A man was driving with his wife at his side and his mother-in-law in the back seat. The two women wouldn’t let him alone.

His mother-in-law would say, “Turn left!”

His wife would then shout, “No! Go right!” and then, “You’re driving much too fast!”

“No, no,” the mother-in-law would counter, “Go faster. I’m having my hair done in 30 minutes.”

After 20 minutes of mixed orders, the husband finally stopped the car in the middle of traffic and asked his wife, “Who’s driving this car, you or your mother?”

Who’s driving this economy? As the price of gas and food goes up and I spend more on basic necessities, maybe I will tap into my new HELOC so that I can buy that flat screen TV I’ve been admiring. Oh, wait a minute – my HELOC is frozen! The excitement from the Fed’s emergency rate cuts has fizzled, which is typical of easier monetary policy. Inflation seems to be moving higher once again: this morning’s Consumer Price Index came in stronger than expected, +.4%, as rising food costs helped push U.S. consumer prices up for a second straight month. For the last 12 months the CPI is up 4.3%, and core prices, which exclude food and energy items, rose 0.3 percent in January, the strongest monthly rise since June 2006. Oil is hovering around $100 per barrel, and the prices for metals and grains are up. The 10-yr is up to 3.94% and 30-yr mortgage prices are worse again by .375-.50. Permits for U.S. homes in January decreased 3%, as expected, to the lowest rate in more than 16 years while Housing Starts rose 0.8 percent, also roughly in line with forecasts but still at the lowest pace since May 1991. Today’s MBA mortgage application index dropped -22.6% with refinance activity -27.9% and purchase applications -11.5%.

In both the US and Europe, the appetite by banks to lend has declined, and analysts believe that a big improvement in credit conditions is not likely. US banks will probably continue to experience an increase in defaults, and as we know the majority of the losses has been generated by subprime mortgages and related structured credit. Rating agencies continue to lower ratings on mortgage-related securities, and a few days ago Countrywide reported that delinquencies and foreclosures continued to rise in January, up to 7.47% in January on their servicing portfolio of $1.48 trillion.

Interestingly enough, if you’re looking for good news to give your clients, the odds for more overnight Fed Funds rate cuts have increased, with many expect Funds to go below 2% by the end of 2008. The current spread between the 2-yr and 10-yr Treasuries is roughly 1.90%, helping ARM prices relative to 30-yr fixed rates, and is the steepest it has been in almost 4 years.

With all of this turmoil, what are the mortgage insurance companies doing to limit their future risk? Recent changes that are generally accepted throughout the MI industry include a 5% LTV reduction for properties in declining markets, 575 Minimum FICO on all MI loans with a 620 minimum FICO on >95% LTV, a 660 minimum FICO on Investment Properties and Alt A and a 97% LTV maximum on IO loans.

Rob Chrisman