David Olson

FOCUS ISSUE FOR THE WEEK: Is it possible for the federal government to stem the tide of 3 to 4.5 million foreclosures in 2010? Through a series of programs, the latest being HARP and HAMP, the government has tried but so far probably not enough. The top forecasters see foreclosures continuing to rise and foreclosure sales continuing to exceed sales of new homes. This means home prices will likely fall about 5% this year before resuming their upward climb.

The DJIA was up 0.5% from 10,566 last week to reach 10,624. There were 11 positive trends offset by 14 negative trends.

Positive Trends

• There were 2.7 million job openings on the last business day of January, up from 2.5 million in December, reported the Labor Department. The job openings rate to total number employed was 2.1%, up from 1.9% a month earlier and the highest reading since February 2009.

• Initial claims for unemployment fell to 462,000 for the week ending March 6, down from 468,000 the prior week.

• The 30-YFR mortgage rate fell to 4.95% this week according to the Freddie Mac survey down from 4.97% last week and 5.05% two weeks ago even though the 10- year Treasury has risen steadily over this period. It is rare that these two indicators move in an opposite direction narrowing their spread by 27 bp. This is due to tightening of spreads of all types of debt over Treasuries due to the big shift of investors from stocks to bonds causing a supply shortage. But on March 12 mortgage rates rose due to the increase in 10-year Treasury rates and strong retail sales.

• U.S. corporations issued $195.2 billion of debt in 2010 through March 10, up from $166.8 billion during the same period in 2009. Risk premiums are falling for corporate bonds.

• Under an Obama administration program to begin around April 1, many borrowers who get reduced payments of their first-lien mortgage through the HAMP automatically would get a break on their second-lien mortgage. BofA has joined this program and other lenders are expected to join soon.

• In April, the administration is about to launch incentives to boost alternatives to foreclosure for people who don’t qualify for a loan modification. They include short sales and deeds in lieu of foreclosure, in which the borrower voluntarily gives up the title and often gets funds to help with moving expenses.

• Bloomberg reported that spreads on Fannie Mae 30-YFR mortgage bonds fell to 63 bp over 10-year Treasuries on March 9, the narrowest in history. This will keep rates on the 30-YFR low even as rates on the 10-year Treasury rise. The 10-year Treasury was 3.68% on March 9 and the Fannie Mae bonds were 4.31%.

• The futures markets anticipate the Fed will raise its target for the fed funds rate to 0.5% from near zero by November or December 2010. On March 16 the Fed is likely to decide to end their purchases of $1.25 trillion of mortgage-backed securities by the end of March.

• The U.S. trade deficit fell to $37.3 billion in January, down from $39.9 billion in December.

• Retail sales rose 0.3% in February, up from 0.1% in January and higher than expected by analysts. Excluding autos, retail sales rose 0.8% in February up from 0.5% in January.

• The jumbo market is beginning to thaw. On March 12 Wells was pricing jumbos at 5.5% which is much closer to conforming rates than earlier.

Negative Trends

• The U.S. foreclosure rate fell 2% in February to 308,524 reported RealtyTrac. This may reflect 10% fewer days (28) in February than in January (31). February was the 12th month in secession that the foreclosure rate exceeded 300,000. The Treasury reported there were 830,000 trial modifications to date through January and 116,000 have resulted in permanent modifications. Lenders took back 78,683 properties in February up 6% from a year earlier. In the present market more supply is coming from foreclosures than from the construction of new homes. The high rate of foreclosures is expected to continue for at least another year. RealtyTrac predicts 4.5 million foreclosures in 2010, up from 2.8 million in 2009. There are about 4.5 million mortgages in serious delinquency.

• Four major housing analysts are predicting home prices to decline 5% or more this year due to rising foreclosures. They include Dave Berson of PMI, Mark Zandi of Economy.com, Mort Zuckerman, Editor-in-chief of U.S. News and largest commercial landlord in the U.S., and Bob Shiller of S&P/Case-Shiller.

• According to Barclays Capital, in 2009 U.S. banks were forced to buy back $20 billion of mortgage loans with faulty underwriting. We believe Barclays has underestimated the overall problem by a third. About half of the total was written off because the loans were delinquent. These buybacks are about three times greater than in 2008. Most of the buybacks were from Fannie Mae and Freddie Mac.

• Mortgage repurchases skyrocketed in 4Q09 with the top three banks accounting for over 80% of the repurchases. BofA, Chase, and Citi were hit the hardest. Total repurchases in 2009 was $33.1 billion according to our analysis of bank call reports. Rates of delinquency are still rising so repurchases are likely to rise further this year.

• The 10-year Treasury rose to 3.70% this week, up from 3.68% the prior week and 3.58% two weeks ago. The MBA forecasts it rising further to 3.8% by the end of March three weeks from now.

• According to EPFR Global, investors around the globe have pulled $15.3 billion out of U.S. stock funds in 2010, and put $20 billion into U.S. bond funds and $2 billion into emerging-market stocks. This trend will keep bond yields and U.S. stock prices down. The S&P500 average P/E is 18.2 based on last year’s profits and 14.6 based on 2010 estimated earnings. The average P/E of the coming year’s earnings has been 16.6 over the past 55 years. That would suggest a 14% increase in stocks by the end of this year but not when investors are pulling their money out of their portfolios and their cash positions are very low. Cash in mutual funds is 3.6% of assets, the second lowest on record.

• Initial public offerings are almost nonexistent today. Private equity fund-raising was down 68% in 2009 to $96 billion. Venture capital barely raised $13 billion, according to Andy Kessler, a former hedge fund manager.

• This week the Treasury auctioned $21 billion of existing 10-year notes at 3.72%. The auction had the highest bid-to-cover ratio ever. The yields were lower than expected according to Cantor Fitzgerald but were up from 3.68% last week. There had been concern that yields might soar to 3.8%.

• The euro is expected to remain between $1.35 and $1.37 according to market analysts. On March 11 Greece was paralyzed by a general strike concerning protests against the austerity measures pursued by their government. As of March 12 the euro was worth $1.377 up from $1.363 last week.

• Congressman Barney Frank wrote letters to the top four banks in the mortgage field (BofA, Citi, Wells, Chase) demanding “immediate steps to write down second mortgages.” Presence of these mortgages is hurting federal efforts to help borrowers who are underwater with their first liens.

• The NFIB small business optimism index fell to 88 in February down from 89.3 in January but still above the recession low of 81 in March 2009. It has basically been going sideways since April 2009.

• The two top officers of Metlife Home Loans have resigned. On March 9, Metlife announced that Pete Makowiecki, CEO, and Jeff Brown, CFO, had left the firm. Both men were employed two years ago at First Horizon Mortgage when it was sold to Metlife. According to National Mortgage News, Metlife Home Loan was the 11th largest residential mortgage originator in 3Q09.

• The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of expectations for gains in consumer prices known as the breakeven rate, widened to 2.26 percentage points today, from 2.18 points a week ago. The average over the past five years is 2.16 percentage points.

• Consumer sentiment measured by the U. of Michigan survey fell unexpectedly to 72.5 in March, down from 73.6 in February.

Biggest strengths: labor productivity and affordability of homes are way up, new home inventories and mortgage interest rates are down, rising dollar vs. euro, home prices have risen for the past seven months, the ISM index has risen for the past seven months, factory orders are up, durable goods orders are up, mortgage spreads over Treasuries have greatly tightened, and the rate on the 30-YFR mortgage has dropped..

Biggest weaknesses: high unemployment, low consumer confidence, high delinquency and foreclosures, very tight underwriting, no liquidity for jumbo mortgages, increasing bank failures, rising losses on commercial real estate loans, further exodus of mortgage firms, declining new and existing home sales, rising federal deficit, end of Fed support for the MBS market, higher buy back requests by banks from the GSEs, 10-year Treasury rates are rising, more documentation is being required by the GSEs, and further regulation is coming with the Consumer Financial Protection Agency.

Forecast: slow, rocky growth forcing more government support for housing and the economy. GDP will probably grow at a 3% rate during the year with a 5% decline in housing prices in midyear.

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 19, 2010 in Milwaukee.
Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. We do customized reports from databases of mortgage lenders. For more details see www.accessmrc.com or phone 410-772-1161.