Construction Spending
- Construction Spending – Month/Month +1.4%
- Construction Spending – Year/Year +0.9%
- Public sector construction spending was +3.1%
- Private residential was +0.7%
- Private commercial was +0.2%

Treasuries will continue to be driven by Eurozone concern. Greece announced that it would not be able to cut its budget deficit to the IMF mandated level. This is the Catch-22 of austerity causing lower GDP and lower tax receipts.

This Friday has the BLS Employment Situation Report which is always a market mover. More people with jobs = more people spending money = Higher GDP. Last month was dead flat. In addition the weak labor market has kept nominal wages from growing with the effect that real (inflation adjusted) wages are down. Recovery will be driven by the consumer who is in a tight spot.

Mortgage Applications
Week-to-week changes in applications last week
- Purchase Index – 0.0 %
- Refinance Index -5.7 %
- Composite Index -4.0 %

Construction Spending (April) +0.4%

ISM Manufacturing Index for May was 53.5 – below previous and consensus.

Big Picture:Not only is U.S. economic growth weakening but Japan is still suffering from the tsunami, the E.U. is refusing to address debt problems and China’s economic growth is slowing. Other than that, things are just fine.

The index showed a 22-month inflation trend. Normally bonds would sell and rates would rise on inflation fears (since inflation erodes purchasing power of a bonds future cash flows), but markets—for now—seem to be agreeing with the Fed’s theory that energy inflation is ‘transitory’. Below are inflation warning comments from manufacturers, as well as a preview for jobs data that will dominate market mood this week.

The ISM index’s employment readings for the first four months of 2011 are the highest in the last 38 years.

This is better news following the past two weeks of rising jobless claims which snapped a multi-month streak of fewer jobless claims. This weaker job trend has contributed to a bullish bond mood.

This Friday’s official BLS jobs report for April calls for 183k new jobs. If this surprises to the upside, rates would lose ground as bonds retreat from 2011 highs. But higher jobless claims suggest the number could be at expectations.

We’ll get two more clues before Friday. First with Wednesday’s April jobs report from payroll provider ADP, and Thursday’s weekly jobless claims. Stay tuned…

MANUFACTURING STATS & MOOD FOR APRIL

When bondholders see inflationary threats in economic data, they typically sell, causing the price of that bond to drop and the yield (or rate) to rise. Bonds have this negative reaction to inflation because it reduces buying power of the future payments a bondholder will get from their bonds. This is the basic premise of rate markets, and when it comes to mortgage rates, this is what mortgage bond investors are thinking about each day as they trade. So now that we know this, let’s look at the inflation data they’re trading on right now.

The table above shows February’s reading on manufacturing activity and inflation from a monthly survey of top manufacturing and purchasing executives by the Institute for Supply Management. It showed that manufacturing activity has now expanded for 19 consecutive months and the ISM Manufacturing index posted its highest reading since May 2004.

Or particular note is the ‘Prices’ section of the table which shows prices increasing for the past 20 months. Also the comments from survey respondents at the top of the table show that prices may soon be passed to consumers.

So why wouldn’t bonds be selling more on this news. It has to do with something Bernanke said on Capitol Hill this morning: the jobs situation is still rather dire, and until we see sustained movement on that front, economic stability is still at risk.

This morning private payroll provider ADP reported that private sector employment increased by 217k, a big spike. But this report has typically been poor in predicting accurate results for the official BLS jobs report—next one due Friday.

So for now, bond traders are sticking to the Bernanke theory that weak jobs mean a wobbly consumer, which both mean business inflation won’t creep to consumers because the consumer wouldn’t be able to sustain it. That’s not the strongest case considering that businesses have little control over the rising commodity prices that are driving inflation they see, but it’s the case—and the trade—for now.

Manufacturing is growing if the ISM Manufacturing Index is at 50 or better and today it was 60.8. The monthly ISM study reviews 18 manufacturing industries, and 14 are reporting growth in January, in the following order: Petroleum & Coal Products; Primary Metals; Apparel, Leather & Allied Products; Wood Products; Computer & Electronic Products; Transportation Equipment; Fabricated Metal Products; Machinery; Paper Products; Miscellaneous Manufacturing; Chemical Products; Furniture & Related Products; Food, Beverage & Tobacco Products; and Electrical Equipment, Appliances & Components. The four industries reporting contraction in January are: Textile Mills; Printing & Related Support Activities; Plastics & Rubber Products; and Nonmetallic Mineral Products.

The table below shows why today’s December ISM Index was generally optimistic on U.S. manufacturing activity and confirms a trend of increasing prices. Rates rise on this kind of data because price inflation causes bonds to sell off. Also, here’s a good WSJ table of global manufacturing activity by country. December Factory Orders and minutes from the December 14 Fed meeting are due tomorrow, mortgage application activity and ADP private payroll numbers are due Wednesday, Initial Jobless Claims are due Thursday, and the official BLS December jobs report showing unemployment rate and jobs gained/lost is due Friday. We’ll cover daily reports and also release our 2011 rate outlook this week.

Ellie Mae IPO Filing
If you’d like to own a piece of Ellie Mae, you will soon have a chance. Ellie has filed papers with the SEC for an initial public offering worth up to $86.25 million. The company, which sells software to mortgage originators, has hired Goldman Sachs as the lead underwriter, along with William Blair, Keefe, Bruyette & Woods, Macquarie Capital, Piper Jaffray, and ThinkEquity. Maybe not so coincidentally, Ellie Mae reported earnings of $1.7 million on sales of $37.7 million in 2009.

Mortgage Company Capital Requirements
Are mortgage companies really going to have to reserve capital (up to 5%) for securitized loans, thus constricting hedging and volumes & liquidity in the secondary markets? CML America and Lenders One are garnering support for an amendment which would create a “zero category” of risk retention for “qualified mortgages” — those mortgages that meet standard underwriting criteria. The amendment would mean that standard fixed rate, adjustable rate, and jumbo mortgages would not be subject to any capital charge. High risk loans (option ARMS, neg-am, etc) would remain the focus of the risk retention provision. CML and Lenders One recommend contacting your US Senator through their Legislative Assistant (LA) and telling the LA that not only are you a business owner in the state and that you are concerned about risk retention for mortgages in the proposed Dodd bill. “Very clearly state that Senator Landrieu has an amendment that permits risk retention for higher risk mortgages but exempts the kinds of products that had nothing to do with the mortgage crisis” and ask that they “support Senator support Senator Landrieu’s amendment, and advise them that Senator’s Stabenow and Hagen are also co-sponsoring.” (It doesn’t have an amendment number yet.)

Citi Cuts Jumbo Rates
According to Reuters (I guess that is one way to release mortgage pricing news), CitiMortgage sharply reduced rates on jumbo loans. The CEO announced that the company cut rates (raised prices) on 30-year fixed-rate and 5/1 adjustable-rate loans. “We are beginning to see a lot of interest in the jumbo market,” Das said. “We want to demonstrate that Citi is a leader in jumbo mortgages and we believe that end of the market has been underserved,” he added. Most banks are comfortable holding on to their jumbo loans – there are some nice spreads.

GMAC Mortgage To Rebrand Ally Capital
GMAC Financial Services, owner of ResCap, and who hasn’t paid back its TARP money, reported its first quarterly profit ($231 million from the bank, but $162 million after including losses from other divisions) since receiving Troubled Asset Relief Program, or TARP, funds (which have not been paid back yet). And on Monday GMAC will rebrand itself Ally Financial Inc., thus matching one of its businesses, Ally Bank.

Mortgage Company Closure
Universal Mortgage, a private mortgage bank in Wisconsin that’s been around since the 1960′s, will begin permanently closing the business this month, eventually eliminating about 100 jobs.

ISM Higher, Rates Better
Yesterday was not a particularly busy day on mortgage trading desks, although rates were a little higher to start the day. Traders report that current coupon yields are above 4.40% and that the spread to Treasuries remains somewhat high. We did have a fair amount of news, all of it reflecting economic recovery. The ISM Manufacturing Index increased to 60.4 in April, up from 59.6 in March and 56.5 in February, and growing at its fastest pace since 2004. Construction Spending increased .2% from the revised February number (private construction spending – residential – fell 0.9% below February totals, but was more than offset by an increase of 2.3% in the public sector for education structures and highway construction). Today we will have Factory Orders and Pending Home Sales, and ahead of that we have a rally: the 10-yr is back down to 3.65% and mortgage prices are better by about .250.

Daily Humor
This is mythical and deep… truly beautiful.

A man asked an American Indian, “What is your wife’s name?”

He replied, “She called Five Horses”.

The man said, “That’s an unusual name for your wife. What does it mean?”

The Old Indian answered, “It old Indian name. It mean ‘Nag, Nag, Nag, Nag, Nag’!”

Is Jumbo Mortgage Comeback for Real?
Do folks here in the US and in the mortgage business have any good news to cheer about, besides rates not being 11%? Some are dealing with the changes in FHA lending and the effect on condominiums. The markets, and interest rates, are facing the end of the Treasury’s purchases of mortgage backed securities and the end of the first time homebuyer tax credit ($8000). The economy does not appear to be rebounding enough to generate much home buying interest, the unemployment rate is hovering around 10%, and foreclosure filings not yet abating.

It could very well be that the jumbo market, like a dormant volcano, is about ready to rumble back to life. In addition to jumbo security prices rallying, there have been several newspaper articles on the subject, and there are rumors that Wells Fargo plans to roll something out in a few business channels possibly as soon as the end of this month. In Los Angeles and Orange counties, Wells Fargo Home Mortgage (retail) already lowered their down payment from 25% to 20%. But, as one would expect and hope, borrowers must provide evidence of high income, have sizable bank accounts as a cushion against the unforeseen and occupy the houses themselves. We don’t really want more problems in the jumbo market by going too far back the credit curve, do we? Do we?

Economic Stat Summary, Fed Vice Chair Donald Kohn Retiring
Yesterday we learned that in January Personal Income increased .1% but that Personal Spending Increased by .5%. So much for that savings rate, which hits its lowest level since 2008. In addition, the ISM Manufacturing Index for February fell slightly from January’s levels, and Construction Spending dropped .6% as expected. The decline in construction spending was led by a fall in private nonresidential construction spending, which more than offset a moderate increase in residential construction. Lastly for news yesterday, Fed Vice Chairman Donald Kohn said that he will leave the Federal Reserve at the end of his four-year term as vice chairman after 40 years at the central bank. Although the announcement was somewhat early, it was not altogether unexpected and many believe that he will be a huge loss to the institution at time when credible, independent thinkers are required to get the Fed through a very difficult political period ahead.

Through all of that we had the usual Fed buying, and higher coupons (which are mostly older, 6% and higher, mortgages) doing somewhat better than lower coupons. With a slight break in the scheduled news today, the rate markets are pretty quiet and close to unchanged from yesterday, although the stock markets appear poised to continue rallying.

Daily Humor
A young Texan grew up wanting to be a law man. He grew up big, 6′ 2”, and strong as a longhorn and fast as a mustang. He could shoot a bottle cap tossed in the air at 40 paces. When he finally became of age he applied to where he had only dreamed of working: the West Texas Sherriff’s Department.

After a big mess of tests and interviews the Chief Deputy finally called him into his office for the young man’s last interview.

The Chief Deputy says, “You’re a big strong kid and you can really shoot. So far your qualifications all look good. But we have what you call an ‘attitude suitability test’ that you must take before you can be accepted. We just don’t let anyone carry our badge son.”

Then, sliding a service pistol and a box of ammo across the desk, the Chief says, “Take this pistol and go out and shoot six illegal aliens, six ACLU lawyers, six Democrat senators, six meth dealers, six Muslim extremists, and a rabbit.”

“Why the rabbit?”

“Great attitude,” says the Chief Deputy. “When can you start?”

Private MBS Investors To Replace Fed
OK, eventually the Fed will either end their $1.25 trillion mortgage-security purchase program, or extend it. Everyone, including the shoeshine boy, knows this – don’t pay any high priced consultants to tell you that. And rates will react accordingly. But heck, not only do we have several more months of the program, but we also have the possibility that either they will extend it, or that an investor-based market will re-develop – just like “the old days”. Let’s cheer for the private investors coming back in.

Housing Recovery Depends On Banking
Do you have money in the bank? Probably. Do banks and money managers have lots of capital? Sure they do. Most recognize that the core of the problem is not a lack of capital, but rather a lack of willingness to deploy/invest it. If everyone is saving for a rainy day, they’re happy just to have the return of their capital rather than earn a good return on their capital. And a solid housing recovery relies on mortgage credit, decent rates, and a private mortgage market.

Warehouse Lending Update
Where does warehouse lending stand these days? A few years ago one couldn’t swing a dead cat around without someone offering you a line. Now, many mortgage banks have either signed captive agreements with some warehouse banks/investors, or are actively staying on the good side of the 10-15 who are still left and trying to stay above the $3 million minimum net worth that some require. Some doubt that Freddie or Fannie will offer lines as long as they are under government conservatorship, in spite of the two agencies continuing to be active in buying loans from qualified clients. (I believe that at this point, a minimum net worth of $2.5 million is required.) Capital requirements are going up for those who exclusively originate on a wholesale basis (an increasing number of warehouse lenders and correspondent investors will not even consider a new application from a company that is strictly wholesale) and no one can deny that the percentage of mortgage broker business has declined.

Thornburg Selling 17,000 Loans
Do you remember when everyone in the business was hoping that Thornburg would survive, and continue to offer “make sense” loans? At this point non-government “make sense” deals seem to be in the realm of private money lenders, and Thornburg, who is bankrupt, is trying to sell its $11 billion (almost 17,000 loans) servicing portfolio. Formal bids are due by January 28th. They no longer originate, purchase, or securitize loans, and many in the industry are viewing the sale of the servicing portfolio as a gauge of interest out there for the potential revival of the secondary market.

Economy & Market Roundup
For economic news yesterday we had the ISM Manufacturing Index, which rose to 55.9 in December from 53.6 in November, growing for the fifth consecutive month and the highest reading since April 2006. (On Wednesday we will have the ISM service report.) Construction Spending in U.S. Decreased 0.6% in November. To balance that number we had Construction Spending total $900 billion in November, the lowest level since July 2003 and down 19% from a year earlier. But 10-yr yields are still near the highest level since June, and 30-yr mortgage rates are still well above 5% – not bad by historical standards, but it won’t get a recent borrower much admiration at the cocktail party.

Helping rates is news that the New York Fed purchased $9.3 billion in agency mortgage-backed securities the week before last. Yesterday, to start the year, traders reported that volumes continued to be light. Ahead of us today we have Factory Orders for November (expected to rise) and Pending Home Sales, both at 10AM EST, but anyone who cares is waiting for Friday’s unemployment data. Most analysts feel that economic readings are showing improvements and that in many markets the housing sector may have found its bottom. We’re seeing, so far this morning, a bit of an improvement in rates. 30-yr mortgage prices are better by about .250, depending on the coupon, and the yield on the 10-yr is down to 3.79%.

Correction To Yesterday’s Commentary
Apologies to Caliber, who yesterday I called “Caliper” at one point but also muddled the condo/FHA news somewhat. My mention of the condo requirements does not relate to FHA loans, but is in fact saying that FHA Condo approvals are no longer accepted for CONVENTIONAL loans.

Lender Guideline Roundup
Late last week Chase made some changes to their pricing and to their credit & and collateral (appraisal) policies. More specifically on the pricing side, Chase made an improvement to their Agency conforming 10-year loans (interesting…) On the appraisal side, on the 18th Chase will require that all conventional loan appraisals be performed by a Certified Appraiser. Of interest is that appraisals performed by Stated Licensed Appraisers will not be acceptable, and that “Chase-approved AMCs have been instructed to use only Certified Appraisers on loans being originated for or sold to Chase.” In addition, Chase is eliminating their appraisal classifications only to have one status: Ineligible (any type of appraisal report or other related appraisal work will not be acceptable to Chase). Chase is following HUD’s FHA appraisal changes, noted in mortgagee letters.

Starting yesterday, “Chase Correspondent is eliminating the option of using FHA condominium project approvals on conventional loan transactions” and “all Non-Agency loans must be sold to Chase Correspondent under a non-delegated status, and as such all individual loans must be underwritten by Chase and all condominium projects must be reviewed and approved by Chase’s Project Approval Group.”

Wells Fargo’s wholesale channel came out with some adjustments to the HELOC program starting 1/16. (Yes, there are still HELOC’s out there.) But for wage income, 1099s will no longer be considered an acceptable form of income documentation. And income from commission, where the commission income makes up <25% of the total qualifying income, will require a current pay stub(s) with year-to-date earnings (should not be handwritten) and a few years of W-2’s or 1040’s. And for self-employment income, 1099s will no longer be considered an acceptable form of income documentation – the borrower will need, for non-employment income, a 1040 tax return and either the most recent bank statement or most recent account statement or distribution letter.

Daily Humor
I was walking past the mental hospital the other day and all the patients were shouting, “13….13….13.”
The fence was too high to see over, but I saw a little gap in the planks. I looked through to see what was going on, and someone poked me in the eye with a stick!
Then they all started shouting, “14….14….14…”

My uncle used to say, “Do not corner something that you know is meaner than you.” Or bigger, for that matter. Speaking of big, the numbers yesterday show that the Fed’s purchases dipped somewhat, as expected. For the week ending on September 30th, the Federal Reserve’s MBS program was a net buyer of $20 billion agency MBS which indicates a $2 billion decline from their prior week’s purchases, entirely consistent with their announcement last week that they will gradually slowdown MBS purchases and also extend their $1.25 Trillion purchase program to into the first quarter of 2010. Anyone nervous about scaling back the Fed’s purchase program should remember that a) they don’t want to de-stabilize the markets, b) historically they are not buyers of MBS’s, c) they are currently buying more MBS’s than are being originated – do they need to buy older production? and d) in spite of the numbers yesterday that showed a decline, mortgage rates still improved nicely.

Treasury Auction Update
There are a few things to note, not the least of which is that the Fed’s MBS purchases continue to be heavily skewed towards conventional loans (Fannie & Freddie) and away from GNMA (FHA & VA) securities, in spite the fact that FHA & VA production has skyrocketed. The Fed is also has bought a large portion of Treasury securities, although there are always more where those came from! In fact, next week the Treasury is selling another $78 billion of 3, 10, and 30 year fixed income securities for anyone wanting to add to their portfolio.

Pending Home Sales & Construction Spending Up, Manufacturing Down
After I sent out the commentary yesterday, we had some decent economic news. Pending Home Sales were up over 6% in August, and are at their highest level since early 2007. (Some explained that this was due to the rush of buying ahead of the tax credit expiring at the end of November, and that buyers are still facing delays due to short sales or HVCC issues.) We also had Construction Spending increase almost 1% in August, which balanced out a revision to the July numbers. (Spending on private residential projects rose 4.7% in August.) And we had the ISM Manufacturing Index drop slightly to 52.6 – still above the magical 50 level that indicates expansion. (Many would say that manufacturers are catching up in taking care of depleted inventories rather than in satisfying new demand…)

Strong Buying for Wall Street Firms
Wall Street firms (all 3 of them) saw very good buying yesterday, in spite of the decent economic news. Whether or not investors pass along the superb MBS pricing to their clients is another issue: 4% securities (which contain 4.25-4.625% 30-yr mortgages) are trading near par (100). Add on some value for servicing, and suddenly these rates are at a point or two premium. In addition, the yield curve is continuing to flatten, impacting ARM rates relative to 30-yr fixed rates. Supposedly Japanese trust banks had been buying Treasuries in the 5-year to 7-year range, but still, there is plenty of supply out there. Some view this as a way of buying “cheap” dollars; others believe that investors are not concerned about inflation while world economies are still weak.

Unemployment Hits 9.8%
Today was the “big daddy” unemployment numbers that always make it into the headlines Saturday morning. Estimates heading into today had job losses pegged at 175-200,000 for September with the Unemployment Rate hitting 9.8%. “Weak but improving” was the term some economist were using for the job market – until this morning. U.S. employers cut 263,000 jobs in September, pushing the unemployment rate to 9.8%. 9.8% is the highest rate since mid-1983 and payrolls had now dropped for 21 consecutive months. After the number stocks are getting hit again, but the yield on the 10-yr is down to 3.13% and mortgage prices are better by .250-.375!

Lender Updates from US Bank and Franklin American
US Bank begins their Freddie Mac Streamline Refi Program today. USB’s Freddie program will go to 105% LTV, with a 620 minimum FICO and all borrowers must have a FICO score. It is available for conforming and high cost county limits in 1-4 units for primary residences and investment properties, 1-unit second homes, condos & PUDs. (Manufactured homes are not allowed). And there is no MI required if there is no MI on the loan being refinanced (even if new LTV is at 105%) – but you should know that this program is not available for existing loans with MI. And, of course, the loan must receive an LP Accept and the existing loan must be current.

Franklin American addressed HUD’s recent Mortgagee Letters announcing significant revisions to FHA program parameters. Starting today any FHA Streamlines & VA IRRRLs going to FAMC will need a minimum FICO of 640. On top of that, FICO price adjustors will be modified for all FHA and VA loans promoting loans with scores above 700. Franklin will also, starting today, require 6 payments (which may or may not be the same as 6 months) with the current lender for this product.

Daily Humor
The Cajun Prenuptial Agreement:

Boudreaux done got older and his childen dun put him in the old folks’ home near Breaux Bridge, where he dun met a lovely lady dat were from Texas.

Now Boudreaux being a fine upstanding Catholic, he didn’t want to do nutin dat were aganst his religion, no. So he dun propose marriage.

Now both Boudreaux and Mabel wuz well into their 80s.

Mable went and tole everyone at the Senior Citizens home the good news. Irene, Mabel’s best friend, told her that since she was very wealthy and the person she was about to wed was, well to say the least, not worth a plug nickel, she should insist on a prenuptial agreement.

Mabel was sitting on the porch swing with Boudreaux and she told him she would marry him providing he would sign a prenuptial agreement.

Boudreaux dun told Mabel, “I don’ know what dat is but I’ll sign anything you want, cause I luv you so much.”

Mabel got out her pen and paper and started:

She said: “I want to keep my house down in Texas with all the oil wells.”

He said: “Dat’s fine wit me. I’ll keep my shack on da bayou.”

She said: “I want to keep my Cadillac, BMW and Lexus.”

He said: “Dat’s fine wit me. I’ll keep my pick-em-up truck.”

She said: “I want to keep my yacht that is moored near my summer home in Padre Island.”

He said: “Dat’s fine wit me. I’ll keep my pirogue.”

She said: “I want to keep all my jewelry.”

He said: “Dat’s fine wit me. I’ll keep my stuffed deer head.”

She said: “And I want to have sex 6 times a week.”

He said: “Dat’s fine wit me. Put me down for Fridays.”