David Olson

FOCUS ISSUE FOR THE WEEK: The Financial Reform Act was passed by the Senate 60 to 39 and will soon be signed into law by President Obama. This 2,300 page financial law will be the biggest piece of legislation affecting lending since the Great Depression and comes on the heals of many other smaller pieces of legislation such as the SAFE Act, changes in GFE, appraisal reform, etc. The biggest impact on the mortgage industry will be the changes in loan officer compensation. The law limits compensation to a flat fee based on the loan amount and requires holdbacks. It prohibits yield spread premiums (YSPs), prepayment penalties, differential pay by type of loan, and payment of differentials by interest rate. At the same time the Labor Department ruled that all loan officers must be paid overtime. Most lenders have no idea how to implement all these changes since no rules have yet been written explaining these new legal requirements. However, it is our belief that we will have at least 12 months before these provisions go into effect. Even without these new rules, the number of loan officers at mortgage brokerages and mortgage banks is down since last year according to a survey we are currently taking. One can only expect more reductions and higher unemployment from this latest act. That means a great reduction in service quality for consumers and maybe fatter margins for the remaining mortgage lenders due to reduced competition.

MORTGAGE MARKET SUMMARY: For the week, the DJIA fell 1% from 10,198 to 10,097. There were 13 positive trends offset by 14 negative trends. We project little or no growth in mortgages over the near term.

Positive Trends

• Rates on jumbo mortgages have come down to 5.5% compared to 6.86% a year ago, reported Bankrate.com. Citicorp reported applications for jumbo mortgages at its retail branches were up 30% over two months ago. Some real estate brokers are reporting a 50% increase in sales of upscale homes that require jumbo mortgages.

• The Bank of Tokyo is forecasting the Euro to fall to $1.10 over the next 12 months and slow growth worldwide. There will be disinflation in the U.S. and a boom in U.S. stocks according to them. But for the week, the Euro rose to $1.29.

• The Conference Board’s measure of CEO confidence held at 62 in 2Q10, unchanged from first quarter. Any number over 50 means more CEOs are upbeat on the business environment than are downbeat.

• World bankers meeting in Basle, Switzerland appear to be easing capital requirements and curbs on risk-taking which should offset some of the tightening that will come with the new U.S. federal regulatory bill.

• There are signs lenders are easing credit standards. Fannie Mae launched an initiative to allow first time home buyers to get a loan with a down payment as little as $1,000. Credit-card issuers mailed 85 million offers of plastic to subprime borrowers in the first six months of this year, up 100% from a year earlier reported Synovate. Nearly 8% of loans for new cars in 2Q10 went to borrowers with FICOs with subprime credit (under 624), up from 6.2% in 4Q09 reported J.D. Powers.

• Delinquency rates for credit cards are down for American Express, Capital One, and Discover.

• For second quarter, both B of A and Citicorp reduced their reserves for future losses suggesting loan losses have passed their peak.

• Initial claims for unemployment fell from 458,000 two weeks ago to 429,000 this past week. But continuing claims for unemployment were up from 4,434,000 to 4,681,000. But those figures represent the market two weeks ago. A minor improvement is taking place.

• Industrial production was up 0.1% in June, which is a slower rate of increase than the 1.3% increase in May. Capacity utilization remained unchanged at 74.1% in June.

• The PPI for June was -0.5%, down from -0.3% in May. The core PPI was 0.1%. There is no evidence of inflation.

• The CPI for June was -0.1% which is up from -0.2% in May. The core CPI was 0.2%, up from 0.1% in May. In either case there is no evidence of inflation and more evidence of deflation.

• The ten year Treasury fell to 2.92% this week, down from 3.06% last week.

• The 30 YFR mortgage remained unchanged from last week at 4.57% reported Freddie Mac.

Negative Trends

• According to the Federal Housing Finance Agency, in 2009 89% of mortgages purchased by Fannie Mae and Freddie Mac had credit scores of 720 or higher. In 2008 the share was 68% and in 2007 the share was 59%. This tightening of credit has reduced mortgage loan volume.

• Federal regulators closed 88 banks so far this year. If the rate of bank failures so far this year continues, by year end 169 banks will be shut down, which will surpass the 140 banks closed by regulators in 2009. About 70 were closed in 2008.

• The Wall Street Journal reported that the S&P 500 index has fallen at an annualized rate of 3% a year over the past 10 years, including dividends and controlling for inflation. Long term Treasury bonds had a gain of 5% a year over the same period, after inflation. Gold is up 10% a year and REITs 8% a year. In the past decade, big U.S. stocks have had the worst performance of nine major investment classes tracked by Morningstar. Now small investors are fleeing stocks at a rapid rate. With such an exodus, this might be a good time to buy stocks.

• The Obama administration is pushing Congress to increase the share of GDP spent on government from 32% up as high as 50%. A recent study by two Swedish economists shows that such a move will cause U.S. GDP to be reduced by 1 to 2 percentage points per year. That is what happened in Sweden over recent decades. Right now U.S. GDP is growing at a 3% rate. Increasing the share of government spending would slow down that rate of growth to 1% to 2%. Europe is currently growing at a 1% annual rate.

• The Financial Reform Bill passed the Senate on Thursday as three Republicans (Brown, Collins, and Snowe) agreed to vote for it. The final vote was 60 to 39. The tax levy on large banks and hedge funds has been scrapped. Instead, the bill authorizes the bailouts to occur first. The money to pay for them will then be collected via a tax on the remaining firms. The bill authorizes the biggest increase in federal rulemaking since the 1930s. We believe the additional regulation will deter lending in the near term and raise the cost of credit. It will benefit the large banks. According to Ed Yingling, President of the ABA, “The result will be over 5,000 pages of new regulations on traditional banks and years of uncertainty as to what the massive new rules will mean.” The new Consumer Financial Protection Bureau will write and enforce the rules governing mortgages and other consumer loans. This new bureau won’t be running for about a year.

• The trade deficit in May widened 4.8% to $42.3 billion, the widest in 18 months suggesting slowed growth in GDP over the next six months.

• The small business optimism index fell 3.2 points to 89 in June reported the National Federation of Independent Business. The index reached a trough at 81 in March but has stalled recently and is very weak by historical standards.

• The Labor Department reported there were 4.67 unemployed people for each job opening in May, up slightly from April.

• Retail sales were down -0.5% in June, following a decline of -1.1% in May. A large portion of the reduction was due to the 2.4% drop in auto sales and 2% decline in gasoline-station sales.

• The Commerce Department reported business inventories rose for the fifth consecutive month in May, up 0.1% from April. With falling retail spending, this suggests a decline in production soon.

• According to a survey released on July 14 by Bloomberg, 70% of Americans view the economy as mired in recession and 50% believe the deficit is dangerously out of control.

• The U. of Michigan survey of consumer confidence fell to 66.5 in July, down from 76.0 in June. This was the lowest level this year for this index.

• TBWS Daily reported that 25% of Americans (43 million) have FICO scores below 599 and therefore can’t get any form of credit. This will keep consumer purchasing down.

• On July 14, the Federal Reserve left interest rates unchanged as they gave a less positive view of the U.S. economy due to turmoil in Europe, lower stock prices, and weaker domestic demand. Fed officials expect it to take as long as five or six years before unemployment approaches the 5% level again.

Conclusion

The economy is slowing down and there is little danger from rising inflation or rising interest rates very soon. Mortgage volume is slow due to tight underwriting and high unemployment. There is little likelihood of increased federal stimulus and insufficient support for tax cuts because of fear of greater federal debt. Although, Obama’s popularity is declining, he still is far ahead of any Republican rival. It looks like more slow growth in the future.
Originator Demographic Survey: Access Mortgage Research has launched a project to support mortgage brokers and bankers. The first step of this project is to measure the size and activity of current and former mortgage brokers and mortgage bankers. A second step is to reduce the challenges of delivering loans to multiple investors and thereby increase loan pull-through rates. To participate in this survey, click onto: http://www.surveymonkey.com/s/June_Mortgage_Originator_Survey.
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