FOCUS ISSUE FOR THE WEEK: The biggest issue facing our nation this week is the Health Care bill. The historic House vote is scheduled for Sunday, March 21. The Congressional Budget Office estimates that the bill will reduce the federal budget deficit by $130 billion in the first decade and $1.2 trillion in the next. Since the bill adds 32 million uninsured people onto the insurance rolls many of whom are poor, unemployed, and have prior medical conditions and since the bill provides no new medical workers and cuts doctor’s payments by 21%, it must be inflationary or result in shortages or rationing. That implies higher taxes to offset the higher spending of $940 billion or serious rationing over the next ten years. Already this week, Obama raised taxes on investments 2.9% by applying the Medicare payroll tax to unearned income. This will soon be raised to 3.8%. The country is split over passage of the bill but 12% more voters think the bill is a bad idea than think it is a good idea according to a Wall Street Journal/NBC poll released this week. Passage of this bill is likely to mean higher taxes, higher deficits, and a slower economic recovery than otherwise. On March 18 for the first time during his presidency, Obama’s negative ratings exceeded his positive ratings on Gallup’s periodic polls of U.S. voters.

WORLD TRENDS: Several prominent economists, including Kenneth Rogoff of Harvard U., foresee a debt bubble bursting in China fairly soon. China’s real estate prices in 70 cities rose 10.7% in 2009 after a total of $1.4 trillion of property loans were originated there. The Shanghai stock market rose 80% in 2009. Their P/E is 52 vs. 19 at the NYSE. China is the largest foreign holder of U.S. government debt with $889 billion and until recently has been a big purchaser of our debt. Recently, they have been cutting back their purchases. China has been a net seller of Treasuries for the past three straight months, the longest such stretch since the end of 2007. Chinese officials have questioned the dollar’s role as a reserve currency and recently sought assurances about the safety of U.S. government debt as the budget deficit widens to a projected record $1.6 trillion this year. China will shortly replace Japan as the world’s second largest economy after the U.S.

Over the past week, the DJIA rose 1% from 10,624 to 10,742. There were 14 positive trends offset by 9 negative trends.

Positive Trends

• Industrial production rose 0.1% in February, up from 0.9% in January.

• Capacity utilization for February rose to 72.7% in February, up from 72.5% in January.

• Initial claims for unemployment were 457,000 for the week ending March 13, down from 462,000 the prior week. The four week moving average was 471,000, also down from the prior week but still a little higher than in February. Continuing claims for unemployment in the week ending March 6 were 4,579,000, up from 4,567,000 the prior week.

• The PPI (producer price index) fell -0.6% in February after rising 1.4% in January. The core index rose 0.1% in February, which is below the 0.3% increase in January. As expected there is no evidence of inflation. On a year-over-year basis in February the PPI was up 4.4% and the core PPI was up 1.0%.

• The CPI for February was 0%, down from 0.2% in January. The core CPI was 0.1%, up from -0.1% in January. No threat from inflation here. The CPI was up 2.1% from a year ago.

• The Conference Board’s Leading Economic Indicators increased for the 11th straight month – impressive, and consistent with the belief that the economy has bottomed out and is slowly strengthening.

• The rate on the 10-Year Treasury fell to 3.69% on March 19, down from 3.70% on March 12 probably from the decline in the PPI and CPI.

• On March 16, Federal Reserve officials retained their pledge to keep the Fed funds rate near zero for an “extended period” and confirmed that $1.25 trillion in purchases of mortgage-backed securities will end this month.

• CoreLogic’s index of fraud on home mortgages fell to 84 in February. It had peaked in 2007 at 112. This index is based on the index rate set at 100 in early 2005.

• The 12-member Standard & Poor’s Supercomposite Homebuilding Index hit a five- month high March 9 on speculation the expanding economy will boost sales. The index has gained 14 percent this year, led by a 41 percent jump in Columbus, Ohio-based M/I Homes Inc., a 31 percent increase by Standard Pacific Corp. in Irvine, California, and a 28 percent rise in Miami-based Lennar Corp.

• The median home price in Southern California rose 10% from February 2009 to February 2010 according to Dataquick. Over the past year the median price rose from $250,000 to $275,000. The lowest price was in April 2009 when the median price was $247,000. The peak price was $505,000 in 2007. Tax incentives drove much of the increase and they will be over by the end of April. Foreclosures accounted for 57% of all sales in February 2009 but fell to 42% a year later.

• According to the New York Post, GMAC has hired Goldman Sachs to start the process of selling Res Cap. Since GMAC is mostly owned by the government ($17 billion for 56%), and Res Cap losing billions of dollars, and Warren Buffett’s Berkshire Hathaway owns a sizeable chunk of ResCap’s debt, it will be interesting to see who buys it.

• MetLife Bank hired Brian Hale as their new national production president of MetLife Home Loans replacing Pete Makowiecki. The goal of MetLife is to make MetLife Home Loans a top five originator of mortgages.

• On March 19 Citicorp announced it wishes to expand in mortgage lending and plans to double the number of correspondent lenders to 600 it is willing to buy loans from. It has decided that mortgages are a core product of the bank.

Negative Trends

• Total lending by U.S. banks fell 7.4% in 2009, the steepest drop since 1942, according to the Wall Street Journal. Total credit pulled out by banks since September 2008 was about $700 billion, more than double the amount distributed by the Obama stimulus program.

• So far this year, the FDIC has shut down 30 U.S. banks at a rate of 12/month. That suggests they will shut down around 360 banks for the year. All closings are done on Fridays. We hear the FDIC is booked until the end of 2011 for prospective shutdowns and their staff is working at capacity. There are 702 banks on their troubled list. There are about 8,012 banks supervised by the FDIC. In addition, many independent mortgage banks are being shut down. There are 1,000 independent mortgage banks filing under HMDA. The website Implode-a-Meter lists 9 mortgage banks shut down over the past three months for an average rate of three per month. We don’t think this list is complete and only includes the larger institutions. In 4Q09 the GSEs required repurchases of $19.4 billion of mortgages from banks. This was up from $7.7 billion in 3Q09. Many of these repurchased loans were originated by correspondent lenders and therefore they have been asked to repurchase them. We estimate half of the $19.4 billion came through the correspondent channel. We believe the cost of these repurchases is so high that it will cause an increase in the number of commercial banks and mortgage banks to be shut down this year.

• Total U.S. household debt, including mortgages and credit-card balances, fell 1.7% in 2009 to $13.5 trillion, the Federal Reserve reported. This was the first annual drop since records began in 1945.

• Housing starts fell 5.9% to 575,000 in February, down from 611,000 in January. Housing permits also fell 1.6% to 612,000 in February from 622,000 in January. Housing starts and permits fell because housing inventories and unemployment are still high.

• There is a shadow housing inventory of 5 to 5.5 million homes in the late stages of delinquency or early stages of foreclosure. Some of these will be ameliorated by loan modification and foreclosure prevention efforts. Also, a rising number will be cleared by bank-approved short sales. That still leaves up to 4.5 million foreclosures likely to take place this year.

• Homebuilder confidence unexpectedly declined in March. The National Association of Home Builders /Wells Fargo index of builder confidence dropped to 15 this month from 17 in February. A reading below 50 means most respondents view conditions as poor.

• The U.S. and the U.K. have moved “substantially” closer to losing their AAA credit ratings as the cost of servicing their debt rose, according to Moody’s Investors Service.

• The Obama Administration’s top three financial authorities (Treasury Secretary Geithner, Budget Director Orszag, and Council of Economic Advisor Chairman Romer) reported that the level of unemployment is likely to remain unchanged at 9.7% for the remainder of the year.

• The 30 YFR mortgage rate measured by Freddie Mac rose to 4.96% this week, up from 4.95% last week.

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.