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Rates Up This Morning, Slow Economic Week
Last week rates were moved around by economic data. By Friday rates had improved slightly, and locks appeared to be picking up a little, but then a better-than-expected employment number pushed them higher. Fortunately for mortgage rates, the spread between them and the 10-yr Treasury (still a benchmark, in spite of actual rates more closely tracking 5-yr and 7-yr notes) is the lowest it has ever been. This week won’t have as much to chew on: the Trade Balance & Jobless Claims will be released on Thursday, and Retail Sales, Consumer Sentiment, and Business Inventories come out Friday. And on Tuesday, Wednesday, and Thursday the US Government will be selling securities to finance its activities: $74 billion broken down by $40 billion in three-year notes, $21 billion in 10-year notes and $13 billion in 30-year bonds. Ahead of this the 10-yr yield is up to 3.72% and mortgage prices are worse by between .125 and .250 in price.

Four More Banks Fail
When I was a kid, I used to pray every night for a new bike. Then I realized that God doesn’t work that way. So instead I stole a bike and asked Him to forgive me. Neither strategy worked for four more banks, as the FDIC shut them down Friday (without finding buyers for two of them leading to losses for depositors who had balances exceeding the agency’s insurance limits). Sun American’s (FL) deposits and assets were acquired by First-Citizens Bank (NC) at a cost to the FDIC of $103 million. The Bank of Illinois was “absorbed” by Heartland Bank (IL) at a cost to the FDIC of about $54 million. Waterfield Bank (MD), at a cost to the FDIC $51 million, and Utah’s Centennial Bank are now being run by the FDIC, with the help of Zion’s Bank, at a cost of about $96 million. more…

Market Reaction To Greece’s Plans, ADP Shows 20k Jobs Lost
Greece announced a well-publicized $5.4 billion plan to cut its deficit (3rd one in 3 months), which of course has their workers protesting. Taking a longer term view, these measures should help the country. Depending on the news from Greece, money either flows in to or out of our Treasury market with the “safe haven, flight to quality” attitude. Greece cutting its massive budget deficit by 4% is obviously a help. (10-yr Notes in Greece yield about 6 %.) ADP showed February private sector jobs declining 20,000, with a back-month revision. Later this morning we’ll see some ISM numbers, and the Beige Book, but overnight (and for now) the rate markets are pretty quiet with the 10-yr sitting around 3.63% and mortgages slightly better given some intra-day price improvements yesterday.

Foreign Investment … In Detroit
Foreign intrigue is always interesting (check today’s joke at the bottom) as is a foreign report (in this case, British) on property values in Detroit. $1 for a house sounds tempting. more…

What Economic Stats Are Doing To Rates
Are we heading for lower rates, or higher rates? Certainly there is no inflationary pressure, although GDP for the fourth quarter (generally thought of as “old news”) was revised slightly higher, and was the strongest quarter of economic growth in more than six years. But Existing Home Sales decreased over 7% in January and was much weaker than expected. At over 3 million units available for sale, at the current pace this is almost an eight month supply. And for the sales in January, 38% were “distressed” sales which include foreclosures. (Maybe we’ll get another tax related surge in the coming months based on the April 30th date, maybe not.)

Also on Friday we had the Chicago Purchasing Managers Index show a little increase in February, but the Michigan Consumer Sentiment Index dropping slightly from January’s levels. But how do Purchasing Managers stack up against news from Greece, or the level of foreign interest in buying our debt? They don’t. The threat of ratings cuts for Greece fueled demand for the safety of U.S. debt and Federal Reserve Chairman Bernanke pledged to hold interest rates at a record low – so don’t look for (short term) rates moving much higher. But continued faith in U.S. economy could fade quickly without signs that Congress is crafting plans to address the very large deficit in which we find ourselves – Bernanke believes that deficits need to be brought down to 2.5% to 3% of the nation’s gross domestic product to be sustainable. more…

NAR’s Proposal for Fannie/Freddie
My daughter and I went through the McDonald’s take-out window and I gave the clerk a $5 bill. Our total was $4.25, so I also handed her a quarter. She said, “You gave me too much money.” I said, “Yes I know, but this way you can just give me a dollar bill back.” She sighed and went to get the manager, who asked me to repeat my request. I did so, and he handed me back the quarter, and said, “We’re sorry but we could not do that kind of thing.” The clerk then proceeded to give me back $1 and 75 cents in change.

Numbers can really be confusing. And when you are dealing with companies that back half of the $11 trillion home loans, things become even more confusing. What would you do about the role of the agencies in the mortgage industry? The National Association of Realtors has put forth a proposal to convert Freddie & Fannie into nonprofit corporations that would largely leave the mortgage-finance giants intact. Of course, the NAR or anyone else just can’t snap their fingers to make this happen: the proposal is likely to meet stiff political resistance because of the bail out money already spent and Congress’s desire to make bold changes. NAR suggests that unlike a federal agency, the new government non-profit authorities will function as self-sustaining organizations, without needing annual appropriations from Congress and without a profit motive but with government backing and guarantees. MI companies would continue to mitigate risk on loans above 80% LTV, and MBS guarantee fees would still be paid by originators. Of course no one wants to endanger the currently fragile housing and credit markets, least of all the NAR and Congress, so look for this process to be a very long and involved one. more…

Treasury vs. MBS Performance
The $16 billion 30-yr bond auction yesterday almost seemed like an afterthought with traders focused on the buyback news. The 10-yr yield was well above 3.60% (not good), and the 30-yr yield came in at 4.72% – the cheapest level a 30-yr auction has come in at since June. But at least it is out of the way! Current coupon mortgage securities are now trading at a yield above the 10-yr of about 66 basis points, and this spread may go even lower if the markets feel that delinquency risk is minimal. Since the end of December the yield on the 10-yr has dropped by 40 basis points (from 3.92% to 3.54%) and now we have given a portion of that up.

Hope For Mortgage Brokers?
Is there hope for mortgage brokers? Many believe so, and this is one indication of that. more…

Dallas Fed President On Fed MBS Buying
Federal Reserve Bank of Dallas President Richard Fisher weighed in with his thoughts on what will happen when the Fed ends their MBS buying program. He believes that the spread between Treasury securities and mortgage securities is abnormally low, and will increase, but said he believes the mortgage market will be fine after the central bank ends its purchases.

Bernanke’s Exit Strategy Summarized
Fed Chairman Bernanke’s testimony, which addresses concerns about the end of the purchases of $1.25 trillion of agency MBS and about $175 billion of agency debt securities at the end of March, was read yesterday. In the statement, Bernanke said the interest rate paid to banks on excess reserves held at the Fed (currently over $1 trillion!) may, for a time, replace the Fed funds rate as the main operating target for policy. Raising the rate would give banks an incentive to park more funds at the Fed instead of lending it out to companies or households, which would slow things down should it come to that. Conversely, reducing the rate, and therefore the quantity of reserves, could put more money out into the system. The Fed could also go back to using reverse repurchase agreements (reverse repos), as a means of absorbing reserves from the banking system. In a reverse repo, the Federal Reserve sells a security to a counterparty with an agreement to repurchase the security at some date in the future. “I currently do not anticipate that the Federal Reserve will sell any of its security holdings in the near term, at least until after policy tightening has gotten under way and the economy is clearly in a sustainable recovery. However, to help reduce the size of our balance sheet and the quantity of reserves, we are allowing agency debt and MBS to run off as they mature or are prepaid.” more…

I thought about taking today off from the commentary to celebrate, since yesterday I won all 4 quarters of my office’s Super Bowl pool! And then I remembered that I was the only one in the pool, don’t really have an office, and that the net effect of my $50 a square winnings was about the same as the US Government buying back their own securities. Oh well.

Bernanke’s Bailout Exit Strategy
On Wednesday at 10AM EST, Federal Reserve Chairman Bernanke plans to testify before the House Financial Services on that day about the central bank’s plans to withdraw emergency stimulus from the U.S. economy. No one believes that the goal of the Fed is to mess up the markets, or the recover, but the Fed has options in unwinding emergency aid “while not causing inflationary fears, hurting job growth or stunting the fragile economy recovery underway.” We already know that they will keep overnight rates near 0% for quite some time. And in fact late last week a Fed official (the president of the Federal Reserve Bank of New York) said the Fed might reconsider ending the mortgage buying program if rates rose sharply. more…

New Bank Definition
I thought I knew what a bank was, until those clever folks at the internet gave me something else to contemplate.

Groundhog Day Predictions Worse Than Coin Toss
Happy Groundhog Day. Few offices outside of Punxsutawney, PA use this as a holiday, whereby since 1887 if the groundhog (Punxsutawney Phil) sees his shadow we have six more weeks of winter. If he doesn’t see his shadow, we will have an early spring. (Never to be outdone, the Great State of Texas chose its state mammal, an armadillo, to predict the weather for their first Armadillo Day.) The National Climatic Data Center reports that Phil’s predictions have been correct only 39% of the time. Worse than a coin toss!

Fed Report of Credit Standards
Do we really need, in the United States, a return to more lenient credit? Self-employed borrowers aside, probably not, as many believe that it helped contribute to the credit issues we have now. Yet the press makes a big deal out of banks in the United States not loosening the flow of credit to consumers and businesses. It is truly a “supply and demand thing”, the credit markets are, and a recent report by the Federal Reserve shows banks aren’t tightening credit standards as much as they were a year or two ago, but they haven’t yet loosened the flow of credit to consumers or businesses. “The net percentage of banks that were tightening standards was close to zero but positive for most types of loans,” the Fed said in its quarterly survey of senior loan officers at 55 U.S. banks and 23 foreign banks doing business in the country. In the January survey, most banks reported that demand for most types of loans is still weakening further, the Fed reported. more…

Replace Fannie/Freddie?
In the current environment, the government giveth, and the government taketh away. Barney Frank once again made headlines last week with the statement that the House Financial Services Committee will recommend doing away with Fannie Mae and Freddie Mac and “rebuilding the U.S. housing-finance system from scratch”. “A whole new system of housing finance,” although most analysts feel that there will be continued government involvement. Given that they set the standards for the mortgage industry, own or guarantee half of the $11 trillion in outstanding home mortgages, and attract huge amounts of capital, it is hard to imagine replacing them with several private investors whose cost of capital would be much higher. No one expects much to happen for a very long time on this issue.

Treasury Auction Preview
Last week the stock markets took a tumble – does that mean that we’ll see a bounce back this week? Perhaps, but the continued nervousness about our economy and our banking system that caused stocks to sell off caused bonds to rally and rates to drop. And mortgage traders saw origination pick up a little, as folks locked when rates were dropping. Some believe that rates may stabilize this week, perhaps creep a little higher, with yet another Treasury auction to deal with. ($44 billion in 2-yr tomorrow, $42 billion 5-yr Wednesday, and $32 billion in 7-yr. Thursday.) more…

One never knows when the subject of mortgage banking will pop up – like yesterday. There I was at the Sundance Ski Resort (the one owned by “Bob” Redford) with my son. (He was there to snow board, I was there in the lodge trying to figure out an opening paragraph for today’s commentary.) I had my 2008 Mortgage Bankers Association canvas computer bag, with “Freddie Mac” printed on it, when up walked a fellow who started asking me about it. It turned out that he is the son of David Glenn. Mr. Glenn was ousted from his job as president and COO of Freddie Mac in 2003, over six years ago, pre-bubble. It turns out that he is doing the same thing now that many other mortgage folks are doing: buying and flipping distressed properties – probably here in Utah.

Rates Up On Mediocre Treasury Auction
Rates were up again yesterday (the 10-yr was up to 3.85%), but then improved ever so slightly in spite of a mediocre $44 billion 2-year note auction. The bid/cover ratio was 2.91, below the average for the last four months, and “Indirect bidders” bought 34% of the issue versus 45%, which is the average over the last several sales. $118 billion is a lot to swallow during a holiday weekend. This morning, and this week, we will have the S&P/Case-Shiller index, the Chicago Purchasing Manager’s Survey, Jobless Claims. One thing working in our favor is that the bond market is technically extremely “oversold”, so, like a spring, may be due to head the other way. But there is no bounce-back yet: the yield on the 10-yr is sitting at 3.85% and mortgage prices are worse by another .125. more…