Access Mortgage Research & Consulting, Inc.
David Olson

FOCUS ISSUE FOR THE WEEK: Earnings for the nation’s largest banks were stronger than expected in third quarter. Earnings were positive at Wells, Chase, BB&T, PNC, Regions and US Bank. They were negative at BofA, Fifth Third, and SunTrust. Citicorp had a small profit but was negative to stockholders after it made a large dividend payment to the government. For this past week after 3Q earnings were reported, the stock prices of Wells, US Bank, SunTrust, PNC and Fifth Third rose. Stock prices fell at Chase, BofA, Citi, Regions and BB&T.
For the week there were 10 positive trends and 10 negative trends. The DJIA closed at 9,972 this week down slightly from 9,996 last week.

Positive Trends

• The Obama administration announced steps to revive HFAs (Housing Finance Agencies). The Treasury will purchase securities from Fannie Mae and Freddie Mac that are backed by HFAs. Before using the proceeds of new bonds, the HFAs will have to sell a portion of new debt to private investors in an effort to attract private capital to the market. Tax-exempt bond issuance by HFAs fell to $4 billion in 2009 from $10 billion in 2008 and $16 billion in 2007 according to the National Council of State Housing Agencies.

• The PPI was -0.6% in September from 1.7% in August. This is the seventh month in the past year that PPI was negative. Surprisingly, core PPI was -0.1% in September from 0.2% in August. Both oil and food prices declined. This shows no signs of inflation but rather deflation. It gives the Fed plenty of room to keep interest rates low.

• U.S. Bancorp is interested in buying several smaller banks but CEO Richard Davis is not considering a megadeal. Their most recent acquisitions were Downey and PFF Bancorp. With $263 billion in assets, they rank sixth among U.S. banks

• Regions president Dowd Ritter said “the economy appears to have bottomed and that bodes well for customers and for us.” They reported $1.7 billion in new nonperforming loans from $1.8 billion in second quarter. Regions net profit was $56.7 million for third quarter.

• Wells Fargo & Co. posted $3.2 billion in third-quarter net income Wednesday on strong community-banking profit even as its loan losses and nonperforming loans continued to rise. The bank expects losses from loans to peak next year. Credit-loss provisions were $6.11 billion, more than double the level from a year earlier and up 20% from the prior quarter. Net charge-offs rose to 2.5% of average loans from 1.96% and 2.11%, respectively. Nonperforming assets increased to 2.93% from 2.23% in the prior quarter. Wells Fargo, the third-largest U.S. bank by market capitalization, posted earnings of 56 cents a share, up from 49 cents a share, or $1.64 billion, a year earlier. Stock analysts were projecting earnings of 37 cents.

• Initial claims for unemployment rose slightly to a 531k annual level in the week ending October 17 from 520k the prior week, but continuing claims fell from 6,021k to 5,923k over the same period. The four-week moving average of initial claims fell also from 533,000 to 532,250 over this period. Employment conditions are recovering very slowly.

• The Federal Reserve’s beige book reported that business conditions in most of the Fed’s 12 districts showed economic stabilization or modest improvements across business sectors. The gains were from very low levels and the commercial real estate sector was “weak or deteriorating” across the nation.

• Leading Economic Indicators by the Conference Board rose 1% in September after rising a revised 0.4% in August.

• Housing starts in September were at a 590,000 annual rate, up slightly from 587,000 in August. The August figure was revised downward from 598,000 reported last month. Housing permits fell to 573,000 in September down from 580,000 in August. Housing starts have been essentially flat since June.

• Existing home sales were up 9.4% in September from August at a 5.57 million seasonally adjusted annual rate. This surge was driven by lower home prices and the prospects of the expiration of a federal tax credit. The spike in demand reduced housing inventories to a two-year low. The nation’s housing supply fell to 7.8 months from 9.3 months in August. The national average home price in September was $219,800 down from $222,400 in August and $235,000 a year ago. So the mean was down 6.5% from a year ago. It was down 1.2% from August and down 18% from 2006. The median price was down 8.5% from a year ago and 21.2% from 2006.

Negative Trends

• Defaults on commercial real estate loans totaled $110 billion, or 6 percent of all such loans, in the second quarter. That’s 11 times the level in the fourth quarter of 2006 when the guidelines were released. Defaults may rise to $170 billion by the fourth quarter of 2010, Foresight Analytics said. U.S. banks held $1.8 trillion in commercial real-estate loans as of the second quarter, representing 24 percent of outstanding bank loans, according to Foresight Analytics. Commercial real estate loans represent 39 percent of the $4.7 trillion in total real-estate loans.

• The National Association of Home Builders/Wells Fargo confidence index declined to 18 from a reading of 19 in September that was the highest in more than a year, the Washington-based association said today. Figures less than 50 mean most respondents view conditions as poor. The index fell because Congress has not yet extended the $8,000 first time home buyer tax deduction which expires at the end of November.

• The IRS is examining more than 100,000 suspicious claims for the first-time homebuyer tax break, which is another sign of potential trouble for the soon-to- expire-program. More than a million claims for the credit have been received so far, but housing industry experts estimate that the credit has helped generate about 350,000 home sales that wouldn’t otherwise have occurred. They argue most of the homebuyers would have bought a home anyway and just cause the national deficit to increase.

• BB&T third quarter profit fell to $152 million from $358 million a year ago. Credit-loss provisions soared 95% to $709 million from $364 million a year ago and rose from $701 million in second quarter. Nonperforming assets rose to 2.5% from 1.2% a year earlier and 2.2% in second quarter. One industry observer states that regional banks simply don’t have any firepower to withstand rapidly eroding commercial assets even if losses form consumer loans are stabilizing.

• SL Green Realty reports that rents for commercial space in mid-Manhattan are down more than 30% from their peaks and continue to decline. This suggests the pricing bubble is popping in commercial properties at least as much as in residential real estate.

• The average 30 YFR mortgage rate rose to 5% from 4.92% according to Freddie Mac. The average 10 year Treasury rose to 3.42% from 3.41% last week.

• The national apartment vacancy rate rose to 7.8% in 3Q09, the highest in 23 years according to Reis Inc., a New York research firm. Investors are buying foreclosed homes and renting them out which brings down apartment rentals.

• Mark Zandi of Economy.com believes mortgage rates will rise one percentage point next year after the government stops its support of the financial markets. The average national home prices will bottom out in the third quarter next year.

• Housing prices fell 0.3% in August according to FHFA compared to a 0.3% rise in July. These reflect prices of houses mortgaged by Fannie Mae and Freddie Mac.

• The number of banks that have failed so far this year rose to 103, the highest number of failures in any single year since 1992. Three Florida banks and one Georgia bank was closed this past week by the state and federal regulators. In addition one credit union was shut down.

Book Review
Against the Gods: the Remarkable Story of Risk by Peter Bernstein. Published by John Wiley in 1996, 337 pp. Bernstein was an economist and author who passed on in June 2009. This book is an historical overview of the evolution of the mathematics of risk written for the layman. It starts with the methods used by the ancient Greeks and ends with the development of esoteric derivatives made possible by the invention of giant computers. Most people who studied college statistics are already familiar with sampling, probability, and the normal distribution. Less familiar is the discovery of the Black-Scholes Model that led to the explosion of derivatives and the ability to offset risk in stocks, commodities, and debt. This led investors to increase their risk through use of the futures and options market (especially the Chicago Board Options Exchange) and contributed to formation and popping of the housing bubble that we the experiencing today. The first derivatives bubble to pop was Long Term Capital Management in 1999 back when derivatives totaled $27 trillion and were entirely unregulated. Due to opposition by Greenspan, Summers, and Rubin, derivatives are still unregulated but now have grown to $595 trillion. Obama is starting to talk about regulating them. Bank of England governor Mervyn King said recently the big banks should get broken up because of the “sheer creative imagination of the financial sector to think up new ways of taking risk” and then passing it on to the taxpayer because they are too big to fail.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Retail and Consumer Direct Channel – May 2010
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.