David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

 

The dominant financial news of the week continued to be the turmoil in Europe.  Even though Greece and Italy successfully replaced their prime ministers with technocrats, the cost of their debt continued to remain high and more alarmingly, the cost of debt rose across Europe as Asian investors pulled out of the market.  There were fears that contagion of the debt crisis would spread to the U.S.  At the same time the Congressional Super Committee didn’t come to any resolution of the U.S. debt crisis.  Otherwise, there was more positive news this week than last week as initial unemployment rates fell, industrial production and retail sales rose, inflation was negative, and housing was somewhat improved.  But the stock market and interest rates declined.

 

MORTGAGE MARKET SUMMARY

 

To date the impact of the crisis in Europe has been beneficial to the housing market in America.   The flight to quality in the US has helped keep our interest rates down to historically low levels.  Falling interest rates in the US improve the affordability rate of housing which was already at a historically affordable rate.  According to the National Association of Home Builders/Wells Fargo Housing Opportunity Index  (HOI) data released on November 17^th, “nationwide housing affordability during the third quarter of 2011 hovered near its highest level in the more than 20 years it has been measured. The HOI indicated that a near-record 72.9 percent of all new and existing homes sold in the third quarter of the year were affordable to families earning the national median income of $64,200. The affordability measure rose slightly from the 72.6 percent set last quarter and has remained above the 70 percent threshold for 11 consecutive quarters. The HOI rarely rose above 60 percent prior to this period.”  It is not clear how long the crisis in Europe will have a beneficial impact on housing.  As European banks begin to sell loans to raise cash, it will reduce demand for mortgage backed securities and we could see mortgage rates rise.

 

The position of the American consumer continues to improve.  The four week moving average of unemployment claims continued to decline.  Bankruptcy rates continue to fall.  Although average income in America has not improved, payment –to- income ratios continue to improve, due to high levels of debt restructuring by bankers and refinancing by Americans.

 

Despite improving economics in the US and low rates, mortgage applications decreased 10.0% from one week earlier, according to data from the Mortgage Bankers Association’s Mortgage Applications Survey for the week ending November 11, 2011.

The rules for HARP 2.0 were released this week and servicers are preparing to refinance more of their customers.  Estimates of the number of homeowners likely to refinance under HARP 2.0 ranged from between 800,000 from FHFA to over 5 million from DataQuick.  Approximately 900,000 people refinanced under HARP 1.0.  The expansion of HARP and the continued challenges in Europe will help more consumers refinance their mortgages to historically low rates and thus continue the trend of improvements in American consumers’ finances.  Ballooning of consumer debt both of mortgages and credit cards built up for more than a decade.  It will take some time for savings rates to rebound to the point where consumers feel comfortable spending freely again.  The trends are going in the right direction and deferred demand for housing is building.

The DJIA fell to 11,796 this week, down from 12,153 due to the European banking crisis.  For the week there were 20 positive trends offset by 23 negative trends.

 

POSITIVE TRENDS

 

• Initial claims for unemployment for the week ending Nov. 12 fell to 388,000, down from 393,000 the prior week.  This was better than expected.  Continuing claims for the week ending Nov. 5 fell to 3,608,000, down from 3,665,000 which was also better than expected.  This is a seven month low.

 

• Industrial production rose 0.7% in October after declining -0.1% in September.  This was stronger than expected.  Capacity utilization also rose 77.8% in October, up from 77.3% in September.

 

• Retail sales rose 0.5% in October, after rising 1.1% in September.  This was higher than expected. 

 

• The CPI fell -0.1% in October after rising 0.3% in September in parallel fashion to the PPI.  This was the first decline in four months.

 

• The PPI fell -0.3% in October after rising 0.8% in September.  The core PPI was zero.  There is no inflationary pressure at the wholesale level.  A decline in energy prices caused the decline.

 

• Greeks overwhelmingly welcomed the appointment of Papademos as prime minister.  He won the approval of three-quarters of the population in three separate polls.  Papademos will present his policy agenda to the Greek Parliament on Nov. 14 and have a confidence vote on Nov. 16.  He has the task of implementing the €130 billion bailout before the next election.

 

• Europe now has the task of creating a stronger bailout fund with a capacity of several trillion euros and a massive program of government-debt purchasing by the ECB.  This big question is whether there is sufficient unity to form a fiscal union among the 17 countries.  We don’t think Europe is quite ready for such a task for all the current 17 countries but maybe for the majority of them.  The ECB this year departed from its initial mandate to maintain price stability to buy sovereign bonds to keep the eurozone together.  So far there is little evidence that this policy has worked.  Interest rates on sovereign debt have been climbing relentlessly.

 

• German Chancellor Angela Merkel called for an overhaul of the European Union, advocating closer political ties and tighter budget rules, to end the debt crisis.  However, she did not advocate the creation of a Euro bond.

 

• German Chancellor Angela Merkel’s Christian Democratic Union party voted to offer euro states a “voluntary” means of leaving the currency area.

 

• The Fed is hinting of doing a third round of quantitative easing (QE3) to support the mortgage market.  The Fed already has bought more than $2 trillion of government bonds and mortgage securities.  The New York Fed is requesting that it increase its buying.

 

• Japan’s GDP rose 6% in 3Q11 at an annual rate.  In the prior three quarters it has contracted.  However, a strong yen and slowing global economy could cut into future growth.

 

• The German Christian Democratic Party called for changes to the Lisbon treaty to allow any eurozone members to voluntarily leave the eurozone without leaving the European Union.  Earlier Merkel and Sarkozy made clear that the only way for Greece to leave the eurozone is to rescind EU membership.  Now a compromise might be reached.  Some experts believe states like Greece may have a better chance dealing with their debt problems outside the eurozone.

 

• The House Financial Services Committee approved a measure that would put employees of the Fannie and Freddie on the federal pay scale, effectively cutting the pay of thousands of employees and suspending packages for top executives that can run to millions of dollars.  This shows how far out of favor the two agencies have fallen.

 

• The NAHB home builder index rose to 20 in November, up from 17 in October showing some strengthening in the residential home building industry.

 

• Impac Mortgage Holdings reported third quarter 2011 net earnings of $3.1 million, up from less than $1 million of earnings for the third quarter of 2010. During the third quarter of 2011, the Company continued to expand its mortgage lending activities increasing loan originations and loan sales.

 

• Building permits rose to 658,000 in October, up from 589,000 in September.  This was stronger than expected.

 

• The yield on ten-year debt fell from 2.045% last week to 2.01% this week.  The recent lowest rate ever was 1.68% last September.  The yield on the 30 YFRM rose slightly to 4.00% from 3.99% last week.  The lowest ever was 3.94% several weeks ago.  Analysts believe if investors didn’t think there was a recession coming in the U.S., ten-year yields would be 75 bp higher.

 

• The seasonally adjusted delinquency rate for mortgage loans on one-to-four-unit residential properties fell to 7.99% in the third quarter of 2011, according to data from the Mortgage Bankers Association. This is the lowest level recorded since the fourth quarter of 2008.  The third quarter seasonally adjusted rate of 7.99% is a decrease of 45 basis points from the second quarter of 2011, and a decrease of 114 basis points from one year ago.

 

• The Philadelphia Fed Index slowed to 3.6 in November, down from 8.7 in October.  This shows manufacturing volume in that district of the country slowing down.  An index number of zero means no growth at all.   However, on the positive side manufacturers expect a big increase in demand six months in the future.

 

• Leading indicators rose 0.9% in October, up from 0.1% in September.

 

NEGATIVE TRENDS

 

• The dollar cost of the euro fell to $1.35 this week down from a peak of $1.49 in April but still up from $1.29 in January.  Over the past year is has averaged $1.42.  Over the past five years it has averaged about $1.38 with a high of $1.60 and a low of $1.20.  Some commentators believe the euro will decline to $1.25 within six months.  That assumes the current banking crisis worsens.  This exchange ratio will give clues how successful the bailout is going.  At present the risk of a recession is judged at 50%.  A recession would cause the currency value to decline.  On Nov. 9, the cost of Italian ten year debt rose over 7% but then declined to 6.5% on Nov. 11.  To a large extent, the success of Italian economy can be judged by this measure.   PIMCO’s Bill Gross and Mohammed El-Erian said the recession could be deep in Europe because there is too much debt and too little growth.

 

• The U.S. banks most at risk to economic problems in the eurozone are Chase, Citigroup, and Bank of America.  This reflects the direct exposure of lending, trading and securities to Greece, Ireland, Italy, Portugal, and Spain but not the indirect exposure to other eurozone banks that might go down due to these problems.  Chase’s gross direct exposure is $27 billion.  The stocks of these large banks fell last week due to these fears.

 

• Stratfor (a political research firm) believes the slowdown occurring in Europe will harm China’s growth model and cause a worldwide recession. 

 

• According to the Economist magazine, “For the euro to survive, Italy must succeed. For Italy to succeed, its squabbling politicians must find unaccustomed reserves of unity and courage. That depends on ordinary Italians being willing to make sacrifices, the ECB backing Italy, and France and Germany standing resolutely behind the euro. It is a dauntingly long list of things to go right.”  The Economist visualizes Europe as being in a situation comparable to that right before World War I.  So many actions must go right for Europe to avoid a financial failure and collapse of the European Union.

 

• The cost of five-year debt for Italy rose to a new high of 6.29%, up from 5.32% in its last auction in October.  The yield on ten-year debt was 6.4%, down from 7.48% a week ago.

 

• Three things must be done in Europe soon:  1) bring down Greek debt to GDP level to 80%; 2) increase the size of the ESF (European Support Fund); 3) recapitalize European banks says analysts at Bank of Tokyo.  They foresee the Euro declining to $1.25 over the next six months.

 

• The odds of a U.S. recession in early 2012 exceed 50% as a result of Europe’s debt crisis, according to researchers at the Federal Reserve Bank of San Francisco.

 

• Eric Chaney, Chief Economist of AXA says the European recession has already started.  A credit crunch is occurring.

 

• European industrial production fell 2% in September from August, the steepest slide since Feb. 2009, reported the European Union’s statistics agency.  This suggests the eurozone will fall back into a fairly deep recession said Ben May, economist at Capital Economics.  Another economist at ING Bank expects eurozone GDP to contract 1.5% in 4Q11, followed by a slight contraction in 1Q12.

 

• “It’s a confidence crisis,” said Elwin de Groot, a senior market economist at Rabobank Nederland in Utrecht, Netherlands. “Investors have no confidence that the euro zone can solve its problems. They will look for the most safe place they can store their money, which is Germany. Everything else is suffering.”  On Nov. 15, Italian ten-year debt rose to 7.07%.  Ten-year Spanish yields climbed 19 basis points to 6.29 percent. The extra yield, or spread, over similar-maturity German bunds surged to a euro-era record 458 basis points from 171 basis points on April 12.

 

• GDP in the eurozone grew at 0.2% in 3Q11 and 1.4% year-on-year.  Deutsche Bank economists are forecasting a full blown recession starting 4Q and continuing into 1Q12.  But this recession will be contained within Europe.  There will be credit tightening and fiscal austerity in Europe but not much contraction in trade.  It doesn’t see a reduction in U.S. growth of 2.5%.

 

 

• On November 15, yields for European sovereign bonds rose for many countries other than those from southern Europe.  Italian yield rose back over 7%, Spanish yield surged to 6.4%, and yields for French, Austrian, Finnish, and Dutch bonds rose.  There was heavy selling from investors in Asia and the Middle East.  Investors are also paying more for protection against debt defaults.  The five-year credit-default swaps of Italy, Spain, France and Belgium all hit records.  Italian default swaps briefly pierced 600 bp for the first time.  This suggests turmoil in the bond market will not be restricted only to a few countries and might last longer until all these countries reduce their debts and increase their economic growth.  This is causing the EU to propose moves toward closer economic integration and request the ECB to buy sovereign debt.  The ECB insists its mandate is limited to fighting inflation.

 

• U.S. banks face a “serious risk” that their creditworthiness will deteriorate if Europe’s debt crisis deepens and spreads beyond the five most-troubled nations, Fitch Ratings said. “Unless the euro zone debt crisis is resolved in a timely and orderly manner, the broad credit outlook for the U.S. banking industry could worsen,” the New York-based rating company said yesterday in a statement. Even as U.S. banks have “manageable” exposure to stressed European markets, “further contagion poses a serious risk,” Fitch said, without explaining what it meant by contagion.

 

• European banks are relying increasingly on loans from the ECB as they can no longer obtain funding from customary market sources.  There is a worldwide sell-off of struggling euro nations’ debt occurring particularly from Asia.  At the end of October, eurozone banks had borrowed a total of nearly €600 billion from the ECB, up from €495 billion at the start of 2011.  Among the biggest borrowers are French and Italian banks.  This has put the ECB’s own balance sheet at risk. To protect itself it recently doubled its capital base.  The unemployment rate in France is rising and its GDP is slowing.  French banks have high amounts of sovereign bonds from Spain, Italy, and Greece.  It may lose its AAA rating which would weaken the European Financial Stability Facility.  The big question is whether a united Europe be governed by northern rules—keep the currency sound and budget balanced—or southern rules—run more deficits and routinely devalue its currency.

 

• The premium France pays over Germany to borrow for 10 years jumped to 200 basis points Nov. 17, the highest since 1990. Yields on Dutch, Finnish and Austrian debt also increased this week. Spain sold 3.56 billion euros ($4.8 billion) of a new 10-year benchmark at an average yield of almost 7 percent, the most since the euro’s creation, as demand for the securities dropped.  Italy paid 7.0% for a ten-year bond and France paid 3.72%.

 

• The annual cost of insuring European corporate debt against default has doubled in the past month over what it cost six months earlier.  European companies are facing higher capital costs as bank lending is curtailed and investors step out of the debt market.

 

• Zerohedge, an American financial blog,  reported on Nov. 18:  “confirming that we have entered a complete US dollar liquidity lock up, and that the global coordinated US dollar swap line rescue operation will be launched any minute: both the US FRA-OIS and the EUR Basis Swap are at multi year extremes. The entire dollar funding market is now at levels not seen since the Lehman collapse and is effectively frozen. Only this time it is much, much worse as never before has the global central bank cadre been assumed and implied to be backstopping the global liquidity cascade.  Ex-out the implied backstop by the monetary authorities, and liquidity is now locked up more than ever in the history of capital markets.”

 

• Morgan Stanley forecasts a €1.5 T to €2.5T in deleveraging by European banks over the next 18 months.  This will lead to credit tightness and very bearish on bank earnings.  There is a danger in contagion in emerging markets where 80% of all world growth is expected in 2012.  By 2012 the euro will fall in value to $1.25/euro.

 

• Housing starts slipped slightly to 628,000 in October, down from a revised 630,000 in September.  This was still stronger than expected.

 

• As of November 15 there had been no resolution of the 12 member Congressional Super Committee to resolve the debt situation.  The report is due by November 23 or that will be an automatic cut across the board in federal spending.

 

• FHA’s loss reserves had fallen so low that there is a 50% chance the agency could run out of money and require a taxpayer bailout next year, according to an independent audit of FHA. As of Sept 30, the reserves were $2.6 billion, down from $4.7 billion last year.  FHA comprises about 32% of the overall mortgage market.

 

• U.S. bank stocks have been falling since mid-October and are much below their levels a year ago, but are still above their lows on October 4.  European banks are down more than 25% over this same period.  In general, the larger the bank, the bigger the percentage decline.

 

• Thomas Hoenig, the former Kansas City Fed president, is likely to be chosen by Congress to be head of FDIC.  Mr. Hoenig is a critic of banks being too big to fail.  He doesn’t agree that capital requirements for banks are too high and might choke economic growth.

 

CONCLUSION

 

Despite some evidence of a strengthening U.S. economy, the weakening of the bond market in Europe suggested a downward blip in the U.S. economy over the next several months as European banks conduct a massive deleveraging and hedging costs rise.

 

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.

David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

The problems in Europe became more serious this week.  Last week the eurozone announced it would permit Greece to leave the zone thus publicly admitting this was now an option that other countries might also follow.  Although Papandreou submitted his resignation as Prime Minister and had been somewhat successful in getting austerity measures passed in Greece, most observers see Greece’s only option is to default on its debt and separate from the zone.  There will be a referendum on this question in Greece.  It would then shift to a devalued drachma.  How exactly this would be accomplished is still to be determined.  At the same time Italy’s problems worsened as its interest rates on its two-year, five-year, and ten-year debt rose to over 7% with a negative yield curve on Nov. 9.  This rate is regarded as too expensive to manage, so it is likely also to default as world investors flee Italy’s debt.  On Nov. 10, the ECB bought up this debt and brought rates down below 7% but how long will they be able to keep this up?  S&P downgraded its credit to A with a negative outlook.  There is no world mechanism large enough to bail out Italy.  Would it be the next country to fragment from Europe?  France was having difficulty maintaining its AAA rating and had to institute more austerity measures.  It is now clear that most of Europe has been living beyond its means over the past several decades.  The political forecaster, the Stratfor Group, sees the most likely outcome as a further fragmentation of the eurozone.  This will be the big story over the next several years.  Already Europe is likely in a recession which can only worsen as fragmentation proceeds.  Europe is on the precipice of a financial collapse unless there is a massive bailout of European banks by the European Central Bank.

 

This means Europe will reduce its imports from the U.S. which will reduce the growth rate of the U.S. although this didn’t show yet in September data.   That suggests little further reduction in the U.S. unemployment rate before the November election.  Both Federal Reserve vice chairman Yellen and chairman Bernanke believe that Europe’s sovereign-debt crisis may damage the weak U.S. economic recovery and the U.S. wouldn’t be able to escape consequences of a “blowup” in Europe.  Meanwhile, Congress is failing to solve its debt crisis.  The collapse of Europe illustrates the importance of solving the U.S. debt crisis.  Massive welfare entitlements must be brought under control.

 

MORTGAGE MARKET SUMMARY

Rate and term refinance volume continues to be the lion’s share of mortgage volume this week and is likely to remain so for at least a couple more quarters given the Obama administration’s plan for HARP 2.0.  Refinance applications were up to 78.6% of total applications, according to the MBA, helped by low interest rates due to problems in Europe.  The number of applications increased by 10% on a seasonally adjusted basis for the third straight week primarily due to an increase in refinances.  With the European turmoil and flight from sovereign debt occurring in Europe, there will likely be further flight of capital to the U.S. and the current refi wave will continue.

Despite record low rates consumers are not choosing to take on more mortgage debt.  Freddie Mac released their refinance report this week showing that the number of people choosing to increase their loan by 5% or more fell to a new low of 18% and cash-in loans increased to 37% from 27% last quarter.

Children are living with their parents longer reducing the potential number of home buyers.  The number of young people aged 25-34 choosing not to live on their own rose from 2010 to 2011 from 14% to 19% of men and 8% to 10% of women according to a recent release from the U.S. Census Bureau.  This is the age group that historically buys their first home.  The average age of first time home buyers is 30 according to NAR.  32% of home sales in September were to first time homebuyers per recent statistics from NAR, unchanged from last month and September last year.  Perhaps the historically high levels of student loan debt are to blame.  Total outstanding student debt is nearing $1 trillion and may for the first time outstrip credit card debt when third-quarter data is released later this month.

If the maximum LTV lenders will permit on HARP 2.0 is increased dramatically and a larger number of people refinance to record low rates, won’t the potential number of future mortgage customers be reduced dramatically?  The industry is going to have to find ways to encourage people to move up.  Perhaps they won’t move up but instead they will put additions on their homes to accommodate their adult children remaining in their homes.

For the week there were 10 positive trends offset by 15 negatives.  Over the past week the DJIA rose from 11,983 to 12,153

Positive Trends

 

• Initial claims for unemployment fell to 390,000 for the week ending Nov. 5, down from 400,000 the prior week.  This was the lowest level in seven months.  The four-week moving average remained at 400,000 but was still down from the prior periods.  Continuing claims fell to 3,615,000 for the week ending October 29, down from 3,707,000 the week earlier.  Both figures were lower than expected and suggest a stronger recovery than earlier foreseen.

 

• Greece’s major political parties on Nov. 6 agreed to form a national unity government that will oversee elections after putting in place a debt-slashing deal.  The new government must push through the loan agreement with the EU and the necessary fiscal and structural overhauls.  Without it, Greece will run out of money by mid-December.  New elections are likely to be held on Feb. 19.  Former ECB VP Lucas Papademos was chosen as interim Prime Minister to lead the new government replacing Papandreou. Greece’s state budget for 2012 must be submitted to Parliament by 2012, the IMF must ratify the payment of a sixth aid tranche on Nov. 21, while payments for the recapitalization of Greece’s banks and other aid under the new loan agreement should kick in from early January to keep the country afloat.  He needs to negotiate an agreed 50% haircut for private holders of Greek debt.  Papandreou announced a national referendum on exiting the eurozone.  The cost of Greek ten-year debt hit a euro-area high of 28.4% recently.

 

• A proposal floated by the Obama administration and Freddie Mac to induce private mortgage investors back into the single-family loan industry likely would need to offer double-digit yields to entice buyers, analysts say.  The approach, which is still in the conceptual study phase, would have Freddie Mac
  and Fannie Mae, the two government-seized mortgage giants, sell single family
  mortgage securitizations of which a small slice — 5% or 10% — would be sold without a government guarantee. Investors buying the subordinated security would be the first to take a loss if mortgages in the package default. To attract these investors, Freddie and Fannie would need to offer a higher yield.

 

• U.S. consumers increased their borrowing in September as consumer credit rose $7.4 billion to $2.452 trillion.  The increases were for car and student loans.  These are areas of increased consumer demand.  Credit card debt continued to decline.

 

• A report by the National Federation of Independent Business shows that small businesses (with fewer than 50 employees) led the U.S. in job growth for the fifth consecutive month.  Large firms (with over 500 employees) are shedding employment.  This data is supported by surveys by ADP.  NFIB says 3% of small employers plan to add employees over the next three months, down from a 2011 high of 5% in August.  According to ADP, over half the job gains recently came from small business and less than half came from medium sized firms.  Confidence among U.S. small companies rose in October for a second month, reflecting less pessimism about the outlook for sales and the economy, the NFIB survey found.

 

• The number of positions waiting to be filled in the U.S. rose in September to the highest level in more than three years, indicating some companies are preparing for an improving economy.  Job openings increased by 225,000 to 3.35 million, the most since August 2008, a month before the collapse of Lehman Brothers Holdings Inc. intensified the financial crisis, Labor Department data showed on Nov. 8.   Hiring advanced by 185,000 to 4.25 million, and firings also climbed.

 

• On Nov 9 the yield on U.S. ten-year debt fell to 1.96% as money streamed out of Europe. At the end of last week the yield was 2.045% down from 2.31% two weeks ago.  The U.S. is becoming a beneficiary of the European debt problems and this may lead to a further refinancing wave for U.S. mortgages.

 

• The export volume of the U.S. to Europe is expected to decline as Europe GDP slows down.  It currently comprises 18% of U.S. exports.  But in September U.S. exports actually rose to $180.3 billion and the trade deficit declined to $43 billion from $44.9 billion the prior quarter.

 

• This year, through October, Ginnie Mae issued $263.3 billion in single-family mortgage securities, compared to Freddie Mac’s $251.5 billion. Fannie Mae, the oldest of the three guarantors, sold $418 billion.  For most of their existence, the government-sponsored mortgage companies Fannie Mae and Freddie Mac have been the nation’s largest backers of residential home loans. Now a distant cousin is challenging their reign.  So far this year, Ginnie Mae, a corporation wholly owned by the government that packages mortgages backed by the Federal Housing Administration and other agencies, has issued more mortgage bonds than Freddie Mac, making it the second-biggest funder of home loans.  Professor Gyourko of Wharton says FHA faces $50 billion in losses in the coming years and has insufficient reserves (only $30 billion) to cover these losses.  But if FHA tightens its underwriting, Fannie and Freddie would increase their losses says Professor Rosen at Berkeley.

 

• The University of Michigan consumer sentiment survey rose to 64.2 in November, up from 60.9 in October.  This is the strongest reading since June.

 

Negative Trends

 

• Europe is at risk of a potentially devastating negative feedback loop.  The eurozone economy is expected to shrink 0.4% in 4Q11 according to Markit.  New factory orders in Germany fell 4.3% in the month of September, with new orders from the eurozone plummeting 12%.  This will make fiscal consolidation much more difficult.  If the eurozone economy tips into recession, the weaker European nations are likely to miss deficit targets by an average of two percentage points of GDP over 2012-14, according to J.P.Morgan Chase.  That could mean the ratio of debt-to-GDP is about 15 percentage points higher than expected by 2014.  Greece’s numbers would look even worse.  And if these countries respond to recession with yet more austerity, the downturn is likely to be even deeper, pushing debt-to-GDP higher.  That, in turn, increases the likelihood they would require further help from Europe’s bailout facilities, transmitting strain to stronger states.  According to Stratfor, a political forecasting service, Europe is “Far from emerging as a unified force, the question will be how divided Europe will become.”  They are seeing some fragmentation of Europe coming.  According to Andrew Bosomworth at PIMCO, we are at a “watershed” moment.  With Italy all but locked out of markets, European officials may have to jettison their short-term firefighting and pick between a smaller, stronger euro zone or a federalist structure with greater cross-border support.

 

• Prime Minister Berlusconi pledged on Nov. 8 to step down as his party failed to get a majority on a routine parliamentary ballot.  He will exit after Parliament approves a budget bill that includes promised welfare spending cuts and changes to Italy’s rigid labor laws.   The Italian Senate approved it on Nov. 10 and sent it to the lower house for approval.  The country faces unprecedented international pressure to take credible steps to shoring up its failing economy.  Now parliament must hold a vote on the austerity and economic-growth measures.  Italian Prime Minister Berlusconi is resigning after serving the past 18 years.  He is accused of not solving the country’s massive debt levels—now 120% of GDP, second only to Greece’s 158%.  Its federal debt is now $2.6 trillion.  The cost of ten year debt rose to 7.29% on Nov. 9 and is over the 7% which is considered to be unmanageable for Italy to pay.  It has been expensive enough for the eurozone to deal with Greece, the weakest of the eurozone members but Italy is much larger and is the second most vulnerable nation within the eurozone.  If a quick solution for Italy is not found, the future of the eurozone is much more questionable.  Berlusconi has not lived up to his many promises to eurozone leaders to reduce the nation’s expenses and raise tax revenue.  Italy must turnover $1 trillion in debt over the next three years.  Mario Monti, a technocrat and former EU commissioner, has been suggested to replace Berlusconi.   He commands respect at home and abroad, and would be a good choice. His task would be far from easy: He would have to win support in Parliament for unpopular tax increases, spending cuts and reforms to pension and employment law.  In Italy, that idea is not unprecedented.  The country went through something similar, albeit less demanding, in the 1990s. It remains a tall order.

 

• It is important that France and Germany retain their AAA rating over the next six months if the credibility of the financial backing within the eurozone is to be maintained.  With the current high volatility of financial markets and economic stagnation, this may be a challenge for France and the viability of the eurozone as it now faces two challenges—Greece and Italy.  French Prime Minister Fillon announced a second austerity package in less than three months as the nation battles to rein in its budget deficit.

 

• BNP Paribas SA and Commerzbank AG are unloading sovereign bonds at a loss, leading European lenders in a government-debt flight that threatens to exacerbate the region’s crisis.  BNP Paribas, France’s biggest bank, booked a loss of 812 million euros ($1 billion) in the past four months from reducing its holdings of European sovereign debt, while Commerzbank took losses as it cut its Greek, Irish, Italian, Portuguese and Spanish bonds by 22 percent to 13 billion euros this year. Banks are selling debt of southern European nations as investors punish companies with large holdings and regulators demand higher reserves to shoulder possible losses. The European Banking Authority is requiring lenders to boost capital by 106 billion euros after marking their government debt to market values. The trend may undermine European leaders’ efforts to lower borrowing costs for countries such as Greece and Italy, while generating larger write-downs and capital shortfalls.

 

• European countries that stayed out of the eurozone are hurting now even though they are not members due to close trade ties with the bloc.  The volume of trade is declining throughout Europe.

 

• Commerzbank swung into a third quarter loss after a large write-down on its Greek sovereign-debt holdings.  It warned that financial turmoil across the eurozone would force it to miss its 2012 profit target.  This is the first sign of a potential credit crunch as European banks scramble to meet new European Union capital requirements.  Also the eurozone’s bailout fund, European Financial Stability Facility, is having difficulty raising €1 trillion as a firewall against the debt crisis since investors want more specifics about how the instrument would be used before committing cash.

 

• The deadline for the budget compromise by the Congressional Supercommittee is November 23 and they are not close yet to an agreement.  They are charged with cutting $1.2 trillion from the budget.  Democrats want higher taxes (especially for the rich).  These are opposed by many Republicans who want major spending cuts, especially entitlements, which in turn are opposed by Democrats.  Lack of an agreement may cause the U.S. credit rating to be reduced.

 

• Ally Financial is considering filing for bankruptcy for its ResCap unit which lost $555 million in the past two quarters. 

 

• Fannie Mae said it would seek $7.8 billion more in U.S. government assistance after posting a net loss of $5.5 billion in the third quarter.  It was the 16^th loss in the past 17 quarters.  The year-ago loss was $1.3 billion.  While mortgage delinquencies have stopped rising, Freddie and Fannie are now selling a large number of properties that they took back through foreclosure and are taking bigger losses on those sales due to falling home prices.

 

• In the last four weeks, as anger over debit card fees festered, more than 650,000 customers signed up for credit unions, according to the Credit Union National Association. The association says that 40,000 additional consumers had signed up on Bank Transfer Day, an initiative on last Saturday to abandon traditional banks organized by people associated with Occupy Wall Street.  The value of those accounts was $80 million.  Another beneficiary of the growing unpopularity of banks is Wal-Mart.  They are expanding a series of financial services to their customers, including debit cards and check cashing.

 

• The Federal Reserve Board has no plans to force big banks to meet Basel III capital requirements early — unless, of course, those institutions want to issue dividends next year.  In early November, Fed Gov. Daniel Tarullo said the central bank would not “pull forward” several deadlines under the new rules.  Before any banks could take comfort in such assurances, however, he added that institutions would have to show they could meet the revised capital targets if they want to issue dividends next year.  Bank stocks are under pressure and asset sales can only benefit a bank so much. As a result, the Fed is clearly eyeing retained earnings as the primary means for banks to reach the Basel III capital thresholds.  Regulators released the names of 29 banks considered globally systemically important banks, or G-SIBs, including eight U.S. institutions: Bank of America Corp., Bank of New York Mellon, Citigroup Inc., Goldman Sachs, JPMorgan Chase & Co., Morgan Stanley, State Street, and Wells Fargo.

 

• Foreclosure sales are moving so slowly in half the states that at the current pace, it will take more than eight years on average to clear the 2.1 million homes in foreclosure or with seriously delinquent mortgages, new research shows.

 

• Home prices fell in nearly 75% of metro areas in the third quarter and the national median price dropped 4.7% from a year earlier reported the National Association of Realtors.  Nationwide, distressed property including foreclosures and homes at risk of foreclosure accounted for 30% of third-quarter transactions, down from 33% in the second quarter.

 

• According to the American Banker, commercial banks have excess deposits that are costing them money.  Dan Geller, an executive vice president at Market Rates Insight in San Anselmo, Calif., estimates that federal deposit insurance is costing banks $1 for every $1,000 in deposits they hold. Banks are also incurring at least $200 in annual overhead costs for each checking account, regardless of whether a balance is $100 or $10,000, he said.  And those costs exclude any interest payment to the customer. The current average interest rate on deposits is 0.57%, which banks have to pay regardless of their need for liquidity, Geller said. At Oct. 31, the excess liquidity deposited at the Fed by banks amounts to $1.5 trillion, earning a rate of 0.25%, Geller said.  Marty Hansen, the president of First State Bank in Fairfax, Okla., concurred, noting that his bank is enduring a 52% loan-to-deposit ratio right now. That’s right. His bank has twice as many deposits as it does loans.  Nationwide, that ratio was 73% at midyear, according to the FDIC’s quarterly banking report. That translates into roughly $8.86 in deposits for every $6.37 in loans on banks’ balance sheets. Those funds have to go somewhere if a bank wants to make any money.  When the financial crisis hit, Congress let banks park money at the Federal Reserve for a paltry 25-basis-point return. Banks have made generous use of this option, which still exists; 72% of all deposit inflows from January to June were moved to the Fed, according to the FDIC. Geller said that, barring a last-minute measure by legislators to extend the Emergency Economic Stabilization Act of 2008, such an opportunity will end on Dec. 31.

 

• European GDP may grow 1.5% this year and 0.5% in 2012, the European Commission said on Nov. 10.  It had earlier projected the 17-nation region to expand 1.6% in 2011 and 1.8% in 2012.  In 2013, the economy may expand 1.3%, the commission said.  The EU can’t exclude the possibility of a “deep and prolonged recession.”

 

CONCLUSION

We see Europe fragmenting into a smaller union which will keep market volatile and weaken world GDP.  It isn’t clear how the U.S. will solve its own debt crisis.  We think the best option is the Bowles-Simpson or Ryan plan.  Romney finally announced his plan which has elements of these earlier plans.

 

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.

 

David Olson

FOCUS ISSUE FOR THE WEEK

This was an eventful week for the European economy as the most recent bailout of Greece started to fragment almost immediately.  Interest rates on the debt of Greece as well as for Spain, Portugal, Italy, and Ireland continued to rise.  A Greek referendum on the bailout was set to take place in January but then was scrapped due to pressure from other eurozone countries.  Papandreou survived a confidence vote, 153 to 145, on November 4.  On November 5, a new government will be formed that may not include him as a candidate.  The G20 did not ratify yet another bailout of Greece nor was a deal made with the IMF to help Greece.  Some commentators see Greece gradually ceding its sovereignty to Germany.  Meanwhile, the first repercussion of the Europe debt crisis hit the U.S. with the massive foreclosure of MF Global.  The world stock markets continued to be volatile and street protests against austerity measures and the weak economy occurred around the world.  On the positive side, October auto sales were up.  The unemployment rate fell to 9.0% even though new payrolls were a disappointing 80,000.

 

MORTGAGE MARKET SUMMARY

The MBA index of mortgage applications rose 0.2% for the week ending October 29.  This is a bit slower than the 4.9% increase the prior week.  Fixed 30-year mortgage rates averaged 4.31 percent, down 2 basis points from 4.33 percent.

 

For the week, the DJIA fell from 12,221 to 11,983.  There were 13 positive trends offset by 21 negative trends.  Six of the negative trends reflect deterioration in Europe.

 

Positive Trends

 

• The U.S. rate of unemployment fell to 9.0% in October, down from 9.1% even though the nonfarm payrolls only were 80,000, and was less than expected.  Payrolls were down from a massively upward revised 158,000 the prior month.  The first estimate of September payrolls was 103,000.  Depending on which analyst you follow, it takes from a 120,000 to a 150,000 increase in payrolls to just keep the unemployment rate constant.  Over the past 12 months, payroll employment has increased by an average of 125,000 per month.  The unemployment rate has remained within a narrow range from 9.0% to 9.2% since April.  Average hourly earnings rose 0.2%, unchanged from September and the average workweek remained unchanged at 34.3 hours.  Overall, the employment picture is still very weak but at least it is not deteriorating.

 

• Federal Reserve officials said the economy has picked up while “significant downside risks” remain, and they refrained from taking any additional steps to ease monetary policy.  They predict the growth rate of GDP in 2012 will be 2.5% to 2.9% and the unemployment rate will decline to 8.6%.  According to Roberto Perli, a former Fed staffer, “the Fed, as of now, does not think it will have to raise rates before the end of 2014.”

 

• Federal Reserve Board Chairman Ben Bernanke signaled on Nov. 2 that the U.S. did not intend to follow the lead of Europeans by calling for large banks to quickly raise more capital.  At a press conference following a two-day Federal Open Market Committee meeting, Bernanke was asked about European plans to require their largest institutions to hold 9% Tier 1 core capital by mid-2012. That is a much faster timeline than the Basel III accord, which would require banks to hold roughly 7% common equity capital by 2019 (not including an additional capital surcharge on the largest banks).  The Fed chairman has previously testified that U.S.’ banks exposure to debt-ridden countries such as Greece, Ireland and Portugal has been “quite minimal” so far.

 

• Total auto and light truck sales were 1,021,313 in October, up 7.5% from a year ago.  Year-to-date, sales were up 10.1% from a year earlier.  At a seasonally adjusted annual rate, sales were 13.26 million vehicles, the highest rate since last February.

 

• Private mortgage insurance defaults declined last month by 19.6%, according to the Mortgage Insurance Companies of America’s (MICA) monthly report.  Private mortgage insurance companies reported September defaults fell to 38,719 from 48,187 the previous month.  New business is down 29%:  private mortgage insurers represented by MICA wrote $4.9 billion in new business September, down 29% from $6.9 billion the same month a year ago. The group (which includes MGIC, Radian, RMIC, PMI, and Genworth) had $477 billion in primary insurance in force in September. That is down 38% from nearly $773 billion in September 2010.

 

• BB&T will acquire BankAtlantic for approximately a $301 million premium, or 2x book. 

 

• The serious delinquency rate on mortgages backed by Fannie Mae dropped to 4% in September, the lowest level since June 2009.  The rate fell every month since the 5.59% peak in February 2009 except for July when it went unchanged. Fannie said the rate fell 3 basis points from August.

 

• Initial claims for unemployment for the week ending Oct. 29 declined to 397,000, down from 406,000 the prior week.  Continuing claims fell to 3,683,000 for the week ending Oct. 22, down from 3,698,000 the prior week.

 

• Productivity rose 3.1% in 3Q, up from -0.1% in 2Q.  This caused labor costs to fall 2.4% in 3Q.  This means reduced pressure on inflation.

 

• Factory orders rose 0.3% in September, up from 0.1% in August.

 

• Third quarter commercial and multifamily mortgage loan originations came in 98% higher than during the same period last year and 10% higher than the second quarter, according to the Mortgage Bankers Association..

 

• Construction spending rose for the second consecutive month in September but missed analysts’ projections by a narrow margin. Overall, outlays grew 0.2%, inclusive of a 0.9% gain in private residential expenditures led by home-improvement projects and a 0.3% rise in private non-residential spending.  Since mortgage rates are at all time lows and home sales are low, families will likely have to remain in their homes longer and spend more on home improvements.

 

• The rate on the ten year Treasury ended the week at 2.045%, down from 2.31% last week.

 

Negative Trends

 

• On November 1 Prime Minister Papandreou announced that the recent bail out agreement of five days earlier would be put before the Greek voters in a referendum in January and later withdrew the referendum after strong opposition from Germany and France.  They feared the entire deal would unravel.  An opinion poll published on October 29 showed 58.9% of Greeks oppose the euro area’s expanded bailout package and debt write-down.  If the referendum were to fail, it would bring down the Greek government and cut off international funding for Greece.  It could propel Greece out of the eurozone.  The referendum which must be approved by the Greek Parliament could be held December 4.  The wait from now until December 4 opens a month-long period of uncertainty for Greece, Europe, and the global financial markets.  This causes more confusion and uncertainty than ever.  Greece needs to borrow more before Dec. 4 and financial markets are likely to be frozen over this period for lending to Greece.  The European Financial Stability Facility will not make any payments for at least a week.

 

• To add to this uncertainty in Greece, although Papandreou survived a vote of confidence 153 to 145 on November 4, he will form a new coalition government on November 5 in which he may not run.  The G20 did not offer yet more backing to Greece nor did the IMF.  So the future of Greece is still very uncertain.  Greece may still drop out of the eurozone rather than endure ten more years of austerity. For the first time the eurozone stated that if they don’t get Greek voter support for the bailout, Greece can withdraw from the union.  This was the first time such a withdrawal was ever considered as an option.  Prime Minister George Papandreou struggled to hold on to power after Greece’s largest opposition party rebuffed his overtures to form a national unity government, raising the prospect of elections that could delay aid needed to prevent default. Opposition leader Antonis Samaras rejected sharing power with Papandreou and called on the premier to quit. Papandreou, 59, scrapped a referendum on a bailout accord with the European Union to avert a split in his party before a confidence vote scheduled for midnight tonight. “I never excluded any topic from the discussion, not even my own position,” Papandreou told lawmakers in Parliament. “I am not tied to a particular post. I repeat I am not interested in being re-elected but just in saving the country.”   Papandreou’s inability to resolve the political gridlock pushes the country closer to the first default by an EU nation even as his scrapping of the referendum averted potential ejection from the 17-member euro region. European Commission President Jose Barroso said he expected a government of national unity will conclude the EU agreement before Greece runs out of funds.

 

• The cost of Italian ten year debt rose to 6.06% on October 28, up from 5.86% a month ago.  Since Italy has a 120% debt to GDP ratio, this high interest rate is very costly.  It suggests the bail out of Greece voted on October 26 is not altogether positive for Europe.  Back in August, interest on ten-year debt in Italy was below 5.0%.  The cost of Greek ten year debt rose to 31% compared to 2% for comparable German debt.  Italy failed to issue growth boosting measures demanded by European Union authorities ahead of the Group of 20 meeting raising further doubts about the government’s willingness to pass economic reforms.  Italy’s debt is 118.4% of its GDP, the next highest after Greece’s 144.9%.

 

• After an initial bounce, markets demonstrated a lack of confidence in Europe’s resolve to protect solvent governments from the financial malaise afflicting its weakest member nations. At a bond auction Oct. 28, the euro area’s third- largest economy, Italy, had to pay investors a yield of 4.93%– a euro-era high — to take the risk of lending it 3 billion euros ($4.2 billion) for three years.  As outgoing ECB President Jean-Claude Trichet put it in a speech in late October, European authorities need the power “to take direct decisions” on economic policy in countries that fail to keep their finances in order.  It is questionable whether any countries will give European central authorities control over taxes and spending very soon.

 

• Unemployment rose to 10.2% in the eurozone in September from 10.1% in August.  Spain’s rate is 22.6% and is the highest.  The lowest is 3.9% in Austria.  Unemployment is now 16.2 million which is at the highest level since records for the Euro-Zone began in January 1998.  Economic growth is slowing in the eurozone.   GDP is predicted to decline to 0.2% in third quarter.  Consumer confidence recently fell to a near two-year low in October.  Household savings rates are rising.  Activity of purchasing managers declined also in October.  Morgan Stanley predicts a 0.5% GDP growth in 2012.

 

• MF Global filed for bankruptcy protection due to a bad bet it placed on Europe’s debt crisis.  Its debt ratings have been reduced to junk and investors have streamed away from the firm.  It has positions of $6 billion heavily related to sovereign debts of Spain and Italy.   Its president is Jon Corzine, formerly head of Goldman Sachs and governor of New Jersey.   This has the potential of being the first casualty of the looming European crisis.

 

• According to Ed Lazear of Stamford’s Business School the cause of the European crisis is bloated government expenditures relative to their private economies and slow growth.  Unless these excessively large public sectors are lowered to become proportional to their private economies, repeated bail outs of their debts will only give temporary relief.

 

• Although Republicans have accused the Obama Administration of increasing regulations, it is not quite true at least in terms of number of pages.  For the first three years of Obama the Federal Registrar has averaged 77,570 pages per year.  In the second Bush administration the Federal Register averaged 77,896 pages and 75,670 in the first Bush administration or 76,783 pages over the entire eight years.  Probably critics are referring to the comprehensive nature of two acts—the Dodd Frank Act and the ObamaCare Act.  The Dodd Frank is 2,319 pages long, mandates 300 new rules, including 160 regulations, of which 80% remain unfinished.  GAO says it will cost $1.25 billion to enforce this law over the next two years.  The Health Care Law is around 2,000 pages long and includes an estimated 95,000 pages of regs of which most have yet to be written.   That is based on 6 pages of the law translated into 429 pages of regulations so far written according to US. News Politics.  There has also been an iffyness about our regulations lately—will taxes be raised or lowered, will they be temporary or permanent, will Washington help raise home values, will the new health care law be implemented or repealed, will proposed regulations be implemented or repealed?  This has led to a huge amount of uncertainty, which has discouraged investment and kept growth in GDP low.

 

• The world’s two largest refrigerator manufacturers, Whirlpool and Electrolux, announced production cuts due to falling demand for their products.  Consumers are cutting back spending on big-ticket items. North American appliance sales this year will be 25% below their 2005 peak.  Western Europe will be down 15% from their 2006 peak.

 

• The Real Clear Politics average of all health polling puts opposition to the Affordable Care Act (ObamaCare) at 50.6% in October and support at 38.4%.  Support is down from a summer high of 41.5%.  According to the Kaiser poll, support is 34% in October, down from 41% in September.  Opposition is 51%, up from 45% in September.  The biggest slide came from Democratic supports whose share of support fell from 65% in September to 52% in October.

 

• Per capita median household income as of June 2011 was 3% lower than in June 2007 reported the Commerce Department.  Since the recession’s end in June 2009, the economy has not been adding jobs at a fast enough pace—at least 150,000 jobs per month—to absorb the growing population.

 

• The ISM-Chicago index fell to 58.4 in October, down from 60.4 in September.  This indicates a slowing down in manufacturing.  An index of 50 means no growth at all.

 

• The national ISM index in October fell to 50.8, down from 51.6 in September.  This is getting close to 50 which signifies no growth at all in manufacturing.  But the ISM index of new orders did rise a few points which is positive for future growth.

 

• The national ISM-services index in October fell to 52.9, down from 53.0 in September.

 

• Construction rose 0.2% in September which is slower than the 1.6% growth in August.

 

• Bank analyst, Mike Mayo, says the next decade will be the worst for bank stocks since the 1930s.  Margins are getting squeezed.  There will be very slow growth.  In the past decade U.S. banks tried to grow too quickly and took on too much risk.  He said the recent resolution of the Greek crisis was dead on delivery from every aspect.  The Canadian banks have performed better over the past decade because they have less competition.  Of all U.S. banks he likes PNC the best.

 

• The ADP estimate of net new employment was 110,000 jobs in October, down slightly from 116,000 in September.  This indicates a continued lackluster market for employment.

 

• PHH Inc. reported a net loss of $148 million in the third quarter, much worse than last year’s loss of $8 million.

 

• Ally Financial Inc. (Ally) on Nov. 4 reported a net loss of $210 million for the third quarter of 2011, compared to net income of $113 million in the prior quarter and net income of $269 million for the third quarter of 2010.  Core pre-tax income, which reflects income from continuing operations before taxes and original issue discount (OID) amortization expense primarily from bond exchanges, totaled $102 million in the third quarter of 2011, compared to $466 million in the prior quarter and $635 million in the comparable prior year period.  In order to proactively address the changes in the mortgage industry as a whole, the company will take immediate action to reduce its focus on the correspondent mortgage channel. Ally will maintain correspondent relationships with its key customers and will continue to participate in the consumer and broker lending channels, which are higher margin businesses. The correspondent channel represents approximately 84 percent of the company’s mortgage originations year-to-date.  As a result, Ally’s exposure to MSR asset volatility will decrease over time, and the company will be better positioned to comply with Basel III requirements.

 

• The U.S. homeownership rate in the third quarter was at the second-lowest level in 13 years as borrowers were evicted after foreclosures and the tightest mortgage standards in more than a decade thwarted new buyers.  The ownership rate was 66.3%, up from the 13-year low of 65.9% in the prior quarter, the U.S. Census Bureau said in a report on Nov. 2.  It was the only gain in two years.  The vacancy rate, measuring empty properties for sale, was 2.4%, compared with 2.5% in the second quarter, according to the report.

 

• Freddie Mac reported a $4.4 billion loss for the third quarter and said it will seek $6 billion from the U.S. Treasury Department. The request brings Freddie Mac’s total Treasury draw to $72.2 billion although it has returned $14.9 billion of that money to taxpayers in the form of dividend payments to the government (including $1.6 billion in the 3^rd quarter).

 

CONCLUSION

A trimmer Europe may be a less costly solution than expecting the Greeks to endure ten years of austerity and Germany to contribute ever larger sums to bail out southern Europe.  Devaluation would get the pain over more quickly.  The U.S. has so far avoided a double dip recession as bond investors streamed out of Europe to the U.S.  But it is harder to foresee better than mediocre growth for U.S. banks over the next five years.

 

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.

David Olson

FOCUS ISSUE FOR THE WEEK

There are two major cures being proposed for Europe’s debt problems:  1) kick out Greece and the other weaker members of the Euro-Zone and have them deflate their currencies or 2) move towards fiscal federalism.  A spokesperson for Societe Generale forecasts a shift to federalism said that fiscal federalism means structural reform, fiscal austerity, and wage restraint, not a transfer of sovereignty to Germany.  Other commentators such as Michael Lewis see the differences in culture within Europe as too great to get a fiscal union.  There is great fear of German control over their countries.  At present, only Germany has the credit and restrained culture sufficient to bail out Europe.  From my survey conducted two weeks ago, I found Europeans and especially Germans weren’t in a mood to pay for further bailouts for other weaker countries in Europe.  How this crisis works out will be the dominant issue over the next five years.  This week the Euro-Zone managed to delay the solution a few months more.

Meanwhile, the U.S. is dealing with its own debt crisis as it uses austerity to cure its problems.  This is causing prolonged high levels of unemployment and no growth in household income.  Growth in real GDP will at best average 2% over the next ten years according to several commentators and may dip back into a recession if Europe tanks.  The banking system worldwide is hurting and it is hard to see a quick recovery to our economy.  We all have to work harder, upgrade our skills, and do more saving.

MORTGAGE MARKET SUMMARY

The Mortgage Bankers Association’s index of mortgage application activity, which includes both refinancing and home purchase demand, rose 4.9% in the week ended Oct 21.  This was a recovery from the prior week when the index declined 14.9%.  Fixed 30-year mortgage rates averaged 4.33%, unchanged from the previous week.

For the week, the DJIA rose 3.5% from 11,808 to 12,221.   There were 10 positive trends offset by 20 negative trends.

Positive Trends

• Third quarter GDP rose to a 2.5% annual rate, up from 1.3% in second quarter. This is slightly lower than expected but is a great improvement.  There also was an increase in optimism by economists due to an increase in capital good shipments and construction activity.  What happens in 2012 is partly dependent on whether congress will vote to keep last December’s payroll-tax cut in place and renew extensions on unemployment benefits.  The average annual rate of real GDP over the past 40 years has been 2.84%.  Several forecasters are predicting that over the next ten years real GDP will average only 2% as we increase our saving and bring down our excessive debt levels.

• On October 24, Obama announced a new overhaul of the HARP plan to let borrowers whose mortgage are backed by Fannie and Freddie to refinance regardless of how far their homes’ values have fallen. Loans that exceed the current 125% LTV won’t be eligible to refinance until early next year.  The original HARP plan was used by only 894,000 borrowers.  The new overhaul is projected to be used by 500,000 to three million borrowers.  It requires much less data on credit worthiness and job security than in the past.  Borrowers won’t have to refinance with the company that services their loan but may go to any lender.  This amounts to a transfer from savers to borrowers.  The program potentially undermines the creation of a private housing finance market and leaves unsettled the future of Fannie and Freddie.  Critics of the plan charge that without first getting the rate of unemployment down, this new program will not likely reduce mortgage foreclosures much and will cause more harm to mortgage lenders.  Supporters of the plan see this is a last effort by Obama to recover the housing market before the election next November.  Currently lenders are behind in their refi activity and it takes a long time to hire and train new underwriters.  Until the regs are written, it is hard to know how many consumers will actually be served.

• Enhancements to HARP Phase II address several other key aspects of HARP including: eliminating certain risk-based fees for borrowers who refinance into shorter-term mortgages and lowering fees for other borrowers; removing the current 125 percent LTV ceiling for fixed-rate mortgages (FRMs) backed by the GSEs; waiving certain representations and warranties that lenders commit to in making loans owned or guaranteed by the GSEs; eliminating the need for a new property appraisal where there is a reliable automated valuation model (AVM) estimate provided by the GSEs; and extending the end date for HARP until Dec. 31, 2013 for loans originally sold to the GSEs on or before May 31, 2009.  This will reportedly enable about 1,000,000 homeowners to refinance their homes.  If we assume an average loan balance of $200,000, this means a potential origination volume lift of about $200 billion in production. Given the MBA forecast of $900 billion, this program would represent about a 22% potential increase in national volume.  But it still leaves ten million mortgage holders underwater.

• The retail price of a gallon of gasoline in the U.S. fell to $3.46 on October 24, down from $3.97 in early May. Many economists expect gasoline prices to fall further which who help consumer spending.

• New home sales rose to a 313,000 annual rate in September, up from 296,000 in August. This was higher than expected but is still basically flat since 2009.  A normal rate would be 1 million.

• Initial claims for unemployment fell to a 402,000 annual rate for the week ending Oct 22, down from 404,000 the prior week. This shows a very slight improvement.  Continuing claims fell to 3,645,000, down from 3,741,000 which is a big improvement.

• Personal income rose 0.1% in September after falling 0.1% in August. Personal spending rose 0.6% in September from 0.2% in the prior month.

• GDP recovered to pre-recession levels in 3Q11.  However, GDP per capita remains 2.9% below pre-recession levels according to the Commerce Department.

• Ed DeMarco, acting direction of FHFA is under huge pressure to do principal write-downs of mortgages but he is resisting because he doesn’t want to increase taxpayer losses at Fannie and Freddie above the $141 billion current level.

• The final reading of the October University of Michigan Consumer Sentiment Index came in at 60.9, above the 59.4 registered in September and the 57.5 seen in the preliminary reading.  But this is still near the lowest level recorded during the past six years and down from the average of 85 for that period.

Negative Trends

• A report by international inspectors said Greece’s funding needs can only be met if bondholders accept write-downs of 60% or if Euro-Zone governments lend Athens billions of euros more than planned. But instead the European leaders agreed on a 50% haircut by private investors and they agreed to expand the firepower of the European Financial Stability Facility to guarantee €800 billion to €1.3 trillion of bonds which is up from the current level of €440 billion.  Greece received €130 billion in bailout loans.  In combination, that will reduce Greece’s debt from 160% of GDP to 120% by 2020.  There is a risk to the Euro-Zone’s triple-A rates states, mainly Germany and France if they raise this fund.  Harvard professor Rogoff believes investors will have confidence in the EZ only “if they lay out a vision of how it will put itself on track and move toward greater political and fiscal union.”  There is another savior in the wing—the European Central Bank.  But the ECB has no incentive to betray in advance its willingness to get France and Germany off the hook by printing money to keep Europe’s heavily indebted governments afloat.  There are also a series of measures for bank recapitalization.  One requires Euro-Zone banks to achieve a 9% capital ratio for core Tier 1 capital by June 2012. 

• The head economist at Mitsubishi UFJ Securities believe the meeting on Oct 23 over the European Monetary Union was a success. The ECB was taken out of the recovery.  Greece will likely go into default and be taken out of the EMU.  There isn’t enough political will left in Germany to support it.  Portugal will probably be next.  But there is a good chance that Italy and Spain can be saved.  There will likely be a recession in Europe next year.  The open question is what becomes of the largest French banks and their impact on U.S. banks?

• Niall Ferguson of Harvard believes Europe is muddling about and not taking the serious steps to address this crisis. Most European banks are currently insolvent so there will likely be a bank run which will cause at least one major bank to fail within the next six months.  The problem is bigger than just Greece.  Ireland and Portugal are nearly as bad.  In the end, he thinks the ECB will have to print its way out of this problem.

• Fitch issued a statement that, “The 50 percent nominal haircut on the proposed bond exchange would be viewed by the agency as a default event under its Distressed Debt Exchange criteria.” While the accord is “a necessary step to put the Greek sovereign’s public finances on a more sustainable footing,” Greece will face “significant challenges” including ratios of government debt to gross domestic product at “well over 100 percent even in a positive scenario.”

• The Federal Reserve estimates that 37.7% of U.S. money market funds are exposed to European banks as a percent of assets. If the Euro-Zone crashes as expected there probably will be a decline in the U.S. stock markets.

• The risk of recession in the Euro-Zone is mounting. The PMI for the EZ fell nearly two points to 47.2 in October according to Markit.  PMI readings below 50 signal a drop in business activity. Only two major players—Germany and the European Central Bank—have much financial firepower left, and neither is keen on using it.  The Euro Zone is on the cusp of a deep recession said an economist at Capital Economics.  In fourth quarter 2001 GDP is expected to be -1%.  Investors are getting increasingly nervous about Italy driving up its borrowing costs to levels that potentially threaten the country’s solvency.

• Sony Kapoor, managing director of policy group Re-Define Europe, says the agreement reached on Wednesday was significant politically but it is still too little and too late. The Euro-Zone will need more money from the ECB and will need to create a growth strategy which will be difficult since Japan and the U.S. are so weak.

• Americans now owe about $950 billion in student loans — more than their total credit-card debt. Two out of five Americans with federal student debt can’t make monthly payments and either defer, default or are delinquent, according to Mark Kantrowitz, publisher of Fastweb.com, a free scholarship-matching service, and FinAid.org, a source of student financial aid information.  There are very few ways to reduce or renegotiate education debt; unlike credit-card debt, few can do this via bankruptcy.  A provision in the 2010 health-care reform law pushed private lenders out of the business of issuing federally guaranteed loans. The 2010 Dodd-Frank financial reform law puts the new Consumer Financial Protection Board in charge of collecting better data and regulating private student lenders. The new agency also is planning to launch an online tool — a “student debt assistant” — to help debtors learn more about their options.

• The index of consumer confidence by the Conference Board fell to 39.8 in October, down from 46.4 in September.  This was lower than expected and was the lowest level since March 2009.

• The Bloomberg Consumer Comfort Index fell to minus 51.1 in the week ended Oct. 23, the lowest in a month, from minus 48.4 the prior period. Ninety-five percent of those surveyed had a negative opinion about the economy, the worst since April 2009 and one percentage point shy of a record high.

• The FHFA housing index fell -0.1% in August, down from 0.8% in July. This means even prices of Fannie and Freddie mortgage loans fell in value in August without including prices of foreclosed homes.

• The Case Shiller seasonally adjusted index of home prices fell 0.04% in August. There were declines in 14 cities and increases in 6 cities.  The biggest increase was in DC and the biggest decline was in Atlanta month-over-month.  Using the unadjusted data, the index rose 0.15%.  Prices rose in ten cities and fell in 10 cities.  Prices are down 3.8% since a year ago which is more than expected by economists.  Since April 2009, home prices have been basically flat.  Prices recovered 6.9% from April 2009 to July 2010 and then fell 7.6% to March 2011.  They retreated back to where they were in April 2009.  From March 2011 to August 2011 they recovered 3.7%.  As of August 2011, prices were still down 30.8% from their peak in July 2006.  According to CoreLogic, more than 25% of home borrowers are underwater.  That is, their current property value is less than the value of their mortgage.  Due to the large imbalance between supply and demand, home prices are expected to fall further before they reach a true bottom.

• Strong growth of rents and occupancy levels of rental apartments have pushed some building values to record levels as Americans shift away from home ownership.  At the end of September 2011, apartment vacancies fell to 5.6%, down from 5.9% in June.  The U.S. is expected to see 1.5 million rental household formations in 2011 according to Green Street.  At some point this increase in household formations, could be shifted to supporting home purchases.

• Pending home sales reported by the National Association of Realtors fell 4.6% in September, after falling 1.2% in August.

• The latest trends report from CoreLogic shows homeownership rates for the 25 to 34 and 35 to 44 year-old age groups composing the largest number of first time home buyers, was down 10% in 2010 compared to 30 years earlier. The slip in homeownership among first time buyers is apparently because of doubts over the weak economy and declining home prices in most areas of the U.S.

• Arizona regulators have taken over PMI Group. Now the insurer will pay just 50% of claims in cash, and the remainder will be deferred.  PMI had been paying claims of about $1.5 billion a year to reimburse lenders and mortgage investors.

• MGIC Investment reported a wider third-quarter loss as the cost of claims from mortgage delinquencies rose. It dragged the stock price of others, such as Radian and PMI, down. Most believe that capital reserve levels have been depleted at many older MI companies, and MGIC has been unprofitable for 16 of the last 17 quarters.

• Genworth Financial Inc.’s mortgage insurance business will either improve results or cease writing new coverage, according to analysts at CreditSights Inc.  The unit “faces a binary outcome,” Rob Haines and Eric Axon of CreditSights said in a note to clients today. “Either the MI business becomes more viable as recent vintage business offsets deterioration in the older vintages, or the business is placed into run-off. We believe that either outcome would improve market perception of the company’s credit profile.”

• Orders for durable goods fell 0.8% in September after declining 0.1% in August.  Much of the decline was in transportation.  Excluding the transportation sector, there was an increase.

• The Census Bureau reported that fewer Americans moved in 2010 than in any year since World War II due to the housing bust and high unemployment.

CONCLUSION

GDP rose at a 2.5% annual rate in 3Q but there is little hope of a return to the higher levels of the past of closer to 3%.  More likely there will be another bump as Europe struggles to deal with its financial crisis.  Its growing austerity cuts back purchases from the U.S.  Slow growth means continued low interest rates but they can’t get any lower than they are currently.  That means refis will decline in 2012 and originations will be around $1 trillion.  We see opportunities for smaller retail mortgage originators who aren’t encumbered with servicing poorly underwritten loans of the past.  Those firms with skills in compliance will do the best.  But we hear of many smaller commercial banks having to shut down because they can’t afford the cost of compliance.

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

David Olson

FOCUS ISSUE FOR THE WEEK

I’ve been in California for the past ten days visiting relatives and friends and hiking in Lake Tahoe and Yosemite National Park.  Although, my observations aren’t totally random they may be insightful.  While hiking I interviewed about 60 Europeans about how they thought the crisis in Europe would be settled.  They were uniformly opposed to further bailing out Greece and thought the country ought to be separated from the rest of the European-Zone and put back on the drachma at a devalued level and allow the market to operate.  The Germans were especially adamant that they didn’t want to have to use their hard work to indefinitely bail out Greece and other weak countries. The only man who questioned this, a highly educated Finn, said unfortunately no provision was made when forming the Euro-Zone for countries to step back out and he was uncertain how this could be accomplished.  The next big meeting on the crisis is scheduled on October 23.  Much is left to do to get through this crisis which promises not to be resolved without causing much damage to Europe and some to the U.S..

I found it curious that I sat next to two small business owners while crossing the country.  On the flight west I sat next to the retired former owner of a family jewelry business in Holyoke, Mass started by his father 97 years ago.  He had to sell it recently when gold soared in value and people stopped buying jewelry.  On the return trip I sat next to a woman who owned a dress shop in Kansas City for 55 years and was having a very hard time.  She hasn’t earned anything in the past three years and has had to reduce her staff from 13 to 3.  She felt she couldn’t sell her business because there are no buyers.

In contrast to struggling small businesses was the quintessential successful American firm we saw at Google headquarters in Mountain View, CA.  Touring with a friend employee we saw playful office spaces with many free perks—food, gymnasium, massage parlors, beautiful cafeterias, halls and lobbies hung with employee art work, lounging areas with comfortable colorful furniture, bookshelves and toys!  Linking the 28 building campus were lovely landscaped walkways and free bikes painted in bright primary colors parked outside every door.  All to attract and hold the best and brightest employees in the world, the source of a flow of innovation that make Google a world leader.  Most of the employees we saw on a Saturday afternoon were Asian and the friends we were visiting are Indian.  They thought the future belongs to China and India.  Yet, despite many challenges in the U.S., the most creative ideas are still coming from here and inventor and business leader Steve Jobs is being idolized all over the world.  More people like him would reignite our growth rate and keep the U.S. in the forefront of economic development.

MORTGAGE MARKET SUMMARY

The MBA reported that applications for mortgages fell 14.9% during the week ending October 15, down from a 1.3% gain during the prior week.  Rates for mortgages have been rising as have prices, especially for gasoline.  We still haven’t reached the bottom of the housing market but are getting closer as inventories fall and housing prices increase in many parts of the country.  Housing starts mainly for multifamily were very strong in September.

For the week the DJIA rose from 11,644 on October 14 to 11,808 on October 21.  For the week there were 13 positive trends offset by 14 negative plans.

Positive Trends

• Industrial production rose 0.2% in September from August. Utility production fell 1.8% in September probably because of a decline in use of air conditioners.  Manufacturing rose 0.4%.  Capacity utilization rose to 77.4% in September, up from 77.3% in August.

• Housing starts for September rose to a 658,000 seasonally adjusted annual rate, up from 572,000 in August. This was much higher than expected and was mainly driven by rising demand for apartments and condos as more people become renters..  However, housing permits fell to a 594,000 rate, down from 626,000 in August.

• The NAHB housing market index rose to 18 in October, up from 14 in September.  This shows a little improvement in home builder sentiment but is still very low.  An index of 50 is neutral (neither positive nor negative).

• Realtor.com reports that housing inventories in September have fallen 20% from a year ago to 2.19 million homes listed for sale. Many sellers have taken their homes off the market.  This absence of inventory is a limiting factor on sales volume.

• Initial claims for unemployment were 403,000 for the week ending October 15, which is slightly improved from the prior week when it was revised up to 409,000. The four week moving average fell also to 403,000, down from 409,000 the prior week.  But continuing claims rose to 3,719,000 for the week ending October, up from 3,694,000 the prior week.  Taken together, this shows the employment situation is remaining flat and not improving.

• The Obama administration scrapped the Class program within Medicare due to lack of funding. This program would have provided home health services and nursing home care for the middle class.  The entire Medicare program passed by the Administration is under stress as expenses soar.

• Both Citicorp and Wells Fargo reported increased profit in third quarter above that a year earlier and over second quarter, but the stocks fell at both firms. Investors are worried fears over the U.S. economy and debt problems in Europe.  Wells is now the most valuable bank by market capitalization.  Citi reported $3.8 billion in profit and Wells reported $4.1 billion.  Bank of America reported $6.2 billion.  Goldman reported a loss for the quarter.  U.S. Bancorp posted a 40% gain in the third quarter to a record $1.27 billion by increasing top line revenue by 4.5% (largely through additional marketing and sales), while reducing charge-offs and delinquencies. Bank of New York Mellon released 3Q earnings that were 4.7% higher at $651million. While low rates hurt margins and caused the bank to waive mutual fund fees, an increase in market share and an expense cutting program helped boost net earnings. The residential mortgage banking segment at PNC earned $22 million in the third quarter, less than half of the $55 million it made in the second quarter and one-fourth of the $97 million profit of the third quarter 2010. NYCB’s mortgage banking income doubled between the second and third quarters, driven by the drop in interest rates and an increase in refinance applications.

• The CPI rose 0.3% in September, unchanged from 0.3% in August. The core CPI slowed to a 0.1% increase, down from a 0.2% increase in August.  Year-over-year, the CPI was up 3.9% which is higher than desired by the Fed.   Big increases in gasoline prices (33.3%) are the biggest cause of inflation.  Year-over-year, the core CPI was up only 2%.

• Fifty-five million Social Security beneficiaries will receive a 3.6% cost-of-living adjustment next year, the U.S. government said on October 19.  There was no increase last year.

• The Philadelphia Fed index of manufacturing rose to 8.7 in October, up from -17.5 in September.

• The Conference Board’s index of leading indicators was 0.2% in September, which is slightly slower than the 0.3% increase in August.

• According to the Federal Reserve’s Beige Book, “Overall economic activity continued to expand in September, although many districts described the pace of growth as ‘modest’ or ‘slight.’” Conditions in the labor market were “little changed, on balance, in September” and several districts saw “only limited and selective demand for new hires.”

• BuildFax unveiled its BuildFax Remodeling Index (BFRI) for August 2011 which showed that remodeling activity reached a record high during the month. BuildFax found that, based on its national footprint of permit data, an estimate of over 3.3 million residential remodeling projects will be permitted in 2011. This figure is up from the estimated 3.1 million residential remodeling projects that were permitted in 2010, an almost 9.5 percent increase. August became the month with the highest level of remodeling activity since the Index was introduced in 2004 and represented the 22nd consecutive month of increases.

Negative Trends

• A meeting will take place on October 23 to deal with the Greek debt crisis. Greece needs more than the $162 billion promised three months ago.  The EU faces resistance from banks over plans for larger write-downs in Greek government debt and a forced recapitalization of banks.  Back in July leaders agreed to raising bank’s core equity capital to 5% for the stress-tested banks but now are considering raising this to 9%.  If Greece is allowed to default and devalue, the three largest French banks will suffer from a major write-down.  This may hurt other banks.  As of October 21 a disagreement between Germany and France over virtually every point in the plan forced the bloc to concede than the EU summit on Sunday won’t produce an agreement.

• Merkel may endorse policies unpopular with her Christian Democratic voters at an Oct. 23 European summit, bowing to world leaders including President Barack Obama, to do more to stem the debt crisis that began in Greece and is now rattling core economies such as Italy and France.

• A global recession is likely if the European debt crisis isn’t resolved within a year, the Nobel Prize-winning economist Dale Mortensen said. Spain’s credit rating was cut on October 19 for the third time in 13 months by Moody’s Investors Service as Europe’s sovereign debt crisis threatens to engulf the nation.

• The MBA predicts mortgage volume of $900 billion in 2012, down from $1.2 trillion in 2011. GDP growth will be only 1.2% in 2011 and 1.7% in 2012.  By 2013 GDP growth increases to 2.4%.  The unemployment rate will rise to 9.3% in 2012.  There is a chance for a slight recession next year due to a European recession that has probably already started.

• Payrolls fell in 25 U.S. states in September, led by North Carolina and Ohio, a sign the weakness in the job market is broad-based. Nevada continued to lead the nation in unemployment with a rate of 13.4%.  The economy needs to generate faster sustained job growth to lower unemployment and spur the consumer spending that makes up about 70% of the economy.  The next highest unemployment rates were in California at 11.9% and Michigan at 11.1%.

• The producer price index rose 0.8% in September, up from 0% in August.  But the core PPI rose only 0.2%, up from 0.1%.

• CoreLogic reports that the five states with the most homes underwater are California, Florida, Arizona, Michigan, and Ohio. These states have 5.7 million homes underwater.

• Residential lenders sold $27.7 billion of Ginnie Mae mortgage-backed securities to investors in September to bring the issuance amount to $350.3 billion for fiscal year 2011, reveals a new report from the Ginnie Mae. The total issuance amount is down 15% from $413 billion in 2010. Ginnie Mae MBS activity has now fallen for two consecutive fiscal years.

• The DJIA was 11,808 at the end of this week making it close to the beginning of the year when it was 11,577. We’ve lost most of the gains of the year.

• Existing home sales in September were at a 4.91 million seasonally adjusted annual rate, down from 5.06 million in August. This indicates that housing is remaining flat.  However, sales were up 11.3% from a year ago.  The national median existing home price fell to $165,400 in September, a 3.5% from a year earlier.  Inventories represented an 8.5-month supply at the current sales pace, compared with a healthy level of about six months. Foreclosures and other distressed properties represented about 30% of sales.

• The Bloomberg Consumer Comfort Index’s monthly expectations gauge dropped to minus 45, the worst reading since February 2009. The weekly measure of current conditions was minus 48.4 for the period ended Oct. 16, up from minus 50.8 the prior week that was close to a record low.

• The Thomson Reuters/University of Michigan preliminary index of consumer sentiment dropped in October as Americans’ outlooks for the economy and their finances slumped to the lowest level since 1980.

• Massachusetts’ highest court added further turmoil to the housing market on October 19 when it ruled that buyers of some foreclosed homes may not be the legal owners of those properties. The decision leaves in limbo hundreds, if not thousands, of people who bought homes seized by lenders under questionable circumstances. They are left with no easy recourse; among their options are to sue the lender behind the botched foreclosure or “reforeclose’’ on the prior owner.

• MetLife Inc. is seeking a buyer for its mortgage operation as it increases focus on its main insurance business. Chief Executive Officer Steven Kandarian announced in July he was putting the deposits business on the market as the federal government tightens rules on the biggest financial firms.  They were the second highest originator of mortgages after Wells Fargo.  This exodus of several large mortgage firms will create opportunities for more smaller firms to expand.

Observations by Christine Clifford on the Mortgage Industry

Last week I was in Chicago meeting with clients who were attending the Mortgage Bankers Conference.  Conference attendees were surprisingly optimistic.  I suspect that record low rates and strong refinance volume were attributable to the upbeat mood.   I heard a lot of positive comments about the quality of the conference and got the impression that people believe Dave Stevens is doing a good job and the association is on a positive trajectory.

All of the mortgage bankers I met with last week have been working very hard.  Volume levels were high but firms were reluctant to hire since they are convinced that we will come to the end of the refinance wave soon and volume will decline.  Continuing repurchase requests and compliance with the next phase of the GSEs loan quality initiative were a concern.  I heard a lot of complaints about repurchase requests for performing loans for technical reasons and a lot of discussion about how long the GSEs would push back loans for what many viewed as questionable technical reasons.  On the positive side, many believe the GSEs have gone through most of the pre-2008 book and the amount of repurchase requests overall should now begin to diminish.  Some bankers commented that the amount of money spent on quality control and auditing doesn’t seem to be aligned with the cost of the risk and said they are not able to do thoughtful risk reward analysis when it comes to controls.  I get the impression that perfection is expected from senior management and regulators regardless of the cost.  The industry is struggling to respond to the existing regulatory challenges and bracing for more.  Rising compliance cost is driving consolidation and causing firms to shrink and exit the mortgage business resulting in a continuing decline in the number of lenders.  This will not benefit consumers but should help maintain margins at a level that will allow the remaining players to make a profit.  On a positive note, I talked with investors that see the changes in the industry as an opportunity and are investing in new companies built to succeed in a compliance heavy environment.

CONCLUSION

The economy is showing very little growth and the unemployment rate is not declining.  The big issue facing our nation is the resolution of the Greek debt crisis.  With massive strikes occurring in Greece protesting austerity measures, it appears less likely the 17 members of the Euro-Zone will be able to remain together.  German citizens are less willing to once again bail out Greece.  If Greece is removed from the Euro-Zone, it is likely that one or more major European banks will fail, which could hurt some large American banks and push us back into a recession.  Meanwhile, some smaller players were finding opportunities to expand in the mortgage industry.

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

David Olson

FOCUS ISSUE FOR THE WEEK

Two events dominate the week—the continued march toward the inevitable default of Greece and class warfare being waged by the Democrats to mask their failed economic policies.  Sometime over the next six months Greece will default on its debt because it can’t pay the huge interest on it.  But this will lead to just one more fix by Germany, the ECB, and the rest of the Euro-Zone.  The cost of ejecting Greece from the Euro-Zone is deemed too high so we think the group will be forced to take a series of expensive steps towards forming a fiscal union.

Class warfare reared its ugly head in the Senate with the proposed millionaire’s tax proposal which only makes sense politically.  If passed, it would slow the economy further.  The Democrats are riding on the coattails of the protestors marching on Wall Street blaming big banks for the recession.  What exactly they expect these banks to do isn’t clear.  Also, Senator Durbin asked B of A customers to quit using B of A.  This would further weaken the bank which is already in a weakened state and having to lay off 30,000 employees.  Their stock is selling for under book value.  By fomenting a revolution, maybe the Democrats hope to stay in power and avoid solving the national debt problem.

MORTGAGE MARKET SUMMARY

The MBA index of mortgage applications fell 4.3% during the week ending September 30, after rising 9.3% the prior week even though mortgage rates were at an all time low.  The fall-out rate on new loans is very high due to low income, poor credit, and low appraisals.

For the week ending Thursday, the DJIA was 11,123, up from 10,913 a week ago.  For the week there were 8 positive trends offset by 20 negative trends.  I will be out of town all next week so the next newsletter will be a few days late.  Thank you for your patience.

Positive Trends

• The ISM index rose to 51.6 in September, up from 50.6 in August indicating a slight improvement.  It was a bit higher than expected.

• Construction spending rose 1.4% in August from -1.4% in July and was also higher than expected.  Total construction was at an annual rate of $799.1 billion.  This is well off its peak of $1.2 trillion in March 2006.

• Auto sales in September rose to a 10.04 million annual rate, up from 9.4 million in August.

• Fannie Mae said the rate of seriously delinquent single-family home loans fell 5 basis points in August to 4.03%. Freddie Mac said its percentage of loans over 90 days past due dipped 2 basis points to 3.49%. That’s down from their February. 2010 peaks of 5.59% and 4.20%, respectively.

• Private industry added 91,000 net new jobs in September, according to ADP which is an early indicator of the BLS report on employment.  This was up slightly from 89,000 in August.  But it still is way below 150,000 necessary just to keep the unemployment rate unchanged.  This suggests that the unemployment rate will be 9.1% or more in September when it is reported on October 7.  In another job-related report, U.S. employers announced plans to trim 115,730 workers from the payrolls last month, more than doubling from August, according to Challenger Gray & Christmas.

• Housing affordability rose in August according to the National Association of Realtors. The average price of a home fell to $168,400 from $171,700 and the average mortgage rate fell to 4.69% from 4.70%.

• Mortgage-related failures among lenders are down 42% as of September 2011 from September 2010. The improvement is entirely due to fewer failures among federally chartered commercial banks; mortgage-related losses contributed to the same number of nonbank mortgage lenders and credit union failures this year as last.  The source of this report was realestateeconomywatch.com.

• Japan’s large manufacturer’s business sentiment index for third quarter rose to 2 from minus 9 in second quarter. The biggest improvement was for large car manufacturers.

Negative Trends

• The Greek government acknowledged on October 2 that it will miss its deficit target this year. GDP for the year 2011 is expected to contract 5.5%.  This is the third year of their recession.  The government agreed to extra austerity measures such as cutting public sector salaries, cutting pensions, and closing some government-linked organizations.  But tax collections are down and social welfare outlays are up.

• The European Union reported that consumer prices rose by 3% in the 12 months to September, up from 2.5% in August and well above their target of just below 2%.

• The PMI index for the euro zone fell to 49.2 in September form 50.7 in August, indicating the economy contracted. The economic sentiment indicator for manufacturers, service providers, other businesses, and consumers fell for the seventh straight month to 95.0 in September from 98.4 in August.

• The Euro fell in value to $1.33/euro on October 3, down from a peak this year of $1.49 in June and down from $1.36 a week ago. By October 4 it fell further to $1.32.  This is probably due to lack of confidence in the euro-zone economy and the fear of a Greek debt default.

• Bill Gross, the manager of the world’s biggest bond fund–PIMCO, said the global economy risks lapsing into recession with the pace of growth falling below the “new normal” level the firm has predicted since 2009.

• Top European officials admitted on October 4 that Greece’s fiscal distress is deepening and increased the change in the July deal to give Greece more cash.  This could be revised to exact a greater toll on its private-sector creditors.  German Chancellor Angela Merkel said that Europe’s rescue fund will only be used as a last resort to save banks.

• A major Belgium/French bank, Dexia, was on the verge of a government-backed breakup.  The value of its stock has fallen 62% over the past year to €1/share.   It is exposed to over €20 billion in sovereign debts of Greece, Italy, Portugal, and Spain representing 128.5% of its core capital.  It is one of Europe’s top 20 banks in assets.

• Initial claims for unemployment for the week ending October 1 were 401,000, up from 395,000 the prior week.  This verifies that the economy isn’t recovering yet.  However, continuing claims fell to 3,700,000 for the week ending September 24, down from 3,752,000 from the week earlier.

• A survey of economists by Bloomberg estimates the September rate of unemployment at 9.1%, unchanged from August.  They estimate GDP to grow at a 1.7% annual rate in 3^rd quarter, down from 2.1% in their August estimate of 3^rd quarter GDP.

• The UBS-Commodity Index closed on September 30 14.7% below the level at the end of August. That brought it to the lowest level since last October.

• The DJIA fell to 10,597 on Oct 3 due to fears about Greece. This was a new low for the year.  Its 12 month high was 12,876 on May 1 so we are down 17.7% for the year from that peak.  Bank America hit a new low for the year at $5.53/sh.  By Oct 5 the market recovered to 10,900.

• Factory orders in August fell 0.2% from a 2.1% growth in July. Factory shipments in August also fell 0.2% after a 1.2% growth in July.  This is evidence manufacturers are working off a backlog from earlier in the year rather than attracting new business.  There is evidence worldwide that manufacturing is slowing down.  The J.P. Morgan global manufacturing index fell to its lowest level since June 2009.  It fell to 49.9 in September from 50.2 in August.  New manufacturing orders in Europe dropped at their fastest rate in 27 months reported Markit.  European production in September fell to 48.5 from 49.0 in August.

• Millions of current and former homeowners will have a chance to get their foreclosure cases examined to determine whether they should be compensated for banks’ mistakes under a wide-ranging review being planned by OCC. This will be a substantial undertaking at great expense to the banks.

• Bank of America plans to shutter its correspondent mortgage arm by the end of this year. The bank had hoped to sell the unit and had been in talks with Fortress Investments for several weeks but was unable to reach an agreement on price, sources say. In the second quarter, BofA purchased about $21.8 billion of loans from correspondents, second to the $26 billion of loans bought by Wells Fargo, according to figures compiled by National Mortgage News and the Quarterly Data Report.

• Congressional Democrats are pushing customers to quit doing business with Bank of America Corp. and one lawmaker is aiming to make it easier for them to stop after the biggest U.S. lender announced plans for new debit-card fees. Representative Brad Miller, a member of the Financial Services Committee, introduced a bill today that would bar banks from imposing fees on people who close accounts, calling the proposal a response to the Charlotte, North Carolina-based company’s plan to charge some debit customers an additional $5 a month for using the cards.

• Data recently released as part of the Home Mortgage Disclosure Act shows 2010 annual origination volume for one- to four-unit residential loans secured by a first lien was down 12.1% on the national level (to 7.37 million originations) on a per-loan basis and down 10.2% (to $1.57 trillion) based on dollar volume.  While nearly every state witnessed drops in origination volume, California was the only state in which mortgage activity actually increased from 2009 to 2010 (up 1.8 percent per-loan and 6.3 percent based on dollar volume).

• Real estate investment trusts that buy U.S. mortgage debt tumbled to the steepest losses since December 2008, on concern that their main source of financing will be roiled by European bank woes.  Mortgage REITs including Annaly Capital Management Inc. and American Capital Agency Corp. dropped as much as 6% on Oct 4, according to a Bloomberg index tracking 33 shares. Losses over the past two days reached as much as 11.1%, the biggest fall in almost three years.

• The ISM service index was 53.0 in September, down slightly from 53.3 in August.

• Fed chief Bernanke warned the U.S. economic recovery was close to faltering and said Congress and the White House had a shared responsibility with the central bank to respond.

• Warren Buffett said the economy won’t recover until housing, which is in a depression, recovers.  “Housing will recover when the number of households grows faster than the number of new houses.”  That may start to happen in 2012.

CONCLUSION

The economy continues to be weak with little change expected in the September unemployment rate.  We have one or more bumps to experience as Greece moves toward default.  The stock market has already priced in this default but it still isn’t clear whether we avoid a double dip since investor and consumer sentiment is at very low levels.

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

David Olson

FOCUS ISSUE FOR THE WEEK

The U.S. economy still looks weak as it is neither expanding nor contracting but holding its own at a weak level of around 1% GDP growth.  This isn’t strong enough to bring down the high rate of unemployment and no aid is likely to come from the Fed or Congress.  The good news this week was falling unemployment claims and modestly higher home prices four months in a row.  Negative U.S. news was falling new home sales, falling pending home sales, falling copper prices, and falling consumer confidence indices.  There was bigger news in Europe as we await the outcome of a probable default of Greece.  Greece passed a real estate tax increase and Germany approved a higher rescue package.  The cost of rescuing the five weak Euro-zone countries will be huge but the cost of unwinding the euro-zone is perceived as even greater.  How much more is Germany willing to spend to keep the euro-zone together?

MORTGAGE MARKET SUMMARY

The MBA index of mortgage applications rose 9.3% in the week ending September 27, up from a 0.6% increase the prior week. With interest rates plummeting to new lows, this is not surprising.  Refis were up 11.2% and purchases were up 2.6%. The four week moving average for the seasonally adjusted market index is up 1.96%. The four week moving average is down 0.18% for the seasonally adjusted purchase index, while this average is up 2.60% for the refinance index.  Falling interest rates are mostly impacting refis.

The DJIA rose 1.3% from 10,771 last week to 10, 913 this week.  For the week there were 12 positive trends offset by 25 negative trends.

Positive Trends

• Initial claims for unemployment fell to 391,000 for the week ending September 24.  This is down from 428,000 the prior week and is a five month low.  Continuing claims fell to 3,729,000 for the week ending September 17, down from 3,749,000 a week earlier.

• The third estimate of GDP for 2Q11 rose to 1.3% from 1.0% in its earlier estimate.

• The average rate for a 30 YFRM fell to 4.01% according to the Freddie Mac survey for September 29.  This was down from 4.09% a week earlier and is an all- time low.  The ten-year Treasury yield rose from 1.71% last week to 1.91% this week.

• Home prices rose modestly in July from June in the Case Shiller housing index. This was the fourth monthly increase in a row.  Using the seasonally adjusted data, prices rose 0.06%.  Prices were up in 8 cities and down in 12 cities.  Using the seasonally unadjusted data, prices rose 0.9% and were up in 17 cities, down in 2 cities and unchanged in one city.  On a year-over-year basis prices were down 4.11%.  This decline was less than expected by most economists.  With the unemployment rate not declining and GDP showing little growth, home prices are expected to fall a bit more before they have reached a clear bottom.  Price increases were strongest in DC and Detroit and price declines were biggest in Phoenix and Las Vegas.

• The Conference Board’s consumer confidence index rose a bit in September to 45.4 from 45.2 in August. But this level is still much lower than where it was in July, June, and May.  It is near the bottom for this cycle.  The average level for the past 15 years was 100.

• The U. of Michigan consumer satisfaction index for September was raised in its final estimate to 59.4 from 57.8 in its initial estimate.  But that is still lower than its level in May, June, and July.

• The Chicago PMI rose to 60.4 in September, up from 56.5% in August. This supports evidence of growth in national manufacturing.

• Greek Prime Minister George Papandreou won parliamentary backing for a property tax to meet deficit-reduction targets required to avoid default. Papandreou’s Socialist Pasok party won the vote in Athens late today by 155 to 142 after Finance Minister Evangelos Venizelos told Greeks they face economic collapse if they don’t plug a budget gap that is exceeding the target set in a bailout, putting an 8 billion-euro ($11 billion) aid payment due next month at risk.

• On September 29, German lawmakers approved an expansion of the euro-area rescue fund’s firepower, freeing the way for European officials to focus on what steps may be needed next to stem the debt crisis. The lower house of parliament passed the measure with 523 votes in favor and 85 against, granting the fund powers to buy bonds in secondary markets, enable bank recapitalizations and offer precautionary credit lines. It raises Germany’s guarantees to 211 billion euros ($287 billion) from 123 billion euros.  Now the debate is shifting to two more difficult issues:  a more radical increase in the scope of bailouts and possible debt restructuring for Greece.

• The mortgage industry completed about 56,000 permanent proprietary loan modifications in August – 68% of which lowered principal and interest payments by 10% or more, according to data from HOPE NOW. The inventory of loans that were delinquent by 60 days or more was 2.80 million, essentially unchanged from 2.81 million in July. Completed foreclosure sales rose to 68,000, up 5 percent from 65,000 in July; and foreclosure starts climbed 18 percent in August to 218,000, up from 185,000 the previous month.  This is small given the high number of mortgages about to be foreclosed.

• Ranieri Real Estate Partners LP has teamed with private-equity funds affiliated with WL Ross & Co. to buy Deutsche Bank Berkshire Mortgage, a key lender to investors in U.S. apartment communities. The Deutsche Bank AG unit, which specializes in making loans to apartment owners and then selling them to Fannie Mae and Freddie Mac, is the No. 2 originator of Fannie Mae-backed multifamily loans. The deal reflects the strength of the apartment sector, which has rebounded faster than other types of commercial space.

• BofA is negotiating to sell its correspondent unit to NationStar Mortgage Holdings. In the first quarter of 2011, this unit accounted for 47% of B of A’s volume.  NationStar is owned by Fortress Investment Group.  Its CEO is Daniel Mudd, formerly CEO of Fannie Mae.  A sale of the mortgage unit would join a steady flow of sales of “noncore” assets that the bank has been disposing of this year to raise capital to offset losses and meet tougher capital rules being phased in by regulators worldwide.  The bank’s shares have lost roughly half their value this year on concerns that continuing problems related to the loans of the former Countrywide Financial could force the company to raise as much as $50 billion of new equity and dilute current shareholdings.

Negative Trends

• Most observers foresee a coming default of Greece. When it comes, the ECB will take a big hit.  Germany and the others will be faced with an awful choice: pony up trillions to “recapitalize” the central bank or abandon the euro along with the union it represents.  Ultimately risk will transfer to the taxpayers.  John Cochrane, Professor of Finance at the U. of Chicago, thinks only by allowing sovereign default and isolating the central bank from that default will the union keep together.

• On September 23, Moody’s downgraded the credit ratings of eight Greek banks by two notches citing probable losses resulting from the banks’ holding of Greek government bonds and the increasing risk of a recession.

• It has become increasingly expensive for European banks to borrow dollars from other lenders or from the foreign-exchange markets due to eroding trust in Europe’s financial system.  At the heart of the problem are credit default swaps that let lenders insure against default.

• European bank funding markets are currently dead. There has been no public senior euro bond issuance since early July.  Three-quarters of financing for Europe’s economy comes from banks.  Fear of sovereign default risks causes a vicious circle whereby banks unable to borrow cut lending, thus reducing growth and raising sovereign default risk.

• The cost of Greece exiting the euro is estimated at 20% of their GDP according to Credit Suisse.  Economist Roubini thinks this has to be done because Greece has an unsustainable debt load and a chronic lack of competitiveness.  He thinks a one-time devaluation would solve their problem within a year.  However, once the taboo of euro-zone exit is broken, other fiscally troubled countries might have similarly catastrophic bank runs, raising the specter of a disorderly euro-zone break-up.  That could trigger losses of up to €300 billion in core euro-zone banks and €630 billion among peripheral countries’ banks.  This is a big price to pay.  It might be cheaper for all involved parties to keep the euro-zone together.

• The IMF is urging the euro-zone to leverage its bailout fund by letting it borrow money more flexibly to bolster investor confidence in Europe’s bond market and banks.

• The European Central Bank dramatically scaled back its purchases of government bonds last week despite continuing strains in financial markets, putting renewed pressure on governments to step up efforts to stem the debt crisis.  One idea that emerged from the September 24-25 meeting of the World Bank and IMF was to turn Europe’s existing €440 billion bailout fund into a €2 trillion leveraged fund for buying European sovereign debt.  But such a move could be massively inflationary.

• New home sales in August fell to a 295,000 annual rate, down from a 302,000 rate in July.  Although the August rate was slightly higher than expected, they have now declined for four consecutive months to the lowest level in the past six months.  The inventory of homes for sale rose slightly to 6.7 months in August up from 6.6 months in July.  The median price of a new home sold was $209,100, down from $228,900 in July and down 7.7% from $226,600 in August a year ago.  Builders continue to face competition from a glut of lower-priced foreclosed and underwater homes.  The market is still dead and record low mortgage rates are not helping it recover.

• KB Home took a $9.6 million loss in its quarter ending August 31, up from a loss of $1.4 million a year ago.  The main reason was sharply lower home deliveries.  This reflects the weakness in new home sales.

• Several key financial managers are expressing doubt in the future value of investing in stocks.  They now think the current financial crisis will continue to reverberate for years.  There is evidence that the Chinese economy is downshifting.

• The Mortgage Litigation Index from MortgageDaily.com climbed to its highest level during any quarter since it was introduced in 2007. Cases challenging the foreclosure process accelerated, investor actions were higher, and criminal activity shot up.  The Second Quarter 2011 Mortgage Litigation Index came in at 190 total cases. Activity grew 26% from the prior quarter and was more than double the level of last year.  The report, which reflects mortgage-related legal actions covered by MortgageDaily.com between April 1 and June 30, was prepared in conjunction with Patton Boggs LLP. There were more cases related to foreclosures than any other category. Foreclosure litigation, which involves rulings in favor of borrowers or cases against rescue firms, was up two-thirds from the first quarter.

• The Independent Community Bankers of America asked federal regulators to launch a moratorium on bank mergers and acquisitions involving financial firms with $100 billion or more in assets. Community bankers believe that new mergers and acquisitions are adding risk to an already shaky financial system while concentrating power in larger institutions that effectively cut into the market share and opportunities for smaller institutions.

• A report by the Inspector General for the Federal Housing Finance Agency said that Freddie Mac may have given up recovering billions of dollars in claims over defaulted mortgages and suggested that a January settlement with BofA to resolve $1.3 billion in bad-loan claims was inadequate.

• Durable goods orders fell 0.1% in August, down from a 4.1% increase in July. This was lower than expected and is yet another indication of a weak economy.  Core capital goods (nondefence/nonaircraft) orders rose 1.1%.

• Personal spending rose 0.2% in August, which is lower than the 0.7% increase in July. This verifies the trend of slower economic growth.  Personal income fell 0.1% in August after rising 0.1% in July.

• Copper prices have fallen from a year to date high of $4.62/pound to $3.24 on September 29.  It touched its low for the year on September 29 but is now recovering a bit.  This commodity goes into almost every type of manufacturing and is a leading indicator of the sector.

• Pending home sales fell 1.2% in August. This is a similar rate of decline as the 1.3% fall in July reported the National Association of Realtors.

• The OCC said 12% of Americans with mortgages were delinquent in second quarter, up from 11.4% in first quarter. This is more evidence of lack of recovery in housing.

• Banks own huge amounts of mortgage-backed securities, and any large refi program that would allow people with underwater homes to refinance through FNMA and FHLMC would negatively impact banks’ investment performance. The “refinanceable” loans are in MBS’s carried at high premiums, like 106 or 108, and if they pay off, the banks get hit with a 6 or 8 point loss.  The Wall Street Journal reports that “the Federal Reserve is taking a cautious stance with U.S. banks that have approached it in recent weeks for permission to buy back more of their shares.”  It depends on an individual bank’s capital situation, and some banks are being told it is too early to use capital that way. Regulators want banks to meet already higher capital standards plus the additional cushion being considered by the Basel Committee on Banking Supervision even after a buyback.

• Only 10,000 to 15,000 homeowners are likely to qualify for the Emergency Homeowners’ Loan Program, created to provide struggling borrowers with no-interest loans of up to $50,000 that could be forgiven after five years if they stayed current on their mortgage payments. The $1 billion initiative was expected to help 30,000 homeowners, and falling short of that goal means $500 million to $670 million will be returned to the Treasury. HUD mismanaged the rollout of EHLP, while Congress’s restrictive qualifications disqualified many homeowners, according to housing advocates.

• Consumer confidence slumped last week to the second-lowest level on record as Americans grew more concerned with their financial situation and the buying climate worsened. The Bloomberg Consumer Comfort Index dropped to -53 in the period ended Sept. 25 from -52.1 the prior week.

• International investors expect the world economy to relapse into a recession, with more than one in three forecasting a global economic meltdown within the next year, according to a Bloomberg poll. About two-thirds of those surveyed say the international economy is deteriorating, up from just 18 percent who felt that way in the last poll, in May. The increased gloom is centered on the 17 countries that share the euro currency: Almost nine in 10 say the euro-zone economy is worsening, according to the quarterly Bloomberg Global Poll conducted Sept. 26 of 1,031 investors, analysts and traders who are Bloomberg subscribers.

• The U.S. is tipping into a recession says the Economic Cycle Research Institute, citing declines in non-financial services, manufacturing and exports.

• According to Nouriel Roubini, the U.S. is already in a recession as is much of Europe. “At this point, the issue is not whether there is going to be a recession or a double-dip but whether it’s going to be relatively mild or whether it’s going to be a severe recession and a global financial crisis,” Roubini said. “The answer to that question depends on what’s going to happen in the euro zone and whether they can get their act together.”  Roubini tends to be biased on the negative side but he did predict correctly the 2006 downturn.

• Gary Shilling is predicting an economic slowdown in the U.S. and Europe leading to a decline in the S&P 500 from 1100 to 800. We are experiencing deflation in wealth, commodities, and home prices.  He foresees a hard landing in China.  He sees a safe haven in Treasury bonds and rental apartments.

CONCLUSION

We see more slow growth with only glimmers of a recovery until a substantive agreement on the euro-zone is reached which would likely mandate a fiscal union.

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.

David Olson

FOCUS ISSUE FOR THE WEEK

Stock markets around the world are plummeting, which is just one of many signals that we are rapidly falling into a recession.  The other signals are declines in consumer confidence, PMI indexes, industrial orders, copper futures, interest rates, and even oil prices.  And these declines are occurring around the world, even in China and India.  On top of this, there is political paralysis in Europe and the U.S.  Obama is calling for mammoth tax increases that even his fellow Democrats have turned down in the past and couldn’t possibly be accepted by the current Congress when the economic roller coaster is headed downward.  Ron Suskind’s new book on the Obama White House calls it “amateur hour at the White House” with virtually all the original economic advisors now gone.  Meanwhile, the leading Republican, Rick Perry, is making foolish remarks about privatizing or abolishing Social Security, eliminating the Federal Reserve, and appeasing Israel, which makes him sound equally amateur.  He needs to use language that is less alarming to his audience if he hopes to win.  Can Republicans forgive Mitt Romney for passage of Medicare in Massachusetts?  It is apparently too late for Chris Christie or Mitch Daniels to win but why then have they published books and dominated the television talk shows lately?

MORTGAGE MARKET SUMMARY

The MBA index of mortgage applications rose 0.6% in the week ending September 17.  This level is still quite low despite record low mortgage rates.  The reason for this slump in housing according to Stuart Miller, CEO of Lennar Corp., is “a mountain of paperwork and never-ending reverifications,” facing prospective home buyers.

For the week, the DJIA fell to 10,771, down 6.4% from 11,509 last week.  For the week there were 7 positive trends offset by 21 negative trends.

Positive Trends

• The central bank will buy $400 billion of bonds with maturities of six to 30 years through June 2012, while selling an equal amount of debt maturing in three years or less, the Federal Open Market Committee said on September 21.  This policy is termed “operation twist.”  The Fed hopes this will spur housing but the margins between the 30 YFRM and the ten year Treasury have widened lately due to excess demand for mortgages relative to available capacity of banks in the current highly regulated environment.  Therefore, we suspect the new Fed policy will have little impact on lowering mortgage rates or increasing mortgage originations.  Last week the spread was 217 bp up from a long time normal spread of 130 bp.  “Growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions and the unemployment rate remains elevated,” the Fed said in a statement that listed its reasons for worry about the anemic condition of the American economy.  As of September 23, the ten year Treasury traded at 1.83%.  Both this week and last week the interest rate on the 30 YFRM was 4.09%, a 50 year low.  Three members of the Open Market Committee opposed the decision to lower long rates claiming it would be inflationary.

• Initial claims for unemployment for the week ending September 16 fell to 423,000, down from 432,000 the prior week. This was higher than expected.   The four-week moving average rose to 421,000 from 420,500 the prior week.  Continuing claims for unemployment fell to 3,727,000 for the week ending September 20, down from 3,755,000 the prior week.  Although, slightly positive, these numbers still signify very little improvement in employment.

• Leading indicators rose 0.3% in August reported the Conference Board.  This was not as strong an improvement as during the prior month when they rose 0.6%.  Leading indicators have now risen four months in a row.

• Sales of existing homes in August rose to a 5.03 million annual rate, up from a 4.67 million rate in July.  This was considerably higher than expected and was the highest rate within the past five months.  Investors, who comprised 31% of sales, swooped in to buy foreclosed homes with cash.  The August pace is still way below the housing peak of 7.08 million in 2005.  Cancellations of sales were 18% during August, double last year’s rate.

• Building permits for August rose to 620,000 annual rate, up from 601,000 in July. This was stronger than expected and is some evidence of growth in housing construction in the near future even though the National Association of Home Builders index for the same period fell.  Perhaps the negative sentiment voiced by the home builders reflects pessimism about the future.

• Commercial/multifamily mortgage debt outstanding increased by 0.1% in the second quarter, the first quarterly increase since the third quarter 2009, the Mortgage Bankers Association reported.  The $2.4 trillion in commercial/multifamily mortgage debt outstanding came in $3.5 billion higher than the first quarter.  Multifamily mortgage debt outstanding rose to $802 billion, an increase of $3.9 billion or 0.5% from the first quarter

• Commercial real estate capitalization rates have been found to be good indicators of expected returns in commercial properties. Recent declines in these cap rates appear to be signaling a commercial real estate rebound, indicating improved investor expectations of price growth in the market. Movements in national cap rates are the predominant drivers of changes in cap rates in local markets. Therefore, the anticipated commercial real estate rebound is likely to be widespread across many metropolitan areas according to the Federal Reserve Bank of San Francisco.

Negative Trends

• President Obama has fleshed out his jobs bill and is now insisting on $1.5 trillion of tax increases on the wealthy and no cut in any part of Social Security or Medicare without tax increases.  This makes it very unlikely that it will pass the Republican-controlled House and is probably meant as a political stance to please the Democratic base.  That means there is less likelihood that the unemployment will decline before the November presidential election.  With the very partisan tone of both the president and Republican leadership in Congress, most commentators doubt anything will be accomplished before the next election.  The White House says a “broad bipartisan budget deal is slipping out of reach.”

• Two Republican Congressional leaders—John Boehner and Mitch McConnell– expressed reservations about the Fed taking additional steps to spur the recovery. The Fed initiated “operation twist” which means lowering long term interest rates by selling short term securities.  According to David Malpass, a former deputy assistant Secretary of the Treasury, the Fed has already bought nearly $2 trillion in longer term bonds with no constructive results.

• The DJIA and S&P 500 indexes are both down about 17% so far this year.  The Hang Seng is down 27%, the Euro Stoxx 50 is down 33%, copper futures are down around 25%, and the ten-year Treasury is down to a 50 year low. The various indexes of consumer confidence and manufacturing (PMI indexes) are all near all-time lows.

• A recent survey by MacroMarkets LLC shows home prices are expected to drop 2.5% in 2011 and rise just 1.1% annually through 2015. That means home prices rise less than the expected rate of inflation and the housing slump continues for four more years.

• Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values. The expected failure of Greece on its debt could lead to one or more bank failures and a credit collapse that will also likely affect American banks.  These European banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks.  There is a strong probability there will be a panic as investors pull back on funding the commercial paper of these banks.

• The National Association of Home Builders housing market index fell to 14 in September, down from 15 in August. This shows that new housing construction is still very low and in decline.

• Even as Europe’s sovereign-debt crisis worsened this year, the euro received support from prospects the ECB would raise interest rates to contain inflation.  Now, that is looking less likely after ECB President Jean-Claude Trichet said at a press conference in Frankfurt on September 8, after the central bank left its benchmark rate at 1.5%, that threats to the euro region have worsened and inflation risks have eased.  The economy faces “particularly high uncertainty and intensified downside risks,” Trichet said.  Financing conditions have worsened in parts of the euro region and the ECB is prepared to pump more cash into markets, he said.

• Merkel’s coalition in Germany lost yet another election on September 18, leading to speculation that the national ruling coalition could break apart amid a rift over the euro crisis. The pro-bailout Social Democrats and Greens led in the vote which suggests the euro crisis isn’t a decisive factor in how Germans vote.

• Greece’s government held an emergency cabinet meeting on September 18 to bring its budget deficit into line after heated warnings from the other euro-zone nations over the weekend that its efforts were insufficient. German Finance Minister Schauble said Greece wouldn’t get the next quarterly dollop of aid (worth $11 billion) unless it met strict deficit targets.  Greek officials say they have only enough cash for another month.

• It is now believed in Europe that a defaulted Greece could be forced to quit the euro, likely triggering a domino effect in other weak countries as depositors tried to quit vulnerable banking systems and get their euros into stronger countries not deemed at risk of single currency exit and devaluation.

• Most European economists now believe a Greek default is inevitable sometime over the next 12 months. The Greek rate of unemployment is now 16% and rising.  Philipp Rosler, Germany’s vice chancellor and economy minister is talking about “Greece’s orderly insolvency” since a default is unavoidable.  Over the past year Greece has done virtually nothing to solve their problem.  They have not fired one civil servant and are taxing the private sector out of existence.  They need to stop subsidizing the unions and close defunct state bodies but are not doing that.  One root problem in Europe has been the increase of the ratio of government spending to GDP from 28% in 1965 to 50% today.  They have a much shorter work week than does the U.S. so have chosen leisure over labor.  After Greece defaults there is concern that several other countries will follow starting with Italy.  This will inevitably cause a reduction in European and American stocks and a GDP decline world wide.

• Over the next several weeks Greece is expecting to receive €8 billion in aid from the EU, the European Central Bank, and the IMF.  Without this aid, the government will run out of money by mid-October.

• Housing starts fell to a 571,000 annual rate in August, down from an upwardly revised 601,000 annual rate in July. The August rate was a little lower than expected.  This is the lowest level since May and indicates that housing starts have been at a recessionary floor for the past two years and are not yet recovering.

• S&P downgraded Italy’s sovereign-debt rate a notch (to A, five notches above junk status) saving the nation’s weak economic growth and fragile government coalition will make it harder to head off the growing crisis sweeping the euro-zone.  Italy’s public debt is bigger than the combined debts of Greece, Spain, Portugal and Ireland, making the country too big to bail out.  The downgrade is likely to drive up Italy’s borrowing costs.

• ShopperTrak, which counts foot traffic at malls and blends it with economic data to predict trends, says that national retail sales will rise 3% during November and December, less than last year’s 4.1% gain.  This just is keeping up with inflation.  The International Council of Shopping Centers is also forecasting a slower 3% increase in sales for November and December.

• Bank of America Corp., the biggest U.S. lender, had its credit downgraded by Moody’s Investors Service, citing a decrease in the probability that the U.S. would support the bank if needed.  The ratings were cut to Baa1 from A2 for long-term senior debt and to Prime-2 from Prime-1 for short-term debt, according to a statement today from Moody’s. The outlook on long-term senior ratings remains negative.  Their stock fell to $6.31 on September 23, which is getting close to $6.30, the low price of the year, reached on August 23.  Wells and Citicorp were also downgraded by Moody’s for the same reasons as BofA—reduced probability the U.S. would bail them out if they were in trouble.

• Bank of America Corp. is among a group of lenders that may face a wave of new lawsuits claiming the system they’ve used for more than a decade to register mortgages cheated cash-strapped counties out of millions of dollars.  Dallas County District Attorney Craig Watkins said state attorneys general and county officials across the U.S. have expressed interest in his lawsuit against Mortgage Electronic Registration Systems Inc. and Bank of America, filed in Texas state court on Sept. 21. Dallas County could be owed as much as $100 million in filing fees, he said. “This is a big new front,” said Christopher L. Peterson, associate dean and professor at the University of Utah S.J. Quinney College of Law. “This case is scary because if Dallas wins then there are a lot of other counties around the country that are going to follow.”

• B of A agreed to sell a $880 million portfolio of commercial mortgages at a 20% to 25% discount as it continues to sell assets. Meanwhile, its stock price plummeted to $6.06 on September 22, a new low for the year, then rebounded to close the week at $6.31 but was still down from a high of $15.25.

• The average rate charged for the 30 YFRM remained at 4.09% on September 22 according to the Freddie Mac Survey.  This was unchanged from the prior week even though rates on ten year mortgage have declined to 1.71%.  This means the spread between the two has widened from a long time average of 130 bp to 238 bp.  This suggests that operation twist by the Federal Reserve will not be successful in lowering mortgage rates and increasing home sales.

• On September 23, the price of gold fell below $1,700/oz along with declines in most commodities as markets uniformly began pricing in a recession. As of September 23 price fell to $1,639/oz.

• The IMF cut its 2012 growth forecast for the U.S. to 1.8% from 2.7% citing a weak housing market as a key negative reason.  However, if there is a debt crisis in Europe, the U.S. will enter a recession in 2Q12.  The Euro-zone and emerging Asia will enter a recession in 1Q12.

CONCLUSION: With poor leadership stemming from the White House and the Federal Reserve and declines occurring around the world, a recession now seems very likely.  Falling interest rates won’t increase mortgage originations because property values are too weak, underwriting requirements too tight, and too many consumers have poor credit.  Economic recovery is at least a year off.

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.

David Olson

FOCUS ISSUE FOR THE WEEK

The biggest economic story this week was continued decline in the value of Greek debt and an increased likelihood of a Greek debt default.  Greece was saved by a bailout by a group of central banks this week but this was just another temporary reprieve.  Most of the burden is falling on Germany and German voters don’t want to pay any more.  They are afraid it will be inflationary and might cause another collapse of their economy similar to what occurred in the early 1930s and brought Hitler to power.  Meanwhile, the stock prices of European banks continue to plummet and this is hurting U.S. bank stocks.  This reduction in their capital base is keeping lending down.  Obama’s jobs’ plan is going no where.  Initial claims for unemployment rose.  Retail sales were flat for August.  The forecast for European GDP was lowered to almost zero for the last half of this year.  There was a slight rise in industrial production and the Michigan consumer sentiment survey for today.  But consumers are negative about the future.  Obama’s popularity keeps falling suggesting we won’t get a recovery until there is a change in administration.

MORTGAGE MARKET SUMMARY

The MBA mortgage application index rose 6.3% from the prior week.  Purchase money loans were up 7.0% and refis were up 6.0%.  Interest rates were at record lows.

The DJIA rose 4.7% to 11,509 this week from 10,992 last week as investors saw some solution to the European debt problem.   For the week there were 9 positive trends and 25 negative trends.

Positive Trends

• Industrial production rose 0.2% in August which was higher than expected.  In July it rose 0.9%. This was the fourth monthly increase in a row.

• Capital utilization rose to 77.4% in August, up from a revised 77.3% in July. The initial reading for July was 77.5%.

• The University of Michigan Consumer Sentiment index for September rose to 57.8, up from 55.7 in August which was the lowest level since November 1980.  The outlook indicator hit 47.0 the lowest level since May 1980, down from 47.4 in August.

• Commercial/multifamily mortgage delinquency rates fell in four of five major investor groups in the second quarter, reported the Mortgage Bankers Association. The delinquency rate for loans held in mortgage–backed securities peaked in 2Q11 but for all other categories it was down.

• Quicken Loans Inc., the nation’s largest online mortgage company, plans to add 500 new workers in two months, with the majority of jobs based in Detroit.

• The MBA expects mortgage originations to top $1.1 trillion in 2011 and $925 billion in 2012, as refinances fall off and purchase volume only increases moderately.  The MBA expects that the 30-year fixed rate will be around 4.6% for 2011 and 4.9% in 2012.

• The PPI didn’t rise at all in August after rising 0.2% in July. There is no inflationary pressure.  But this also reflects a very weak economy.  Core PPI (excluding food and energy) rose 0.1% in August after rising 0.4% in July.  The year-over-year PPI rose a bit more than 6.0% reflecting increases other than in fuel and food.

• Continuing claims for unemployment for the week ending September 3 were 3,726,000 down from 3,738,000 the prior week which was revised up from the initial reading of 3,717,000.

• Interest on the 30 YFRM fell to a new low of 4.09% from 4.12% the prior week.

Negative Trends

• The Wall Street Journal reported that two of the three of France’s largest private-sector banks suffered further credit-rating downgrades this week because of the banks’ large holding of Greek government debt. The rating on Societe Generale is down three notches below AAA with a negative outlook.  The rating for Credit Agricole is one notch higher and also on review.  Paribas’s rating is unchanged at Aa2 but kept on review for a downgrade reported Moody’s.  Stock prices for these banks have been declining recently.  The Stoxx Europe 600 bank index is down over 25% since August 1.  This decline in Europe bank stocks seems to be having some impact on U.S. bank stocks.  On September 12, Bank of America traded at $6.98, down from a 2011 high of $15.25 on January 14 but up from a low of $6.30 on August 23.  Chase traded at $32.08, a low for the year, down from a 2011 high of $38.00 on February 18.  Wells traded as $23.52 down from a high of $34.10 on February 8, but up from a low of $22.88 on August 10.  The S&P 500-stock index sector has fallen 18% year-to-date.

• Debts of the top three French banks—BNP, Credit Agricole and Societe Generale were 250% of French GDP vs. the debts of three top U.S. banks—BofA, Chase, Citigroup—amounting to 39% of U.S. GDP.

• Yields on Greek two-year notes rose above 60% on September 12 for the first time. Five-year credit-default swaps to insure the country’s bonds and to speculate on government securities soared 937 basis points to an all-time high of 4,437, according to CMA. The contracts are the highest in the world and more than three times the 1,244 basis points for Portuguese debt.  This means there is a 98% probability of Greece defaulting on its debt.  Lars Feld, a member of the German government’s council of economic advisers, said on September 12 that a “disorderly restructuring” of Greece may take place if the Greek government decides to get out of the euro zone.  On September 15, the yield on ten year debt for Greece rose to 25%, twice its level at the start of the year.  On September 12, a Greek bond maturing in March traded yielding 200%.  Two year bonds yielded 75%.  Bond yields also rose for bonds issued by Italy, Spain and Portugal.

• European finance ministers gave no indication on September 16 of fresh aid for lenders to go along with yesterday’s liquidity lifeline from the European Central Bank. The finance chiefs from the euro region said the 18-month debt crisis leaves no room for tax cuts or extra spending to spur an economy on the brink of stagnation.   The debt overhang is taking its toll on the wider economy, the European Commission said yesterday. It cut its growth forecast to 0.2% for the third quarter and 0.1% in the fourth, down from earlier projections of 0.4% for both periods.

• European banks are losing deposits as savers and money funds spooked by the region’s debt crisis search for havens, a trend that could worsen economic and financial conditions.  Retail and institutional deposits at Greek banks fell 19% in the past year and almost 40% at Irish lenders in 18 months. Meanwhile, European Union financial firms are lending less to one another and U.S. money-market funds have reduced their investments in German, French and Spanish banks.

• Options traders turned the most bearish on the euro this week in almost eight years, signaling the currency may extend its 4.8% drop this month, as Europe struggles to stem the sovereign-debt crisis.  On September 13, the euro was worth $1.36, down from $1.46 several weeks ago.  Euro puts that give traders the right to sell the currency at $1.25 “are in demand,” signaling traders see room for further weakness, Olivier Korber, a currency-derivatives strategist at Societe Generale SA in Paris, said in a telephone interview on September 12.

• According to economist Allan Meltzer, Greece has a 15% to 20% gap between its average worker’s productivity and the average real wage. That’s the amount by which productivity must increase or real wages must fall to achieve equilibrium.  The only effective way to solve this discrepancy is devaluation according to him.  All other methods are short term stop gaps or are too onerous.

• The prospects for President Obama’s jobs bill looked dimmer on September 12 when he revealed that it included tax increases to cover the cost. A compromise with Republicans looked very dim.  Obama’s deficit plan was changed to omit changes to Social Security and Medicare and Republicans took tax increases off the table.  According to a recent poll by Bloomberg, by a margin of 51% to 40%, Americans doubt the package of tax cuts and spending proposals intended to jumpstart job creation that Obama submitted to Congress this week will bring down the 9.1% jobless rate. That sentiment undermines one of the core arguments the president is making on the job act’s behalf in a nationwide campaign to build public support.

• Initial claims for unemployment rose to 428,000 in the week ending September 10, up from 417,000 in the prior week. This is the highest level since June.  The four week moving average was 419,500, up from 415,500 the prior week.  This suggests there will not be a decline in the rate of unemployment in September.

• The Empire Manufacturing index fell to -8.8 in September, down from -7.7 in August. This indicates a declining trend in manufacturing and was lower than expected.  This was the weakest reading since last November.

• The Philadelphia Fed index of manufacturing was -17.5 in September, not as far down as -30.7 in August but still lower than expected.

• Retail sales were flat in August which is below the 0.2% growth projected by WSJ economists. Also, July retail sales were brought down from a 0.5% increase to 0.3%.  However, retail sales were up 7.2% from August 2010.  This indicates a weak economy since consumer spending usually comprises 70% of GDP.  Retail sales ex auto rose 0.1%.

• Interest on the ten-year Treasury rose from 1.92% last week to 2.06% this week.

• JPMorgan Chase’s Jamie Dimon called the Basel III capital rules “blatantly anti-American.” “He was referring to new capital requirements that call for banks to hold core tier one capital that equals 7% of risk-weighted assets. That number climbs to 9.5% for systemically important financial institutions like JPMorgan Chase, Citigroup and Bank of America.”  Due to this new reg, B of A is cutting back in mortgage lending.

• The U.S. budget deficit for July was revised upward from $91b to $129b.  For August the deficit was $134.2 b, which was higher than expected.  This suggests a weaker economy than earlier projected.

• The Census Bureau reported that median household income fell 2.3% to an inflation-adjusted $49,445 in 2010 from 2009.  This is 7.1% below its 1999 peak.

• The SEC is reviewing whether mortgage REITS should continue to be unregulated or should be subject to the Investment Act of 1940.  This is stalling plans by 5 REITS from coming public.

• Bank of America Corp. must pay $930,000 to an employee who uncovered fraud at Countrywide Financial Corp. and was fired in violation of whistleblower protections, the U.S. Department of Labor said.  The employee was terminated soon after the Charlotte, North Carolina-based bank took over Countrywide in 2008, the agency said today in a statement. The worker, who must also be reinstated, led internal investigations that found “pervasive wire, mail and bank fraud involving Countrywide employees,” according to the release.

• Securities regulators are pushing for a $200 million settlement with Citigroup.

• The CPI was 0.4% in August, which was higher than the 0.2% expected but below 0.5% in July.

• Banks in the S&P 500-stock index are trading at tangible book value compared with a 25-year average of about 2.3 times, report Barclays.  At 8.8 times, they have the lowest forward price/earning multiple of any S&P sector.

• RealtyTrac reports that foreclosure filings rose 7% in August compared to the previous month, as more home buyers fell behind on their mortgage payments. However, the research shows that filings were still 33% lower than a year earlier, making August the 11th consecutive month of year-over-year declines. A total of 228,098 U.S. homes received some kind of foreclosure filing during the month.

• Ken Markison, associate vice president and regulatory counsel with MBA, said now and in the near future, regulatory impacts stemming from the Dodd-Frank Act will hurt the mortgage industry.  The most hurtful provisions are new credit risk retention requirements and ability to repay mandates. Markison called QRM and QM the two most significant mortgage-related rules from Dodd-Frank that will likely harm the industry.  He said both regulations seek to align interests of securitizers, lenders and borrowers to assure more sustainable loans, but warned that both proposals are narrowly defined and have potential unintended consequences.  “Risk retention would include 5% of credit risk of the security but much was left to the regulators,” Markison said. “QRM mortgages with risk retention will be costlier and, in some cases, to some borrowers, far less available.”

• Faulty mortgages and foreclosure abuses have cost the nation’s five biggest home lenders at least $65.7 billion, according to a tally by Bloomberg News, and new claims may push the industry-wide total to twice that amount.

• Borrowers defaulted on federal student loans at an 8.8% rate for fiscal 2009, up from 7% a year earlier, the U.S. Education Department said today.  Student loans from the government rose to $386 billion in July, up from $139 billion two years earlier.

CONCLUSION: Despite the rise in mortgage applications this past week, the housing market is still basically flat.  So is the rate of unemployment.  We are in a weak economy showing little signs of recovery.

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.

David Olson

FOCUS ISSUE FOR THE WEEK

The big news this week was the collapse of the euro down to $1.36 and the record 60 year low of the ten year Treasury to below 1.90%.  There was much speculation that Greece was on the verge of defaulting.  European Central Bank director Stark’s resignation showed policy divisions at the bank.  A meeting of the G7 is planned over the weekend.  Last week’s employment report caused most economists and consumers to lower their forecasts. Consumer sentiment and Obama’s popularity have both dropped to new lows.  This week we had the “beige book” which showed economic malaise across the nation.  This week several more economists predicted a double dip—even the New York Times.  Europe’s problems worsened and this alone may drive our economy into negative territory.  The big news within the mortgage world was the announcement of further scaling back by Bank of America and hints that Chase and Wells will follow suit.  The constant stream of court suits against bankers has disheartened the entire mortgage industry, especially the biggest players.  Obama did try to encourage Congress to pass yet another stimulus package which included some elements designed to please Republicans.  Was this an effort to retake the initiative from the Republicans by encouraging voters nationwide to support higher taxes and more government spending to bring down unemployment and thereby save his reelection?  It is too bad he didn’t take this initiative earlier in his administration instead of jamming through the massive ObamaCare law which is now seen as too expensive and has become increasingly unpopular with voters.  It will be interesting to see how Congress responds to this last ditch effort.  Some Congressmen, including Eric Cantor, voiced agreement for some of his proposals.  Meanwhile, European events overshadowed much of the impact of Obama’s speech.  If the economy continues to sink, then even far right Republicans will have to support some form government spending to stimulate the economy.  .

MORTGAGE MARKET SUMMARY

Mortgage applications fell 4.9% in the week ending September 3, after a 9.6% decline the prior week.  Despite record low mortgage rates, activity is not picking up. The MBA’s seasonally adjusted refinancing application index fell 6.3% while its gauge of loan requests for home purchases climbed 0.2%  Fixed 30-year mortgage rates averaged 4.23%, down from 4.32% the prior week and the second lowest rate since the group began its survey nearly 22 years ago.

The DJIA fell 2.2% from 11,240 last week to 10,992.  For the week there were 8 positive trends offset by 16 negative trends.

Positive Trends

• The ISM index for services rose to 53.3 in August, up a little from 52.7 in July.  This is a fraction higher than expected but is down from its peak level this year of 59.7 in February.

• The interest on the ten year Treasury fell to 1.92% from 2.03% last week which reflects the exodus from the stock market world wide and surge to safety. This is a record low and means mortgage rates are likely to fall further.  On September 9 for a while the interest rate fell below 1.90% which was the lowest in the past 60 years.

• The average interest rate on the 30 YFRM fell to 4.12% for the week ending September 8, down from 4.22% a week earlier according to a survey by Freddie Mac.  This is the lowest rate for this mortgage rate ever since the survey began in 1971.

• Germany’s high court cleared the bailout plans of Greece and other struggling nations.  However, Chancellor Merkel will need to seek permission from parliament when taking on further financial burdens in Europe.  Merkel told parliament the European Union should amend its treaties to force euro members to adhere to fiscal discipline so individual countries can’t endanger the common currency in the future.

• President Obama spoke before Congress on September 8 asking for a jobs stimulus package costing $447 billion.  The bill would include tax cuts and spending on roads and bridges, schools and teachers plus a variety of other proposals.  Mark Zandi of Moody’s estimated that the plan would add 2 percentage points to real GDP growth and 1.9 million payroll jobs, while reducing the unemployment rate by a percentage point.  Other forecasters were less optimistic because of the delays in getting these projects started.  Obama’s past stimulus plans have not achieved their promised goals and have been very costly.

• Consumer credit increased in July by $12 billion up from $11.3 billion in June. This was higher than forecast.  This was the tenth consecutive monthly expansion.  Most of the increase is in nonrevolving debt.

• In Georgia there is a program popular with both Republicans and Democrats that allows companies to audition workers for eight weeks while they receive unemployment checks.

• Due to the fear of a Greek default, the value of the euro fell to $1.36. This was the lowest price in the past 6 ½ months. As recently as Monday it traded at $1.42.  The prior week it was at $1.46.

Negative Trends

• The beige book report of the Federal Reserve paints a picture of a faltering recovery. We have an economy in a deep malaise with more uncertainty and caution.  Other than stronger car sales, sales of big ticket items are down.  For the month of July actual hiring fell 1.9% and the rate of hiring as a percentage of the work force had been generally flat for more than a year.

• On September 8, Bloomberg reported that credit-default swaps on Greek government debt surged to a record, signaling a 91 percent chance the nation will fail to meet debt commitments, after its economy shrank more than previously reported.  Five-year contracts on the country’s sovereign bonds jumped 196 basis points to 3,001 basis points, at 3:45 p.m. in London, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately negotiated market.  Gross domestic product shrank 7.3% from a year earlier after declining 8.1% on an annual basis in the first quarter.  On September 9 credit-default swaps insuring Greek government bonds jumped 701 basis points to a record 3,727 basis points, according to CMA. The five-year contracts signal there’s a 94 percent probability the country won’t meet its debt commitments.

• In August, the employment-to-population ratio was 58.2%, a hair above the 28 year low it fell to in July.  This is down from 62.7% in December 2007 and below the all-time high of 64.7% in 2000.  It is unusual for this ratio to fall during a recovery as it has during the past two years.

• The Federal Housing Finance Agency, on behalf of Fannie Mae and Freddie Mac, filed 17 lawsuits worth $196 billion on September 2 in New York state and federal courts and in federal court in Connecticut. The FHFA accuses the banks of misleading Fannie Mae and Freddie Mac about the soundness of the mortgages underlying the securities.  This has caused a big drop in U.S. banking stocks as well as other stocks.

• Bank of America changed its managerial team as turmoil continued to hurt the bank. Among several shifts, Barbara Desoer, head of the bank’s mortgage business, no longer reports directly to their CEO, Moynihan.  This suggests a reduction in future importance of mortgages within the bank.  Brian Moynihan continues as CEO of the bank.  David Darnell and Thomas Montag become co-chief operating officers.  This year there will be more than 10,000 job cuts to the bank’s consumer banking and mortgage areas.  The stock has fallen 48% so far this year.  Dick Bove of Rochdale Securities says this shift means the bank has shifted its emphasis from consumer banking to commercial and investment banking.  He predicts 600 retail branches will be shut down and 30,000 employees will be let go.  This means a big exodus out of the residential mortgage business—especially out of correspondent and potentially warehouse lending.  The Wall Street Journal reported on Sept 9 that B of A may eliminate 40,000 jobs and 750 of its 5,700 branches.  It shed 63 branches in second quarter.  This withdrawal from mortgage lending might be followed by other large banks.

• According to a study in 2010 by the Kauffman Foundation, 100% of net job growth in the U.S. comes from entrepreneurial start-ups. We have had fewer start-ups recently due to the cost of compliance with ObamaCare and Sarbanes Oxley.  In addition, the patent office has a huge backlog of 1.2 million patent applications waiting for examination.  According to retired chief judge Paul Michel of the U.S. Court of Appeals for the Federal Circuit, simply clearing the patent backlog could create up to 2.25 million jobs by 2014.

• September could mark the start of the slump, said Julia Coronado, chief economist for North America at BNP Paribas in New York, who predicts the economy will shrink at a 2% annual rate in the fourth quarter.  Harvard University’s Martin Feldstein, a member of the nine-person NBER committee, said on Aug. 26, “We’ve got a better-than-even chance that we’re going to be sliding into what will be called a recession.”

• There’s a 60 percent probability that most advanced economies will fall into a recession, while authorities are running out of options to provide emergency support, said  Nouriel Roubini, economist. This will occur before 2013.

• A large European stock index (Stoxx Europe 600) fell 4.1% on September 5 reflecting fears of a recession.  Bank stocks fell the most.  The euro slid below $1.42, its lowest in a month.   The U.S. 10 year Treasury hit 1.91%, the lowest level in five decades.    The cost of insuring European banks against default hit record highs on September 5.  European banks hold a large amount of sovereign bonds on their books and the market prices for these bonds have plummeted.  If these bonds were valued in banks’ books at current market prices, the banks would have to be shut down.

• A report by the Institute of International Finance, a global bank association, says an array of proposed bank rules in the U.S. and Europe will result in tighter credit markets and slower growth in several large economies. The new rules, including mandates that banks have more cash relative to debt, will lower economic output, or gross domestic product, in the U.S., the euro zone, the United Kingdom, Japan and Switzerland by a total of 3.2% in the next five years, the study said. As a result, the global economy will have 7.5 million fewer jobs than it would have without the regulations, according to the report.

• The cost to private investors would be twice as much as the relief payment homeowners would receive under a mass refinancing plan, finds a Congressional Budget Office working paper. The one-year model plan shows that refis of 2.9 million mortgages worth $428 billion would save borrowers $7.4 billion through lower payments and avoid 111,000 defaults at a cost of about $600 million. However, investors would lose as much as $15 billion from prepayments on securities yielding above-market rates. The refi effort would have little impact on economic output and the housing market and only a minor effect on future home prices, according to CBO.

• Initial claims for unemployment rose marginally to 414,000 for the week ending September 2 from 412,000 the prior week. This was higher than expected.  Continuing claims continued inching down to 3,717,000 for the week ending August 30, from 3,747,000 the prior week.  This weak report means no improvement in the current unemployment rate.

• Sri Kumar, chief strategist from TCW says the U.S. economy is already in a recession with 3Q GDP at -1.0% and 4Q GDP at -2.0%.

• U.S. residential mortgage lending volume will struggle to reach the mid-$800 billion range in 2012, according to market research firm iEmergent, as the recent boom in refinancings dries up at Fannie Mae and Freddie Mac.

• The chief economist for the OECD predicts U.S. GDP growth of 1.1% in 3Q and 0.4% in 4Q. Italy will have a decline in 3Q and Germany will decline in 4Q so the weighted average GDP of the three biggest euro-zone economies will fall 0.4% in 4Q.  With this gloomy forecast for Europe, it will be more difficult for the U.S. economy to recover.

• Desmond Lachmond, an economist at the American Economic Institute, believes Greece will default on their sovereign debt before the end of this year. Economic slowdowns in Germany, France, U.K. and the U.S. make it virtually impossible for the euro-zone’s peripheral countries to export their way out of economic trouble.  Because there was an electoral defeat for German Chancellor Merkel’s coalition in a local election on September 4, Merkel is now limited by Germany in how much she can spend to bail out European neighbors.  This means it will be difficult for the U.S. to recover in 2012.

CONCLUSION: The economy continued to show weakness during the week despite record low mortgage rates.  No one sees a recovery in housing for a year or so.  Is there any initiative that our government can take now to prevent a double dip?  The probability keeps declining.

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.