David Olson

FOCUS ISSUE FOR THE WEEK: A political bombshell went off in Massachusetts on Tuesday night as an unknown Republican, Scott Brown, won the Senate seat held by Democrats since 1972.  Fifteen months ago Obama carried Massachusetts by 26 points and this week Brown won by 5 percentage points—a 31-point shift.  This followed recent losses of governorships to Republicans in New Jersey and Virginia (Chris Christie and Bob McDonnell, respectively) where Obama also had won by big margins.  And we shouldn’t forget the announcement by Senator Dodd of Connecticut that he won’t run again because he didn’t think he could get reelected.  What other Democrats will change their positions based on these elections?  This will shift positions on the health care reform bill, climate change, immigration, bailing out of banks, a new consumer protection agency, access by Muslim terrorists to the U.S. courts, raising taxes, deficit reduction, and action on reducing unemployment.  We think it means less increase in taxes and less government spending than before.

The DJIA fell 4.l% from 10,610 last week to 10,173.  There were ten positive trends offset by seven negative trends.

Positive Trends

• The number of foreclosed homes on the market dropped to 637,000 in November from 845,000 a year earlier reported Barclays Capital.  Banks are under heavy political pressure to carefully screen borrowers to see if they might qualify for loan modification before proceeding with foreclosures.  This has caused the number of foreclosures to decline more than expected earlier.

• The Home Builders expect single-family starts in 2010 to increase 38% from 444,000 in 2009 to 610,000 in 2010.  The MBA forecasts 609,000 starts in 2010.  Dave Berson of PMI predicts home prices will remain flat for the next three years until 2013 when they will resume their 4% growth/year.

• The American Securitization Forum, an industry group, estimates that a small amount of private-label mortgage securities will enter the market in 1Q10.  They will be backed by high-quality jumbo mortgages.  The first offering could total $500 million.  Back in 2005 there was issued $1.2 trillion in non-agency MBS declining to $50 billion in 2009.

• Building permits rose to 653,000 in December, up 10.9% from 589,000 in November.  This indicates housing starts will improve in January.

• The PPI rose only 0.2% in December down from 1.8% in November.  The core PPI was flat. This further indicates there is no inflation as shown by the CPI last week.

• Wells Fargo Bank’s CFO Howard Atkins said, “It is possible that consumer loan                                                                                                                                                                                                                                                                                                                                     losses in total have already peaked.”  But Atkins believes more likely that consumer loans losses will peak in the first half of 2010 and commercial loan losses peak in the second half of 2010.

• The leading indicators index run by the Conference Board rose 1.1% in December, up from 1% in November.  This was up higher than expected and indicates the economy is still growing.

• The Freddie Mac survey of rates charged for the 30 YFR mortgage was down to 4.99% this week from 5.06% the prior week.  It is now down three weeks in succession.  The yield on the ten year Treasury fell to 3.60% from 3.67% the prior week and 3.81% two weeks ago.  This is evidence of a weak economy.

• The Philadelphia Fed manufacturing index grew 15.2 in January vs. 22.5 in December but was still positive.  Any reading above 0 indicates growth.

• The supply of unsold single-family homes dropped to 3.8 months from 5.6 months a year ago in California.  Inventories there had peaked at 16.6 months in January 2008.  Along the coastal areas of California sellers are again getting multiple offers.  A similar lack of inventory was reported this week in Washington DC.

Negative Trends

• In 2006, FHA had 2% of the residential mortgage market.  By 4Q09, it had jumped to 25% according to Inside Mortgage Finance.  Based on recency data published by CoreLogic, FHA delinquency has been rising alarmingly each year from 2004 to 2008.  The worst ever will be 2009 originations.  In 2009, 87% of the FHA loans had down payments of less than 5%.  They permit down payments as low as 3.5%.  Loan-loss reserves held by FHA peaked at over 6% in 2006, but now is down to 0.5% of their $685 billion in loans they insure and still falling.  Congress requires the agency to maintain a 2% ratio.  On January 19, David Stevens, FHA chief, said:  “We should not play this large a role.  It’s not healthy for the mortgage-finance system, it’s not healthy for the economy, and it’s certainly not sustainable for the long term.”  Last month, HUD Secretary Shaun Donovan said FHA was “not properly managing or monitoring its risk.”  This suggests FHA will be tightening its underwriting shortly.  On January 20, FHA raised its insurance premium from 1.75% of the total loan amount to 2.25%.  Borrowers with credit scores below 580 will have to make a minimum down payment of 10 percent.   There was also a reduction in the amount of money sellers can kick in for closing costs.

• Citicorp posted a $7.6 billion loss in 4Q09 mainly due to repayment of the TARP payment from the federal government.  Its loss was higher than expected by analysts.  Not counting the government repayment, the loss was $1.4 billion.  For the year the loss was $1.6 billion.  Local consumer lending from CitiFinancial had a $2.3 billion loss.

• JP Morgan Chase reported a $3.3 billion profit in 4Q09.  This was higher than expected by analysts.  Profit for the year was $11.7 billion.  Retail banking at Chase had a $400 million loss in the quarter.  Defaults are still rising in its home equity loans and first mortgages.  They added $1.9b to consumer loan loss reserves.  Their ROE was 23%.  Consumer lending reported a loss of $1.4 billion.

• The housing market index of The National Association of Home Builders fell to 15 in January from 16 in December.  Any number under 50 shows that more builders say sales conditions are poor than that they are good.

• Housing starts in December fell 4% to a 557,000 annual rate down from 580,000 in November.

• Initial claims for unemployment rose to 482k for the week ending January 16, up from 446k the prior week and up now three weeks in a row.  The four week moving average for this measure also rose.  We don’t think this means a second dip in the economy but rather that recovery is very slow.  Continuing claims for unemployment were 4599k and continued to decline from the prior period.

• President Obama proposed that banks be prohibited from running proprietary trading operations or investing in hedge funds and private equity funds as a way to limit the risk of another financial crisis.  This caused the stock prices of large banks to decline on January 21.  The proposal has to be passed by Congress.

Future meetings run by Access Mortgage Research:

Our firm plans to conduct a survey of the mortgage brokerage industry early next year to determine their current market share.  Call us if you wish to participate.

17^th Benchmark Study Meeting for the Wholesale Channel – in Phoenix, April 2010.

17^th 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.