Mortgage backed securities had another losing day yesterday moving lower in price by .375 in discount. Many lenders did reprice for the worse as the losses held through close. The stock market is one of the driving forces behind bond market losses at the moment as bond traders are taking some of their cues about the long term economic outlook from current stock performance. Sparking the stock market rally was the much better than expected earnings from Goldman Sachs and Johnson and Johnson. If stocks gain, it puts a damper on the safety-oriented mentality that can spur demand for bonds like treasuries and MBS. Although MBS have lost a fair amount of ground recently, bond and stock traders alike are waiting for additional data before a firm trend is likely to develop. This includes several of the more anticipated earnings announcements as well as the scheduled economic data. Of particular importance, according to many market participants, are earnings from JP Morgan, Bank of America and Citi. Once those chips are down and this reasonably busy week of data is over, there is a higher potential for a trend to develop in MBS for better or worse.
On the surface, the economic data yesterday favored the stock market over the fixed income market, but as the markets had time to digest the less superficial aspects of the reports, mitigating factors helped ease bond losses and keep a stock rally in check. Today we get several important data sets that will set the trend for today.
First out this morning is the weekly Mortgage Bankers’ Association applications index which tracks the weekly change in mortgage applications at major lenders. An increasing trend in purchase activity would be seen as a positive indicator for equities as home purchases lead to many other purchases including furniture, flooring, appliances, etc… Also, one would have to feel very confident in their own financial position and job security to purchase a new home, so economic factors relating to consumer confidence are also in play. The report has shown a large decline in purchase activity from last week moving lower by 9.4% and pointing to continued troubles in the housing market. Many economists and talking heads have stated that housing is a critical component of our potential recovery and although reports on housing and mortgages can vary greatly from week to week, this one is certainly not indicating an imminent recovery. On a positive note the refinance activity improved again last week moving higher by 18%. The increase in refinance activity can be attributed to the recent decline of mortgage rates back to the 5% mark.
In other data, the US Department of Labor released the monthly Consumer Price Index(CPI) which measures the price change of a fixed basket of goods and services at the consumer level. One of the biggest enemies of mortgage rates and indeed of bonds in general, is higher inflation. To explain why this is with broad strokes, if inflation decreases the value of today’s money, and fixed income investments pay a guaranteed return of today’s money, then the greater the inflation, the less and less a fixed income investment would return. Of course it’s going to return the amount of money it promises (one hopes), but if you’re planning on getting $1000 back in a year on a fixed income investment and inflation is so bad that, in a year from now $1000 only buys two cheeseburgers, the VALUE of your investment is obviously not as high as it is today when that same $1000 could buy a new TV and a week’s worth of cheeseburgers. Sounds like mortgage blogger paradise to me…
Back to the point, today’s data indicates a slightly higher than expected rate of inflation but most of the increase can be attributed to higher gasoline prices as was the case with yesterday’s PPI report. The headline CPI came in right on expectations at a month over month increase of .7% but year over year CPI posted a -1.4% decline which is the biggest decline since 1950! The core rate, which strips out volatile food and energy prices posted a slightly higher read of 0.2%. The market had anticipated only a 0.1% increase to the core rate. Year over year the core rate has risen by 1.7% which is well within the Fed’s comfort zone for inflation and better than last month’s 1.8% reading. Our economy needs inflation to grow and the Fed would like to see core inflation between 1% and 2%. With the recent decline in oil prices, this trend of higher consumer prices is not likely to continue. Following the release of this report, MBS have continued to move lower which will result in higher consumer borrowing costs.
The New York Fed has released the monthly Empire State Manufacturing survey which gives market participants a read on the strength of the manufacturing sector around the New York area. Readings below 0 indicate a contracting sector while readings above 0 indicate expansion. The release has indicated a much better than expected reading of -0.55 versus expectations of -4.5. This is a sizable improvement over last month’s -9.4 and contributes to the case for recovery which. As you know, most of data that are good for the recovery are bad for bonds, so this certainly did not help this AM’s situation.
The final data set this morning is the release of Industrial Production down -0.4% versus a consensus of -0.7%. This report shows how much factories, mines and utilities are producing and better than expected readings are generally good for stocks and bad for bonds. In May, this data set posted a drop of -1.1%. But remember, this is still a decline and “less bad” doesn’t necessarily equal “good.”
If you are keeping stats, the economic data, except for purchase applications, is all negative for fixed income. The downward pressure on MBS prices is continuing and so far this morning has posted another .25 in discount drop. This trend may be short-lived as we still have the FOMC minutes later today, jobless claims tomorrow and earnings reports to digest. Like yesterday, for MBS to manage any type of rebound they will need the stock market to move lower. That looks to be a difficult challenge this morning as stock market futures are pointing to a significantly higher open. If the stock market does change course, it will allow for money to flow back into treasuries first than into MBS. Currently, the benchmark 10 year note is continuing to move higher in yield and is trading at 3.54. Just last week, it was trading under 3.30! One reason we feel the current market has not set a firm trend is that the trading volume is extremely low. If market participants really feel the economy has turned, the rally in the stock market would see much higher level of trades. This is a key indicator of the market waiting for guidance but unfortunately the rally in the stock market is at the expense of the fixed income sector.
At 2pm eastern, the Federal Reserve will release the minutes from their last Federal Open Market Committee. Most of the information in the minutes will already be known, but market participants will review it thoroughly for any hints of future monetary policy and outlook on the economy. Matt and AQ will post any relevant details after the release on the MBS Commentary blog.
Early reports from fellow mortgage professionals are indicating the mortgage rates continue to move higher. The par 30 year fixed rate conventional mortgage is in the 5.00% to 5.25% range for the best qualified consumers. In order to qualify you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including 1 point loan origination/discount/broker fee. If you are accessing home equity, you should expect to pay higher costs or take a higher interest rate. For consumers seeking FHA or VA loans, expect the rate to be about .25% higher than conventional loans.
Changes in Home Appraisal Guidelines
The National Association of Home Builders (NAHB) is pleased with one underwriting guideline adjustment made last week by government sponsored enterprise, Freddie Mac.
Freddie Mac's Bulletin 2009-18 announced several changes to the GSE's underwriting guidelines. The changes deal mainly with the documentation required for income and asset verification, make "condominium hotel" loans ineligible for purchase, and eliminated Form 70A, Energy Addendum as a required attachment to appraisals.
More notably, Freddie Mac made several "Best Practices" recommendations for selecting appraisers and reviewing their products. One of these contained the statement that Freddie does not require appraisers to use Real Estate Owned, foreclosures or short sales in selecting comparable sales but rather that appraisers must "certify that comparable sales chosen are those most similar to the subject property." These should include distressed sales if they are representative, something many industry professionals have been requesting since the Home Valuation Code of Conduct was enacted on May 1, 2009.
In a press release on Monday, NAHB Chairman Joe Robson said that this was "a step in the right direction," but that this modification needed to go further. He called for additional changes that would allow appraisers the option of expanding both the geographic area and the time frame for comps in cases where local and recent contracts are heavily skewed toward distressed sales.
He cited a recent survey by NAHB that found that 26 percent of builders have seen signed contracts fall apart because of appraisals that do not reflect the contract sales price. Of these, 54 percent said that the questionable appraisals were actually coming in at less than the cost of building the home.
In addition, 60 percent of those responding to the survey knew of problems in their market areas caused by inadequate appraisal values. The biggest problem reported resulted from the use of foreclosures and distressed sales as comparables.
The NAHB's position is that such sales should not be used without appropriate adjustments to reflect the cost of improving them to a point where they are a valid comp and a reasonable alternative for the home buyer.
"Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values," Robson said. "This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery.
The NAHB further stated that current appraisal practices are causing other problems for builders by depressing the availability of acquisition, development, and construction funds. The low values being assigned to land and subdivisions have caused banks and investors to cut lending to builders, require additional collateral, or even call performing loans.
"If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole," said Robson.
Freddie Mac's Bulletin 2009-18 announced several changes to the GSE's underwriting guidelines. The changes deal mainly with the documentation required for income and asset verification, make "condominium hotel" loans ineligible for purchase, and eliminated Form 70A, Energy Addendum as a required attachment to appraisals.
More notably, Freddie Mac made several "Best Practices" recommendations for selecting appraisers and reviewing their products. One of these contained the statement that Freddie does not require appraisers to use Real Estate Owned, foreclosures or short sales in selecting comparable sales but rather that appraisers must "certify that comparable sales chosen are those most similar to the subject property." These should include distressed sales if they are representative, something many industry professionals have been requesting since the Home Valuation Code of Conduct was enacted on May 1, 2009.
In a press release on Monday, NAHB Chairman Joe Robson said that this was "a step in the right direction," but that this modification needed to go further. He called for additional changes that would allow appraisers the option of expanding both the geographic area and the time frame for comps in cases where local and recent contracts are heavily skewed toward distressed sales.
He cited a recent survey by NAHB that found that 26 percent of builders have seen signed contracts fall apart because of appraisals that do not reflect the contract sales price. Of these, 54 percent said that the questionable appraisals were actually coming in at less than the cost of building the home.
In addition, 60 percent of those responding to the survey knew of problems in their market areas caused by inadequate appraisal values. The biggest problem reported resulted from the use of foreclosures and distressed sales as comparables.
The NAHB's position is that such sales should not be used without appropriate adjustments to reflect the cost of improving them to a point where they are a valid comp and a reasonable alternative for the home buyer.
"Home builders are increasingly concerned that inappropriate appraisal practices are needlessly driving down home values," Robson said. "This, in turn, is slowing new home sales, causing more workers to lose their jobs and putting a drag on the economic recovery.
The NAHB further stated that current appraisal practices are causing other problems for builders by depressing the availability of acquisition, development, and construction funds. The low values being assigned to land and subdivisions have caused banks and investors to cut lending to builders, require additional collateral, or even call performing loans.
"If the spigot for housing production loans is cut off, there can be no housing recovery, and this has major implications for the economy as a whole," said Robson.
Bad Implications for Housing Recovery
The American Bankers Association's (ABA) today released Consumer Credit Delinquency data. The ABA report said that the composite ratio, which tracks delinquencies in eight closed-end installment loan categories, rose 0.1 percent to a new record high of 3.23 percent of all accounts being delinquent.
Closed-end installment loans are extensions of credit to a borrower in which all funds are dispersed at the time of the loan closing. These loans have scheduled periodic repayment plans based on the amount of principal that was lent and the interest rate that was charged by the lender. Most real estate and auto loans are forms closed-end installment loans, also known as closed-end credit. The ABA's overall delinquency rate includes direct auto, indirect auto, closed-end home equity, home improvement, marine, mobile home, personal, and recreational vehicle loans.
The delinquent balances on those accounts rose from 3.16 percent to 3.35 percent of total balances due. The ABA defines a delinquency as payment that is 30 days or more overdue.
The weak labor market has been blamed for the record rate of delinquencies on credit card debt and home equity loans as job losses topped 2 million in the first quarter of 2009 leaving over 14.5 million Americans unemployed. ABA Chief Economist James Chessen said:
"When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we're going to see higher job losses in the next year, and I expect elevated delinquencies."
Chessen added that the unemployed may be using bank cards to bridge a temporary income gap, especially with less home equity to fall back on as housing prices continue to fall. Bank card delinquencies rose 23 basis points to 4.75 percent of all accounts, compared to 4.52 percent in the previous quarter. The balances on those delinquent accounts rose dramatically, up 108 basis points to 6.60 percent of the value of all outstanding bank card debt, marking a new record.
Illustrating the detrimental loss of consumer credit and its affect on housing was the home equity category of the report. Home Equity loan delinquencies rose 0.49 basis points to 3.52 percent of all accounts, a record high. The Home Equity Line of Credit category rose 43 bps to 1.89 percent of all accounts.
With continued job losses and longer periods of unemployment expected, further credit delinquencies are anticipated, especially if consumers are becoming increasingly reliant on credit cards to "make the ends meet". Credit issuers are thus likely to freeze or close accounts in anticipation of this event. With a loss of credit, consumers will be forced to make a decision on whether to make their housing payment or buy groceries to feed their family. Clearly this would lead to further housing delinquencies and eventually more foreclosures.
This draws attention to yet another roadblock to the Obama Administration's efforts to increase consumer spending via lower monthly housing costs. Because loans sold to the government sponsored enterprises, Fannie Mae and Freddie Mac, are subject to risk based loan level price adjustments, borrowers whose FICO scores are under 680 have a higher cost of borrowing than a consumer whose FICO score is over 680. The rising rate of delinquencies means more consumers will see their FICO score drop below 680 which implies more homeowners be subjected to higher housing finance costs. Not a positive omen for the prospects of a housing recovery.
Here is a look at the rest of the categories.....
Delinquencies rose for the following categories:
Direct Auto Loans from 2.03 to 3.01%
Mobile Home Loans from 2.96 to 3.70%
Personal Loans from 2.88 to 3.47%
Recreational Vehicle Loans from 1.38 to 1.52%
Delinquencies dropped for the following:
Auto Loans Made through Dealers from 3.53 to 3.42%
Marine Loans from 2.35 to 2.04%
Property Improvement Loans from 1.75 to 1.46%
Closed-end installment loans are extensions of credit to a borrower in which all funds are dispersed at the time of the loan closing. These loans have scheduled periodic repayment plans based on the amount of principal that was lent and the interest rate that was charged by the lender. Most real estate and auto loans are forms closed-end installment loans, also known as closed-end credit. The ABA's overall delinquency rate includes direct auto, indirect auto, closed-end home equity, home improvement, marine, mobile home, personal, and recreational vehicle loans.
The delinquent balances on those accounts rose from 3.16 percent to 3.35 percent of total balances due. The ABA defines a delinquency as payment that is 30 days or more overdue.
The weak labor market has been blamed for the record rate of delinquencies on credit card debt and home equity loans as job losses topped 2 million in the first quarter of 2009 leaving over 14.5 million Americans unemployed. ABA Chief Economist James Chessen said:
"When people lose their jobs or work fewer hours, it makes it that much harder to meet their obligations. Unfortunately, we're going to see higher job losses in the next year, and I expect elevated delinquencies."
Chessen added that the unemployed may be using bank cards to bridge a temporary income gap, especially with less home equity to fall back on as housing prices continue to fall. Bank card delinquencies rose 23 basis points to 4.75 percent of all accounts, compared to 4.52 percent in the previous quarter. The balances on those delinquent accounts rose dramatically, up 108 basis points to 6.60 percent of the value of all outstanding bank card debt, marking a new record.
Illustrating the detrimental loss of consumer credit and its affect on housing was the home equity category of the report. Home Equity loan delinquencies rose 0.49 basis points to 3.52 percent of all accounts, a record high. The Home Equity Line of Credit category rose 43 bps to 1.89 percent of all accounts.
With continued job losses and longer periods of unemployment expected, further credit delinquencies are anticipated, especially if consumers are becoming increasingly reliant on credit cards to "make the ends meet". Credit issuers are thus likely to freeze or close accounts in anticipation of this event. With a loss of credit, consumers will be forced to make a decision on whether to make their housing payment or buy groceries to feed their family. Clearly this would lead to further housing delinquencies and eventually more foreclosures.
This draws attention to yet another roadblock to the Obama Administration's efforts to increase consumer spending via lower monthly housing costs. Because loans sold to the government sponsored enterprises, Fannie Mae and Freddie Mac, are subject to risk based loan level price adjustments, borrowers whose FICO scores are under 680 have a higher cost of borrowing than a consumer whose FICO score is over 680. The rising rate of delinquencies means more consumers will see their FICO score drop below 680 which implies more homeowners be subjected to higher housing finance costs. Not a positive omen for the prospects of a housing recovery.
Here is a look at the rest of the categories.....
Delinquencies rose for the following categories:
Direct Auto Loans from 2.03 to 3.01%
Mobile Home Loans from 2.96 to 3.70%
Personal Loans from 2.88 to 3.47%
Recreational Vehicle Loans from 1.38 to 1.52%
Delinquencies dropped for the following:
Auto Loans Made through Dealers from 3.53 to 3.42%
Marine Loans from 2.35 to 2.04%
Property Improvement Loans from 1.75 to 1.46%
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