The regulator for Fannie Mae and Freddie Mac announced that they must adopt rules aimed at curbing high-risk lending through interest-only and other “non-traditional mortgages.”  The Office of Federal Housing Enterprise Oversight will require FNMA and FHLMC to buy home loans from originators that underwrite mortgages at the fully indexed and amortizing rate, and many investors are following suit. The guidance also discourages the companies from buying mortgages from lenders that require little documentation of a borrower's income and assets.  Mortgages sold to Fannie Mae and Freddie Mac on or after Sept. 13^th must comply with the guidance, OFHEO said.

If you walk up to someone, and offer them $1 now or $2 a month from now, which option will they chose? What about offering someone $10,000 now or $20,000 in a month – what then? Economists spend a lot of time studying human reactions to decisions like this, and the implications on things like Christmas Savings Accounts and 401(k) plans. Biology also enters into the research, since most animals are not rational when it comes to the “see it now, want it now” versus “resisting temptation for more benefit in the future” decisions. This has come up recently given the choices that many consumers were faced with on their mortgage selection in recent years. ARM’s with high resets have caused problems for borrowers that opted for these rather than fixed-rate loans.

Things were pretty quiet yesterday, and this morning we start the day with the 10-year yield at 5.06% but oil above $75/barrel. Yesterday Bernanke’s testimony provided no real new news. However, there is definitely the feeling among legislatures that wages having lagged, growth is projected to be below trends, unemployment is projected to rise even as the labor force drops (leading to slower job growth), and therefore why is the Fed concerned about inflation? According to the FOMC, economic growth is moderate now and expected to strengthen a bit in 2008, inflation should edge down, and unemployment should inch up.

MBA Mortgage Applications Survey was -.9% with purchases -1.6% and refinancings +4.9%.  The applications survey is not yet signaling a bottom to the market as borrowers changing existing loans continues to be more a significant motive for applications than a surge in housing demand. The “bad” news continued with Housing Starts +2.3% and Building Permits -7.5% in June. New construction activity is slow and will decline even further, as the housing market has yet to hit bottom. This morning we had Jobless Claims out at 301k, which didn’t move things too much, although the 4-week moving average has been sliding.