Challenger Announced Job Cuts
The number is an eye-popping 115,730. Up from 51,114. The two biggest employers laying folks off are the U.S. Army and Bank of America. I am sure that some politician will connect these two and suggest that we deploy those troops to Wall Street to quell that unrest.

MBA Mortgage Applications
-Purchase Index – Week/Week -0.8 %
-Refinance Index – Week/Week -5.2 %
-Composite Index – Week/Week -4.3 %
-Many refinance borrowers are deleveraging by moving to 15-year terms with the maturity making up 27 percent of the week’s refinancing volume for the highest share on record. I have also seen people paying down mortgages to $417,000 to get better rates. There is a macroeconomic effect of the moves to shorter durations and pay-downs. The most obvious is that the pay-down borrowers have less cash and the 15 year borrowers have less money available for discretionary spending.

ISM Service Sector
- Composite Index – 53.0
- Previous was 53.3.

Weak sauce.

ISM Manufacturing Index for July was 50.9 vs. 55.3 for June and estimates of 54.3. Readings below 50 mean a contraction. The full report also shows inflation moderating. This continues the recent trend which was created by businesses getting ahead of the consumer.

Rates dropped as bonds rallied on the ISM news, but also because of Friday’s GDP. I cannot emphasize how awful the GDP report was, and I’ll be publishing a more detailed analysis of it this Friday. A weak Employment Report this Friday following an awful GDP report could send the 10-year yield down close to 2.5%, MBS would also rally, and rates would drop further.

Retail Sales
-ICSC-Goldman: week/week +1.5%
-ICSC-Goldman: year/year +3.5%
-Redbook: year/year +5.2%

Economic Activity In Non-Manufacturing Sector
-June ISM non-manufacturing index down to 53.3 vs 54.6 in May
-Reading above 50 signals expansion
-Near expectations of 53.7
-Inflation index moderating: June prices 60.9, down 8.7 since May
-See ISM survey responses and stat table below

Rates are slightly lower to begin this week as mortgage bonds rally to regain some of last week’s losses—rates drop when bond prices rise on a rally and vice versa. Below is last week’s recap and this week’s outlook.

Why Rates Rose June 27 to July 1
(1) Greece passed budget cuts and tax hikes needed to secure the next payment in its bailout package granted last May. Greece is prolonging the inevitable with their bailout, but short-term, markets see this austerity vote passage as positive.

(2) S&P reported that home prices gained 0.7% in April, the first monthly gain in eight months. Markets generally ignored the fact that home prices are still down 4% year-over-year.

(3) The National Association of Realtors reported that May Pending Home Sales gained 8.2% in May and are up 13.2% since May 2010. Pending home sales measures new contracts homebuyers have entered into, and there’s no guarantee they’ll close. But again, markets are keen on the simplest bits of good news.

(4) 2yr, 5yr, and 7yr Treasury auctions were all met with weak demand, which rattled mortgage bond markets as well.

(5) Jobless claims were 428,000 for the week ended June 25, down 1000. Same story here, the short-term reaction is good for stocks, bad for bonds. But claims are still above the 400,000 mark, which is a weak market.

(6) The Institute for Supply Management (ISM) reported Chicago area manufacturing index was 61.1 for June, higher than May and above expectations. Also the ISM June Manufacturing Index, which is a national reading, was 55.3 vs. 53.5 in May and also beat expectations. Readings above 50 signal expansion.

Outlook for July 5-8 Week
It’s all about jobs this week with private payroll provider ADP’s June jobs report Wednesday, weekly jobless claims Thursday, and the BLS jobs and unemployment rate reports Friday.

We also have the ISM non-manufacturing services index for June on Wednesday.

Lots of rate damage done last week with mortgage bonds (FNMA 4% coupon) dipping below the 200 day moving average (DMA) to end Friday. But this morning, bonds are up 31 basis points and touching the 200 day line again.

Bonds would have to break above this 200 DMA plus the 50 DMA which is another 29 basis points above current levels. Jobs would have to be worse than already-low expectations for this to happen.

On the downside, mortgage bonds have 82 basis points to drop to hit their next level of price support at the 100 DMA, which would push rates up about .25%.

For that to happen this week, jobless claims and jobs lost would have to rise, and ISM Services data would have to beat expectations.

Volatility of the past two weeks shows markets reacting strongly even when data is slightly above or below expectations.

We can expect that to continue, and borrowers should be ready to lock rates or have a strong stomach.

Bonds continue rallying while stocks and commodities are down on weaker Chinese growth concerns, Portugal’s bailout, less than expected private sector job growth from payroll provider ADP, less than expected economic activity in the non-manufacturing services sectors. Details and outlook below.

ADP, payroll provider to 23 million employees and 500,000 businesses, reported that private sector jobs increased by 179,000 in April. This was below expectations of 200,000.

Today’s ADP number is followed by weekly jobless claims tomorrow when we’ll find out if there’s a three week trend of higher claims (which would help rates maintain these levels), and then Friday’s all-important BLS jobs report.

Friday’s estimates call for 183k new jobs and 8.8% unemployment (vs. +216k and 8.9% for March). An upside surprise would cause bonds to retreat and rates to rise slightly.

Markets are again shaking off Institute for Supply Management data showing meaningful inflationary threats during April. Monday showed the trend in manufacturing sectors, and today is the same in non-manufacturing businesses.

Normally bonds would sell and rates would rise on inflation fears (since inflation erodes purchasing power of a bonds future cash flows), but other weak economic factors are making traders fall in line with the Fed’s theory that inflation is short term. Below is a table with inflation warning comments and results from the ISN Non-Manufacturing report.

Also U.S. bonds are rallying despite inflation signals because Portugal yesterday agreed to a three-year $116 billion bailout with the EU and IMF. Their bailout comes after Ireland and Greece suffered the same fate. And again, U.S. bonds are benefitting as European bonds sell.

Rates are unquestionably excellent, and while technical trading patterns for bonds are improving to suggest we could be somewhat steady at these levels in the coming days, it’s all going to depend on Thursday’s and Friday’s jobs data.

Stay tuned…

ISM Non-Manufacturing April Survey Results

A key catalyst for the selloff was today’s non-manufacturing activity from the Institute for Supply Management that showed services industries grew at the fastest pace since 2005 and price inflation has been increasing for 19 months. Below is a table summarizing the findings as well as some respondents from business managers participating in the monthly survey. This survey also suggests hiring may have been better, so some of the bond selling is also in preparation for a jobs report tomorrow that has nowhere to go but up after last month’s poor results. Improving jobs means better economy which means higher rates.

It wasn’t just Libya driving investors into bonds. Last week’s second of three 4Q2010 GDP readings showed the economy grew 2.8%, down from the first reading of 3.2% (final reading March 25). Also Case Shiller and NAR existing home data showed that home prices are at the same level as they were 8 and 9 years ago, respectively. Will market jitters continue next week?

We’re back on inflation watch beginning Monday with January’s Personal Consumption Expenditures (PCE) Index, the Fed’s favorite consumer inflation measure. At 1.2%, December’s annual PCE reading was within the Fed’s inflation comfort zone of 1-2%, and there’s still no real signs of consumer inflation. Except for the fact that business inflation is rising in several manufacturing surveys of recent months, and this may eventually pass to consumers. Monday, Tuesday and Thursday we’ll get reads on manufacturing activity and inflation from three Institute for Supply Management surveys.

It’s also a big week to get a read on the consumer beginning with Monday’s Personal Income & Spending data (released along with PCE), Wednesday’s jobs report from payroll provider ADP, which is the precursor to Friday’s Bureau of Labor Statistics February jobs report. January’s report showed that only 36k non-farm payrolls were added, yet unemployment dropped from 9.4% to 9%. Even the smartest market participants were stumped, so this report will cause a stir.

Besides wild daily volatility that’s become the norm, rates should be even to slightly higher next week—an uptick would most likely come from bonds selling a bit on manufacturing inflation embedded in the ISM survey reports.

CONFORMING RATES ($200,000 to $417,000) 0 POINT
30 Year: 4.875% (4.99% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 3.625% (3.74% APR)

SUPER-CONFORMING RATES ($417,001 to $729,750 cap by county) 0 POINT
30 Year: 5.125% (5.24% APR)
FHA 30 Year: 4.75% (4.84% APR)
5/1 ARM: 3.875% (3.99% APR)

JUMBO RATES ($729,751 to $2,00,000) 1 POINT
30 Year: 5.25% (5.37% APR)
5/1 ARM: 4.0% (4.12% APR)

“It used to be that we could ‘underwrite’ a loan and use common sense to navigate individual circumstances and actually make a decision that a loan was a good credit risk. Then DU and LP [Fannie and Freddie's automated underwriting engines] came along and gave us the laundry list that had to be followed. We were still able to manually underwrite loans for those transactions that did not fit the box. Then the bottom fell out of the business and everyone got scared and new rules came out. Investors and Wall Street were to blame for allowing individuals who were not telling the truth to buy homes. Today investors are pre-underwriting loans prior to purchase and we have to ‘march to their tune’ including getting pieces of paper that seem ridiculous, but since we need the investor to purchase the loan so we obtain them anyway. Only the most qualified borrowers with all their ducks in a row get loans these days. Manually underwritten loans are subject to scrutiny such as we have never seen before and frankly, we do not have the courage to paint outside of the lines because we cannot afford to have a loan purchase refused. Today, it takes two to three times as long to underwrite a loan and we have checklist upon checklist that help us make sure all of the i’s are dotted and the t’s are crossed. I have been doing this for over 30 years and frankly we are back to the rules of the early 80′s or worse when it comes to documentation.”

And Even More On Why Loan Approvals Are So Hard
Speaking of analyzing credit, are you ready to have an underwriter at the closing table? In Fannie’s latest letter to lenders, the company states, “Borrower Credit – Undisclosed Liabilities: Lenders are responsible for determining that all debts incurred or closed by the borrower, up to and concurrent with settlement on the subject mortgage loan, are disclosed on the final loan application that is signed by the borrower at closing. These debts must be evaluated and included in the qualification for the subject mortgage loan. Lenders must have adequate internal controls and processes to support this requirement.”

Overview of ‘Millennial’ Consumers Ages 18-29
What is a “millennial”? It is anyone currently age 18-29, and the Pew Research Center released a comprehensive study of the 50 million people in the millennial generation, which is useful to anyone trying to reach this audience. But doesn’t this group contain the next critical segment of potential borrowers? They tend to be pro-government Democrats, liberals, likely to not join a church, favoring non-military solutions, and very diverse: only 60% white. (38% of them have tattoos, and of those, half have more than one.) The millennial generation says older people have better moral values and a better work ethic. 68% believe that either now or at some time in the future they will earn enough money to lead the kind of life they want, higher than previous generations even though they have this high level of unemployment. 1 in 8 have moved back home after college. Most of their education about ads, trends, and news comes from the web, through Facebook, Twitter, blogs they find their information from these sources.

The Tail-End of the Fed’s MBS Program
The market has twenty trading sessions before the cessation of the MBS purchase program. Traders believe that mortgage rates should increase, most noticeably in the lower coupon, current production area. At this point, besides the Fed, traders are not seeing much buying outside of some hedge funds and money managers for current coupon product. There was some hope that with the agencies buying delinquent mortgages out of pools, demand would pick up, but so far they have seen little interest in spite of the ultra-clean current production. Possibly their reinvestment decisions are now going to coincide with the end of the fed program. Much of this community is concerned with higher yields because of this and the overall macro environment.

Unexpected Increase in ISM, Beige Book, Unemployment Predictions
Mortgage prices got off to a softer start Wednesday as the Non-Manufacturing ISM number showed an unexpected increase. The 8:15AM EST ADP employment number suddenly had analysts lowering their forecasts for tomorrows Non-Farm Payroll number, and the estimates now seem to be -60,000 jobs with an unemployment rate of 9.8%. Yesterday, as stocks lost some steam and the results of the Beige Book came out, bonds rallied somewhat and mortgage spreads tightened, and investors produced some intra-day price improvements which were welcomed. The Fed’s Beige Book (which is literally beige, but is a report of the various Fed districts) showed some improvement but with soft labor markets and a weak commercial real estate sector.

Today we have Jobless Claims, some productivity numbers, and Factory Orders, along with the Treasury announcing the amounts of next week’s 3, 10, and 30-year auctions. And tomorrow we could see some volatility with the unemployment data. Greece is still in the spotlight as investors are still wary, but most agree that a bailout is likely with Greece issuing a 10-yr note and a meeting scheduled for tomorrow between the Greek Prime Minister and the German Chancellor. Currently the US 10-yr is, once again, hovering around 3.62% and current coupon mortgage prices are roughly unchanged.

Daily Humor
(Warning: PG)
One dark night outside a small town on the Wisconsin – Minnesota border, a fire started inside the local chemical plant and in a blink of an eye it exploded into massive flames. The alarm went out to all the fire departments for miles around.

When the volunteer fire fighters appeared on the scene, the chemical company president rushed over to the fire chief. “All our secret formulas are in the vault in the center of the plant. They must be saved. I will give $100,000 to the fire department that brings them out intact!”

But the roaring flames held the firefighters off.

Soon, more fire departments had to be called in as the situation became desperate. In the distance, a lone siren was heard as another fire truck came into sight. It was the nearby Norwegian Rural Township volunteer fire company composed mainly of Norwegians well over the age of 65. To everyone’s amazement, the little run-down fire engine roared right past all the newer sleek engines that were parked outside the plant and, without even slowing down, drove straight into the middle of the inferno.

Outside, the other firemen watched as the Norwegian old-timers jumped off right in the middle of the fire and fought it back on all sides. It was a performance and effort never seen before. Within a short time, the Norse old timers had extinguished the fire and saved the secret formulas.

The grateful chemical company president announced that for such a superhuman feat he was upping the reward to $200,000 and walked over to personally thank each of the brave fire fighters. The local TV news reporter rushed in to capture the event on film, asking their chief, “What are you going to do with all that money?”

“Vell,” said Ole Oleson, the 80-year-old fire chief, “Da first ting ve gonna do is fix da brakes on dat focking truck!!”

Rates Up on Fewer Jobless Claims, 4yr High For ISM Index
Why are rates where they are? The answer is stronger-than-expected economic news. Well, Thursday morning we learned that Jobless Claims unexpectedly fell by 22,000 to 432,000, which is their lowest level in almost a year and a half. Continuing Claims fell by 57,000. So the thinking goes that “if fewer people are filing jobless claims, the employment picture is starting to look a little rosier, which means that the economy must be doing better…” We also had the ISM Index print its highest level in almost 4 years.

Economic Preview For Week
This week promises to be a busier week, news-wise, than last. Today we start with an “amuse bouche” of ISM Manufacturing data. Tomorrow we throw in a few Pending Home Sales and Construction Spending numbers, Wednesday ISM Services, Thursday Jobless Claims, and on Friday, for desert, we have all the Unemployment numbers. The odds continue to drop for the Fed keeping their “0-.25% Fed Funds target” past April – it is down into the low 80% range. We start the year here in the US with the 10-yr yield at 3.85% and mortgage prices roughly unchanged from Thursday’s levels.

Mortgage Apps Down, Refis Are 76% of Apps
As it happens at this time every year, lock desks are slowing down. The week before last, the MBAA’s application index dropped almost 11%, with refinancing down about 10% and purchases down almost 12%. One thing to note, which I find most distressing, is that refinancing accounts for almost 76% of apps. If rates move higher (why wouldn’t they if the economy improves?), and/or underwriting guidelines don’t loosen up (why would they given projected delinquencies?) what will this do to the average mortgage banker’s pipeline.

FHA Broker Compensation Caps Removed (For Now)
FHA lenders should know that HUD removed the 1% origination fee cap. Under the new RESPA changes, the single origination charge on the GFE and HUD-1 must include all administrative and processing fees related to the origination of the loans, including compensation for both the mortgage lender and broker, and HUD recognized the bundled charge would exceed the 1% cap. In effect, HUD will no longer limit the amount of the origination fee charged to FHA borrowers to 1%; the FHA will expect lenders to charge “fair and reasonable” fees. Subjectivity is not popular these days, so look for additional guidance on fee limitations soon. See 09-53 at this link.

GMAC Bailout 3.0
GMAC received a third rescue package from taxpayers valued at $3.8 billion that gives you and me a majority stake. (You were going to buy stock in them anyway, right?) “The infusion will bolster lending at GMAC as it absorbs $3.8 billion in new pretax charges and decides what to do with its loss-plagued home mortgage unit. Proponents say GMAC is crucial to the U.S. auto industry. Res Cap is not viewed as being a big plus for the income statement, and apparently is on the block.

Lender Guideline Roundup

• One traditional way of controlling a pipeline is to cancel a lock if the file doesn’t come in by a certain number of days after locking. It makes sense – “Give us some documents if the lock is real!” The most recent example is Union Bank of California, which has a minimum lock period of 60 days, who informs their brokers that “All loans will be re-priced at ‘the higher of’ when a package is not received within 30 days of lock expiration date.” UBOC also adjusted their lock breaking policy, which is available one time during original lock period and only after the loan submission: to current rate: 0.500 rebate, or one-eighth (0.125) higher than current rate for a reduced rebate of +.125% for loans with rebates or +.125% cost to points, or lastly split rate if at least .500 difference in rate: free.

• GMAC correspondents addressed questions about FHA loans that move from one lender to another. “When a borrower switches from one lender to another, the first lender must, at the borrower’s request, transfer the case to the second lender. Transferring the case requires the first lender to transfer the FHA case number to the second lender using the Case Transfer functionality within FHA Connection, and provide the second lender with a copy of the appraisal report ordered by and completed for the first lender.” GMAC, and the FHA, does not require that the client name on the original appraisal be changed to that of the second lender. GMAC’s memo goes on to discuss the responsibilities of the second lender’s DE underwriter, how to reduce processing delays caused by appraisal issues (“…the second lender is permitted to order a second appraisal under the limited circumstances…”), and gives guidance on the second appraisal.

• GMAC also has a new validity period for appraisals (used for FHA insured mortgages) for loans on existing, proposed, or under construction less than one year, and is now 120 days.

• Well, it would appear that all of the “decisioning” companies have moved over to Fannie DU 8.0. Huh – a new product? Wouldn’t you know it relates to foreclosures? US Bank’s wholesale group is giving their brokers up to 80% LTV for purchases of Bank Owned Properties (i.e., REO) although in some states they will only go to 75% LTV. “1st position liens only, no 2nd mortgages, appraisals must be ordered thru U.S. Bank, foreclosure process must be complete, full home inspection required for bank owned properties, current residence must be sold, and mechanics lien coverage is required on title insurance.

• Starting today Caliber Funding is following HUD Mortgagee Letter 2009-48 and will remove the second appraisal requirement for loan amounts greater than $417,000 (excluding upfront mortgage insurance premium (UFMIP) with an LTV greater than or equal to 95% and located in a declining market, and cash-out refinance transactions with a loan amount greater than $417,000 and located in a declining market. Caliper also tweaked their pricing on loans between $40-$49,999 and REO’s (both more expensive to originate), raised the minimum loan amount for “Texas Section 50 A6” from $40,000 to $100,000, and will no longer allow FHA-Approved Project Reviews for Condominiums.

Daily Humor
Tony and Yvonne were 85 years old and had been married for sixty years. Though they were far from rich, they managed to get by because Tony watched their pennies. Though not young, they were both in very good health, largely due to Yvonne’s insistence on healthy foods and exercise for the last decade.

One day, their good health didn’t help when they went on yet another holiday and their plane crashed, sending them off to Heaven.
They reached the pearly gates, and St. Peter escorted them inside. He took them to a beautiful mansion, furnished in gold and fine silks, with a fully stocked kitchen and a waterfall in the master bath. A maid could be seen hanging their favorite clothes in the closet. They gasped in astonishment when he said, “Welcome to Heaven. This will be your home now.”

Tony asked Peter how much all this was going to cost. “Why, nothing,” Peter replied, “Remember, this is your reward in Heaven.”

Tony looked out the window and right there he saw a championship golf course, finer and more beautiful than any ever built on Earth.

“What are the greens fees?” grumbled Tony.
“This is heaven,” St. Peter replied. “You can play for free, every day.”
Next they went to the clubhouse and saw the lavish buffet lunch, with every imaginable cuisine laid out before them, from seafood to steaks to exotic deserts, free flowing beverages.
“Don’t even ask,” said St. Peter to Tony. “This is Heaven, it is all free for you to enjoy.”
Tony looked around and glanced nervously at Yvonne.
“Well, where are the low fat and low cholesterol foods and the decaffeinated tea?” he asked.
“That’s the best part,” St. Peter replied. “You can eat and drink as much as you like of whatever you like and you will never get fat or sick. This is Heaven!”
“No gym to work out at?” said Tony
“Not unless you want to,” was the answer.
“No testing my sugar or blood pressure or…”
“Never again. All you do here is enjoy yourself.”

Tony glared at Yvonne and said, “You and your damn bran Flakes. We could have been here ten years ago!”

http://blogs.wsj.com/developments/2009/09/01/delinquency-rates-higher-on-broker-originated-mortgages/

IRS Loan Tracking
If you’re an honest, law-biding citizen, should you care if the IRS starts comparing mortgage payments and income? What about if you’re a roofer who makes half his income in cash? If Jane Doe claims she makes $2,000 per month on her taxes, yet her mortgage payment is $3,500, should that be a reason for Ms. Doe to be investigated? In yet another story yesterday, it appears that the IRS “will study whether it should make greater use of data on mortgage-interest payments provided to it by banks.” The IRS currently uses such data to send notices to non-filers who it believes should have filed a return. The data could also be used to target for audits individuals who don’t file tax returns, or who report less income than they paid in mortgage interest. Of course, if you’re a struggling borrower that is using money out of your savings account, or from Mom & Dad, to make the mortgage payment, you don’t need two guys with badges showing up at your office….

Wells TARP
Wells Fargo was in the rumor mill yesterday, not for anything mortgage-related but rather on if and when it is going to pay back the government TARP money. The rumors prompted its CEO to make a statement that Wells will not be selling more stock to pay back its TARP monies but rather use its earnings. Wells, in addition to Citi and Bank of America, have not paid back any TARP money yet. Although $25 or $26 billion is a big chunk of change, Wells has been having its best results in its history and has had made money by cutting its dividend. Let’s hope that they keep buying mortgages!

Yesterday was one of those days when it was better to own fixed-income securities than to own stocks. As it turned out, there were rumors swirling about Wells Fargo (see above), and this caused the herd to shuffle into the proverbial “flight to quality”. Besides, many think that the stock market has gotten a little ahead of itself in recent weeks, and took some profits by selling. Regardless, bonds did well, and rates came down. But as I have said, few are complaining about rates – they are too busy wondering if guidelines will ever loosen up.

Economic Stats Update
What moved rates yesterday? Construction Spending was -0.2% in July, and year-over-year spending is down 10.5%. The Institute for Supply Management’s Factory Index increased to 52.9 in August, better than expected. We also had the National Association of Realtors report that Pending Home Sales were up 3.2%, more than forecast, and once again attributed to lower rates, less expensive houses, and the tax credit (which expires around Thanksgiving). So go figure: better news across the board should have moved the stock market higher and bonds lower, but the reverse happened.

Today we have Factory Orders and the FOMC Minutes, although we have already seen mortgage applications. U.S. mortgage applications were down last week a little over 2%, with purchase apps declining for the first time since early July. Purchase loan applications dipped 1%, and applications to refinance fell about 3%. We also had the ADP employment numbers, which don’t include government jobs, which showed that job losses in the U.S. private sector fell to their lowest monthly level in nearly a year. “Only” 298,000 jobs were cut in August. After this tidbit we find the 10-yr at 3.36% and mortgage securities about unchanged.

Daily Humor
The following was actually developed as a mental age assessment by the School of Psychiatry at Harvard University. Take your time and see if you can read each line aloud without a mistake. The average person over 40 years of age cannot do it!

1. This is this cat.
2. This is is cat.
3. This is how cat.
4. This is to cat.
5. This is keep cat.
6. This is an cat.
7. This is old cat.
8. This is geezer cat.
9. This is busy cat.
10. This is for cat.
11. This is forty cat.
12. This is seconds cat.

Now, go back and read the third word in each line from the top down.