Premier Mortgage Group

STRAIGHT STATS

Mortgage interest rates improved slightly on the week on continued concerns that Greece will default on its sovereign debt. S&P downgraded Greece’s debt to junk which led many investors to move money into the Treasury markets, also helping mortgages. Also of note, the Treasury Department auctioned off $118 billion in 2 year, 5 year, and 7 year notes this past week. Demand was mixed. Economic data was generally in line with expectations or better than expected. Economic data better than expected included April Consumer Confidence, the Chicago Purchasing Managers Index, and the University of Michigan Consumer Sentiment Index. Economic data in line with expectations included weekly jobless claims, continuing claims, and the first look at Q1 GDP, which was up 3.2%. Also, the Fed left the Fed Funds rate unchanged at the conclusion of its FOMC meeting.

COMMENTARY

Several unusual forces are pushing and tugging at markets, making it hard to isolate actual changes in trend. The all-defining 10-year T-note continues to fall in yield, a four-week straight-line decline from 3.99% to 3.66% this morning. 3.60% is the next key level, going all the way back to December. Maybe this drop reflects recovery skepticism among global bond investors, or maybe it’s a temporary flight from woes in Europe. Mortgages are stuck at 5.125%, the spread to the 10-year at 1.45% the widest in six months — possibly widening because flights to quality are usually limited to Treasurys, or possibly because the Fed is no longer buying MBS and mortgages are gradually returning to a normal, 1.75% spread. There were no good clues in the economic data, neither signs of stall nor acceleration. New claims for unemployment insurance in April have been a hair higher than in March, near 450,000 weekly. New mortgage applications are running 31% above February, confirming a remarkable spike in home sales, but we won’t know until mid-May how much is due to the expiring tax credit (bet on “a lot”). 1st Quarter GDP pulled up 3.2% in today’s release, the third-straight quarterly gain, but the stock market is down on the news. Consumer spending was a healthy component, which it sure as hell ought to be, given the Treasury hosing $150 billion that it doesn’t have into American pockets each month.

Several unusual forces are pushing and tugging at markets, making it hard to isolate actual changes in trend.

The all-defining 10-year T-note continues to fall in yield, a four-week straight-line decline from 3.99% to 3.66% this morning. 3.60% is the next key level, going all the way back to December. Maybe this drop reflects recovery skepticism among global bond investors, or maybe it’s a temporary flight from woes in Europe.

Mortgages are stuck at 5.125%, the spread to the 10-year at 1.45% the widest in six months — possibly widening because flights to quality are usually limited to Treasurys, or possibly because the Fed is no longer buying MBS and mortgages are gradually returning to a normal, 1.75% spread.

There were no good clues in the economic data, neither signs of stall nor acceleration. New claims for unemployment insurance in April have been a hair higher than in March, near 450,000 weekly. New mortgage applications are running 31% above February, confirming a remarkable spike in home sales, but we won’t know until mid-May how much is due to the expiring tax credit (bet on “a lot”).

1^st Quarter GDP pulled up 3.2% in today’s release, the third-straight quarterly gain, but the stock market is down on the news. Consumer spending was a healthy component, which it sure as hell ought to be, given the Treasury hosing $150 billion that it doesn’t have into American pockets each month.

In one of the best measures of inflation, the GDP report had its annualized rate dropping from 1.5% in the 4^th Quarter to 1.1%. Low inflation is good, too low is not.

Last, after its meeting this week the Fed tilted its description of the economy ever-so-slightly better, but is obviously still worried, maintaining its “exceptionally low… extended period” rate language. KCFed prez Tom Hoenig dissented again, his third-straight demand since January to toughen language; the Elmer Fudd of inflation hunters, he’s still blazing away at a Wascawy Wabbit now gone altogether.

Americans are properly pre-occupied with our own affairs, the more so the closer we get to our front doors. Most of us feel the weight of employment and housing, and flinch at thinking about the fiscal-repair sacrifices ahead.

Developments in Europe are incomprehensible to most civilians, but comparisons there to here should be reassuring, even confidence-building. Not the negative pleasure of watching somebody in more trouble than you are, but the positive discovery that you’re more capable than you thought.

Europe, roughly the same population and GDP as here, not even 15 years into a currency union is too fragmented to protect itself in a credit and budget wreck. We fear political polarization, and grapple with Bubble Zones, but the gulf between a Bostonian and an Arizonan is nothing compared to Lisbon versus Helsinki. In the euro zone, sixteen separate national governments, tax codes, treasuries, retirement systems, cultures… fourteen different languages… the US is a paradise of unity by comparison.

There are similarities in the financial problems here and there, but our ability to resolve them is without parallel. California could default on its debt without threatening the Union or the dollar. We wrestle with retirement and health costs, but 23% of people in the euro zone are older than 60, and only 18% here, the gap growing every day. Our youth has been replenished by immigration, legal and not, people who have seen the limits to opportunity elsewhere.

Our flexibility has no counterpart anywhere. As painful as it is to go through, no other nation would allow a housing bubble to deflate with such violence. We are making more progress than we know. We have retarded the rates of foreclosure and loan write-off, but nothing like the zombie-banks in Japan and Europe.

Nobody knows — can know — where we are in a cycle that we’ve never tried before. But we’re better than we were, and have the means to adapt.

Talk about a win-win: this REO program can help you purchase your first home at a great price, or get started on the property investment track. Some highlights of the program:

• - Up to 97% LTV
• - Minimum 660 FICO
• - No mortgage insurance
• - No appraisal
• - Up to 6% seller concessions

Check available listings on the HomePath website.

STRAIGHT STATS

Mortgage interest rates increased slightly this past week as economic data was mostly better than expected. Economic data of note included March Existing Home Sales, up 6.8% on expectations that sales would be up 5.2%. March New Home Sales jumped 26.9% on expectations that they would increase 5.2%. March Durable Goods Orders, excluding automobile sales, were up 2.8% on expectations that they would be up 0.6%. With automobile sales included, orders fell 1.3% on expectations that they would increase by 0.2%. Weekly jobless claims fell by 24k and continuing claims fell by 40k. Both numbers were in line with expectations. March Leading Economic Indicators increased 1.4% on expectations that they would increase by 1.0%.

COMMENTARY

Long-term rates — the ones guaranteed to rise — fell again at mid-week, Treasurys more than mortgages: the 10-year T-note made it to 3.73%, and mortgages briefly to 5.00%. The action was largely due to Greek default, the possibility of a failed bailout (see Fannie and Freddie and “Paulson’s Bazooka,” the dud in summer ‘08) and a bond-run spreading to the rest of Club Med. Europe is in a lose-lose trap benefitting the dollar and Treasurys: if the bailout fails, chaos follows; if the bailout works, Club Med economies will fall into depression, and the financial position of the bailers — Germany and France — will weaken. A domestic-data trading tip-off this week: bonds did nothing in response to positives in home sales and orders for durable goods. The market shows no fear of real recovery and a tightening Fed. The late-week rise in Treasury and mortgage rates seems entirely due to the next wave of Treasury bonds to be auctioned next week, and it’s worth playing for a rate-retreat when most of the bonds have been sold. Late Wednesday, maybe.

Long-term rates — the ones guaranteed to rise — fell again. The 10-year T-note made it briefly to 3.73%, and to 5.00% before rising a bit yesterday.

The action was largely due to Greek default, the possibility of a failed bailout (see Fannie and Freddie and “Paulson’s Bazooka”, the dud in summer ‘08) and contagion to the rest of Club Med. Today’s Euro-zone assistance is holding, for the moment.

On the letter of the law, The SEC’s fraud lawsuit against Goldman is weak. However, the light shed by the filing is already a help to pros and civilians alike.

For three years Wall Street has tried to sell the idea that it was tricked by mortgage brokers into buying bad mortgages. Now everybody understands the suction machine that ran out of control on the Street, hungry for bad loans in volume so immense that the Street finally invented imaginary ones, “reference notes” and synthetics.

At the core: the Street’s discovery that it could make more money shorting bad loans than holding good ones.

In Mel Brooks’ 1968 fraud epic, “The Producers,” arch-promoter Max Bialystock (Zero Mostel) was struck by revelation: a Broadway show that went bust could make a lot more money than a hit. The scheme required two things: the chutzpah to sell a play many times to investors, and then finding a play so bad, so dreadful, that it was guaranteed to close after its first performance. Then keep the excess sales proceeds.

Thus Max and his frightened but greedy CPA (Gene Wilder) sat in an empty theater thumbing through piles of rotten scripts, until the grand, “ah-HAH!!” at discovery of awful perfection: the song-and-dance production, “Springtime for Hitler.”

Goldman Sachs helped to invent ABACUS 2007-AC1, a CDO which hedge-funder John Paulson wanted desperately to short via credit default swap. This CDO, parts rated AAA by idiots at Moody’s, its bad mortgages earnestly and cluelessly assembled by idiots at ACA, bought by idiots at Germany’s IKB bank (in springtime, no less), the CDS provided by ACA’s idiot sister company, ACA Capital, CDS re-issued by dolts ABN Amro Bank and the Royal Bank of Scotland back to Goldman. Upon the collapse of the CDO, valueless in five short months, the CDS through Goldman paid Paulson $840 million.

Part of Goldman’s defense: many SEC rules do not apply in dealings with sophisticated investors. Like these. Another defense, different deal: according to Goldman’s head of German operations, Alexander Dibelius, banks “do not have an obligation to promote the public good.” Ahhh… spring.

In an alternate Goldman script, CFO David Viniar might appear at Chairman Lloyd Blankfein’s door: “Lloyd, fixed income has come up with a new structure, huge volume and profit. The deals are going to crash, stuff we stopped doing last year, but AIG London and other dopes will CDS ‘em, the short-side swaps rich to us. Okay?”

Blankfein: David, how huge is ‘huge’ volume? “With copycats, a trillion or two, I guess.” How soon will they crash? “Oh, a year… some less.”

In that volume… would that crater AIG? “Oh, yeah [laughs], but we’re safe.” David, a hole that big, that fast… is that a risk to the system? “Yeah, maybe… could be.”

Well, then. A lot of money for us in those swaps. Damned shame. I’ve got two calls to make. To warn AIG’s chairman about his London boys. And Ben Bernanke… if it’s this big, then he doesn’t have much time to make his own calls. Tell our guys I’m sorry.

Impossible script, of course. In 1968, Wall Street normal. By 2007… never happen.

Without integrity writ large, without some sense of responsibility to society, then markets cannot function. All of this “moral hazard” and “too-big-to-fail” is just amusing noise. Neither reform legislation nor regulators can force good behavior upon those who intend to evade, edge, quibble, and prevaricate their way around integrity.

Integrity is a cultural matter, long in formation, not easily lost. But, when it is lost… that’s what we call a “failed nation.”

Spring is approaching fast, and many home owners are preparing their summer remodeling plans. Here are some tax credits and other incentives to make energy improvements to your home:

• Colorado Governor’s Energy Office (GEO): Rebates begin in March and are anticipated for installation of a variety of ENERGY STAR appliances, solar electric, solar domestic hot water, small wind, energy audits, insulation and air sealing measures, duct sealing, gas condensing furnaces, and energy monitors. Learn more about GEO rebates here.
• Boulder County ClimateSmart Loan Program: Full upfront financing for over 40 different residential energy efficiency and renewable energy measures within Boulder County. The next required workshop will be in March – learn more here, and signup for their email to be notified when the workshop date has been scheduled.
• Xcel Energy Rebates: Get rebates for installing a new, eligible air source heat pump, central air conditioner, evaporative (swamp) cooler, natural gas furnace or broiler, home insulation, or natural gas water heater. Restrictions apply, some rebates require an approved contractor to install. To learn more, choose Colorado and go to the Programs and Resources pages of the Residential section of www.xcelenergy.com.
• Boulder County energy efficiency rebates and incentives.
• U.S. Department of Energy incentives.