Premier Mortgage Group

Mortgage interest rates improved slightly this past week as the Fed indicated that it “is prepared to provide additional accommodation to support the economic recovery” at the conclusion of its FOMC meeting.  It is implying that it is prepared to purchase more Treasuries to help keep interest rates low if the recovery stalls.  Economic data was mixed.  August Housing Starts and Building Permits improved substantially, but from weak levels in July.  August Existing Home Sales were better than expected but are at their second lowest level since 1997.  August Durable Goods Orders were in line with expectations.  Excluding transportation orders, though, durable goods orders increased more than expected.  Weekly jobless claims increased more than expected and August New Home Sales were weaker than expected.

The Dow Jones Industrial Average is currently at 10,834, up over 200 points on the week.  Crude oil futures are currently trading at $76.40 per barrel, up almost $3 per barrel on the week.  The Dollar has weakened versus both the Euro and Yen on the week.

Next week look toward Thursday’s final look at Q2 GDP and weekly jobless claims along with Friday’s Personal Income and Outlays and ISM Manufacturing Index as potential market moving events.

For the first time since 2002 the Fed said that inflation is uncomfortably below target (any time below 1%, some sectors of the economy are already in deflation), and the Fed “…is prepared to provide additional accommodation if needed.”

Credit markets took the Fed’s post-meeting announcement on Tuesday and ran a bit too far: the 10-year Treasury note stone-dropped to 2.50%, today back to 2.60%, but mortgages were little changed.

Given the deep policy division at the Fed (the do-nothings paralyzing the do-somethings), I think the Fed will need to see weaker data to resume quantitative easing. Martin Feldstein this week had the best description of the economy: “In a holding pattern.” He sits on the NBER committee that calls the beginning and end of recessions, and looked less than thrilled at its pronouncement that the Great Recession ended 15 months ago. Next Fed meeting: the day after Election Day.

One of the puzzles in this cycle has been the steady contraction in lending by banks. The Fed has packed banks with no-cost reserves since 2008, but nothing has come out the far side, bank credit shrinking as never since the 1930s.

Why? The bankers say that few people or businesses qualify for loans; and those that do, do not want to borrow. The bankers would also like you to stop asking.

As pinched and punishing as bankers can be, banks only make money by making loans. However, fear of loss stops ‘em cold. There are two broad categories of loss fear: worry about new loans that you could make, and the rather deeper concern for loans that you have already made. But, we know the banks are now in fine shape, don’t we? Sharp Timmy Geithner and his super-duper stress test last year said so, right?

I get the sense that banks are trapped in a game of hot-potato. The spuds in question: mortgages long gone from bank balance sheets, long-since sold, or partially written off, or somebody else took the first hit. Now these rotten russets are returning to fields of original harvest. Night of The Living-Dead Tubers.

Fannie and Freddie have outstanding at least $20 billion in bank buy-back demands, the bank foot-dragging causing complaint to Congress. Analysis of defaulted loans often trails foreclosure by years, hence no way to know how many zombie Idahos will lurch home. Right now Fannie and Freddie have another 1.5 million loans headed into foreclosure, many to be dumped in the buyback truck, and a steady flow behind that.

Fannie-Freddie buybacks are straightforward. The hot-spud game is a circular affair. At the peak of stupidity in 2007, there were $2.2 trillion in mortgage Asset-Backed Securities outstanding (the worst paper, nothing to do with Fannie-Freddie), now written down by $789 billion (Fed Z-1, L.218, line 19). Many of those loans were made by the dearly-departed and gone altogether (Bear, Lehman); however, many more were made by the departed-but-absorbed (World by Wachovia then Wells, Countrywide and Merrill by BoA, WaMu by Chase), and even more by the usual-suspect survivors.

Seems that many of the buyers of ABS from these creators feel they were misled, and would like buy-back at original face value. Seems further that the creators hung on to the lucrative right to service these delayed-action explosive spuds, and the captive servicers are reluctant to tell their parent banks that they have to buy back, even though that’s the servicers’ duty. And there’s the Federal Home Loan Bank system, in court to force the original cooks of blighted hash browns to fry in their own oil.

Then, behind all of that lies the officially sanctioned commercial-loan extend and pretend, $1.4 trillion outstanding at banks, and another half-trillion ABS-securitized, real losses hidden. And the 2nd mortgages and equity lines outstanding, still 90% of the $1.1 trillion 2007 peak; banks haven’t made a lot of new 2nds, and the old ones — half of Ireland moved to Boston to keep from eating stuff like that.

As frustrated as the nation was by TARP and “bailouts,” banks need help. Not more pretense of good health, not more punishment, not more yer-on-yer-own, but help.

Mortgage interest rates improved slightly this past week on mixed economic data.  Data better than expected included the August Treasury budget deficit, August Retail Sales, July Business Inventories, and weekly jobless claims.  Economic reports weaker than expected included the New York Fed Empire State Manufacturing Index, August Industrial Production, August Capacity Utilization, the September Philadelphia Fed Business Index, and the University of Michigan Consumer Sentiment Index.  The August Consumer Price Index (CPI), a measure of inflation, was up 0.3% on expectations that it would be up 0.2%.  Year over year, though, CPI is up just 1.1%.  Excluding food and energy, core CPI is up just 0.9%.

The Dow Jones Industrial Average is currently at 10,589, up slightly over 100 points on the week.  Crude oil futures are currently trading at $73.35 per barrel, down over $3 per barrel on the week.  The Dollar weakened versus the Euro and strengthened versus the Yen on the week.

Next week look toward Tuesday’s Housing Starts, Thursday’s weekly jobless claims and Existing Home Sales, and Friday’s Durable Goods Orders and New Home Sales as potential market moving events.  Also, the Fed’s FOMC meeting concludes on Tuesday.  Markets expect that short term rates will be left unchanged.

In this last week of summer, the financial-political world is still in the suspended animation in which it began summer.

Recovery aborted by June, the US economy is flying just above stall speed; options for European sovereign debt and currency, and China trade are narrowing, but not yet closed. We’ll have an election in six weeks but are short of leaders.

August retail sales rose a thin .4%, and industrial production .3%, but July was revised down by .4%. Capacity in use was supposed to crawl up to 75% from 74.8% (80% is the border of health) but fell to 74.6%. The spike in unemployment-insurance claims has fallen from near 500,000 weekly, but settled at 450,000 where it’s been since last year. Today’s University of Michigan confidence index was expected to rise from 68.9 to 70, and instead dumped to 66.6, the lowest in 13 months.

Kids in the ‘50s raised Out West practiced the eye-squint necessary for proper delivery of this picture-show cowboy line: “It’s quiet out there… too quiet.”

So, time out for history.

This odd election is a mask for the public mind, which silently asks, What has happened to us, what should we do and expect, and who are we, anyway? The Democrats answer with more government, the Republicans with less government, and the Tea Party with an angry hammer-smash at the reset button.

All three appeal to the American myth: adopt our ideas, squash the others, and we will unleash America the Anointed, back to its predestined dominance and wealth!

The American economic miracle was underway before the time-out for the Civil War, and had eclipsed all other powers long before 1900, a triumph of fantastic natural resources, social mobility, rule of law, and protection by oceans. We rose from there to a pinnacle beyond Rome in largest part because our economic competitors — ALL of them — blew themselves to pieces twice in the first half of the Bloody Twentieth.

After WWI America held in its vaults 75% of the gold in the world, and IOUs from all European competitors for billions more, in gold. Even suppressed by Depression, America’s wealth was so great in 1941 that we could self-finance WWII, printing no money, and maintain stable prices — unmatched by any victor of any big war before or since. After WWII, there were no competitors standing: Europe, Russia, China, and Japan in smoking ruin, and the rest of the world more in barter than economy.

The great good that America had done, with an unselfishness never found in prior empires, and the good she would do to help the world rebuild — those things fully justified a sense of triumph, and it was real, no myth at all.

That was a long time ago. From 1945 on, we poured out gold and almighty dollars in trade deficits that allowed the world to recover. We began ceaselessly to borrow from ourselves and the world way back in 1963, and in 1971 had to stop the gold flow.

There is no way to identify an instant, or even a decade, in which an empire flips from borrowing as good business to borrowing to support a standard of living no longer justified by its productive effort. In retrospect we crossed the threshold sometime between 1970 and 1990. The markers: “jobless recovery” after the 1991 recession; the jobless escape from 2001 recession only by engineered housing bubble (yes, it was partly on purpose); and escape from this one uncertain on any terms.

Somewhere in there we forgot the need to compete, and to live within our means. We still have the great advantages of enforceable contract, transparency, and mobility-opportunity, but natural resources overcome by consumption and oceans carrying imports will not support high lifestyle in global commerce by electron.

I think the people are way ahead of the three parties, fully aware that the thirty-year era of free lunch is done. Thus I hope that this uniquely American, chaotic election will have greater result than it looks right now. The risk, of course: the decadent refusal of all prior empires to pull up their suspenders, face reality, and adapt.

Mortgage interest rates increased slightly again this past week without much new economic data for the markets to digest.  Economic data of note included weekly jobless claims which fell more than expected and the July Trade Deficit which was less than expected.  July Wholesale Inventories increased 1.3% on expectations that they would increase 0.4%.  Consumer Credit continued to fall in July, down $3.63 billion which was in line with expectations.  The Treasury auctioned $67 billion in 3 Year Notes, 10 Year Notes, and 30 Year Bonds this past week which was met with mixed demand from the markets.

The Dow Jones Industrial Average is currently at 10,433, down about 15 points on the week.  Crude oil futures are currently trading at just over $76 per barrel, up almost $2 per barrel on the week.  The Dollar strengthened versus the Euro and weakened versus the Yen on the week.

Next week look toward Tuesday’s Retail Sales, Wednesday’s Industrial Production, Thursday’s Producer Price Index (PPI) and weekly jobless claims, and Friday’s Consumer Price Index (CPI) as potential market moving events.

The Fed’s beige book said the obvious; “Continued growth…mid-July through the end of August, but with widespread signs of a deceleration.” Not double-dip, not yet. In the absence of fearful dippers buying bonds, the 10-year T-note rose to a one-month high 2.80%, although doing no particular damage to mortgage rates, still near 4.50%.

A great many people now write about housing, many of the strongest opinions held by people who gained their knowledge by living in a house, and driving past other ones.

The new rage: “Just let housing go.” These people do not seem to remember the benefits of letting Lehman go, the simple life without banks and their deposits.

The most common error among nouveau experts is to confuse housing with the stock market. The “let it go” crew insists on this sophistry: When home prices go low enough, buyers will return. Too many sellers of IBM stock, and down she’ll go to a value attractive to buyers. Correction complete, IBM liquid in global markets 24/7, a new bull market will begin. Supply and demand. Doncha know. Simple.

There are too many houses. So, stop building, finish foreclosing, let new households buy up the excess in a couple of years, and it’s all fixed. Easy. Just let housing go.

For every complex problem there are several simple and mistaken solutions. The trouble with houses, different from stocks, begins here: the damned things are where they are, and so are their markets. Can’t move ‘em to the shortage in Saudi Arabia, and Saudi Arabia ain’t coming to them. Beyond immobility, they are unique: no two the same; beyond location, huge differences in size, type, and price.

Since housing rolled over five years ago, today’s prices are higher in 29 states. Prices fell as much as 10% in 12 states, and as much as 20% in four more (MA, MN, RI, NH). The last, pesky five: MI -27%, AZ -29%, FL -31%, CA -35%, and NV -48%.

Exactly whose prices, where, would you next like to “let go,” and how far? In the last year of stumbling economic and housing policy, prices fell in all but 10 states.

Then consider some wrinkles in ol’ supply/demand. By the general factoid, we create 1-1.5 million new households each year, and will therefore absorb excess supply. The lowest guess I’ve seen for household formation during suppressed 2010 is 600,000, but my hunch is closer to zero. Illegal immigration that used to run close to one million annually may have stopped altogether (net of move-back). The demand side is further diminished by household credit damage and unemployment, and at my desk the one creditworthy borrower in four shut out by today’s absurd underwriting constraints.

On the supply side, unless somebody shoots ‘em, builders are going to build 400,000 new units — cheap and easy, in part because foreclosure-recycled finished lots don’t cost any more than farmland. More supply: as the owner-occupied fraction of housing falls from near-70% to the low-60% range, at least five million investor buyers will have to be found. And they’ll have to pay cash because investor credit is choked, especially at banks. The ex-owners leaving these homes will live somewhere, but we have no idea how many will remain independent households, and how many double-up.

Deeper into supply… we don’t know what it is. We really don’t know how many habitable dwellings there are in the USA. In hard times, habitability is a less fussy distinction. Housing supply shrinks by wear-out, obsolescence, and bad economics-of-fix; however, in tough times the life of a house can be extended a long, long time.

Then slice supply by price range. The top half of every micro-market in the nation is in bad shape, in part because of the near-void of jumbo financing. These are the rich that we’re going to tax and eat, for heaven’s sake! We’re counting on them!!

So, you’ve got some IBM to sell? Sure hope your certificate number doesn’t end in 3 or 5 or 6. Prices are awful for those. Dead for 9s. Say, where are you? Gee, whiz. There’s really no market for IBM there. You want to margin your shares, to hang on for better days? Given value there, and market conditions… credit, forget it.

Housing needs and deserves emergency help, and some imagination. Right quick.

Mortgage interest rates increased slightly this past week largely driven by today’s better than expected jobs report for August.  Today’s report showed that non-farm payrolls fell by 54k on expectations that they would fall by 120k.  Private non-farm payrolls increased by 67k on expectations that they would increase by 44k.  The unemployment rate increased to 9.6%, in line with expectations.  Also, weekly jobless claims fell slightly on expectations that they would increase.  Other positive economic news of note included July Personal Spending, the Case Shiller 20 City Home Price Index, the Chicago Purchasing Managers Index, August Consumer Confidence, the August ISM Manufacturing Index, and July Pending Home Sales.  Economic data weaker than expected included July Construction Spending and the August ISM Services Sector Index.

The Dow Jones Industrial Average is currently at 10,395, up about 450 points on the week.  Crude oil futures are currently trading at $73.54 per barrel, up slightly on the week.  The Dollar weakened versus the Euro and Yen on the week.

Next week look toward Thursday’s International Trade and weekly jobless claims as potential market moving events.  All markets are closed on Monday for Labor Day.   The Treasury will auction $67 billion in 2 year notes, 10 year notes, and 30 year bonds next week.

One of these monthly payroll reports will signal a turn in the economy to self-sustaining growth, and splatter the bond and mortgage markets all over the windshield.

Not today. The payroll positive in August: non-government jobs rose by 67,000 (half of those in un-affordable health care, the only sector to gain jobs every month of the recession). Details were thin cheer: overall employment fell 54,000 in August, as cuts in one-time census-workers and other government jobs overwhelmed the private gain; and a June-July revision found that we did not lose 352,000 jobs, only 229,000.

Flat, going nowhere, but not double-dip. Therefore sell safety-bonds: 10-year T-notes jumped to 2.75% from 2.47% on Wednesday, but mortgages have held 4.50%.

In the absence of double-dip or recovery, the policy vacuum hardened.

The doves at the Fed need ugly data to push the hawks aside, and allow hatching of more quantitative easing, the direct purchase of financial instruments. Code: “QE2.”

This is an election year, but the most peculiar in modern times.

The White House finds the economy so difficult that foreign policy looks attractive.    Old joke: walking on a beach, Bernie finds an old brass lamp, rubs it, and out pops a very small Genie. “Ya get one wish. Let’s have it.” What about three wishes? “I’m a little Genie. Move it.” Hmmm… altruism, or selfishness…. Mr. Genie, my one wish… give us peace in the Middle East. “Hey! I’m a little Genie — gimme something I can handle.” Okay, to hell with mankind. Mr. Genie, I would like one more wildly romantic weekend with Mable, my wife of 52 years.

Long pause. Very long… “Hey! Ya gotta map of the Middle East on ya?”

The White House adopted Senator George Aiken’s prescription for Vietnam: declare victory, leave, and have a parade. “The end of combat” in Iraq does not quite square with the 50,000 troops still there. Cooks and bakers, maybe… mechanics… and the bands. Music is good.

This week we’ve got Hosni and Bibi in town, and we’re going to solve Palestine.

In any normal world, the Republicans would move to the middle, to take advantage of a country annoyed with Obama’s old-tired-Left performance. The center gave him a landslide, but the center has not gotten center in return.

The Republicans do have one old political law to support their grumpy silence: “Never interfere with an opponent who is committing suicide.” However, the Republicans are swilling hemlock of their own in the Calvin Coolidge clubhouse, locked from the inside, lest anyone try to join them. Everybody who likes “I’ve got mine, you’re on your own” is already in.

Amazing. This is a democracy, and our government is a mirror of the people. Today’s detachment — abandonment — of the center and Main Street by both parties is without precedent, a fun-house mirror.

Yet, maybe the mirror is accurate: the people do not know what has happened to them nor what to do about it, and thus politics are lost in empty space.

All economic-fix proposals on the table are re-runs, trying to stimulate “aggregate demand.” More stimulus spending (less money, but better-targeted), tax cuts (payroll tax holiday?), QE2 — all the same deal, old-fashioned efforts to “jump-start” the economy that failed in mass and are not likely to work in mini.

Discussion of structural issues has halted. Some big part of our unemployment problem dates to the mid-‘90s rise of predatory exports from Asia. A new do-nothing, embarrassing delegation leaves next week to beg in China. Some say that labor force skills are obsolete, yet age 55+ employment is rising, and it’s youth that’s in trouble.

Last, the elephant in the structure: the financial system cannot generate credit, and most of the economic glitterati think that’s okay. We borrowed too much, and now we have to pay it back. Suffer. It’s good for you. Made better people of your grandparents.

Void it is, until the economy declares itself. And it will.

FHA released a mortgagee letter today (mortgagee letter 2010-28) with details regarding changes to mortgage insurance.

Highlights:

• Effective with case numbers assigned on or after October 4, 2010
• Upfront mortgage insurance will change to 1.0%
• Annual mortgage insurance with loan terms > 15 years:
  <= 95% LTV = 0.85%
  > 95% LTV = 0.90%
• Annual mortgage insurance with loan terms <= 15 years:
  <= 90% LTV = No Annual MIP
  > 90% LTV = 0.25%

Please contact us with questions about these MI changes!