David Olson

FOCUS ISSUE FOR THE WEEK: Report from Europe

My family and I just spend the past two weeks in England, Denmark and Sweden.  In several ways these countries are ahead of the U.S.  1) They have widespread cheap and convenient public transportation.  We managed without cars (except for use of a three cabs) this whole time.  We walked or used public transport.  2) There were sidewalks and bikeways everywhere.  Bike usage is an estimated ten times greater than in the U.S.  3) People in large numbers take bikes to school, work and shopping, evidenced in large and filled parking areas for bikes.  4) Cars are smaller and gas costs $8/gallon—twice as much as in the U.S.  5) People are used to walking and biking so fewer are overweight, especially fewer kids.  6) There are fewer slums than in the U.S.  7) Downtowns are vibrant and full of people. 8) People consume much less energy/capita than in the U.S. 9) They are much further ahead in the use of windmills, nuclear power, solar panels and geo-thermal heat.  10)  Smaller cars, houses, and appliances discourage over-consumption of energy.  11) Getting through their airports is much more efficient and pleasant.  England is in the middle of a sharp economic correction but the only complaints I heard were students opposing the tripling of college tuition.  Also, fees on their public transit have been rising and are not cheap.  The U.K. is attempting to lower its federal deficit.  Having read Tom Friedman’s Hot, Flat, and Crowded book during this trip I was conscious of the dangers stemming from rising levels of carbon dioxide in the atmosphere causing global warming and diseases from bad air.  We returned home to record heat in the U.S. and rising oil prices, strengthening my belief that we will have to move more rapidly away from dependence on fossil fuels or get into even greater problems than we are currently having.

MORTGAGE MARKET SUMMARY: Over the past three weeks, there were 7 positive trends and 19 negative trends.  The two big negative trends are rising unemployment rate and continuing decline in home prices.  Most of the remaining advanced countries are in recession and can’t buy much from us so we can’t export our way to a stronger economy.  Mortgage interest rates have been declining for the past two months but housing has yet to show evidence of recovery.  GDP only grew 1.8% in 1Q11 but final sales were much less—0.6% on an annual basis and only 0.15% for the quarter.  Weakness around the world and no progress in solving the U.S. deficit suggests further weakness this year and even the possibility of a double dip.  Even Ben Bernanke admits that the economy is weak.  The main good news is steady declines in mortgage rates and some recovery in mortgage securities.

Positive Trends

• New home sales in April were at a 323,000 annual rate, up 7.3% from 301,000 in March. This was higher than expected although it is still low.  It is 23.1% below the level a year ago.  Most economists were expecting 300,000.  The median sales price in April was $217,900, up from $214,900 in March.  The current inventory of unsold new homes fell to 6.5 months, down from 7.3 months in March.

• Springleaf, an offshoot of American General Finance is planning to raise $500 million for nonconforming/non-agency loan financing. American General is owned by AIG and FCFI Acquisition, a private equity fund which in turn is owned by Fortress and headed by Daniel Mudd.

• Nationstar, also owned by Fortress, is a specialty mortgage servicing company trying to do an initial public offering to raise $400 million.

• Interest rates for the 30 year fixed rate mortgage declined once again this week (June 9) to 4.49%, down from 4.55% last week. This was the eighth weekly decline in a row.

• The yield on ten year Treasuries fell to 2.97% from 3.01% last week.

• CoreLogic reported that 22.7% of all residential properties with a mortgage were in negative equity at the end of the first quarter, down from 23.1% in the fourth quarter.

• Regulators extended to August 1 the deadline for public comments on risk retention rules for mortgage and other types of consumer credit. The deadline was formerly June 10.  There is concern that these new rules would drive mortgage originations down further.

Negative Trends

• In May the economy only produced 38,000 new jobs although economists expected 175,000. This low number caused the unemployment rate to rise to 9.1%.  During the prior three months, average monthly growth in nonfarm employment averaged 220,000 jobs.  Government jobs fell 29,000.  Average weekly hours were unchanged at 34.4 hours.  Average hourly earnings were up slightly to $22.98.

• Home prices fell another 0.8% in March from February based on seasonally unadjusted figures calculated by Case Shiller. Using seasonal adjustments, prices fell only 0.2%.  Of the 20 cities tracked, prices were only up in Seattle and Washington DC.  Prices are now down 33.1% from their peak in July 2006.  Prices for first quarter 2011 are down 4.2%.  Home prices had reached a trough in April 2009 and then rose slightly for about a year but now prices are lower than that trough.  Founder Bob Shiller said home prices may fall another 10-25% over the next five years.

• Initial claims for unemployment rose to 427,000 for the week ending June 4. This is higher than 426,000 the prior week and is the ninth consecutive week that claims were above 400,000. They reached a two-year low of 375,000 in February.  Economists were expecting claims of 419,000.  The four-week moving average declined from 426,750 for the week ending May 21 to 424,000 for the week ending May 28.

• The Justice Department has instructed federal prosecutors to be creative in adapting old laws to take against banks over the financial crisis. They should focus on potential misdeeds when banks made home loans and packaged them into securities.  Banks are engaged in settlement talks with many federal agencies and the 50 state attorneys general to put their mortgage-related problems behind them.  Banks have not been able to estimate what these investigations will cost them.

• As we approach the August 2 deadline for raising the U.S. debt ceiling some investors are already moving away from buying Treasury bonds. Monthly purchases of Treasury securities by foreign investors fell from $118 billion last August to $27 billion March.

• Moody’s forecasts home prices will fall an additional 5% by the end of 2011 due to the large number of foreclosed homes on the market. Real estate agents claim banks do not have sufficient staff to manage all these foreclosures.  These agents believe lender-owned home listings are routinely out of date and overpriced by as much as 10%.  One positive trend is that mortgage delinquencies are receding lately.

• Jamie Dimon, head of Chase Bank, the most profitable U.S. bank, took an unusual step in pressing Ben Bernanke in a public forum on June 7 on whether regulators have gone too far in reining in the U.S. banking system and are slowing economic growth.

• The Dow Jones Industrial average fell to 11,951 from a peak of 12,876 reached on May 2 so is down 7.2% from that peak. The index is down 1.6% from its close last Friday of 12,151.

• Three mortgage insurance company stocks, MGIC, Radian, and PMI, fell after MGIC reported more new delinquencies in May than in the prior month and fewer delinquent loans were made current.

• The Wall Street Journal reported that the failure of Dodd-Frank’s regulatory arm to write new rules for the $583 trillion derivatives market has the financial sector in a panic over its legal exposure. This is just the latest cause of concern to banking over the generally perceived over-regulation which is causing the economy to remain in a slump.

• The American Bankers Association predicts the Dodd-Frank Act will put more than 1,000 banks out of business by 2020. Smaller banks don’t have sufficient legal staff to manage all the new regulations coming from this Act.  The Consumer Financial Protection Bureau is set to launch June 21.  Lenders predict the new regulation will cause lenders to have fewer product choices, and lead to lower volumes and tighter margins.

• Global stocks sank the most in two months, while the euro slid to a record low versus the Swiss franc and commodities plunged, amid signs of Europe’s government-debt crisis worsening and the economic recovery slowing.

• AAA reports that the average retail price for regular gasoline has risen from $2.80/gal a year ago to $3.99 on May 1 and $3.72 on June 10.

• According to Campbell Surveys, in April, 35.7% of the housing market was first-time homebuyers while 47.7% of available property was distressed causing a difference of 12.2 percentage points between the two. Traditionally, first time homebuyers buy most of the distressed homes.  When there is more distressed property available than first time homebuyers, investors enter the market paying low prices.  Normally first-time home buyers are about 1/3^rd of the market.  That means there is downward pressure on home prices.

• Of the six largest advanced economies, only two are growing—the U.S. and Germany.  Japan, U.K., France and Italy are in recession.

• Oil prices on the Nymex are $98.90/barrel on June 10, down slightly from two weeks ago.  They are down a bit from their 52 week peak of $114.5 reached in early April.

• Since April, prices of many subprime mortgage securities have declined between 15% and 20% reported the Wall Street Journal.  There were similar price declines for all types of high yield corporate bonds blamed on evidence of general economic decline, especially falling home prices and weak job numbers.

• Ally Financial is postponing its $5 billion IPO because of weak market conditions and impending fines due to its mortgage foreclosure practices. The U.S. government owns nearly 74% of the lender.

• The National Association of Home Builders predicts construction of only 431,000 single family homes this year—the lowest level of the housing bust.  They also forecast only 320,000 new homes will be sold, which is less than last year.

CONCLUSION: The U.S. economy declined further while I was gone these past two weeks.  At least we are not yet in recession like most other advanced countries.  These are tough times and we don’t seem to be making much progress exiting the recession or getting off our dependence on oil.  If we don’t get regulatory relief soon for the mortgage industry, the economy is likely to go into a double dip.

Access Mortgage Research was founded in 1991 to provide research to the mortgage industry. For more details see www.accessmrc.com or phone 410-772-1161.