David Olson

FOCUS ISSUE FOR THE WEEK: As of today the total U.S. national debt is $12.6 trillion according to the CBO. They estimate that the federal deficit in F2009 (which ends on Sept 30, 2010), will be $1.7 trillion, up from $1.4 trillion last fiscal year. This annual deficit is projected to decline to $1.1 trillion next year but will likely exceed $1 trillion each year over the current decade. Annual cost of interest on this debt is projected at $383 billion in the current year and is projected to rise as the national debt rises and interest costs rise. The passage of the Health Care bill this week will likely increase these figures despite the projections stated in the announcement of the bill’s passage. Social Security and Medicare comprise 42% of our current budget and are projected to grow rapidly. According to Isabel Sawhill of Brookings, “In just two to three decades, they (Social Security and Medicare) will be absorbing all our current revenues. So it’s imperative to address the issue now.” Total debt held by the public in 2010 is $9.9 trillion according to Wikipedia. This amounts to 67% of GDP. Foreign owners of U.S. Treasury debt is $3.7 trillion. The largest two are China and Japan. The U.S. GDP is currently $14.5 trillion making the debt to GDP ratio 87%. Foreign-held debt to GDP is 26%. On March 25 Zhu Min of the People’s Bank of China said, “America itself is weak, because in a two- to four-year horizon, U.S. debt will climb to 110% of GDP and stay there for a while. . . High levels of debt throughout the developed world would keep growth low for several years.” These projected rising debt levels to GDP also imply rising interest rates and greater risk of default. Just this week the rate on some corporate debt was below the rate on some Treasuries of the same maturity.

WORLD TRENDS: European Central Bank President Jean-Claude Trichet’s campaign for governments to learn the lessons of the Greek fiscal crisis may provoke a transatlantic policy split that forces the euro back toward its lows of 2006. This week the euro fell to $1.34 from $1.37 last week and one hedge fund, Bluegold Capital is predicting a decline to $1.20. The Greek 10-year bond yields hit 6.5% this week vs. 3.06% for the comparable German bond. This spread reflects the financial crisis in Europe. The Europeans agreed to bailout Greece on March 25 and temporarily stemmed the downward tide. But the bailout merely offers to lend money to Greece at a higher rate (around 8%) than they are currently paying and can’t afford. The yield on the U.S. 10-year rose from 3.69% to 3.85% this week but the 30 YFR mortgage only rose to 4.99% from 4.96%. Bill Gross of PIMCO says “Investors should expect lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy.”

The DJIA rose 1.0% from 10,742 to 10,850. There were 9 positive trends vs. 9 negative trends.

Positive Trends

• Initial claims for unemployment fell to 442,000 for the week ending March 20 down from 456,000 the prior week. Continuing claims declined to 4,648,000 from 4,702,000.

• Orders for durable goods rose 0.5% in February after rising 3.9% in January.

• HSBC quietly opened 18 retail branches in the U.S. in 2009 and plans six more locations this year. The bank had $84 billion in U.S. deposits as of June 30, 2009. HSBC ranks 13th in deposits in the U.S. HSBC’s largest U.S. unit has 382 offices throughout New York state and an additional 102 branches in 11 other states and Washington, DC according to the FDIC.

• The Washington Post reported that the share of recent FHA loans that are seriously delinquent fell in February to the lowest point since last summer, reversing an alarming increase in the agency’s default rate.

• GM is projected to earn a profit in 2010. Sales are up 75% in 1Q10 from a year ago. The U.S. Treasury still owns 60% of the firm. GM must repay $5.7 billion it borrowed from the government.

• A survey of 620 U.S. firms conducted by Duke University in February reported that they expected capital spending to grow by 8.9% over the next year, up from 1.5% from the survey conducted last December.

• On March 26 the Obama Administration announced an expanded plan to increase the number of loan modifications to reduce the number of potential foreclosures. Total active trial or permanent mortgage loan modifications by the top four mortgage lenders (BofA, Chase, Wells, and Citi) total around 600k according to the Wall Street Journal. Most of these are for option ARM loans. There have been only 170k permanent modifications by all lenders. Based on the large number of mortgages in serious delinquency, there are about 4 to 4.5 million loans to go into foreclosure this year up from 2.8 million last year. More than half of mortgage loan modifications made in 1Q09 redefaulted three quarters later.

• GDP growth for 4Q09 was revised down to 5.6% in the U.S. which is still strong.

Negative Trends

• Seven banks with assets of over $3.3 billion were closed Friday, March 19, with the FDIC acting as receiver in all seven at a cost to its deposit insurance fund of about $1.3 billion. Buyers were found for 6 of the 7.

• The Federal Reserve Bank of Chicago’s national activity index, a composite of 85 economic indicators, fell to negative 0.64 in February from a negative 0.04 in January. Anything below zero indicates the economy’s pace is slower than usual. Most of the weakness was in the housing sector and low consumer spending.

• Existing home sales in February fell to a 5.02 million annual rate, down from 5.05 million in January. This was the third successive monthly decline. The number of homes on the market jumped 9.5 percent, pushing the time it would take to sell all properties at the current sales pace up to 8.6 months from 7.8 months at the end of January. Part of this decline probably reflects the heavy winter weather. Sales should increase due to the extension of the tax credit to July 1.

• New home sales fell to a 308,000 annual rate in February, down from 315,000 in January. This was an all-time low rate for the industry since numbers were first collected in 1963. New home sales peaked in 2005 at 1,283,000. The average annual rate over the past decade was 901,000 units.

• The FHFA home price index fell -0.6% in January, after declining -2.0% in December. This index only covers properties mortgaged by Fannie Mae, Freddie Mac, and the Federal Home Loan Banks and is therefore less volatile than the Case-Shiller index which covers all 1-to-4 family homes sold.

• The interest rate for the 10 year Treasury rose as high as 3.92% this week and then settled at 3.85%, up from 3.69% last week.

• According to Moody’s in 2009 office prices fell 33% in New York City. Apartment prices fell 38% in Florida. Over the past three months commercial-property prices moved up slightly but there is still a large over-supply and low volume of transactions.

• The yield on the 30 YFR mortgage based on the Freddie Mac survey rose to 4.99% from 4.96% last week.

• The Health Care Bill passed Congress and was signed into law on March 23 and the stock market rallied. The rewrite of the bill passed on March 25 again with only Democratic votes. The country is split on this issue and further squabbling over the details of this massive and expensive change is expected. Due to the bill AT&T took a $1 billion charge due to a loss of a subsidy for health care costs for retirees. Three other major firms followed suit. Towers Watson consulting firm estimates a loss of $14 billion in corporate profits this quarter as other firms follow suit.

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 18-20, 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.