FOCUS ISSUE FOR THE WEEK: It was very appropriate that we should see clear signs of economic resurrection during Easter week. After nearly three years of being in the tomb, the economy is now up. We had a very strong payroll report of 162,000 new jobs in the labor force. The ISM index is near an all time high rate over the past 16 years. Manufacturing is also strong around the globe. Auto sales are way up. Personal consumption and consumer confidence are up. The stock market continued its rise from its nadir a year ago at 7,000 and is over halfway back to its prior peak of 14,000 in Oct. 2007. Also, the dollar strengthened relatively to every major currency on Friday. This is a day for rejoicing!

WORLD TRENDS: Greece sold bonds again this week to fund its continuing deficit but they sold only 1/3rd the amount they were seeking. The yield on the 10 year notes was 335 bp higher than charges for German bonds of the same maturity. Over the past ten years the difference averaged 60 bp. Back in January the difference was 396 bp so there has been some improvement since the Europe Community and IMF offered to back the debt. The Greek prime minister said that Greece has little hope of getting its interest costs and debt pile under control if the yields remain elevated. Despite this weakness, the Euro rose to $1.349 from $1.34. The Greek stock market fell 14.1% in 1Q10. Moody’s downgraded five Greek banks due to the country’s weakening macroeconomic outlook. The cause of the crisis is the 2009 budget deficit which was nearly 13% of GDP, more than four times the EU limit. The U.S. budget deficit this year is expected to be 11.7% of GDP. This weakness in Europe means the dollar will not soon lose its position as the key currency. The dollar has been rallying since last December.

The DJIA rose 0.7% from 10,850 last Friday to 10,927. During the week there were 14 positive trends offset by 12 negative trends.

Positive Trends

• Nonfarm payrolls rose 162,000 in March after declining 14,000 in February from the payroll/establishment survey. Also, the numbers for January and February were revised upward by 40,000 jobs. Over the prior two years this number has been negative in all but one month—November 2009. But this wasn’t enough to erode the unemployment rate which remained unchanged at 9.7%. The average workweek expanded marginally from 33.9 hours to 34 hours. Average hourly earnings fell 0.1% after rising 0.2% in February. The total number of people employed rose by 264,000 from February on the household survey (Current Population Survey). At least half the increase in March payrolls was due to weather related shutdowns in February. Also, the increase includes 48,000 part time Census Bureau positions so the net increase was smaller but still positive. Since the civilian labor force continues to grow, it will take more than 75,000 new jobs per months to lower the rate of unemployment.

• The ISM index rose to 59.5 in March, up from 56.5 in February. This was the fastest pace for this index of manufacturing since July 2004.and indicates strong growth in employment in this sector. This index was a bit higher in 2004 peaking at 61.4 but since then has been lower. It is in the upper end of its historical range since 1948. There is a similar surge in manufacturing occurring in Europe, Germany, and China. Only Greece among advanced countries is still declining.

• Factory orders rose 0.6% in February, up from 2.7% in January. This was the tenth increase in 11 months.

• U.S. auto sales surged 24% in March from a year earlier reported Autodata Corp. Sales rose from 858k to 1,070k. This was only the third time since August 2008 that U.S. auto and light truck sales exceeded one million. The annualized pace was 11.8 million vehicles which was still far below the 16 million pace that exceeded before the downturn.

• Personal consumption rose 0.3% in February after rising 0.4% in January.

• Home prices measured by Case-Shiller rose 0.3% in January over December on a seasonally adjusted basis after rising a similar amount in December. This was the 8th consecutive monthly increase. It isn’t clear why three similar indexes, the NAR median, RadarLogic’s RPX and the FHFA “Purchase-Only” index, are still declining. I suspect none of them is seasonally adjusted. If prices are truly rising, why isn’t home sales volume increasing? New home sales reported an all-time low in February and existing homes sales were down three consecutive months in February. The tax incentive for new home buyers runs out at the end of April and Fed support for the MBS market ended March 31. Mortgage rates are expected to rise 25 bp over the next three months.

• Consumer Confidence measured by the Conference Board rose to 52.5 in March, up from 46.4 in February.

• Initial claims for unemployment were 439,000 for the week ending March 27, down from 445,000 the prior week. Continuing claims also declined.

• Citicorp sold 24% of Primerica for $252m in an IPO. The shares soared 31% on the first day of the sale. The financial supermarket is being dismantled and returned back to a bank. Recently Citicorp announced it planned to expand in the mortgage arena.

• Junk bond sales reached a record $38.9 billion in March, passing the previous high of $36 billion in November 2006, Bloomberg data show. This is a sign of thawing in the bond market.

• Redwood Trust is trying to reopen the market for private MBS. It soon plans to sell $200 million in jumbo MBS. At the peak of the housing boom in 2006, $2 trillion in private MBS were sold to investors and the market has been nearly dead since 3Q07.

• Freddie Mac approved plans to use PMI to secure mortgages. Last month it approved use of MGIC insurance. PMI stock soared 40% on the news. All the MIs benefited by this news.

• The Moody’s/REAL Commercial Property Price Index rose 1.0% during January to 114.73, the third consecutive monthly gain following a two-year slump. Commercial real-estate prices hit a low of 107.98 in October 2009, 43.7% below their October 2007 peak. Since then, Moody’s researchers report, properties have recovered 6.3% of their lost value.

• This week’s mortgage trends: spreads are widening, competition is reducing, MI (mortgage insurance) is loosening, lenders are relaxing their underwriting, warehouse lenders are easing, jumbos are slowly coming back, mortgage rates are creeping up, the share of refis is diminishing, and HUD is tightening requirements for mini-eagles.

Negative Trends

• The 10-year Treasury yield was 3.94% this week up from 3.85% at last week’s close. Most of the jump occurred on Good Friday after the payroll report.

• The 30 YFR mortgage yield rose to 5.08% from 4.99% on the Freddie Mac survey for the week ending April 1. This was a 13 week high. Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed 0.05 percentage point to 4.56 percent as of 11:45 a.m. in New York, the highest since December 28, according to data compiled by Bloomberg.

• Construction spending fell 1.3% in February after falling 1.4% in January. New home sales hit an all-time low in February and existing home sales fell the past three consecutive months.

• Personal income remained unchanged in February after rising 0.3% in January.

• Long term unemployment (defined as for over six months) is a bigger problem today than it was in last serious recession in 1981. Today, over 40% of unemployed Americans have been out of a job over six months compared to 26% in 1981 and 1982. Research indicates that the longer one is out of a job, the more difficult it is to get back into the job market.

• There were 580,000 Option ARMs outstanding at the end of 2009. About 150,000 will have their interest rates reset this year and another 150,000 are scheduled to reset in 2011. More than 75% of these loans are under water. About 180,000 are late on their mortgages.

• The Fed exited the MBS market on March 31. Some private lenders have entered the market to replace the Fed. The expectation is mortgage rates will rise about 25 bp with this exodus over the next several months.

• ADP reported that total employment nationwide fell 23,000 in March after declining 24,000 in February. Most economists were expecting an increase that averaged 40,000 workers. Construction employment fell by 46,000 workers by this report. It isn’t clear why the BLS numbers in the payroll and household surveys were positive while this figure is negative.

• Dan Fuss of Loomis Sayles forecasts the yield on 10-year Treasuries will rise from 3.86% currently to over 4% by year end and to 6.25% by year end 2012. That suggests mortgage rates will be 7.39% by then. The MBA forecast the 10 year Treasury at 4.9% by year end 2012.

• According to a broker website, “Think Big, Work Small”, loan originators at mortgage banks and mortgage brokerages in 8 states have not yet completed their NMLS test and certification—OR, OH, CA, PA, UT, NY, NJ, and MT. By June 1 all brokers must have this completed or they will lose their license to operate to comply with the SAFE Act. We heard that California loan officers with a DRE license have until year end.

• According to a survey by Deloitte, 73% of commercial property executives expect commercial rents to drop this year and 76% believe property values will also fall (despite the rise in prices reported by Moody’s above). According to the MBA, purchases of investor homes fell 16.1% in 2009 from 2008. Overall, commercial property is suffering more than is residential. As we reported in last week’s newsletter, commercial property values fell around 33%-38% last year in New York and Florida according to Moody’s.

• According to estimates by Scotsman Guide there were 20,000 mortgage brokerages still operating at the end of 2009. The NMLS had an estimate 26,000 where HUD reported 14,000 mortgage firms qualified to do FHA loans. Which number is correct? We believe the number of licensed mortgage bankers and brokers is around 20,000 but the number is declining. Many are not eligible to originate FHA. July 1, 2010 all mortgage bankers and brokers and their loan officers must be in compliance with the SAFE Act. By then we will have a better estimate of the number of firms, although even then we won’t know how much volume they are doing. We believe many firms are licensed but are doing little or no volume. This is derived from data compiled by the credit bureaus. Meanwhile, HUD is requiring these mortgage bankers to have a minimum net worth of $1 million and that will grow to $2.5 million within three years. At present only 369 firms meet that larger cut-off according to National Mortgage News. This suggests there will be a sharp reduction in the number of these firms and some will likely merge together to meet this higher standard.

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.