Access Mortgage Research & Consulting
David Olson

BIG PICTURE: Two banks with warehouse operations were taken over this week, Guaranty and Colonial. What is the future of warehouse lending? We see increased interest in serving higher net worth organizations and declining interest in serving the mortgage banker with less the $10 mm in net worth.

The takeover of Guaranty and Colonial is likely to make it even harder for smaller mortgage bankers to get access to capital. We suspect BB&T will tighten the underwriting guidelines of Colonial. This will greatly
reduce the number of mortgage banks in business. When you add this to the huge reduction in mortgage brokers, we have a big reduction in third party lending. There has been a massive shift to the retail channel. Tom Charles, one of the principals at a loan trading firm–Quadrant Advisors LLC, said there has been a growing interest on the part of smaller commercial banks
in buying and selling mortgages. They will replace much of the volume that came from the mortgage bank channel.

The DJIA on August 20 at close was 9350, little changed from the close of 9321 last week. But by Friday, August 21, the market was soaring on the positive news on existing home sales. We think the news for the week is strong. The strongest signs are the rise in the leading indicators, existing home sales, and home prices. Inflation and interest rates remain controlled and the outlook is for slow growth.

Positive Trends

• The Conference Board’s index of leading indicators rose 0.6% in July after rising 0.8% in June. This was the fourth consecutive rise in this index and suggests the recession is over even though the pace of recovery is slow.
• House prices continued to rise in June and July according to two data sources. Radar Logic shows that average house prices over 25 metropolitan statistical areas rose 3% in June over May. Prices rose in 23 of the 25 MSAs. Altos Research/RealIQ maintains a 10-city composite index which rose 1.2% in June (over May) and 0.9% in July. Most analysts have been relying on the Case-Shiller Index which is slower to publish its data. Its most recent data is for May and shows an increase for the first time. Therefore, the increases in these other sources are a leading indicator for the Case-Shiller Index which will publish its data for June next week.
• Housing starts in July fell slightly to 581,000 from 587,000 in June. All the decline was in multifamily starts since starts of single family homes continued to climb. Housing permits fell slightly from 570,000 in June to 560,000 in July. This suggests a slow recovery in housing. Since the inventory of new homes is now back to normal, there should be no further decline in single family housing starts.
• The PPI (producer price index) fell by 0.9% in July from 1.8% in June. The core PPI fell from 0.5% to -0.1%. This indicates the economy is still and there is no inflationary pressure.
• Despite the steepness of this economic downturn we do not think there will be a sharp recovery. Rather we see a 2% average annual rate of growth in GDP over the next four quarters. This slow growth forecast is now the consensus among most economists although a few see a double dip.
• The many signs indicating a slow recovery, suggest the 10 year Treasury will remain under 4% throughout the rest of the year. On August 20, it was 3.46%. A polling of the 17 primary dealers in Treasuries shows a median forecast of 3.6% by yearend. This means mortgage rates are likely to remain flat the rest of this year.
• In July the volume of private-label securitized mortgages that were liquidated through foreclosure was nearly as high as the amount that defaulted for the first time, according to Amherst Securities Group LP. The pace of first-time defaults in this sector has been falling since January. If the trend persists, liquidations could soon be outpacing new defaults.
• For the week ending August 20, the average 30 YFR mortgage was 5.12% vs.5.29% the prior week according to the Freddie Mac survey. On August 21 the yield on the 10 year Treasury was down to 3.43%. On August 12 it hit a high of 3.71%.
• Existing home sales rose to an annual rate of 5.24 million in July, up from 4.89 million in June. This was higher than expected. These sales are now up six months from a trough of 4.49m in January. The rate is up for four consecutive months for the first time in the past five years. They are also up from a year ago July when they were 4.99 million. Inventories are still at 9.4 months, unchanged from June. The national median existing-home price for all housing types was $178,400 in July, which is 15.1 percent lower than July 2008. Distressed properties continue to weigh down the median price because they typically sell for 15 to 20 percent less than traditional homes.

Negative Trends

• According to the MBA, the percentage of loans in the foreclosure process at the end of the second quarter was 4.30 percent, an increase of 45 basis points from the first quarter of 2009 and 155 basis points from one year ago. The combined percentage of loans in foreclosure and at least one payment past due was 13.16 percent on a non-seasonally adjusted basis, the highest ever recorded in the MBA delinquency survey. Delinquency and foreclosure rates are unlikely to improve until unemployment rates ease, MBA said, despite the administration’s mortgage workout initiatives.
• Retail sales at the same stores were down 4% in July from a year ago reported Johnson Redbook’s weekly index. This suggests a slow economic upturn.
• Initial claims for unemployment rose to 576,000 for the week ending August 15, up from 561,000 the prior week. For the past 7 weeks these claims have remained under 600,000.
• The peak week was March 28 at 674,000, which is 20 weeks ago. The four week moving average has been rising for more than the past five weeks. However, the four week moving average for continuing benefits has continued to trend down. It is unlikely we will return to the prior peak but the rate of unemployment is recovering at a very slow pace.
• BB&T bought Colonial Bank on August 15. It isn’t clear yet what the structure of the purchase is but BB&T stock rose on the announcement. BB&T marked down Colonial’s construction loans by 67% and all loans by 33%.
• BBVA (Banco Bilbao Vizcaya Argentaria of Spain) won the FDIC auction to buy Guaranty Financial of Austin, Texas. Guaranty is large in warehouse lines and it is uncertain if the new owner will continue this business. Guaranty with $15b in assets is about to fail. BBVA is the second largest bank in Spain.

Future meetings run by Access Mortgage Research:

September 10, Broker Channel Risk Management Conference Call
September 29-30, Retail and Consumer Direct Meeting in Milwaukee
October 11, Correspondent Counterparty Risk Meeting in San Diego
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmtgresearch.com or phone 410-772-1161.