By Louis S. Barnes

The terrible taper has begun!

As with most long-feared events, little happened in the instance. Okay, two things: the 10-year T-note and mortgages rose close to their highs of the year, but have since fallen back, and the Dow jumped 292 points. The same Dow which had supposedly bubbled in the artificial stimulus of QE (quantitative easing) leaped in exuberance at its demise.

Psychological-financial oddities aside, take two things from taper week. First, Clinton’s Law (“It’s the economy, stupid”). Second, a mortgage Christmas Carol. Read Andrew Waite’s thoughts here on what this means.

The Fed affirmed its 2014 forecast: an abrupt jump in GDP from 2%-ish to 3%-ish, and a rise in inflation from sub-1% to 1.5%. If the Fed is right, then we have entered a familiar business-cycle recovery and Fed tightening cycle. The Fed’s promise to keep as-is the Fed funds rate, the overnight cost of money, this week has kept long-term rates under control (“extended guidance” at least into 2015). If the economy really does accelerate, long-term rates will rise no matter what the Fed funds rate.

     Also helping long rates: the bond market is skeptical of acceleration. Bond people grasped the benefits of QE better than popular commentators, and wonder why the economy is going to do so much better without it. The Fed knows the economy is fragile and does not want to end effective stimulus; it seems to have concluded that QE has lost utility versus risk, done like a dry-breasted turkey. Yet, the lone dissenter at this week’s Fed meeting was Eric Rosengren, Boston Fed president, in 2008 the one person to grasp that a credit shortage had more than canceled the Fed’s rate cuts. The only sector capable of pulling the whole economy: housing, and housing depends on credit.

     Concealed by all the taper twitter: the last acts of a modern Scrooge. Since 2009 Edward DeMarco has been in charge of the FHFA and its duties as conservator of Fannie and Freddie (the GSEs) after their failure in the credit panic of 2008. In DeMarco’s defense: no hotter potato was ever handed to anybody, Congress has been contradictory and undermining, and the White House and Treasury AWOL. DeMarco correctly saw his job as protecting taxpayers, but like so many pinched denizens of counting houses thought the best policy was skinflint.

     In a credit disaster, one sure way to make it worse: choke what little credit remains. DeMarco has for five years recalibrated GSE underwriting to strangulation. Evidence: the default rate on new production has fallen 90% below pre-bubble levels.

     In the well-intended effort to pay back Treasury assistance, and to risk adjust loan pricing, DeMarco brought us the hated Loan Level Pricing Adjustments. The GSEs now run large profits and have rebated their bailout to the Treasury. But this week DeMarco announced another round of LLPA hikes and increased the GSEs’ securitization guarantee fee, now triple its pre-bubble percentage.

     From 1935 to 2000 when the US mortgage market performed flawlessly, no bubbles and no busts (the S&L meltdown was commercial loans), credit pricing was socialized. 5% down or 50% down all got the same deal, only mortgage insurance added for the lowest down payments. Risk was calibrated by underwriting, not price: big down payment, relaxed scrutiny; 25% or less, we’re going to hold you upside down by the ankles and shake. Now we waterboard everybody, including supremely qualified investors, and in Libertarian zeal surcharge to death low-down borrowers.

     DeMarco’s replacement, Mel Watt, has already been confirmed by Congress. The Fed even post-taper, trying to keep rates low, is still buying nearly all net-new GSE production. Yet this week DeMarco, sitting in his chair as it is wheeled out to thankless retirement, gave orders to raise the cost of mortgages on the theory that if Fannie loans become expensive enough, private markets will take over. Total private-market securitization this year: about $13 billion, roughly one week of GSE-based production. The big housing question in 2014: will Mel Watt begin to reverse DeMarco’s damage?

     A Merry Christmas to one and all!! Nothing religious, just felicitations from Charles Dickens, and wishes for redemption of any troubled soul nearby. DeMarco’s to start.

Click on charts below to make them larger.

12-20 Lou chart 1

12-20 Lou chart 2

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12-20 Lou chart 4

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  • Danny Johnson

    Danny Johnson has flipped hundreds of houses over the last 11+ years in San Antonio, Texas. He blogs about flipping houses at and is the author of "Flipping Houses Exposed: 34 Weeks in the Life of a Successful House Flipper," a best-selling book on Amazon. He also provides real estate investor websites at

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