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The S&P Case Shiller December 2009 report of existing home sales showed year-over-year -3.1% price declines averaged across 20 major metropolitan areas (see table below). Notable declines for the year-over-year period were Las Vegas -20.6%, Tampa -11%, and Detroit -10.3%, and Phoenix -9.2%. But comparing YOY November to YOY December, all 20 metro areas showed improvement. Also Boston, Dallas, Denver, San Diego, San Francisco, and Washington are positive (see returns in table below). Home prices are now at similar levels to what they were in summer 2003. The 10 and 20 city home price composites saw improvements in their annual rates of return every month of 2009.

S&P acknowledged the obviously improved condition of the housing market versus the beginning of 2009, but said the rate of improvement since summer 2009 hasn’t been sustained. As a reminder S&P also said two months ago that a resumed decline in home prices like in the early-1980s seems unlikely because our monetary policy is more consistent than it was then. See our report from two months ago for more on that.
Case Shiller December 2009 Home Price Index

Below is Fed chairman Ben Bernanke’s full testimony he was scheduled to deliver to the House Financial Services Committee today but the hearing was postponed due to weather. This testimony, when it does happen, will be followed by detailed Q&A which we will cover in more detail. For now, the most important point to highlight is from the Monetary Policy and Asset Purchases section below where Bernanke discusses various measures on how the Fed will unwind its unprecedented market stimulus. He points out in the excerpt here the biggest focus is likely to be paying interest on bank reserves:

…The Federal Reserve’s [various asset] purchases have had the effect of leaving the banking system in a highly liquid condition, with U.S. banks now holding more than $1.1 trillion of reserves with Federal Reserve Banks. A range of evidence suggests that these purchases and the associated creation of bank reserves have helped improve conditions in private credit markets and put downward pressure on longer-term private borrowing rates and spreads. The FOMC anticipates that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. In due course, however, as the expansion matures the Federal Reserve will need to begin to tighten monetary conditions to prevent the development of inflationary pressures. The Federal Reserve has a number of tools that will enable it to firm the stance of policy at the appropriate time. Most importantly… more…

Cash-Out vs. Cash-In Refi Stats
Remember when cash-out refinancing was the bulk of our business, and any investor who would tweak their price slightly on this product would either see all or none of the business? Four or five years ago, that category of loan hit 88%, which, according to Freddie Mac, put another way, means that 9 out of 10 refi borrowers were increasing their loan balance! Now, however, the trend has moved in the opposite direction: in Freddie’s latest quarterly survey of refinancings, 33% of homeowners put cash into the deal to lower their mortgage balances, which was the highest ever, and cash-out refi’s are down to 27%. And why not, IF you have the cash – you’re certainly not earning much on it in the bank – and if you’d like to qualify for a better rate by lowering your LTV. Columnist Ken Harney points out that it is one form of savings plan – just like it used to be!

Treasury Auctions Watering Down Bond Market
Fixed income securities weren’t helped by the $81 billion of securities to be sold this week, on top of the weather issues. The 3-yr auction was yesterday, 10’s today, 30’s tomorrow. The only scheduled news for today is the Trade Balance numbers. more…

Still Hard Times For Jumbo MBS
Why wouldn’t investors want to gobble up securities made up of jumbo loans? Well, how about delinquencies? In a story out of Business Week, “US prime jumbo mortgages at least 60 days late backing securities reached 9.6% in January from 9.2% in December, the 32nd straight increase for “serious delinquencies,” according to Fitch Ratings.” This is almost 3x the rate in 2008. Folks in the business know that non-agency securities don’t have the guarantees/insurance of Freddie, Fannie or Ginnie Mae. So where do these beasts trade? According to the article, last March they hit a low of .63 (so a loss of almost 40 cents on the dollar versus the original principal balance) but are now up into the low 80’s.

This raises the question “Why would an investor buy a pool of mortgages?” In the past, banks, who were, and still are, making fees on originating the loans, didn’t have to hold on to them, but instead could pool them and make them attractive to buyers. The buyers did not hold the individual mortgages, but parts of huge packages of them. Kind of like thinking about how delicious the Orange Chicken is at Panda Express and not having to think about how it got there. On top of that, the rating agencies told investors that the pools were safe, especially so in light of recent appreciation trends. Unfortunately now the rating agencies can’t quite say that, and are having difficulty trying to figure out how to rate any pool of mortgages. more…

Economic Worries
Yesterday’s stock market drop dominated the financial news. And a slowing economy helps rates and mortgage loan agents, right? (It’s a two-edged sword.) So the markets did not pay much attention to Non-Farm Productivity increasing over 6% during the fourth quarter of 2009. Efficiency in the last nine months of 2009 soared at the fastest pace since 1966 as companies cut worker hours even after sales stabilized. Factory Orders for November were up 1%, better than expected. And 4Q09 GDP was 5.7% at the first reading last week. But the focus, and one of the reasons given for stocks taking a beating, was on Jobless Claims which hit a 7-week high.

There is certainly a lot to be nervous about. There is the concern that around-the-world budget deficits will need to be financed by issuing more debt. California, with the 8th largest economy in the world, is continuing to have budget problems. On top of all that, oil prices declined over 5% while gold prices also fell, down over 4%. The dollar was weaker to the yen, but firmer to the euro as the risk aversion trade returned, and this helped Treasuries and mortgage security prices, dropping rates to December levels. more…

Fed chairman Ben Bernanke has been confirmed by a 70-30 Senate vote to continue in a second term. He now needs to decide how and when to unwind all the stimulus created to help America through the credit crisis. Some stats on the Fed’s balance sheet below from Bloomberg. Also noteworthy is their survey of economists showing 30yr fixed rates could rise 0.3% when Fed mortgage bond buying ends March 31. We don’t know more details about the survey and whether that means exactly by March 31, but that’s how the wording sounds (see below). Our outlook calls for rates to rise 1% during 2010.

Bernanke has increased government backstops to banks and other firms and used the Fed’s balance sheet to revive credit, including through the purchase of $1.25 trillion in mortgage backed securities. more…

Treasury Secretary Tim Geithner is testifying before congress this morning about the AIG bailout in Fall 2008. At issue is whether AIG counterparties should have been paid in full for AIG’s obligations to them using government aid. As the testimony points out, Treasury and the Fed were mostly concerned about broad economic meltdown and had some extremely tough choices to make without the luxury of time, and as Geithner said: “It is very hard to judge a decision through the prism of hindsight and on the basis of the events that followed.” (see this quote in bold below for Geithner’s points that follow it).

The testimony is clear, just like Henry Paulson’s many appearances before congress were during the heat of the crisis. But this rationale gets lost in the chatter. The most obvious example of chatter this morning was when a senator compared the bad decision of the AIG bailout in the heat of crisis to the bad decision of Minnesota Viking quarterback Bret Favre losing a super bowl bid to the New Orleans Saints last weekend by throwing an interception in the heat of the NFC championship game. more…

The S&P Case Shiller November 2009 report of existing home sales showed year-over-year -5.3% price declines averaged across 20 major metropolitan areas (see table below). Notable declines for the year-over-year period were Las Vegas -24.5%, Phoenix -14.2%, and Detroit -13%. Conversely, San Francisco has reported eight consecutive months of positive returns, San Diego has reported seven and Los Angeles and Phoenix six. Also Dallas, Denver, San Diego, and San Francisco turned positive (see returns in table below). Comparing YOY October to YOY November, all 20 cities in the composite showed lesser rates of decline. Both the 10 and 20 metro area Composites show that home prices are at similar levels to what they were in mid-2003. November is the tenth straight month that the YOY rate of decline has decreased, and the third consecutive month these statistics have registered single digit declines after 20 consecutive months of double digit declines.

S&P called these results a “mixed picture” because only five of the markets saw price increases in November versus October, and four of the markets (Charlotte, Las Vegas, Seattle and Tampa) posted new low index levels. This despite some of the improvements discussed above. As a reminder S&P also said last month that a resumed decline in home prices like in the early-1980s seems unlikely because our monetary policy is more consistent than it was then. See our report last month for more on that.
Case Shiller November 2009 Home Price Index

Yesterday President Obama proposed a 10-year fee on large financial services firms to make sure taxpayers are repaid for the TARP and other massive assistance the government provided to those firms during the heat of the credit crisis in 2008. The fee is intended to raise about $90b over the next 10 years, and according to a Marketwatch report, 10 firms will repay 60% of the tax.

The U.S. has recovered most of the $700b in TARP funds but this is an effort to accelerate the original repayment plan terms that weren’t required until 2013 under original TARP provisions. Below is a full excerpt of the Obama proposal, and here’s the White House proposal on the bank repayment program in PDF format.
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The CEOs of Goldman, Bank Of America, JP Morgan Chase, and Morgan Stanley went before the Congressional Financial Crisis Inquiry Commission today to revisit what happened during the heat of the financial crisis in 2008. Yesterday the NYT published a good list of questions that should be asked. Some are populist propaganda, but many are relevant and legitimate. Perhaps the best question of all, that gets at the root of the entire issue, was offered by David Stockman, OMB Director under President Reagan. The question is below, but unfortunately the political pitchfork waving in a key election year will likely overshadow the ability to get to the root of that question. And even if Congress can get to the root of the banking problems, take a look at this picture of the testifying CEOs. Do these expressions (especially Blankfein and Dimon, the two on the left) look remotely contrite or willing to play ball?

Without the Troubled Asset Relief Program, Wall Street banks would not have survived the shock to the financial system that occurred in September 2008. Nor would they have subsequently accrued large profits and bonus pools in 2009. Shouldn’t a substantial share of those bonus pools be sequestered on bank balance sheets for several years to increase the banks’ capital levels and shield taxpayers against another bailout?/blockquote>