As the U.S. economy continues to weaken, secondary credit markets, which play a large role in supporting consumer lending, are showing further signs of distress. Even with the Fed pumping billions of dollars of credit into the economy with loan auctions and low interest rates, lenders are continuing to tighten standars and raise rates. One part of the problem is a near total collapse in confidence in the market for securitized mortgages and loans. NYT:

[T]he market for securitization, through which mortgages and other debts are packaged and sold as securities, has become sclerotic and almost totally dependent on government support. The problems, intensified by bond investors who have grown leery of these instruments, have been a drag on the economy and have persisted despite the exercise of extraordinary regulatory powers by policy makers.

“The mortgage finance system in the United States has been badly damaged,” said Anthony Lembke, co-head of investments at MKP Capital Management, a hedge fund firm that is a big investor in mortgages. “There is definitely some reinvention that will need to occur, and that will include some explicit involvement by the government.”

Private securitizations have cratered. Data from Thomson Reuters says lenders securitized only $131 billion in loans in the first half of 08, down from $1 trillion in the same period last year. As a result, mortgage rates have crept up, which will keep the pressure on the housing market:





Credit is also tightening despite support in secondary markets from GSEs like Fannie Mae (FNM) and Freddie Mac (FRE). Fannie and Freddie have securitized $692 billion worth of mortgages so far this year, about the same as last year. But secondary buyers are now harder to come by, and Freddie and Fannie's desperate attempts to save themselves will now reduce their own buying and selling. Freddie Mac, for example, announced yesterday that it would stop buying subprime mortgages in New York.

The two companies, which reported big losses last week, have said that they might reduce or slow the amount of large loans they buy from banks, a signal that two giants that had been big buyers might become sellers. If so, that would lower the price of mortgage securities even more, raising the cost of borrowing for home buyers.

So the credit picture is still getting worse, not better. This is in part why those calling a bottom on financial stocks are probably jumping the gun. Until the housing and mortgage markets shows signs of stabilization, a sustained rally in financials is unlikely.

See Also: Freddie Mac To New Yorkers: Not Buying Anymore Of Your Mortgage Junk

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