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How Is Unemployment Calculated?
Here in the US, the unemployment rate is estimated by a household survey called the Current Population Survey, conducted monthly by the Federal Bureau of Labor Statistics. The unemployment rate is calculated by dividing the number of unemployed persons by the size of the workforce. An unemployed person is defined as a person not employed but actively seeking work. The size of the workforce is defined as those employed plus those unemployed.

Largest Employer In U.S.
Who is the largest private employer in the United States? Wal-Mart! 2.1 million of us work there. In the public sector, the US Government employs about 2% of the nation’s workforce. The US Postal Service is the largest civilian employer, with about 600,000 folks. Private sector job growth continues to be the key to a sustainable economic recovery, especially if we expect to see much of an improvement in housing prices. Economists continue to believe the probability of a double-dip recession remains low, but are cautious. Heading into this employment data, most believe that if private sector job creation does not improve (or at least hold-up) in the near term, there will be significant ramifications on the economic horizon ranging from the outcome of the November mid-term elections to the likelihood that the Fed proceeds with an additional dose of quantitative easing. more…

No More MBS Buying From Fed
Rates continue to trend lower, helped yesterday by the release of the FOMC meeting’s minutes which alluded to the possibility of the Fed reinvesting in MBS’s. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can’t qualify, not those that don’t have jobs or those that simply pay cash for houses.) “A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases,” the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.

FDIC Banks Report $22b Aggregate Profit
“It’s hard to make a comeback when you haven’t been anywhere.” Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses. 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…

What If All Mortgages Were 1% Lower?
A Wall Street acquaintance of mine wrote to me about dropping trillions of dollars of mortgages by 1%. “I think that something like it may just happen. Many people I’ve talked to have said the same thing: ‘The money would go directly to the borrowers to help our economy, and totally bypass our government. There would be no claims of the government wasting the money on projects or programs at the taxpayer’s expense.’”

TARP Taxpayer Cost Continues To Drop
The government’s $700 billion bailout of the financial system (TARP) will be argued about well into the future, but the cost to the taxpayer for TARP continues to drop. The Congressional Budget Office projected that the overall deficit impact of the TARP will be about $66 billion, down from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a significant drop from the initial projection of $350 billion. TARP, as we all recall (or maybe not) gave the government the authority to use $700 billion to prevent the collapse of the financial industry (and a few automakers along the way). Banks are repaying bailout money and automakers are continuing to payback their loans. more…

Guns & Mortgages
This story speaks for itself, here’s the link and the epic lead paragraph below: Prosecutors: Mortgage Worker Got Drunk, Shot Computer Server

A Salt Lake City mortgage company employee allegedly got drunk, opened fired on his firm’s computer server with a .45-caliber automatic, and then told police someone had stolen his gun and caused the damage. more…

Higher 2010 Rate Forecasts All Wrong
At the start of the year, not only were the smartest guys in the room talking about how mortgage rates would go up when the Fed ended their $1.2 trillion purchase program, but that rates would be going up in general given the expected economic rebound. Of course, neither turned out to be true and every originator can’t believe their good fortune by experiencing yet another refi boom, assuming their rolodex has borrowers with equity and decent credit.

Treasury Auctions Next Week
Yesterday’s economic news did nothing to suggest that higher rates will arise in the near future – assuming foreign investors don’t mind the US’s level of debt compared to GDP. The US Treasury said it will sell $109 billion of government debt next week, not far off analysts’ expectations for issuance of $107 billion to $108 billion. The Treasury will sell $7 billion of reopened 30-year TIPS on Monday, then $37 billion of 2-year notes on Tuesday, $36 billion of 5-year notes on Wednesday, and $29 billion of 7-year notes on Thursday. more…

Loan Costs Up 37% Nationally
Loan costs are up 37% nationally this year, and 41% in Illinois, according to Bankrate Inc. Lenders absorbed a certain portion of this increase as the government began requiring lenders to provide more accurate good faith estimates of closing costs or face penalties. Nationally, average estimated closing costs rose to $3,741 from $2,732. The most expensive state was New York, where costs averaged $5,623, and Texas, where costs averaged $4,708. It includes lenders’ origination fees and title and settlement fees. It does not include property taxes, recording fees or homeowners insurance.

Fate of Fannie & Freddie
Freddie Mac announced that it will be asking for an additional $1.8 billion cash infusion from the Treasury Department after reporting a 2nd quarter loss of $6 billion. ($6 billion is better than the $8 billion lost during the 1st quarter, but still…) These numbers include stock dividends payable to the US Treasury. So I guess Freddie pays a dividend, and then basically asks for it back in order to continue functioning? There continues to be conjecture about Fannie/Freddie’s fate. The latest comes from an ex-Fed Governor, William Poole, and is worth a skim. Ultimately, of course, if those companies leave the US mortgage market, and are replaced by private investors, it will have a huge impact on both small and lenders. more…

Rates Lower Still
Mortgage prices rising (agency MBS’s, not non-agency stuff). Not only are all rates dropping, but the spread between Treasury and MBS’s is still fairly tight – further helping mortgages. The demand for agency MBS cash flows is strong, but the primary market can’t churn out enough supply. Investors know that, on average, current mortgages have sparkling credit quality, and that the risk of investing in them is minimal since both Treasury and mortgage securities are firmly backed by the same entity: the US Government. Whatever spread now exists is based not so much on fear of default, but more fear of early pay-off.

Thursday saw a lot of selling in agency MBS’s, but on Friday it dropped off a cliff, nearing $1.2 billion. Regardless, rates continue down. The 10-year U.S. Treasury note yield fell to a fresh 16-month low in Europe today with weakness in Japan and in equity markets stimulating demand for U.S. government debt – we’re down to a yield of 2.62% (weren’t we just around 3%?) and mortgages are better between .125 and .250 in price this morning. Overall it’s a pretty decent news week. Today is the Empire State manufacturing index; tomorrow will be a bigger day with Housing Starts & Building Permits, Industrial Production & Capacity Utilization, and the Producer Price Index. Jobless Claims, Leading Indicators and the Philly Fed manufacturing index will be released on Thursday. more…

FHA Mortgage Insurance Increasing October 4
FHA mortgage insurance will be increasing as of October 4, 2010 because the FHA insurance pool only has $3.5 billion in cash and Treasury securities left in its “capital reserve account” The money sitting in the CRA represents a 71% decline in just the last three months. The Mutual Mortgage Insurance Fund (MMIF) capital ratio has fallen below its statutorily mandated threshold. On the good news side of the ledger, from October through June the FHA had 19,310 fewer insurance claims on loans gone bad and paid $3.7 billion less than projected by the audit, perhaps due to solid foreclosure efforts although some feel that this is only because some states are experiencing a backlog in processing foreclosures.

Under HR 5981, FHA plans to adjust its annual mortgage insurance premium (effective with any new loans October 4) from .55% to 1.55%, yielding approximately $300 million per month in value to the FHA Mutual Mortgage Insurance Fund at a time when its reserves are perilously low. To offset this, FHA will lower its upfront premium from 2.25% to 1.25%. This will be effective for 30yr fixed loans. As you can guess, mortgage insurance companies are pleased with this news, since annual FHA premiums will be closer to annual PMI premiums and that could encourage lenders and borrowers to turn to non-FHA products for more mortgages. Borrowers currently shopping for FHA loans should revisit their strategy with their lender given this new news. more…

Out of the 2,300 pages in the soon-to-be-law financial reform bill, none of them attempt to reform Freddie or Fannie – most say because F&F deserve their own reform bill and that will happen in 2011 after the U.S. Treasury completes its study. Fannie was created in 1938 to help buy mortgages from financial institutions and free up capital that could, in turn, be lent to consumers by banks, and Freddie was created in 1970 to do the same for S&L’s and to keep Fannie from being a monopoly. Investors – foreign and domestic – had the belief that loans backed by Freddie and Fannie carry an implicit US government guarantee. These two GSEs functioned as quasi-private companies that bought, bundled and securitized trillions of dollars of mortgages, in the form of mortgage-backed securities, and currently hold or guarantee more than $5 trillion of them. (There are others GSE’s – Government Sponsored Enterprises – like the Federal Home Loan Banks, the Farm Credit System, and Farmer Mac. Of course there is HUD & the FHA, and the VA program.)

The problem is, of course, that taxpayers, through the US government, have put up about $150 billion to keep them afloat, their value (and the value of the stock) has plunged, and analysts expect many more billions will be required to keep them solvent. The 25 basis point “guarantee fee”, added to the interest rate of the borrower, is not enough. Foreign investors who own their debt are concerned about the safety of their holdings, in turn requiring a higher return on their money for the additional risk – and to lower the risk we have effectively nationalized the two companies although their debt is not included on the government’s balance sheet. In fact, the Congressional Budget Office cannot audit either one, and if one combines the government bailout money of F&F with the existing budget deficit, it totals about $16 trillion, over 100% of our GDP. more…