As Yogi Berra so wisely observed, “It’s tough to make predictions, especially about the future.”

We were still receiving Bear Stearns rate sheets at the beginning of 2008. The year began with the Fed slashing funds rates by 1.25% in two bold moves, and the rout was on. At the time, few would have predicted that Bear and many other marquee names would get wiped out and/or see their shareholder value evaporate. Oil fell nearly 75% from its highs and we became used to 500-point stock market days. The numbers look benign on the table below, but they are the most remarkable that we may see in our lifetimes.

Even Alan Greenspan admitted “shocked disbelief.” He relied upon financial institutions to protect shareholder equity by policing themselves. In countless cases, that was a mistake. Gruesome records were set almost every day, and almost every asset class – bonds, stocks, real estate, and commodities – lost value. As the economy unwound its reliance on debt, we fell in to the grips of deflation.

Will 2009 bring economic collapse or will markets begin to mend?

Two reliable predictors give hope. First, the spread between LIBOR and Treasury yields, which measures global risk. The spread ended the year tighter than when it began, and far tighter than the extreme levels of late summer. Second, volatility embedded in stock option prices is a good predictor, and is referred to as the “fear index.” While still elevated, it ended the year reflecting much less fear than the worst seen in 2008. Both indicators lead us to believe that the economy has backed away from the brink.

While the economy may not collapse completely, we have some tough work ahead of us. Recessions brought on by financial crises (rather than typical business cycles) are severe, reports John Mauldin. In past such recessions, real housing prices declined 35% over six years, while equity prices collapsed 55% percent over three and a half years. The unemployment rate rose by 7% over four years and output fell 9% over two years. And government debt increased massively. By these historical measures, we have a long way to go.

The good news for mortgage bankers is that mortgage rates are low, and are likely to stay that way. Fallout – of the 50% variety – and early loan payoffs have become the problems du jour. In spite of Barron’s warning to “get out (of Treasuries) now,” there is little economic reason for mortgage rates to rise. Nary a holiday party went by without someone asking when they could have their 4.50% mortgage rate (in the near future, we think). Mortgage demand is strong. The New York Fed “began purchasing fixed-rate mortgage- backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae,” the Fed bank said in a statement released by e- mail.

So severe is the concern over lower rates, fallout, and refinanced mortgages, that the lack of premium mortgage pricing is as much an impediment to the refinance boom as anything else. You can pick any premium mortgage rate you want and the price won’t be much above 102.

President-elect Barack Obama and his family spent the holidays in Hawaii. To which President Bush said, ‘You know, I prefer spending my Christmases right here in the United States.’ – Jay Leno

Thanks for your business and have a good week. — Tom Millon