FOCUS ISSUE FOR THE WEEK: The biggest story of the week continued to be the unwinding of Europe. Ex-Fed Chairman Volcker predicted the disintegration of Europe. The probability of one or more nations leaving the European Union increased and investor confidence in European debt and equities fell further. This was a net positive trend for the U.S. as interest rates fell even though our economy showed more elements of strength which otherwise would have been considered inflationary. One negative for the U.S. was a decline in exports to Europe as our export prices rose with the decline in the euro. A second negative is if the unwinding gets too big it could potentially thrust the entire world back into a recession.

MORTGAGE MARKET SUMMARY: The current top priorities of the mortgage industry are: 1) figuring out how to comply with the avalanche of new regulations that to a large degree have inconsistent and nonexistent guidance from regulators; 2) dealing with high foreclosures, government mandated modifications of mortgages, and the uncertainty of the impact of sweeping changes coming with the financial industry bill currently being debated in Congress; and 3) making good loans in an economically sluggish economy and a period of excess deposits. With rates dropping and the economy strengthening there was more reason to raise our origination forecast for the year to $1.3 trillion or even higher.

The DJIA rose 2.3% from 10,380 to 10,620 this past week. During the week there were 13 positive trends offset by 6 negative trends.

Positive Trends

• The rate on the 10 year Treasury was volatile this past week rising up to 3.53%, up from 3.43% last week. But it ended on May 14 at 3.42%. This was the lowest rate since last December.

• On the Freddie Mac survey for the week, the average rate for the 30 YFR mortgage was 4.93%, down from 5.00% last week. It was the lowest rate in the past three months.

• Initial claims for unemployment fell to 444,000 for the week ending May 8, down from 448,000 the prior week. This is another sign of a strengthening economy.

• Retail sales rose 0.4% in April, which is not quite as strong as the 2.1% growth in March but is still up.

• Capacity utilization rose in April to 73.7%, up from 73.1% in March.

• Industrial production rose 0.8% in April, up from 0.2% in March.

• The U. of Michigan survey of consumer sentiment rose to 73.3 in May, up from 72.2 in April.

• The European Union agreed to bail out Greece and world-wide financial markets for a total of nearly $1 trillion. This settled world stock markets which had been falling on May 6 and May 7. Many observers think this huge amount will still not solve Greece’s problem which stems from excess welfare payments financed by debt. But it will at least stem the spread of a general market decline. The huge bailout is likely to keep the euro down relative to the dollar and mean slower economic growth in Europe which means lower U.S. exports to Europe. This will mean slower growth in the U.S. and less risk of inflation. The rescue sent the 10 year Treasury up from 3.43% to 3.54% which is still relatively low. The stock market soared on May 10. It is now likely the European Central Bank will maintain its main policy interest rate at 1% through 2011, which puts no pressure on the Fed to raise its rate soon.

• There was more talk of a breakup of the Eurozone. This led to the decline of the euro to $1.23 on May 14. This negative trend in Europe should support our debt market and keep mortgage rates down. The UBS predicted the euro will slide to $1.15 by the end of December and $1.10 by the end of 2011.

• The NAR predicts home prices nationwide will rise 2.5% this year as the economy improves.

• Fannie Mae announced that in March 2010 only 5.47% of its loans were 90 days or more past due, down from 5.59% in February. This was the first decline in serious delinquency in the past three years.

• Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds tumbled 0.06 percentage point to 4.21 percent as of 2:02 p.m. in New York, after earlier reaching 4.19 percent, the lowest since December 8, according to data compiled by Bloomberg. It is not clear year whether this recent decline in rates has benefited volume. Last week saw no change at Chase but a big surge at Wells.

• GM announced that it is considering buying back GMAC/Ally Bank. At present the government owns 56% of GMAC and 61% of GM.

Negative Trends

• The percentage of all home mortgage defaults that are “walk aways” rose to 12% in February 2010 according to Morgan Stanley. This is up from zero in 2006, 2% in 2007, 8% in 2008 and 9% in 2009. A “walk away” is a borrower who could pay but chooses not to because his house is worth less than his mortgage. This data is based on periodic surveys of defaulting homeowners.

• Fannie Mae asked the U.S. government for an additional $8.4 billion in aid after posting an $11.5 billion net loss for 1Q10. This marked the 11th consecutive loss for the firm. Recent losses for Fannie Mae now total $145 billion. The three agencies—Fannie, Freddie, and FHA/VA currently account for 96.5% of mortgage originations in 1Q10 according to Inside Mortgage Finance. This leaves only 3.5% for jumbos, subprime, and Alt-A loans.

• Gold prices soared to a record $1,233/oz on May 14 as Europeans moved their assets out of the euro and into gold.

• Senate Democrats voted down the McCain amendment to the financial regulation bill that would have reformed the GSEs. The vote was on party lines except for two Democrats who voted for the amendment—Bayh and Feingold.

• The Senate passed an amendment (63 to 36) sponsored by Senator Merkley to the above mentioned bill that would prohibit YSPs and overages. This could greatly reduce mortgage originations in all channels but especially the wholesale channel.

• There is some fear that the disintegration of Europe might send the entire world economy back into recession, including the U.S. The European stocks were down sharply but not the U.S. stocks as yet, except for financials. This fear is part of the reason that bond yields are sinking.

CONCLUSION: The mortgage market strengthened during the week that was very volatile.

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.