David Olson

FOCUS ISSUE FOR THE WEEK: Sometimes events abroad benefit us that we have little to do with. A case in point is the euro, which has fallen to a 9-month low against the U.S. dollar. As of February 12 it was $1.36/Euro, down 10% from a high of $1.52 last November 25. The cause is the weakness in five European economies, known as the PIIGS— Portugal, Italy, Ireland, Greece, and Spain. Overall economic growth in Europe is low. The combined growth in GDP of the euro zone was 0.1% in 4Q09 from 3Q09. Also, China tightened its credit which further hurt the euro. This has led to funds shifting to the U.S. and has helped keep interest rates low in the U.S. That should help strengthen our GDP growth.

The DJIA rose 1% from 10,012 last week to 10,099 this week but is still down 6% from its January 14 peak of 10,767. This week there were 6 positive trends offset by 7 negative trends.

Positive Trends

• According to the Wall Street Journal (February 9, 2010, page 1), as of February 9 the federal government has handed Fannie Mae and Freddie Mac a total of about $111 billion. But there is no limit on taxpayer money it is willing to deploy over the next three years. They have eliminated the previous limit of $200 billion per firm. The federal government sees the two GSEs as essential to healing the housing market by providing cheap mortgages. Together with FHA, they currently fund 90% of American mortgages. The GSEs are also seen as a convenient tool to clean up the housing mess. So the GSEs are seen as playing a key role in loan-modifications. They also are lending support to the apartment sector. Barney Frank is now saying the two GSEs should be abolished and replaced with an entirely new housing-finance system. As of year-end 2009 at Freddie Mac, 3.87% of single-family mortgage were 90+ days past due. At Fannie Mae the figure is 5.29%. The two GSEs are now officially social policy tools of the federal government which is what they de facto were in the past.
A contrary picture of the GSEs is given on the FHFA’s website in a letter dated February 2, 2010 by Edward DeMarco, the acting director: “The central goal of FHFA and the Enterprises is minimizing their credit losses from delinquent loans.” Also, “permitting the Enterprises to engage in new products is inconsistent with the goals of conservatorship. Therefore, I am instructing the Enterprises not to submit such requests under the rule.” This letter suggests that the GSEs do everything in their power to minimize their losses and reduce their role in supporting the housing market.

• Fannie Mae and Freddie Mac said they will ramp up their purchases of some $200 billion in delinquent home loans that the two government-controlled mortgage-finance companies have guaranteed. Those loans were packaged into mortgage-backed securities now held by pension funds, insurance companies and other investors. Fannie and Freddie are required to buy out nonperforming loans when they modify mortgages or when the loan has been delinquent for 24 months. But now they are planning to buy more loans that are 120 days or more past due. “There’s going to be more than $100 billion of cash sloshing around in the hands of MBS investors,” said Jim Vogel, an analyst at FTN Financial. Many of those investors will look to plow that money back into the mortgage market. This should provide investors with cash to buy Fannie and Freddie MBS’s that will no longer be bought by the Federal Reserve. But it will also encourage more buybacks by originators. LPS (Lender Processing Services of Jacksonville, FL) estimates there are 4.8 million loans that are in default and could now be sent back to originators.

• Initial claims for unemployment for the week ending February 5 were 440,000, down from 483,000 the prior week. This confirms the decline in the unemployment rate showing a strengthening of the economy.

• Retail sales rose 0.5% in January, up from a decline of -0.1% in December. This was stronger than expected.

• The average rate for the 30 YFR mortgage fell to 4.97% this week from 5.01% last week according to the Freddie Mac survey.

• There was a 10% decline in the euro over the past 2 ½ months (see focus issue above).

Negative Trends

• The Mortgage Bankers Association sold their headquarters in Washington, DC for half the price they paid for it in 2007. They paid $79 million for it back then and sold it in February for $41 million. They had a $75 million mortgage with a group of banks led by PNC. They are now planning to rent space. Membership is down from a peak of 3,000 to 2,400. MBA staff has been reduced from a peak of 150 to 107. They claim to be showing a profit currently. Obviously, their forecasting staff did not see the collapse coming in the real estate market. This decline in value is close to average for the decline in all commercial real estate.

• Professor Elizabeth Warren of the Congressional Oversight Panel and Harvard U. says the average value of commercial real estate across the U.S. has fallen 40% from the peak in 2007. From 2010 to 2014, some $1.4 trillion in commercial real-estate loans is coming due. But for nearly half of those loans, the borrower’s debt is more than the property value, the panel said. They will cause many community banks to fail. There are 2,988 community banks that are “real estate concentrated.” This comprises 37% of the total number of banks in the U.S. The problem is concentrated in areas where the economic boom was greatest, such as Atlanta, Phoenix, Las Vegas, and Florida.

• iEmergent, a financial services research firm based in Des Moines, predicts originations of $1.3 trillion in 2010 with half the volume being purchase money and half refinances. This is one of the lowest forecasts for the year. Other forecasts range from $1.3 to $1.7 trillion.

• The U.S. Treasury auctioned off 10 year securities at an average yield of 3.69% on February 10. This was somewhat higher than expected. The average yield for the ten year Treasury last week was 3.59%. By February 12, the 10 year bond was 3.69%.

• RealtyTrac reported 315,716 foreclosures in January, up 15% from January 2009 and the 11th consecutive month when foreclosures exceeded 300,000. However, filings fell 10% from December. Mortgage modifications through the HAMP program are failing. It is expected there will be more than 3 million foreclosures in 2010. The top ten states in the rate of foreclosures/household were: NV, AZ, CA, FL, UT, ID, MI, IL, OR, and GA. The top ten cities in rate of foreclosures were: Las Vegas, Phoenix, Modesto, Stockton, Riverside-San Bernardino, Merced, Vallejo- Fairfield and Bakersfield, Cape Coral-Fort Myers and Orlando-Kissimmee.

• The consumer sentiment index of the University of Michigan fell to 73.7 in February from 74.4 in January.

• The Federal Reserve announced it will stop buying MBS as the end of March and begin selling them out of its portfolio sometime this year. This is likely to send interest rates up. Wells just raised its rates on its long locks.