Mortgage Lenders Face Long Rehab

Since then, the Fed has attempted several rate cuts and unorthodox steps to improve liquidity and bring down key interest rates that impact mortgage resets and corporate funding rates. Most economists expect the Fed will continue to slash rates and work to help borrowers refinance mortgages into the least-expensive loans possible, despite rising inflationary pressures.

With Treasury bond rates relatively low lately, mortgage refinancing activity from exotic loans into more traditional already has been quite active. The Mortgage Bankers Association refinance index jumped 4.3% in the week ended Wednesday, after climbing 32% the week ending Dec. 5.

The wrinkle in keeping interest rates low and borrowers refinancing is a resurgence of inflation pressures, which economists expect to continue through 2008, given the spike in oil prices this fall. Already, despite continued credit market pressures, Treasury bond rates have risen this week.

Treasury yields impact fixed 30-year mortgage rates. Thursday morning, the Labor Department reported that energy prices drove up producer prices to a 17-year high. Wednesday morning, the Labor Department reported import prices are running higher by 11.4% from a year ago -- the highest pace in 17 years as well.

Punk Ziegel's Bove, however, says the current crisis is not unique to past mortgage industry woes of prior decades, which did nothing to stem the resurgence of nonconforming lending once the excess was washed out. He notes the most recent was a wave of subprime lending that wound down in the flight-to-quality panic of 1998 after the hedge fund Long Term Capital Management decided to liquidate its assets. That led to the end of subprime lenders such as The Money Store and Green Tree Financial, among others.