David Olson

FOCUS ISSUE FOR THE WEEK: The House-Senate Conference Committee approved the mammoth financial reform bill on June 24. It will be the largest financial reform since the 1930s. Banks and other related financial institutions will be much more limited in the loans they can do and there will be an increase in the capital they will have to hold. President Obama says the new law will provide 90% of what he requested. The main impact will be to slow the growth of credit in the U.S. and prevent a repeat of some of the abuses of the recent past.

MORTGAGE MARKET SUMMARY: The yield on the 30 Year FRM fell to low of 4.69% this week—the lowest rate since 1971. The Fed announced it would continue to keep rates low until 2011. Refis continued stronger than expected but lending standards continued to be tight. The housing recovery will be slow as sales of new and existing homes decline. There was a small improvement in unemployment and consumer confidence.

The DJIA fell to 10,143 from 10,450. For the week there were 9 positive trends offset by 14 negative trends.

Positive Trends

• The average rate on 30 Year FRM fell to 4.69% this week, down from 4.75% last week and the lowest rate since this survey began in 1971. Also, current coupon mortgage bonds backed by 30 year FRM fell to 3.85% on June 24. They are within 76 bp of ten year Treasuries, down from a high of 93 bp on May 24, after climbing from a record low of 59 bp on March 29.

• The yield on the ten year Treasury fell to 3.06% on June 24 as home sales for May were much weaker than expected but then returned to 3.11% by the end of the week. This is the lowest rate since April 2009. Back in December 2008 the ten year Treasury yield almost fell to 2%.

• The Federal Reserve retained a pledge to keep the benchmark interest rate at a record low for an “extended period” and signaled that European indebtedness may harm American growth. According to a survey of economists, the Fed won’t raise rates until the first quarter of next year. The Wall Street Journal survey of economists estimates rates won’t rise until March 2011. Since January, bank holdings of Treasury bonds have risen 3% while their commercial and industrial loan portfolios have fallen by 4% and real-estate loans have contracted by 2%.

• Prices of mortgage securities issued by Fannie Mae, Freddie Mac, and Ginnie Mae have risen to 15 year highs. They yield 1.5% more on an annual basis than comparable Treasury securities and have comparable safety. Bonds with a 4.5% coupon rose to 103.4. The 4% coupon rose to 100.8. The seven year Treasury yielded 2.54% on June 24 which is a comparable maturity to the GSE bonds.

• Initial jobless claims decreased by 19,000 to 457,000 this past week. So far this year, there has been an average of 463,000 claims a week. Last week the four-week average claims were 462,750. That means filings have leveled off rather than slowed so far this year.

• Durable goods orders fell -1.1% in May after rising 3.0% in April. However, excluding transportation (mostly airplanes), they rose 0.9% after falling -0.8% in April. This was the third increase in the past four months indicating manufacturing will help maintain the recovery.

• The U. of Michigan consumer confidence index rose to 76.0 in June, up from 75.5 in the preliminary June survey and 73.6 in May.

• The FHFA home price index rose 0.8% in April, up from 0.1% in March.

• China announced it will float the yuan and not keep a fixed relation to the U.S. dollar. This will help lower the U.S. trade deficit but it also caused the U.S. stock prices to fall. The current exchange rate is 6.8275 yuan per dollar. At the end of 2010 the average investment bank in the U.S. foresees the rate at 6.65 yean per dollar and in 12 months is projecting 6.5 yuan per dollar. That translates to a 5% appreciation of the yuan. That will make our exports more competitive with the Chinese. Manufacturing in China grew from $0.25 trillion in 2000 to $1.5 trillion in 2010 while U.S. manufacturing remained flat at $1.6 trillion per year.

Negative Trends

• Congress is getting close to passing the financial reform act—“Restoring American Financial Stability Act of 2010” (Dodd-Frank Act). Some negative provisions in the bill are: 1) requiring lenders to retain a 5% stake in loans that are bundled with other and loans sold in pieces to investors, but this isn’t required for conforming mortgages and FHA/VA. 2) loans would have to cap mortgage-origination fees at 3% of the loan. 3) banks will be required to hold more capital. 4) Lenders must prove that any refinancing provides a “net tangible benefit” to the borrower. 5) Lender-paid commissions based on the rate or type of loans (yield spread premiums) would be barred. Origination costs would have to be paid upfront or over the life of the loan by the borrowers. The House-Senate Conference Committee completed debate on June 24 and both houses will vote the bill next week. President Obama is expected to sign it into law on July 4. This is the biggest bank reform since the 1930s. Banks will be limited in their trading of derivatives and their investing in hedge funds. The biggest impact will be to further tighten credit and restrict bank earnings. Since the law is over 2,000 pages and is written in vague language, the full impact of this act won’t be known until the regulations are written over the next several years.

• Existing home sales fell in May to a 5.66 million annual rate, down from 5.79 million in April. This was much lower than expected and suggests demand was probably pulled into prior months before the June tax-credit deadline.

• New home sales fell to a 300,000 annual rate in May, down from 446,000 in April. This is the lowest sales rate in the history of this data set going back to 1963. There are 8.5 months of inventory for sale up from 5.8 months in April.
The median price for a new house was $200,900, the lowest level over the past year

• The number of mortgage applications filed to purchase houses dropped this month to the lowest level since 1997, according to data from the Mortgage Bankers Association.

• Foreclosures jumped to a record for the second consecutive month in May as lenders stepped up property seizures, according to RealtyTrac Inc., an Irvine, California-based data seller.

• The Standard & Poor’s Supercomposite Homebuilder Index, which includes Toll Brothers Inc. and Lennar Corp., dropped 27 percent through June 21 since reaching a 19-month high on May 3. The broader S&P 500 Index was down 8.6 percent from April 23’s 19-month peak.

• Lee Farkas, chairman of Taylor, Bean & Whitaker Mortgage Capital allegedly defrauded Colonial Bank by selling it more than $1.5 billion in fake or fraudulent mortgage loans. Farkas was indicted by a grand jury on June 15 in Virginia District Court and charged with 16 counts of fraud and conspiracy. Farkas initially encountered significant cash flow problems in 2002 and continued in business by committing various kinds of fraud. His firm filed false information to the SEC and Ginnie Mae. If found guilty of all counts Farkas could face a maximum prison term of more than 400 years. The investigation began when Colonial Bank sought $570 million TARP money from the Treasury Department. The total losses to the FDIC that stemmed from the fall of Colonial Bank could exceed $3 billion.

• Neil Barofsky, the special inspector general for TARP, said more TARP-related cases of a similar magnitude could still be forthcoming. Charles Antonucci was the second bank officer to be arrested for falsifying his TARP application. He was the former CEO of failed Park Avenue Bank.

• On June 17 the Justice Department announced the arrest of nearly 500 people in what it billed as a nationwide “takedown” of mortgage scams, many of them directed at homeowners in financial distress. They have identified losses of $2.3 billion stemming from hundreds of mortgage-fraud cases. The names of the mortgage originators accused of fraud have yet to be released. Many of the frauds involved government economic-stimulus programs.

• Mark Zandi, head of Economy.com (owned by Moody’s), predicts home foreclosures will total 1.9 million this year, down slightly from 2 million in 2009.

• The Internal Revenue Service blocked almost 10 percent of U.S. claims for the first-time homebuyer tax credit after receiving erroneous or fraudulent filings, according to a report on June 23. The claims in question included about $9.1 million from 1,295 prison inmates, $18.8 million from people who bought homes before the law took effect and $134 million from situations where more than one filer said they bought the same house, the report said.

• Fannie Mae said it would “lock out” borrowers from getting a new loan for seven years if they default on a mortgage they could afford to pay. CoreLogic estimates about 25% of mortgages currently outstanding are underwater. Morgan Stanley estimates around 12% of all mortgage defaults in February were strategic.

• GDP for 1Q10 was revised down to 2.7% from 3.0%. The GDP deflator for 1Q10 was raised to 1.1% from 1.0%.

• Over the past year tightened rules on consumer credit have been passed at both the state and federal level affecting credit cards, bank accounts, auto loans, payday loans, and mortgages. The impact will be reduced consumer spending.

Conclusion: Falling housing sales, downward revised GDP, and massive new federal banking regulations mean further sluggish growth in the economy despite historically low mortgage rates. We will see further declines in housing prices in much of the U.S. over the next half year.
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.