause that damage. Mr. Trump’s speech on Wednesday was well nigh catastrophic to markets. Attitude, errors and fantasies aside, the Europe travel ban is stupid and directly hurtful. Imagine if John Kelly were still chief of staff -- would the White House have impeded testing since January? If Rex Tillerson were still at State, would Mohammed Bone Saw try an oil-price war at our most vulnerable moment?

The competent people have gradually been removed from the White House. Hate The Swamp, do you? The Swamp is saving us, diffuse and leaderless, dutiful and determined.

Democrats... maybe build a glass-sided JoeMobile? Cluelessness in leadership is widespread. Angela Merkel, “two-thirds of Germans will have the virus.” Bet not. The prime minister of Canada and wife exposed by foreign visitors, the same as our president and vice president, Ivanka and Barr, the new chief of staff, and Ted Cruz. Numbskulls.

Testing is coming, and so is a crest. Feel pride in our good sense at the grass roots. Nobody told baseball to postpone, or the Masters, or the NCAA, or every employer in the nation to shift quickly to work at home. Well done.

The rise in the 10-year T-note despite Fed buying... good news. That’s the unmistakable sign of fading panic. Here is the last 90 days:


This is a clip of Wednesday’s 30-fixed mortgage prices from the most-used national wholesale search engine. On Thursday, often no rates at all. Back in business now!


Here -- if you have good eyes -- you can see the similarity and difference between now and 2008. The spread between 10s and mortgages began to widen when subprime markets shut in 2007, and opened to a chasm when Lehman failed. In a full-go panic, money goes to Treasurys and away from all other IOUs. We have seen the same thing in the last two weeks, but only two weeks, and this chart is a day out of date. Wed-Thu, mortgages 4.375% and 10s 0.50%, the chasm again. Today, thanks to the Fed and recovering nerves, 10s to 0.96% and mortgages 3.625% -- still wide, but alive!