FOCUS ISSUE FOR THE WEEK: There was a strong rally in the ten-year Treasury last week that was reversed, in part, this week due to further problems over Greek debt, fraud charges against Goldman Sachs, and continued strength in the economy. With the economy showing continued signs of recovery, investors are likely to demand higher yields over the course of this year. The crisis in Greece reflects a world problem of excessive debt of all kinds. It is likely that this excessive demand for all kinds of debt will keep interest rates rising since there isn’t enough savings to meet this demand at current rates of interest. A mortgage rate of 5.7% (for the 30 YFR mortgage) is likely by year end. That means a continued gradual recovery in housing sales and reduction in mortgage volume due to a decline in refinances.

WORLD TRENDS:
For the first time in six years, China ran a small trade deficit in March and may run another one in April. This indicates that China is starting to power its growth with domestic consumption. China must be increasing its imports from abroad. China has held the yuan at about 6.83 per dollar since July 2008. It is hinting that they will let it appreciate 5% to 6.49 yuan per dollar. This should reduce their huge trade surpluses.

Greece may require $108 billion in financial assistance to avoid default said the Bundesbank President Weber. Greece formally requested $40 billion from Euro partners and $20 billion from the IMF. Greece’s debt is more than 110% of GDP and its deficit was 13% of last year’s GDP and is now projected to exceed 14%. These high ratios have caused their interest costs to rise. Greece sold the 13-week securities on April 19 to yield 3.65%, compared with 1.67% at a sale of similar debt on January 19, according to the Athens-based Public Debt Management Agency. Interest rates on Greek 10-year bonds rose to 9% this week and on two year bonds to 11%. Both were record rates since Greece joined the euro in 2000. There is a glut of government bonds in all major Western economies right now which could lead to a full-blown sovereign debt crisis said the IMF. Strikes and shutdowns occurred in Athens on April 23 to protest austerity measures within Greece. Stratfor believes Greece will inevitably default and further weaken the entire European banking system. The euro has fallen back down to $1.338 due to the continued problems in Greece.

The Bank of Canada signaled on April 20 that it may raise its base rate in June, joining India and Australia in raised rates. India has now raised its base rate ¼% twice over the past two months. Australia raised its base rates ¼% on April 7. The Canadian signal has strengthened the Canadian dollar so that it is now worth more than the U.S. dollar. These trends suggest the Fed may have to raise the Fed Funds rate by year end. The Canadian dollar has strengthened 30% relative to the U.S. over the past year.

The DJIA rose 1.7% from 11,019 last week to 11,204. For the week there were 11 positive trends offset by 9 negative trends.

Positive Trends

• Sales of previously owned homes in March rose 6.8% to a 5.35 million annual rate, more than anticipated, from a 5.01 million pace in February reported the National Association of Realtors. The number of previously-owned homes on the market increased 1.5% to 3.58 million. At the current sales pace, it would take 8 months to sell those houses compared with 8.5 months at the end of the prior month.

• Sales of new homes jumped to a 411,000 annual rate in March., up sharply from 324,000 in February. This is much higher than expected.

• Initial claims for unemployment were 456,000 this past week ending April 17, down from 480,000 the prior week. The four-week moving average for claims rose to 460,000, up from 458,000 the prior week. Continuing claims fell to 4,646,000, down from 4,686,000 the prior week. A gradual recovery is taking place in unemployment.

• According to data released by LSP Applied Analytics, the number of mortgages that were delinquent fell 8.6% in March after declining also in February. The biggest slide was in loans 30-59 days overdue.

• According to Equifax and Moody’s Economy.com, credit card delinquencies fell to 2.67% in March from 2.86% last December. Delinquencies also fell for auto and other consumer loans.

• The Conference Board’s leading economic indicators rose 1.4% in March from February. It is 11.7% above its year-earlier level.

• Land prices in the U.S. reached a trough in most markets in early 2009 and are now up 20% on average reported the Wall Street Journal. Prices in Phoenix and California’s Inland Empire are up more than 60% and in Orlando and L.A. are up around 35%. Demand is especially strong for finished lots close to major cities.

• Citicorp reported first-quarter net income of $4.43 billion following a loss of $7.58 billion in the fourth quarter and a profit of $1.59 billion in the first three months of 2009.

• Wells Fargo reported net income of $2.55 billion in 1Q10, down from $2.8 billion in 4Q09. This was a little higher than expected by analysts. Fee income grew 7% and lending margins widened compared with a year earlier. Charge-offs were $5.3 billion which is down from a year ago. Their stock reached a 52 week high on April 21.

• Several large U.S. banks have seen their stock prices approach around 15% of their all-time highs recently—Wells, Chase, US Bank, BB&T and PNC. In most cases the all-time high stock price occurred in mid-2007 before the market crash. Many other banks are still trading way below 50% of their all time stock price. This is a strong sign of the degree of recovery of the market. For U.S. stocks in general prices have recovered about 50-55% of the decline that began in October 2007 and continued until March 2009 and are still 22% below the October 2007 peak.

• It is likely that the Dodd bill on bank regulation will get passed by the Senate in two weeks and by Congress within a month. It will likely have four parts: 1) The Federal Reserve will oversee systemic risk of large banks. 2) There will be resolution authority to unwind banks using the bankruptcy code. 3) There will be regulation of derivatives trading. 4) A Consumer Protection Agency within the Federal Reserve will be created. It will be comprised of nine members from the current bank regulators. The provision to have a $50 billion resolution fund will probably not be included in the final bill due to Republican opposition.

Negative Trends

• Mark Zandi of Economy.com estimates that five million households aren’t making their mortgage payments. He estimates 1.9 million homes will be lost in foreclosures this year and 1.1 million next year. Last year 2 million were lost and in a normal year 600,000 are lost. He forecasts an unemployment rate of 10.2% at year end and 8.6% at the end of 2011. The interest rate on the 30 year mortgage will be 5.7% by year end.

• Foreclosure filings rose 16% in the first quarter from a year earlier and bank seizures reached a record, according to Irvine, California-based RealtyTrac Inc. A record 367,000 foreclosure filings were made in March. There are about 5.5 million additional properties in the foreclosure pipeline, according to Barclays Capital.

• SunTrust has posted losses in excess of $2 billion over the past five quarter (through 4Q09) and is expected to post another loss in 1Q10. Their stock has been trading at 52-week highs in anticipation of a buyout by Barclays or RBC. James Wells III is the new CEO of the bank.

• According to Fitch Ratings, there are $536 billion of commercial mortgage backed securities outstanding of which 7% are now 60 days or longer past due. By year end they expect the delinquency rate to rise to 11% or more. Much of this collateral represents resorts because travel spending is down.

• Sovereign debt as a share of GDP for the G-7 nations is projected to reach 112.5% by year end according to the IMF. This is the highest level since the end of WWII.

• The PPI rose 0.7% in March, up from -0.6% in February. This was higher than expected but is still not horrible. The core rate remained unchanged at 0.1%.

• Durable goods orders fell 1.3% in March vs. a 1.1% increase in February.

• In early summer FHA plans to reduce the maximum amount a seller can contribute to the buyer’s closing costs to 3% from 6%. This is expected to reduce the number of prospective buyers by 15%.

• The yield for the 10-year Treasury rose from 3.76% last week to 3.81%. Interest on the 30-year FRM remained unchanged at 5.07% according to the Freddie Mac survey.

Future meetings run by Access Mortgage Research:
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.