My favorite Haines legacy is the Briefcase Indicator, a segment he’d do in the mornings before Alan Greenspan’s Fed meetings. He’d watch Greenspan walking from his car to his office and study the contents and weight of Greenspan’s briefcase for clues as to the day’s FOMC decision—he’d do close-ups, parse every single aspect of the briefcase, study how Greenspan walked, and carry on the segment for several minutes at a time. With anyone else, it would have been just another BS gimmick, but somehow it always carried requisite credibility along with the entertainment factor. That was the magic of Mark Haines, a man who’s legacy will live eternally in financial media.

Rate Factors Week of June 21
Volatility could return with a full economic slate next week. Here’s the market moving data for the week, each noted with what impact it could have on rates:

We start with May Existing Home Sales Tuesday (rates neutral), a two-day Federal Open Market Committee meeting ending with a rate policy announcement Wednesday (rates neutral to higher), the third of three 1Q2010 GDP readings Friday (rates neutral to higher), $108b in 2yr, 5yr, and 7yr Treasury Note auctions Tuesday-Thursday (rates higher), and the House/Senate reconciliation of a massive finance reform bill will reach a critical stage as lawmakers look to finalize the bill for President Obama (rates neutral).

What The Fed Will Say Wednesday, June 23
The Fed’s FOMC meeting announcement Wednesday will likely reveal the Fed’s intent to keep overnight bank-to-bank Fed Funds Rates at .25% and overnight Fed-to-bank Discount Rates at .75%. They may also confirm whether they’ll raise these overnight rates before they’d start selling the $1.25b in mortgage bonds they bought from January 1, 2009 to March 31, 2010.

And finally, we’ll see if any FOMC members come around to Kansas City Fed President Thomas Hoenig’s way of thinking. At every FOMC meeting this year, he’s voted to start gradually hiking rates to avoid more violent rate hikes later (more on this in next section).

The Fed selling mortgage bonds would directly and immediately cause mortgage rates to rise, while the Fed hiking overnight rates would have an indirect and slower hiking impact on mortgage rates. So when they decide the economy can handle higher rates they will hike overnight rates first. Then as the recovery strengthens, they’d start selling mortgage bonds. When those bond prices drop in a selloff, mortgage rates rise commensurately.

Are Fed Rates Too Low For Too Long?
The debate today is whether Bernanke’s Fed is keeping rates too low for too long. Greenspan’s Fed did the same thing with the Fed Funds Rate from January 201 (6.5%) to June 2004 (1%), and when they did start hiking off the 1% mark, it was gradual until Fed Funds reached 5.25% June 2006. It stayed there until the financial crisis picked up steam, then the Fed cut from 5.25% in September 2007 to .25% December 2008, and it’s been at .25% since then.

Greenspan took lots of heat for leaving rates too low for too long. Bernanke is perhaps better justified since this financial crisis and resulting global economic instability is much deeper than anything Greenspan faced. But we’ve also increased the money supply drastically to combat the crisis, so if the economy does show continued signs of improvement, inflation can spike quickly. Fed rate hikes and mortgage bond selloffs would follow, both causing mortgage and all other rates to spike.

Volatility is the byproduct of markets trading on every little sign that we’re finally ready to move out of an artificially low rate era. And that’s precisely why this WeeklyBasis opened by saying “it’s quite surprising” to see less volatility in recent weeks.

It’s also why consumers waiting for lower rates will be disappointed if they wait much longer.

CONFORMING RATES ($200,000 – $417,000) – 0 POINT
30 Year: 4.75% (4.87% APR)
FHA 30 Year: 4.75% (4.89% APR)
5/1 ARM: 3.5% (3.62% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) – 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.875% (4.99% APR)
5/1 ARM: 4.25% (4.37% APR)

JUMBO RATES ($729,751 – $2,00,000) – 1 POINT
30 Year: 5.375% (5.49% APR)
5/1 ARM: 4.5% (4.62% APR)

Bernanke vs Greenspan
I guess when people become tired of Ben Bernanke, they look back at Alan Greenspan. The former Federal Reserve chief’s favorite economic indicator is men’s underwear sales. Supposedly, Greenspan often said one of the first things men stop buying when the economy is doing poorly is underwear, because it’s something no one really sees. You can reason that when men start buying new boxers and briefs, it means the economy is turning around. Interestingly, after a 12-month, 12% decline through the end of January, men’s underpants sales leveled off during February and March, according to NPD (a group which tracks clothing trends). That suggests the economy is stabilizing, right? Usually it goes up 2% to 3% annually – don’t ask me why, as I would think it would hover around population growth – so a return to that would be a good sign.

Factory Orders Up, ISM Index Down
Orders at factories, some of which make underwear, were up .7% in April, and therefore up two of the last three months, after a revised 1.9 percent drop in March that was more than twice the previous estimate. Yesterday we also had the ISM Non-Manufacturing Index increased to 44 in May, the highest level in seven months yet lower than forecast, from 43.7 the prior month. Since the service sector makes up almost 90%, regardless of the headline-grabbing factories, so this is an important number. The market, however, was unconvinced that these were exciting numbers: stocks sold off, and Treasury prices rose (leading to lower rates).

Bond Traders Take Profits
Traders also saw some profit-taking in the steepening yield curve trade, so investors were unwinding the sale of long-dated maturities and purchase of short-dated notes, which widened the yield spreads to historic widths last week. So the yield curve is becoming a little less steep: the difference between 2- and 10-year yields narrowed yesterday to 2.66 percentage points, from a record 2.76 percentage points on May 27. Fannie 4% securities, into which would be placed 4.25-4.625% mortgages, are down (worse) almost 3 points in the last few weeks, yet Fannie 6.5% & 7% securities have actually improved in price! Traders believe that the bottom has dropped out of refinances, so the prepayment speeds on these loans is will slow down at current MBS prices.

Productivity Up
The news overnight and this morning was friendlier toward stocks than bonds, although those two markets improving or worsening at the same time is not unheard of. Are you being productive? U.S. Non-farm Productivity came out this morning, +1.6%, and it was much stronger than initially estimated (+.8%) in the first quarter. The number of hours in manufacturing fell at a record pace, plunging at a 9% annual rate in the first quarter, the largest decline since the first quarter of 1975. Hours worked in manufacturing tumbled at an annual rate of 19.5%, the biggest quarterly drop on records dating back to 1987!

Jobless Claims Down
Workers filing new claims for jobless benefits fell for a third straight week last week, indicating a drop in the rate of the labor market’s deterioration. Claims were down 4k to a seasonally adjusted 621,000 in the week ended May 30th, about as expected. Continuing claims (the number of people staying on the benefit rolls after collecting an initial week of aid) declined for the first time since early January, and was also the first time in 17 weeks that they did not set a record. However, the four-week moving average for new claims, considered to be a better gauge of underlying trends as it smoothes out week-to-week volatility, rose 4,000 to 631,250 in the week ending May 30. After the news we find the 10-yr back up to 3.66% and mortgage prices worse by .375.

Lender Guideline Roundup
SunTrust, beginning this week, said that non-permanent resident aliens will no longer be eligible borrowers for their Portfolio Affordable Housing Mortgage Program. “Loans locked prior to Monday, June 1, 2009 will be honored; however, loans must be closed and delivered to SunTrust by the original lock-in expiration date. Lock extensions and relocks will not be granted. No exceptions.” No tears.

CitiMortgage, who last week came out with their “High Balance Loan Limits for Agency Jumbo loans” – which increased, had some caveats. Nothing onerous, but namely “Loans above the Permanent High Cost limits must be registered using newly created Sub-Program codes…In addition, due to the loan amount changes, LTV and FICO requirements have also been changed by Fannie Mae (and thus Citi). CitiMortgage also announced that DU Expanded Approvals recommendations will no longer be permitted on Agency Jumbo programs, all borrowers must have a FICO score, subordinate financing is not permitted on co-op loans, and for properties in attached condominium projects, the appraisal must contain two comparable sales from projects outside of the subject’s project in addition to the current comparable sale requirements. In addition to required appraisal, a Field Review (One-Unit Residential Appraisal Field Review Report) is required if the loan amount is > $625,500 and the LTV, CLTV, or HCLTV is greater than 80%; or the property is valued at $1,000,000 or more and the LTV, CLTV, or HCLTV is greater than 75%.”

Citi also followed other lenders with their “New lending parameters have been introduced for second homes and investment properties when the borrower has up to four (4) financed residential properties, including the subject property. If the subject property is a primary residence, there are no additional reserve requirements for the other financed properties. If the subject property is a second home or investment property, there are reserve requirements for both the subject property and the other financed properties. Second home – 2 months PITI plus an additional 2 months’ reserves on every other financed second home and investment property are required. Investment – 6 months PITI plus an additional 2 months’ reserves on every other financed second home and investment property are required.” This applies to all Citi’s conventional loans underwritten manually or with DU – but do not apply to DU Refi Plus or loans processed via LP. Citi also reminded sellers that borrowers having more than four financed residential properties are not permitted under their current guidelines.

Daily Humor
A man riding his Harley was riding along a California beach when suddenly the sky clouded above his head and, in a booming voice, the Lord said, “Because you have tried to be faithful to me in all ways, I will grant you one wish.”
The biker pulled over and said, “Build a bridge to Hawaii so I can ride over anytime I want.”
The Lord said, “Your request is materialistic, think of the enormous challenges for that kind of undertaking; the supports required reaching the bottom of the Pacific and the concrete and steel it would take! It will nearly exhaust several natural resources. I can do it, but it is hard for me to justify your desire for worldly things. Take a little more time and think of something that could possibly help mankind.”
The biker thought about it for a long time. Finally, he said, “Lord, I wish that I and all men could understand women; I want to know how she feels inside, what she’s thinking when she gives me the silent treatment, why she cries, what she means when she says nothing’s wrong, and how I can make a Woman truly happy.”
The Lord replied, “Would you like two lanes or four on that bridge?”

Question: What do you think about nationalizing the banks?

Answer: I think Roubini, Dodd and Greenspan haven’t thought this one through. The U.S. isn’t Sweden, and not just because our blondes aren’t au naturel. Their successful approach revolved around a handful of banks but we have 7,500, as well as many S&Ls and credit unions, which would have to be flushed into government hands. Regulators are overwhelmed as it is, and if you thought Lehman Brothers was a mistake, just standby and see what nationalizing Citi or BofA would do. Our banks remain at the heart of domestic/global financial transactions and daily clearing, while those Scandinavian banks were not. PIMCO would not dispute the need to further capitalize systemically important banks via convertible bonds held by the government, which unfortunately dilute shareholders’ interests. To go further, however, and “haircut” senior debt or even existing preferred stock similar to that issued via the TARP would create an instability policymakers should not want to risk. In turn, forcing creditors to take haircuts would undermine other financial sectors such as insurance companies and credit unions. The goal of future policy should be to recapitalize lending institutions while maintaining the basic infrastructure of credit markets. Outright nationalization and haircutting of creditors will do just the opposite.

But she was shut down by Fed chairman Alan Greenspan, SEC chairman Arthur Levitt, Treasury Secretary Robert Rubin, and Rubin’s successor Lawrence Summers—and not long after she left the CFTC post in 1999, then-Senator Phil Gramm did the deregulatory bidding of these other leaders and got his CFTC Modernization bill through congress. This open market advocacy is fine because you can’t have over-regulated markets if you expect to compete globally. But you can’t let derivatives go utterly unregulated.

The Enron run-up and failure was the first direct result of Gramm’s CFTC Modernization bill. The current crisis is the second. Here’s how The Economist sums up derivatives regulation:

Every bubble sees excesses; it seems odd to single out the CDS. Think back to the crash of 1987 when fingers pointed at the equity-futures market, which institutions were using to protect against falls in their share portfolios. It was argued that this exacerbated the crash. A commission was established; restrictions were imposed. Twenty years later, the Chicago equity futures and options market is vast: some $45 trillion of contracts traded on the S&P 500 index alone last year compared with the total American stockmarket value of just $10 trillion. But equity futures are unnoticed and unblamed in the crisis.

In 20 years the CDS may well be as little remarked as the equity future is now. But only with reform. As well as a clearing house, the market must be more transparent. Banks and other quoted firms should reveal how exposed they are to the market. CDSs have their uses. There is no reason why investors should not speculate in corporate debt if they can speculate on equities, currencies, commodities and the rest.

This is something Born was trying to defend, but according to much of the reporting since then, she wasn’t a savvy politician and her approach was ostensibly spurned on the basis of her approach rather than the merit of her argument. Maybe regulators, Lawrence Summers being the only one of that era with a significant position in the Obama administration, will finally understand this time.

Recent Stories Revisiting Derivatives De-Regulation That Led To Crisis

• Bloomberg: Former CFTC Head Brooksley Born Vindicated as Swap Rules Take Shape.
• NY Times: Taking Hard New Look At Greenspan Legacy

However, Greenspan has actually made some valid points in recent days. Regarding rates, he correctly points out that long-term rates were low during the home price run-up and would have spurred housing prices anyway. Regarding a fix for the housing crisis, he said that we should consider a solution similar to the Treasury’s Resolution Trust Corporation which ran from 1989 to 1995 as a way to help unwind the S&L crisis — the RTC was set up to liquidate assets of troubled savings and loan associations that had been declared insolvent by the Office of Thrift Supervision.

Right now there are two housing rescue plans in the works, one from the Bush administration and one from Congress. The administration wants banks to forgive negative equity for owner-occupied borrowers and then to use FHA to insure the remaining balance of loans. This is designed to keep people in their homes rather than having them walk away. Congress wants to implement a second economic stimulus plan with about $20 billion in tax and other incentives for homeowners, builders and companies. The end result should be some combination of the RTC and both proposed plans, but in the rush to regulate (and therefore have some soundbytes for campaign speeches) in an election year, we may see a band-aid fix instead of a fully thought out solution. Call it a 60% solution … only it won’t do extraordinarily well.

The most important thing here is that rates are low and we can’t necessarily expect them to be low for the rest of the year. Rates too low for too long is what caused many to blame Greenspan for the market troubles we have now.

Tuesday three more voting members of the FOMC will create more waves—Fed Chairman Ben Bernanke, Dallas Fed president Richard Fisher, and Fed Governor Frederic Mishkin are all making public comments. Two weeks ago, Fisher and Mishkin caused rate spikes with inflation bias comments. Friday is the all-important Consumer Price Index inflation report, and the monthly jobs and wage growth report. If these come in higher than expected following all the Fed speak, rates will jump.

MORE DETAILS ON FED SPEAK
Fed Chairman Ben Bernanke has been saying what Plosser said for months: rate cuts are to help financial market liquidity. He’s wisely left out the part that that they’d hike rates back up to avoid excessive growth in prices. Perhaps because he knows this is implied by markets anyway, and it’s a mistake for Bernanke to let his lieutenants speak publicly and beat markets over the head with it.

Greenspan’s public comments were notoriously obtuse, his FOMC members rarely made public comments, and he ruled the FOMC with an iron fist—his decisions went. Bernanke is much more clear in public comments, his FOMC members constantly make speak public comments, and he encourages consensus in FOMC decisions. I think Bernanke’s approach is better in all areas except for allowing high public visibility for voting Committee members. If they continue to let their consensus building debates play out publicly, the volatility will get worse. It’s too much information for sensitive markets to digest. The Fed’s job is to steady the ship, not create more waves.

Rates are very good right now, and anyone buying a home is benefiting from this. If it gets better, consumers and businesses will benefit. But as long as the Fed is so outspoken, people should let it sink in. Same theory goes for super-conforming loans (up to $729k in much of the Bay Area). Higher limits may help some, but pricing can’t be counted on because of the market itself rising, and super-conforming from $417-729k) will most likely carry higher rates than conforming loans up to $417k.

Conforming ($200,000 – $417,000) – NO POINTS
30 Year: 6.125% (6.275% APR)
15 Year: 5.375% (5.53% APR)
5/1 ARM: 5.375% (5.52% APR)

Jumbo ($417,001 – $1,000,000) – NO POINTS
30 Year: 7.0% (7.14% APR)
5/1 ARM: 6.125% (6.28% APR)
7/1 ARM: 6.125% (6.28% APR)