The Obama put is in full effect. Late last week, a dismal Treasury auction pushed interest rates higher and mortgage rates crept above – gasp! – 5.00%. The Treasury quickly renewed its quantitative easing (buying debt, in other words), and mortgage rates dropped nicely below 5.00%. Recent market trends continue; spreads shrink while Treasury yields rise.

Courtesy of the U.S. Treasury, the spread between mortgage and Treasury yields steadily shrinks. The difference between the par yield on mortgage securities and equivalent Treasuries is 1.95%. We haven’t seen such a low level since late 2007. The yield spread hovered around 1.75% for much of 2007, which seemed like a wide spread at the time. The yield spread was 1.25% for much of the mortgage boom earlier this decade, but we may never see those spread levels again.

Consumers are still paying a full 1.00% above securities yields. The spread between consumer mortgage rates and mortgage securities is not shrinking. Strong mortgage application volume combined with limited industry capacity is keeping consumer rates relatively high. Few consumers are complaining, however, about rates less than 5.00%. Rates are low, and are likely to stay that way.

New mortgage activity is booming against a backdrop of questionably higher stocks and an economy that is not worsening as quickly as it once was. Just this morning, Nobel Laureate Paul Krugman said that “global economic prospects don’t justify the two-month rally that has restored $9 trillion to stock markets around the world.” Unemployment is 8.9%, its highest level since 1983. It takes over 21 weeks to find a new job, a new record. Home prices dropped the most on record in the past year. That’s a loss of 14% nationally, and down 59% (!!!) in Cape Coral-Ft. Myers, Florida.

The good news – in the world of distressed loans anyway – is that prices have stabilized. Delinquent loans trade at 30-40 cents of UPB, depending on characteristics. REO prices range from 70 cents of BPO for “stable” markets like California and New York, all the way down to 10 cents of BPO for very weak markets like Detroit. About $500 million of product traded hands last month, and about half of the loans that were modified defaulted again.

In California, Arnold Schwarzenegger is calling for the legalization of marijuana. Yes. He is calling his program “Weed the People.” – Jay Leno

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