Premier Mortgage Group

Mortgage interest rates improved slightly on the week with limited new economic data for markets to digest.  Of note, May Existing Home Sales and New Home Sales were down, but not as much as expected.  Weekly jobless claims increased more than expected, up 9k to 429k claims.  The final look at Q1 GDP showed annualized growth of 1.9%, slightly higher than the 1.8% expected.  May Durable Goods Orders were up 1.9% on expectations that they would be up 1.0%.  The Fed’s FOMC meeting concluded on Wednesday.  As expected, the Fed left the Fed Funds rate unchanged.  Also, the Fed indicated that it will not engage in a third round of quantitative easing.  It appears that the EU and IMF have agreed to a bail-out package for Greece.  However, Greece must pass $118 billion of austerity measures through parliament.

The Dow Jones Industrial Average is currently at 11,966, down almost 40 points on the week.  Crude oil futures are currently trading at $91 per barrel, down $2 per barrel on the week.  The Dollar strengthened versus both the Yen and Euro on the week.

Next week look toward Monday’s Personal Income and Outlays, Tuesday’s Consumer Confidence, Wednesday’s Pending Home Sales Index, Thursday’s jobless claims, and Friday’s ISM Manufacturing Index as potential market moving events.

The world received a ton of new information this week, most in political cloak, all difficult to interpret. Markets accordingly have wockety-tonged all over the place, but the 10-year T-note sliding below 2.90% says the net effect is heightened anxiety.

The only straightforward stuff was US economic data. Sales of both new and existing homes slid in May, but with no real change in pattern. Weekly claims for unemployment insurance are trickling upward, 11-straight weeks above 400,000 — far below the 650,000 post-Lehman, but about the same as the worst of the two prior recessions. May orders for durable goods improved, but did not offset April’s decline; similarly, the Chicago Fed’s index in May was again negative, but better than April.

The endless Greek saga reminds me of schoolboy trial by Odyssey and Iliad fire. Lashed to a mast, but no sirens in sight. Could Odysseus just… go home? The European proceedings are now officially stupid, an argument over verb conjugation: default, defaulting, defaulted. Each day that the inevitable approaches, stocks sink and cash goes to bonds, then reversing at each new and absurd procrastination.

The moment that Greece finally goes will be anticlimax, as banks and regulators have had 18 months to sort through the web of its debt and credit default swaps. The daily concern in the markets is the next euro-dominoes.

In the global black box of black boxes, China is further along in its first-ever central bank fight with inflation. New signs: slowing real estate sales, a decline in lending, and a spike in bank-to-bank lending rates (5.5% to 8.9%). All nations, even ones with a hundred years’ experience in this sort of thing, are touchy about how much tightening medicine to apply to deal with a little inflation. Yet none has ever beaten China-sized inflation without a recession, and throwing a lot of people out of work.

China is likely to be flinchier than most, as it is in the midst of one of its changes in leadership without constitutional guide, just a power struggle under the covers between Party, Army, bureaucrats, entrepreneurial Princes, and ethnic and migrant crowds. Thirty years ago, less than 20% of China lived in cities; today, more than 50%. Urban populations are volatile. How China’s first capitalist business cycle plays out may matter more than anything that happens in Europe.

With that backdrop, the aftermath of the Fed’s meeting this week seems almost routine and orderly. Almost. The Fed did not announce any new action; in fact took pains to engrave that it would not do anything until the economy does something.

However, two jarring aspects. First, another downward revision in the Fed’s 2011 GDP forecast: January’s 3.9% best-case gave way in April to 3.3% and this week to 2.9% — which will require acceleration in the second half of the year. Then, rather more disturbing, Mr. Bernanke offered, “We don’t have a precise read on why this slower pace of growth is persisting.”

Tha-dump. “Maybe some… weakness in the financial sector, problems in the housing sector, balance sheet and deleveraging issues — some of these headwinds may be stronger or more persistent than we had thought.”

You don’t say. Housing… ya think, could be? Credit a little… scarce?

All right, enough smartass. Be serious: Perfesser Bernanke doesn’t have the votes to take new stimulus steps, regional Fed rockheads ready to revolt. Congressional no-bailouters and hard-money nitwits are especially upset that the Fed has interrupted their path to national suicide. This is a good time for the Fed to get off the stage, to lower its profile in self-protection.

A benefit from that exit: the markets already see, and the nation soon will, that absent the Fed there is nobody on stage. The hapless Treasury Secretary speaks from time to time, but no one listens, and the President has not been seen near a financial issue since his party got pasted last November. Congress… is Congress.

Thus a competition between misgovernment here and in Europe and who-knows-what in China, and the net result is safety trades and lower rates, even for mortgages.

Mortgage interest rates were flat week over week on mixed economic data but volatility was high.  Economic data stronger than expected included May Retail Sales, weekly jobless claims, May Housing Starts and Building Permits, and May Leading Economic Indicators.  Economic data weaker than expected included April Business Inventories, the June New York Empire State Manufacturing Index, May Industrial Production and Capacity Utilization, the June NAHB Housing Market Index, the June Philadelphia Fed Business Index, and the University of Michigan Consumer Sentiment Index.  The New York Empire State Manufacturing Index and the Philadelphia Fed Business Index fell to levels indicating contraction in both sectors.  Also of note, the May Producer Price Index (PPI) and the May Consumer Price Index (CPI) were in line with expectations.

The Dow Jones Industrial Average is currently at 12,062, up slightly over 100 points on the week.  Crude oil futures are currently trading at $93.61 per barrel, down over $5 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 Existing Home Sales, Thursday’s weekly jobless claims and New Home Sales, and Friday’s Durable Goods Orders and final look at Q1 GDP as potential market moving events.  Also, the Fed’s FOMC meeting concludes on Wednesday.  Markets expect the Fed Funds rate to be left unchanged.

Domestic data vied with the European circus for control of financial markets, for once pushing in the same direction. Down. Both stocks and rates.

Greece seems certain to default in some form this summer, and European efforts have switched to containing contagion in the aftermath. When Bear Stearns went down in March 2008, with some Fed safety net in place, no dominoes followed; six months later, when Lehman and AIG tanked, not even an all-out Fed and TARP could stop a collapse that we’re still living in. Hell of a thing: no way to find out if there’s water in the pool except by taking a triple gainer off the high board.

The US data were as important. The NY and Philly Feds released their indices for June: both expected to hold positive ground, instead both went negative to the same degree and for the first time in nine months. The 10-year T-note quickly reversed a run at 3.10%, back in the 2.90s. May retail sales were okay, ex-cars and gasoline (everybody’s got to eat, buy socks…); and new unemployment claims stopped rising.

Core CPI in May up to .3% is enough to paralyze any thought of new Fed stimulus for the moment, but is not really “inflation.” Prices of commodities and food have been driven up by wildly overheating emerging nations which are now slowing, all their central banks tightening. Here, incomes flat, higher prices are uncomfortable but not a spiral caused by money-printing, as so many fear.

The NFIB small-business survey confirmed all, down for a third straight month, the lowest index value since last September, led by softening plans to hire.

National economic policy is confronted with several damned-if-you-do, damned-if-you-don’ts. Cut federal spending before recovery? Or risk a Treasury-borrowing wreck? Restrict credit to prevent any new bubble ever? But how to recover without credit?

Perhaps the toughest issue: after one of the great regulatory failures of all time, how to institute adequate regulation without paralyzing commerce?

Many moons ago, my beloved business partner of 20 years, now retired, shed some light. We had allowed an able loan processor a limited hunting license to make a few loans in addition to regular duties, supplementing her income without adding to our fixed cost. Sixty days later we discovered that our processing had slowed to a crawl, and our “limited” producer had booked more loans than any in the sales staff. Fixed that. But, a month later, different version: production again bloated, this time at the cost of processing quality. Stopped that. Then another month, and a third evasion.

Partner and I sat down to write a rulebook to head off any more misbegotten behavior. After a short while, partner said, “This is stupid. Why spend our time attempting to invent rules faster than a lousy employee can invent misbehavior?” She was dead right.

Any auditor will tell you: if the senior officers of a company intend to conceal fraud, they can — for a while, if not forever — no matter how good the auditor.

The Fed’s latest rules for mortgage underwriting are 117 pages of legal argle-bargle posted in the Federal Register, overlapping, circular, swat-fly-with-sledgehammer.

Get to the heart of the matter. We cannot repair and maintain our economy without principled people in corporate leadership. Everyone in financial markets (why stop there…) must accept and enjoy overriding duties to the society and the system. All risk taken must first survive that test.

Establish an ethical code. Get a forest of right hands in the air, taking the oath. Then energetic self-policing within and without each firm. And only one way to deal with miscreants: drop your shop or threaten the system, and you — Mr. CEO, Mr. CFO, and your directors — get lifetime bans from senior work in public companies.

No more of this absurd footsie, in which confessing stupidity is an adequate defense. You say that you thought the prices of houses would rise forever?

Sport, you are gone.

Note Philly/NY Fed average (dashed green), and that they are the first June data. Maybe other indices will follow, maybe not, but correlation is clear and justifies market reaction to their reports this week.

The 10-year T-note has held a new, lower range 2.95%-3.05%, pulling low-fee loans closer to 4.50% but not quite there. Although a bad idea to gamble with rates so low, the trend is down. All economic data show a new US “soft patch” beginning in April; China may be slowing more than expected in its fight against inflation; and Europe’s interminable can-kicking is closer to dominoes. In the last week, the most important event was Chairman Bernanke’s speech acknowledging the slowdown, insisting that the economy would pick up in the second half of the year, and making clear that the Fed has no plans for new stimulus. Some interpret that speech as confirmation that the Fed has shot its wad; others take it at face value, but disbelieve the happy outlook; and nobody found reassurance. NY Fed President Bill Dudley today delivered a carbon copy with explanations of why the economy should do better, an unimpressive list continuing the authorities’ quite fantastic obliviousness to the damage done by faltering housing and credit tighter than any in modern times.

The Dow Jones Industrial Average is currently at 11,957, down almost 200 points on the week.  Crude oil futures are currently trading at $99.14 per barrel, down about 50 cents on the week.  The Dollar was flat versus the Yen and slightly weaker versus the Euro.

Next week look toward Tuesday’s Producer Price Index and Retail Sales, Wednesday’s Consumer Price Index and Industrial Production, and Thursday’s Housing Starts, Jobless Claims and Philadelphia Fed Survey as potential market moving events.

Financial markets stayed in tight ranges all week — not at all calm, just waiting for more falling footwear.

Whistling noises from above: Greece is going to default, and soon, and its creditors are going to pretend that it hasn’t, but the default will trigger obligations under credit-default swaps, the contagion vector to banks, followed by other Club Meds wanting the same non-default default.

Perfesser Bernanke’s speech on Tuesday snipped the suspenders holding optimists’ pants: the economy has slowed but will do better in six months (uh-huh), no new stimulus coming. Trying to pull pants up while texting SELL! can produce accidental Weiners, even if perps have seen the Bernanke movie before.

OPEC refused to increase production, impoverished members enjoying high prices (Iran, Venezuela), Saudis understanding the damage to customers. The no-shortage story that speculators are responsible for $100/bbl no longer holds crude.

China is the great, global-economic black box. It is widely rumored to be in a slowdown, perhaps deeper than intended to hold down inflation, real estate bubble blowing at last, but nobody trusts official statistics, and all other observations are blind-men-with-elephant. China itself likely does not know what is happening to it. To the degree that the People’s Bank of China does, it ain’t talking — not straight, anyway. Best free-space blog is www.mpettis.com, which emphasizes how little anyone knows.

In perfect contrast, we in the US all but drown in good data. Withal, two problems: our leadership either refuses to read the obvious, or cannot agree what to do about it. This week the Fed released the mother of all data, at www.federalreserve.gov quarterly Z-1, which accounts for the flow and landing place of every dollar in the economy.

Through Q1’11, consumer credit continued to fall (ex-student loans) as it has since 2008. Total bank loans and leases have stopped declining for the moment, but are off 10% from the 2008 peak in a series that had not declined significantly since data began in 1950. Part of the current credit shortage is off-bank, in the collapse of “asset-backed securities.” Some ABS were the super-toxic mortgages for which Fannie is blamed (was $2.2 trillion, written down to $1.2 trillion… oops), but the rest, another $2 trillion has also collapsed to half the 2007 outstanding, mostly by payoff and little new issuance.

Second mortgages continue their slow slide, now $925 billion, down from $1.1 trillion in 2008. However, as CoreLogic reports that 40% of these loans are underwater, the presence of all $925 billion on financial-system balance sheets is an absurd fiction.

Another one: this week, Fed Vice Chair Janet Yellen spoke on housing. Refreshing, at first — the first top Fed official to devote a speech to the subject this year. Yellen is a “dove,” a believer in Fed intervention, a Democrat, and her speech began by describing over-tight credit as a principal cause of housing non-recovery. The second half of the speech advocates new regulations to tighten credit more. Germans have a wonderful word for Yellen’s thinking: Wolkenkuckcuksheim. (“Cloud-cuckoo-land”)

News headlines elsewhere trumpet the “$943 billion gain in household net worth.” And I have a bridge to sell to you. The two lines accounting for asset increase are stock values up in the quarter, and pension fund assets — stocks again. Maybe stocks stay up, maybe not. Overall household liabilities declined by foreclosure, but no decline for households not foreclosed, and a mixed blessing for those who were.

Two things matter to households: the money they have, and the equity in their homes, net of mortgages or free and clear. Z-1 money — deposits, money-markets — crept upward by about $100 billion. Aggregate values of homes clunked down another $339 billion. In 90 days. The next 90 will decline about the same. The national total value of US homes is now a little less than in 2003, a little more than in 2002. Down $6.6 trillion since 2007.

In the perverse world of mortgages and bonds, falling footwear means lower rates. If you qualify. And not enough lower to intercept the footwear, just following.

This chart does not look so bad, resembling a return to normal. And maybe prices will withstand the dumping of 5 million homes now in the foreclosure process.

Mortgage interest rates improved again this past week on economic data that was mostly weaker than expected.  Today’s employment report for May showed non-farm job gains of 54k on expectations of 185k new jobs.  Private non-farm jobs were expected to increase by 220k jobs.  As reported, 83k private jobs were created.  The ADP jobs estimate reported 38k new jobs on expectations that 170k jobs would be created.  The May unemployment rate increased to 9.1% on expectations that it would remain unchanged at 9.0%.  Weekly jobless claims showed filings at 428k on expectations of 413k filings.  Also of note, the Case Shiller Home Price Index fell by 4.2% year over year.  Other reports weaker than expected included the May Chicago Purchasing Managers Index, May Consumer Confidence, the May ISM Manufacturing Index, and April Factory Orders.  On a positive note, April Construction Spending and the May ISM Services Sector Index were better than expected.

The Dow Jones Industrial Average is currently at 12,167, down about 270 points on the week.  Crude oil futures are currently trading at $99.67 per barrel, down about $1 per barrel on the week.  The Dollar weakened versus both the Yen and Euro on the week.

Next week look toward Thursday’s International Trade and weekly jobless claims as potential market moving events.

Poor payrolls in May, another weak Case-Shiller home-price report, and a big deceleration in manufacturing have pushed down hopes, stocks, bond yields, and mortgages, now near 4.50%. However, the data do not support a return to recession: the ISM service-sector index actually improved in May 54.6 from 52.8 in April.

Today’s greatest frustration among mortgage people — worse than all the new and self-defeating rules, worse than volume too low to make a living, worse than turning away good applicants — is to watch the White House, Congress, and financial “experts” of all stripes discuss mortgage-market history, and attempt reinvention.

The Soviets did a more honest job with textbooks. Creationists have a better grasp of evolution. Little kids do better repeating a sentence down a long line of classmates. Daniel Patrick Moynihan: “You’re entitled to your own opinion, but not your own facts.”

None of us wants to see a repeat of Bubble lending. However, our national leadership, which could not see Bubble lending when it was happening, still doesn’t know what it was and who did it. Rather worse, it refuses to distinguish Bubble lending from the prudent standards prevailing from about 1995 back to 1934 (and beyond), and so reinvention has become a suicidal game of over-tightening and score-settling.

These guys, all of them, squirt the heart of the matter around the room like a watermelon seed, most from ignorance, too many on purpose. Really awful political axe-grinders, led by Peter Wallison and Edward Pinto of AEI, have invented this subprime definition: any Fannie-Freddie (“GSE”) ARM of any type, quality immaterial, any fixed-rate loan above 80% of value, any Fico below 660 — subprime!!!

A rose by any other name would smell as sweet. Got that. But names do matter. Hence a brief history of subprime time.

In the beginning, early 1990s, a subprime loan was by definition one that the GSEs would not buy. Sub-prime. Less-than. And the term had the attractive cachet to borrower dopes that its interest rate might be below “prime.” Synonymous subprime terms: “B, C, D” credits, inferior to “A” (I never could figure them out — I couldn’t tell B borrowers from D, and none of them deserved a loan).

At the same time, “Alt-A” lending began on a parallel track: these were “A” loans, but not in the GSE playbook (a rental-property loan in Jumbo amount, for example). Alt-A subsumed prudent “stated-income” loans, the term appearing at S&Ls in 1980, the lending approach as old and solid as dirt: 25%-40% down, fine credit, good story about unusual income, deep and documented post-closing reserves.

In the late ‘90s, the used-to-be-great investment banks discovered that they could securitize trash, trick rating agencies, and sell bad paper at pretend high yields all over the world. Their appetite for subprime and Alt-A loans became ravenous.

By 1997, stated-income required only 20% down, then 10%, and by 2002, nothing. WaMu and World sipped and then sucked the Kool-Aid. The Alt-A book was similarly suborned (Lehman’s ALS, Bear). But the worst, the absolute dead worst: loans subprime by construction, by their terms guaranteed to fail, the infamous 2/28 and 3/27. Fixed for a couple of years, then jump 6% above Libor.

The GSEs had nothing to do with the racketeering described above. They bought a trivial amount of AAA subprime securities, and too many loans with Ficos under 660, about 15% of their total (however, “A-minus” was not subprime). Through 2005 the flood of bad credit perversely caused bad loans to perform, but then they were first to default in waves, causing a whirlpool that has dragged in millions of “A” loans.

Today the GSEs are terrified for their lives, standards over-tightened for political protection. There are no S&Ls, and over-regulated local banks cannot fill the gap. The giant commercial banks have forever hated all other mortgage lenders — embarrassed by them — want the business all their own, but cannot handle the volume, nor carry the paper even when consumers are forced to pay into a new protection racket.

Get the GSEs back in the game, or take the (continuing) consequences.

This chart exposes the Big Lie blaming Fannie and Freddie for the disaster, and another fable: that “private” mortgage markets are the sloution. “PLS” = Private Label Securities; note early-default whirlpool.

Current as of today. Not a “recovery.”