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Average Rate Is 6% on $11t In U.S. Mortgage Debt
Yes, rates are still great, even with the little uptick we saw last week. But interestingly, the effective mortgage rate outstanding on all $11 trillion of US household residential mortgage debt remains basically unchanged at 6%. Originators on the front lines know that even though rates are at all-time lows, a huge proportion of households cannot refinance due to credit or value issues. So unlike previous low-rate cycles, when prepayments increased predictably, this time around is different.

Fannie Mae Zero-Down Loan
A new program from Fannie Mae called Affordable Advantage is available to first-time home buyers in Idaho, Massachusetts, Minnesota and Wisconsin, and created in conjunction with the states’ housing finance agencies. Proponents say that low down payments themselves were not the problem, except when combined with other risk factors like adjustable rates or lax underwriting. Various state agencies have continued to make loans with low down payments to those who may or may not have the best credit. Affordable Advantage loans are 30-year fixed mortgages, with mandatory homeownership counseling, available to people with credit scores of 680 and above (720 in Massachusetts). The buyers have to put in $1,000 and must live in the homes. more…

Why Banks Aren’t Lending More
Why aren’t large depository banks loosening their credit guidelines and lending more money? Market watchers suggest that one reason is the buy-back issue: FNMA & FHLMC have sizable losses on bad loans and are considering forcing eleven large lenders (the biggest being BofA and Chase) to buy back loans which would result in losses of over $100 billion. Not only are banks grappling with that potential issue, but there may also be a lack of confidence in the health of our economy banks, businesses, and consumers. No one wants to borrow money to buy a house or expand their business if they aren’t confident about their job or more optimistic about the economy. And right now, as there often is, investors can’t seem to decide if the bond market (which is pointing toward further weakness) or the stock market (pointing toward stability and moderate growth) is more correct about predicting the future health of the US economy.

Is There A Bond Bubble & Are Rates Set To Spike?
Rates have an inverse relationship with fixed-income prices, meaning that when bond prices go up, rates go down. With the major drop in rates in the last several months comes talk of a “bond market bubble”. Most economists do not feel that we’re in a bond market bubble where there is a disconnect between prices and fundamental reality, but it is still worth talking about. All bubbles follow a common pattern, whether it concerns high-tech stocks, tulip bulbs, or real estate. Initially prices increase when a new opportunity presents itself with the prospect of good returns. Investors become more optimistic and lenders become less risk-averse. Suddenly everyone is chasing prices regardless of fundamental values, expectations become unrealistic, and speculators who are more concerned with short term gains rather than long term returns flood the market. But clearer minds begin to prevail, and insiders start to sell. Asset prices stop rising, panic sets in, and investors rush to unload positions before the next guy, and prices crash. more…

Rate Snapshot
Conforming, Jumbo, and FHA rates ended last week at record lows again (see rates below), which makes a two-month streak of record lows. A significant rate spike is not expected in the near future, but it’s also not likely rates will stay this low. Here’s why rates could tick up next week.

How Bond Markets Affect Mortgage Rates
We will see June Retail Sales figures Wednesday, June business inflation figures Thursday, and June consumer inflation Friday. These reports are important, but will likely show continued tame inflation and tentative consumers, which won’t surprise rate markets. more…

Loan Apps At 9 Month High
The Mortgage Bankers Association reported that apps were up almost 7% last week, hitting a 9-month high mostly due to refinancing. And as one would expect, purchase apps sunk to a 13-year low. Refi’s were up over 9% last week, but purchase apps fell 2%.

Dividend vs. Bond Yields: Time To Buy Stocks?
Here is an interesting investment phenomenon. No one can foretell the future, but currently the dividend yield on the Dow Jones Industrial Average’s 30 stocks is roughly 3%. If you purchased a 10-yr Treasury Note, you would earn a risk-free yield of about 2.92% for the next ten years. So if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury notes! Of course, stocks and bonds could both go up or down in price in the next 10 years, but still, stocks are increasingly attractive, on a relative basis, when compared to bonds. Heck, the dividend yield on many utility stocks is between 5-6%, and who doesn’t want to make money every time someone recharges their Blackberry or turns on their air conditioning? more…

How Many Can Refi vs. How Many Qualify
There was a story in the Wall Street Journal wondering “But if rates are so low, why isn’t demand for new loans picking up? For one, most borrowers who could refinance probably did so last year, when rates fell below 5% in March, August, and December. Many borrowers with an incentive to refinance can’t qualify with today’s tougher lending standards or don’t think it’s worth paying the closing costs on a new loan. Credit Suisse estimates that around 61% of all borrowers with a 30-year fixed rate mortgage could lower their mortgage rate by 0.75 percentage point at current rates. But analysts estimate that only 38% of those borrowers could actually qualify at current standards. More borrowers can’t qualify because they don’t have enough equity in their homes, their credit scores have taken a hit, or they’ve seen their income reduced.”

Covered Bonds Rejected By Reform
It is one thing to pass financial reform, and other to actually implement and enforce financial reform. That may be what faces the mortgage industry after the Dodd-Frank (nicknamed “Frank ‘n Dodd”) reform bill passes. Votes on flood insurance and the extension of loans funding under the First Time Home Buyer Tax Credit are due this week. Due to opposition from the Treasury Department, an amendment that would allow covered bonds to get a start in the U.S. mortgage market was blocked (wait a second, didn’t previous Treasury Secretary Hank Paulson advocate for covered bonds during the crisis?). Federal regulators will oversee appraisal management companies that are affiliated with federally insured banks under the Dodd-Frank regulatory reform bill. more…

Why You Shouldn’t Give Out Your Social Security Number On The Radio
Does the name “Todd Davis” ring a bell? He is the CEO of a company called LifeLock, and he made the news a while back by broadcasting his Social Security Number in radio ads to show confidence that his identity couldn’t be stolen. Phoenix New Times reported that, based on police reports, Davis appeared to be the victim of identity theft at least 13 times, which was 12 more times than previously known. LifeLock’s current ad slogan is “Real Protection. Real Peace of Mind.” But folks apparently rose to the challenge of using his identity! The article is a little sensationalized, but the moral of the story seems to be what I tell my kids: Don’t give out your social security number on the radio.

Reinventing Ratings Agencies
Lookout Moody’s, S&P, and Fitch – there’s a new kid on the street. Jules Kroll, founder of Kroll and current principal of K2 Global Partners, plans to launch Kroll Bond Rating this summer. The man credited with modernizing the intelligence and security sectors will target mortgage-backed securities (MBS). For those playing at home, there has been 1 (one) non-agency MBS issued in 2010. His plan is that instead of relying on the issuer-paid model for running the rating agency, a consortium of institutional investors will own 30% to 40% of the company and before investing in a product will require a Kroll bond rating. Institutional investors would include public pension funds, corporate pension funds, endowments and universities, with each owning a small segment of the company. Issuers such as Redwood Trust will have to pay for the rating up front, with the actual rating based more on due diligence and auditing rather than basic assumptions used in the past by existing rating agencies. more…

PIMCO head Bill Gross just published his June Investment Outlook in which he explores whether developed countries’ debt burdens stunt economic growth and investment returns. His conclusion: the world’s debt obligations mean a likely outcome for investors is 4-6% annualized returns for a diversified portfolio of stocks and bonds. Regarding Greece, he said that “there is no reasonable scenario which would allow Greece to grow its way out of” its debt burdens, and that its debt would have to be restructured a year or two years down the road. Regarding the U.S., this is what Gross had to say: more…

Summary of $962b European Bailout
Although recent indicators suggest that the Euro-zone economy (16 countries) is slowly and weekly expanding, a default by Greece or anyone else (PIGS: Portugal, Ireland, Greece, Spain) would slam the European banking system, and in turn ours. As it turns out, the European Union (EU) and the International Monetary Fund (IMF – almost 20% funded by the US) joined forces to create a loan package/bond purchase plan for $962 billion (759 billion euros)—more here and here. Of course, Greece has yet to succeed with its austerity measures – retiring at age 55 with full pay sounds pretty good.

The aid package created this morning in Europe, along with the huge rally in stocks, once again overshadows any “short term” jobs number. But Friday’s unemployment data does point out an interesting feature of the make-up of the employment data. Nonfarm employment rose by 290,000 jobs in April. But the unemployment rate increased, moving from 9.7% to 9.9%. How does that work? Ordinarily, a jump in nonfarm payroll would push the unemployment rate lower. Last month, however, individuals who had previously given up looking for work (and hence were no longer considered to be part of the labor force) sensed improving economic conditions and resumed their job search. So while 805,000 individuals entered (or re-entered) the labor force in April, only 550,000 found jobs. The remaining 255,000 who didn’t find jobs are now added to the tally of the unemployed, hence the unemployment rate increase to 9.9% from 9.7% previously. Many jobs came from relatively low-paying industry classifications, or were part-time jobs, and so hourly earnings were unchanged. In fact, the household data shows part-time jobs have accounted for nearly 65 percent of the jobs added over the past three months. more…

How Lenders Create Rate Sheets
Zero-point rates on loans up to $729k held at record lows for the second week last week even though mortgage bond levels might suggest rates would have dropped further. Jumbos also held steady at very attractive levels. Mortgage bonds benefitted as the EU/IMF’s $140b Greece bailout caused investors to sell European debt and buy more conservative U.S. mortgage and Treasury bonds. When bond prices rise on these buying rallies, rates drop.

But it’s not actual mortgage rates that drop when mortgage bond prices rally, it’s mortgage bond yields (the rate of return on those bonds) that drop. Then lenders re-price mortgage rate sheets based on those lower yields. This lowering of mortgage rates didn’t happen to quite the extent that lower mortgage bond yields might suggest because last week was wildly volatile. Mortgage bond prices swung more than 100 basis points Thursday and Friday—in the bond world, this is similar to the massive swings we saw in the Dow Thursday (when it was down 1000 at one point). more…

Saw this picture on Barry Ritholtz’s site which came originally from NYT. A useful diagram of Europe’s debt situation. According to NYT “Banks and governments in these five shaky economies owe each other many billions of euros (converted here to dollars) and have even larger debts to Britain, France and Germany. Arrow widths are proportional to debt amounts.” Click the picture for full size image that’s part of the NYT feature on this topic.