The Mortgage Bear Market Reaches Bottom

Today's takeover, by FHFC, of the management of Fannie Mae and Freddie Mac, which together guarantee almost three quarters of all U.S. mortgages, brings the current bear market in mortgages to its bottom -- at last. Mortgage defaults there will certainly continue to be; huge, billion-dollar losses will be admitted and accounted for; still, this is the bottom. Three quarters of all mortgages are now in the hads of the United States Treasury. That's it, folks.

So where do we go from here ? First, we go forward pretty much as we were yesterday. The mortgage qualification guidelines have already been redrawn, months ago. Borrowers are now expected to document both their income and the down payment, to have a few months of mortgage payment reserves, and to qualify for mortgaes with a monthly payment at no more than 40 % of gross income (and often less). These qualification guidelines are what used to be called "conventional" mortgages -- as opposed to non-conventional, often subprime, sometimes "Alt-A" or "negative amortization" loans. Today the "conventional" mortgage IS the mortgage that (with few exceptions ) you will get.

Second, the housing price trend continues downward as the market adjusts to a price level at which buyers can qualify for mortgages -- because if a buyer can't qualify, he is not a buyer and your house will not be sold to him. This downward revision in prices seems to me to be much closer to complete than not. In most markets prices have fallen 20 % to 25 % since 2005; in many markets they've fallen 40 %, 50 %, 60 %, even 75 %. Half of all sales, in some of these most depressed markets, are foreclosures.

Foreclosure sales are always a distress price. They are part of the bottom. Yet the foreclosure part of the price decline will soon be diminishing. More and more lenders are offering radical loan modifications to current borrowers. I've seen monthly payments reduced from 3,650.00 to 1,800.00. Interest rates are being dropped from 8 % to 3 % -- Cuntrywide is acting aggressively in this vein. Clearly the smartest lenders do not want to keep on foreclosing properties and encumbering themselves with a huge administrative burden. And so the market is improving: because the move by these lenders from foreclosure to modification will remove a very large chunk of bear market house sales from the marketplace.

Both ohn McCain and Mr. Obama indicate support for the Treasury's tae-over of Fannie Mae and Freddie Mac. They have to support it. There really is no other choice. Taxpayers, however, will bear the $ 200 billion burden -- maybe.

But maybe not. The takeover, by itself, has improved the market. Sentiment is turning a bit to the optimist side. Mortgage interest rates are coming down.

The move to improve won't become evident tomorrow, but by the middle of next year sentiment will most likely be stronger. One sign in that direction is the recent new strength in the U.S. dollar's exchange rate versus the Euro. Back in May it took $ 1.59 to buy one Euro. Today it takes $ 1.40. That's a 14 % improvement. Back in May it took $ 2.02 to buy one British Pound. Today it takes $ 1.72. That too is about a 14 % improvement.

Granted, that a 14 % up-move in the U.S. dollar's exchange prices is not a revolution. In June of 2007 the Euro was worth $ 1.30; in 1999 it was worth $ 0.90. Clearly the dollarhas a long sway to go on the upside before it can feel its value restored to the Euro equivalence that it and the Euro both expected to enjoy. I'm guessing, however, that the Dollar's exchange rate is a sign of improvements to come in the housing market. Recovery might well be in place by 2010. The taxpayer may yet NOT have to support this huge mortgage buyout.

To be continued...later today