Premier Mortgage Group

RATES INCREASE SLIGHTLY ON MIXED DATA, TREASURY ACTIONS

STRAIGHT STATS

Mortgage interest rates increased slightly this past week on mixed economic data and pressured by Treasury debt auctions of $118 billion.  Economic data worse than expected included December Existing Home Sales, December New Home Sales, weekly jobless claims, and December Durable Goods Orders.  December Existing Home Sales fell 16.7%, the largest monthly decline ever.  On the flip side, economic data better than expected included January Consumer Confidence, the advance Q4 GDP report, the January Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index.  Q4 GDP was up 5.7% on expectations that it would be up 4.6%.  Also, as expected, the Fed left short term rates unchanged at the conclusion of its FOMC meeting on Wednesday and Fed Chairman Ben Bernanke was confirmed by the Senate for another term yesterday.

COMMENTARY

Next Friday’s employment report will tell all for February. The ISM reports early in the week could move rates, but only if dramatic trend-changers.

A note on Fed politics: our rates stayed high in part because of a formal dissenter at Wednesday’s meeting. Tom Hoenig, president of our home-district Kansas City Fed, wants the Fed to drop its commitment to low rates for a “extended period.” Many in the markets thought it important, but it was not. Hoenig is an empire builder (19 years on the job, three times longer than any other sitting regional-bank president) and a monomaniac demanding tight policy all the time. He’s the same guy who cast a dead-wrong dissent against cutting rates in October 2007.

Many serious, if quiet, observers think the Fed has mistaken an absence of panic for recovery, and object to its “strengthening economy” language last Wednesday. The Chicago Fed’s own comprehensive index (www.chicagofed.org, “CFNAI” on right) showed the economy weakening in December.

Despite the slide in the stock market, long-term rates held high (3.65% 10-year T-note, 5.125% mortgages), propped by the Fed’s insistence that that the economy is “strengthening,” and an adjustment-bloated, 5.7% surge in 4^th Quarter GDP.

News of some stability in home prices was offset by big drops in December sales: existing-home sales collapsed 16.7%, the worst ever measured, and new homes fell 7.6%. Apologists pointed to weather and to the expiring home-purchase tax credit; others noted that December is often cold, and the credits were renewed and amplified.

Mr. Obama said in the SOU that he had not explained health care reform with sufficient clarity. That’s not all: to date, no one in authority has clearly explained how we got into this financial crisis, or how we will get out of it, or how to avoid doing it again. Caught in this trap, in the absence of compelling Fireside Chats, the nation and Congress have begun to chew legs — their own and anyone else’s within reach.

The Fed now has toothmarks all over its marble pillars, and a brief historical explanantion may take some pressure off chewers and chewee alike.

The Fed was created by Congress in 1913 as an antidote to the frequent “panics” that plagued banks and the economy. Hence its number-one duty: “lender of last resort.” As it has loaned our way out of crashes (missed only once, ’30-‘32), it has inevitably loaned to miscreants partly responsible for the mess; however, all citizens today disturbed by “bailouts” should understand that it is we who have been bailed.

When the Fed is not intercepting immediate disaster it reverts to job two: stable prices via an economy neither too hot nor too cold — “monetary policy.” It does so by manipulating the cost of money to banks, for years on end tweaking and fiddling until a moment of serious inflation. Then the Fed must do the only thing it can: jack rates high enough to throw millions out of work (missed on that one only once, too: ’77-‘79).

Work like this is best done not merely in secrecy but invisibility. There is no central bank in the Constitution: the Fed is an un-democratic star chamber often accused (falsely) of all sorts of conspiracies. We know that Congress and the President cannot be trusted with money, and certainly not ourselves, so we appoint the best few dozen people that we can find, give them infinite power, and expect them to get it right.

Until they don’t. Then we fragment into mini-mobs embracing an inconceivable variety of fruitcake theories about how the Fed should operate. Chewing legs.

In the disorderly postmortem underway, the trail leads quickly to assertion that the Greenspan Fed kept rates too low for to long, 2002-2004. One notch further back lies similar criticism about the stock market bubble. Everyone sold on this pathology should reconsider.

First: the Fed is always behind. Always. It cannot know the future except to know that monetary policy and interest rates today will not have full effect for a year or more. Worse, the economy is in a constant state of innovation, but the back-looking Fed must adjust gradually, not in catch-up lurches.

Second: for the Fed to raise rates and throw millions out of work something must be wrong, something demonstrable to Congress and the people. In its whole history, that “something” has been serious inflation. During the stock bubble there was no inflation,  and pulling the plug on the whole economy then was indefensible; and from 2002-2004 we were in near-deflation, losing a quarter of a million jobs each month.

The lesson from this disaster is the need for more Fed responsibility, not less. We should ask the Fed to use narrow blades, not just the interest-rate sledgehammer. If the Fed were charged with Big Cop duty, the stock bubble could have been pre-empted by a needle into the sleepy-SEC fanny: demand proper underwriting of new issues.

Had the Fed slipped a shiv to foolish mortgage and other securitized credit standards in 2003, when credit began its ruinous growth — which is within its current authority but not stated responsibility — we would not be here today.

FLAT ON MIXED ECONOMIC DATA

STRAIGHT STATS

Mortgage interest rates were mostly flat this past week on mixed economic data. Economic data better than expected included December Building Permits, December Leading Economic Indicators, and continuing jobless claims. Economic data weaker than expected included December Housing Starts, weekly jobless claims, and the January Philadelphia Fed Business Index. On the inflation front, the December Producer Price Index (PPI), a measure of wholesale prices, was up 0.2% on expectations that it would be unchanged. Excluding the volatile food and energy components, core PPI was unchanged on expectations that it would be up 0.1%. Year over year PPI was up 4.4% and core PPI was up 0.9%.

COMMENTARY

Anticipating mortgage rates now, short- and long-term, is a simple thing. In the short run, everything depends on how hard the stock market may fall. The equity market has defied gravity for half a year, and the combination of non-recovery, political meltdown, and economic policy overtaken by bi-partisan populist anger could take stocks all the way to a re-test of the March lows. Nothing like panic to drive money to mortgages and bonds. If stocks hold, so will we.

Longer term, everything depends on the interaction between immense Treasury borrowing, a still-broken private market (and broken Fannie and Freddie) for mortgages, and the Fed’s willingness and ability to buy. The Fed and its plan to stop buying in March is key. The Fed is under assault from all sides and may paralyze without political support. Mr. Bernanke’s term ends in nine days, and a timely or favorable Senate confirmation vote is in doubt. If confirmation fails, a new form of panic will follow, and not one that will help anything.

Big week. Since last summer, economic policy and markets have been frozen in anticipation of recovery. This period of apparent stability has been an illusion, tension building, and markets and politics have begun disorderly moves to catch up.

Stocks have cracked, which should have helped mortgage rates, but the aid has been intercepted by on-rushing Treasury borrowing. Mortgages are stuck above 5.00%.

The economics of the moment are the easy part. There is no recovery worthy of the name, especially in jobs. Housing in half the country is in deep trouble. We are living on Treasury borrowing that must slow, but we dare not. The administration has no functioning plan for economic recovery, and average citizens are mightily annoyed.

The political consequences… holy smokes. First the ricochets and collateral damage, then one bright light of effective action, at the FHA of all places.

Coverage of the Massachusetts upset has focused on partisan triumph and consequences to health-care reform. Wrong and wrong. Voters for senator-elect Brown were asked, was the economy the key to your vote for Brown? Yes. Nine to one.

During the last many immobile months in the White House a quiet coup took place. The do-nothing Summers-Geithner axis has been replaced by the Volcker-Axelrod populist-and-punish front. At first I thought this week’s announcements of taxes on banks and break-‘em-up plans were political ploys to get out in front of national anger and health-care failure.

No such luck. The White House thinks the plans are good policy. Warren Buffet denounced the tax plan within hours as the idiocy that it is. Banks already pay heavy fees to replenish the FDIC after their fellows’ disasters; yanking more capital would mean fewer loans, and we must have loans to get out of this.

Paul Volcker was easily the most punishing Fed Chairman ever (created the worst post-war recession previous to this to break the back of inflation), but his world is long gone. This whole “too-big-to-fail” argument is mistaken. If all of America’s top-20 banks were half their 2007 size, nothing in this disaster would have been different. We suffered a systemic failure. In dominoes, size doesn’t matter.

Threatening to bust up the banks may buy a pause in the national gathering of tar and feathers, but not for long. Recovery, dammit. Focus on recovery, not retribution.

The political breakdown has immobilized the Fed, the only part of government to rise to the crisis. A bi-partisan mob in Congress has decided: since the Fed has been doing lots of things, they must have been the wrong things. Stop them. Forever.

Under attack, the Fed has already begun to withdraw, specifically to end its direct purchases of Treasurys, Agency debt, and MBS. No political cover, no Fed. Like 2008: criticized for its Bear Stearns firebreak, next time… let Lehman go.

Just when faith in good government seemed a lost hope, FHA Commissioner David Stephens provided an example to all the bumblers and mobs. Under great pressure to tighten loan standards beyond anything in its 74-year history (in the name of prudence thereby choking off the last support for housing) Stephens left loan criteria alone, raised some revenue, and tightened standards a different way.

He will publically expose lenders making too many bad loans. He will hold them accountable. If they continue to misbehave, he will put them out of business.

What a concept. Instead of one-size regulatory paralysis, he will focus on the bad guys. Make it personal. Name names. When Mr. Obama took office, he expressed disinterest in the size of government in favor of government “that works.”

Could we try that, please, on banks and Wall Street? Put the whole system in capital forbearance and form long-term recapitalization plans under consent decree. Make good loans and assure recovery. Misbehave and we will remove you. During recovery make plans for future systemic soundness; no experimental axe-work until then.

There is more than one way to quiet an angry nation.

When interest rates move in global capital markets, so do mortgage rates nationwide — instantly. That’s real time as in no down time, lag time, lead time, rag time, tea time, or tee time. Right now!

When rates rise during any business day, within minutes every mortgage lender begins to receive e-mails screeching “REPRICING!!,” usually shutting down the ability to lock a client’s rate until new prices are posted. These mails sometimes have little sad faces drawn on them, which make an already over-stressed mortgage lender turn homicidal. When rates fall, the same process operates in reverse, but the notifications are a tad slower, prices often high-side sticky until the next day.

Electronic money moves at the speed of light, and so does the price of money. This real-time condition often causes confusion and bad feeling among borrowers and lenders, and always complicates borrower desires to shop among lenders and to compare against survey benchmarks.

If you are a sophisticated shopper, you will soon figure out that newspaper lists of rates from different lenders are approximations at best, delayed at least one day’s publication. These traditional ads have been overtaken by the web, and surfing lenders is today’s typical consumer process.

Internet postings are theoretically real time (electrons, after all), but many are slow to update. Worse, because surfers are most sensitive to rates,  web postings – just like the old newspaper ads – often degenerate into a fibbing contest. Most modern mortgages are commodities, from paperwork to underwriting standards, but there are vast differences between lender skills, quality, honesty, experience, and services. Counseling by a good lender may save you more money than the gap between the highest quote and the lowest.

Even in 2010, web rates are mostly virtual time, not real time. No rate is firm until locked (and often not until underwritten and approved, including the appraisal). “That was this morning’s price; this is afternoon.” “The piggyback 2^nd isn’t going to work; we’re going to have to switch to 90% with mortgage insurance and the rate will go up .25%.”

If actual, real-time, lender-to-lender comparison is more trouble than it’s worth, what about survey benchmarks?

The real estate industry is the nation’s largest single business, and the mortgage business is its finance component. You would think that somebody would post every day a real-time, honest pricing survey.

Nope.

The national news media rely on survey sources, but their perpetual inaccuracy is a matter of black humor in the industry. Freddie Mac (the Federal Home Loan Mortgage Corp.) is the most widely quoted, and awful.     Freddie releases its survey finding on Thursdays, but conducts the survey Monday to Wednesday each week. Its announcement on Thursday is a bulletin from Jurassic Park.

Every lender hears from survey-lagged clients: “Young man, you are lying to me. Katie Couric just told me that mortgage rates are 5.75% today!”

Another Freddie defect (plaguing all surveys): its weekly “rate” is based on an antique assumption, that everybody still pays an origination fee, and the amount of the fee is variable from week-to-week. Thus Freddie always understates the no-point-no-origination rate preferred by most consumers – and the media never reveal the weekly-changing fee.

Imagine if the national media reported the Dow Jones Average three days late, and got it wrong every time.

Better than Freddie, much closer to real time, is HSH Associates, Butler, NJ, quoted often in the media. HSH is trying hard, but Keith Gumbinger, HSH’s publisher and a good guy, from time to time posts a composite rate, a mixture of Jumbo and Fannie conforming – always lower than the former, and higher than the latter. And, like so many web pages – everybody has to make a buck – the HSH home page has degenerated into a clutter of advertising designed to capture the clicker.

No libel intended… other national news sources allege accuracy and currency, but are just wrong, day after day. The recent champion in that class has been Bank Rate Monitor. As real lenders see and hear their daily description of rates on CNBC and the like, you can hear our soft chorus of “Huh?” in the background.

The era of the web is confounding. Many, many people read Wikipedia with more caution than financial postings. The best way to stay current with day-to-day changes in mortgage rates, even intra-day: watch the 10-year T-note. The gap between the 10-year and mortgages (Treasurys lower by about 1.70% in normal, non-crisis times) changes from time to time, but mortgages will tend to follow any big change in the 10-year. Entirely free of entrapment by click, or fibbing, Bloomberg.com, Online.WSJ.com, and many others stream the 10-year yield.

Still determined to shop widely for a rate, apparent price more important to you than anything else? Pick a few well-recommended local lenders, and then call ‘em all within a 15-minute span on a stable bond market afternoon.

RATES IMPROVE DESPITE TREASURY AUCTIONS

STRAIGHT STATS

Mortgage interest rates improved this past week despite supply pressures from Treasury debt auctions as the recent run up in rates appears to have been overdone. The 3 Year and 30 Year auctions were reasonably strong but the 10 Year auction was weak with less participation from foreign bidders than expected. Economic data was generally weaker than expected. The November Trade Deficit was more than expected. December Retail Sales were weaker than expected, down 0.3% on expectations that they would be up 0.5%. Excluding automobile sales, retail sales were down 0.2% on expectations that they would be up 0.3%. Weekly jobless claims and the University of Michigan Consumer Sentiment Index were weaker as well. Inflation data was tame. The December Consumer Price Index was up only 0.1% on expectations that it would be up 0.2%. Year over year CPI increased 2.7%. Excluding the food and energy components, core CPI was up 0.1%, in line with expectations. Year over year, core CPI was up 1.8%.

COMMENTARY

Most of the time, watching markets is a daily grind anticipating and reacting to new economic data. Early in this new year and decade, I get from all Wall Street friends a sense of tension building in political space — or better said, policy space. Herb Stein, the fine economist operating 1950s-1980s, issued Stein’s Rule: “Unsustainable trends are not sustained.” We seem near one or more trends nearing adjustment.

Public policy toward the recession has not changed since last spring, and in many ways, neither has the recession (housing, credit supply, jobs). That stuck-in-place is global, Europe in non-recovery (even Germany’s GDP was flat in Q4), Japan floundering in deflation, and China’s heroic stimulus not sustainable without recovery among those who buy its exports.

Pure hunchwork, but when the market/policy adjustments come, no matter what they are, the conseqence for us is more likely to be mortgage rates about the same or lower, not a big upward move. Self-fulfilling prophecy, a la Stein: until the economy is strong enough to survive higher rates, they will not rise.

Long-term rates have continued a modest retreat from the December highs, 10-year Treasurys to 3.67%, mortgages sliding toward 5.00%.

Further improvement depends on Fed and Treasury policy regarding 1) their desire to get the Fed out of the MBS-buying business, 2) the embalmed state of Fannie and Freddie, 3) private markets closed to mortgages, and 4) the slowly collapsing theory that housing and the economy are in self-sustaining recovery. A financial-market accident somewhere would do the trick, too.

New economic data are weak. The NFIB small-business survey declined broadly in December; consumer credit continued its freefall, off $17 billion in November, triple the forecast drop; and December retail sales expected to rise instead fell .3%.

My wife, Bronx-born, high-risk labor and delivery RN, given to the brisk speech of her workplace, is as non-political as I am a news junkie. Perhaps once a month she has something to say about that world. Something… firm.

“These bankers and their bonuses are disgusting.”

I began to explain the private-partnership history of investment banks, their very low salaries, and end-of-year divvy-up the pot into bonuses – commissions, really.

Dinner and tranquility seemed a better idea. However, getting a close-hand load of citizen anger helped me over the gulf between the days of dignified partnerships (a few remain: Lazard Frères, Warburg Pincus, Brown Brothers Harriman, the Rothschilds – none connected to this disaster) and modern, giant, public-company looters.

Four top bankers this week faced the Financial Crisis Inquiry Commission and its barrage of puffballs. Be damned glad it was not a half-dozen of my wife’s co-workers, practiced at deflating physicians. The FCIC panelists are too ignorant of Wall Street to grill the bankers on details. Worse, the panel has no clue that investment-bank CEOs will not bother to debate, are physically incapable of losing self-control, and will answer, smiling, earnest, and expertly evasive at any length until you go away.

Unless and until you play hardball.

Mr. Blankfein, Goldman Sachs is more important than its stockholders, right? Unlike your old partnership, living on its wits, your stockholders have given to you immense amounts of capital, but you keep the profits? And you’re more important than your customers, against whom you are happy to trade, correct?

Is Goldman more important than the United States?

You did pay back the TARP money that you say you didn’t need. But in the panic, to save yourselves, you scurried to become a bank – your liabilities guaranteed by the citizens of the United States. Do you not have a higher duty to these people?

How about a duty not to hurt them? Since you accepted their guarantee, protection from a fatal “run,” have you installed any ethical standard by which your avarice comes second to what is good for the country? How about responsibility for the effects of your operations on other firms and the financial system itself? If AIG is stupid enough to guarantee your bad deals, crashes, and takes the system with it, your hands are clean?

In the great debt binge from 2000-2006, the nation’s stock of home loans doubled from $5 trillion to $10 trillion. The toxic-mortgage fraction alone, in Asset-Backed Securities, exploded from $350 billion to $2.1 trillion. At least half will be a dead loss, just as a similar amount of CDOs, SIVs, CLOs, and such.

All four of you… “gentlemen,” and your peers not here: you alone invented all of these deals. You pushed them hard, and lost money only if you were late to quit.

So. If you are here today to claim that you didn’t understand the harm you were doing, then you are too dangerous to keep your jobs or ever again to work on Wall Street. Or you may confess that you did understand, but the money was to good, the deals too rich. If so, you are going to jail.

Take your pick.

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