When you're chewing on life's gristle
Don't grumble, give a whistle
And this'll help things turn out for the best ...
And ... always look on the bright side of life
- Eric Idle (Monty Python)
At 11:30 a.m. EST on Christmas Eve, the U.S. Department of the Treasury announced a handful of significant changes to its support of those venerable twins: Fannie Mae and Freddie Mac. Most significant was an unveiling of its potential equity injections for the next three years.
Mortgage traders and analysts alike scrambled for the next several days to interpret exactly what this means for the secondary mortgage market, but in the end little actual market reaction was seen. Instead the move was seen — as all previous moves to shore up the twins — as further indication the government will not allow for a default on their debt. No big surprise there.
But now that the folks keyed in on the short-term view have settled their stomachs, focus is turning on longer-term implications. In particular, just when will we have a private sector mortgage market once again?
When the President submits his budget recommendations in February, he plans to include specific suggestions about what to do with the twins long-term. I have been hoping this will finally kick off a serious debate — both in Congress and in the public — that would lead quickly to a resolution of this roadblock. Instead, the Christmas Eve gift we received could indicate we have much longer to go.
In this column, in my regular speeches, in client presentations and in my conversations with anyone who will listen, I have preached for the last year and a half that the quickest route to economic recovery drives right through the mortgage market. We only need answer a few, but admittedly significant, questions regarding government support for the housing sector.
Once the uncertainty recedes about where government will play, private lenders will reemerge, which will create a stable environment for homebuyers along with lower interest rates. This is all we really need to give the consumer courage to reenter the malls and bring strength to our economy once again.
Instead, I fear we are setting the stage for this uncertainty to continue through 2010 and beyond, keeping potential lenders guessing and thereby reluctant to commit to providing home loans. As long as the government dominates the mortgage market, I do not believe a strong economic recovery is possible in the near future.
However, the refrain from the Monty Python song keeps bounding around in my head, encouraging a look on the brighter side of life. Unfortunately, this leads me away from looking at the economy.
Key Developments
Treasury issuance set another record last week at $209 billion. This was the eighth record week for Treasury issuance during the year and was met with the same solid demand as all the others. With all the grumbling about how much debt we are accumulating, it remains curious that demand continues to be strong enough to accommodate.
An early look at Christmas sales showed rising Internet sales totaling $27 billion from November 1 through December 24. This was a 5 percent jump from last year and included a 20 percent increase in consumer electronics.
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