Larry Pearl for David Olson

FOCUS ISSUE FOR THE WEEK: This was a week of ups and downs. The week started off on a positive note with housing starts, industrial production and capacity utilization up, and ended the week on the negative side with initial claims for unemployment hitting a nine month high. The economy remains weak with little hope for improvement in the unemployment rate for quite some time. On Thursday, economists at Chase cut their forecast for growth in the economy for the remainder of the year by 1% in each of the next two quarters. They are now predicting 1.5% growth in the 3rd quarter and 2% in the 4th quarter.

MORTGAGE MARKET SUMMARY: On Tuesday, the Obama administration held it’s Conference on the Future of Housing Finance in search of a fix for the Fannie Mae and Freddie Mac problem, which has cost taxpayers nearly $150 billion. According to Newsweek, “It is striking that more than two years after the housing crisis, which brought the American economy to its knees, there is still no clarity on the way forward.” We have some groups calling for a complete government takeover of mortgage finance, a housing agency saying that we should reduce federal involvement, and another panelist saying the whole industry should be left to private lenders. All of this is taking place as interest rates fall but have little impact on stimulating the economy.

For the week there were 7 positive trends offset by 8 negative trends. The DJIA fell from 10,303 last week to 10,213. It is now down 4.1% in the past two weeks.

Positive Trends

• Housing starts are up but the future looks weak. Housing starts rose 1.7% from June to a seasonally adjusted annual rate of 546,000 last month. New construction of single-family homes, the key sector of the housing market, fell 1.2% over the month to an annual rate of 421,000.

• Industrial production rose in July by 1% after falling in June (-.1%). This rise was almost twice the consensus forecast.

• The producer price index was up by .2% with the core up .3%. This is positive since it reduces some of the fear of deflation and provides an incentive for business to increase output.

• Capacity utilization increased by .7% to 74.8% supporting the above statement that business will increase production if they can get higher prices for their output.

• The ten year Treasury slipped to 2.61%from 2.69% the prior week and 2.91% three weeks ago.

• Freddie Mac reported that the interest rate on a 30-year fixed rate mortgage fell to 4.42%. This is the ninth week in a row that the rate has fallen or stayed the same. Last week we predicted there would be a slight drop in the mortgage rate, and we think this will also occur next week since the ten-year treasury rate continues to fall.

• According to the Mortgage Bankers Association Weekly Mortgage Applications Survey for the week ending August 13th, mortgage loan application volume, increased 13.0% on a seasonally adjusted basis from one week earlier. The refinance index increased 17.1% from the previous week and was the highest since the week ending May 15, 2009. The refinance share of mortgage activity increased to 81.4% of total applications.

Negative Trends

• Building permits dropped to a seasonally adjusted annual rate of 565,000 in July, down 3.1% from a revised 583,000 in June. Building permits have always been a weak indicator of future economic activity since permits don’t always turn into housing starts and the timing of when the buildings are actually started varies considerably.

• Initial claims for unemployment benefits jumped by 12,000 to 500,000, the third straight weekly increase. This was the first time since last November that initial claims hit 500,000. A year ago the figure stood at 550,000 and at its peak in March 2009, 640,000 claims were filed. Continuing claims, reported for a week earlier than initial claims, fell a little to 4,478,000 from an upward revision of last week’s data. They should show an increase next week when new data is released.

• The leading indicators of economic activity came in at 0.1%, which was lower than the consensus forecast of 0.2%. Although this was better than the 0.3% decline in June, it does not predict much growth ahead.

• California is within a few weeks of running out of money and may have to issue IOUs. This stems from the failure of the governor and lawmakers to come up with a way to close an estimated $19 billion shortfall and pass a budget for the current fiscal year which began in July.

• State pension plans across the country are facing an unfunded collective liability estimated to be as high as $3 trillion. This is a measure of the shortfall between promised pension benefits and the ability of the pension funds to pay those benefits. According to a report released yesterday by Northwestern University economist Joshua Rauh, pension funds in at least seven states could dry up by 2020, and 31 states could be in trouble by 2030.

• The Congressional Budget Office reported the 2010 federal deficit would hit $1.3 trillion, second-largest to 2009′s $1.4 trillion.

• Statistically, the national average for closing costs seems to have soared in 2010, up 37% to $3,741 from just $2,732 in 2009. Bankrate reported that lender fees, everything from origination charges to courier or express mail charges, jumped 22.8%. Third-party fees, for things such as appraisals and title insurance, skyrocketed 47.2%. New laws and the desire on the part of lenders to make sure that borrowers can repay their loans have pushed the cost of underwriting and verifications up dramatically, and these costs are being passed along to the consumers.

Conclusion

Our conclusions for the economy remain the same as last week. Slow growth and a continuing high unemployment rate for the rest of the year and into next year. The historically low interest rates are not having as much impact on consumers spending power as past periods of low interest rates due to tight underwriting guidelines. The recent stimulus from the federal government to the states of $26 billion will most likely be somewhat offset by higher state taxes or reduced spending needed to balance their budgets.
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.
Future meetings run by Access Mortgage Research:
18th Benchmark Study Meeting for the Retail and Consumer Direct Channel – September, 28-30, 2010 in Milwaukee.
18th Benchmark Study Meeting for the Broker Channel – November 2010 in Phoenix.
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

David Olson will be back for next week’s newsletter.