David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK
The news this week was mixed. Initial claims for unemployment fell for the third week in a row and were back down to the level reached in April 2008. Housing starts soared. Retail sales rose. The Empire Manufacturing Index rose. The NAMB Housing Market Index rose. Leading Indicators were up and mortgage delinquency was down. In Europe, the Greek Parliament passed the austerity plan and the troika approved the big haircut on outstanding Greek sovereign debt. Obama and Congress agreed on extending payroll tax cuts through the end of the year. Most economists foresee positive from of around 2.2% to 2.5% this year.
On the negative side, U.S. industrial production was flat, Europe and Japan were in recession. There were around four million homes in foreclosure meaning further declines in home prices were likely. Several prominent economists foresee the Greeks defaulting on their debt causing financial problems worldwide.

MORTGAGE MARKET SUMMARY
Servicers today face growing risks, challenges and costs. Increasing and ever changing demands from the government makes a challenging task overwhelming. Who wants to service loans? How many firms have the capital to do so? Most originators sell their loans to a small group of large banks that have the capacity to service. Due to the rising capital requirements, few firms are able or interested in entering this business. There are many other ways for banks to deploy capital where the risks are more defined. The unknown impact of impending Dodd Frank regulation coming from the CFPB and the likelihood of further lawsuits against servicers makes this expensive business unappealing despite the large margins for origination. A recent audit conducted by Lou Pizante, a partner at Aequitas Compliance Solutions, a mortgage regulatory compliance firm, says his audit of 382 foreclosures in California found that the original lender did not properly assign the mortgage in 85% of the cases. If mortgage bond investors choose to use audits like this as an opportunity to sue servicers, the settlement costs could be significant.

MetLife’s recent retreat from mortgage servicing is a prime example of a firm retreating from servicing due to the high compliance costs. Other servicers have had to raise capital or are looking to raise capital such as PHH, Flagstar and Everbank. An increasing number of originators are trying to build their own holdings of servicing because of the limited market for loans and because of the low price paid for servicing. However, few firms have the capital necessary to service all the loans they originate. There is no market for servicing, so how many firms can convince their board of directors that it makes sense to invest in an illiquid asset? Only 93 bank holding companies have over $3 billion in assets according to the Federal Reserve. Basel III will make it harder for the largest banks to grow servicing. The health of the mortgage industry depends on a growing, viable servicing business. We need find ways to define the costs related to the mistakes of the past so that servicing can once again become a profitable business and the housing market can recover.

The Mortgage Bankers Association reported that its Market Composite Index fell by 1.0% on a seasonally adjusted basis from one week earlier. On an unadjusted basis, the Index was essentially unchanged compared to the previous week. The four-week moving average fell by 0.45%. The Refinance Index increased by 0.8% from the previous week to its highest level since August 8, 2011. The four-week moving average rose by 0.21%. The refinance share of mortgage activity increased to 81.1% of total applications from 80.5% the previous week. This is the highest refinance share since Jan. 20.
For the week, the DJIA rose 0.5% from 12,862 to 12,929. There were 14 positive trends, 5 neutral trends, and 19 negative trends.

POSITIVE TRENDS
• Initial claims for unemployment fell to 348,000 for the week ending February 11, down from 361,000 the prior week. This was lower than expected and is the third week in a row of declines. The four-week moving average also fell to 365,000, down from 367,000 the prior week. It was the lowest week since April 2008. Continuing claims fell to 3,426,000 for the week ending February 4, down from 3,526,000 the prior week.

• Housing starts in January rose to 699,000 at a seasonally adjusted annual rate, up from 689,000 in December. This was much higher than expected. Building permits rose to a 676,000 seasonally adjusted annual rate, up from 671,000 in December.

• Retail sales rose 0.4% in January, up from 0% in December. This was lower than expected.

• The Empire Manufacturing index reflecting New York State was 19.5 in February up from 13.5 in January.

• The NAHB Housing Market Index in February rose to 29, up from 25 in January. Some very modest growth in occurring in home building. This was the fifth consecutive month of increases. It is the highest level the index has reached in more than four years after reaching a low of 8 in 2009. Since 1985 it has averaged about 50.

• The leading economic indicators published by the Conference Board rose 0.4% in January, slightly slower than the 0.5% increase in December.

• The MBA 4th Quarter National Delinquency Survey said the delinquency rate for mortgage loans on one-to-four-unit residential properties decreased to a seasonally adjusted rate of 7.58% of all loans outstanding, a decrease of 41 basis points from the third quarter and a decrease of 67 basis points from one year ago. The non-seasonally adjusted delinquency rate decreased five basis points to 8.15% this quarter from 8.20 percent last quarter. The percentage of loans on which foreclosure actions started during the fourth quarter fell to 0.99 percent, down nine basis points from last quarter and down 28 basis points from one year ago. The delinquency rate includes loans that are at least one payment past due but does not include loans in the process of foreclosure. The percentage of loans in the foreclosure process at the end of the fourth quarter was 4.38%, down five basis points from the third quarter and 26 basis points lower than one year ago. The serious delinquency rate, the percentage of loans that are 90 days or more past due or in the process of foreclosure, was 7.73%, a decrease of 16 basis points from last quarter, and a decrease of 87 basis points from the fourth quarter of last year. MBA said the combined percentage of loans in foreclosure or at least one payment past due was 12.63% on a non-seasonally adjusted basis, a 10 basis point decrease from last quarter and was 107 basis points lower than a year ago.

• On February 12 the Greek Parliament passed a package of spending and wage cuts by a 199-74 vote. Eurozone finance ministers required this approval package as a condition for giving Greece a second bailout of €130 billion from Eurozone governments and the IMF which should allow Greece to escape a debt default in March. The legislation outlines the terms of a bond-swap plan that will reduce the debt Greece owes to its private-sector creditors by around €100 billion. This should give Greece enough time to complete the debt write-down before the March 20 bond redemption, when the government must repay €14.5 billion. The vote led to rioting in Athens and the expulsion of 43 deputies who voted against the measure. The leader of one of the ruling parties—New Democracy and likely the next prime minister–said the measures should be renegotiated after national election expected in April. But Angela Merkel said “an amendment to the program can’t and won’t happen.” Euro-area finance chiefs will convene in Brussels on Feb. 15 for their second extraordinary meeting on Greece in a week. Frustrated after two years of missed budget targets, ministers declined to ratify the €130 billion package in a special session on Feb. 9, demanding that Greek officials put their verbal commitments into law. It is likely the finance ministers will approve the package on Feb. 15. The bailout deal, which would result in significant losses for bondholders, is intended to help reduce Greece’s debts to 120% of Gross Domestic Product by 2020, from about 160% currently. Greece, which owes some €330 billion, has come close to default before.

• A survey of 49 economists by the Wall Street Journal predicts GDP to grow 2.5% in 2012, up from 1.6% in 2011. A year ago, the panel of economists predicted 3.4% GDP growth for this year so were off by more than half. Two major risks to achieving this goal are the still unresolved Europe debt crisis, the turmoil in the Mid-East which affects oil prices, and the U.S. presidential election. A panel of economists surveyed by the Philadelphia Fed predicted GDP growth of 2.3% this year. The Obama administration predicts growth of 2.7% for the year. Wells predicts 2.2% growth. The MBA predicts 1.8% growth.

• Regional banks and smaller lenders are picking up origination and servicing market share given up by BofA, Citi, and Chase. U.S. Bancorp, Flagstar, Fifth Third, and BB&T all gained market share in the fourth quarter on top of double-digit gains over the past three years 1.8% growth.

• Nicolas Sarkozy officially announced his reelection bid on Feb. 8. At present he is deeply unpopular but he has enlisted the aid of Angela Merkel to stump for him so he can win another five years in office. The two big fears in France are fear of decline and fear of Germany and she addresses both.

• Congress and the President agreed to extend the current payroll tax cut through the end of the year and continue longer unemployment benefits. This tax cut will not be paid with a G-fee increase.

• EverBank has agreed to acquire MetLife Bank’s Warehouse Finance business. Financial terms of the transaction were not disclosed. The acquisition, which is expected to close in the first half of 2012, will leverage EverBank’s residential lending expertise and increase EverBank’s assets by approximately $400 million.

• The CPI rose 0.2% in January, up from 0% in December. This was lower than expected. The core CPI also rose 0.2% and was higher than expected. Increases in motor fuel prices pushed the average up.

NEGATIVE TRENDS
• Industrial production was unchanged in January after rising 1% in December. Capacity utilization fell to 78.5% in January from 78.6% in December. Excluding autos, production in other parts of the economy fell 0.3%. Activity in the mining sector declined 1.8%. Utilities output was down 2.5% in December, “as demand for heating was held down by temperatures that moved further above seasonal norms,” the Fed said. The index does not include services which were probably positive but it still suggests a somewhat slower growth in GDP than in 4Q.

• The eurozone GDP fell 0.3% from 3Q to 4Q11. This was the first quarterly decline since 2Q09 when it fell 0.2%. Greece GDP fell 7.0% in 4Q from a year earlier and is down 16% from the end of 2007. Portugal is down 2.7% in 4Q. German GDP fell 0.2% from 3Q to 4Q. Eurozone industrial production is down 2.0% in December from a year earlier.

• Japan’s GDP fell 2.3% annualized in 4Q, down from a 7% increase in 3Q.

• Oil prices in January are up 23.7% from a year ago. Excluding petroleum, import prices were flat.

• Inside Mortgage Finance reports that there are currently almost four million homes in foreclosure and in the shadow inventory. This means their impact on overall market prices should be expected to be felt for at least the next year or two. November 2011 was the 23rd consecutive month that distressed property sales had accounted for over 40 percent of all sales. This will keep downward pressure on home prices as shown in the Case Shiller price index.

• Piper Jaffray Securities predicts Greece will default in about six months because they can’t raise tax revenue. You can’t shrink your way to economic growth. It is not a good sign when people are rioting in the streets while Parliament is passing an austerity measure. About one-third of the labor force is in the public sector and 21% are unemployed. They have been living on debt. As government stimulus is withdrawn, incomes will have to fall or productivity rise to make up the difference. Except for Germany, the rest of Europe is in a recession.

• Paulson & Co., the $23 billion hedge fund run by John Paulson, said Greece may default by the end of March, triggering the breakup of the euro. Greece needs as much as €90 billion to meet funding requirements under the anticipated agreement on private sector involvement, the recapitalization of the banks and other funding needs. “We believe a Greek payment default could be a greater shock to the system than Lehman’s failure, immediately causing global economies to contract and markets to decline,” the hedge fund said. The euro is “structurally flawed and will likely eventually unravel,” it said. Two years after pledging to pull Greece back from the brink, European leaders are torn between pouring more aid into the country or risking an unprecedented national bankruptcy that might force the country out of the euro and prompt renewed market tumult.

• The latest bailout of Greece reduces the ability of the EFSF (European Financial Stability Facility) to bail out other weak European nations by raising the interest costs of future borrowers. We need to watch the borrowing cost of future debt auctions says a professor at George Mason University, Veronique de Pugy who predicts Greece experiencing a messy default.

• The Federal Housing Administration will exhaust its reserves over the coming year, according to budget projections released on Feb. 13, which would require a Treasury infusion for the first time in its 78-year history. But Obama administration officials said more recent developments, including fines that will go to the FHA from last week’s $25 billion mortgage settlement with five major banks, could cover any shortfall and obviate the need for taxpayer funding. The FHA has burned through its reserves over the past three years as defaults mount on loans it guaranteed as housing markets deteriorated. The estimates by the White House’s Office of Management and Budget show that the FHA’s capital reserves, which stood at $4.7 billion in October, would be wiped out in the coming year, forcing the agency to seek nearly $700 million from the U.S. Treasury. At risk of exhausting its reserves due to the spike in mortgage default rates, the FHA is set to unveil a new round of premium hikes for home buyers. The increases are one of a number of new steps being taken by the White House to shore up the agency’s finances and avoid a taxpayer bailout. Released on Feb. 13, the Obama administration’s budget proposal projects that a key FHA account, which holds reserves that exceed projected losses, will be depleted within the next year.

• The national mortgage delinquency rate (the rate of borrowers 60 or more days past due) increased for only the second time since the end of 2009, edging upward to 6.01% at the end of the fourth quarter in 2011. This information is reported by TransUnion and is part of its ongoing series of quarterly analyses of credit-active U.S. consumers and how they are managing credit related to mortgages, credit cards and auto loans. Between the third and fourth quarters of 2011, all but 13 states experienced increases in their mortgage delinquency rates. On a more granular level, 64% of metropolitan areas saw increases in their mortgage delinquency rates in Q4 2011. This is the same percentage as found in Q3 2011, but up from Q2 2011 when only 21% of MSAs experienced an increase.

• Greece has called for a new election on April 8. The conservative New Democracy party led by Samaras is expected to receive 33% of the vote. The Panhellenic Socialist Movement has fallen to 8% of the expected vote. This leaves mostly likely a coalition with the right-wing Laos party under Karatzaferis who voted against the austerity measures. So the election is problematic.

• Moody’s downgraded Italy a notch and maintained a negative outlook. It also downgraded Malta, Portugal, Slovenia, Slovakia and Spain and they also have negative outlooks. Moody’s also warned Great Britain of a downgrade.

• Obama proposed a budget for the coming fiscal year which calls for a deficit of $1.3 trillion in 2012. This makes four years in a row above $1.29 trillion. Federal debt held by the public as a share of GDP has risen from 40% in 2008 to a projected 77% in 2013. The payroll tax cut will be extended on Feb. 15 which will maintain economic growth but widen the deficit.

• According to the Wall Street Journal, in the U.S., banks with assets over $10 billion comprise 80% of all commercial bank assets, up from 30% in 1992. The top six banks comprise 66%–BofA, Chase, Wells, Citi, US Bank, and SunTrust. Despite the huge fines levied on the top six banks, consolidation continues.

• The government’s new consumer watchdog on Feb. 13 outlined the first steps of its plans to regulate mortgage servicers, which have come under fire for fraudulent foreclosure practices. The Consumer Financial Protection Bureau will revamp the billing statements sent to homeowners and the disclosures required for some complicated mortgages. It also is drafting new rules to prevent servicers from improperly charging consumers for homeowner’s insurance. The massive financial reform legislation passed in 2010 that established the CFPB also required it to take steps to retool the mortgage servicing industry. The plans outlined Feb. 13 will apply not only to servicers operated by banks but also to those run by other financial institutions that were previously not subject to federal supervision. The Mortgage Bankers Association, which represents servicers, said it supports the CFPB’s efforts to create more transparent disclosures and create a single set of standards across the industry. “There’s so much uncertainty about the rules of engagement for the housing system going forward that credit has become more constrained,” said Dave Stevens, the group’s chief executive. “There’s an opportunity to help put balanced yet meaningful practices in place on a national scale to allow the markets to move forward.” On Feb. 13, the CFPB released a draft of the homeowners’ new mortgage billing statement. It includes not only the principal loan amount and interest rate, but also the date the rate could reset and a description of any late payment or penalty fees. One section addresses consumers “experiencing financial difficulty” and includes information on housing counselors. The statements include a phone number and e-mail address to contact the servicer.

• For the third year in a row, the Obama administration has proposed a tax on the largest financial institutions, despite the fact that it has zero chance of passing Congress.

• Citigroup has agreed to pay $158.3 million to settle claims that its mortgage unit fraudulently misled the government into insuring risky mortgage loans for over six years. The government said Wednesday that CitiMortgage had certified 30,000 mortgages for insurance provided by the Federal Housing Administration and submitted many certifications that were “knowingly or recklessly false.” More than a third of those mortgage loans went into default, resulting in millions of dollars in losses for the government because of the insurance claims. Preet Bharara, the United States attorney in Manhattan, said lenders for too long viewed “insurance of their mortgages like they were playing with house money.” As part of the civil fraud settlement, Citi accepted responsibility for failing to comply with government requirements and submitting certifications that were fraudulent. The payments are in addition to the $2.2 billion Citigroup has to pay in connection with the $26 billion mortgage loan settlement announced last week by the Justice Department and the nation’s top mortgage lenders.

• As outstanding student debt approaches $1 trillion, it’s one more reason record-low interest rates aren’t doing more to boost housing. The tighter lending standards that have emerged in the wake of the recession weigh particularly on younger, first-time home buyers, according to a Federal Reserve study sent to Congress on Jan. 4. These households tend to be younger, often have relatively new credit profiles, lower-than-average credit scores and fewer economic resources to make a large down payment, the report said. The Fed’s white paper said 9 percent of 29- to 34-year-olds got a first-time mortgage between 2009 and 2011, compared with 17 percent 10 years earlier. “These data suggest a large decline in mortgage borrowing by potential first-time homebuyers due to not only weaker housing demand, but also the effect of tighter credit conditions,” the Fed said.

• A new report released on Feb. 17 found systemic flaws in San Francisco’s foreclosure process which could be fodder for securities investors to make claims against banks and mortgage servicers.

NEUTRAL TRENDS
• This spring the Obama administration is planning to wind down mortgage giants Fannie Mae and Freddie Mac. It is doing so by raising guarantee fees and tightening underwriting. It is not clear yet who will replace them in the market. In the past community banks and credit unions took part of the market but currently they sell at least half their loans to the agencies. They have sold a small amount to private investors like pension plans. Two alternative plans are to create a new government agency that would continue to insure mortgages or one that would intervene only during a crisis. Over the past several years, the market share originated by mortgage brokers and mortgage bankers has greatly diminished. Heavy court settlements on the top banks have caused them to cut back their position in the market. The community bank association is considering a cooperative structure, modeled after the Federal Home Loan Banks, whereby participating banks would be responsible for capitalizing the entity. That would permit community banks to increase their market share.

• Luxembourg Finance Minister Frieden said he couldn’t rule out Greece exiting the Eurozone. He is a member of the Council of Ministers for the Economic Union. When the Eurozone was first formed there was no provision for a member to exit but lately the leaders of the Eurozone believe they have a way and are not opposed to this occurring.

• Some 43% of refinancing borrowers chose a 15- or 20-year loan in the fourth quarter of 2011, the highest share since the early part of 2003, reports Freddie Mac. Fixed-rate mortgages accounted for more than 95 percent of refis, with 58% of borrowers who had a hybrid adjustable-rate mortgage shifting into a fixed-rate product. The quarterly report reveals a trend toward reducing debt and saving interest by shortening the repayment schedule on mortgages.

• The producer price index rose to 0.1% in January, up from -0.1% in December. This increase was lower than expected and indicates very little inflationary pressure. Core PPI rose 0.4%, up from 0.3% in December.

• On Feb. 14, the New York Fed approved the purchase of ING Direct by Cap One making it the fifth largest bank by deposit size in the U.S. after BofA, Chase, Wells, and Citi. By assets they have $321 billion whereas the larger four banks all have over $1 trillion. In second quarter 2012 they plan to buy HSBC’s U.S. credit card business. Cap One has the fifth largest portfolio of credit cards outstanding in the U.S. after BofA, Chase, Citi, and AmExpress.

CONCLUSION
For the moment, Greece seems saved from defaulting on its debt despite the recession in Europe and Japan. The U.S. is the strongest advanced economy despite running huge deficits over $1 trillion for the past three years and again this year. Housing continues to be the weakest sector of the economy but is showing glimmers of hope. Large mortgage lenders continue to get punished which discourages mortgage expansion.
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

The strongest positive news was the big drop in initial claims for unemployment.  Consumer borrowing for cars and tuition also increased strongly.  The biggest negative news was the head of one of Greece’s major parties voted against the austerity measures which in effect dooms the bailout plan for Greece.  Unless the troika now comes up with an even stronger offer or Greek officials change their mind on accepting austerity measures, keeping Greece in the eurozone now seems impossible.  There is very little time left for a positive settlement.  European and U.S. stocks fell on the news on Feb. 10 and interest rates declined.  Most of the other negative news was related to continued challenges in the mortgage industry.

MORTGAGE MARKET SUMMARY

The top five mortgage companies agreed to settle a $25 billion claim against them.  This  settlement will allow these banks to know the cost of payouts for the combined suits from the 49 states and federal government so they can plan for that particular set of costs.  But it leaves the door open for yet other suits against them and smaller mortgage companies so the ultimate total cost is still unknown.  The press is exulting in the benefit to consumers with no focus on the impact on the banks.

Not knowing the extent of the legal and repurchase risk and the unprecedented size of the cost to the industry so far has inhibited the healing of the housing finance industry.  The following quote, we think clearly explains what is going on:  “The fear of the unknown is a lot worse than when you finally get a figure,” said Alex Lieblong of Key Colony Management, which manages about $153 million, including shares in Bank of America and Wells Fargo. “If you could get it all into a box and say that this is the known figure, then that will be viewed as a positive.”  The settlement between the major servicers and the state AGs provides a known figure, approximately $25 billion, and helps the mortgage industry move forward.  However, the settlement was a very high price to pay for a non-comprehensive solution to the robo-signing scandal.  This week we saw another attempt by Ally Financial to put its past behind it with the announcement of its intent to sell itself through a pre-packaged bankruptcy.  The regulatory uncertainty is restricting the amount of private capital flowing into the industry and discouraging talent which is leaving the business altogether resulting in a lack of skilled staff.  Many banks are unable to respond to all the refinance requests.  Bank of America is so busy they are restricting themselves to working only with existing customers.  This suggests that it may be extremely difficult for the industry to respond to the government’s demands for modifications and implementing other government programs.  Recovery in housing is still off in the future which means the economic recovery is not imminent.

The MBA mortgage index rose 7.5% in the week ending Feb. 4.  On a seasonally adjusted basis, refis rose 9.4% and purchases rose only 0.1%.

For the week there were 7 positive trends offset by 17 negative trends and one neutral trend.  The DJIA fell from 12,862 to 12,801.  Most of the decline was blamed on the collapse of the Greek talks.

POSITIVE TRENDS

• Initial claims for unemployment fell to 358,000 for the week ending Feb. 4, down from 373,000 the week earlier.  The four-week moving average declined to 366,000, down from 376,000 a week earlier.  This indicator is down further than expected and is now down four weeks in a row indicating a steady decline in new people unemployed.  This shows that new people are not being added to the unemployment roles as rapidly as earlier.  However, continuing claims for the week ending Jan. 28 rose to 3,515,000, up from 3,451,000 a week earlier.  The four-week moving average fell to 3,498,000 and is now also down four weeks in a row.

• Consumer borrowing in the U.S. rose 8.3% at a seasonally adjusted annual rate in December over November, driven by demand for auto and student loans.   This was higher than forecast.  Credit increased by $19.3 billion to $2.5 trillion, Federal Reserve figures showed today in Washington.  In November credit rose by $20.4 billion.  Earlier in the year the monthly increase averaged around $5 billion so there were large increases in November and December.  Nonrevolving credit rose at an 11.8% seasonally adjusted annual rate and revolving rose 4.1%.

• The American Banker reported that dozens of small- to medium-sized mortgage firms have been contemplating the unthinkable: keeping the new MSRs they create instead of selling their loans servicing-released.  “I have 20 clients who are thinking about holding MSRs,” said Austin Tilghman, president and CEO of United Capital Markets, Denver. “It’s an economical thing.”  It’s no secret among correspondent sellers—firms that originate in their own name and then sell servicing-released—that the big boys on the other end of the transaction haven’t exactly been paying up on the SRP (servicing-released premium).  “The chief reason is the SRP,” said Glenn Corso, managing director of the Community Mortgage Banking Project. “Our members feel what’s being offered is below the real economic value of the servicing they’re creating.”  According to servicing brokers, the SRP currently being paid by the megabanks translates into a value of two to three times the servicing fee, at best. “But the real value of that servicing strip is four times to five times,” said one advisor, requesting his name not be attributed to the estimate because he has clients on both sides of deals.  Calculated in terms of basis points, the SRP can range from 50 basis points to 110 bps, said Corso. (The standard minimum servicing fee on Fannie Mae and Freddie Mac loans is 25 basis points, though their regulator is contemplating changing it.)

• On Feb. 1, President Obama announced further details of his housing initiatives:   (1) Broad Based Refinancing to Help Responsible Borrowers Save an Average of $3,000 per year: Non-agency loans would be eligible for this program as well;  (2) Homeowner Bill of Rights: The President is putting forward a single set of standards to make sure borrowers and lenders play by the same rules;  (3) First Pilot Sale to Transition Foreclosed Property into Rental Housing to Help Stabilize Neighborhoods and Improve Home Prices;  (4) Moving the Market to Provide a Full Year of Forbearance for Borrowers Looking for Work;  (5) Pursuing a Joint Investigation into Mortgage Origination and Servicing Abuses: This effort marshals new resources to investigate misconduct that contributed to the financial crisis; and (6) Rehabilitating Neighborhoods and Reducing Foreclosures: In addition to the steps outlined above, the Administration is expanding eligibility for HAMP to reduce additional foreclosures, increasing incentives for modifications that help borrowers rebuild equity and is proposing to put people back to work rehabilitating neighborhoods through Project Rebuild.

• On January 27, the Treasury Department announced changes to the Home Affordable Modification Program, which included:  1) Extending HAMP until December 31, 2013.  2) Including second liens and other debts into the 31 percent qualifying DTI ratio, thus making more borrowers eligible for HAMP.  3) Paying triple incentive payments to investors (including Fannie Mae and Freddie Mac) who agree to reduce principal for borrowers with LTVs above 115 percent. Incentive payments will range from 18 to 63 cents on the dollar, depending on the degree of principal reduction; and 4) Expanding HAMP eligibility to investment properties occupied by a tenant and vacant properties which the borrower intends to rent.

• The Home Affordable Modification Program has helped 763,000 homeowners as of December, up from 751,000 in November.  The administration initially projected that 3,000,000 to 4,000,000 borrowers would get help.  Last month, it said it would give troubled homeowners an additional year to enroll in HAMP and increase payments to banks in an effort to get them to reduce more borrowers’ loan balances.

• According to Bloomberg, banks, accelerating efforts to move troubled mortgages off their books, are offering as much as $35,000 or more in cash to delinquent homeowners to sell their properties for less than they owe.  This trend should accelerate getting more loans in foreclosure off the books of banks.

NEGATIVE TRENDS

• The U. of Michigan consumer confidence index fell to 72.5 in February, down from 75.0 in January.  This was a bigger decline than expected by forecasters or the U. of Michigan who expected an increase given the big drop in unemployment and initial claims as well as the rise in stock prices.  Consumers are still nervous as is also reflected in the steady decline in people voting in the Republican primaries compared to prior years.

• On Feb. 10 a leader of Greece’s governing coalition pushed back against German demands for deeper budget cuts to get the bailout needed to prevent a financial collapse.  George Karatzaferis, who heads one of the three parties supporting interim Prime Minister Lucas Papademos, said he wouldn’t support austerity measures worked out for a rescue.

• As of Feb. 10, no agreement had been reached in the financial bailout discussion with Greece.  Greek Finance Minister Venizelos said while agreement had been found on issues such as bank recapitalization and state asset sales, the government and the so-called troika of international creditors were still at odds over labor reforms and fiscal measures for this year. The talks with euro-area finance ministers were “very difficult.” he said.  Even after a second bailout, Greece may be saddled with too much debt, too little growth and too large a budget hole to do without even more money, which euro nations led by Germany are increasingly reluctant to offer.  “If we determine that it’s all going wrong in Greece, then there won’t be a new program — and that means in March you’ll have a declaration of bankruptcy,” Luxembourg’s Jean-Claude Juncker, who chairs euro finance meetings, told Der Spiegel magazine in an interview published Feb. 5.

• Greeks are being asked to take a 20 percent pay cut.  Top European leaders insist that Greeks pay for the wages of past financial sins by accepting a hefty reduction in pensions and wages. Without that and other austerity measures, such as layoffs of 15,000 state workers, the Aegean country won’t receive a European loan to help make payment on a $19 billion bond next month. A Greek default could push Italy, Spain, and other European nations into a crisis. By the millions, Greeks went on a 24-hour nationwide strike Feb. 7 to protest the enforced austerity.   On Feb. 8, Greece accepted the pay cut.  But Greece has been in a four year depression with an unemployment rate at 20.9% in November.  They are meeting with their creditors on Feb. 9.  It is a toss-up whether both sides will agree to a deal.  Will the creditors accept the 70% haircut?  There is a feeling that Greece can’t survive further austerity measures without economic growth.  The Greek government, facing a 14.5 billion-euro bond payment on March 20, is struggling to arrange financing to avert a collapse of the economy.

• The ECB made key concessions on its holdings of Greek debt which it has bought at a discount.  It will exchange its Greek bonds for bonds of the EFSF.  The EFSF will sell them back to Greece at the discounted price paid by the ECB.  This will erase these Bond holdings.  Germany proposed on Feb. 4 the creation of a budget commission, named by Eurozone finance ministers, who would have veto power over Greek spending.  It is facing opposition in Greece.  The last sticking issue was requested cuts in Greek retiree pension benefits, a reduction in the minimum wage by 22%, the end of permanent jobs in state-owned companies, and cuts of 150,000 public-sector jobs by 2015.

• The serious delinquency rate for FHA mortgages reached 9.6% in December, and the highest level in more than two years, HUD recently announced. More than 711,000 FHA-insured loans were seriously delinquent, up almost 19% from one year earlier, according to the HUD report, and up 3% from November. At the same time, mostly for pricing reasons, originations are down. In December, the FHA insured 93,700 mortgages, a nearly 30% decline from the 133,000 insured in December 2010. Analysts are most concerned with the FHA’s insurance fund: in its fiscal year 2011, the FHA Mutual Mortgage Insurance Fund slipped to a 0.24% capital ratio from 0.5% the year prior. By law, the fund must remain above 2%. Lenders should not be surprised if the FHA insurance premiums go up again this year.

• Barbara Desoer, president of BofA Home Loans, announced she is leaving Bank of America.  She once reported directly to CEO Brian Moynihan.  She was mentioned as a candidate to replace Moynihan as head of the bank.  But after a recent reorganization, she was placed under COO David Darnell.  Desoer held the title president of home loans until the bitter end, though she had been forced to relinquish control. Her final task was to help integrate residential mortgages into consumer and small-business banking. That work is apparently done.  Her position is not being replaced. This is yet another sign of the weakness in the mortgage industry.

• The administration agreed to a settlement among state attorneys general, the nation’s five largest mortgage servicers — Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Citigroup Inc. and Ally Financial Inc. — and certain federal agencies.   The proposed settlement will total up to $25 billion, and would require servicers to provide roughly $17 billion in direct relief to distressed borrowers in the form of principal reductions or other measures, including short sales or loan forbearance.  Servicers would receive credit for different relief actions, with certain types of principal write-downs earning more credit than short sales, for example.

• As part of a national settlement against leading banks over alleged foreclosure abuses, the White House has indicated that investors in U.S. residential mortgage securities will have to write down as much as $40 billion of principal for distressed borrowers. Over the weekend, HUD Secretary Shaun Donovan called the move a “down payment” for future principal reduction efforts that result from settlements between financial firms and the U.S. government. He said the Obama administration will use the threat of litigation against big firms as a means of winning additional aid for struggling borrowers.

• For all legal settlements in 2011, Bloomberg reported that costs from faulty mortgages and shoddy foreclosures have topped $72 billion at the biggest U.S. banks as they near a settlement of a 50-state probe into the industry’s practices.  Wells Fargo, Bank of America, Citigroup, JPMorgan Chase and Ally Financial, the five largest home lenders during the real estate boom, tallied at least $6.78 billion in new costs tied to mortgages during the second half of 2011, according to data compiled by Bloomberg News. Bank of America, ranked second among U.S. banks by assets, contributes $41.8 billion of the overall total.

• Ally Financial Inc. (ALLY)’s mortgage unit is talking to buyout firms including Fortress Investment Group LLC (FIG) and Cerberus Capital Management LP about selling itself through a pre-packaged bankruptcy, according to people with knowledge of the matter.  The unit, Residential Capital LLC, and its financial advisers also have contacted Centerbridge Capital Partners LLC and Leucadia National Corp. (LUK) to gauge their interest, said two of the people, who declined to be identified because the discussions are private. A prearranged bankruptcy is among options being explored as Ally, ResCap and their advisers aim to craft a plan for the unit by the end of March, before ResCap encounters financing and liquidity deadlines, said the people.  Ally is seeking to limit liabilities at ResCap, which faces at least 22 mortgage-linked securities lawsuits that threaten to wipe out profit at the Detroit-based parent. A pre-packaged bankruptcy would allow ResCap to reach an agreement with creditors and other stakeholders before filing. It’s seen as the likeliest outcome inside the unit and is an option that has gained momentum in recent weeks, said the people.

• Bank of America is declining in market share.  It is no longer the nation’s biggest mortgage servicer in the U.S., according to the latest report from IMF. It is no surprise that Wells Fargo is now the biggest mortgage servicer in the country with $1.82 trillion in business, or nearly 18% of the total market, compared with Bank of America’s $1.77 trillion or a shade over 17%.  Recently BofA had lost its title as biggest bank in the U.S. when its reported assets fell to $2.22 trillion, below JPMorgan Chase’s $2.29 trillion.   Last week Barbara Desoer lost her position as CEO of BofA mortgage and is not being replaced.  This suggests further shrinkage of their mortgage division, especially the wholesale area.

• The U.S., lacking a plan to contain $1 trillion deficits, faces the prospect of another rating cut in six to 24 months depending on the outcome of November elections, according to John Chambers of Standard & Poor’s.

• As refis soar again this week we hear reports that Bank of America is limiting the number of refinance applications it accepts over the phone, telling borrowers who do not have an existing relationship with the bank that they may have to wait 60 to 90 days before the can get their application processed.  There may be other lenders in the same predicament since few banks foresaw the further declines in mortgage rates taking place.

• Federal security supervisors warned several large banks, including Ally, BofA, Citi, Deutsche Bank, and Goldman Sachs over the sale of subprime mortgage backed bonds they bundled and sold to investors in 2007 and 2008.  In those two years were issued about $700 billion in MBS bonds.  This means likely further payouts from these institutions.

• Chase Bank announced they are consolidating their correspondent sector as they shift more of their originations to their retail bank.
• S&P downgraded 34 Italian banks on Feb. 10.

NEUTRAL TRENDS

• Equifax reported that U.S. consumers sharply reduced their debts by 11% last year, from $12.4 trillion to $11.1 trillion.  Most of the decrease must be mortgage debt because of the reported increase in auto and student debt.

CONCLUSION

The U.S. economy continues to move forward despite the disasters afflicting the mortgage industry and the apparent failure to keep Greece in the eurozone.  The U.S. will benefit in the short run with lower interest rates as money streams out of Europe.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

 

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

There was more gradual improvement in the economy this week headlined by the fall in the rate of unemployment to 8.3%.  In addition, initial claims for unemployment were down, auto sales were way up, truck traffic was up, factory orders rose, and the ISM manufacturing and ISM servicing indices were up.  The negative trends were:  a decline in labor force participation, flat overall consumer spending, low demand for commercial loans at banks, falling home prices, falling consumer confidence, a big loss at Ally Bank, the exodus of Citicorp from the mortgage broker channel, and falling credit ratings for mortgage insurers.  Republicans fear the U.S. heading down the path of Europe causing long term economic decline while Democrats tend to like the European model with its big safety net for all.  But this week even Professor Krugman writing in the New York Times is now worried over Greece being ejected from the eurozone as problems continue in Europe.  Obama proposed some further stimulus for the mortgage industry but Congress isn’t likely to support it.

MORTGAGE MARKET SUMMARY

The fourth quarter earnings releases from major servicers and most recently Ally’s earnings release show how much the cost of servicing has risen due in large part to managing large numbers of defaulted loans but also to regulatory changes and rising legal risk.  The state attorneys general continue to argue with servicers over a settlement figure.  Basel III requirements will raise the capital cost.  One would think that servicing would be a valuable asset today given the improved quality, conservative appraisals and generally lower risk of loans the lenders are originating.  The servicing originated now is likely to stay on the books for over seven years, yet the price being paid for servicing is at record lows.  The price is a reflection of a lack of qualified servicers with a capacity to grow their holdings in servicing.  This is not likely to change quickly given the enormous complexity involved in servicing loans today; therefore the number of investors in loans originated by mortgage brokers and bankers is unlikely to increase.  The remaining lenders will have to increase their margins in order to cover the increased cost and risk now involved in servicing.  The impact for the consumer will be less choice in originators, lower service quality and higher cost.

POSITIVE TRENDS

We again have an even balance of positive and negative trend–15 positive trends and 15 negative trends, 1 neutral trend, and the DJIA rose 1.5% from 12,660 to 12,862.

• The rate of unemployment fell to 8.3% in January from 8.5% in December and was the lowest level since February 2009.  Nonfarm payrolls rose 243,000.  Both rates were stronger than expected.  Average hourly earnings rose 0.2% but the average workweek remained unchanged at 34.5 hours.  The fall in the unemployment rate was not due to the growth in payrolls but a decline in the labor force participation rate from 64.0% in December to 63.7% in January.  The employment to population ratio remained unchanged from December.  Over the last three months, the private sector has added 655,000 positions.  Long term unemployment remained unchanged at 5.5 million persons and the youth unemployment rate was unchanged at 23%.  The U.S. still has 5.5 million fewer jobs than it did before the recession began in December 2007.

• Initial claims for unemployment for the week ending Jan. 28 were 367,000, down from 379,000 the prior week and lower than expected.  The four-week moving average declined to 376,000 from 378,000 and has been gradually declining for the past three weeks.  It is now at its lowest level since December 29, 2011 when it was at 374,000.  This suggests steady gradual improvement in the employment picture.  Continued benefits for unemployment also declined for the week ending Jan. 21 as did the four-week moving average for this indicator showing gradual improvement.

• Construction spending in December was up 1.5% according to the Commerce Department.  This is stronger than the 0.4% increase in November.  Residential construction was up 0.8% but nonresidential was up 3.3%.  Housing is still weak.   Private construction was up 2.1% and public construction was up 0.5%.

• Auto sales in January soared to a 5 million seasonally adjusted annual rate, up from 4.2 million in December.  This is one of the strongest sectors in the economy.  U.S. auto sales rose 11% over a year ago.

• U.S. truck traffic rose 6.8% by weight in December from November.  For the year, traffic in 2011 was up 5.9%.  Traffic has been rising at about this rate since March 2009 after a steep decline in 2008.

• The ISM manufacturing index for January was 54.1, up from 53.1 in December.

• The ISM index servicing index for January rose to 56.8 from 53.0 in December.

• Factoring orders rose 1.1% in December after rising 2.2% in November.

• Greece and its private sector creditors were closer to an agreement over a €100 billion debt write-down on government bond and a reduction on the interest charge.  As of Jan. 29 they are down to 3.6%.  They are below 3.5% for maturities to 2020 and below 4% for the entire 30 years.  Greece is making progress on one component of the package, nearing an agreement for bondholders to accept deeper losses on a 50% cut in the face value of more than 200 billion euros of debt.  European concerns that Greece can deliver budget cuts and economic reforms are holding up other parts of the package, which Greece needs to meet a €14.5 billion bond payment due on March 20.  In March, a second bailout deal for Greece of €145 billion will be needed.  Many economists believe some Eurozone governments and the European Central Bank will have to forgive some of what Greece owes them.  As of Feb. 3 no agreement had been reached with Greece.

• The Financial Times on Jan. 29 reported that Germany is proposing the creation of a commissioner, appointed by euro-member states, with power to veto budget decisions by Greece as a condition for its second bailout agreement.   The proposal is likely to spark controversy in Greece as politicians gear up for an election that may take place in April. Nine in 10 Greeks are unhappy with the performance of Lucas Papademos’s interim government, according to a poll published by Skai TV and the newspaper Kathimerini on Jan. 15.

• Obama announced a plan to provide refinancing to underwater homeowners to aid the housing market.  The streamlined refinancing, if it wins funding from Congress, would make new mortgages less expensive and limit paperwork. Appraisals and tax returns would not be required, according to the White House fact sheet.   “A lender need only confirm that the borrower is employed,” according to the document. Unemployed borrowers might qualify for the loans if they meet other credit requirements.   The proposal could save borrowers an average of $3,000 a year, Obama said. The program is open only to “responsible” homeowners current on their payments and with no more than one delinquency in the previous six months.

• An index of executive and consumer sentiment in the 17-nation euro area rose to 93.4 from a revised 92.8 in December, the European Commission in Brussels said.  That’s the first increase since February 2011.

• Leaders of 25 European Union governments agreed on Jan. 30 to closer fiscal union and a permanent bailout fund.  It would require governments to keep their budget deficits to an average of 0.5% of GDP over the economic cycle and to reduce their total government debt toward 60% of GDP over time.  Currently the ratio is 89% for the 17 member eurozone.  The leaders agreed that the European Court of Justice will be empowered to impose fines on members running excessive deficits.  Fines will be capped at 0.1% of GDP.  Germany has been resisting a proposal that would lift the €500 billion cap on the combined total resources of the new fund and the temporary fund.  That proposal would provide a total commitment of €750 billion. 

• Fannie and Freddie announced on Feb. 1 a plan to solicit bids for bulk sales of foreclosed properties.

• Federal investigations of illegal behavior by mortgage firms have so far not led to any convictions.  The Justice Department during the week ending Jan. 27 issued civil subpoenas to 11 financial institutions as part of its investigation.  The new investigations are getting support from the states of New York and California who weren’t satisfied with prior settlement proposals.

NEGATIVE TRENDS

• In fourth quarter 2011, a net 16% of U.S. banks reported weaker demand for commercial and industrial loans.  For the year there was only 1.7% increase in C&I loans.  This suggests slow economic growth.

• Consumer spending was flat in December after rising 0.1% in November.  Consumer income rose 0.5% after rising 0.1% in November.

• The Case Shiller Home Price Index fell 1.3% from October to November and is down 3.7% from a year ago.  It has fallen the past three months.  It is down 32.9% from its peak in July 2006.   In November it fell in 19 of the 20 cities tracked by Case Shiller.  It only increased in Phoenix.  The index has basically been rather flat since April 2009 and is expected to remain rather flat for the next year or longer.  GDP is expected to rise at a slow pace and no rapid increase in housing sales is expected.

• The Consumer Confidence index of the Conference Board fell to 61.1 in January, down from 64.0 in December.  This decline was not expected and falls after two months of large gains.  Consumers increased their pessimism over the jobs market and direction of incomes.

• Around 33% of all small businesses borrowed against the equity in their homes to fund their business, according to a 2009 survey by NFIB.  Back in 2006 small business owners extracted around $75 billion for their homes to fund their businesses.  That has fallen to as little as $20 billion currently according to Mark Zandi.  The balances of home equity lines and second mortgage have tumbled 27.5% since the end of 2007.  This is yet another way the weak housing market is hurting the overall economy.

• Greece’s aid program wasn’t finalized on Jan. 30 as expected because talks with banks over debt reduction weren’t completed, German Chancellor Angela Merkel said.  On Jan. 29 Greek Finance Minister Evangelos Venizelos rejected reports of plans to appoint a commissioner to oversee the nation’s budget. The focus on Greece clouded progress toward a permanent aid fund and tougher deficit rules before a European Union summit in Brussels on Jan. 30.

• On January 30, Portugal’s 10-year bond yield climbed 217 basis points to a euro-era record 17.39%. The cost of credit-default swaps insuring $10 million of Portuguese sovereign debt for five years rose to a record $4.25 million in advance and $100,000 annually, according to CMA prices at 2:30 p.m. in London, amid concern investors will have to take losses in the wake of a Greek debt deal. The Markit iTraxx SovX Western Europe Index of swaps on 15 governments climbed 9.4 basis points to 332.75.

• Nouriel Roubini, an economist from NYU, calls the eurozone a slow motion train wreck with Greece defaulting in 12 months.

• Since 2010 Greece has persistently fallen behind its target for reducing its budget deficit.  This stems from slow implementation of economic overhauls and a worsening recession.  Germany is losing confidence in Greece’s bailout program.  The increasingly polarized political scene in Greece stems from the mounting economic strains on the Greek population.  Greece is holding elections in April which are expected to produce a weak government.  Luxembourg Prime Minister Jean-Claude Juncker said on Feb. 1 Greek bond-swap talks with private creditors are “ultra-difficult.” Greece will default on its debt and is likely to leave the euro, Nobel economics laureate Paul Krugman said at a conference in Moscow on Feb. 2.

• Taxpayers will spend another $27 billion between 2013 and 2022 subsidizing Fannie Mae and Freddie Mac, according to the Congressional Budget Office estimates released Tuesday.  The CBO reduced its estimate by $35 billion from last year’s projection of $62 billion because of an upcoming raise in the guarantee fees the mortgage giants will charge lenders. Congress agreed in late December to fund the temporary payroll tax cut by raising the Fannie and Freddie guarantee fees by 10 basis points through 2021.  The CBO said $5 billion was spent to subsidize the mortgage giants in 2011 and another $7 billion is expected this year.  Both Fannie and Freddie drew $183 billion in bailouts from the Treasury Department since entering conservatorship in 2008. As of Sept. 30, the companies still owe $151 billion.

• Standard & Poor’s downgraded the credit ratings of several U.S. mortgage insurers, and said the outlook is negative. On Monday Fitch Ratings dropped its ratings on Old Republic International Corp. (ORI) by three notches, sending the ratings into junk territory. S&P downgraded MGIC Investment Corp. and its mortgage unit a notch to B, Radian Group and three of its units, and Genworth Mortgage Insurance Corp. and Genworth Residential Mortgage Insurance Corp. of North Carolina by two notches to B.

• Ally bank suffered a loss of $250 million for the 4^th quarter, and the mortgage Origination and Servicing segment reported a fourth quarter 2011 pre-tax loss from continuing operations of $237 million. “The fourth quarter 2011 pre-tax loss from continuing operations included $125 million of pre-tax income from originations, an $81 million pre-tax loss from servicing and a $270 million charge recorded during the quarter for penalties expected to be imposed by certain regulators and other governmental agencies in connection with foreclosure-related matters.  In addition to the foreclosure-related charge, fourth quarter 2011 Origination and Servicing results declined on a year-over-year basis due to a lower net gain on the sale of mortgage loans, lower net financing revenue due to a decline in production and higher noninterest expense.” Refinancing was 80% of volume.  The loss in 3Q11 was $210 million.  For the year 2011 their loss was $201 million.  In 2010 they earned $1,075 million.

• Citicorp announced it will cease buying loans from mortgage brokers on Feb. 8.

• On Feb. 2, the Congressional Budget Office issued a forecast that if no agreement is reached to extend the tax cuts and block the spending curbs, unemployment would rise to 8.9% by year-end from 8.5% now, and hit 9.2% at the end of 2013.

• The Obama administration plans to push forward this spring with efforts to wind down government-backed housing giants Fannie Mae and Freddie Mac and attract more private funding to mortgage markets, Treasury Secretary Timothy F. Geithner said on Feb. 2.  Geithner told reporters that administration officials have begun more intensively exploring legislative options for overhauling the nation’s housing finance system with lawmakers on Capitol Hill, as well as with academics and outside advocacy groups.  Still, he said that concrete changes won’t come soon.  “It’s going to be a complicated process,” Geithner said. “We don’t expect to legislate this year.”

NEUTRAL TRENDS

• Productivity rose 0.7% in fourth quarter 2011 down from 1.9% increase in third quarter.  This caused unit labor costs to rise 1.2%.  This shows a rising inflation trend.

CONCLUSION

Europe is struggling in a recession and will likely drop Greece from its eurozone community this year as the U.S. economy moves forward with moderate growth.  The jolt that will likely occur as the eurozone fragments will hurt some U.S. banks that are already weak and cause a temporary decline in our economy.  Otherwise, a strengthening employment picture, rising car sales, and strengthening manufacturing and services indicates an improving economy.  Housing is almost singular in its stagnation and slow rate of recovery.  Two other big risks revealed this week were the apparent planned attack of Iran by Israel to destroy its nuclear weapons capacity and the CBO forecast of the unemployment rate jumping to 9% by the end of the year.  Either one of these risks or the risk of European fragmentation could greatly damage our economic recovery.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

 

David Olson and Christine Clifford

 

FOCUS ISSUE FOR THE WEEK

The economic news this past week wasn’t quite as strong as was the prior blow-out week but it still was positive.  The four-week moving average of initial claims for unemployment receded again as did continuing claims.  GDP, durable goods orders, the U. of Michigan confidence indicator, and leading indicators were up.  The Fed signaled interest rates would remain low until the end of 2014. The ECB lent European banks a huge amount and brought down the borrowing rates for most European countries.  There was even some evidence of buyers for mortgage assets and expanded consumer lending.

But housing still was the fly in the ointment.  Both pending home sales and new home sales fell.  Investors were buying a lot of homes for cash bringing average home prices down.  Europe was in recession.  Talks with Greek creditors were at an impasse.  Germany resisted pressure to lend ever larger sums to its weaker neighbors.  The three big swords hanging over the economy were:  a messy dissolution of the eurozone, weakening housing market, and high unemployment.

MORTGAGE MARKET SUMMARY

According to Freddie Mac, the rate for the 30 year fixed rate has remained below 4% for eight consecutive weeks.  Mortgage volume should be growing and housing prices stabilizing yet this week we learned that sales of new single-family houses in December fell to a seasonally adjusted annual rate of 307,000, below the revised November rate of 314,000 and 7.3% below the December 2010 estimate of 331,000.   For the year, an estimated 302,000 new homes were sold, down 6.2% from a year ago (323,000).  According to, the Federal Housing Finance Agency for the 12 months ending in November, U.S. prices fell 1.8%. The U.S. index is 18.8% below its April 2007 peak and roughly the same as the February 2004 index level.  The National Association of Realtors reported that pending home sales fell slightly in December after reaching a 19-month high in November.  They also said that contract failures remain a problem.  Why aren’t more homes selling?  Could the issue be extremely conservative underwriting guidelines implemented as a result of elevated levels of repurchase requests from Fannie Mae and Freddie Mac and fears about the impact of HUDs new risk management efforts?

In the eyes of the states’ governments and the federal government, lenders have not paid sufficiently for the impact of the housing melt down.  Obama announced in the state of the union address an expanded effort by the justice department to fight mortgage fraud.  Many states are refusing to settle their suits with servicers.  California was the only state to receive a minimum guarantee from banks as part of a nationwide settlement over mortgage servicing problems, but it has rejected the offer.  Bank of America, Wells Fargo and JP Morgan Chase guaranteed that Californians would receive about $15 billion in aid in the form of lower monthly payments and loan balances, or more than half of the $25 billion total settlement. A spokesman for state Attorney General, Kamala Harris, called the proposal “inadequate.”  Will the lenders continue to be overly cautious until they settle the outstanding legal battles with the government?

For the week there were 12 positive trends, 14 negative trends, and 6 neutral trends.  The DJIA fell from 12,716 to 12,660.

POSITIVE TRENDS

• For the week ending January 21, initial claims for unemployment and continuing claims both rose after their steep declines the prior week.  However, using the four-week moving average, initial claims fell to 378,000 from 380,000 the prior week.  Continuing claims fell to 3,569,000 from 3,581,000 the prior week.

• GDP growth for fourth quarter was 2.8% which is above the growth rate of 1.8% in third quarter but lower than expected.

• Caliber Funding LLC, Irving, Texas, is talking to several loan officers and support staff who worked at MetLife Home Loans and may wind up hiring upwards of 300 full-timers, according to officials familiar with the situation.  Caliber CEO Brian Simon told National Mortgage News that “We’re in the process of nailing down a few specifics” involving a “significant number of them” but said he could not comment further.  Caliber is a fast growing nonbank lender that is licensed to fund in 45 states. Simon said that within 90 days the company should be in all 50 states.

• While Citigroup Inc. struggles to get rid of its consumer lending unit, some of its smaller competitors are cheerfully bulking up similar businesses.  Banks including Wells Fargo & Co. and SunTrust Banks Inc. are expanding their non-credit card installment lending, finding a new avenue for growth in this relatively obscure corner of the consumer banking business. Customers use these generally unsecured “personal” loans in lieu of home equity or card loans, to cover expenses like home repairs or medical bills.  This type of lending is helping some banks gain business from a broader customer base, including the riskier customers they abandoned during the worst of the financial crisis. Those customers still might not qualify for credit cards or mortgages, but banks are reaping the benefits of reaching out to them with alternative loans:  SunTrust, for example, saw a 53% increase in personal loans originated in 2011 versus 2010.

• The euro recovered some of its lost value as it rose from $1.26 to $1.32/euro.  This means U.S. exports will increase in value and strengthen GDP.

• The University of Michigan sentiment index was 75 in January, up from 69.9 at the end of December and a bit higher than expected.

• Durable goods orders in December slowed to a 3.0% growth rate, down from 4.3% in November.  This still shows evidence of moderate economic growth.

• Leading indicators reported by the Conference Board rose 0.4% in December after rising 0.2% in November.  Fourth quarter GDP was stronger than any of the earlier quarters of the year but still not strong enough to get the unemployment rate to former low levels.  Most economists believe the rate won’t fall below 7% over the next ten years.

• Federal Reserve officials said their benchmark interest rate will stay low until at least late 2014 and anticipate that unemployment will remain high and inflation “subdued.”  They predict GDP will grow 2.2% to 2.7% in 2012 which is lower than their prior prediction for this year announced last November of 2.5% to 2.9%.  They also predict long run inflation of 2%.  Martin Feldstein of Harvard U. predicts GDP growth in 2012 will not exceed 2%.

• In December, the ECB put $489 billion of euros in the regions’ banks through a new program offering three-year loans at cheap interest rates.  This has brought a sharp drop in short-term yields on the debt of the weakest European nations.  The yield on Italian two-year debt has fallen to 3.9% from 7.8% in late November.  Spanish government two-year yields have fallen to 3.3% from a 6.2% high.

• Croatians voted in favor of joining the EU, 66% to 33%.  But only 47% participated in the referendum, down from 84% who voted for independence from Yugoslavia in 1992.  Despite evidence of a coming crackup, at least one new country wants to join the EU.

• The Eurozone purchasing managers’ index rose 2.1 points in January to 50.4 signaling expansion for the first time in five months according to Markit, a research firm.  Most of the growth was in Germany.

NEGATIVE TRENDS

• The National Association of Realtors reported that pending home sales fell 3.5% in December after rising 7.3% in November.

• New homes sales in December slowed a bit to 307,000, down from 314,000 in November.  This continues to be one of the weakest sectors of the economy.  They have been essentially flat for the past three years despite record low interest rates, falling home prices, and rising rents.  The median price for a new home is down 12.8% from a year ago.  Housing inventories are at 6.1 months.

• The December survey by Inside Mortgage Finance also showed that many of the home purchasers are investors, who account for one out of three transactions or 33.2%. A huge 74% of investor purchases were all cash home purchases during the last month of the year, according to the survey.  Investors accounted for 22.8% of residential purchases during the month, up six-tenths of a percent from November. However, despite representing slightly less than a quarter of purchases investors’ have an over-sized command on the market since their ability to pay cash in the majority of transactions puts undue downward pressure on home prices.  This suggests further decline in home prices.

• The World Bank predicts the Eurozone GDP will dip 0.3% in 2012 but the IMF sees a dip of 0.5%.  Worldwide GDP will be 3.9% percent, down from 4.5% in the earlier prediction.  The U.S. outlook will be 1.8% growth.

• British GDP fell 0.2% in fourth quarter according to Britain’s Office for National Statistics after growing 0.6% in third quarter. 

• Talks with Greek creditors are at an impasse.  Creditors have agreed to accept a write-down of 50% of the outstanding €200 billion in Greek bonds.  In addition, Eurozone countries will lend Greece €30 billion that Greece will earmark for creditors at 4%.  But Germany and the IMF want a 3.5% coupon.  Greece will experience a short term technical default which will only last a few weeks or even a few days.  Charles Dallara, President of the Institute of International Finance is not concerned about it.  Meanwhile, the IIF will get the support from its creditors for the 50% haircut to the nominal value of the Greek bonds.  No agreement has yet been reached on the coupon for the new bonds yet—the net present value reduction.  Greece will eventually default on its debts, even if the nation reaches a deal with the private sector to restructure its debts, according to a panel of experts.  John Chambers, head of sovereign ratings at Standard & Poor’s, said Tuesday that the deal being negotiated between Greece and private sector investors would “in all likelihood” qualify as a default.  The proposed restructuring aims to reduce Greece’s debt load to 120% of its economic output by 2020, from 160% currently.   But even at that level, Greece’s debt burden would still be “very high” and the nation’s credit rating will remain “very low,” said Chambers.  S&P could assign Greece a “selective default” rating by the fall, according to Chambers.  Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

• Christine Lagarde, head of the IMF, said unless euro-zone leaders urgently build a bigger emergency bailout fund, two of the euro zone’s largest economies, Italy and Spain, risked insolvency as the cost of financing their debt spikes upward. Economists said failures in the two economies could spark a global financial and economic meltdown, and IMF staff are urging Europe to at least double the size of their firewall to around €1 trillion.  Insolvency in those two nations “would have disastrous implications for systemic stability,” she said.  “There are three imperatives—one is stronger growth, two is large firewalls; three, deeper integration,” said Ms. Legarde.  “Resorting to budget cuts across the board without growth will only add to recessionary pressures.”  Germany is under pressure to back a significant expansion of the planned European Stability Mechanism—a permanent bailout fund of €500 billion that European leaders hope to launch in July.  This fund is being set up to succeed the European Financial Stability Facility which has a capacity of €440 billion.  Concern is growing in Europe that previous programs to help Greece reduce its debt load will fail, and that Athens will default on its debt.

• In his State of Union speech, President Obama asked the Justice Department to launch yet another investigation of mortgage lenders over selling of mortgages into securities.  Obama said he would propose legislation to give “every responsible homeowner” the ability to take advantage of low interest rates.  Although details of the new plan — which he said could save a homeowner on average $3,000 a year — were sketchy, Obama said it could be paid for through fees paid by banks. That idea was a strong signal the administration is still considering what essentially amounts to a tax to recoup funds from large financial institutions that received aid during the bailout. While a so-called bank tax has been discussed before in Washington, including in the debate over Dodd-Frank, such fees have not had much bipartisan congressional support.  “A small fee on the largest financial institutions will ensure that” a refinancing plan “won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust,” Obama said.  The Wall Street Journal believes none of these housing initiatives will go very far since Congress won’t approve them.

• Portugal will probably need a second bailout as fear increase that it won’t be able to return to markets for financing in 2013.  Portugal must regain full access to capital markets next year to repay €9 billion in debt due in September 2013.  Bond yields and the cost of insuring Portuguese debt against default have reached record levels.  One foreign exchange broker opined that Portugal has very little realistic prospect of paying back its debts in full.  Despite following the recommended policy of austerity imposed on it, bond rate yields have not declined in Portugal.

• Despite rising bank stock prices, the big banks’ mortgage expenses keep piling up, in a backlog that is likely to drag down their profits — and a broader housing recovery — for the foreseeable future.  As the largest banks reported quarterly results this month, they took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs.  Even Wells Fargo & Co., which posted the strongest fourth-quarter mortgage results and now controls a third of the U.S. mortgage market, had significant costs for loan repurchases and mortgage servicing failures. It posted about $300 million in costs related to mortgage servicing and foreclosures.  The worst problem, analysts say, is that the banks’ fourth-quarter charges do not necessarily signal any sort of resolution to the litigation and regulatory risk for banks with significant mortgage exposure.  All the large banks are keeping large reserves for mortgage repurchases, regulatory risk, and foreclosures.

• German ten-year bond yields rose from 1.77% two weeks ago to 1.87% on Jan 27 over concerns over the Eurozone crisis.

• A former IMF economist, Simon Johnson fears Italy won’t be able to surmount its €1.90 trillion debt burden without a restructuring that would impose further huge losses on financial institutions across the Eurozone.  This would cause multiple government debt defaults starting with Greece and possible departures from the euro.

• On Jan. 24, Flagstar announced a fourth-quarter loss of $44.9 million, compared to a loss of $14.2 million a quarter earlier, as credit costs rose. A year earlier, the company reported a $192.1 million loss, largely due to a hit it took in order to unload nearly half of its problem assets through a bulk sale. Since 2007, Flagstar has lost nearly $1.4 billion.  The loss was actually closer to $66 million, because the company benefited in the fourth quarter from a $21 million gain from the sale of its branches in the Indiana and Georgia markets.
• Fitch downgraded the credit rating of Italy and Spain two notches and also cut Belgium, Slovenia, and Cyprus.  This means a bigger bailout is needed to preserve the eurozone.

NEUTRAL TRENDS

• The cost of renting a home rose 2.5% in December year-over-year.  This should shift some consumers to consider buying a home if they can get a mortgage.  The weak housing market is preventing more rapid GDP growth.

• A study completed in 2012 by three economists, Quercia, Ding, and Reed, suggests that the QM loan term restrictions on their own would curtail the risky lending that occurred during the subprime boom and lead to substantially lower foreclosure rates without overly restricting access to credit.  Based on this analysis, they believe that policymakers should not impose additional LTV, DTI and FICO requirements on QRM mortgages, especially given the potential disproportionate impact of these thresholds on creditworthy low-income borrowers and borrowers of color.

• Three ways to boost housing:  1) Since the Federal government owns Freddie Mac and Fannie Mae who dominate today’s market, the government could ask Freddie to increase the number of home loans investors can have from the maximum of 4 at Freddie and 10 at Fannie.  Just increasing the limit to 12 for both agencies would have a big impact.  2) The government should establish certainty around its current rules, especially rules involving repurchases of defaulted loans.  3) Give investors equity stakes in homes in exchange for mortgages when the home is under water.

• The FHFA noted in a letter that forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost F&F almost $100 billion.  Freddie & Fannie guarantee nearly 3 million mortgages on single- family homes that are underwater.

• Mexican President Calderon who is president of the Group of 20 says Europe needs a “real depreciation of the euro” and a bigger firewall to resolve the crises in the indebted countries.  The bigger the firewall, the faster the solution, he said.

• European Union Economics Commissioner Olli Rehn said the bailout fund needs a boost in January and some concessions on interest rates on existing official loans.  In addition, the U.S. must increase its contribution to the IMF.

 

CONCLUSION

There is little likelihood of a double-dip in the U.S. but also little likelihood of a normal robust recovery.  Rather we will continue to limp along with an anemic recovery around 2.5% GDP growth.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

 

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

What a change a week can make!  We now see big signs of improvement in the economy.  There are 20 positive trends vs. only 9 negative trends—the best ratio of positive to negative trends in many months!   The biggest headline is the 50,000 drop in initial claims for unemployment, a rise in industrial production, a rise in existing home sales, the home builder confidence index rose, both the New York and Philadelphia manufacturing indexes rose, bank earnings are up in several major banks, repossessions are down, bank and home builder stocks are up, and inflation is nonexistent.  The negatives are mainly in Europe—nine downgrades by S&P of Eurozone debt.  Housing starts dropped a little and Citicorp can’t sell its consumer credit firm.  We have long observed that many people are like sheep and tend to follow what everyone else is doing.  It appears we have reached a point where the pessimism that has lingered since 2007 is being turned around.

MORTGAGE MARKET SUMMARY

Rates are great.  According to Freddie Mac’s weekly survey they fell again last week.  Consumer optimism is returning and the economy appears to be showing some signs of health.   “December attitudes have rebounded from the lows seen during the debt ceiling debate and economic deterioration of Europe this past summer. There is marked improvement in consumer sentiment regarding the direction of the economy, personal finances, and future home price expectations,” said Doug Duncan, vice president and chief economist of Fannie Mae.  The Mortgage Bankers Association reports that application volume is strong.  Who wants the business?  Recent quarterly reports show that volume is down at Bank of America, Chase and Citi.  It appears that the large banks are focusing more on serving existing banking customers and are thinking about mortgage lending as part of their whole consumer banking strategy.  Independent mortgage bankers are picking up the volume that the large depositories have walked away from.  Firms like Primary Residential Mortgage and Prime Lending have recently hired some of the top loan officers from the banks and are growing at a rapid pace.  How much can these smaller firms grow without robust investor appetite to purchase their servicing?  If they must hold their servicing, their growth rate will slow.

Repurchase requests from Fannie Mae and Freddie Mac continue to be a challenge for the entire mortgage industry.  Management at SunTrust and Chase mentioned this as an ongoing frustration in their recent earnings release.  Large repurchase requests have made the largest servicers increasingly risk averse, lengthened the underwriting process, and increased expenses.  If the Obama administration really wanted to improve the housing industry, they could encourage the GSEs to do a settlement with servicers for pre-2008 originations and allow the servicers to put the risk of older production behind them and focus on new business.

We are hearing that mortgage servicing is beginning to trade again but at a discount.  Now that a head of the Consumer Financial Protection Bureau has been appointed and it seems that the finance industry is not going to oppose his appointment perhaps regulation of Dodd Frank will move forward and the industry will get clarification of the many outstanding regulatory questions such as the definition of a qualified residential mortgage.  Once some of the regulatory uncertainty is reduced, trading of loans and private securitization is much more likely to rebound.

For the week there have been 20 positive trends and 9 negative trends.  The DJIA rose 2.4% from 12,422 last week to 12,716.

POSITIVE TRENDS

• Initial claims for unemployment fell dramatically to 352,000 for the week ending Jan. 14, down from 402,000 the prior week.   This was a four year low.  The four-week moving average fell to 379,000 from 383,000.  Continuing claims also plummeted to 3,432,000 from 3,647,000.

• Industrial production rose 0.4% in December after declining -0.3% in November.  This suggests slow growth in 4^th quarter with recovery in December.  Capacity utilization rose to 78.1 in December up from 77.8 in November.

• The producer’s price index (PPI) fell to -0.1% in December, down from 0.3% in November.  Fuel and food prices were down.

• The consumer’ price index (CPI) was unchanged for the month of December from November.  There couldn’t be a clearer sign of no inflation especially when the wholesale index actually declined in December.

• The National Association of Home Builders index rose to 25 in January, up from 21 in December.  This was higher than expected and was the highest level since 2007.

• The stock of seven builders’ stock has risen 59% since early October as a range of investors buy up these stocks.  They are assuming there will be a strong spring buying season.  Among the stocks that are appreciating are Lennar, Pulte, Toll Brothers, D.R. Horton, and NVR.

• The Empire State Manufacturing index rose to 13.5 in January, up from 8.2 in December.

• The Philadelphia Federal Reserve Bank Index of Manufacturers rose to 7.3 in January, up from 6.8 in December.

• Mortgage foreclosure filings and repossessions fell to their lowest level since 2007 last year.  Total filings, including default notices and bank repossessions were down 33% for the year (2011) to 2.7 million, according to RealtyTrac, the online marketer of foreclosed properties.  One in every 69 homes had at least one foreclosure filing during the year, while 804,000 homes were repossessed. That’s a significant improvement from the peaks reached in 2010 — when 1.05 million homes were repossessed — and the lowest levels seen since 2007.   More than 4 million homes have been lost to foreclosure over the past five years.  While the declines seem like good news for the housing market, where a flood of foreclosed homes has depressed home prices, much of it is due to processing delays caused by fall-out from the “robo-signing” scandal that broke in late 2010.  During the year, banks spent more time making sure paperwork was legal and proper, creating a backlog in the foreclosure pipeline. As a result, the average time it took to process a foreclosure climbed to 348 days during the fourth quarter, up from 305 days a year earlier.

• The International Monetary Fund is proposing to raise its lending capacity by $500 billion to insulate the global economy against any worsening of Europe’s debt crisis, according to the Wall Street Journal.  The Washington-based lender currently has about $385 billion available to lend and wants to lift that to $885 billion after identifying the potential for a $1 trillion global financing gap in the next two years. To incorporate a cash buffer, that means asking its membership for $600 billion.

• For fourth quarter, Wells Fargo posted $4.11 billion in profits, or 73 cents a share, up from $3.41 billion, or 61 cents a share, a year earlier. Revenue fell 4.1% to $20.6 billion.  Wells indicated it is looking to make acquisitions, unlike most of its peers.  The company has already made several buys over the past few quarters, including the purchase of LaCrosse Global Fund Services, a managed hedge fund administration and middle-office service provider, in September.  According to Timothy Sloan, CFO, “our focus is going to be on U.S.-based assets and businesses, which we think we can underwrite and price appropriately.”

• U.S. Bancorp’s fourth-quarter earnings jumped 39% as the lender again reduced funds set aside to cover potentially risky loans and benefited from growth in lending.  Provisions for loan losses in the fourth quarter were $497 million, down from $912 million a year earlier and $519 million in the third quarter.  U.S. Bancorp reported a profit of $1.35 billion, or 69 cents a share, up from $974 million, or 49 cents a share, a year earlier.

• About one million American homeowners would get write-downs in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, U.S. Housing and Urban Development Secretary Shaun Donovan said on Jan. 18.  The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.  “We’re very close to a settlement that would both fix the servicing problems, but also help over a million families around the country stay in their homes and get help,” Donovan said at a U.S. Conference of Mayors meeting in Washington.  Talks between federal officials, state attorneys general and major banks to resolve allegations of “robo-signing” and other misconduct in foreclosures have dragged into their second year.  Donovan’s announcement came the same day that two big regional U.S. banks disclosed they had set aside funds related to mortgage servicing matters, a sign that lenders beyond the five largest mortgage servicers may join the expected settlement.  In exchange for between $20 billion to $25 billion in relief to distressed homeowners, the banks – Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and Ally Financial Inc. – will put behind them potential government lawsuits about improper foreclosures and abuses in originating and servicing the loans.  Using Donovan’s estimate, the settlement could provide roughly a $20,000 reduction each for the one million borrowers.

• Citigroup reported fourth quarter 2011 net income of $1.2 billion or $0.38 per share, compared to $1.3 billion or $0.43 in fourth quarter 2010.  Its fourth quarter revenues were $17.2 billion, down 7% from the prior year period.  CEO Pandit said, for 2011, “We increased our net income to $11.3 billion, up 6% from the previous year.

• In a report from Tom Charles of Quadrant Advisors we heard of a great trade for the new year:  a $25 million sale of seasoned performing residential adjustable mortgage loans that are almost 4 years old (on a WA basis). The seller provided updated credit scores and property valuations so the investor is able to consider the pool with some assurance that a deal can be completed.  Other noteworthy parameters involving this trade included (1) a WA current credit score of approximately 740, (2) a WA current LTV of approximately 65%, and (3) nationwide collateral (not including Florida).

• Spending on home improvements is expected to rise modestly in 2011 for the first year since 2006 while spending on new construction is expected to languish, reported HIS Global Insight.  An additional expansion of 5.7% is expected in 2012.

• The Greek government and its private-sector creditors have moved closer to a debt-restructuring deal on the basis of new proposals.  It could pave the way for a bailout of the country.  Private creditors are showing willingness to accept a 50% cut in the value of the Greek bonds they hold that are coming due.  One open question is whether the deal will be considered to be truly voluntary.  Holders of CDS insurance (credit default swap contracts) have incentives to refuse to agree to the deal so they could claim payouts.

• Bank of America earned $2 billion in net income in 4Q11.  For 2011 they earned $1.4 billion, up from a loss of $2.2 billion 2010.  The income included revenue from the sale of assets.

• Existing home sales rose 5.0% to 4.61 million annual rate in December, up from 4.39 million in November.  This was higher than expected and was the third monthly increase in a row.  Inventories of homes for sale fell to the lowest level since 2005.  Multifamily homes (including townhouses and condos) rose 8.7% whereas detached homes rose 4.6%.

• The euro rose in value back to $1.29, up from $1.26 last week.  This stems from rising optimism over a solution to the Eurozone crisis.

 

NEGATIVE TRENDS

• Housing starts fell slightly to a 657,000 seasonally adjusted annual rate, down from 685,000 in November but it was still up higher than during the prior months in 2011 and most of 2010.  There does appear to be a recovery occurring in housing using a moving average or quarterly numbers.

• U.S. consumers defaulted on credit in December at a rate of 2.24%, the highest rate since 2.3% in April, according to an index by Standard & Poor’s and Experian.  Credit defaults increased two basis points from 2.22% in November, though they declined from 3.01% in December 2010.  S&P said mortgage defaults drove the overall increase, as first-mortgage defaults rose to 2.19% from 2.17% in November. Those mortgages saw a 1.92% default rate in August.  Second-mortgage defaults ticked up to 1.33% from 1.26%.  “The second half of 2011 saw a slight reversal of the two-year downward trend in consumer credit default rates,” said David Blitzer, managing director and chairman of S&P’s index committee. “First mortgage default rates rose for the fourth consecutive month, as did the composite.”

• On January 13, S&P downgraded nine Eurozone countries one or two notches.  They included France, Spain, Italy, Portugal, Malta, Slovakia, Slovenia, Cyprus, and Portugal.  On the same day as the downgrades, talks between Greece and a group of creditors negotiating to restructure its debt broke down.  If no deal can be reached with its creditors, Greece will need billions of euros in additional aid to make a big bond repayment in March.  The downgrades will hurt the European Financial Stability Facility (EFSF) which has no capital of its own. Instead it relies on borrowing against the credit of stronger countries to help the weak.  This means the EFSF will not be able to lend as much in the future to help weak countries like Greece.  On March 14 a €14.5 billion bond matures for Greece.  To have a voluntary agreement in time, European leaders would have to sign off at a summit on Jan. 30.  The talks that broke down last Friday were seeking to slice €100 billion from the Greek government’s €350 billion in debt without delivering an ultimatum to private bondholders who together hold more than €200 billion of bonds.  Without France and Austria, the sum of AAA guarantees to back the EFSF falls from €451 billion to €271 billion.  This fund is committed to providing about €200 in funds to help rescue Portugal, Ireland and Greece.  S&P warned on Jan. 16 that efforts to address Europe’s financial problems are falling short.   Germany has the euro area’s only stable AAA grade.  But its current debt-to-GDP ratio is 83%, much higher than the 60% ceiling set in the Maastricht Treaty.  Bill Gross of PIMCO thinks Greece will soon default on its debt.

• Greek officials believe that if the IIF (Institute of International Finance) agrees and a “critical mass” of around 68% of investors voluntarily go along, then this will trigger so-called collective action clauses that will bind the remaining investors into the deal.  The IIF represents the private investors in Greek debt.  The goal of the talks with the private sector is to slice €103 billion from the Greek government’s €350 billion in debt without any signs of coercion. An agreement in principle would set up a formal debt offer during the week of Feb. 6-10, with the final debt exchange expected to be completed by the end of February.  The sticking point remains the interest rate stitched to the bond swap. Greece says it can’t afford to pay more than a 4.5% average coupon on the new bonds, while sovereign creditors such as Germany and the IMF want below 4% to make sure Greece can afford it and to avoid future shortfalls. The IIF, however, wants more than 5%.  On March 20, Greece has to make a bond payment of €14.5 billion.  If they can’t agree on a compromise a default may take place then.  The biggest danger in Greece is the gradual bank run taking place.  Bank deposits in late 2011 were down 17% from a year earlier.  Immigrant workers from Albania and elsewhere are moving their funds out of the country.  GDP is estimated to have fallen 6% in 2011 and another 3% in 2912.

• Fourth-quarter profits at PNC fell 41% from the previous quarter, and 40% from a year earlier, to $493 million. Higher foreclosure expenses and the cost of redeeming preferred securities were the main reasons.  Profits should benefit this year from the addition of RBC’s 400 branches in North Carolina, Florida, Alabama, Georgia, Virginia, and South Carolina, CEO James Rohr said.  Excluding $170 million in integration costs, the deal will add to earnings in 2012 because PNC does not have to issue shares to pay for the deal, he said.

• Since 2009, Citicorp, the third-largest bank by assets, has tried to sell its CitiFinancial consumer lending business, now called OneMain Financial. Those efforts have been fruitless so far — but Citigroup is not planning on giving up anytime soon, said chief financial officer John Gerspach.   This firm was formerly called Commercial Credit.  At the present time there is little demand for any mortgage or consumer finance company.

• Basel II and III tried to make banks safer by prescribing capital levels and by steering banks toward “safe assets.”  In the past mortgage-backed securities were among the safest, safer than business and consumer loans and even whole mortgages.  So the Basel rules favored MBSs.  They also favored sovereign debt.  This led to banks holding an excessive amount of both and brought on the current sovereign bubble and the recent mortgage bubble.

• President Obama once again rejected the Keystone XL oil pipeline from Canada.  This will slow down job growth and raise the price of fuel.  Canada’s Prime Minister Harper now promises to sell that oil to China.  The average retail price of a gallon of gasoline rose to $3.45 this week rising for the fourth straight week.

• Three large Eurozone banks that sold new shares last year need to raise capital again.  The three are Italy’s Monte Dei Paschi di Siena, Spain’s Bankia, and Germany’s Commerzbank.  This means investors will likely be reluctant to put additional money into Eurozone banks.  So even if Greece is bailed out again there will be weakness in the banking sector.

CONCLUSION

This looks like a big market turnaround in the U.S. economy to us.  But the Eurozone still has lots of challenges.  The next big challenge for Europe occurs on March 20 in Greece.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

David Olson and Christine Clifford

 

FOCUS ISSUE FOR THE WEEK

During the second week of January, there were some signs of modest improvement in the economy, especially in auto sales, services, and oil and gas extraction.  Consumer credit grew very sharply in November and consumer sentiment rose in January.  Bank earnings and stock prices rose.  Mortgage rates reached a new low causing refis to remain high.  But initial claims for unemployment turned back up and December retail sales other than auto were very weak.  German GDP fell in fourth quarter making it virtually certain that the European Union was in a recession.  So far the collapse in Europe seemed to be benefiting the U.S. by causing world savings to stream to the U.S. and keeping U.S. interest rates surprisingly low.  MetLife Mortgage shut down after trying unsuccessfully trying to find a buyer for the past year.  The president of Fannie Mae resigned.  A few weeks ago the president of Freddie Mac announced his retirement.  Perhaps they both resigned from political pressure because these two GSEs so dominate the mortgage industry and the housing industry is not showing any recovery yet.  The eurozone keeps heading for at least a partial collapse but it is possible that this may actually benefit the U.S. by keeping interest rates and inflation low.

MORTGAGE MARKET SUMMARY

According to Freddie Mac mortgage interest rates are at the lowest level since the 1950s.  Freddie Mac said on January 12 the average rate on the 30-year fixed mortgage fell to 3.89%. Rents have risen and housing values are low.  As a result of historically low interest rates and low home values, existing homes are incredibly affordable.  According to the MBA, mortgage loan application volume increased 4.5% on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the index increased 34.4% compared with the previous week.  The Refinance index increased 3.3% from the previous week.  The seasonally adjusted Purchase Index increased 8.1% from one week earlier.  Why hasn’t application volume increase more?  According to NAR and Freddie Mac, the underwriting guidelines are too tight and the job markets are too weak.   However, recent economic data indicates that our economy is on a positive trajectory.  Given the current economic conditions, this spring should be a great purchase money market.

Looking at interest rates, one would think that now would be a great time to get into mortgage lending.  However, despite sales and market share growth, MetLife is exiting mortgage lending and was unable to find a buyer for their mortgage company and announced this week they would close down their mortgage group.   PHH, a large lender and servicer, has been having trouble convincing investors to purchase their debt.   Flagstar, a top originator and large servicer of mortgages, has been unable to get investors interested in their stock which has remained stubbornly low all year.  Few mortgage servicing pools have been trading and those that have sold have been sold at a discount.  Chase and PHH recently announced that they reduced the value of their mortgage servicing rights.  All indications are that interest rates are unlikely to fall further and rates of consumer relocation have dropped considerably, therefore the servicing originated over the past year will stay on the books longer than it has in the past 20 years.   MetLife cited the cost of regulation as the reason for exiting consumer lending and banking.  One of the causes Chase cited for a loss in their mortgage origination business was large mortgage repurchases.  They are expecting to have to repurchase $350 million a quarter this year.  Uncertainty about future repurchase risk is one reason cited for the lack of interest in purchasing mortgage companies today.  Uncertainty about regulations related to qualified mortgage and qualified residential mortgage capital retention requirements from Dodd Frank is also cited as a reason for lack of investor interest in mortgage servicing. 

For the week there were 10 positive trends and 16 negative trends.  The DJIA rose from 12,359 last week to 12,422 this week.

POSITIVE TRENDS

• In November consumer credit outstanding grew by $20.4 billion after rising $6.0 billion in October.  This was the biggest monthly increase since November 2001 and was twice as high as expected by the most optimistic forecaster.  Most of the increase was for non-revolving credit.  Revolving credit has now increased three months in succession.
• The Federal Reserve’s beige book showed the U.S. economy is starting to improve modestly.  The economy “expanded at a modest to moderate pace” from late November through the end of December on increased holiday retail sales, demand for services and oil and gas extraction, the Fed said in its Beige Book anecdotal business survey released today in Washington. At the same time, most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”

• ROE for banks with assets over $10 billion rose to 9.72% in 3^rd quarter, up from -12% in 4^th quarter 2008.  But this is below the 14.4% average experienced in the ten years before the financial crisis.  ROA averaged 1.1% in third quarter, up from -1.1% in 4^th quarter 2008, but still below the pre-crisis average of 1.24%.
• Job cuts in state and local government are expected to continue to be a weak point in the job market, but such cuts are diminishing.  They were 14,000 in December 2011 down from 24,000 a year earlier.
• Three members of the Federal Reserve are publicly calling for Fannie and Freddie to take more aggressive action to support housing.  This would include reducing loan balances on underwater loans and purchasing more MBS.

• Lender Processing Services Inc., Jacksonville, Fla., said its November Mortgage Monitor report showed mortgage delinquencies have fallen by 25% from its January 2010 peak, continuing a trend of fewer loans becoming delinquent.  At the same time, LPS said new problem loans–those loans seriously delinquent as of the end of November that were current six months prior–have not improved significantly in the last year. “This degree of stagnation indicates that while the situation is not getting markedly worse, it is not improving either, and inventories of troubled loans remain significantly higher than pre-crisis levels across the board,” LPS said.
• More Americans are moving from part-time to full-time jobs, adding to evidence a strengthening labor market will bolster household confidence and spending.  The number of people putting in a full week rose to 113.8 million in December, the most since February 2009, the Labor Department’s monthly employment report showed last week. At the same time, 8.1 million worked fewer hours because they couldn’t find a full-time job, the least since January 2009.
• GI Partners of Menlo Park, CA plans to announce a plan to buy foreclosed homes at discounts and rent them out to tenants.  This investment ($250 million to buy Waypoint Real Estate Group) would be among the largest to date by an institutional investor in the single-family rental space.  White House officials are looking at rental conversions to help clear a glut of foreclosed homes.
• Redwood Trust Inc. plans to sell securities backed by about $400 million of new U.S. home loans, only the fourth sale of such debt since credit markets seized in 2008, according to Bloomberg.  The deal may be completed as soon as next week.  The Mill Valley, California-based Redwood, which focuses on so-called jumbo loans, issued all three prior non-agency transactions, data compiled by Bloomberg show. Credit Suisse Group AG is managing the offering.  Issuance peaked at about $1.2 trillion in each of 2005 and 2006, and may total $5 billion this year, according to JPMorgan Chase & Co. analysts.

•  The University of Michigan index of consumer sentiment rose to 74 in January, up from 69.9 in December. 

NEGATIVE TRENDS

• Initial claims for unemployment reversed direction rising to 399,000 claims for the week ending January 6, up from 375,000 the prior week.  The four-week moving average also rose to 382,000, up from 375,000 the prior week.  The four-week moving average had fallen the prior five weeks in a row.  Continuing claims rose to 3,628,000 up from 3,609,000 the prior week.  The four week moving average remained unchanged.  This suggests a slowdown in the recent decline in the unemployment rate.
• Retail sales rose only 0.1% in December after rising 0.4% in November.  Excluding auto sales, there was a 0.2% decline in December.  This now shows a weak Christmas sales period after early data indicated a strong Christmas.

• U.S. Treasury yields are unlikely to increase in the near future because of concern the recession in Europe may be deeper than anticipated and market volatility may spill over into the U.S.  Buyers will have to accept historically low yield on U.S. government debt to get relative safety, reports the Franklin Templeton fixed-income policy committee.
• According to Harvard Economic Professor Barro, seven East European countries that recently joined the EU have announced they have lost interest in adopting the Euro.  Popular opinion is also against euro membership in the U.K., Sweden, and Denmark.  None of the remaining outsider European countries wants to embrace the common currency.  The political response to the ongoing fiscal and currency crisis is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency.  The cost of forcing populations with disparate histories into a single nation will likely be prohibitively high.  Therefore Barro recommends elimination of the euro altogether.  This could be done by each member country reinstituting their own currency and making it par with the euro and then gradually eliminating the euro after several years.   If the euro is eliminated altogether, there would be a much bigger negative impact on the U.S. economy.
• “Fannie Mae and Freddie Mac will need to raise guarantee fees over the next two years to fulfill the requirements of the recently-passed tax cut extension bill. We think that this increases the risk of a rating agency downgrade and so continue to prefer debt of other GSEs, such as Federal Home Loan Banks and Federal Farm Credit Banks, over Fannie and Freddie.” So stated a research piece from Bank of America Merrill Lynch, suggesting that the risk on both agencies debt will increase. “There is a possibility that S&P and Moody’s decide to lower the credit ratings of Fannie Mae and Freddie Mac based on the fact that we have now entered the final year of unlimited capital availability and no plan has been put in place to make sure that these two GSEs have enough capital to weather a moderately bad economic scenario beyond 2012. Since the conservatorship of Fannie and Freddie started in 2008, no progress has been made on the future of these companies, whose combined balance sheet is nearly half the size of the entire US banking system combined (5.4tn vs. 12.5tn).”
• Fannie Mae CEO Michael Williams resigned after serving the past three years. This announcement comes three months after Freddie Mac CEO announced his plan to resign at the end of this year.  The two firms have cost taxpayers $151 billion since the takeovers by the federal government.
• Yields for German six month Treasuries fell to -0.012%.  This is the first time Germany’s yields have fallen into negative territory and suggests investors are too worried to invest in the rest of Europe.  Switzerland and the Netherlands have also had negative yields recently.  A bond-market panic could cut off major economies such as Spain and Italy from affordable credit.  European banks are increasingly reluctant to lend one another money due to their heavy exposures to Eurozone governments.  Yields on Italy’s ten-year bond remained above 7%–a level considered unsustainable.  Germany and France pressed Greece and its bondholders to agree on easing Greece’s debt burden.   Greece’s bailout loans from the Eurozone and the IMF are on hold until a deal is reached with private investors.  Greece’s high deficit is raising the risk of a full-blown default on its bonds.  But on Jan. 12, the ten year yield on Italian debt fell back to 6.63%.
• Standard & Poor’s stripped France of its AAA credit rating for the first time, Finance Minister Francois Baroin said, reflecting the risk to the country from the spread of the euro-area debt crisis.
• Fitch announced that Italy will likely be downgraded by the end of January due to the rising bond yields and the lack of a Europe-wide plan to prevent the sovereign debt crisis from spreading.  Fitch noted that a Greek exit from the euro remains a potential option.  Greece still could drag the Eurozone into a deeper crisis.  Fitch rates Greece a triple-C.  On March 20 Greece must repay a €14.5 billion bond.  Currently it doesn’t have that money.
• According to the German statistical office, German GDP contracted 1% in 4^th quarter which has hurt German exports and business confidence.  Many economists expect Germany to stagnate before recovering slowly in 2012.  A worse-than-expected turn in Southern Europe’s debt crisis could spur financial-market panic and lead to a deeper recession.
• The euro fell to $1.26 on Jan. 11, down from close to $1.28 a day earlier.   There has been a fairly steady decline in the euro for the past three months.  In mid-October the euro was $1.42.  Back in April there was a peak at $1.49.
• MetLife Home Loans announced they are exiting the mortgage business.  Apparently they could not find a buyer for their firm which has been on the market for at least a year.  They were the tenth largest originator in the industry according to Inside Mortgage Finance.

• Chase’s mortgage originations in 2011 were the lowest in the past ten years.  J.P. Morgan Chase & Co. reported a 23% drop in fourth-quarter profits, the result of another weak quarter for investment banking operations, but executives said loan-growth numbers across the bank signal an improving economy.  As the first major bank to report for the fourth quarter, J.P. Morgan’s results offer a glimpse into what is largely expected to again be a bleak quarter for the nation’s largest financial institutions. Revenue at the bank missed expectations, and shares shed 4.1% to $35.37 in recent trading.  The bank’s mortgage operations swung to a loss, largely because the bank reduced the value it ascribes to mortgage-servicing rights it holds by $832 million. Mr. Dimon said on the call the bank continued to originate more mortgages, but that it wasn’t an area he saw the bank making a profit in.  “We are getting killed in mortgages, if you haven’t noticed,” he said.  ”Mortgage production and servicing reported a net loss of $258 million, compared with net income of $330 million in the prior year. Mortgage production pretax income was $161 million, a decrease of $392 million, or 71%, from the prior year. Production-related revenue, excluding repurchase losses, was $1.1 billion, a decrease of $269 million, or 20%, from the prior year, reflecting narrower margins and lower volumes. Production expense was $518 million, an increase of $82 million, or 19%, reflecting a shift to higher-cost originations within the retail channel as well as enhanced underwriting processes. Repurchase losses were $390 million, compared with repurchase losses of $349 million in the prior year. The higher losses were primarily driven by an acceleration of Agency demands.”  Mortgage repurchase losses are forecast at $350 million per quarter and mortgage loan losses, at $900 million a quarter. In addition, a further 10%-15% contraction in JPMorgan’s real estate portfolio is expected to reduce net interest revenue in 2012 by $500 million.

•  Several large banks have announced layoffs.  MetLife’s Mortgage Group eliminated 4,300 jobs this week.  Last fall B of A laid off 30,000 workers and signaled it plans to get rid of 750 of its 5,700 branches over the next several years.  Royal Bank of Scotland announced the layoff of 3,500 i-banking workers.

• PHH issued a prospectus to sell $150 million in debt to help pay off $250 million of debt that matures in April.  Originally they were looking to see $250 million debt back in December, but cancelled that offering.  S&P recently downgraded their long term debt rating two notches to BB-.  Last week the company president resigned.  Their stock price has been falling from around $20/share in June 2011 to $10.65 on Jan. 11.  They have taken large valuation adjustments in mortgage servicing rights the past three years, including $600 million in the nine months ended Sept. 30, 2011.  They lost $140 million in the nine months ended Sept. 30, 2011.  In the current market mortgage servicing isn’t trading for it has no value and they have taken big write-downs over the past several years in the value of their mortgage servicing.  PHH Corp raised its doubts over continuing as a “going concern” if it failed to improve its liquidity, and said the Consumer Financial Protection Bureau (CFPB) launched an investigation into its mortgage insurance practices.  PHH is also looking at ways to improve liquidity, which may include a sale of its reinsurance business and mortgage servicing rights, it said.

• The U.S. trade deficit in November increased to -$47.8 billion, up from -$43.3 billion the prior month.  This weakens GDP in fourth quarter.

CONCLUSION

The U.S. continues to show modest improvement as the eurozone heads for a mild recession and reduction of its weaker members.  It will take more months before we see clear signs of a strong recovery in housing even though some home builder and bank stocks showed improvement.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

The U.S. economy looked good this week—initial claims for unemployed continued to recede, factory orders rose, construction rose, ISM services index rose, and the ADP employment index rose massively.  The employment report on Friday was particularly strong with the unemployment rate falling to 8.5%, new jobs up by 200,000, rising hourly wages, and expanded work week.  The domestic auto industry was generally in good shape despite a very slight decline in December.  The three big negatives were continued weakness in single-family housing caused by high defaults and uncertainty over new regulations: the continued collapse of the eurozone; and the jump in oil prices due to the potential conflict in the Strait of Hormuz.  Despite large loans extended to support the refinancing of sovereign debts, there was little investor confidence in the debts of the weaker European countries.  This caused the euro to continue to slide against the U.S. dollar and sovereign debt yields to rise.

MORTGAGE MARKET SUMMARY

The cost to rent a home in the U.S. continues to rise while the cost to buy a home is at record lows.  Reis Inc. reports the average effective monthly rent — the amount paid after discounting — was $997 in the second quarter of the year. That is an increase from $974 a year ago. Second-quarter rents climbed in all but two markets.  Apartment vacancies dipped in 72 of the 82 markets Reis tracked during the April-through-June period, dropping the U.S. vacancy rate to 6 percent. That is the lowest since 2008 and was down from 7.8 percent in 2010′s second quarter, notes Reis.

Despite record low rates an improving job picture and improving consumer sentiment, the number of applications for purchase money loans fell.  According to the MBA, “mortgage application activity declined over the last two weeks, even after adjusting for the typical seasonal decline in activity.  Refinance applications continue to account for the vast majority of total application volume, with the refinance share reaching its highest level in 2011.”

NAR reported that pending home sales reached their highest level in 19 months in November so we should see an increase in purchase money lending soon.  In the meantime, lenders are increasingly busy meeting the demand generated from HARP (Obama’s refinance program).

For the week there were 14 positive trends and 15 negative trends.  The DJIA rose to 12,359, from 12,217 a week ago.

POSITIVE TRENDS

• Initial claims for unemployment fell to a 372,000 seasonally adjusted annual rate in the final week of 2011, down from 387,000 the prior week.  The four-week moving average fell to 373,000 from 377,000.  Continuing claims were 3,595,000 for the ending Dec. 23, down from 3,617,000 the prior week.  The four-week moving average was virtually flat at 3,602,000, down from 3,603,000.
• The ADP employment index for December rose massively to 325,000, up from 204,000 in November.
• The rate of unemployment fell to 8.5% in December, down from an upwardly revised 8.7% in November.  Nonfarm payrolls were up 200,000, which is double the 100,000 improvement in November.  Hourly earnings were up 0.2%, after being flat in November.  The average workweek expanded to 34.4 hours, up from 34.3 hours the prior month.  All these indicators were higher than expected.
• The ISM services index rose to 52.6 in December, up from 52 in November.
• The ISM manufacturing index for December was 53.9, up from 52.7 in November.  This was higher than expected and shows improvement in U.S. manufacturing.  It suggests stronger growth in fourth quarter GDP.
• Domestic light vehicle sales fell slightly in December to a 10.24 million annual rate from 10.34 million in November.  But in November sales had reached their highest level since April 2008 and are generally heading upward.  For the year 2011, total sales were 12.8 million, up 10.3% from 11.6 million in 2010.  Year-over-year, domestic light vehicle sales were up 9% in December.  Total vehicles sales (including imports) in December were flat with November at 13.6 million.  From 1998 to 2007 total vehicle sales averaged over 16 million per year so we have to see another 15% increases before we reach that level again.
• Factory orders rose 1.8% in November after falling 0.2% in October.
• Growth in construction spending in November was 1.2% after a 0.2% decline in October.

• Several auto lenders are making loans to borrowers despite their poor pay histories on their mortgage debt reported the Wall Street Journal.  Lenders in this group include Ally Financial, General Motors Financial and Mitsubishi Motors Credit.
• The national apartment vacancy rate fell to 5.2% in 4Q11, the lowest level since late 2001.  This is causing an increase in rental fees.
• In 2011 only 92 banks failed after 157 failed in 2010.  This is an improvement but 844 banks still remain on regulators’ problem bank list so we should see more failures in 2012.
• Morgan Stanley reported that large cap banks in the U.S. had 9.8% growth in C&I loans in the 2011.

• Consumers are paying down their debts in fourth quarter across an increasing number of loan categories, according to the American Bankers Association. That was a welcome reversal for the banking industry, which in the second quarter saw the ABA report an uptick in delinquencies.

•  The national office vacancy rate fell to 17.3% in fourth quarter, down from 17.4% in third quarter.  Office space rents rose 0.4% during the quarter, continuing the same increase in the prior quarter.

NEGATIVE TRENDS

• The Federal Reserve released on Jan. 3 its minutes from Dec. 13 where it said:  the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.” The central bank also added a reference to “apparent slowing in global growth,” and said that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”  Federal Reserve officials will for the first time make public their own forecasts for the federal funds rate at their Jan. 24-25 meeting.
• The Federal Reserve sent a letter to the congressional banking committees stating that tight mortgage-lending standards threaten to hold back the economy.  The Fed signaled support for more aggressive use of Fannie Mae and Freddie Mac to strengthen the housing recovery.  The two agencies should be encouraged to absorb more losses.
• PHH Corp., the largest non-bank lender, abruptly replaced chief executive officer Jerome Selitto with chief operating officer Glen A. Messina on Jan. 4, weeks after a failed bond offering and an S&P downgrade.  This suggests PHH may sell part of their firm and shrink their production.

• The AG of Massachusetts sued B of A, Chase, Citi, GMAC, Wells, and MERS for unfair and deceptive foreclosure practices.  The state wants $25 billion in restitution.  GMAC announced shortly after the lawsuit was filed that it would stop purchasing new mortgage from third parties in the state because recent developments have led mortgage lending in Massachusetts to no longer be viable.  The AG then called for a Congressional inquiry to this decision.
• Oil prices jumped to $102.49/barrel on Nymex due to fears of Iran in the Strait of Hormuz.
• Two of the big hurdles for the Eurozone in the coming three months are the necessity of Italy to issue €118 b in bills and bonds and Spain to refinance about €60 billion.  Most economists see challenges of raising more debt in the Eurozone as the most difficult economic problems to resolve in the new year.
• The euro fell on Jan. 4 from almost a one-week high against the dollar after a European report showed inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets the region’s debt crisis is worsening.  On Jan. 5 the euro fell to $1.27 for the first time since 2010.  This indicates continued lack of confidence in European recovery.  The low point in 2010 was June 4 when the euro fell to $1.20.  The euro has now fallen for ten weeks in a row from a peak of $1.42 on Oct. 27, 2011.
• Spanish bonds (GSPG10YR) dropped for a third day on Jan. 4 amid speculation the nation will seek assistance from the European Union and the International Monetary Fund.  The yield on the 10-year rose to 5.43%.
• Hungary is having a standoff with the EU and IMF over a law that the Hungarian Parliament enacted at the end of 2011.  The IMF and EU say the law threatens the independence of the country’s central bank.  This dispute has caused yields on Hungarian bonds to exceed 10%.  The country’s currency, the forint, has fallen to the lowest level since early 2009.
• China’s property prices fell for the fourth straight month in December.  This is putting pressure on Chinese consumer at a time when both the domestic and global economy is dependent on their spending.
• For the past three years in a row the Hong Kong stock exchange has had more IPOs than the NYSE.  Gingrich blames Sarbox for shrinking the viability of new firms in the U.S.
• President Barack Obama installed Richard Cordray as head of the Consumer Financial Protection Bureau with a recess appointment on Jan. 4, testing the limits of his executive authority to fill the post without Senate approval, White House Communications Director Dan Pfeiffer said.
• Eurozone governments need to refinance more than €1 trillion in sovereign debt in 2012.  The cost of Italian ten-year debt rose over 7%.  Interest rates on French debt inched up.  Investors are expecting S&P to downgrade France’s debt this month.  German retail sales fell the last two months of 2011.  French consumer confidence declined, and the Italian unemployment rate moved up to 8.6% in November from 8.5% in October.
• Retail sales in December had lower increases than expected.  Based on reports from 22 retailers, sales were up 3.4%.  For the entire November and December Christmas season same-store sales rose 3.1%, compared with 4.3% in 2010.  Initial reports showed a sharper increase.
• European confidence in the economic outlook fell to the lowest level in more than two years and German factory orders plunged in November.

CONCLUSION

We see steady growth in the U.S. economy and continued problems in Europe.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

This was a short Christmas holiday week resulting is less economic news than usual.  The major positive trends were strong retail spending, rising pending home sales, declines in initial claims for unemployment, and rising consumer confidence.  The U.S. stock market is up slightly for the year while the big stock markets elsewhere are down.  The big negatives are further declines in home prices, falling euro, rising oil prices, and the continued challenge within the eurozone.  Despite increased support from the U.S. Federal Reserve and the ECB, the yield for Italian ten-year bonds was over 7% which is unsustainable.  The price for oil on Nymex surged over $100/barrel and the euro fell to an 11 month low.  We also have the challenge of partisan gridlock in Congress and continuing spending cuts in state and local governments.  We continue to expect a partial fragmentation in the eurozone and a slow adjustment to a fiscal union among the remaining states.  The U.S. will have slow growth and Europe will have a recession.  The U.S. rate of unemployment will be moderately lower by the end of 2012.

MORTGAGE MARKET SUMMARY

Surprisingly low interest rates made 2011 a better year than most expected for the mortgage industry.  Economic woes in Europe are helping keep U.S interest rates at record lows and should help keep rates low awhile longer.  Low rates coupled with housing prices that have fallen over 30% since the July 2006 peak have pushed up housing affordability to record highs.  These conditions coupled with pent-up demand and an increase in consumer confidence are credited by NAR for a 7% increase in pending home sales in November.  Freddie Mac’s chief economist, Frank Nothaft is expecting low rates to help spur demand for refinances through HARP and purchase money demand in 2012 but does not think refinance volume will be as high as it was in 2011.  While record affordability will increase purchase volume, it will not increase sufficiently to make up for the drop off in refinance volume in second half 2012 when operation twist expires.  Freddie Mac expect total originations in 2012 to be lower than 2011.  MBA is projecting $968 billion in originations.  Fannie Mae’s economist sees a 40% chance for a double dip recession and thinks the housing market won’t improve before 2015.  Most economists are projecting a slight improvement in unemployment rates and a sluggish recovery with housing values declining somewhat further in 2012.

 For the week there were 10 positive trends and 6 negative trends.  For the week the DJIA slipped to 12,217, down 0.6% from 12,294 a week ago.

POSITIVE TRENDS

• Shares of home builders are up 30% since the end of third quarter as measured by the Dow Jones index measuring those shares.  This is higher than the 10.5% gain in the S&P500.  Many hedge funds think the worst is over and a rebound is coming.  Goldman thinks housing prices might decline by another 3% next year before beginning a rise.
• Pending home sales in November rose 7.3% indicating some improvement in the housing market.  This index had risen 10.4 in October.  “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high,” said NAR chief economist Lawrence Yun.
• The Chicago PMI remained virtually unchanged at 62.5 in December from 62.6 in November.  Any figure over 50 means an increase.
• Initial claims for unemployment four-week moving average continued its decline to 375,000, down from 381,000 the prior week.  For the week ending Dec. 24 rose unexpectedly to 381,000, up from 366,000 the prior week.  This was higher than expected and suggests the rapid declines in the prior month were not sustainable.  Continuing claims for unemployment also retreated unexpectedly to 3,601,000, up from 3,567,000 the earlier week.  But they were also down using a four-week moving average.  Overall, there has been a slow but fairly steady improvement in the two indicators.  This suggests moderate expansion in 2012.
• The consumer confidence index of the Conference Board rose in December to 64.5, up from 55.2 in November.  This was much higher than expected for forecasters and is at its highest level since April.  But the Bloomberg confidence index fell back to -47.5 from -45.
• Retail sales at chain stores was strong in the final week of Christmas according to the Goldman Sachs Weekly Chain Store index. 
• The U.S. economy is currently stronger than most European economies.  It has added jobs for 13 straight months and new jobless claims have been declining since the spring until this past week.  The U.S. stock market is up slightly this year whereas stocks in the German DAX are down 15%, the Brazilian Bovespa is down 17%, and the Chinese Shanghai Comp. is down 21%.
• The Federal Reserve Bank is helping to bailout European banks.  They are using temporary U.S. dollar liquidity swap arrangements with the ECB.  The interest rate is 50 bp over the overnight index swap rate.  The ECB guarantees to return the dollars at an exchange rate fixed at the time of the original swap is made.  It then lends the dollars to European banks of its choosing.  As of Dec. 21 the total swaps are $62 billion.
• General Electric Co.’s finance arm agreed to buy the U.S. retail-deposit business of insurer MetLife Inc., in a deal that matches the life insurer’s desire to get out from under federal regulation with GE’s pursuit of a more-reliable funding source.
• The U.S. Treasuries ended the year at near an all-time low as problems in Europe caused funds to stream into the U.S.   At the beginning of the year the median of 70 economists surveyed by Bloomberg were predicting the U.S. ten-year bond would yield 3.75%, but instead it ended at 1.88%.   This suggests mortgage rates will remain very low throughout 2012.

NEGATIVE TRENDS

• As we move into 2012, the biggest obstacle to economic growth in the U.S. is the eurozone crisis and the biggest voice in solving that crisis is Germany—in particular Chancellor Angela Merkel.  American officials think there are three steps needed to pull us out of this problem—1) a trillion dollar rescue fund to help weak member countries; 2) more action by the ECB to help member states in distress; and 3) a fiscal union that gives European states legal power to limit deficits run up by other member states.  At present none of these three steps look likely because of opposition in Germany.
• The Case Shiller Housing Index for October fell 1.2% from September.  Of 20 cities, prices were down in all but Phoenix.   For 20 large cities, the index was down 3.4% from a year earlier.  Since the peak in July 2006, the index is now down 32.1%.  The steepest decline was in March 2011 when it was down 33.3% from the July 2006 peak.  Using the seasonally adjusted numbers, the index is now at an all-time low of 33.0% from its peak.  The October index is down 0.6% from September.  This suggests the index is now on a decline and with all the loans in foreclosure, it is sure to fall further before it reaches its nadir.  We are expecting about another six months before this nadir is reached.  The steepest decline was in Atlanta–5.0%.
• Oil prices have moved back to around $100/barrel after falling below $80 in early October.  On Dec. 27 Nymex oil was $101.32/barrel but receded to $99 on Dec. 29.  Earlier this week Iran threatened to close the Strait of Hormuz.
• The euro fell to an 11 month low–$1.29. 
• Italy’s ten-year bonds reached 7% on Dec. 27 which is considered unsustainable.  On Dec. 29 the yield on the Italian ten year bond was 7.03%.   Italy auctioned €7 billion of debt mostly short term to bring the total raised this week to almost €20 billion, underscoring how the European Central Bank is helping the world’s fourth-biggest borrower tap markets.  In the week before Christmas the ECB lent €489 billion in three-year money to European banks.  Yields for three-year debt went for 5.62% compared with 7.89% at the Nov. 29^th auction and were a hopeful sign.  Italy must borrow €400 billion in 2012.  Italy’s total debt is €1.9 trillion and is mostly long term.  At the auction on Dec. 29 Italy sold less debt than it had hoped and most was short term.  Similarly, at a recent auction Hungary sold less than half the bonds it wanted to.
• Bank stocks were the worst performing sector in 2011.  The S&P 500 Index fell 18%, the KBW Bank Index fell 24%, Bank of American fell 59%, AIG fell 52%, Goldman Sachs fell 46%, Citicorp fell 43%, and Chase fell 21%.  This indicates how weak the banking sector is and helps explain the slow economic recovery.

CONCLUSION

We think the Eurozone will experience a crisis in 2012 which will force it to downsize and adapt more serious fiscal measures in their union.  The U.S. will benefit from continued low interest rates as money flows here from Europe which will help our housing industry.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry.  For more details see www.accessmrc.com or phone 410-772-1161. 

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

We wish all our readers a very happy holiday weekend and a prosperous new year.

The best news for the week was further improvement in unemployment, consumer sentiment, housing starts, existing home sales, new home sales, and builder confidence.  Finally the housing market is showing clear signs of recovery.  The bad news was a recession and more financial weakness in Europe, further weakness at Bank of America, a reduced estimate for 3Q11 GDP, and a slowdown in U.S. population growth.

MORTGAGE MARKET SUMMARY

This week interest rates fell and application volume for refinances was strong.  MBA reported that refinance share rose to an annual high of 80.7% of total applications last week.  According to Freddie Mac, average interest on a 30-year fixed mortgage slipped to a record low for the third time in 2011. The benchmark rate declined to 3.91% this week from 3.94% the previous week; the company’s records date to the 1950s.

According to the Bureau of Economic Advisors, corporate profits in the U.S. have been increasing every quarter since first quarter 2009.  Increasing profits are required for job growth and job growth and improving consumer sentiment are required for the housing market to recover.  We are beginning to see some reduction in the number of people claiming unemployment insurance and an increase in consumer sentiment.  Unemployment insurance claims fell for the past two weeks and consumer sentiment as measured by the University of Michigan has improved for the past four months.  We are also seeing some signs of improvement in the housing market.  New single family housing starts rose and existing single family home sales increased in November according to NAR.  Thanks for HARP 2.0 refinance volume should be strong in first half 2012.  If our economy continues in the current trajectory, we are likely to see a good purchase money market as well this spring.

For the week there were 11 positive trends offset by 18 negative trends.  The DJIA rose from 11,866 to 12,294.

POSITIVE TRENDS

• Initial claims for unemployment fell to 364,000 for the week ending Dec. 17, down from 368,000 the prior week.  These are very low rates and suggest another decline in the next monthly unemployment rate.  Continuing claims for unemployment for the week ending Dec. 10 fell to 3,546,000, down from 3,625,000 the prior week.
• The University of Michigan consumer sentiment index for December rose to 69.9, up from 67.7 in November.  This was the fourth consecutive monthly increase but the index hasn’t returned yet to the peak achieved in January.
• The National Association of Home Builders announced that its home builder confidence index rose from 19 in November to 21 in December.  This was higher than expected.
• Housing starts in November jumped to 685,000, compared to 627,000 in October.  This is much higher than expected.  Housing permits similarly jumped from 644,000 in October to 681,000 in November.  Most of the increase is in multifamily as families shift from purchasing homes to renting apartments.  Single-family starts rose 2.3% from October and rose 25.3% for homes with two or more units.  Purchases of low priced homes are increasing and mortgage rates are at record lows.
• Existing home sales in November rose to 4.42 million up from 4.25 million in October.  The slight growth was lower than expected.  The initial estimate for October was 4.97 million so there was a big reduction in that first estimate.
• New home sales in November were at a 315,000 annual rate, up from 310,000 in October.

• The European Central Bank will lend euro-area banks a record amount for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.   The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans today, the most ever in a single operation and much more than economists’ median estimate. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate — currently 1% — over the period of the loans. They start Dec. 22.  This should provide liquidity during these trying times.
• Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets.   Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a statement on Dec. 20.

• House Speaker John Boehner agreed to extend a U.S. payroll-tax cut past its Dec. 31 expiration, backing down under pressure from Senate Republicans and President Barack Obama.  We don’t think this extension will have that much impact on the economy since it is so short term.
• Durable goods orders rose 3.8% in November, up from 0% in October.  Excluding transportation, durable goods only rose 0.3%, which is less than the 1.5% achieved in October.
• Personal income and personal spending rose 0.1% in November.  Personal income rose  0.4% in October but personal spending was 0.1%.  These increases were less than forecast.

NEGATIVE TRENDS

• European banks are at the nexus of Europe’s sovereign crisis. Huw van Steenis and the European financials team of Morgan Stanley forecast that European banks will seek to delever their balance sheets by €1.5-2.5 trillion over the coming 18 months, with a significant impact to banks earnings, numerous asset classes and global economic recovery.

• Last week, the cost of five year paper for Italy rose to a euro-era high of 6.47%, up from 6.29% the week earlier.  There are smaller signs of cash moving out of Italy than in Greece.  Much of the exodus is occurring along the northern border.  There is concern than these early signs of exodus could increase to a flood.
• During the week of Dec. 19, the Fed is expected to support a new global framework that requires giant financial institutions to hold extra capital.  This would affect mostly banks with more than $50 billion in assets.  The large banks believe this will reduce lending and hurt the economy.
• Fitch Ratings announced on Dec. 16 it has placed all investment grade rated curozone sovereigns and their debt with Negative Outlook onto Rating Watch Negative while Moody’s went beyond any soft move to downgrade by notches to AA3 the country of Belgium.
• France’s credit outlook was lowered by Fitch Ratings, which also put the grades of nations including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.
• The final estimate of GDP for 3Q11 was 1.8%, which is lower than the previous estimate of 2% and lower than expected by economists.
• Bank of America shares fell below $5 on December 19, the first time since 2009.  There are fears of negative impact from Europe. 
• Fannie Mae’s economist, Doug Duncan has a pessimistic forecast for 2012.  By the end of 2012, the unemployment rate will be 9.0%, GDP growth will be only 1.5% in 2012, and all of Europe except for Germany will be in recession.  He sees a 40% chance that the European recession will cause a double dip in the U.S.
• It is now the 20^th anniversary since the start of the euro currency in the Netherlands.  In 2009 80% of the public supported the idea and now a majority favor dropping the currency.  The rightest Freedom Party has been gaining seats in Parliament and favors dropping the euro and driving foreigners out of the Netherlands.
• Last week the SEC filed a lawsuit against the six top executives of Fannie Mae and Freddie Mac.  For the first time in a government report, the complaint has charged the two enterprises with playing a major role in creating the demand for low-quality mortgages before the 2008 financial crisis.  They charge them with hiding the size of their purchases from the market.  According to the SEC suit, in 2006 Fannie Mae adjusted its automated underwriting system to buy more lower FICO scores and higher LTV loans than previously permitted.  It was decisions like this that SEC says caused the bubble.

• Daniel Mudd, the former Fannie Mae CEO who is the subject of a new, massive SEC fraud suit, announced on Dec. 21 that he is taking a leave of absence from his current employer, Fortress Investment Group, New York.  The publicly traded FIG controls Nationstar Mortgage, Irving, Texas, a major subservicing contractor to the government-controlled Fannie. It also has been a buyer of Freddie Mac MSRs.  Until his leave of absence deal was struck, Mudd served as CEO and director of Fortress.
• U.S. mortgage bonds that lack government backing are trading at about the lowest prices in more than a year, even as riskier assets from high-yield company bonds to stocks rally, with investors bracing for sales of home-loan debt by European banks.   A group of prime jumbo-mortgage securities tracked by JPMorgan Chase & Co. as a benchmark fell to 93.3 cents on the dollar this month, the lowest level since August 2010. A set of subprime bonds tumbled to a two-year low of 28.1 cents.   Banks across Europe have pledged to cut more than 950 billion euros ($1.2 trillion) of assets during the next two years, after regulators made them increase core capital to 9 percent by June instead of in 2019, according to data compiled by Bloomberg. Combined with the greater difficulty of trading in the $1.1 trillion market of non-agency mortgage bonds and concern that the U.S. housing market has yet to bottom, the threat of the region’s banks unloading their holdings is helping to depress values.
• Bank of America Corp. spent most of the past decade building up a full suite of credit card operations, but now it is jettisoning what it can.  The bank dumped close to $1 billion in credit card assets in two separate deals announced on Dec. 21, as part of its effort to slim down and focus on its core business lines. The portfolios sold were part of B of A’s “agent-bank” business, which specializes in issuing credit cards on behalf of credit unions, smaller banks and other financial institutions.  Bank of America is shedding these assets as it tries to overcome an array of regulatory and financial problems, including widespread concerns about its capital levels, future profitability, and single-digit share price.  It is a major reversal for the company that, six years ago, paid $35 billion to buy credit card lender MBNA Corp.   Now B of A’s efforts to slim down its once-massive card operations are paying off for its smaller, healthier rivals.

• This week the California Attorney General filed suit again Fannie and Freddie seeking information on the vacant homes owned by the agencies in the state and details of what activities are occurring in those homes, such as drug dealing, prostitution, etc.  California is pressuring the two agencies to more actively write-down the balances on their loans.

• Bank of America will pay $335 million to settle allegations that its Countrywide financial Corp. unit discriminated against black and Hispanic borrowers, in the largest residential fair-lending settlement in history.
• Macroeconomic Advisers revised down its forecast for 2012 to 2.2% from 2.4%.  They assume “no extension of the payroll tax credits and an ugly event in the eurozone.”  An example of an ugly event would be the collapse of a large bank or asking Greece to leave the Eurozone.  Capital flight is intensifying from Greece since late 2009.  Greeks have pulled more than €60 billion of cash—about a quarter of total deposits—from their banks.  Between September and early November 2011, those outflows totaled nearly €14 billion, representing two of the worst months for deposit outflows.
• The Census Bureau reported that the U.S. population only grew by 2.2 million from July 2010 to July 2011 to reach a total of 311.6 million.  This was the slowest growth rate (0.71%) since the 1940s, reflecting lower immigration and a steep drop in the birthrate.  From 2000 to 2009, the population grew at an average annual rate of 0.94%.  For the period July 2009 to July 2010, it grew 2.4 million (0.78%).  This suggests slower demand for new housing.
• It is reported this week that Everbank is in negotiations to buy part of MetLife Mortgage.  MetLife has indicated it wants to exit the mortgage industry because it isn’t profitable enough.  A week ago the rumor was of PNC buying MetLife Mortgage.  The fact that neither one had yet happened suggests the market for mortgage firms is still very weak.

CONCLUSION

We expect yet another year of slow economic growth in the U.S.—probably around 2%, up from 1.7% this year–due to the European recession and weakness in housing.  But there should be no double dip in the U.S.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.

FOCUS ISSUE FOR THE WEEK

The positive news for the week was the decline in initial claims for unemployment to the lowest level since March 2009 and rising manufacturing in the Northeast.  This was balanced by falling industrial production, falling capacity utilization, a recession in Europe, and evidence that last week’s eurozone meeting didn’t attain its goals.  It is certain Greece will have to default and exit the union.  Yields on Italy’s ten year debt rose to over 7% which is unsustainable.  Much stronger action will be needed to save the eurozone.  European banks are shedding their holdings of sovereign debt of the weaker nations.  The root problem is unwillingness to cut funding or tighten eligibility for entitlements that are no longer affordable.

MORTGAGE MARKET SUMMARY

Our economy and the mortgage industry are experiencing dramatic structural changes.  We don’t know exactly what the market will look like in a few years but we do know that it will not look like it does today with refinance volume accounting for the majority of all applications.   According to the MBA 79.7% of applications were for refinances last week and 76% two weeks ago.  Currently inflation and interest rates are at record low levels and are likely to stay there for a couple more quarters.  Can the mortgage industry use this time to retool for the future?  This is tough to do when Washington is not providing clear guidance and radical changes are being proposed like Corker and Garret’s proposal to get rid of the GSEs altogether and have FHFA regulate private securitizations.

We do know that our population growth rate is more likely to stay flat or decline since immigration rates have declined and fewer American’s are getting married and many are putting off starting a family and moving back in with their parents after college instead.  We also know that the number of multiple generation households has increased.  Increasing student loan debt and slow growth in income are making it tougher for young people to live independently.  Low interest rates on CDs have reduced retires incomes.  Doesn’t it make sense for family members to find ways to help each other financially?  Should our loan offerings change to reflect these trends?  According to NAR, 15% of first time home buyers are receiving down payment help from their parents.  Can the industry find other ways to creatively help family members work together to meet their housing needs?

The volume of foreclosures will grow throughout 2012.  Many of these homes are bought for cash by investors and kept as rental properties because vacancy rates are so low across the U.S.  Can mortgage lenders find new and improved ways to finance these investors so they can buy more homes and reduce the amount of outstanding REO.  The sooner we find ways to sell off all the foreclosures the sooner housing prices will begin to stabilize in the U.S.

To view a video of the data discussed in the summary, click here:  http://www.authorstream.com/Presentation/cclifford-1282087-weekly-mortgage-market-summary-5/

For the week there were 11 positive trends and 17 negative trends.  The DJIA fell from 12,184 last week to 11,866 this week.

POSITIVE TRENDS

• Initial claims for unemployment fell to 366,000 for the week ending Dec. 10, down from 385,000 the prior week.  The four week moving average declined to 388,000 from 394,000 a week earlier.  Continuing claims fell to 3,603,000 for the week ending Dec. 3, up from 3,599,000 the prior week showing virtually no change.
• The EU meeting in Brussels on Dec 9-10 did make some marginal improvements in dealing with the European financial crisis which have initially have been approved by the financial markets.  The main features of the agreement are:  1) a slightly stronger fiscal union with automatic consequences when a euro country exceeds the 3% of GDP deficit limit; 2) each country must pass a constitutional amendment that pledges a balanced budget and includes automatic corrections of a deficit; 3) commits the countries to put €500 billion into a European Stability Mechanism bailout fund in 2012 instead of in 2013; 4) The ESM to require future bailout recipients to restructure it or otherwise put some of the burden on its private-sector creditors; 5) their countries would put €200 billion to the IMF’s general account which would give the fund more power to help with Europe.  It will take months for this accord to go into effect.  The U.K. announced it will not participate in these agreements.
• Yields on Treasuries hit almost an all-time low (0.352%) on Dec. 12 for three-year yields as investors showed their disappointment with the European Union summit.  This shows how the U.S. will benefit in part from the European financial problem.
• Relative yields on mortgage-backed securities that guide new loan rates fell to the lowest in five months as investors wager the Federal Reserve is on standby to expand its holdings if the U.S. economy or Europe’s sovereign debt crisis worsens.
• The Federal Reserve Board of Governors met on Dec. 13 and reiterated that short term interest rates are likely to stay near zero until mid-2013, at least.  Federal Reserve Chairman Ben S. Bernanke signaled he’s concerned Europe’s crisis will hobble a 2 1/2-year U.S. expansion that may need another boost from the central bank.
• The Empire Manufacturing index rose to 9.5 in December, up from 0.61 in November showing expansion in manufacturing in the northeast.
• The Treasury on Dec. 14 sold $13 billion worth of 30-year bonds, with investors accepting a record-low yield of 2.925% at the auction. Earlier in the week, the federal government unloaded nearly $21 billion in 10-year notes at a yield of 2.02%.

 

• A bank research firm, Trepp LLC, reports that the number of bank failures is reducing.  There have been 90 so far this year and there are 227 potential failures in the future at a rate of perhaps 100 per year.  Florida, Georgia and Illinois retain their status as the failure hubs on industry observers’ lists. But several failure watchers said mini-hubs could be places such as Minnesota, Missouri, North Carolina and Tennessee.
• The CPI for November was 0% up from 0.1% in October but still essentially showing that inflation is not a problem.  The core CPI did rise to 0.2% from 0.1% but still it small.

• The Philadelphia Fed index of manufacturing rose to 10.3% in December, up from 3.6% in November which is a similar increase picked up by the New York Fed and indicates growing strength in manufacturing in the northeast.
• American Banker, reports, “Perhaps the future for loan brokers isn’t so bleak after all. Wholesale lenders table funded almost $33 billion of loans in the third quarter, giving the channel a 9.2% market share, according to new figures compiled by National Mortgage News and the Quarterly Data Report. In the first and second quarters of this year brokers had market shares of 6.8% and 7.9%, respectively. The 6.8% figure marked an all-time low for the industry. Three years ago they had a 19% share.”

NEGATIVE TRENDS

• On Dec. 12 Greece was on the brink of default and yields on Italian and Spanish debt were near unsustainable trends showing lack of success at the Brussels meeting on Dec. 9.  Yields on Italian 10 year debt rose from 6.27% to 6.44% on Dec. 11.  On the same day three large Italian labor unions went on strike over the austerity measures.  Even if all the 26 European Union members get their countries to approve the fiscal controls by limiting budget deficits, without economic growth, the objectives will not be reached.  Harvard Professor Martin Feldstein believes Europe needs country-by-country fiscal reforms and Greece should default on its debt and leave the eurozone.  The recent meeting in Brussels was a failure and didn’t achieve increased European political integration nor improve the outlook for eurozone sovereign bonds.  Also, Germany refused to raise the size of Europe’s permanent bailout fund beyond €500 billion and there is continued speculation about ratings downgrades.  Former fed vice chairman Alan Blinder thinks the European problem is huge and won’t be easily solved because its foundation is too weak.  You can’t build a monetary union without a central government strong enough to impose cross-border discipline or finance large cross-country transfers.  That implies there will be a falling apart of the eurozone next year which will likely cause a worldwide recession.

• On Dec. 9 the yield on the German ten-year bund rose from 1.97% to 2.106%.  All eyes will be watching this yield and the yield on the sovereign debts of the weaker European countries.  As of Dec 12 Investors were fleeing assets denominated in the 17-nation currency as European Union leaders failed to end concern that Italy and Spain will succumb to a sovereign-debt crisis that forced Greece, Ireland and Portugal to seek bailouts.  Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.” The company said Dec. 12, without taking any action, that a European Union leaders’ summit last week did little to ease pressure on Europe’s sovereign bond ratings.  Standard & Poor’s put 15 of the 17 euro nations on “creditwatch negative” last week, pending the outcome of last week’s summit and the actions of central bankers.

• Five large banks (Ally, B of A, Citi, Chase, and Wells) are close to settling with federal and state officials over robo-signing without proper review and other foreclosure practices.  The cost would be $19 to $25 billion.
• On Dec. 12 Moody’s reiterated its intention to revisit its ratings for all EU sovereign borrowers in the first quarter of 2012.  They think the crisis is in a critical and volatile stage which policy makers will find increasingly hard to contain.
• Oil prices traded on Nymex surged from $98 to $100/barrel on Dec. 13 on news that Iran would be holding military exercises on the straits of Hormuz.  Over the past year oil reached a high of $114/barrel and a low of $76.
• On Dec 13, the Euro fell to $1.30/euro down from a high of $1.49 earlier this year.  This means the cost of our exports to Europe has risen and we will sell less to them.  Over the past year the euro peaked at $1.49 and troughed at $1.29.  Over the past five years, the euro troughed at $1.20.  A worsening of the European crisis may bring the euro down to $1.25 according to some analysts.  Barclays predicts $1.20 by the end of 2012.  It depends on how successful the resolution of the euro crisis is and how low the key lending rate of the ECB goes.  It is currently down to 1% which makes holding funds in euros less attractive to investors.  As of Dec. 13 the situation in Greece has worsened and large strikes occurred in Warsaw protesting the EU rescue plan and demanding that Poland not participate.  The Japanese Finance Minister said European leaders must do more to fix the region’s debt crisis before asking for money from the IMF.  On Dec 15, the Euro fell to $1.29.  Yields for ten year Italian bonds rose to over 7% on Dec. 15.

Retail sales rose only 0.2% in November, which is a smaller increase than during the prior two months and less than what was expected.  In October retail sales had risen 0.6% and in September they had risen 1.3%.  Even so, GDP is expected to be stronger in fourth quarter than in third quarter.

• The House voted 234-193 on Dec. 13 to extend payroll tax cuts and jobless benefits, paying in part for them by increasing guarantee fees collected by government-sponsored enterprises.  Representatives voted mostly along party lines, with most Republicans supporting the bill.  HR 3630 includes a provision to up guarantee fees charged by Fannie Mae and Freddie Mac “not less than an average increase of 10 basis points for each origination year or book year.”  The increase would offset about $35.7 billion in costs through 2021, according to a report Friday from the Congressional Budget Office.  The Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders objected to the inclusion of the G-fees, and said any redirection of revenue for reasons unrelated to housing is counterproductive.
• European industrial production declined 0.1 percent in October after a 2% drop the previous month.  An index of euro-area manufacturing and services activity due to be published tomorrow probably fell to 46.5 in December from 47 in November, according to a Bloomberg News survey of economists.  Martin van Vliet, an economist at ING Group in Amsterdam, said the euro-region economy is “slowly but surely slipping into a new recession.”
• The PPI rose 0.3% in November, up from -0.3% in October indicating rising inflation.  The core PPI rose 0.1% in November from 0% the prior month.
• Industrial production fell 0.2% in November, after rising 0.7% in October.  Capacity utilization declined to 77.8% in November down from 78.0% in October.  This indicates weakness in November.

Banking stock analyst Dick Bove predicts U.S. banks will cut 150,000 jobs in 2012 because of the need to cut costs.  He said, “The government is beating the banks with a baseball bat.”  Interest rates are at record lows, banks can’t price cards freely, and there are big requirements to increase capital.   The Obama administration is slamming the industry as hard as it can.  Regional banks are finding that profitable growth is nearly impossible in their traditional businesses. Consequently, many are taking the untraditional approach of diversifying in areas dominated by equally beleaguered rivals.  Both Huntington and Regions are moving into indirect auto lending.  Virtually all banks are expecting a decline in mortgage lending. The Federal Housing Finance Agency will play a key role in shrinking the backlog of homes now in foreclosure, since Fannie Mae and Freddie Mac own half of all distressed loans, Fitch says in a research note. The glut of real estate-owned property held by banks and the government has hit a “staggering” 2.2 million units, and disposing of them and expediting the foreclosure process over the next two years is crucial to economic recovery. Fitch expects the FHFA to devise a plan to sell REOs at a measured pace, including in bulk to investors who would rent them out until the housing market rebounds.

• IMF Director Lagarde said the world economic outlook “is quite gloomy” with pervasive downside risk, downward revisions, slower growth than expected, higher deficits than predicted and public finances in shaky condition. “And that is pretty much true the world over, Lagarde said, and the crisis is escalating.”  Harvard Economic Professor Niall Ferguson thinks the major risk in Europe is defaults and bank failures, not inflation which is the main worry of the ECB.
• The Economist magazine opines:  “Ultimately, the eurozone faces a similar choice. Its members could strike a grand bargain that deploys the ECB’s balance-sheet and some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency, but whether enough of them are prepared to pay the price. This summit suggests not.”
• Lending Processing Services reports there are 2.2 million homes in foreclosure plus 1.8 million that are 90+ days late.  It is this shadow inventory that will depress home prices next year.
• European banks have been selling their holdings of sovereign debt for all countries other than Germany which means the eurozone is coming apart.  This is especially true of debt of Greece, Italy, Spain, Portugal, and Ireland.  This means interest rates on this debt will continue to rise.

CONCLUSION

The hopes generated last week for resolving the eurozone crisis have largely evaporated this week.  Now we wait to see how the European nations handle their crisis and how serious the damage will be.  We think the U.S. should be able to come through with minimal damage but it still means at best slow growth for the U.S.  With our economic recovery so slow, mortgage volume will be sub-$1 trillion.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.