Premier Mortgage Group

The world changed this week, big-time, as markets struggled to keep up with political shifts, then economic, then political again. Markets are still behind.

Sad reports on housing routed the recovery brigade: May existing-home sales fell 2.2%, and sales of new ones collapsed 32.7%. 1^st Quarter GDP was revised down (again) from the original 3.5% gain to 2.7%, and two-thirds of that remainder was inventory re-building. May orders for durable goods were still strong (+.9%), but that was it for positives.

The Fed’s post-meeting statement had the feel of can’t-say-that. Prior statements have referred to “strengthening” recovery. This one said that recovery is “proceeding.” Wherever this procession is going, nobody will mistake it for the 4^th of July parade.

Money ran to bonds for safety, the 10-year T-note to its 3.09% low, mortgages about 4.75%, for one fleeting instant 4.50%. Applications for loans faded anyway.

In the first political development, China announced last weekend that it would let the yuan float upward, and global trading sparkled in pleasure for four whole hours. Then Monday’s yuan-trading reality exposed China’s utter deceit, exchanging its credibility for escape from more yapping by Mr. Geithner at the G-20 summit (can’t blame them). China obviously will continue a weak yuan, which will undercut wages and recovery everywhere else.

The second political shift has been long in coming, but this week’s sudden, global, and concerted lurch came as a surprise: all of Europe and Japan are embarking on simultaneous fiscal contraction. Stimulus be damned, all are determined to get their finances in proper order. If they can.

Japan’s newest prime minister in its lickety-split turnstile, Naoto Kan, proposes a 5% national sales tax and capped spending to chip at a national debt double its GDP. Such measures guarantee recession, and 10-year yen bonds now pay barely 1.00%.

France is taking unthinkable steps to cut its welfare state, raising the retirement age to 62 (Incroyable! Citoyens aux barricades!!). All of Club Med is attempting spending cuts in the range of 4% of GDP for each of the next three years, recessions certain.

The one European nation that should not cut, already-austere Germany, will do so. Angela Merkel and those competing to replace her are unmoved by the need to buy something from the rest of Europe, or to offer fiscal support. Europe will get an export boost from the devaluing euro, but not enough.

The UK has thus far done everything right (devalue, semi-nationalize banks, force them to lend), and its new government has embarked on the last step, a budget fix, the right way: for each pound sterling in new taxes, four pounds in spending cuts.

Then there’s the United States.

Tim Geithner and Larry Summers have offered incoherent advice to the world for months: maintain fiscal stimulus while adopting restraint. Maybe take a little time with the restraint, but don’t stop the stimulus. As of this week, the world is done with that.

So are we, whether we do it to ourselves, or markets force us. An economy staggering forward somewhere between flat-bottom “U” and double-dip cannot possibly generate enough tax revenue to close the chasm to the Left’s social promises and Right’s dreams of low taxes and military adventure. Forty-five years of that, done now.

The arch-Keynesian of the hard Left, Paul Krugman, still in favor of big spending, this week abandoned the Obama platform. He wrote that our long-run budget problem “will require, first and foremost, a real effort to bring health care costs under control.”

Peter Orszag, talented director of the Office of Management and Budget, has quit.

Mr. Obama’s thinking is opaque. Words, words, words, more words… farther off-point every time he speaks. He seems annoyed that the real world has intercepted his agenda, and is unwilling to adjust. Combined with lunacy in the other party, markets face a leadership vacuum, and markets don’t like that one bit.

Mortgage interest rates were mostly flat this past week despite weakness in housing data.  May Existing Home Sales fell 2.2% on expectations that sales would increase by 7.0%.  May New Home Sales fell by 32.7% to 300k annualized units, its lowest level since the report was created in 1980.  May New Home Sales were expected to fall, but only by 14.5%.  Other economic data of note included weekly jobless claims which fell slightly more than expected.  May Durable Goods Orders were in line with expectations.  Overall, orders fell by 1.1%.  Excluding transportation orders, though, orders increased by 0.9%.  Q1 GDP was revised lower to +2.7% on lower consumer spending.  As expected, the Fed left short term rates unchanged at the conclusion of its FOMC meeting.  Also, the Treasury auctioned $108 billion in new debt, which was met with reasonably strong demand.

The Dow Jones Industrial Average is currently at 10,132, down over 300 points on the week.  Crude oil futures are currently trading at over $77 per barrel, up about $3 per barrel on the week.  The Dollar has weakened versus the Yen and has strengthened slightly versus the Euro on the week.

Next week look toward Monday’s Personal Income and Outlays, Thursday’s ISM Manufacturing Index and Pending Home Sales Index, and Friday’s June jobs report as potential market moving events.

Mortgage interest rates improved slightly this past week on mixed economic data.  Data weaker than expected included May Housing Starts, down 10% on expectations that starts would be down 2.8%.  Single family housing starts were down 17.2%, the largest decline since 1991.  May Housing Permits fell 5.9% on expectations that they would be up 3.4%.  Weekly jobless claims increased by 12k on expectations that they would fall by 2k.  The Philadelphia Fed Business Index fell to 8.0 on expectations that it would come in at 18.8.  On the flip side, May Industrial Production and Capacity Utilization were both better than expected.  The New York Empire State Manufacturing Index for June increased from May levels.  Also of note, May inflation data continued to show tame inflation.

The Dow Jones Industrial Average is currently at 10,452, up about 240 points on the week.  Crude oil futures are currently trading at almost $77 per barrel, up almost $3 per barrel on the week.  The Dollar weakened versus both the Euro and Yen on the week.

Next week look toward Tuesday’s Existing Home Sales, Thursday’s Durable Goods Orders, and Friday’s final look at Q1 GDP as potential market moving events.  Also, the Fed’s FOMC meeting concludes on Wednesday.  It is expected that the Fed will leave short term rates unchanged.

Long-term rates are holding lows nicely, the 10-year T-note near 3.20%, and lowest-fee mortgages just under 5.00%.

New data tilts to slowdown. The Philly Fed index surprised on the downside, half its forecast; new unemployment claims rose (might be BPs gift to the Gulf); single-family housing starts and permits fell off cliffs, 17.2% and 5.9% respectively; and core CPI rose only point-one percent. Manufacturing has been the only strength, industrial production gradually crawling out of a hole, but still 7.9% below 2007.

Europe continues to stumble on the way to wherever it is going, all sovereign bond spreads there widening versus German bonds. A quiet run.

A plague has descended onto this land, and its name is “No Taxpayer Bailout!”

This illness is related to a few other fatal rashes and fevers of modern democracy, but nothing beats NTB! for decadence.

When some huge part of the economy needs to be bailed for the common good, there isn’t anyone else out there but taxpayers. In small disasters there is somebody else. Example: BP will probably have enough assets and future income to pay for most of its blowout damage, but even in that case, higher costs from new controls on drilling will be paid by taxpayers.

Another somebody-else example: deposit insurance has been funded by a levy on banks since 1933. Two problems. The banks, of course, pay the fee by means of lower interest to savers and higher costs to borrowers. Deadlier: a big enough bank run will overwhelm the FDIC, or any fund that banks themselves can raise.

The origin of NTB! in recent usage: the “S&L Bailout” of the late 1980s was decried as a raid on the taxpayer. Nevermind that all of the stockholders were wiped out, as were most of the officers and directors, and the FSLIC fund, and the ONLY people bailed out were the depositors, who did not lose a dime. Oddly enough, nearly all depositors are taxpayers. And vice-versa. Just as in the disaster in progress now.

“Decadence” is a nasty word requiring justification to those who think their hard-earned tax money is being wasted. When a rescue is obviously necessary, ask a nearby NTB!, “Whom else do you have in mind? Non-taxpayers? The poor? Pets? The French?” The most common response is “Government should do it (Grrrrr).”

Government doesn’t have any money. Government only has money if somebody pays taxes, or if it borrows; and if it borrows, somebody sure as hell better pay taxes.

Which leads to the expectation of the modern voter-taxpayer that somebody else will pay the taxes. I will pay taxes to fund the spending that I want, but somebody else has to pay taxes for the stuff that I don’t want. I don’t want to borrow, so I won’t pay taxes to pay interest. Certainly not principal. Somebody else.

Then there is government “guarantee.” Student loans, veterans’ benefits, Social Security. And contingent guarantees: if the FDIC runs out of money, government will guarantee all deposits. If a series of hurricanes bankrupts Federal flood insurance, government will guarantee. Nothing stands behind the Federal Reserve Note in your wallet except the nation’s willingness to pay taxes.

Europe is trying to save the euro by deploying a $900 billion fund to pick up bad bonds issued by Club Med. However, the fund is nothing but a pile of guarantees by governments that don’t have enough tax revenue as it is. Guarantee is meaningless if given by a government with neither the will to levy taxes, nor to cut spending.

“Government guarantee” sounds so powerful that people always play along, until they realize (late, always late…) that in the end nothing is guaranteed except, “Will you take a check?”  The end hastens when too many taxpayers lose faith in other taxpayers, and force our representatives to tell us what we want to hear.

If pandering leapfrog codifies NTB! into law, at the onset of the next great financial FUBAR, you will have forbidden yourselves to save you.

The window of historically low rates is continuing! Due to European economic woes and other factors, mortgage rates are still very low. That makes today an excellent time to refinance your loan or purchase property. No one can say how long the opportunity will last, and in fact most experts were expecting rates to rise this spring and summer.



STRAIGHT STATS

Mortgage interest rates were mostly unchanged on the week without much new economic data for markets to digest.  Today’s Retail Sales report for May showed that sales fell by 1.2% on expectations that they would increase by 0.3%.  This is the worst decline in retail sales in eight months.  Excluding automobile sales, retail sales fell by 1.1% on expectations that they would increase by 0.1%.  The University of Michigan Consumer Sentiment Index increased to 75.5 on expectations that it would increase to 74.8.  April Business Inventories, April Wholesale Inventories, and weekly jobless claims were in line with expectations.  The April Trade Deficit increased to $40.3 billion, its highest level in more than a year.  Also of note, the Treasury auctioned $70 billion in debt, which was reasonably well received by the market.

National preoccupation with SpillCam is a useful distraction from a slow-motion blowout in financial markets. The leak in the money well will not harm the environment, but much like the deep-water layers of oil in the Gulf, a slippery mess is uncontained.

The stock market is all over the place, but not the credit markets: US Treasurys are holding panic prices easily, the 10-year in a new range 3.09% to 3.30%, still trending down. We borrowed another $80 billion this week without a ripple.

Retail sales in May fell 1.2%, creating head-shaking confusion about the real state of recovery. Several measures of inventory rebuilding say that cycle has ended, and may have overshot to excess. Too soon for double-dip: serious stock-market people (there are a few) are optimistic about big-company earnings, and the red-hot emerging/China conveyor. In a sign of adaptation to trouble, the NFIB small-biz survey (www.nfib.com, “SBET”) improved in overall optimism, and in sales and earnings, although the reading is about the same as the worst of the last two recessions.

The insight of John Maynard Keynes, 80 years ago: if private-sector demand flags in a recession, then government must borrow and spend to intercept a downward spiral to deflation. Everyone understands that prescription should have been taken in the ‘30s, as well as its companion: to stop a bank run, central banks must provide replacement liquidity, infinite if necessary. As in all recessions since the ‘30s, from the outset of this predicament in August 2007 governments and central banks throughout the West took those measures, and then with increasing vigor.

There will be no permanent marker at the grave of Keynesian Stimulus, nor even a precise date of death. The approach will work again someday, so long as the government involved has not already frittered away its borrowing capacity, nor acted so slowly that asset-deflation has decapitalized its banking system, nor is it entangled in the aftermath of a currency delusion.

The US is oh-for-two, Europe oh-for-three. RIP Keynesianism. The ongoing borrowing and spending, and liquidity hose… just buying time. But done. Over.

MoneyCam, first in the US: mortgages intermittently touched new-record bottom, as low as 4.75% with no points. In the most striking sign that something odd is going on, new mortgage applications are in a five-week free-fall, even refinance ones. The short, Memorial Day week might have distorted, but applications were 30% below the same week last year.

There is only one explanation for no response to record-low rates: four years of housing deflation, and too many potential buyers think, “What good does 4.75%, or 3.00%, or 2.00% do me if I can’t sell this thing for what I paid?”

MoneyCam in Europe: a full-scale bank run is underway, banks running on banks, just like 2007 except that Euro banks are wrecks at the start of this one. The ECB is providing cash to replace the run, but it just piles up in the accounts of banks at the ECB, banks unwilling to lend to each other.

The second, confirming trace on-screen: the trillion dollar euro-bailout has all of the collective security of a flock of sheep (gratis Winston). A 3-year German Bund trades 0.59% today, and Spain 3.32% (US 1.22%). A German 10-year is 2.57% (US 3.22%), and Portugal pays 5.23%. Germany is the one nation on earth that should be expanding its Keynesian deficit, to help the rest of Europe, to become an importer, and instead offers Gotterdammerung to the whole continent.

The one bright spot, the one policy path for the US and the rest (after the euro blows): the UK. It has done everything right: instantly devalued in 2007, injected capital into its banks in ‘08, and forced them to lend, which induced modest real estate recovery. Now two brave kids, Cameron and Clegg, will cut government spending because no conceivable tax can fill the budget hole. The UK 10-year is holding, 3.46%.

I do hope the kid over here is paying attention.

STRAIGHT STATS:

Mortgage interest rates improved this past week, largely supported by today’s weaker than expected May employment report.  Non-Farm Payrolls were expected to increase by 540,000.  As reported, payrolls increased by 430,000.  However, temporary census workers accounted for 411,000 of the new jobs created.  Private job creation was weak, calling into question the strength of the overall employment picture.  Unemployment was reported at 9.7% on expectations that it would be 9.8%.  Also of note, April Construction Spending increased 2.7%, its largest gain since August of 2000.  April Pending Home Sales increased by 6.0%, mainly driven by the expiring tax credit.  The May ISM Manufacturing Index was also stronger than expected.  Weekly jobless claims and the ISM Services Sector Index were in line with expectations.

COMMENTARY:

Today’s payroll flop — only 20,000 real jobs created in May — will take some time to settle all the way in. Immediately: 10-year T-notes are 3.22% (from 3.36% yesterday and 3.99% six weeks ago), and mortgages below 5.00%. The payroll report has confirmation: new unemployment has held high for five months; May retail sales look soggy (“same-store” data); auto sales flubbed in May; and housing shows every sign of a serious fade, post-tax credit. Purchase applications have hit a 13-year low; the unemployed do not apply, nor do the underwater, and the few, the brave who think they are qualified often find themselves in the “rejected” pile. In days ahead, the entire recovery camp from government to stock-pushers has more than explaining to do. It must change its mind.

Today’s payroll flop — only 20,000 real jobs created in May — will take some time to settle all the way in. Immediately: 10-year T-notes are 3.22% (from 3.36% yesterday and 3.99% six weeks ago), and mortgages below 5.00%.

The payroll report has confirmation: new unemployment has held high for five months; May retail sales look soggy (“same-store” data); auto sales flubbed in May; and housing shows every sign of a serious fade, post-tax credit. Purchase applications have hit a 13-year low; the unemployed do not apply, nor do the underwater, and the few, the brave who think they are qualified often find themselves in the “rejected” pile.

In days ahead, the entire recovery camp from government to stock-pushers has more than explaining to do. It must change its mind.

All in one furball: How can mortgage rates be so low, and home prices so low, affordability the best ever measured, yet housing defies recovery? One unifying answer: credit. Not enough, and wildly too tight.

The credit dearth is perfectly rational. At default rates like these, nobody knows what new loan is safe to make, and underwriting has been overtaken by hand-shaking, eye-glazed panic. The horrifying conundrum: new loans will inevitably produce new losses, yet without enough new loans, losses on existing ones will be greatly higher.

Underwriting rules should be based on prior loss experience. That is, any borrower characteristic that generates an outsized loss rate should be excluded. Example: credit score below a certain threshold. Early in the present disaster, in 2007 Fannie and Freddie (the “GSEs”) began proper re-calibration of underwriting, withdrawing their portion of the credit ease that led to the bubble.

In stage two, 2008 defaults surging further, the GSEs began to throw defensible exceptions out with the bathwater. No matter how big your down payment, no matter how much money you have, or how good your credit, or work experience, income underwriting will be 1040-or-the-highway. No exceptions. Hysterical blindness.

In 2009 stage three, unemployment drove some defaults to a hundred times prior worst case, and impossible to tell if an underwriting flaw caused a default, or the 75-year-record recession. GSEs began to issue rules having little to do with actual risk, tightening for the sake of tightening. The thunder of doors slamming on empty barns. The 2009 classic: if you have disputed a credit report item, the GSEs will block your closing until you prove that your dispute did not hide a debt outstanding. You prove.

Mortgage haiku: Every borrower looks like a concealed IED to people fried by PTSD.

New for 2010, Fannie’s Loan Quality Initiative demands a credit report re-run immediately before closing. Yes, once in a while a borrower will be found to have blown himself up by buying a new frig and washer-dryer on credit. Many, many, more times we’ll get a mistaken report, or an ambiguity, or an argument that will delay or kill closing. What’s the likely ratio of defaults prevented versus useless meddling? One to one hundred? One to one thousand? Ten thousand?

Nobody knows. Sounds tough, so do it. Another: under LQI, some creep is going to check to see if you really moved into your new primary residence. True, it is fraud to fail to do so, and misrepresented rental properties have much higher rates of default. However, heaven defend the poor souls who let sellers stay an extra month, or who engage a house-sitter while travelling, or who want to renovate before moving in. No power on or off planet will protect the new owner who has taken down part of the house to add-on and add value. The ratio of loss-prevention to pointless intrusion and punishment of technical offense?

The GSEs have turned sensible and predictable mortgage closing into a field of open manholes, new ones popping open at each step. This effort at mortgage perfection — instead of rational, actuarial management of loss — has thinned the pool of eligible borrowers to the point that housing cannot recover. Not in time for the economy.