Premier Mortgage Group

Mortgage interest rates were flat on the week as economic data was slightly better than expected.  September Existing Home Sales and New Home Sales were better than expected.  Increases in existing home sales were largely driven by the expiring tax credit.  October Consumer Confidence, September Durable Goods Orders, and the October Chicago Purchasing Managers Index were slightly better than expected.  Weekly jobless claims fell more than expected.  The Q3 Advance GDP report showed that the economy grew at an annual rate of 2.0%, in line with expectations.  The University of Michigan Consumer Sentiment Index fell to 67.7, its lowest level since November of 2009.  The Treasury auctioned $99 billion in 2 Year, 5 Year, and 7 Year Notes, which was met with mixed demand.

The Dow Jones Industrial Average is currently at 11,086, down about 50 points on the week.  Crude oil futures are currently trading at $81.57 per barrel, up slightly on the week.  The Dollar weakened versus the Yen and strengthened versus the Euro on the week.

Next week look toward Monday’s Personal Income and Outlays along with the ISM Manufacturing Index, Thursday’s Jobless Claims, and Friday’s Employment Report for October and Pending Home Sales Index as potential market moving events.

The Fed’s formal QE2 announcement will arrive at 2:15pm EST next Wednesday, the most-telegraphed punch in the history of punching. Hence, QE2 Q&A….

Monetary “easing” is a central bank’s standard antidote to recession, tried and effective hundreds of times here and elsewhere. The central bank cuts its cost of money and “injects” reserves into banks buy buying Treasurys from them with invented money. These operations ignite lending and borrowing, and we recover.

In this Great Recession, the Fed began to ease early, in ’07, and then massively post-Lehman, September 2008. Without effect, no response at all. Banks were and are incapable of providing credit: capital exhausted, crippled by brainless demands by government that they raise more, fear of new losses, and fewer borrowers.

A controlling equation: MV = GDP(p). The quantity of money times its rate of turnover (velocity) equals GDP. That (p) notation refers to prices. If you get MV going to fast, you get big GDP and inflation; if too slow, deflation. V rises in good times with credit creation and slows in bad; in extreme cases (bank runs) M disappears altogether. In “quantitative easing,” the central bank bypasses broken banks completely and buys Treasurys in the open market, sustaining M. Done right, price-neutral printing!

For three solid years we have been in asset deflation (you live in one of those), not general-price deflation; however, core measures of inflation are falling this year below 1%. The Fed engaged in QE from January 2009 through March 2010, and many think it stopped too early, contributing to economic and price deceleration. Thus, QE2.

Doesn’t printing money guarantee future inflation? The Fed hopes so! But only to get CPI back in the 2% range, and the economy is so slack (“excess capacity”), and so much money has effectively gone to mattresses that all inflation tinder is soaking wet.

But, once printed, the money is still there! The easiest of all central bank jobs is to make money disappear. If the Fed overdoes QE, if banks suddenly snort to wakefulness and make loans, all the Fed must do is to sell Treasurys that it bought. Market rates will rise, and the cash will go back into the Fed’s mattress. Coming out of this, expect high volatility in start-stop-start “draining,” but the Fed will not allow the aftermath go to inflation.

Why bother? Why not just leave well enough alone? The Fed did contribute to the predicament, and is hardly infallible, but its errors were omission, especially allowing a credit bubble to inflate (and no, rates were not “too low” ’02-’04 — underwriting was too easy). Since ’07, the Fed has been the only government institution to rise to the crisis, and a major lesson of the crisis is the need for an active Fed to regulate terms and supply of credit, and cautiously to intervene in asset bubbles.

What of that Hoenig fellow, and his cry for stability? The captain of RMS Titanic felt that a straight course and steady speed were the proper policies, all this zigging and zagging, slowing and speeding just silly responses to low-probability risks.

How will we know if QE2 works? That’s why Wednesday is such a big deal. The Fed has not said what indicators it will watch itself. QE1 was “shock and awe,” a pre-announced 18-month $1.7-trillion print. QE2… the Fed is likely to revert to normal behavior: it will give a broad outline, but will not tell us what it’s watching because the Fed wants to watch markets react to QE2, not markets watching the Fed.

Hunches. (Remind me when they go wrong.) The Fed intends to drive down intermediate Treasury rates (3-10 years, “caving-in the shoulder of the yield curve”), and in turn drive down other long-ish rates. Perhaps mortgages in the threes. In further turn, those lower rates will support asset values (houses if the Fed is lucky, stocks and gold if not). As assets stabilize, maybe even rise in value, defaults will wane and the world will become safe for bankers to lend. Last, the Fed’s intent is domestic, not to “drive the dollar down,” although it would be pleased if other central banks were forced to follow, giving global support to M and adding pressure to currency manipulators.

Hope to hell it works. There is no Plan B.

Mortgage interest rates improved slightly this past week on mixed economic data.  Industrial Production, Capacity Utilization, Building Permits, and the Philadelphia Fed Business Index were weaker than expected.  September Housing Starts increased 0.3% on expectations that starts would fall by 3.5%.  Weekly jobless claims fell slightly.  The Fed’s Beige Book, a survey of economic conditions in the 12 Fed districts, showed modest improvement compared to the previous report which showed slow economic activity.  It is widely expected that the Fed will announce the details of its second round of quantitative easing at the conclusion of its FOMC meeting on November 3^rd.  It is expected that the Fed will purchase longer dated Treasuries to help support lower interest rates.

The Dow Jones Industrial Average is currently at 11,119, up about 70 points on the week.  Crude oil futures are currently trading at just under $81 per barrel, down about $0.50 on the week.  The Dollar is slightly stronger versus the Euro and Yen on the week.

Next week look toward Monday’s Existing Home Sales, Tuesday’s Consumer Confidence, Wednesday’s Durable Goods Orders, Thursday’s weekly jobless claims, and Friday’s first look at Q3 GDP as potential market moving events.  Also, the Treasury will auction $109 billion in new debt next week adding supply pressure to interest rates.

Another week with no market-moving news, and bond traders still in the cheerful state they call “death watch,” waiting for the Fed’s formal QE2 “go” on November 3^rd.

Why the anxiety over something supposed to be good news? A lot of money has been bet on lower rates to come, but that wagering has already driven rates down. If there is anything disappointing in the Fed’s announcement (magnitude, duration, objective)… thus life ends for wrong-side traders.

The New York Fed’s Bill Dudley: “The momentum of recovery has slowed…. The current situation is wholly unsatisfactory.” Dudley pointed to steady deceleration from 2009’s 3.25% GDP gains to 2.75% in early 2010 and, “most likely…even slower….”

As we stumble through this unprecedented predicament, there is a model for success, or at least how to try to succeed. And, no, it’s not one of Rogoff’s mini-fables of financial crisis in Liechtenstein or Upper Volta  in 1882. (“This Time It’s Different” leaves me cold, in part because it misses wrong-headed government efforts that made crises worse, and includes too many economies the size of phone booths.)

The one place not missing a step: the United Kingdom.

1. Flood the financial system with cash. The US got that far.

2. Devalue your currency. At the onset of disaster, the UK knocked down the value of the pound almost 25%, from $1.95 to $1.50, making exports more competitive and discouraging imports. After three years, the US may be getting around to it.

3. Re-capitalize your banks. Banks without capital are useless, smelly bloats that can neither write off bad debt nor make new loans. The US injected TARP cash as capital, then had no clue what to do as partial owners, then let them pay back TARP (which the weak could not afford), and now banks still sit with inadequate capital and bellies full of rotting toxics. The UK held its nose and got the job done.

4. As capital provider, instruct bankers reluctant to lend: “Make loans, or we’ll find someone who will.” You mean, make more loans that will go bad? “If you don’t make new loans, they will all go bad.” The US has failed completely; the UK got it right in ’08.

5. Begin quantitative easing, buying your own sovereign debt, and ignore inflation risk. The UK has done so since 2008 despite near-3% inflation, and continuously, no go-stop-go as here in 2010.

Then the hard part.

6. Get your spending in line with your tax revenue. Ignore the spend-now, tax-later Lefty-Keynesian drunks. Start by cutting excessive promises to spend in the far future, which does no immediate economic harm, and walk the cuts back toward the present.

Brave, new, young Prime Minister David Cameron announced the overriding rule: “Four pounds in spending cuts for every pound in tax increases.” And now the details: chop all branches of the military by 40,000 (to a total smaller than the US Marines), and cut equipment and aircraft, and mothball one of two new aircraft carriers; cleave 490,000 employees from public payrolls (in a nation one-fifth our size), slash the Royal Family, the Olympics, National Health Service, Foreign Office, BBC… everything.

Borrowed to the brink of ruin? Balance the budget by 2015. It’s not done, but it’s underway. Not some “3% of GDP” perma-deficit, the pitiful US target. The Brits are a hard lot, accustomed to collective belt-tightening. After WWI, in the Depression, in WWII, and worse after it; then, really not enough to eat, and as cold indoors as out.

We pride ourselves on pull-together, and know-how, but that was our grandparents. We can’t even talk a good game. We pretend.

As a kid, when it was time to get a tooth filled, or for stitches, or to scrub a skinned knee, my Okie Dad looked into my frightened eyes, squinted his, gritted his teeth, and growled to give me brave words to say to myself, whenever in need for the rest of my life: “How tough… are you?”

If we find the will, the UK is the way.

This quarter we focus on national data and less on Colorado. Little has changed locally, and the national picture is confusing and widely mis-described.

Colorado entered a slightly softer patch this summer, but remains in much better shape than most of the country. As of August, statewide unemployment had risen from 8.0% to 8.2%, but Boulder County enjoyed a .1% decline to 6.4%.

The Colorado Division of Housing reported statewide August 2010 foreclosure filings at 3,142 down from 3,496 in August 2009. Foreclosure data is badly distorted by uneven management of foreclosures by Federal agencies and banks: although August 2010 was distinctly better than last year, this August was much worse than this July, which had only 2,718 filings. Most likely: still a lot of defaulting loans in the pipeline, genuine improvement not yet arrived.

The national economy is an immense thing, some sectors performing quite differently from others. We have chosen these graphics to give the best illustration of the whole.

1. JOBS
This chart of prior-recession job recovery compared to this shows the dramatic change in recoveries since 1990. The slow (black line, 1990), to slower (2002), to extended (red, present) we believe reflects the onset of globalized wage competition.

(calculatedriskblog.com)

2. HOUSING
We all knew that the housing tax credit and its extension would pull demand from the future. Few suspected that the credits masked an underlying decline in the marketplace. The initial and extended peaks of activity are clear below, as is suspicious weakness following.

(calculatedriskblog.com; NAR)

3. BIG BUSINESS
Perhaps the best proxy for big-business conditions is the performance of the S&P500 stock index. The index is the aggregate value of the 500 largest US corporations, but 65% of their earnings come from overseas. Previously rigid, slow-movers (General Motors), today’s giants are very agile multi-nationals that have shed domestic costs and labor, and have no trouble obtaining financing.

The S&P500 slid downhill with the economy beginning in April, but bottomed, and its rise above summer tops may presage a stronger recovery. In any event it shows strength in these giant companies.

(CNNMoney.com)

4. SMALL BUSINESS
For comparison, have a look at the National Federation of Independent Business survey of small-business conditions (the NFIB has conducted the Small Business Economic Trends survey since 1973). Main Street business feels no recovery at all, still mired at levels far below the worst of the last two recessions.

(NFIB.com)

5. TREASURIES
Another marker of the general health of the economy is the yield of US Treasury 10-year notes. The better the economy, the greater the risk of inflation, and the higher long-term interest rates go; the weaker the economy, the reverse.

The straight-line decline began simultaneous with the end of the Fed’s bond- and MBS-buying “quantitative easing” (15 months, $1.6 trillion), and an obvious economic slowdown. There may be cause-and-effect there, maybe not, but it is striking to see such a decline in yields when the Fed stopped buying.

The flattening in the last 45 days coincides with a better stock market, and probably a stabilizing economy. Poor, weak, but perhaps stable.

Of course, mortgage rates almost always follow the 10-year (the great exception in modern times was 2008, when markets fled all securities except Treasurys.

(finance.yahoo.com)

6. FANNIE & FREDDIE
In the gales of misinformation about mortgage performance, much of it generated by ancient dislike for Fannie Mae and Freddie Mac, the general public believes that those agencies produced the bad mortgages responsible for the housing disaster. The chart page following (from the new regulator of Fannie and Freddie, the FHFA) shows actual performance by category through the 2nd quarter of 2010.

Consider that the extreme rates of default on subprimes and low-FICO loans also undermined well-underwritten loans in housing markets collapsed by suicide loans and recession.

(fhfa.gov)

7. ASSET-BACKED-SECURITIES
And, if you would like to see the true mortgage culprit, “Asset-Backed Securities”, the awful stew of subprimes… look at the growth rate from 2000 to the peak in 2007. From a piddling $387 billion (mostly sound “jumbos”) to $2.175 TRILLION in just seven years!

(Federal Reserve Z-1)

Mortgage interest rates were mostly flat on the week on mixed economic data.  Economic reports better than expected included September Retail Sales, up 0.6% on expectations that they would be up 0.4%.  The October New York Empire State Manufacturing Index was also better than expected, increasing to 15.73 on expectations that it would come in at 6.0.  August Business Inventories increased more than expected as well.  Economic reports weaker than expected included weekly jobless claims, which increased 13k on expectations that they would increase only 4k.  The University of Michigan Consumer Sentiment Index was weaker than expected and the August Trade Deficit grew more than expected.  Inflation data was tame.  The September Consumer Price Index increased only 0.1%.  Excluding the food and energy components, core CPI was unchanged.

The Dow Jones Industrial Average is currently at 11,054, up about 50 points on the week.  Crude Oil Futures are currently trading at $81.44 per barrel, down slightly on the week.  The Dollar weakened versus both the Yen and Euro as it appears that the Fed will purchase longer dated Treasuries starting in November to help keep rates low.

Next week look toward Monday’s Industrial Production, Tuesday’s Housing Starts, and Thursday’s Philadelphia Fed Manufacturing Index as potential market moving events.

The whole financial world here and abroad is positioning itself for the second round of  “quantitative easing” by the Fed to begin on November 3.

Last week, bond markets overshot hopes for the impact of Fed purchases of Treasurys with invented money, and this week yields have bounced back up. However, everything is on hold until we learn the duration, magnitude, and actual effect of QE2.

Adding to expectant tension: China’s August exports to the US rose to $35.3 billion, and its imports from us fell to $7.3 billion. One effect of QE2 may be a currency war; despite the vulnerability to China feared by so many, these trade figures beg the question: Who exactly, needs whom?

The media, politicians, consumer advocates, ambitious state Attorneys General, and hungry lawyers everywhere have seized on RoBoForeclo, the nation’s newest self-destructive mania.

Substance. Foreclosure resembles pregnancy in that one either has a mortgage in public record against real property collateral, or not; and one is either current on that obligation, or not. Every state and many counties have different statutes and procedures, but all have extensive time periods for the mortgagor to bring current a default, or to deny the existence of the obligation.

Substance. Despite frantic media digging, I have not heard a single documented case in which an owner lost a home who did not owe the money and was not in default.

We are a nation of laws, and hence procedures that must be followed; there should be embarrassment and penalties for bad-faith actors. However, when courts consider damage awards, separating actionable from incidental, culpable from sloppy, they ask who was harmed and to what degree. No one has been harmed in RoboForeclo.

Facts aside, this wounded and confused America, goaded to lash out may do terrible harm to what’s left of housing and credit. A nation of scorpions in a bottle.

Mortgage servicers are a pain and have no friends. They don’t deserve any. They send to us bales of mail and solicitations for things that we do not want. They make mistakes, and then threaten. They are organized to compress costs, which means — as so much of the modern world — they do not answer their phones. These are data-processing people, not underwriters, decision-makers, or “deal” people.

Mortgage bill-collecting (“servicing” void of service) began to separate from lenders and owners of loans with the creation of Ginnie Mae in 1968. Of today’s $10.6 trillion mortgage stock, perhaps 75% is serviced by an entity that is merely a contractor to the owner of the promissory note. Servicers have no more to do with stupid and predatory lending than your car mechanic controls GM’s design of your Chevy.

The natural rate of mortgage default in the 40 years before this disaster was less than 1% per year. In the 30-million-loan portfolio of Fannie and Freddie alone (no matter what shills and idiots say, the highest quality pool in the US), about half of the nation’s total, 4.6% of loans today are 90 days or more past due or in foreclosure, and another 7.5% are delinquent. Perhaps ten times normal, and conditions are vastly worse for sub-prime, Alt-A, and Option Arm servicers. The Fannie-Freddie data resides at http://www.fhfa.gov/webfiles/16687/2q10fprfinal.pdf, together with their servicers’ immense burden to mitigate loans.

No big business can scale up ten-fold in 18 months. Imagine Toyota trying it, or Alcoa, or Exxon, or Microsoft. This RoBoForeclo lynch mob might recall the Fannie-Freddie regulator’s demand last summer that servicers move faster to foreclose. Total filings, all loan types in September alone: 347,420 (RealtyTrac).

When I consider all of the real damage done in the Great Recession — ruined hopes and dreams, honest and hardworking families simply run over, and the cheering at home-price declines by the hard-money liquidationists — this national rush to pick nits by hangman’s noose reflects an angry and pathetic helplessness.

The third quarter’s sales figures were blurred by the homebuyer tax credits – during this quarter in 2009 the tax credit was expected to expire in November, so there was a surge in activity, whereas this quarter in 2010 followed the actual expiration in April, making quarter-to-quarter comparisons of number of sales deceptive. In actuality, more homes have sold in Boulder County during the first three quarters of 2010 than did last year – 3249 sold in 2010 versus 3139 sold in 2009.

Source: BARA

The combination of weak economic news and anticipation of resumed QE by the Fed has taken the 10-year T-note to 2.34% (as high as 2.70% in the last weeks) and is pushing mortgage rates toward 4.00%.

Middling numbers like the ISM service-sector rise from 51.5 in August to 53.2 in September, and today’s meager gain of 67,000 private-sector jobs in September are not double-dip indicators. However, we’re running a $1.5 trillion deficit, one-third of it due to tax revenue lost in the Great Recession, and we must get the economy going fast enough to produce more revenue.

The bond and mortgage markets are hugely overbought, overweighting QE2 to be announced on November 3 (the Fed meets the day after Election Day). We do not know the magnitude or duration of QE2; the program faces very substantial opposition here and abroad, mostly ignorant here, and fearful there; and since QE theory has never been tried in actual, sustained practice, we cannot know its effect.

Clients and Realtors should find hope in the effort, but should also be warned of the instability and unpredictability of this situation. Those who wish to gamble should understand the size of the risk, and those who wish to lock should understand that 30-year mortgages can drop into the 3s without an ability to re-set the lock.

The table is tilted lower, but it’s only two inches from the floor.

The economy and markets have moved into a situation as unstable as pre-Lehman, although unlike 2008 with a chance for a good outcome, a turn in the Great Recession.

The forces and actors are a mystery to the media and most analysts, confounding many of the actors themselves. Some things are in plain sight: the 10-year T-note has nose-dived to 2.34% because of economic fear and anticipating new Fed intervention. Mortgages are falling toward an unthinkable 4.00%.

The economy is sputtering along, but running out of time: the recession has cut Federal tax revenue by almost $500 billion annually, and we must ignite the economy to close that part of the deficit gap before the Treasury loses its ability to borrow.

From 1929-1932, the world’s central bankers attempted to stave off disaster by applying proven wisdoms: balanced budgets, hard money, the gold standard, fixed exchange rates, insisting that debtors repay, and allowing runs to collapse banks to restore moral hazard and market discipline. One man throughout, over and over told them they were crazy: John Maynard Keynes. (See “Lords of Finance.” Please.)

In the three years of this disaster, we have had the wit to embrace some Keynesian stimulus, and Mr. Bernanke’s heroics finally stopped a systemic run in the winter of 2009. However, as ’29-‘32 we are still in the grip of a “liquidity trap” (infinite bank reserves cannot create credit), and the “paradox of thrift” twists frugal effort into destructive liquidation. Also as ’29-’32, an utterly unsustainable global currency and trading system adds overriding instability, and is crumbling by the hour.

Mr. Bernanke sees the hazard as clearly as Keynes: here in the US a “risk-run” continues, public and institutional investors fleeing to cash and Treasurys, the resulting drop in monetary velocity already producing asset deflation, now spreading to other prices, and undercutting any prospect of recovery. Jan Hatzius, Goldman super-economist, offered two scenerios this week: “Pretty bad… and very bad.”

The international system is poised to break: Asian exporters have arranged trade-pushing weak currencies, but have become dependent while damaging their trading victims. Europe is locked in euro-gold just like ’29-’32, the weak desperately needing to devalue from a too-strong euro, the strong enjoying an absurdly weak euro. The US has been unable to devalue because the euro crisis beat us to it last spring, and China has followed us down. Prime Minister Wen: “If the yuan is not stable it will bring disaster to China… turmoil and closing factories….” Uh-huh. Try things here, sport.

On November 3 — unless blocked — Mr. Bernanke and a small, brave band near him will announce QE2: the intention to invent and disburse enough cash to counteract velocity and deflation here, and enough to force the other central banks to follow, or suffer their own consequences. Germany has verboten QE by the ECB, hence the euro is rising, demolishing any chance for Club Med recovery. The ECB buys just enough sovereign bonds to prevent collapse, and to fill the hole in a Euro-zone bank-on-bank run, as they try to protect themsleves from sovereign default and euro breakup.

Japan still does not get it: its QE announcement on Tuesday was timid (20 years of deflation, now), and the yen rose to another suicidal high. Brazil gets it, installing new capital-import controls to keep the real low. Australia gets it, suspending tightening into its hot economy, unnecessary if the world goes QE. The UK flinched, pulling back from sustained QE, paralyzed by fears of inflation, its very last worry.

Mr. Bernanke found some support from middle-roader Charles Evans, Chicago Fed, who favors “much more accommodation than we’ve put in place.” Forces of ignorance rose to oppose: pea-brained cowboy Richard Fisher, Dallas Fed: “Since the FOMC meeting, a handful of my colleagues have fanned further speculation about QE2….”

Mr. Bernanke has the votes and the courage to proceed, but risks an open revolt at the Fed, and opposition from House Republicans, soon to be more numerous. Hope first that he and his noble few find enough support, and then that QE2 works. Hope hard.