FOCUS ISSUE FOR THE WEEK: There is now widespread expectation that the one trillion dollar bailout of Greece won’t be sufficient and Greece and perhaps several other nations will have to separate from the European community. This lack of trust in the euro caused a flood of foreign funds to stream into the U.S. The ten year Treasury fell 33 bp over the week. Further declines are expected in the euro causing it to decline to $1.10 or so by year end.

MORTGAGE MARKET SUMMARY: Inflation is nonexistent, unemployment is rising, foreclosures are rising, Treasury yields are plummeting, and mortgage rates are falling. This indicates we are having a slow recovery and the Fed will not raise the Funds rate at all this year. We are already seeing an increase in refis as the rate falls to 4.5% or so on the 30 year FRM.

The DJIA fell 4.0% from 10,620 last week to 10,193. Over the past week there have been 11 positive trends and 7 negative trends.

Positive Trends

• GM earned a profit of $865m in 1Q10 helped by higher production and lower discounts. They are getting ready to do an IPO to pay off the federal government’s ownership in the firm.

• Global demand for long-term U.S. financial assets strengthened in March to a record as investors from China to the U.K. purchased the most Treasuries since November, a Treasury Department report said.

• The National Association of Home Builders/Wells Fargo confidence index rose to 22, exceeding the median forecast of economists surveyed by Bloomberg News and the highest level since August 2007, from 19 in April, data from the Washington-based group showed today. Readings lower than 50 mean more respondents said conditions were poor.

• The ten year Treasury yield fell to 3.20% on May 21, down from 3.53% the prior week. This was the lowest level since 5½ months ago. The lowest rate over the past year was 3.18% on October 1, 2009.

• The 30 year FRM fell to 4.84% from 4.93% the prior week. If it continues to fall to 4.5% there will be a big increase in refis and will reduce the number of foreclosures otherwise expected.

• Banks and thrifts earned a total of $18 billion in profit during 1Q10. This was the highest amount since 1Q08.

• The CPI was -0.1% in April, down from 0.1% in March. It was up 2.2% from a year ago. The core CPI was zero in April. The core was up 0.9% from a year ago. This is much lower than the 1.5% to 2.0% range of inflation the Fed prefers to see in the core CPI according to Nomura economist Pandl. This is a very low rate of inflation and suggests the Fed will not raise its Funds rate this year.

• The PPI was also -0.1% in April, down from 0.7% in March. The core PPI was 0.2%, up from 0.1% in March. The PPI was up 5.5% from a year ago. The core PPI was up 1.5% from a year ago. There is little inflation.

• The euro rose from $1.23 a week ago to $1.25 this week. On Tuesday the euro was down to $1.21. Given the serious debt problems in Europe, further declines are expected this year to $1.15 or lower. The global Euro Dow fell 5.7% during the week, which is greater than the DJIA.

• The Fed announced it will not sell its $1 trillion of MBS portfolio this year.

Negative Trends

• A consultant, Meredith Whitney, writing in the Wall Street Journal states that there will be a loss of one to two million jobs at state and local government over the next 12 months due to lack of revenue and need to balance their budgets. This alone will raise the level of unemployment and keep economic growth weak. The civilian labor force is currently 154 million so that means an increase in the unemployment rate of 0.6 to 1.3 percentage points from this source which will be netted out of decreases in the unemployment rate from improvements in the private economy.

• Funds are streaming out of stocks and high yield bonds into government bonds and will keep the rate for the 10 year Treasury low for the near future. It may fall as far as 3% which means the rate for 30 YFR mortgages will decline to 4.5% or even lower. The cause for this trend is turmoil in Europe.

• The FDIC currently lists 775 banks as “problem” institutions. This is 10% of the total operating banks in the U.S. This number is up from 702 at the end of 2009 and 252 at the end of 2008. So far this year the FDIC has shut down 72 banks. The FDIC announces its bank shutdowns on Friday and there have been 20 Fridays so far this year. This means there has been an average of 3.6 banks shut down per week. That suggests if all the troubled banks are shut down at the current rate, it will take another 4 years to complete the process.

• At the end of 1Q10, 4.63% of all mortgage loans were in foreclosure at the end of first quarter, down from 4.58% at the end of 2009 reported the MBA. An additional 9.4% of borrowers were overdue but not yet in foreclosure. That means 14.0% of mortgage loans were either in foreclosure or overdue. This is up from 12.0% a year ago. About 2.6 million households were 90 days or more overdue but still not in foreclosure. This is 4.91% of all mortgage loans. About 2 million households are expected to go through foreclosure or short sale this year. The five states with the highest rates of serious delinquency are NV, CA, AZ, FL, and MI.

• According to Jim Satterwhite of Infusion Technologies who specializes in default management, we will have another 30 months of high defaults causing the average home price to decline another 10%. This suggests the bottom of the price cycle will be in 2011. He also estimates that 25% of all foreclosures are “strategic defaults” where borrowers could pay but choose not to.

• Initial claims for unemployment rose to 471,000 for the week ending May 14, up from 446,000 the prior week. The four-week moving average rose to 454,000 up from 451,000 the prior week. This indicates a slow recovery.

• The Financial Reform bill passed the Senate 59 to 39 and now must be reconciled to the House bill. The president will likely sign the final bill within a month. The Senate bill forbids paying of YSPs and overages which would hurt mortgage brokers. Increased regulation of banks will reduce their profit margins.

Conclusion: Weakness in Europe is extending the period of refis within the U.S. The economy is recovering slowly.
Future meetings run by Access Mortgage Research:
18th Benchmark Study Meeting for the Retail and Consumer Direct Channel – September, 2010 in Milwaukee.
18th Benchmark Study Meeting for the Broker Channel – Fall 2010
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.