At Least Oil Is Down Too

• Bonds rallied yesterday a little, but have given back all that
  momentum and more today, so we're back to where we were Friday on
  rates. At least oil is falling - we're more than $18 off the high and
  still going.
  
  
• There is a proposal out there being put together by a
  private/public consortium of mortgage people and government regulators
  that actually has some merit. It will be a couple of months before we
  get the full details, but right now it appears that what we're looking
  at is a plan to increase transparency in the packaging of mortgage
  loans so they can be purchased. This would add confidence to the
  secondary mortgage market, increase liquidity, and probably drive down
  rates, especially for good borrowers.
• This is the technical part, so skip it if you don't care:
  mortgages are packaged in large groups for sale on the secondary
  market. Primary lenders have used this packaging to shed loans from
  the books and obtain new lending capital. However, up to the moment,
  the packages of loans have been fairly opaque; that is, the secondary
  financiers were never quite sure what it is they were buying. The
  packages of securitized loans were often significantly heterogeneous,
  and as the market has melted down, that has contributed to the
  distress, because the lending institutions that purchased these
  packages couldn't really tell what they were worth - they didn't know.
  
  
  
• Some of the loans were fine, most of them, even, but many were
  not. How many? Nobody knew. Was this package better or worse than
  that one? Nobody knew. How much real exposure did the financier have
  to market downturn? Nobody knew.
• To a large extent, nobody knows now, either, which is why the
  recent spate of better-than expected earnings from servicing banks has
  been such welcome news. At least we're pretty sure the entire
  portfolio isn't going to self-destruct.
• This opacity does two things: one, it increases risk-based
  pricing for good loans (20%+ equity, 720 credit, full income
  documentation) while significantly decreasing pricing for bad loans,
  and two, it allows lenders to make riskier loans, because they can then
  package them with good ones and sell the whole shooting match as "A"
  credit mortgages.
• You're right, this is stupid.
• What this proposal would do, then, is make it much easier for an
  investor to tell what he was buying, because all the loans in any given
  package would share characteristics. This will increase liquidity,
  especially for good borrowers, and get some money moving in the
  mortgage market again. Rates will fall for less risky loans.
• Rates will, of course, rise for more risky ones, which will
  emphasize things that need emphasizing, like having a job and some
  money in the bank, and a history of paying bills on time. That will be
  painful for some, but better on the whole for everyone.
• Congress will then step in and prohibit risk-based pricing as
  being discriminatory, and the entire market will collapse. But we will
  have made a good try, and that's important.