David Olson and Christine Clifford

FOCUS ISSUE FOR THE WEEK

The economic news this past week wasn’t quite as strong as was the prior blow-out week but it still was positive.  The four-week moving average of initial claims for unemployment receded again as did continuing claims.  GDP, durable goods orders, the U. of Michigan confidence indicator, and leading indicators were up.  The Fed signaled interest rates would remain low until the end of 2014. The ECB lent European banks a huge amount and brought down the borrowing rates for most European countries.  There was even some evidence of buyers for mortgage assets and expanded consumer lending.

But housing still was the fly in the ointment.  Both pending home sales and new home sales fell.  Investors were buying a lot of homes for cash bringing average home prices down.  Europe was in recession.  Talks with Greek creditors were at an impasse.  Germany resisted pressure to lend ever larger sums to its weaker neighbors.  The three big swords hanging over the economy were:  a messy dissolution of the eurozone, weakening housing market, and high unemployment.

MORTGAGE MARKET SUMMARY

According to Freddie Mac, the rate for the 30 year fixed rate has remained below 4% for eight consecutive weeks.  Mortgage volume should be growing and housing prices stabilizing yet this week we learned that sales of new single-family houses in December fell to a seasonally adjusted annual rate of 307,000, below the revised November rate of 314,000 and 7.3% below the December 2010 estimate of 331,000.   For the year, an estimated 302,000 new homes were sold, down 6.2% from a year ago (323,000).  According to, the Federal Housing Finance Agency for the 12 months ending in November, U.S. prices fell 1.8%. The U.S. index is 18.8% below its April 2007 peak and roughly the same as the February 2004 index level.  The National Association of Realtors reported that pending home sales fell slightly in December after reaching a 19-month high in November.  They also said that contract failures remain a problem.  Why aren’t more homes selling?  Could the issue be extremely conservative underwriting guidelines implemented as a result of elevated levels of repurchase requests from Fannie Mae and Freddie Mac and fears about the impact of HUDs new risk management efforts?

In the eyes of the states’ governments and the federal government, lenders have not paid sufficiently for the impact of the housing melt down.  Obama announced in the state of the union address an expanded effort by the justice department to fight mortgage fraud.  Many states are refusing to settle their suits with servicers.  California was the only state to receive a minimum guarantee from banks as part of a nationwide settlement over mortgage servicing problems, but it has rejected the offer.  Bank of America, Wells Fargo and JP Morgan Chase guaranteed that Californians would receive about $15 billion in aid in the form of lower monthly payments and loan balances, or more than half of the $25 billion total settlement. A spokesman for state Attorney General, Kamala Harris, called the proposal “inadequate.”  Will the lenders continue to be overly cautious until they settle the outstanding legal battles with the government?

For the week there were 12 positive trends, 14 negative trends, and 6 neutral trends.  The DJIA fell from 12,716 to 12,660.

POSITIVE TRENDS

• For the week ending January 21, initial claims for unemployment and continuing claims both rose after their steep declines the prior week.  However, using the four-week moving average, initial claims fell to 378,000 from 380,000 the prior week.  Continuing claims fell to 3,569,000 from 3,581,000 the prior week.

• GDP growth for fourth quarter was 2.8% which is above the growth rate of 1.8% in third quarter but lower than expected.

• Caliber Funding LLC, Irving, Texas, is talking to several loan officers and support staff who worked at MetLife Home Loans and may wind up hiring upwards of 300 full-timers, according to officials familiar with the situation.  Caliber CEO Brian Simon told National Mortgage News that “We’re in the process of nailing down a few specifics” involving a “significant number of them” but said he could not comment further.  Caliber is a fast growing nonbank lender that is licensed to fund in 45 states. Simon said that within 90 days the company should be in all 50 states.

• While Citigroup Inc. struggles to get rid of its consumer lending unit, some of its smaller competitors are cheerfully bulking up similar businesses.  Banks including Wells Fargo & Co. and SunTrust Banks Inc. are expanding their non-credit card installment lending, finding a new avenue for growth in this relatively obscure corner of the consumer banking business. Customers use these generally unsecured “personal” loans in lieu of home equity or card loans, to cover expenses like home repairs or medical bills.  This type of lending is helping some banks gain business from a broader customer base, including the riskier customers they abandoned during the worst of the financial crisis. Those customers still might not qualify for credit cards or mortgages, but banks are reaping the benefits of reaching out to them with alternative loans:  SunTrust, for example, saw a 53% increase in personal loans originated in 2011 versus 2010.

• The euro recovered some of its lost value as it rose from $1.26 to $1.32/euro.  This means U.S. exports will increase in value and strengthen GDP.

• The University of Michigan sentiment index was 75 in January, up from 69.9 at the end of December and a bit higher than expected.

• Durable goods orders in December slowed to a 3.0% growth rate, down from 4.3% in November.  This still shows evidence of moderate economic growth.

• Leading indicators reported by the Conference Board rose 0.4% in December after rising 0.2% in November.  Fourth quarter GDP was stronger than any of the earlier quarters of the year but still not strong enough to get the unemployment rate to former low levels.  Most economists believe the rate won’t fall below 7% over the next ten years.

• Federal Reserve officials said their benchmark interest rate will stay low until at least late 2014 and anticipate that unemployment will remain high and inflation “subdued.”  They predict GDP will grow 2.2% to 2.7% in 2012 which is lower than their prior prediction for this year announced last November of 2.5% to 2.9%.  They also predict long run inflation of 2%.  Martin Feldstein of Harvard U. predicts GDP growth in 2012 will not exceed 2%.

• In December, the ECB put $489 billion of euros in the regions’ banks through a new program offering three-year loans at cheap interest rates.  This has brought a sharp drop in short-term yields on the debt of the weakest European nations.  The yield on Italian two-year debt has fallen to 3.9% from 7.8% in late November.  Spanish government two-year yields have fallen to 3.3% from a 6.2% high.

• Croatians voted in favor of joining the EU, 66% to 33%.  But only 47% participated in the referendum, down from 84% who voted for independence from Yugoslavia in 1992.  Despite evidence of a coming crackup, at least one new country wants to join the EU.

• The Eurozone purchasing managers’ index rose 2.1 points in January to 50.4 signaling expansion for the first time in five months according to Markit, a research firm.  Most of the growth was in Germany.

NEGATIVE TRENDS

• The National Association of Realtors reported that pending home sales fell 3.5% in December after rising 7.3% in November.

• New homes sales in December slowed a bit to 307,000, down from 314,000 in November.  This continues to be one of the weakest sectors of the economy.  They have been essentially flat for the past three years despite record low interest rates, falling home prices, and rising rents.  The median price for a new home is down 12.8% from a year ago.  Housing inventories are at 6.1 months.

• The December survey by Inside Mortgage Finance also showed that many of the home purchasers are investors, who account for one out of three transactions or 33.2%. A huge 74% of investor purchases were all cash home purchases during the last month of the year, according to the survey.  Investors accounted for 22.8% of residential purchases during the month, up six-tenths of a percent from November. However, despite representing slightly less than a quarter of purchases investors’ have an over-sized command on the market since their ability to pay cash in the majority of transactions puts undue downward pressure on home prices.  This suggests further decline in home prices.

• The World Bank predicts the Eurozone GDP will dip 0.3% in 2012 but the IMF sees a dip of 0.5%.  Worldwide GDP will be 3.9% percent, down from 4.5% in the earlier prediction.  The U.S. outlook will be 1.8% growth.

• British GDP fell 0.2% in fourth quarter according to Britain’s Office for National Statistics after growing 0.6% in third quarter. 

• Talks with Greek creditors are at an impasse.  Creditors have agreed to accept a write-down of 50% of the outstanding €200 billion in Greek bonds.  In addition, Eurozone countries will lend Greece €30 billion that Greece will earmark for creditors at 4%.  But Germany and the IMF want a 3.5% coupon.  Greece will experience a short term technical default which will only last a few weeks or even a few days.  Charles Dallara, President of the Institute of International Finance is not concerned about it.  Meanwhile, the IIF will get the support from its creditors for the 50% haircut to the nominal value of the Greek bonds.  No agreement has yet been reached on the coupon for the new bonds yet—the net present value reduction.  Greece will eventually default on its debts, even if the nation reaches a deal with the private sector to restructure its debts, according to a panel of experts.  John Chambers, head of sovereign ratings at Standard & Poor’s, said Tuesday that the deal being negotiated between Greece and private sector investors would “in all likelihood” qualify as a default.  The proposed restructuring aims to reduce Greece’s debt load to 120% of its economic output by 2020, from 160% currently.   But even at that level, Greece’s debt burden would still be “very high” and the nation’s credit rating will remain “very low,” said Chambers.  S&P could assign Greece a “selective default” rating by the fall, according to Chambers.  Opposition to payouts on Greek credit-default swaps from European Union policy makers is softening as disputes over a voluntary debt exchange threaten to push the nation into default.

• Christine Lagarde, head of the IMF, said unless euro-zone leaders urgently build a bigger emergency bailout fund, two of the euro zone’s largest economies, Italy and Spain, risked insolvency as the cost of financing their debt spikes upward. Economists said failures in the two economies could spark a global financial and economic meltdown, and IMF staff are urging Europe to at least double the size of their firewall to around €1 trillion.  Insolvency in those two nations “would have disastrous implications for systemic stability,” she said.  “There are three imperatives—one is stronger growth, two is large firewalls; three, deeper integration,” said Ms. Legarde.  “Resorting to budget cuts across the board without growth will only add to recessionary pressures.”  Germany is under pressure to back a significant expansion of the planned European Stability Mechanism—a permanent bailout fund of €500 billion that European leaders hope to launch in July.  This fund is being set up to succeed the European Financial Stability Facility which has a capacity of €440 billion.  Concern is growing in Europe that previous programs to help Greece reduce its debt load will fail, and that Athens will default on its debt.

• In his State of Union speech, President Obama asked the Justice Department to launch yet another investigation of mortgage lenders over selling of mortgages into securities.  Obama said he would propose legislation to give “every responsible homeowner” the ability to take advantage of low interest rates.  Although details of the new plan — which he said could save a homeowner on average $3,000 a year — were sketchy, Obama said it could be paid for through fees paid by banks. That idea was a strong signal the administration is still considering what essentially amounts to a tax to recoup funds from large financial institutions that received aid during the bailout. While a so-called bank tax has been discussed before in Washington, including in the debate over Dodd-Frank, such fees have not had much bipartisan congressional support.  “A small fee on the largest financial institutions will ensure that” a refinancing plan “won’t add to the deficit, and will give banks that were rescued by taxpayers a chance to repay a deficit of trust,” Obama said.  The Wall Street Journal believes none of these housing initiatives will go very far since Congress won’t approve them.

• Portugal will probably need a second bailout as fear increase that it won’t be able to return to markets for financing in 2013.  Portugal must regain full access to capital markets next year to repay €9 billion in debt due in September 2013.  Bond yields and the cost of insuring Portuguese debt against default have reached record levels.  One foreign exchange broker opined that Portugal has very little realistic prospect of paying back its debts in full.  Despite following the recommended policy of austerity imposed on it, bond rate yields have not declined in Portugal.

• Despite rising bank stock prices, the big banks’ mortgage expenses keep piling up, in a backlog that is likely to drag down their profits — and a broader housing recovery — for the foreseeable future.  As the largest banks reported quarterly results this month, they took charges for repurchasing soured loans, complying with federal mortgage servicing standards, paying for an upcoming settlement with state attorneys general and resolving significant foreclosure and litigation costs.  Even Wells Fargo & Co., which posted the strongest fourth-quarter mortgage results and now controls a third of the U.S. mortgage market, had significant costs for loan repurchases and mortgage servicing failures. It posted about $300 million in costs related to mortgage servicing and foreclosures.  The worst problem, analysts say, is that the banks’ fourth-quarter charges do not necessarily signal any sort of resolution to the litigation and regulatory risk for banks with significant mortgage exposure.  All the large banks are keeping large reserves for mortgage repurchases, regulatory risk, and foreclosures.

• German ten-year bond yields rose from 1.77% two weeks ago to 1.87% on Jan 27 over concerns over the Eurozone crisis.

• A former IMF economist, Simon Johnson fears Italy won’t be able to surmount its €1.90 trillion debt burden without a restructuring that would impose further huge losses on financial institutions across the Eurozone.  This would cause multiple government debt defaults starting with Greece and possible departures from the euro.

• On Jan. 24, Flagstar announced a fourth-quarter loss of $44.9 million, compared to a loss of $14.2 million a quarter earlier, as credit costs rose. A year earlier, the company reported a $192.1 million loss, largely due to a hit it took in order to unload nearly half of its problem assets through a bulk sale. Since 2007, Flagstar has lost nearly $1.4 billion.  The loss was actually closer to $66 million, because the company benefited in the fourth quarter from a $21 million gain from the sale of its branches in the Indiana and Georgia markets.
• Fitch downgraded the credit rating of Italy and Spain two notches and also cut Belgium, Slovenia, and Cyprus.  This means a bigger bailout is needed to preserve the eurozone.

NEUTRAL TRENDS

• The cost of renting a home rose 2.5% in December year-over-year.  This should shift some consumers to consider buying a home if they can get a mortgage.  The weak housing market is preventing more rapid GDP growth.

• A study completed in 2012 by three economists, Quercia, Ding, and Reed, suggests that the QM loan term restrictions on their own would curtail the risky lending that occurred during the subprime boom and lead to substantially lower foreclosure rates without overly restricting access to credit.  Based on this analysis, they believe that policymakers should not impose additional LTV, DTI and FICO requirements on QRM mortgages, especially given the potential disproportionate impact of these thresholds on creditworthy low-income borrowers and borrowers of color.

• Three ways to boost housing:  1) Since the Federal government owns Freddie Mac and Fannie Mae who dominate today’s market, the government could ask Freddie to increase the number of home loans investors can have from the maximum of 4 at Freddie and 10 at Fannie.  Just increasing the limit to 12 for both agencies would have a big impact.  2) The government should establish certainty around its current rules, especially rules involving repurchases of defaulted loans.  3) Give investors equity stakes in homes in exchange for mortgages when the home is under water.

• The FHFA noted in a letter that forgiving mortgage debt on Fannie Mae and Freddie Mac loans would cost F&F almost $100 billion.  Freddie & Fannie guarantee nearly 3 million mortgages on single- family homes that are underwater.

• Mexican President Calderon who is president of the Group of 20 says Europe needs a “real depreciation of the euro” and a bigger firewall to resolve the crises in the indebted countries.  The bigger the firewall, the faster the solution, he said.

• European Union Economics Commissioner Olli Rehn said the bailout fund needs a boost in January and some concessions on interest rates on existing official loans.  In addition, the U.S. must increase its contribution to the IMF.

CONCLUSION

There is little likelihood of a double-dip in the U.S. but also little likelihood of a normal robust recovery.  Rather we will continue to limp along with an anemic recovery around 2.5% GDP growth.

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

What a change a week can make!  We now see big signs of improvement in the economy.  There are 20 positive trends vs. only 9 negative trends—the best ratio of positive to negative trends in many months!   The biggest headline is the 50,000 drop in initial claims for unemployment, a rise in industrial production, a rise in existing home sales, the home builder confidence index rose, both the New York and Philadelphia manufacturing indexes rose, bank earnings are up in several major banks, repossessions are down, bank and home builder stocks are up, and inflation is nonexistent.  The negatives are mainly in Europe—nine downgrades by S&P of Eurozone debt.  Housing starts dropped a little and Citicorp can’t sell its consumer credit firm.  We have long observed that many people are like sheep and tend to follow what everyone else is doing.  It appears we have reached a point where the pessimism that has lingered since 2007 is being turned around.

MORTGAGE MARKET SUMMARY

Rates are great.  According to Freddie Mac’s weekly survey they fell again last week.  Consumer optimism is returning and the economy appears to be showing some signs of health.   “December attitudes have rebounded from the lows seen during the debt ceiling debate and economic deterioration of Europe this past summer. There is marked improvement in consumer sentiment regarding the direction of the economy, personal finances, and future home price expectations,” said Doug Duncan, vice president and chief economist of Fannie Mae.  The Mortgage Bankers Association reports that application volume is strong.  Who wants the business?  Recent quarterly reports show that volume is down at Bank of America, Chase and Citi.  It appears that the large banks are focusing more on serving existing banking customers and are thinking about mortgage lending as part of their whole consumer banking strategy.  Independent mortgage bankers are picking up the volume that the large depositories have walked away from.  Firms like Primary Residential Mortgage and Prime Lending have recently hired some of the top loan officers from the banks and are growing at a rapid pace.  How much can these smaller firms grow without robust investor appetite to purchase their servicing?  If they must hold their servicing, their growth rate will slow.

Repurchase requests from Fannie Mae and Freddie Mac continue to be a challenge for the entire mortgage industry.  Management at SunTrust and Chase mentioned this as an ongoing frustration in their recent earnings release.  Large repurchase requests have made the largest servicers increasingly risk averse, lengthened the underwriting process, and increased expenses.  If the Obama administration really wanted to improve the housing industry, they could encourage the GSEs to do a settlement with servicers for pre-2008 originations and allow the servicers to put the risk of older production behind them and focus on new business.

We are hearing that mortgage servicing is beginning to trade again but at a discount.  Now that a head of the Consumer Financial Protection Bureau has been appointed and it seems that the finance industry is not going to oppose his appointment perhaps regulation of Dodd Frank will move forward and the industry will get clarification of the many outstanding regulatory questions such as the definition of a qualified residential mortgage.  Once some of the regulatory uncertainty is reduced, trading of loans and private securitization is much more likely to rebound.

For the week there have been 20 positive trends and 9 negative trends.  The DJIA rose 2.4% from 12,422 last week to 12,716.

POSITIVE TRENDS

• Initial claims for unemployment fell dramatically to 352,000 for the week ending Jan. 14, down from 402,000 the prior week.   This was a four year low.  The four-week moving average fell to 379,000 from 383,000.  Continuing claims also plummeted to 3,432,000 from 3,647,000.

• Industrial production rose 0.4% in December after declining -0.3% in November.  This suggests slow growth in 4^th quarter with recovery in December.  Capacity utilization rose to 78.1 in December up from 77.8 in November.

• The producer’s price index (PPI) fell to -0.1% in December, down from 0.3% in November.  Fuel and food prices were down.

• The consumer’ price index (CPI) was unchanged for the month of December from November.  There couldn’t be a clearer sign of no inflation especially when the wholesale index actually declined in December.

• The National Association of Home Builders index rose to 25 in January, up from 21 in December.  This was higher than expected and was the highest level since 2007.

• The stock of seven builders’ stock has risen 59% since early October as a range of investors buy up these stocks.  They are assuming there will be a strong spring buying season.  Among the stocks that are appreciating are Lennar, Pulte, Toll Brothers, D.R. Horton, and NVR.

• The Empire State Manufacturing index rose to 13.5 in January, up from 8.2 in December.

• The Philadelphia Federal Reserve Bank Index of Manufacturers rose to 7.3 in January, up from 6.8 in December.

• Mortgage foreclosure filings and repossessions fell to their lowest level since 2007 last year.  Total filings, including default notices and bank repossessions were down 33% for the year (2011) to 2.7 million, according to RealtyTrac, the online marketer of foreclosed properties.  One in every 69 homes had at least one foreclosure filing during the year, while 804,000 homes were repossessed. That’s a significant improvement from the peaks reached in 2010 — when 1.05 million homes were repossessed — and the lowest levels seen since 2007.   More than 4 million homes have been lost to foreclosure over the past five years.  While the declines seem like good news for the housing market, where a flood of foreclosed homes has depressed home prices, much of it is due to processing delays caused by fall-out from the “robo-signing” scandal that broke in late 2010.  During the year, banks spent more time making sure paperwork was legal and proper, creating a backlog in the foreclosure pipeline. As a result, the average time it took to process a foreclosure climbed to 348 days during the fourth quarter, up from 305 days a year earlier.

• The International Monetary Fund is proposing to raise its lending capacity by $500 billion to insulate the global economy against any worsening of Europe’s debt crisis, according to the Wall Street Journal.  The Washington-based lender currently has about $385 billion available to lend and wants to lift that to $885 billion after identifying the potential for a $1 trillion global financing gap in the next two years. To incorporate a cash buffer, that means asking its membership for $600 billion.

• For fourth quarter, Wells Fargo posted $4.11 billion in profits, or 73 cents a share, up from $3.41 billion, or 61 cents a share, a year earlier. Revenue fell 4.1% to $20.6 billion.  Wells indicated it is looking to make acquisitions, unlike most of its peers.  The company has already made several buys over the past few quarters, including the purchase of LaCrosse Global Fund Services, a managed hedge fund administration and middle-office service provider, in September.  According to Timothy Sloan, CFO, “our focus is going to be on U.S.-based assets and businesses, which we think we can underwrite and price appropriately.”

• U.S. Bancorp’s fourth-quarter earnings jumped 39% as the lender again reduced funds set aside to cover potentially risky loans and benefited from growth in lending.  Provisions for loan losses in the fourth quarter were $497 million, down from $912 million a year earlier and $519 million in the third quarter.  U.S. Bancorp reported a profit of $1.35 billion, or 69 cents a share, up from $974 million, or 49 cents a share, a year earlier.

• About one million American homeowners would get write-downs in the size of their mortgages under a proposed deal with banks over shady foreclosure practices, U.S. Housing and Urban Development Secretary Shaun Donovan said on Jan. 18.  The deal, which could be struck within weeks, would mark the largest cut in the mortgage load since the start of the credit crisis.  “We’re very close to a settlement that would both fix the servicing problems, but also help over a million families around the country stay in their homes and get help,” Donovan said at a U.S. Conference of Mayors meeting in Washington.  Talks between federal officials, state attorneys general and major banks to resolve allegations of “robo-signing” and other misconduct in foreclosures have dragged into their second year.  Donovan’s announcement came the same day that two big regional U.S. banks disclosed they had set aside funds related to mortgage servicing matters, a sign that lenders beyond the five largest mortgage servicers may join the expected settlement.  In exchange for between $20 billion to $25 billion in relief to distressed homeowners, the banks – Bank of America Corp, Wells Fargo & Co, JPMorgan Chase & Co, Citigroup and Ally Financial Inc. – will put behind them potential government lawsuits about improper foreclosures and abuses in originating and servicing the loans.  Using Donovan’s estimate, the settlement could provide roughly a $20,000 reduction each for the one million borrowers.

• Citigroup reported fourth quarter 2011 net income of $1.2 billion or $0.38 per share, compared to $1.3 billion or $0.43 in fourth quarter 2010.  Its fourth quarter revenues were $17.2 billion, down 7% from the prior year period.  CEO Pandit said, for 2011, “We increased our net income to $11.3 billion, up 6% from the previous year.

• In a report from Tom Charles of Quadrant Advisors we heard of a great trade for the new year:  a $25 million sale of seasoned performing residential adjustable mortgage loans that are almost 4 years old (on a WA basis). The seller provided updated credit scores and property valuations so the investor is able to consider the pool with some assurance that a deal can be completed.  Other noteworthy parameters involving this trade included (1) a WA current credit score of approximately 740, (2) a WA current LTV of approximately 65%, and (3) nationwide collateral (not including Florida).

• Spending on home improvements is expected to rise modestly in 2011 for the first year since 2006 while spending on new construction is expected to languish, reported HIS Global Insight.  An additional expansion of 5.7% is expected in 2012.

• The Greek government and its private-sector creditors have moved closer to a debt-restructuring deal on the basis of new proposals.  It could pave the way for a bailout of the country.  Private creditors are showing willingness to accept a 50% cut in the value of the Greek bonds they hold that are coming due.  One open question is whether the deal will be considered to be truly voluntary.  Holders of CDS insurance (credit default swap contracts) have incentives to refuse to agree to the deal so they could claim payouts.

• Bank of America earned $2 billion in net income in 4Q11.  For 2011 they earned $1.4 billion, up from a loss of $2.2 billion 2010.  The income included revenue from the sale of assets.

• Existing home sales rose 5.0% to 4.61 million annual rate in December, up from 4.39 million in November.  This was higher than expected and was the third monthly increase in a row.  Inventories of homes for sale fell to the lowest level since 2005.  Multifamily homes (including townhouses and condos) rose 8.7% whereas detached homes rose 4.6%.

• The euro rose in value back to $1.29, up from $1.26 last week.  This stems from rising optimism over a solution to the Eurozone crisis.

NEGATIVE TRENDS

• Housing starts fell slightly to a 657,000 seasonally adjusted annual rate, down from 685,000 in November but it was still up higher than during the prior months in 2011 and most of 2010.  There does appear to be a recovery occurring in housing using a moving average or quarterly numbers.

• U.S. consumers defaulted on credit in December at a rate of 2.24%, the highest rate since 2.3% in April, according to an index by Standard & Poor’s and Experian.  Credit defaults increased two basis points from 2.22% in November, though they declined from 3.01% in December 2010.  S&P said mortgage defaults drove the overall increase, as first-mortgage defaults rose to 2.19% from 2.17% in November. Those mortgages saw a 1.92% default rate in August.  Second-mortgage defaults ticked up to 1.33% from 1.26%.  “The second half of 2011 saw a slight reversal of the two-year downward trend in consumer credit default rates,” said David Blitzer, managing director and chairman of S&P’s index committee. “First mortgage default rates rose for the fourth consecutive month, as did the composite.”

• On January 13, S&P downgraded nine Eurozone countries one or two notches.  They included France, Spain, Italy, Portugal, Malta, Slovakia, Slovenia, Cyprus, and Portugal.  On the same day as the downgrades, talks between Greece and a group of creditors negotiating to restructure its debt broke down.  If no deal can be reached with its creditors, Greece will need billions of euros in additional aid to make a big bond repayment in March.  The downgrades will hurt the European Financial Stability Facility (EFSF) which has no capital of its own. Instead it relies on borrowing against the credit of stronger countries to help the weak.  This means the EFSF will not be able to lend as much in the future to help weak countries like Greece.  On March 14 a €14.5 billion bond matures for Greece.  To have a voluntary agreement in time, European leaders would have to sign off at a summit on Jan. 30.  The talks that broke down last Friday were seeking to slice €100 billion from the Greek government’s €350 billion in debt without delivering an ultimatum to private bondholders who together hold more than €200 billion of bonds.  Without France and Austria, the sum of AAA guarantees to back the EFSF falls from €451 billion to €271 billion.  This fund is committed to providing about €200 in funds to help rescue Portugal, Ireland and Greece.  S&P warned on Jan. 16 that efforts to address Europe’s financial problems are falling short.   Germany has the euro area’s only stable AAA grade.  But its current debt-to-GDP ratio is 83%, much higher than the 60% ceiling set in the Maastricht Treaty.  Bill Gross of PIMCO thinks Greece will soon default on its debt.

• Greek officials believe that if the IIF (Institute of International Finance) agrees and a “critical mass” of around 68% of investors voluntarily go along, then this will trigger so-called collective action clauses that will bind the remaining investors into the deal.  The IIF represents the private investors in Greek debt.  The goal of the talks with the private sector is to slice €103 billion from the Greek government’s €350 billion in debt without any signs of coercion. An agreement in principle would set up a formal debt offer during the week of Feb. 6-10, with the final debt exchange expected to be completed by the end of February.  The sticking point remains the interest rate stitched to the bond swap. Greece says it can’t afford to pay more than a 4.5% average coupon on the new bonds, while sovereign creditors such as Germany and the IMF want below 4% to make sure Greece can afford it and to avoid future shortfalls. The IIF, however, wants more than 5%.  On March 20, Greece has to make a bond payment of €14.5 billion.  If they can’t agree on a compromise a default may take place then.  The biggest danger in Greece is the gradual bank run taking place.  Bank deposits in late 2011 were down 17% from a year earlier.  Immigrant workers from Albania and elsewhere are moving their funds out of the country.  GDP is estimated to have fallen 6% in 2011 and another 3% in 2912.

• Fourth-quarter profits at PNC fell 41% from the previous quarter, and 40% from a year earlier, to $493 million. Higher foreclosure expenses and the cost of redeeming preferred securities were the main reasons.  Profits should benefit this year from the addition of RBC’s 400 branches in North Carolina, Florida, Alabama, Georgia, Virginia, and South Carolina, CEO James Rohr said.  Excluding $170 million in integration costs, the deal will add to earnings in 2012 because PNC does not have to issue shares to pay for the deal, he said.

• Since 2009, Citicorp, the third-largest bank by assets, has tried to sell its CitiFinancial consumer lending business, now called OneMain Financial. Those efforts have been fruitless so far — but Citigroup is not planning on giving up anytime soon, said chief financial officer John Gerspach.   This firm was formerly called Commercial Credit.  At the present time there is little demand for any mortgage or consumer finance company.

• Basel II and III tried to make banks safer by prescribing capital levels and by steering banks toward “safe assets.”  In the past mortgage-backed securities were among the safest, safer than business and consumer loans and even whole mortgages.  So the Basel rules favored MBSs.  They also favored sovereign debt.  This led to banks holding an excessive amount of both and brought on the current sovereign bubble and the recent mortgage bubble.

• President Obama once again rejected the Keystone XL oil pipeline from Canada.  This will slow down job growth and raise the price of fuel.  Canada’s Prime Minister Harper now promises to sell that oil to China.  The average retail price of a gallon of gasoline rose to $3.45 this week rising for the fourth straight week.

• Three large Eurozone banks that sold new shares last year need to raise capital again.  The three are Italy’s Monte Dei Paschi di Siena, Spain’s Bankia, and Germany’s Commerzbank.  This means investors will likely be reluctant to put additional money into Eurozone banks.  So even if Greece is bailed out again there will be weakness in the banking sector.

CONCLUSION

This looks like a big market turnaround in the U.S. economy to us.  But the Eurozone still has lots of challenges.  The next big challenge for Europe occurs on March 20 in Greece.

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

During the second week of January, there were some signs of modest improvement in the economy, especially in auto sales, services, and oil and gas extraction.  Consumer credit grew very sharply in November and consumer sentiment rose in January.  Bank earnings and stock prices rose.  Mortgage rates reached a new low causing refis to remain high.  But initial claims for unemployment turned back up and December retail sales other than auto were very weak.  German GDP fell in fourth quarter making it virtually certain that the European Union was in a recession.  So far the collapse in Europe seemed to be benefiting the U.S. by causing world savings to stream to the U.S. and keeping U.S. interest rates surprisingly low.  MetLife Mortgage shut down after trying unsuccessfully trying to find a buyer for the past year.  The president of Fannie Mae resigned.  A few weeks ago the president of Freddie Mac announced his retirement.  Perhaps they both resigned from political pressure because these two GSEs so dominate the mortgage industry and the housing industry is not showing any recovery yet.  The eurozone keeps heading for at least a partial collapse but it is possible that this may actually benefit the U.S. by keeping interest rates and inflation low.

MORTGAGE MARKET SUMMARY

According to Freddie Mac mortgage interest rates are at the lowest level since the 1950s.  Freddie Mac said on January 12 the average rate on the 30-year fixed mortgage fell to 3.89%. Rents have risen and housing values are low.  As a result of historically low interest rates and low home values, existing homes are incredibly affordable.  According to the MBA, mortgage loan application volume increased 4.5% on a seasonally adjusted basis from one week earlier.  On an unadjusted basis, the index increased 34.4% compared with the previous week.  The Refinance index increased 3.3% from the previous week.  The seasonally adjusted Purchase Index increased 8.1% from one week earlier.  Why hasn’t application volume increase more?  According to NAR and Freddie Mac, the underwriting guidelines are too tight and the job markets are too weak.   However, recent economic data indicates that our economy is on a positive trajectory.  Given the current economic conditions, this spring should be a great purchase money market.

Looking at interest rates, one would think that now would be a great time to get into mortgage lending.  However, despite sales and market share growth, MetLife is exiting mortgage lending and was unable to find a buyer for their mortgage company and announced this week they would close down their mortgage group.   PHH, a large lender and servicer, has been having trouble convincing investors to purchase their debt.   Flagstar, a top originator and large servicer of mortgages, has been unable to get investors interested in their stock which has remained stubbornly low all year.  Few mortgage servicing pools have been trading and those that have sold have been sold at a discount.  Chase and PHH recently announced that they reduced the value of their mortgage servicing rights.  All indications are that interest rates are unlikely to fall further and rates of consumer relocation have dropped considerably, therefore the servicing originated over the past year will stay on the books longer than it has in the past 20 years.   MetLife cited the cost of regulation as the reason for exiting consumer lending and banking.  One of the causes Chase cited for a loss in their mortgage origination business was large mortgage repurchases.  They are expecting to have to repurchase $350 million a quarter this year.  Uncertainty about future repurchase risk is one reason cited for the lack of interest in purchasing mortgage companies today.  Uncertainty about regulations related to qualified mortgage and qualified residential mortgage capital retention requirements from Dodd Frank is also cited as a reason for lack of investor interest in mortgage servicing. 

For the week there were 10 positive trends and 16 negative trends.  The DJIA rose from 12,359 last week to 12,422 this week.

POSITIVE TRENDS

• In November consumer credit outstanding grew by $20.4 billion after rising $6.0 billion in October.  This was the biggest monthly increase since November 2001 and was twice as high as expected by the most optimistic forecaster.  Most of the increase was for non-revolving credit.  Revolving credit has now increased three months in succession.
• The Federal Reserve’s beige book showed the U.S. economy is starting to improve modestly.  The economy “expanded at a modest to moderate pace” from late November through the end of December on increased holiday retail sales, demand for services and oil and gas extraction, the Fed said in its Beige Book anecdotal business survey released today in Washington. At the same time, most industries saw “limited permanent hiring,” and the housing market remained “sluggish.”

• ROE for banks with assets over $10 billion rose to 9.72% in 3^rd quarter, up from -12% in 4^th quarter 2008.  But this is below the 14.4% average experienced in the ten years before the financial crisis.  ROA averaged 1.1% in third quarter, up from -1.1% in 4^th quarter 2008, but still below the pre-crisis average of 1.24%.
• Job cuts in state and local government are expected to continue to be a weak point in the job market, but such cuts are diminishing.  They were 14,000 in December 2011 down from 24,000 a year earlier.
• Three members of the Federal Reserve are publicly calling for Fannie and Freddie to take more aggressive action to support housing.  This would include reducing loan balances on underwater loans and purchasing more MBS.

• Lender Processing Services Inc., Jacksonville, Fla., said its November Mortgage Monitor report showed mortgage delinquencies have fallen by 25% from its January 2010 peak, continuing a trend of fewer loans becoming delinquent.  At the same time, LPS said new problem loans–those loans seriously delinquent as of the end of November that were current six months prior–have not improved significantly in the last year. “This degree of stagnation indicates that while the situation is not getting markedly worse, it is not improving either, and inventories of troubled loans remain significantly higher than pre-crisis levels across the board,” LPS said.
• More Americans are moving from part-time to full-time jobs, adding to evidence a strengthening labor market will bolster household confidence and spending.  The number of people putting in a full week rose to 113.8 million in December, the most since February 2009, the Labor Department’s monthly employment report showed last week. At the same time, 8.1 million worked fewer hours because they couldn’t find a full-time job, the least since January 2009.
• GI Partners of Menlo Park, CA plans to announce a plan to buy foreclosed homes at discounts and rent them out to tenants.  This investment ($250 million to buy Waypoint Real Estate Group) would be among the largest to date by an institutional investor in the single-family rental space.  White House officials are looking at rental conversions to help clear a glut of foreclosed homes.
• Redwood Trust Inc. plans to sell securities backed by about $400 million of new U.S. home loans, only the fourth sale of such debt since credit markets seized in 2008, according to Bloomberg.  The deal may be completed as soon as next week.  The Mill Valley, California-based Redwood, which focuses on so-called jumbo loans, issued all three prior non-agency transactions, data compiled by Bloomberg show. Credit Suisse Group AG is managing the offering.  Issuance peaked at about $1.2 trillion in each of 2005 and 2006, and may total $5 billion this year, according to JPMorgan Chase & Co. analysts.

•  The University of Michigan index of consumer sentiment rose to 74 in January, up from 69.9 in December. 

NEGATIVE TRENDS

• Initial claims for unemployment reversed direction rising to 399,000 claims for the week ending January 6, up from 375,000 the prior week.  The four-week moving average also rose to 382,000, up from 375,000 the prior week.  The four-week moving average had fallen the prior five weeks in a row.  Continuing claims rose to 3,628,000 up from 3,609,000 the prior week.  The four week moving average remained unchanged.  This suggests a slowdown in the recent decline in the unemployment rate.
• Retail sales rose only 0.1% in December after rising 0.4% in November.  Excluding auto sales, there was a 0.2% decline in December.  This now shows a weak Christmas sales period after early data indicated a strong Christmas.

• U.S. Treasury yields are unlikely to increase in the near future because of concern the recession in Europe may be deeper than anticipated and market volatility may spill over into the U.S.  Buyers will have to accept historically low yield on U.S. government debt to get relative safety, reports the Franklin Templeton fixed-income policy committee.
• According to Harvard Economic Professor Barro, seven East European countries that recently joined the EU have announced they have lost interest in adopting the Euro.  Popular opinion is also against euro membership in the U.K., Sweden, and Denmark.  None of the remaining outsider European countries wants to embrace the common currency.  The political response to the ongoing fiscal and currency crisis is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency.  The cost of forcing populations with disparate histories into a single nation will likely be prohibitively high.  Therefore Barro recommends elimination of the euro altogether.  This could be done by each member country reinstituting their own currency and making it par with the euro and then gradually eliminating the euro after several years.   If the euro is eliminated altogether, there would be a much bigger negative impact on the U.S. economy.
• “Fannie Mae and Freddie Mac will need to raise guarantee fees over the next two years to fulfill the requirements of the recently-passed tax cut extension bill. We think that this increases the risk of a rating agency downgrade and so continue to prefer debt of other GSEs, such as Federal Home Loan Banks and Federal Farm Credit Banks, over Fannie and Freddie.” So stated a research piece from Bank of America Merrill Lynch, suggesting that the risk on both agencies debt will increase. “There is a possibility that S&P and Moody’s decide to lower the credit ratings of Fannie Mae and Freddie Mac based on the fact that we have now entered the final year of unlimited capital availability and no plan has been put in place to make sure that these two GSEs have enough capital to weather a moderately bad economic scenario beyond 2012. Since the conservatorship of Fannie and Freddie started in 2008, no progress has been made on the future of these companies, whose combined balance sheet is nearly half the size of the entire US banking system combined (5.4tn vs. 12.5tn).”
• Fannie Mae CEO Michael Williams resigned after serving the past three years. This announcement comes three months after Freddie Mac CEO announced his plan to resign at the end of this year.  The two firms have cost taxpayers $151 billion since the takeovers by the federal government.
• Yields for German six month Treasuries fell to -0.012%.  This is the first time Germany’s yields have fallen into negative territory and suggests investors are too worried to invest in the rest of Europe.  Switzerland and the Netherlands have also had negative yields recently.  A bond-market panic could cut off major economies such as Spain and Italy from affordable credit.  European banks are increasingly reluctant to lend one another money due to their heavy exposures to Eurozone governments.  Yields on Italy’s ten-year bond remained above 7%–a level considered unsustainable.  Germany and France pressed Greece and its bondholders to agree on easing Greece’s debt burden.   Greece’s bailout loans from the Eurozone and the IMF are on hold until a deal is reached with private investors.  Greece’s high deficit is raising the risk of a full-blown default on its bonds.  But on Jan. 12, the ten year yield on Italian debt fell back to 6.63%.
• Standard & Poor’s stripped France of its AAA credit rating for the first time, Finance Minister Francois Baroin said, reflecting the risk to the country from the spread of the euro-area debt crisis.
• Fitch announced that Italy will likely be downgraded by the end of January due to the rising bond yields and the lack of a Europe-wide plan to prevent the sovereign debt crisis from spreading.  Fitch noted that a Greek exit from the euro remains a potential option.  Greece still could drag the Eurozone into a deeper crisis.  Fitch rates Greece a triple-C.  On March 20 Greece must repay a €14.5 billion bond.  Currently it doesn’t have that money.
• According to the German statistical office, German GDP contracted 1% in 4^th quarter which has hurt German exports and business confidence.  Many economists expect Germany to stagnate before recovering slowly in 2012.  A worse-than-expected turn in Southern Europe’s debt crisis could spur financial-market panic and lead to a deeper recession.
• The euro fell to $1.26 on Jan. 11, down from close to $1.28 a day earlier.   There has been a fairly steady decline in the euro for the past three months.  In mid-October the euro was $1.42.  Back in April there was a peak at $1.49.
• MetLife Home Loans announced they are exiting the mortgage business.  Apparently they could not find a buyer for their firm which has been on the market for at least a year.  They were the tenth largest originator in the industry according to Inside Mortgage Finance.

• Chase’s mortgage originations in 2011 were the lowest in the past ten years.  J.P. Morgan Chase & Co. reported a 23% drop in fourth-quarter profits, the result of another weak quarter for investment banking operations, but executives said loan-growth numbers across the bank signal an improving economy.  As the first major bank to report for the fourth quarter, J.P. Morgan’s results offer a glimpse into what is largely expected to again be a bleak quarter for the nation’s largest financial institutions. Revenue at the bank missed expectations, and shares shed 4.1% to $35.37 in recent trading.  The bank’s mortgage operations swung to a loss, largely because the bank reduced the value it ascribes to mortgage-servicing rights it holds by $832 million. Mr. Dimon said on the call the bank continued to originate more mortgages, but that it wasn’t an area he saw the bank making a profit in.  “We are getting killed in mortgages, if you haven’t noticed,” he said.  ”Mortgage production and servicing reported a net loss of $258 million, compared with net income of $330 million in the prior year. Mortgage production pretax income was $161 million, a decrease of $392 million, or 71%, from the prior year. Production-related revenue, excluding repurchase losses, was $1.1 billion, a decrease of $269 million, or 20%, from the prior year, reflecting narrower margins and lower volumes. Production expense was $518 million, an increase of $82 million, or 19%, reflecting a shift to higher-cost originations within the retail channel as well as enhanced underwriting processes. Repurchase losses were $390 million, compared with repurchase losses of $349 million in the prior year. The higher losses were primarily driven by an acceleration of Agency demands.”  Mortgage repurchase losses are forecast at $350 million per quarter and mortgage loan losses, at $900 million a quarter. In addition, a further 10%-15% contraction in JPMorgan’s real estate portfolio is expected to reduce net interest revenue in 2012 by $500 million.

•  Several large banks have announced layoffs.  MetLife’s Mortgage Group eliminated 4,300 jobs this week.  Last fall B of A laid off 30,000 workers and signaled it plans to get rid of 750 of its 5,700 branches over the next several years.  Royal Bank of Scotland announced the layoff of 3,500 i-banking workers.

• PHH issued a prospectus to sell $150 million in debt to help pay off $250 million of debt that matures in April.  Originally they were looking to see $250 million debt back in December, but cancelled that offering.  S&P recently downgraded their long term debt rating two notches to BB-.  Last week the company president resigned.  Their stock price has been falling from around $20/share in June 2011 to $10.65 on Jan. 11.  They have taken large valuation adjustments in mortgage servicing rights the past three years, including $600 million in the nine months ended Sept. 30, 2011.  They lost $140 million in the nine months ended Sept. 30, 2011.  In the current market mortgage servicing isn’t trading for it has no value and they have taken big write-downs over the past several years in the value of their mortgage servicing.  PHH Corp raised its doubts over continuing as a “going concern” if it failed to improve its liquidity, and said the Consumer Financial Protection Bureau (CFPB) launched an investigation into its mortgage insurance practices.  PHH is also looking at ways to improve liquidity, which may include a sale of its reinsurance business and mortgage servicing rights, it said.

• The U.S. trade deficit in November increased to -$47.8 billion, up from -$43.3 billion the prior month.  This weakens GDP in fourth quarter.

CONCLUSION

The U.S. continues to show modest improvement as the eurozone heads for a mild recession and reduction of its weaker members.  It will take more months before we see clear signs of a strong recovery in housing even though some home builder and bank stocks showed improvement.

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 U.S. economy looked good this week—initial claims for unemployed continued to recede, factory orders rose, construction rose, ISM services index rose, and the ADP employment index rose massively.  The employment report on Friday was particularly strong with the unemployment rate falling to 8.5%, new jobs up by 200,000, rising hourly wages, and expanded work week.  The domestic auto industry was generally in good shape despite a very slight decline in December.  The three big negatives were continued weakness in single-family housing caused by high defaults and uncertainty over new regulations: the continued collapse of the eurozone; and the jump in oil prices due to the potential conflict in the Strait of Hormuz.  Despite large loans extended to support the refinancing of sovereign debts, there was little investor confidence in the debts of the weaker European countries.  This caused the euro to continue to slide against the U.S. dollar and sovereign debt yields to rise.

MORTGAGE MARKET SUMMARY

The cost to rent a home in the U.S. continues to rise while the cost to buy a home is at record lows.  Reis Inc. reports the average effective monthly rent — the amount paid after discounting — was $997 in the second quarter of the year. That is an increase from $974 a year ago. Second-quarter rents climbed in all but two markets.  Apartment vacancies dipped in 72 of the 82 markets Reis tracked during the April-through-June period, dropping the U.S. vacancy rate to 6 percent. That is the lowest since 2008 and was down from 7.8 percent in 2010′s second quarter, notes Reis.

Despite record low rates an improving job picture and improving consumer sentiment, the number of applications for purchase money loans fell.  According to the MBA, “mortgage application activity declined over the last two weeks, even after adjusting for the typical seasonal decline in activity.  Refinance applications continue to account for the vast majority of total application volume, with the refinance share reaching its highest level in 2011.”

NAR reported that pending home sales reached their highest level in 19 months in November so we should see an increase in purchase money lending soon.  In the meantime, lenders are increasingly busy meeting the demand generated from HARP (Obama’s refinance program).

For the week there were 14 positive trends and 15 negative trends.  The DJIA rose to 12,359, from 12,217 a week ago.

POSITIVE TRENDS

• Initial claims for unemployment fell to a 372,000 seasonally adjusted annual rate in the final week of 2011, down from 387,000 the prior week.  The four-week moving average fell to 373,000 from 377,000.  Continuing claims were 3,595,000 for the ending Dec. 23, down from 3,617,000 the prior week.  The four-week moving average was virtually flat at 3,602,000, down from 3,603,000.
• The ADP employment index for December rose massively to 325,000, up from 204,000 in November.
• The rate of unemployment fell to 8.5% in December, down from an upwardly revised 8.7% in November.  Nonfarm payrolls were up 200,000, which is double the 100,000 improvement in November.  Hourly earnings were up 0.2%, after being flat in November.  The average workweek expanded to 34.4 hours, up from 34.3 hours the prior month.  All these indicators were higher than expected.
• The ISM services index rose to 52.6 in December, up from 52 in November.
• The ISM manufacturing index for December was 53.9, up from 52.7 in November.  This was higher than expected and shows improvement in U.S. manufacturing.  It suggests stronger growth in fourth quarter GDP.
• Domestic light vehicle sales fell slightly in December to a 10.24 million annual rate from 10.34 million in November.  But in November sales had reached their highest level since April 2008 and are generally heading upward.  For the year 2011, total sales were 12.8 million, up 10.3% from 11.6 million in 2010.  Year-over-year, domestic light vehicle sales were up 9% in December.  Total vehicles sales (including imports) in December were flat with November at 13.6 million.  From 1998 to 2007 total vehicle sales averaged over 16 million per year so we have to see another 15% increases before we reach that level again.
• Factory orders rose 1.8% in November after falling 0.2% in October.
• Growth in construction spending in November was 1.2% after a 0.2% decline in October.

• Several auto lenders are making loans to borrowers despite their poor pay histories on their mortgage debt reported the Wall Street Journal.  Lenders in this group include Ally Financial, General Motors Financial and Mitsubishi Motors Credit.
• The national apartment vacancy rate fell to 5.2% in 4Q11, the lowest level since late 2001.  This is causing an increase in rental fees.
• In 2011 only 92 banks failed after 157 failed in 2010.  This is an improvement but 844 banks still remain on regulators’ problem bank list so we should see more failures in 2012.
• Morgan Stanley reported that large cap banks in the U.S. had 9.8% growth in C&I loans in the 2011.

• Consumers are paying down their debts in fourth quarter across an increasing number of loan categories, according to the American Bankers Association. That was a welcome reversal for the banking industry, which in the second quarter saw the ABA report an uptick in delinquencies.

•  The national office vacancy rate fell to 17.3% in fourth quarter, down from 17.4% in third quarter.  Office space rents rose 0.4% during the quarter, continuing the same increase in the prior quarter.

NEGATIVE TRENDS

• The Federal Reserve released on Jan. 3 its minutes from Dec. 13 where it said:  the economy “has been expanding moderately,” compared with the Nov. 2 assessment that growth “strengthened somewhat.” The central bank also added a reference to “apparent slowing in global growth,” and said that “strains in global financial markets continue to pose significant downside risks to the economic outlook.”  Federal Reserve officials will for the first time make public their own forecasts for the federal funds rate at their Jan. 24-25 meeting.
• The Federal Reserve sent a letter to the congressional banking committees stating that tight mortgage-lending standards threaten to hold back the economy.  The Fed signaled support for more aggressive use of Fannie Mae and Freddie Mac to strengthen the housing recovery.  The two agencies should be encouraged to absorb more losses.
• PHH Corp., the largest non-bank lender, abruptly replaced chief executive officer Jerome Selitto with chief operating officer Glen A. Messina on Jan. 4, weeks after a failed bond offering and an S&P downgrade.  This suggests PHH may sell part of their firm and shrink their production.

• The AG of Massachusetts sued B of A, Chase, Citi, GMAC, Wells, and MERS for unfair and deceptive foreclosure practices.  The state wants $25 billion in restitution.  GMAC announced shortly after the lawsuit was filed that it would stop purchasing new mortgage from third parties in the state because recent developments have led mortgage lending in Massachusetts to no longer be viable.  The AG then called for a Congressional inquiry to this decision.
• Oil prices jumped to $102.49/barrel on Nymex due to fears of Iran in the Strait of Hormuz.
• Two of the big hurdles for the Eurozone in the coming three months are the necessity of Italy to issue €118 b in bills and bonds and Spain to refinance about €60 billion.  Most economists see challenges of raising more debt in the Eurozone as the most difficult economic problems to resolve in the new year.
• The euro fell on Jan. 4 from almost a one-week high against the dollar after a European report showed inflation slowed and Italy’s biggest bank said it needs to raise more capital, fueling bets the region’s debt crisis is worsening.  On Jan. 5 the euro fell to $1.27 for the first time since 2010.  This indicates continued lack of confidence in European recovery.  The low point in 2010 was June 4 when the euro fell to $1.20.  The euro has now fallen for ten weeks in a row from a peak of $1.42 on Oct. 27, 2011.
• Spanish bonds (GSPG10YR) dropped for a third day on Jan. 4 amid speculation the nation will seek assistance from the European Union and the International Monetary Fund.  The yield on the 10-year rose to 5.43%.
• Hungary is having a standoff with the EU and IMF over a law that the Hungarian Parliament enacted at the end of 2011.  The IMF and EU say the law threatens the independence of the country’s central bank.  This dispute has caused yields on Hungarian bonds to exceed 10%.  The country’s currency, the forint, has fallen to the lowest level since early 2009.
• China’s property prices fell for the fourth straight month in December.  This is putting pressure on Chinese consumer at a time when both the domestic and global economy is dependent on their spending.
• For the past three years in a row the Hong Kong stock exchange has had more IPOs than the NYSE.  Gingrich blames Sarbox for shrinking the viability of new firms in the U.S.
• President Barack Obama installed Richard Cordray as head of the Consumer Financial Protection Bureau with a recess appointment on Jan. 4, testing the limits of his executive authority to fill the post without Senate approval, White House Communications Director Dan Pfeiffer said.
• Eurozone governments need to refinance more than €1 trillion in sovereign debt in 2012.  The cost of Italian ten-year debt rose over 7%.  Interest rates on French debt inched up.  Investors are expecting S&P to downgrade France’s debt this month.  German retail sales fell the last two months of 2011.  French consumer confidence declined, and the Italian unemployment rate moved up to 8.6% in November from 8.5% in October.
• Retail sales in December had lower increases than expected.  Based on reports from 22 retailers, sales were up 3.4%.  For the entire November and December Christmas season same-store sales rose 3.1%, compared with 4.3% in 2010.  Initial reports showed a sharper increase.
• European confidence in the economic outlook fell to the lowest level in more than two years and German factory orders plunged in November.

CONCLUSION

We see steady growth in the U.S. economy and continued problems in Europe.

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

This was a short Christmas holiday week resulting is less economic news than usual.  The major positive trends were strong retail spending, rising pending home sales, declines in initial claims for unemployment, and rising consumer confidence.  The U.S. stock market is up slightly for the year while the big stock markets elsewhere are down.  The big negatives are further declines in home prices, falling euro, rising oil prices, and the continued challenge within the eurozone.  Despite increased support from the U.S. Federal Reserve and the ECB, the yield for Italian ten-year bonds was over 7% which is unsustainable.  The price for oil on Nymex surged over $100/barrel and the euro fell to an 11 month low.  We also have the challenge of partisan gridlock in Congress and continuing spending cuts in state and local governments.  We continue to expect a partial fragmentation in the eurozone and a slow adjustment to a fiscal union among the remaining states.  The U.S. will have slow growth and Europe will have a recession.  The U.S. rate of unemployment will be moderately lower by the end of 2012.

MORTGAGE MARKET SUMMARY

Surprisingly low interest rates made 2011 a better year than most expected for the mortgage industry.  Economic woes in Europe are helping keep U.S interest rates at record lows and should help keep rates low awhile longer.  Low rates coupled with housing prices that have fallen over 30% since the July 2006 peak have pushed up housing affordability to record highs.  These conditions coupled with pent-up demand and an increase in consumer confidence are credited by NAR for a 7% increase in pending home sales in November.  Freddie Mac’s chief economist, Frank Nothaft is expecting low rates to help spur demand for refinances through HARP and purchase money demand in 2012 but does not think refinance volume will be as high as it was in 2011.  While record affordability will increase purchase volume, it will not increase sufficiently to make up for the drop off in refinance volume in second half 2012 when operation twist expires.  Freddie Mac expect total originations in 2012 to be lower than 2011.  MBA is projecting $968 billion in originations.  Fannie Mae’s economist sees a 40% chance for a double dip recession and thinks the housing market won’t improve before 2015.  Most economists are projecting a slight improvement in unemployment rates and a sluggish recovery with housing values declining somewhat further in 2012.

 For the week there were 10 positive trends and 6 negative trends.  For the week the DJIA slipped to 12,217, down 0.6% from 12,294 a week ago.

POSITIVE TRENDS

• Shares of home builders are up 30% since the end of third quarter as measured by the Dow Jones index measuring those shares.  This is higher than the 10.5% gain in the S&P500.  Many hedge funds think the worst is over and a rebound is coming.  Goldman thinks housing prices might decline by another 3% next year before beginning a rise.
• Pending home sales in November rose 7.3% indicating some improvement in the housing market.  This index had risen 10.4 in October.  “Housing affordability conditions are at a record high and there is a pent-up demand from buyers who’ve been on the sidelines, but contract failures have been running unusually high,” said NAR chief economist Lawrence Yun.
• The Chicago PMI remained virtually unchanged at 62.5 in December from 62.6 in November.  Any figure over 50 means an increase.
• Initial claims for unemployment four-week moving average continued its decline to 375,000, down from 381,000 the prior week.  For the week ending Dec. 24 rose unexpectedly to 381,000, up from 366,000 the prior week.  This was higher than expected and suggests the rapid declines in the prior month were not sustainable.  Continuing claims for unemployment also retreated unexpectedly to 3,601,000, up from 3,567,000 the earlier week.  But they were also down using a four-week moving average.  Overall, there has been a slow but fairly steady improvement in the two indicators.  This suggests moderate expansion in 2012.
• The consumer confidence index of the Conference Board rose in December to 64.5, up from 55.2 in November.  This was much higher than expected for forecasters and is at its highest level since April.  But the Bloomberg confidence index fell back to -47.5 from -45.
• Retail sales at chain stores was strong in the final week of Christmas according to the Goldman Sachs Weekly Chain Store index. 
• The U.S. economy is currently stronger than most European economies.  It has added jobs for 13 straight months and new jobless claims have been declining since the spring until this past week.  The U.S. stock market is up slightly this year whereas stocks in the German DAX are down 15%, the Brazilian Bovespa is down 17%, and the Chinese Shanghai Comp. is down 21%.
• The Federal Reserve Bank is helping to bailout European banks.  They are using temporary U.S. dollar liquidity swap arrangements with the ECB.  The interest rate is 50 bp over the overnight index swap rate.  The ECB guarantees to return the dollars at an exchange rate fixed at the time of the original swap is made.  It then lends the dollars to European banks of its choosing.  As of Dec. 21 the total swaps are $62 billion.
• General Electric Co.’s finance arm agreed to buy the U.S. retail-deposit business of insurer MetLife Inc., in a deal that matches the life insurer’s desire to get out from under federal regulation with GE’s pursuit of a more-reliable funding source.
• The U.S. Treasuries ended the year at near an all-time low as problems in Europe caused funds to stream into the U.S.   At the beginning of the year the median of 70 economists surveyed by Bloomberg were predicting the U.S. ten-year bond would yield 3.75%, but instead it ended at 1.88%.   This suggests mortgage rates will remain very low throughout 2012.

NEGATIVE TRENDS

• As we move into 2012, the biggest obstacle to economic growth in the U.S. is the eurozone crisis and the biggest voice in solving that crisis is Germany—in particular Chancellor Angela Merkel.  American officials think there are three steps needed to pull us out of this problem—1) a trillion dollar rescue fund to help weak member countries; 2) more action by the ECB to help member states in distress; and 3) a fiscal union that gives European states legal power to limit deficits run up by other member states.  At present none of these three steps look likely because of opposition in Germany.
• The Case Shiller Housing Index for October fell 1.2% from September.  Of 20 cities, prices were down in all but Phoenix.   For 20 large cities, the index was down 3.4% from a year earlier.  Since the peak in July 2006, the index is now down 32.1%.  The steepest decline was in March 2011 when it was down 33.3% from the July 2006 peak.  Using the seasonally adjusted numbers, the index is now at an all-time low of 33.0% from its peak.  The October index is down 0.6% from September.  This suggests the index is now on a decline and with all the loans in foreclosure, it is sure to fall further before it reaches its nadir.  We are expecting about another six months before this nadir is reached.  The steepest decline was in Atlanta–5.0%.
• Oil prices have moved back to around $100/barrel after falling below $80 in early October.  On Dec. 27 Nymex oil was $101.32/barrel but receded to $99 on Dec. 29.  Earlier this week Iran threatened to close the Strait of Hormuz.
• The euro fell to an 11 month low–$1.29. 
• Italy’s ten-year bonds reached 7% on Dec. 27 which is considered unsustainable.  On Dec. 29 the yield on the Italian ten year bond was 7.03%.   Italy auctioned €7 billion of debt mostly short term to bring the total raised this week to almost €20 billion, underscoring how the European Central Bank is helping the world’s fourth-biggest borrower tap markets.  In the week before Christmas the ECB lent €489 billion in three-year money to European banks.  Yields for three-year debt went for 5.62% compared with 7.89% at the Nov. 29^th auction and were a hopeful sign.  Italy must borrow €400 billion in 2012.  Italy’s total debt is €1.9 trillion and is mostly long term.  At the auction on Dec. 29 Italy sold less debt than it had hoped and most was short term.  Similarly, at a recent auction Hungary sold less than half the bonds it wanted to.
• Bank stocks were the worst performing sector in 2011.  The S&P 500 Index fell 18%, the KBW Bank Index fell 24%, Bank of American fell 59%, AIG fell 52%, Goldman Sachs fell 46%, Citicorp fell 43%, and Chase fell 21%.  This indicates how weak the banking sector is and helps explain the slow economic recovery.

CONCLUSION

We think the Eurozone will experience a crisis in 2012 which will force it to downsize and adapt more serious fiscal measures in their union.  The U.S. will benefit from continued low interest rates as money flows here from Europe which will help our housing 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 and Christine Clifford

FOCUS ISSUE FOR THE WEEK

We wish all our readers a very happy holiday weekend and a prosperous new year.

The best news for the week was further improvement in unemployment, consumer sentiment, housing starts, existing home sales, new home sales, and builder confidence.  Finally the housing market is showing clear signs of recovery.  The bad news was a recession and more financial weakness in Europe, further weakness at Bank of America, a reduced estimate for 3Q11 GDP, and a slowdown in U.S. population growth.

MORTGAGE MARKET SUMMARY

This week interest rates fell and application volume for refinances was strong.  MBA reported that refinance share rose to an annual high of 80.7% of total applications last week.  According to Freddie Mac, average interest on a 30-year fixed mortgage slipped to a record low for the third time in 2011. The benchmark rate declined to 3.91% this week from 3.94% the previous week; the company’s records date to the 1950s.

According to the Bureau of Economic Advisors, corporate profits in the U.S. have been increasing every quarter since first quarter 2009.  Increasing profits are required for job growth and job growth and improving consumer sentiment are required for the housing market to recover.  We are beginning to see some reduction in the number of people claiming unemployment insurance and an increase in consumer sentiment.  Unemployment insurance claims fell for the past two weeks and consumer sentiment as measured by the University of Michigan has improved for the past four months.  We are also seeing some signs of improvement in the housing market.  New single family housing starts rose and existing single family home sales increased in November according to NAR.  Thanks for HARP 2.0 refinance volume should be strong in first half 2012.  If our economy continues in the current trajectory, we are likely to see a good purchase money market as well this spring.

For the week there were 11 positive trends offset by 18 negative trends.  The DJIA rose from 11,866 to 12,294.

POSITIVE TRENDS

• Initial claims for unemployment fell to 364,000 for the week ending Dec. 17, down from 368,000 the prior week.  These are very low rates and suggest another decline in the next monthly unemployment rate.  Continuing claims for unemployment for the week ending Dec. 10 fell to 3,546,000, down from 3,625,000 the prior week.
• The University of Michigan consumer sentiment index for December rose to 69.9, up from 67.7 in November.  This was the fourth consecutive monthly increase but the index hasn’t returned yet to the peak achieved in January.
• The National Association of Home Builders announced that its home builder confidence index rose from 19 in November to 21 in December.  This was higher than expected.
• Housing starts in November jumped to 685,000, compared to 627,000 in October.  This is much higher than expected.  Housing permits similarly jumped from 644,000 in October to 681,000 in November.  Most of the increase is in multifamily as families shift from purchasing homes to renting apartments.  Single-family starts rose 2.3% from October and rose 25.3% for homes with two or more units.  Purchases of low priced homes are increasing and mortgage rates are at record lows.
• Existing home sales in November rose to 4.42 million up from 4.25 million in October.  The slight growth was lower than expected.  The initial estimate for October was 4.97 million so there was a big reduction in that first estimate.
• New home sales in November were at a 315,000 annual rate, up from 310,000 in October.

• The European Central Bank will lend euro-area banks a record amount for three years in its latest attempt to keep credit flowing to the economy during the sovereign debt crisis.   The Frankfurt-based ECB awarded 489 billion euros ($645 billion) in 1,134-day loans today, the most ever in a single operation and much more than economists’ median estimate. The ECB said 523 banks asked for the funds, which will be lent at the average of its benchmark interest rate — currently 1% — over the period of the loans. They start Dec. 22.  This should provide liquidity during these trying times.
• Europe bolstered its anti-crisis arsenal, channeling 150 billion euros ($195 billion) to the International Monetary Fund as the European Central Bank widened its support for sagging bond markets.   Four countries not using the single currency also pledged to add to the IMF war chest while Britain refused to commit, preventing officials from reaching the 200 billion-euro target to ease the euro area’s home-grown debt burdens. The U.K. will “define its contribution” in early 2012, euro finance ministers said in a statement on Dec. 20.

• House Speaker John Boehner agreed to extend a U.S. payroll-tax cut past its Dec. 31 expiration, backing down under pressure from Senate Republicans and President Barack Obama.  We don’t think this extension will have that much impact on the economy since it is so short term.
• Durable goods orders rose 3.8% in November, up from 0% in October.  Excluding transportation, durable goods only rose 0.3%, which is less than the 1.5% achieved in October.
• Personal income and personal spending rose 0.1% in November.  Personal income rose  0.4% in October but personal spending was 0.1%.  These increases were less than forecast.

NEGATIVE TRENDS

• European banks are at the nexus of Europe’s sovereign crisis. Huw van Steenis and the European financials team of Morgan Stanley forecast that European banks will seek to delever their balance sheets by €1.5-2.5 trillion over the coming 18 months, with a significant impact to banks earnings, numerous asset classes and global economic recovery.

• Last week, the cost of five year paper for Italy rose to a euro-era high of 6.47%, up from 6.29% the week earlier.  There are smaller signs of cash moving out of Italy than in Greece.  Much of the exodus is occurring along the northern border.  There is concern than these early signs of exodus could increase to a flood.
• During the week of Dec. 19, the Fed is expected to support a new global framework that requires giant financial institutions to hold extra capital.  This would affect mostly banks with more than $50 billion in assets.  The large banks believe this will reduce lending and hurt the economy.
• Fitch Ratings announced on Dec. 16 it has placed all investment grade rated curozone sovereigns and their debt with Negative Outlook onto Rating Watch Negative while Moody’s went beyond any soft move to downgrade by notches to AA3 the country of Belgium.
• France’s credit outlook was lowered by Fitch Ratings, which also put the grades of nations including Spain and Italy on review for a downgrade, citing Europe’s failure to find a “comprehensive solution” to the debt crisis.
• The final estimate of GDP for 3Q11 was 1.8%, which is lower than the previous estimate of 2% and lower than expected by economists.
• Bank of America shares fell below $5 on December 19, the first time since 2009.  There are fears of negative impact from Europe. 
• Fannie Mae’s economist, Doug Duncan has a pessimistic forecast for 2012.  By the end of 2012, the unemployment rate will be 9.0%, GDP growth will be only 1.5% in 2012, and all of Europe except for Germany will be in recession.  He sees a 40% chance that the European recession will cause a double dip in the U.S.
• It is now the 20^th anniversary since the start of the euro currency in the Netherlands.  In 2009 80% of the public supported the idea and now a majority favor dropping the currency.  The rightest Freedom Party has been gaining seats in Parliament and favors dropping the euro and driving foreigners out of the Netherlands.
• Last week the SEC filed a lawsuit against the six top executives of Fannie Mae and Freddie Mac.  For the first time in a government report, the complaint has charged the two enterprises with playing a major role in creating the demand for low-quality mortgages before the 2008 financial crisis.  They charge them with hiding the size of their purchases from the market.  According to the SEC suit, in 2006 Fannie Mae adjusted its automated underwriting system to buy more lower FICO scores and higher LTV loans than previously permitted.  It was decisions like this that SEC says caused the bubble.

• Daniel Mudd, the former Fannie Mae CEO who is the subject of a new, massive SEC fraud suit, announced on Dec. 21 that he is taking a leave of absence from his current employer, Fortress Investment Group, New York.  The publicly traded FIG controls Nationstar Mortgage, Irving, Texas, a major subservicing contractor to the government-controlled Fannie. It also has been a buyer of Freddie Mac MSRs.  Until his leave of absence deal was struck, Mudd served as CEO and director of Fortress.
• U.S. mortgage bonds that lack government backing are trading at about the lowest prices in more than a year, even as riskier assets from high-yield company bonds to stocks rally, with investors bracing for sales of home-loan debt by European banks.   A group of prime jumbo-mortgage securities tracked by JPMorgan Chase & Co. as a benchmark fell to 93.3 cents on the dollar this month, the lowest level since August 2010. A set of subprime bonds tumbled to a two-year low of 28.1 cents.   Banks across Europe have pledged to cut more than 950 billion euros ($1.2 trillion) of assets during the next two years, after regulators made them increase core capital to 9 percent by June instead of in 2019, according to data compiled by Bloomberg. Combined with the greater difficulty of trading in the $1.1 trillion market of non-agency mortgage bonds and concern that the U.S. housing market has yet to bottom, the threat of the region’s banks unloading their holdings is helping to depress values.
• Bank of America Corp. spent most of the past decade building up a full suite of credit card operations, but now it is jettisoning what it can.  The bank dumped close to $1 billion in credit card assets in two separate deals announced on Dec. 21, as part of its effort to slim down and focus on its core business lines. The portfolios sold were part of B of A’s “agent-bank” business, which specializes in issuing credit cards on behalf of credit unions, smaller banks and other financial institutions.  Bank of America is shedding these assets as it tries to overcome an array of regulatory and financial problems, including widespread concerns about its capital levels, future profitability, and single-digit share price.  It is a major reversal for the company that, six years ago, paid $35 billion to buy credit card lender MBNA Corp.   Now B of A’s efforts to slim down its once-massive card operations are paying off for its smaller, healthier rivals.

• This week the California Attorney General filed suit again Fannie and Freddie seeking information on the vacant homes owned by the agencies in the state and details of what activities are occurring in those homes, such as drug dealing, prostitution, etc.  California is pressuring the two agencies to more actively write-down the balances on their loans.

• Bank of America will pay $335 million to settle allegations that its Countrywide financial Corp. unit discriminated against black and Hispanic borrowers, in the largest residential fair-lending settlement in history.
• Macroeconomic Advisers revised down its forecast for 2012 to 2.2% from 2.4%.  They assume “no extension of the payroll tax credits and an ugly event in the eurozone.”  An example of an ugly event would be the collapse of a large bank or asking Greece to leave the Eurozone.  Capital flight is intensifying from Greece since late 2009.  Greeks have pulled more than €60 billion of cash—about a quarter of total deposits—from their banks.  Between September and early November 2011, those outflows totaled nearly €14 billion, representing two of the worst months for deposit outflows.
• The Census Bureau reported that the U.S. population only grew by 2.2 million from July 2010 to July 2011 to reach a total of 311.6 million.  This was the slowest growth rate (0.71%) since the 1940s, reflecting lower immigration and a steep drop in the birthrate.  From 2000 to 2009, the population grew at an average annual rate of 0.94%.  For the period July 2009 to July 2010, it grew 2.4 million (0.78%).  This suggests slower demand for new housing.
• It is reported this week that Everbank is in negotiations to buy part of MetLife Mortgage.  MetLife has indicated it wants to exit the mortgage industry because it isn’t profitable enough.  A week ago the rumor was of PNC buying MetLife Mortgage.  The fact that neither one had yet happened suggests the market for mortgage firms is still very weak.

CONCLUSION

We expect yet another year of slow economic growth in the U.S.—probably around 2%, up from 1.7% this year–due to the European recession and weakness in housing.  But there should be no double dip in the U.S.

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.

FOCUS ISSUE FOR THE WEEK

The positive news for the week was the decline in initial claims for unemployment to the lowest level since March 2009 and rising manufacturing in the Northeast.  This was balanced by falling industrial production, falling capacity utilization, a recession in Europe, and evidence that last week’s eurozone meeting didn’t attain its goals.  It is certain Greece will have to default and exit the union.  Yields on Italy’s ten year debt rose to over 7% which is unsustainable.  Much stronger action will be needed to save the eurozone.  European banks are shedding their holdings of sovereign debt of the weaker nations.  The root problem is unwillingness to cut funding or tighten eligibility for entitlements that are no longer affordable.

MORTGAGE MARKET SUMMARY

Our economy and the mortgage industry are experiencing dramatic structural changes.  We don’t know exactly what the market will look like in a few years but we do know that it will not look like it does today with refinance volume accounting for the majority of all applications.   According to the MBA 79.7% of applications were for refinances last week and 76% two weeks ago.  Currently inflation and interest rates are at record low levels and are likely to stay there for a couple more quarters.  Can the mortgage industry use this time to retool for the future?  This is tough to do when Washington is not providing clear guidance and radical changes are being proposed like Corker and Garret’s proposal to get rid of the GSEs altogether and have FHFA regulate private securitizations.

We do know that our population growth rate is more likely to stay flat or decline since immigration rates have declined and fewer American’s are getting married and many are putting off starting a family and moving back in with their parents after college instead.  We also know that the number of multiple generation households has increased.  Increasing student loan debt and slow growth in income are making it tougher for young people to live independently.  Low interest rates on CDs have reduced retires incomes.  Doesn’t it make sense for family members to find ways to help each other financially?  Should our loan offerings change to reflect these trends?  According to NAR, 15% of first time home buyers are receiving down payment help from their parents.  Can the industry find other ways to creatively help family members work together to meet their housing needs?

The volume of foreclosures will grow throughout 2012.  Many of these homes are bought for cash by investors and kept as rental properties because vacancy rates are so low across the U.S.  Can mortgage lenders find new and improved ways to finance these investors so they can buy more homes and reduce the amount of outstanding REO.  The sooner we find ways to sell off all the foreclosures the sooner housing prices will begin to stabilize in the U.S.

To view a video of the data discussed in the summary, click here:  http://www.authorstream.com/Presentation/cclifford-1282087-weekly-mortgage-market-summary-5/

For the week there were 11 positive trends and 17 negative trends.  The DJIA fell from 12,184 last week to 11,866 this week.

POSITIVE TRENDS

• Initial claims for unemployment fell to 366,000 for the week ending Dec. 10, down from 385,000 the prior week.  The four week moving average declined to 388,000 from 394,000 a week earlier.  Continuing claims fell to 3,603,000 for the week ending Dec. 3, up from 3,599,000 the prior week showing virtually no change.
• The EU meeting in Brussels on Dec 9-10 did make some marginal improvements in dealing with the European financial crisis which have initially have been approved by the financial markets.  The main features of the agreement are:  1) a slightly stronger fiscal union with automatic consequences when a euro country exceeds the 3% of GDP deficit limit; 2) each country must pass a constitutional amendment that pledges a balanced budget and includes automatic corrections of a deficit; 3) commits the countries to put €500 billion into a European Stability Mechanism bailout fund in 2012 instead of in 2013; 4) The ESM to require future bailout recipients to restructure it or otherwise put some of the burden on its private-sector creditors; 5) their countries would put €200 billion to the IMF’s general account which would give the fund more power to help with Europe.  It will take months for this accord to go into effect.  The U.K. announced it will not participate in these agreements.
• Yields on Treasuries hit almost an all-time low (0.352%) on Dec. 12 for three-year yields as investors showed their disappointment with the European Union summit.  This shows how the U.S. will benefit in part from the European financial problem.
• Relative yields on mortgage-backed securities that guide new loan rates fell to the lowest in five months as investors wager the Federal Reserve is on standby to expand its holdings if the U.S. economy or Europe’s sovereign debt crisis worsens.
• The Federal Reserve Board of Governors met on Dec. 13 and reiterated that short term interest rates are likely to stay near zero until mid-2013, at least.  Federal Reserve Chairman Ben S. Bernanke signaled he’s concerned Europe’s crisis will hobble a 2 1/2-year U.S. expansion that may need another boost from the central bank.
• The Empire Manufacturing index rose to 9.5 in December, up from 0.61 in November showing expansion in manufacturing in the northeast.
• The Treasury on Dec. 14 sold $13 billion worth of 30-year bonds, with investors accepting a record-low yield of 2.925% at the auction. Earlier in the week, the federal government unloaded nearly $21 billion in 10-year notes at a yield of 2.02%.

• A bank research firm, Trepp LLC, reports that the number of bank failures is reducing.  There have been 90 so far this year and there are 227 potential failures in the future at a rate of perhaps 100 per year.  Florida, Georgia and Illinois retain their status as the failure hubs on industry observers’ lists. But several failure watchers said mini-hubs could be places such as Minnesota, Missouri, North Carolina and Tennessee.
• The CPI for November was 0% up from 0.1% in October but still essentially showing that inflation is not a problem.  The core CPI did rise to 0.2% from 0.1% but still it small.

• The Philadelphia Fed index of manufacturing rose to 10.3% in December, up from 3.6% in November which is a similar increase picked up by the New York Fed and indicates growing strength in manufacturing in the northeast.
• American Banker, reports, “Perhaps the future for loan brokers isn’t so bleak after all. Wholesale lenders table funded almost $33 billion of loans in the third quarter, giving the channel a 9.2% market share, according to new figures compiled by National Mortgage News and the Quarterly Data Report. In the first and second quarters of this year brokers had market shares of 6.8% and 7.9%, respectively. The 6.8% figure marked an all-time low for the industry. Three years ago they had a 19% share.”

NEGATIVE TRENDS

• On Dec. 12 Greece was on the brink of default and yields on Italian and Spanish debt were near unsustainable trends showing lack of success at the Brussels meeting on Dec. 9.  Yields on Italian 10 year debt rose from 6.27% to 6.44% on Dec. 11.  On the same day three large Italian labor unions went on strike over the austerity measures.  Even if all the 26 European Union members get their countries to approve the fiscal controls by limiting budget deficits, without economic growth, the objectives will not be reached.  Harvard Professor Martin Feldstein believes Europe needs country-by-country fiscal reforms and Greece should default on its debt and leave the eurozone.  The recent meeting in Brussels was a failure and didn’t achieve increased European political integration nor improve the outlook for eurozone sovereign bonds.  Also, Germany refused to raise the size of Europe’s permanent bailout fund beyond €500 billion and there is continued speculation about ratings downgrades.  Former fed vice chairman Alan Blinder thinks the European problem is huge and won’t be easily solved because its foundation is too weak.  You can’t build a monetary union without a central government strong enough to impose cross-border discipline or finance large cross-country transfers.  That implies there will be a falling apart of the eurozone next year which will likely cause a worldwide recession.

• On Dec. 9 the yield on the German ten-year bund rose from 1.97% to 2.106%.  All eyes will be watching this yield and the yield on the sovereign debts of the weaker European countries.  As of Dec 12 Investors were fleeing assets denominated in the 17-nation currency as European Union leaders failed to end concern that Italy and Spain will succumb to a sovereign-debt crisis that forced Greece, Ireland and Portugal to seek bailouts.  Fitch said a “comprehensive solution” to the euro-zone crisis is “technically and politically beyond reach.” The company said Dec. 12, without taking any action, that a European Union leaders’ summit last week did little to ease pressure on Europe’s sovereign bond ratings.  Standard & Poor’s put 15 of the 17 euro nations on “creditwatch negative” last week, pending the outcome of last week’s summit and the actions of central bankers.

• Five large banks (Ally, B of A, Citi, Chase, and Wells) are close to settling with federal and state officials over robo-signing without proper review and other foreclosure practices.  The cost would be $19 to $25 billion.
• On Dec. 12 Moody’s reiterated its intention to revisit its ratings for all EU sovereign borrowers in the first quarter of 2012.  They think the crisis is in a critical and volatile stage which policy makers will find increasingly hard to contain.
• Oil prices traded on Nymex surged from $98 to $100/barrel on Dec. 13 on news that Iran would be holding military exercises on the straits of Hormuz.  Over the past year oil reached a high of $114/barrel and a low of $76.
• On Dec 13, the Euro fell to $1.30/euro down from a high of $1.49 earlier this year.  This means the cost of our exports to Europe has risen and we will sell less to them.  Over the past year the euro peaked at $1.49 and troughed at $1.29.  Over the past five years, the euro troughed at $1.20.  A worsening of the European crisis may bring the euro down to $1.25 according to some analysts.  Barclays predicts $1.20 by the end of 2012.  It depends on how successful the resolution of the euro crisis is and how low the key lending rate of the ECB goes.  It is currently down to 1% which makes holding funds in euros less attractive to investors.  As of Dec. 13 the situation in Greece has worsened and large strikes occurred in Warsaw protesting the EU rescue plan and demanding that Poland not participate.  The Japanese Finance Minister said European leaders must do more to fix the region’s debt crisis before asking for money from the IMF.  On Dec 15, the Euro fell to $1.29.  Yields for ten year Italian bonds rose to over 7% on Dec. 15.

• The House voted 234-193 on Dec. 13 to extend payroll tax cuts and jobless benefits, paying in part for them by increasing guarantee fees collected by government-sponsored enterprises.  Representatives voted mostly along party lines, with most Republicans supporting the bill.  HR 3630 includes a provision to up guarantee fees charged by Fannie Mae and Freddie Mac “not less than an average increase of 10 basis points for each origination year or book year.”  The increase would offset about $35.7 billion in costs through 2021, according to a report Friday from the Congressional Budget Office.  The Mortgage Bankers Association, the National Association of Realtors and the National Association of Home Builders objected to the inclusion of the G-fees, and said any redirection of revenue for reasons unrelated to housing is counterproductive.
• European industrial production declined 0.1 percent in October after a 2% drop the previous month.  An index of euro-area manufacturing and services activity due to be published tomorrow probably fell to 46.5 in December from 47 in November, according to a Bloomberg News survey of economists.  Martin van Vliet, an economist at ING Group in Amsterdam, said the euro-region economy is “slowly but surely slipping into a new recession.”
• The PPI rose 0.3% in November, up from -0.3% in October indicating rising inflation.  The core PPI rose 0.1% in November from 0% the prior month.
• Industrial production fell 0.2% in November, after rising 0.7% in October.  Capacity utilization declined to 77.8% in November down from 78.0% in October.  This indicates weakness in November.

• IMF Director Lagarde said the world economic outlook “is quite gloomy” with pervasive downside risk, downward revisions, slower growth than expected, higher deficits than predicted and public finances in shaky condition. “And that is pretty much true the world over, Lagarde said, and the crisis is escalating.”  Harvard Economic Professor Niall Ferguson thinks the major risk in Europe is defaults and bank failures, not inflation which is the main worry of the ECB.
• The Economist magazine opines:  “Ultimately, the eurozone faces a similar choice. Its members could strike a grand bargain that deploys the ECB’s balance-sheet and some form of Eurobond in exchange for fiscal integration. The question is not whether they can save the currency, but whether enough of them are prepared to pay the price. This summit suggests not.”
• Lending Processing Services reports there are 2.2 million homes in foreclosure plus 1.8 million that are 90+ days late.  It is this shadow inventory that will depress home prices next year.
• European banks have been selling their holdings of sovereign debt for all countries other than Germany which means the eurozone is coming apart.  This is especially true of debt of Greece, Italy, Spain, Portugal, and Ireland.  This means interest rates on this debt will continue to rise.

CONCLUSION

The hopes generated last week for resolving the eurozone crisis have largely evaporated this week.  Now we wait to see how the European nations handle their crisis and how serious the damage will be.  We think the U.S. should be able to come through with minimal damage but it still means at best slow growth for the U.S.  With our economic recovery so slow, mortgage volume will be sub-$1 trillion.

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

Two opposite trends characterize this week:  an improving U.S. economy and a crumbling eurozone trying to reform to stay alive.  The U.S. rate of unemployment fell to 8.6% in last week’s surprising news and we see further improvement this week in lower initial claims for unemployment.  Adding to this news was evidence of rising retail sales (especially autos) but still no recovery in housing or banking so we shouldn’t get overly enthusiastic yet.  On Dec. 9 at the meeting in Brussels of the Eurozone leaders, we should get a clearer view of how many European nations will support a fiscal union.  Our guess is that 16 of the 17 will support the idea but not Greece or the other 10 members that are part of the larger European Union.  Germany will dominate the new reduced fiscal union and will press its disciplined austerity measures on the other members. We then will have to watch whether bond investors will believe these pledges and whether voters in each member country will vote for the revised treaties giving Germany power over member country’s tax and spending practices.

MORTGAGE MARKET SUMMARY

The MBA’s weekly application index showed that last week applications shot up almost 13% versus the week before.  American consumers are choosing to reduce both their interest rate and their outstanding balances when they refinance instead of taking out more debt.  According to Freddie Mac, in third quarter 2011, 37% of people who refinanced, decreased their loan balance.  The index hit a low of 4% in second quarter 2006 and has been rising since then.  It hit a high of 44% in first quarter of this year.  Cash-in refinances are having an impact on total outstandings.  The Federal Reserve reported that total outstanding one-to-four family mortgages have declined to $9.9 trillion in third quarter down from a high of $10.5 trillion in 2007.

Consumers are reducing outstanding debt in numerous ways.  According to Federal Reserve data, outstanding debt was at 132% of disposable personal income in 2007 and it has now declined to 114% in third quarter 2011.  Average credit card balances have fallen from a high of $5,776 in Q1 2009 to $4,762 in Q3 2011 according to TransUnion.  Equifax’s November 2, 2011 National Credit Trends Report shows that total consumer debt now stands at $11.2 trillion, nearly equivalent to the $11.1 trillion posted pre-recession in 2006 according to the most recent Equifax National Credit Trends Report. Consumer debt outstanding peaked in October 2008 at $12.4 trillion.

Declining debt levels have resulting in improvements in consumers’ ability to manage their debt payments.  According to TransUnion there was a year over year decline in auto debt 60 day delinquency rates from .58% in Q3 2010 to .47% in Q3 2011 and a decline in credit card delinquency rates from .83% in Q3 2010 to .71% in Q32011.  TransUnion reported that credit card delinquency rates for borrowers 90 days or more delinquent on one or more of their credit cards reached their lowest levels in 17 years during the second quarter of 2011 (0.60%).  It expects them to remain relatively low in 2012, decreasing approximately 7% from 0.74% in the fourth quarter of 2011 to 0.69% by the end of 2012.  According to a press release from the Mortgage Bankers Association on November 17^th, 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. This is the lowest level recorded since the fourth quarter of 2008.

For the week there were 11 positive trends offset by 14 negative trends.  The DJIA rose to 12,184 up from 12,019 last week.

POSITIVE TRENDS

•  Initial claims for unemployment for the week ending Dec. 3 fell to 381,000, down from 404,000 the prior week.  The four-week moving average also declined to 393,000 from 396,000 the prior week showing improvement in the employment picture.  This was the lowest level in the past nine months.  Continuing claims fell considerably to 3,583,000 for the week ending Nov. 26, down from 3,757,000 the week earlier.

•  Tax revenue from employee pay was up 4.8% in the third quarter from a year earlier after adjusting for changes in withholding rates over the past few years, said LaVorgna, who is the chief economist at Deutsche Bank Securities Inc. in New York. By contrast, the Commerce Department’s figures show wages and salaries climbed 2.9% over the same period.  This means the economy is stronger than reported earlier.

•  Auto sales rose to a 13.6 million unit annual pace in November, up from a 13.2 million rate the prior month and the highest level since August 2009, according to industry data.

•  The University of Michigan consumer sentiment index rose in December to 67.7, up from 64.1 in November.

•  The Conference Board’s Employment Trends Index jumped 1.2% to 103.7, the highest level since September 2008, from 102.4 the prior month that was more than initially estimated, figures from the New York-based private research group showed today. The measure rose 6.4% from November 2010.

•  Merkel and Sarkozy are talking about concrete plans to convert the eurozone to a fiscal union but are still apart on their respective proposals.  Merkel wants a strict regimen of legally binding budget discipline including automatic sanction against countries that don’t stick to their budget.  She rejects issuing euro bonds.  Sarkozy grudgingly accepts more automatic sanctions and favors issuing euro bonds.  These proposals would require changes in the current treaties of all member countries.  Can the respective countries agree in time to make such changes before the union collapses?

• The key Italian ten-year bond closed on Dec. 2 at 6.56%, down from 7.16% a week earlier and close to the level reached two weeks earlier.  Premier Monti outlined a new austerity plan for Italy which includes:  1) a one-time 1.5% tax on funds repatriated under Italy’s tax amnesty; 2) a 2% rise in value-added tax; 3) a rise in the retirement age for women from 60 to 66; 4) as much as €2 billion in annual tax breaks for companies that boost hiring.  However, Italy has €1.9 trillion of government debt and will need to find buyers for a mountain of new paper in 2011.  This is part of Monti’s three year plan made up of €30 billion in tax increases, spending cuts, pension overhauls and growth-boosting measures.

• Funding next year’s $1.3 trillion U.S. budget deficit may get a boost from Germany as bunds under perform Treasuries for the first time since the European debt crisis began in 2009.   While the U.S. needs to double bond sales to investors after the Federal Reserve reduced purchases, Treasuries due in 10 years or more are 2011’s best-performing sovereign securities, returning 26% as of Nov. 30, according to Bloomberg/EFFAS indexes.

• Most international investors predict at least one nation will eventually dump the euro and they say greater fiscal ties or a smaller currency area are the best fixes for the region’s debt crisis, according to the quarterly Bloomberg Global Poll taken on Dec. 6.

• Eurozone leaders were moving forward on bringing the proposed European Stability Mechanism start date up one year to mid-2012.  At their talks in Brussels EU leaders added 200 billion euros ($267 billion) to their crisis-fighting war chest and tightened anti-deficit rules.

• The ECB lowered their main policy rate to 1% undoing two increases in April and July.  The biggest question is whether Berlin will let the ECB buy up troubled sovereign bonds.

NEGATIVE TRENDS

• The euro area’s six AAA rated countries are among the nations to be placed on a negative outlook by S&P, and their credit ratings may be cut depending on the result of a summit of European Union leaders on Dec. 9.  The euro reversed its gains and U.S. Treasuries rose after the credit- ranking firm planned to reduce six AAA outlooks.  The ratings firm put Germany, France and 13 other euro-area nations on review for a downgrade, saying “continuing disagreements among European policy makers on how to tackle” the region’s debt crisis risk damaging their financial stability.  Grades may be lowered by one level for Austria, Belgium, Finland, Germany, Netherlands and Luxembourg, and as many as two steps for the other governments if the summit results don’t satisfy S&P’s criteria, the firm said.  More than $8.1 trillion of government debt would be affected if S&P does downgrade all the nations, according to data compiled by Bloomberg.  Germany and France are rated AAA.  The “negative” outlook on CC rated Greece, which is 10 steps below investment quality, wasn’t changed, as its grade “connotes our belief that there is a relatively high near-term probability of default,” S&P said. The firm kept its “negative” outlook on Cyprus’s long-term rating and placed its short-term rating on “creditwatch with negative implications.”

• Morgan Stanley is expecting the eurozone to slip into a recession in 4Q11.  European banks are still downsizing to shore up investor confidence and meet tighter capital standards by the middle of 2012.  Their deleveraging could amount to 10% of eurozone bank assets, says Barclays Capital.

• On Dec. 5, the yield for ten-year government debt in Italy fell to 5.94% from a peak of 7.36% earlier.  This shows hope that the big meeting on Dec. 9 will help solve the eurozone problem.  However, there is no plan to create euro bonds backed by a central authority able to make fiscal transfer to over-indebted regions in the eurozone.  We shall have to wait to see what is agreed at that key meeting.  A key item in the debate is financial sanctions—penalties imposed on countries running a budget deficit in excess of 3% of gross domestic product—made more automatic.  Under a proposed compromise Sarkozy and Merkel said that sanctions would apply automatically and that only a weighted majority of European countries would have the authority to reverse the punishment.  On Dec. 8 the yield on the two year debt of Italy rose 0.44 percentage points to 6.5%.  Yields also rose for French, Belgian, and Spanish debt.

• Factory orders fell 0.4% in October after declining 0.1% in September indicating weakness in that sector. There were decreases in electrical equipment, commercial airplanes and boats.

• The index for ISM services in November slipped to 52.0 from 52.9 in October indicating a slight slowdown in its recovery.

• Financial firms worldwide have cut more than 200,000 jobs this year, up from about 58,000 last year and 174,000 in 2009, according to data compiled by Bloomberg.  On Dec. 6 Citicorp announced plans to cut 4,500 positions.  Vikrim Pandit has cut more than 100,000 jobs since he became CEO of Citicorp in December 2007 through dismissals and sales of distressed assets and businesses. B of A plans to cut 30,000 positions over the next several years.

• SunTrust Banks’ top officer said Tuesday mortgage repurchase costs in fourth quarter could be “well above” those reported in prior quarters, as soured loans made during the housing boom continue to dog the Atlanta-based regional lender.  Banks have come under pressure from investors to buy back soured mortgage loans.   Investors allege the loans, packaged together into investment securities, didn’t meet the terms of the investment agreements, resulting in losses. “This is a frustrating process and it is increasingly sort of difficult to predict,” SunTrust President and CEO William Rogers told analysts during an investor conference in New York.

• TransUnion released a study on Dec. 7 that reveals the divergence in payment patterns — where consumers are increasingly apt to pay their credit cards before their mortgages — has now occurred for three straight years. However, for the first time since the deviation began, the percentage of consumers who are current on their credit cards and at least 30 days delinquent on their mortgage payments has declined.

• Over the last five years, the KBW index of 24 large-cap bank stocks is down 61% while the S&P 500 has been flat.  Year-to-date, BKX has lost nearly 23% while the S&P has gained 4.78%.  This disparity between banks and the broader market isn’t just about performance. Bank stocks also are more volatile, and many of the industry’s leading companies trade well below book value.

• CoreLogic, Santa Ana, Calif., said its October Home Price Index showed a decline for a third consecutive month. A separate report from Clear Capital, Truckee, Calif., said its Home Data Index Market Report improved just slightly in October, by 0.3%.  CoreLogic said home prices in the U.S. decreased 1.3% on a month-over-month basis, the third consecutive monthly decline.  According to the CoreLogic HPI, national home prices, including distressed sales, declined by 3.9 percent on a year-over-year basis.  This follows a decline of 3.8% in September from a year ago.  Excluding distressed sales, year-over-year prices declined by 0.5% in October from a year ago and by 2.1% in September compared to September 2010.  “Home prices continue to decline in response to the weak demand for housing,” said CoreLogic Chief Economist Mark Fleming. “While many housing statistics are basically moving sideways, prices continue to correct for a supply and demand imbalance.  Looking forward, our forecasts indicate flat growth through 2013.”

• French officials on Dec. 7 stated there is little likelihood for a broad new treaty to resolve the debt crisis among the 27 European Union members.  More likely will be an accord among the 17 eurozone members agreed to by Christmas.  The decision may come on Dec. 9 at the summit meeting.  A key plank in the Franco-German plan is to introduce more automatic sanctions on budget sinners.  This will build confidence in the Eurozone.  It might also persuade the ECB to step up intervention in government-bond markets to reverse recent selloffs and bring down borrowing costs.

• Household wealth in the U.S. fell from July through September for a second straight quarter as the European debt crisis depressed stocks and home values decreased.  Net worth for households and non-profit groups decreased by $2.45 trillion to $57.4 trillion, the Federal Reserve said today in its flow of funds report from Washington.  Americans reduced debt in the third quarter, extending a string of declines dating back three years.  A 14% slump in the Standard & Poor’s 500 Index, the worst quarter since 2008, combined with another decrease in households’ real estate values in the third quarter.  A rebound in stocks at the end of this year and slower home-price declines may help stabilize Americans’ balance sheets at the same time employment growth picks up.

• Total U.S. debt in 3Q11 was $50 trillion, down from a peak of $51 trillion in 1Q09.  Over the same period government debt has greatly increased as private debt decreased.  Over this period government debt rose from 15% to 24% of the total.  How can the federal government boost GDP without boosting the financial system?

• A recent Wall Street Journal poll of economists showed that they don’t see home prices exceeding the CPI until 2016.  But average home prices will start rising in 2012.

CONCLUSION

The economically advanced nations of the world are all struggling to discover how they can pay for their huge entitlements, especially in an era of slow economic growth.  What is confronting Europe will confront the U.S. very shortly.  On December 9-10 the European Union met to see if they could move closer to a fiscal union or be forced to fragment their existing monetary union.  Germany has all the clout.  Will southern Europe cede political control to them?

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 Economist magazine thinks the eurozone is now dead and there is little hope for its survival.  The ECB isn’t showing any willingness to massively buy sovereign debt.  Earlier in the year it raised interest rates to the already very weak countries in the south.  Southern Europe has a weak trade balance and can’t survive its current huge debt payments without being able to increase its exports.  But the combination of high and rising interest rates and enforced austerity are weakening the economies of Spain, Italy, Portugal, Greece, and Ireland.  And the contagion is spreading to Belgium, Germany and elsewhere.  The magazine predicts the breakup of the eurozone will be very messy and be similar to breakup of Yugoslavia in 1991 which reduced the member countries to poverty after the breakup.  Other breakups were Czechoslovakia and the Soviet Union.  President Obama has said the U.S. wants to support the eurozone but says the U.S. will not pledge any taxpayer funds.   Nor is China showing any interest in saving it.  Only Germany and the U.S. could potentially save it, and that is not looking possible.  On Nov. 30 the Fed lent some short term funds to six European central banks but this is viewed as merely a short term fix.  The head of the ECB outlined a fix but it requires charter changes which normally take time to do.  We think the most likely outcome is a reduced eurozone and the beginnings of a fiscal union of the stronger members.  There has to be some punishment for the widespread profligacy and abuse among the five weaker members, especially Greece.  The big question is whether this will cause a run on the banks in Greece and Italy.  There was evidence on December 2 of funds shifting from the eurozone as a whole to Scandinavia and the U.S.  The good news is evidence of a strong economy in the U.S. despite problems in Europe.

MORTGAGE MARKET SUMMARY

Applications for mortgages fell 11.7% in the week ending Nov. 26 from the prior week reported the Mortgage Bankers Association.  Most of the decrease was due to a decrease in refinance application activity.  Mortgage rates were little changed this past week, with the average 30-year fixed-rate mortgage at or below 4.00 percent for the fifth consecutive week according to Freddie Mac.  Case Shiller reported that home prices fell again in September.  Prices were down 32.5% from the peak in April 2006.  They were down 3.6% from a year ago.  Perhaps the extraordinarily low rates coupled with low housing prices helped spur housing activity.  The National Association of Home Builders (NAHB)

reported increased sales of new homes and The National Association of Realtors (NAR) reported an increase in pending home sales in October.

For the week the DJIA rose from 11,231 last week to 12,019 this week.  For the week there were 19 positive trends offset by 15 negative trends.

POSITIVE TRENDS

• The rate of unemployment plunged to 8.6% in November, down from 9.0%.  This surprising decline occurred even though nonfarm payrolls only rose 120,000.  The average workweek remained unchanged at 34.3 hours.  Average hourly earnings fell 0.1%.  There was a drop of 315,000 people out of the labor force in November plus an increase of 172,000 in population which accounted for most of the unemployment decline.  In a normal month, you would need 150,000 new jobs to employ the growth in the population.  The household survey counted an increase in total employment of 278,000 which is much higher than the 120,000 from the establishment survey.  There was a surge of nearly 50,000 retail jobs that are probably due to rising expectations of Christmas sales.  Growth in temps and health care also accounted for the improvement.  Revisions to prior reports added a total of 72,000 jobs to payrolls in September and October.

• Retail sales rose 6.6% on Black Friday (the day after Thanksgiving) suggesting improved consumer confidence.

• The ISM index for the U.S. rose to 52.7 for November, up from 50.8 in October.  Again this shows modest growth in manufacturing.
• Pending home sales in October rose 10.4%, up from a decline of 4.6% in September, reported the National Association of Realtors.
• The Federal Reserve in its beige book report of Nov. 30 reported that the economy grew in most parts of the U.S. in October and the first part of this month, though hiring remained subdued, suggesting a slow if increasingly steady recovery.  Most Fed districts described the pace of growth as slow or moderate.  Contacts generally noted modest increases in consumer spending, stronger tourism activity, a steadily expanding manufacturing sector, sluggish real-estate and construction markets, and stable wages and salaries since the previous beige book was released Oct. 19.
• Construction spending rose 0.8% in October, after rising 0.2% in September.  This is a very modest improvement in construction.
• Consumer confidence measured by the Conference Board soared to 56 in November from 40.9.  This was much higher than expected.  It may reflect strong retail sales over Thanksgiving.  But stock market declines later in November suggest this was a one month blip.

• Eurozone leaders are negotiating a fiscal pact that would make budget discipline legally binding and enforceable by European authorities.  The move, which hasn’t yet been agreed to, would be a first step toward closer fiscal and economic coordination within the currency area.  Officials hope the new agreement would persuade the ECB to undertake more drastic action to reverse the recent sell-off in eurozone debt markets.  If agreement is reached, a pact could be announced before the next European summit in early December and could come into force as soon as early 2012.  One idea is for the ECB to lend to the IMF who in turn would lend directly to the troubled eurozone countries.  The IMF is backed by many more countries than the ECB and could help stem the crisis.

• The head of the ECB, Mario Draghi, has been increasing his funding of southern European members of the eurozone but said before he will increase more they must accept a tighter union bound by enforceable fiscal rule and the alignment of economic policies.  The ECB mandate calls for it to keep inflation just below 2%.  It is forbidden from financing government debt.  Even so, ECB officials have significant scope to scale up their purchases without breaking the law. Over the last several weeks they have bought around $10 billion per week.  If purchases are for monetary policy purposes there is apparently no legal constraint their size.  There is a feeling that the ECB will lower interest rates for a second straight time when it meets next week to 1% from 1.25%.

• The biggest bond dealers in the U.S. say the Federal Reserve is poised to start a new round of stimulus (QE3), injecting more money into the economy by purchasing mortgage securities instead of Treasuries. Fed Chairman Ben S. Bernanke and his fellow policy makers, who bought $2.3 trillion of Treasury and mortgage-related bonds between 2008 and June, will start another program next quarter, 16 of the 21 primary dealers of U.S. government securities that trade with the central bank said in a Bloomberg News survey last week. The Fed may buy about $545 billion in home-loan debt, based on the median of the 10 firms that provided estimates.

• According to the National Association of Realtors, the apartment rental market – multifamily housing – is expected to see vacancy rates drop from 5.0% in the fourth quarter to 4.3% in the fourth quarter of 2012; multifamily vacancy rates below 5% generally are considered a landlord’s market with demand justifying higher rents.  Areas with the lowest multifamily vacancy rates currently are Minneapolis, 2.4%; New York City, 2.7%; and Portland, Ore., at 2.8%.  Average apartment rent is projected to rise 2.5% this year and another 3.5% in 2012. Multifamily net absorption is likely to be 238,400 units this year and 126,600 in 2012.  The remainder of commercial real estate is not as strong but is expected to grow as the overall economy expands.  In 4Q11, office vacancies are 16.7% and industrial vacancies are 12.7%.
• CoreLogic released negative equity data showing that 10.7 million, or 22.1%, of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011. This is down slightly from 10.9 million properties, or 22.5 percent, in the second quarter. An additional 2.4 million borrowers had less than 5 percent equity, referred to as near-negative equity, in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.1 percent of all residential properties with a mortgage nationwide in the third quarter, down from 27.5 in the previous quarter.
• British Prime Minister Cameron reported slower GDP growth in the U.K. and the need for more austerity.  He expects the U.K. will be hurt by a potential breakup of the eurozone.
• S&P reduced the long term credit ratings of BofA, Citi, and Goldman Sachs from A to A-.  It lowered the ratings of Chase from A+ to A.  Wells and Bank of New York Mellon fell from AA- to A+    Many European banks were also downgraded.
• ADP estimates U.S. employers added 206,000 jobs in November, up from 130,000 in October.
• On Nov. 30 the central banks of the U.S., the euro region, Canada, the U.K., Japan and Switzerland agreed to cut the cost of providing dollar funding via swap arrangements (by 50 bp), the Federal Reserve said, and agreed to make other currencies available as needed.   Essentially the Fed is lending to six other central banks at a fixed rate of exchange for a short period of time until the crisis is over.  China said earlier today it will cut the reserve requirement ratio for banks by 0.5 percentage point from Dec. 5, while data on U.S. business activity and the employment and housing markets topped economists’ estimates. This easing up of liquidity sent stock markets around the world up.  The DJIA rose 3.6% on Nov. 30.  It is now up to the individual European Central Banks, the ECB, and the IMF to see if they will bail out the eurozone.

• Barney Frank announced he will not seek reelection in 2012. He is the Senior Democrat on the House Financial Services Committee and co-author of the Dodd Frank Act.  He may be replaced by Maxine Waters, the next most senior Democratic member.

• New home sales in October were at a 307,000 seasonally adjusted annual rate, up slightly from the revised 303,000 level in September but down from the initially reported 310,000 level and lower than what economists expected.  In either case, home sales have been at a floor for the past two years at around the 310,000 level.  They were 323,000 in 2010 and are projected to be 301,000 in 2011, the lowest level ever since records began in 1963.  From 1995 to 2000 sales averaged around 850,000 per year and reached a peak of 1.4 million in 2005.  The only positive signs in the numbers were the median price rose 4% year of year and inventories retreated to 6.3 months from 6.4 months in September.

• 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’s (MBA) National Delinquency Survey.  This is the lowest level recorded since the fourth quarter of 2008.  However, foreclosure rates and serious delinquency rates remain high.  The percentage of loans on which foreclosure actions were started during the third quarter was 1.08%, up 12 basis points from last quarter and down 26 basis points from one year ago. The percentage of loans in the foreclosure process at the end of the third quarter was 4.43%, unchanged from the second quarter and four basis points higher than one year ago.

NEGATIVE TRENDS

• According to the Case Shiller housing index, seasonally adjusted home prices fell 0.6% in September from the month earlier.  Of the 20 cities reported, prices were down in 15 cities and up in 5 cities–Washington, DC, New York, Cleveland, Portland, and Dallas.  Prices were down 32.5% from the peak in April 2006.  They were down 3.6% from a year ago.  Using the seasonally unadjusted data, prices were also down 0.6% from the month earlier, down 3.6% from a year ago, and were down 31.3% from the cyclical peak in July 2006.  Prices were down in 17 cities and up in only three cities—Washington DC, New York, and Portland.  Home prices are coming down again after a five month run of increases that occurred during the summer.  More declines are expected in the near term as banks unload more foreclosures.

• Initial claims for unemployment rose a bit in the week ending Nov. 26 to 402,000, up from 396,000 in the prior week.  Continuing claims rose to 3,740,000 for the week ending Nov. 19, up from 3,705,000 the prior week.  This is worse than expected and shows weakness in the employment sector.  The four week moving average rose to 396,000 last week, up from 395,000 the prior week.  Similarly, the four week moving average for continuing claims rose modestly suggesting no change in the unemployment rate.

• FHA’s capital reserves are 0.24%.  This suggests huge risk to taxpayers since the statutory minimum is 2%.  Since home prices are still plummeting and the unemployment rate is high, there is huge risk for those FHA borrowers with less than a 5% down payment.

• From mid-August this year to now, bank volatility has been over 3%; that is, the standard deviation of the daily returns on an index of bank stocks computed using a 30-day rolling window.   Since the great depression, such high volatility has been associated with looming crises.  Currently, such volatility is occurring on all sizes of banks.  In 1930 this measure reached 9%.  In 1937 it reached 4%.  In 1987 it reached 5%.  In 2007 it reached 8%.  It is currently around 4%.  In most years it has been around 1%.  This high volatility suggests that banks are too highly leveraged and investors are fearful for the soundness of the banks.

• S&P downgraded Belgium’s debt one notch.  S&P cites a slowing economy and protracted political uncertainty.  Belgium has been without a federal government since elections in June 2010.  S&P projects general government debt at around 93% of GDP in net terms and 97% of GDP in gross terms.

• Fitch downgraded the U.S. rating outlook to negative on Nov. 28 following similar downgrades by Moody’s and S&P.  Fitch’s outlook on the U.S., which it still assigns its top AAA grade, reflects “declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path will be forthcoming,” making the probability of a downgrade greater than 50 percent over two years, the company said yesterday in a statement. Standard & Poor’s and Moody’s Investors Service said Nov. 21 that the so-called supercommittee’s inability to reach an agreement didn’t merit downgrades because the inaction will trigger $1.2 trillion in automatic spending cuts.

• Italian Prime Minister Monti wrote a letter to Merkel and Sarkozy stating that Italy may default on its debt and their economy crash if Italy were unable to service its debt. The country’s two-year borrowing costs have doubled since early September. The European Financial Stability Facility, the region’s bailout fund, doesn’t have the resources to stand behind Italy’s government debt of 1.9 trillion euros ($2.54 trillion) — much of which comes due next year — and is unlikely to win the support of national parliaments for more funding. So a default would mean a collapse and would be anything but orderly.   Monti said Sarkozy and Merkel “confirmed their support for Italy, saying that they are aware that the collapse of Italy would inevitably lead to the end of the euro.”

• New data revealed by the Federal Reserve shows that major U.S. banks were bailed out massively during the financial crisis that started in 2007.  Add up guarantees and lending limits, and the Fed had committed $7.77 trillion as of March 2009 to rescuing the financial system, more than half the value of everything produced in the U.S. that year.  The Federal government claims it didn’t lose any money from the loans but the vast extent of the bailout shows how weak the entire banking structure was at the time.  It is much stronger now but still in trouble as evidenced by the low stock prices for banks today.  The big question is how well they will survive the shock about to come from Europe as the eurozone fragments.

• The Economist magazine says “there is little doubt the eurozone will see a deep recession in 2012 with a fall in output of perhaps 2%.  The Financial Times, Bloomberg, and the Economist believe a breakup of the eurozone is imminent.  “Without a dramatic change of heart by the ECB and by European leaders, the single currency could break up within weeks. Any number of events, from the failure of a big bank to the collapse of a government to more dud bond auctions, could cause its demise. In the last week of January, Italy must refinance more than €30 billion ($40 billion) of bonds. If the markets balk, and the ECB refuses to blink, the world’s third-biggest sovereign borrower could be pushed into default.”

• The OECD said the eurozone is currently in recession which will continue in 1Q12.  It called the curozone debt crisis “the key risk to the world economy” that could “massively escalate economic disruption” if it isn’t resolved.  An economist at Capital Economics (a consulting firm) predicted eurozone GDP would fall 1% in 2012 and 2.5% in 2013. 

• Interest rates charged for eurozone debt continued to escalate at the Nov. 26 auction.  Italy’s 15 year inflation-indexed bond went for 7.3%.  Investors have been punishing banks holding big portfolios of debt issued by the south European nations.  There is fear that as these countries pressure their banks to hold their debt, it could come at the expense of loans to the private sector and cause their economy to go down.  Europe won’t solve its debt problem without improving its economy.  The only way that will occur is likely to be devaluation and increasing exports.  On Nov. 29 the rate for Italian ten-year bonds rose to 7.89%, a new high.

• The Commodity Futures Trading Commission reports that investors are betting against the euro.  Morgan Stanley expects the euro to fall to $1.25 by the end of 1Q12.

• The U.K. budget office cut its growth forecast for 2011 to 0.9% from 1.7% earlier, and to 0.7% in 2012 from 2.5% earlier.  This means the U.K. must borrow an additional $172 billion over the next five years.  The U.K. would only narrowly avoid recession but is dependent on how deep the eurozone recession is.

• Data from U.S. bank regulators showed a decline of 2.5% in employment by 2,500 smaller U.S. banks in 3Q11.  Overall, banks grew by 5,012 jobs to a total of 2.1 million workers.

• The yield on the ten year Treasury rose from 1.97% last week to 2.03% this week reflecting strength in the economy.

CONCLUSION

The good news is little evidence so far in the U.S. that European problems will further weaken our economy; however there is much speculation that the euro will weaken and thereby reduce our capacity to export.  About half the profits of major American corporations come from Europe so a recession in Europe will be reflected in their earnings and thus impact our stock market.  The collapse of the eurozone will cause sovereign debts to be written off and hurt investors in the U.S.

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

 Bad news from Europe and China dominated the week.  We are no longer merely concerned about the Greeks defaulting on their debt or even the 50% write-down of their sovereign debt.  We are concerned about the debt of all eurozone countries, even Germany.  Can any part of the eurozone hang together?  Will the euro survive in any fashion?

The major remedy recommended for saving the eurozone is a fiscal union of all 17 countries but that would require creating new treaties that member countries have been very slow to approve in the past.  With all countries now under threat, would the stronger countries in the north be confident enough to not be dragged down by the weaker southern countries?  It now is evident that all of Europe will have to engage in austerity measures.

Adding to the negative news was the reduced estimate for U.S. GDP from 3Q11, the sharp decline in China’s manufacturing sector in November, and the collapse of the Congressional super committee with no agreement on how to reduce our own deficit.

What does this mean for the U.S.?  Lower demand for U.S. products, low interest rates, flight to quality of world investable funds, a falling stock market, and the U.S. housing market takes several more years to recover.  Americans have to get serious about holding their leadership position by increased willingness to study longer hours on technical subjects and decreasing time spent on frivolous pursuits; therefore the necessity to train for the available skilled jobs here.

MORTGAGE MARKET SUMMARY

Mortgage applications fell 1.2% during the week ending Nov. 19 after falling 10% the prior week even though interest rates remained low.  According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 4.07 percent in October from 4.11 percent in September; the rate was 4.23 percent in October 2010.

According to NAR, contract failures jumped to 33% in October from 18% in September and were only 8% are year ago.  NAR defines contract failures as “cancellations caused by declined mortgage applications, failures in loan underwriting from appraised values coming in below the negotiated price, or other problems including home inspections and employment losses.” The NAR’s economist, Yun also blames “disruption in the National Flood Insurance Program, and lower loan limits for conventional mortgages” for increased contract failures.

There is little evidence of a housing recovery although existing home sales inched up a bit.  Much of the recovery is in the multifamily sector as rental vacancies decline.  Declining rental vacancies are impacting trends in the single family market as well.  The Campbell Report says that investor purchases of single family homes represented about 22% of closed transactions for the month of October, the third straight month that investors have held a share greater than 20%.  The gap between the supply of distressed properties and their absorption by first-time homebuyers has now widened to 13.7 points in October compared to 8.8 points in September, indicating that first-time homebuyers have become less active in the distressed property housing market.

The DJIA fell from 11,796 last week to 11,231.  The stock market fell 7 days in a row due to the mounting European crisis and lack of solution in Congress to the U.S. debt crisis.  For the week there were 10 positive trends offset by 18 negative trends.

POSITIVE TRENDS

• On November 18 the ECB purchased sovereign debt from Italy, Ireland Spain, Portugal, and Greece and brought down the rates for that debt.  As of last week, the ECB held €187 billion of sovereign bonds.  ECB president Mario Draghi said European governments should stop delaying promised anti-crisis measures.  He resists large-scale bond buys and rejects delays in implementing hard measures.  The ECB lacks a mechanism for enforcing fiscal discipline.

• There was a new election in Spain and Popular Party, the conservative party, defeated the Socialists by promising austerity to solve the economic problems.  With an unemployment rate of 21%, Spain has a huge challenge to face.

• Existing home sales inched up to a 4.97 million annual rate in October from 4.90 million in September.  This was higher than forecast by a survey of economists.  The inventory fell to 8 months from 8.3 months in September and the median price fell 4.7% from a year earlier.

• The index of national economic activity produced by the Chicago Fed rose to -0.13 in October from -0.20 in September.  Zero indicates growth at its historical trend rate so we are rising back to trend.

• Worldwide investors are being driven into U.S. Treasury bonds by the worsening European debt crisis.  Indirect bidders at the Nov. 14 auction in the U.S. reflect foreign interest.  They fueled much of the demand in the auction.

• Toll Brothers bought CamWest Development, a Seattle builder for cash.  Toll has weathered the slump better than its peers.  Since the downturn, the only major deal has been Pulte’s $1.3 billion acquisition of Centex in 2009.  CamWest holds a lot of developable land in Seattle, a hot market when land is scarce.

• U.S. auto sales were at a 13.26 million seasonally adjusted annual rate in October, up from 13.1 million in September.  Sales were up 7.5% year over year.  Year-to-date 2011 from 2010, sales were up 10.1%.  Sales are still at depression levels but are rising.  There are more autos being scrapped than sold.  The auto industry is adding jobs and each position has a multiplier of 10.  That is, for each new auto industry employee, 9 jobs are added in Michigan outside the industry.  Since 2008, the Michigan economy has fared better in terms of job and income growth than any other state except oil and gas rich North Dakota.

• Payrolls increased in 39 states in October, while the jobless rate dropped in 36, indicating the labor market is steadying across much of the U.S.   Illinois led the nation with a net gain of 30,000 jobs, followed by California with an increase of 25,700 jobs, according to figures from the Labor Department.   Virginia, Pennsylvania and Washington rounded out the top five states with the biggest gains.

• The leaders of Germany, France, and Italy agreed on Nov. 24 to pursue closer political and economic integration to shore up Europe’s banks and keep the protracted debt crisis from freezing new lending.  The European Commission presented a proposal that would give Brussels increased powers to monitor the budget of member’s states.  They also pushed for the creation of eurozone bonds that would pool the debt of eurozone countries.  In the past it has taken years to amend their treaty.  Can these countries move fast enough to solve the current crisis and bond rates across Europe soar?  This week even the interest rate on Germany debt rose questioning whether any part of the eurozone will be able to remain together.

• The evolution of fracking natural gas from shale in the U.S. has cut the cost of production of a new gas well by one-half to one-third.   This has helped our share of oil consumption met by imports to fall from 60% in 2005 to 47% in 2010.  This is completely transforming the energy security of the U.S.

NEGATIVE TRENDS

• The Congressional super committee admitted failure of its mission on Nov. 21 to reduce the federal deficit by $1.2 trillion.  Now that cut will be done across the board unless Congress prevents that from occurring,   Normally this failure should lead to a down grade for our debt but the greater problem occurring in Europe is causing investment funds to stream to the U.S.
• Initial claims for unemployment moved back up a small amount to 393,000 for the week ending Nov. 18, up from 391,000 the prior week.  Continuing claims for unemployment rose to 3,691,000, up from 3,623,000 the earlier week.
• Interest rates on sovereign debt continued to rise this week.  Spain had to pay a record 5.11% yield on three-month bills, more than double the rate it paid last month.  Banks borrowing from the ECB soared to the highest level since 2009 reaching €247 billion in seven-day financing to banks.  Italian ten year bond yields were 6.75%.  Deposits flowed out of southern European banks, especially from Italy, France and Spain.  This forced these banks to increase the interest rates they paid.  In third quarter, bank deposits flowed from banks in south Europe to the Nordic countries, Austria, and Benelux (Belgium Netherlands and Luxembourg).  Nonretail deposits fell 16% and 10% respectively at the Italian banks, Intesa Sanpaolo and UniCredit.  In all of Spain, nonretail deposits fell 20%.  But in the Nordic banks, nonretail deposits rose 7% in third quarter.  As deposits flow out of the south, there will be less money to lend to their corporations and will lead to a credit crunch on top of the austerity measures being imposed.

• CoreLogic says it could take until 2020 for markets to fully digest an overhang of foreclosed properties that represents a shadow inventory of potential bank-owned homes.

• Companies less than a year old employed 2.5 million people as of March 2011, down from 3.5 million in 2007.  Funding remains difficult for new companies.

• Merrill Lynch economists expect home prices to drop another 8% nationwide over the next 18 months before bottoming.  They expect the foreclosure process to speed up driving prices down further.

• The global financial-services industry eliminated more than 200,000 jobs this year, eclipsing 174,000 in 2009, data compiled by Bloomberg show.

• The second estimate of 3Q11 GDP was 2%, not 2.5% as indicated in the first estimate.  The GDP deflator remained unchanged at 2.5%.  
• Bank of America Corp. dropped the most in the Dow Jones Industrial Average and touched levels last seen in March 2009 as investors speculated on how much faulty mortgages will cost the lender.  Bank of America fell 5 percent on Nov. 21 to $5.49, the lowest since March 11, 2009.  The shares are down 59 percent this year, the worst showing in the 24-company KBW Bank Index. (BKX).  The KBW bank index of 24 large bank stocks peaked at $120/share in 2007 and fell to $36.40 on Nov. 21, down 69% from the peak.  Its lowest level since 2007 was $20 in March 2008.    
• Durable goods orders fell 0.7% in October after declining 1.5% in September.  Most of the decline was from transportation.
• Personal spending rose 0.1% in October after rising 0.7% in September.  This was lower than expected and indicates slow growth.
• The Fed released their stress tests for large U.S. banks (The 2012 Comprehensive Capital Analysis and Review).  Morgan Stanley thinks all the U.S. banks will pass the test but BAC will have the most difficulty due to their bottom tier capital ratios and high mortgage exposure. 
• The euro dropped to $1.32 this week from $1.35 last week and a high this year of $1.49 which occurred in April.  Some forecasters see the euro falling to $1.25 within the next six months.  The low for 2011 was $1.29 in January.
• An auction for German debt fell short by 35% even though the spread offered for the debt was at a two and a half year record spread over comparable U.S. Treasuries.  At the same time the yield on the Treasuries was at a record low yield for Treasury five year debt.  This means that funds are flowing to the U.S. from Europe.  Even German debt is being hurt by the debt crisis in Europe.
• The city of Harrisburg, PA filed for bankruptcy but a judge through out the filing because it was only supported by the city council and not the mayor and other parts of the city government.  A receiver has been appointed for the city placing the city under the jurisdiction of the state.  Many more cities will likely be filing for bankruptcy as well as several states.  This is adding confusion and volatility to the bond market.  Spreads are widening as the risk increases.
• China’s manufacturing sector fell sharply in November, the biggest drop in nearly three years.  This was due to the slowdown in demand from Europe and the U.S.  It caused Asian stock prices to fall more than 2%.
• On Thanksgiving Day, Fitch downgraded Portugal’s debt two points to junk status.  Fitch said a prolonged economic contraction is exacerbating efforts to cure a wide budget gap.  Portugal’s ten-year bond yield rose 43 basis points to 12.64% right after the downgrading.  On Nov. 25 Moody’s downgraded Hungary’s debt to junk status.
• The Italian Treasury paid 6.504% to auction €8 billion of six month loans, almost twice the 3.535% a month ago and the highest since August 1997.  Italy’s two-year bonds yielded a euro-era record 7.83%, almost 50 basis points more than 10-year notes. 

CONCLUSION

Europe is poised for a double dip and if the eurozone fragments, this will slow down the entire world economy.

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.