David Olson

FOCUS ISSUE FOR THE WEEK: Even though Republican alternatives are not clear (other than tax cuts, federal spending cuts, and a lesser role for government), voter sentiment has been shifting away from the Democrats in all the recent polls. The decision by Democratic Senator Evan Bayh of Indiana to not seek reelection even though he is very popular in his conservative state suggests he will be replaced by a Republican, even though no strong Republican candidate has yet announced his candidacy. Also, Byron Dorgan of North Dakota announced he is dropping out and there are new candidates running for seats held by Democrats in Illinois and Delaware. The seats held by Michael Bennett of CO and Harry Reid of NV are also considered endangered. Democratic-held seats in eight states are currently in play—AR, CO, IL, NV, PA, IN, DE, and ND. This means it is very likely the Democratic majority in the Senate will decline from its current 59 seats to perhaps 55 seats or even fewer. Some forecasters see the Republicans retaking control in November. Since little gets done without a 60 seat majority, there is even less likelihood that any of the major Obama initiatives like Health Care, GSEs, or Consumer Protection Plan will get passed. Even the top priority jobs bill was killed. We are stuck in deadlock.

The DJIA rose 3% this week to 10,402 up from 10,099 last week. During the week there were 14 positive trends offset by 8 negative trends.

Positive Trends

• Housing starts rose 2.8% to 591,000 in January, up from 575,000 in the prior month. Starts of single-family homes rose 1.5% in January whereas multifamily starts rose 9.2% in the month. This was higher than expected. But building permits (which weakly forecast next month’s starts) fell from 653,000 in December to 621,000 in January. The fall in permits in January may reflect a rush to buy permits in December before the price rose in 2010. Housing starts are still at a very low level and face difficulties in working through rising foreclosures.

• The National Association of Home Builders reported their housing market index rose to 17 in February from 15 in January. This is a measure of builder confidence in selling single-family homes. A reading above 50 indicates more builders view sales conditions positively than see them negatively. It has been more than three years since this index was above 50.

• The CPI rose by only 0.2% in January, which was unchanged from its rate of increase in December. The core CPI actually fell -0.1% in January after rising 0.1% in December. Shelter costs, the largest component of the core index, fell 0.5%. This should assuage all fears of inflation reasserting itself soon.

• Industrial production rose 0.9% in January up from 0.7% in December.

• Capacity utilization rose from 71.9% in December to 72.6% in January.

• Abby Joseph Cohen of Goldman Sachs says the S&P 500 index is undervalued by 14%-18%. Corporate balances sheets are strong so we are likely to see increases in mergers and acquisitions. Employment will be slower to recover than will stock prices.

• The leading indicators rose 0.3% in January, up only slightly from the 1.2% increase in December. This was the 10th increase in a row.

• The rate for the 30 YFR mortgage fell to 4.93% for the week ending February 18, down from 4.97% the prior week according to the Freddie Mac survey.

• Manufacturing in the New York Federal Reserve Region rose unexpectedly in February much more than in January. Their general economic index rose to 24.9 in February up from 15.9 in January.

• The Federal Reserve unexpectedly raised the discount rate for borrowings from member banks to 0.75% from 0.50% on February 18. The more important fed funds rate remained as before at 0% to 0.25%. Historically the two rates have been one percentage point apart. Despite protestations that there was no change in the Fed’s policy, the markets jumped at the announcement—rates on Treasuries rose and the Euro declined further against the dollar. The futures market raised the odds of two increases in the fed funds rate this year to 50% from 28% before this move.

• The Mortgage Banker’s Association reported that mortgages 30 to 59 days delinquent fell to 3.63% in 4Q09, down from 3.79% in 3Q09 which probably reflect an improving economy. However, there were still 15% of all mortgages that were either delinquent or in foreclosure in 4Q09, up from 11% in 4Q08. The total number of households that are delinquent was 7.8 million.

• On February 15, Lenders One was acquired by distressed mortgage servicer Altisource Portfolio Solutions (ASPS). Lenders One is a consortium of 157 independent mortgage bankers that use their combined bargaining power to leverage agreements with preferred vendors and investors. They are officially known as Mortgage Partnership of America and were privately held by 16 partners, primarily Scott and Tim Stern in St. Louis, MO. Altisource paid a mixture of cash and stock. Lenders One claims to have originated $77 billion in mortgages in 2009, making it one of the largest mortgage lenders in the U.S. Altisource’s global headquarters are located in Luxembourg, and the company’s US offices are in Kennesaw, Ga., a suburb of Atlanta. ASPS trades on Nasdaq and has a market cap of $640 million. It has been listed on Nasdaq since August 2009. The merging of the two firms will give mortgage banking members an improved capital market and loan execution strategy. Besides servicing, Altisource provides appraisal and title services. Altisource CEO William Shepro will run the combined firm from Kennesaw, Ga. Altisource was formerly part of Ocwen. It separated from them in August 2009.

• Fannie Mae approved PMI as a direct issuer of mortgage guaranty insurance, and the MI unit also obtained a waiver to continue writing new mortgage insurance business, even if it falls below the capital requirements of the Arizona state regulator. According the press release, PMI also said it is currently in discussions with Freddie Mac regarding approval of PMI Mortgage Assurance Co (PMAC) to transact new mortgage insurance business. PMAC is a subsidiary of PMI Mortgage Insurance Co, PMI’s main mortgage insurance company.

• MGIC, ranked #1 among MI companies, and who posted its tenth straight quarterly loss last month also made news. Its president sent a letter which discussed utilizing MGIC Indemnity Corporation (“MIC”), a wholly owned subsidiary, to support new mortgage insurance business. “MIC” has been approved by Fannie Mae, Freddie Mac, and the Office of the Commissioner of Insurance for the State of Wisconsin (“OCI”) to concurrently write new business with MGIC beginning on April 1, 2010. “MIC will be the writing company for states with minimum regulatory capital requirements that do not grant MGIC a waiver to continue writing new business and MGIC will remain the writing company in all other states.” Same programs, same rates, same guidelines according to the president.

Negative Trends

• There are 7.7 million households delinquent on their mortgage payments at the end of 2009 according to the John Burns Real Estate Consulting Inc. study. Of these 5 million will go through foreclosure or related procedures over the next few years. Most of the efforts to modify loans only delay the loss of homes to foreclosure. Despite this looming foreclosure supply, home prices are likely to remain level over the next few years as long as mortgage rates don’t rise sharply and the economy doesn’t slip back into a recession.

• Mortgage delinquencies of 60 or more days rose for the 12th straight quarter, hitting a record high 6.89% in Q409, according to market research by credit bureau TransUnion. The rate of deceleration seen in previous quarters in the rise in delinquencies appears “short lived,” the credit bureau said. Year-over-year, the delinquency rate is up about 50% from 4.58% delinquent in Q408. TransUnion projects the 60-day delinquency rate will peak between 7.5% and 8% over the course of 2010.

• Initial claims for unemployment rose to 473,000 for the week ending Feb. 13, up from 442,000 for the week ending Feb 6. Continuing claims remained unchanged for the week ending Feb. 6 from the prior week.

• PPI rose to 1.4% for January, up from 0.4% in December. The core PPI rose to 0.3% up from 0% in December. This was higher than expected and suggests an increase in interest rate soon.

• The ten year Treasury rose to 3.77%, up from 3.69% last week. The gap in yields between 2- and 10-year Treasuries increased to a record 2.93 percentage points. The record steepness of the yield curve suggests expectation of inflation on the part of debt investors.

• The Obama administration is being very mum about the future of the GSEs. Also, its new Federal Housing Finance Agency doesn’t have a permanent director nor does the OTS or OCC. That means we have no leadership managing these key agencies and no clear sense of what Obama plans for them. With the growing deadlock in Congress, that means more floundering in Washington. The most likely direction is more of the same.

• The PMI Group reported losses of $228.2m – or $2.76 per share – in Q409 as mortgage defaults continue to put financial pressure on the company’s mortgage insurance business. PMI Group’s quarterly loss widened from the year-ago quarter, when the company posted $181m of losses, according to the earnings statement. Losses were driven by the mortgage insurance operations, which widened to a $242m loss in Q409 from $174.1m of losses in the year-ago quarter. Primary insurance reserves grew by $236.7m to $2.9bn in the quarter, due to higher claim rates and higher default inventories.

• According to the Conference of State Bank Supervisors which is managing the SAFE Act, of the 165,095 loan officers eligible to take the test and comply with the Act, by January 2010, 79,185 were still in compliance and are tracked by the NMLS (Nationwide Mortgage Licensing System). This means there was a 52% attrition over that period in the number of loan officers working at mortgage bankers and mortgage brokers. They are unable to distinguish between the two. In 2010 the remaining states come on line with an estimated 250,000 loan officers. Over approximately the same period the combined number of mortgage bankers and mortgage brokers tracked by the Bureau of Labor Statistics peaked at 506,700 in early 2006 and fell to 255,700 in November 2009 for a 49.5% decline. According to the Conference of State Bank supervisors, the number of mortgage companies fell from 35,600 in 2008 and 2009 to 12,627 in January 2010 for a 65% attrition. Data compiled by Ellie Mae and our firm suggest that most of the attrition has been with independent mortgage brokers. Many of them have shifted over to mortgage bankers. We believe the number of mortgage brokerages is down about 72% from the peak of 53,000 back in 2004. We also think there is double counting in the NMLS number of loan officer and mortgage companies.

Future meetings run by Access Mortgage Research:
17th Benchmark Study Meeting for the Wholesale Channel – in Washington, DC, April 12-13, 2010.
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.