What The U.S. Should Learn From Europe’s Debt Problems

Can We Learn Anything From Europe’s Problems?
With all the talk of European debt problems, it’s useful to know how Europe is structured. The European Union is made up of 27 countries, though it may be 28 soon with Croatia. But only 16 countries use the euro, and those 16 make up the “euro zone”. Many potential countries – those that have been considering joining up – are now waiting. These include Poland, the Czechs, and several smaller Eastern European countries. Many of the entry rules and restrictions (like deficit size) are being broken by current members.

EU/Eurozone concerns seem, on the surface, to make it less critical that we address our own problems here in the U.S. Economists point out that with Treasury rates low the expense on debt service is low, but if politicians refuse to adopt fiscal sustainability then the markets will do it for them just like they’ve done in Europe. When markets lose confidence in a country’s bonds, they sell (or short) those bonds which pushes up the yield or rate the country has to pay to investors service that debt. Politicians tend toward surface level, short-term views on most topics, and this threatens U.S. economic health because it means our own austerity measures are ignored. “Austerity measures” is a term used to describe a country’s fiscal decision to cut spending and raise tax revenue, and while markets (and creditors) usually force austerity measures upon profligate countries already in crisis (as we’ve seen in Greece, Spain, and other EU/Eurozone countries), the lesson that the U.S. should take from all of this is to tighten fiscal policy before we reach the same fiscal crisis levels. Unfortunately, this isn’t politically convenient and is therefore unlikely to happen.

Lending Strategy Changes for BB&T, U.S.’s 12th Largest Bank
According to one news source, Liberty Mortgage Corp., a division of Branch, Banking & Trust (BB&T), is exiting the wholesale channel, a move that could change its focus to the bank ramping up both its correspondent and warehouse lending divisions. BB&T ranks 12th in the United States in terms of assets.

Pending Home Sales Up 6%, Home Loan Demand Down
Yesterday morning NAR announced that Pending Existing Home Sales increased by 6% in April, its third gain in a row. A sample of 20% of transactions showed that sales were up 30% in the Northeast, up nicely in the West and Midwest, down a shade in the South. And compared to a year ago, sales were up 25%. Remember that these numbers measure housing sales contract activity – a signed contract is not counted as an actual existing home sale until the deal closes. A sale is listed as “pending” when a contract to purchase an existing home (single-family, condos, and co-ops) has been signed but the transaction has not closed. Combine that with the current demand for home loans falling and you have…confusion. But if the supply of mortgages is down, and demand is strong, look for mortgages to do well.

Mortgage Bonds Worse This Morning
Regardless, rates moved higher, and prices worsened, after this number came out. Fortunately mortgages tightened, meaning that they did not do as poorly, but MBS volumes were still reported as “lower than normal”. Keep in mind that although current rates are in the high 4’s, most trading volume occurs in MBS’s made up of 5.25-6.125% mortgages – those are more liquid and easily tradable. The U.S. 30-year Treasury bond fell to a full point loss and 10-yr Notes were down about .75 in price and up to 3.34% in yield.

ADP Shows +55k Jobs Gained, Jobless Claims Down 10k Last Week
This morning we had the private ADP jobs number, with usually a dubious correlation between this number and the unemployment data which will come out tomorrow. ADP’s report, for example, does not include census hiring (since it is government related), but still showed a gain of 55,000 for its 4th consecutive increase. Tomorrow’s nonfarm number is expected to be up over 500,000, a strong number for the economy. That isn’t to say that rates won’t move higher even if the number comes in as expected – they already are! We also had Initial Jobless Claims out this morning, -10,000, down from a revised 463,000, with the 4-week moving average creeping higher.

Also, 1st Quarter Productivity came out at 2.8% with Labor Costs -1.3%, with little change in rates, and still ahead of us Factory Orders (expected +1.8%), the ISM Nonmanufacturing index (expect unchanged), and the auction amounts for next week’s Treasury sale (expect about $80 billion). With all of this we find the 10-yr up to 3.40% and mortgage prices worse by about .250.

Warehouse Lending Update
In 2009, mortgage lenders were worried about a lack of warehouse lenders. Although most companies are seeing lower volumes, in theory freeing up warehouse capacity, apparently warehouse issues are still present. The Mortgage Bankers Association stated that the number of warehouse lenders has gone from 200 in 2007 to about a dozen last year! (These include firms such as BofA, Wells Fargo, Southeast Securities, Flagstar, ViewPoint Bank, Florida Capital Bank, etc., etc.) And in an associated study, the Reynolds Group reported total commitments by warehouse lenders to mortgage bankers fell from a peak of $2.25 trillion in 2006 to just $340 billion in 2009.

The MBA, whose dedication to smaller lenders has come under question recently, issued a release saying,

“Warehouse lenders going out of business, terminating, or adding restrictions to their warehouse lines of credit are causing independent (non-depository) mortgage lenders to struggle to maintain their ability to serve borrowers by providing funding on schedule and offer consumers options when shopping for a mortgage.”

Some banks issue captive lines, restricted warehouse lines, ceased to issue new lines or stopped increasing existing lines and increased pricing and restricted terms have closed down lines altogether – and anyone looking for a line had better have a good track record, decent profits, be lawsuit free, and a bullet-proof business plan.

Along these lines, the Bank of New York Mellon is working closely with MERS to create eVaults for warehouse lending. The reported goal of this is to improve a model for compliance and speed to deliver warehouse lines of credit. Once a loan is registered through MERS and comes to the custodian, BONY (in this case) can provide the asset on paper or electronically. One official stated, “We use the one custodian to get the risk mitigation without touching paper. When the loan is actually created, and certified the first time, it satisfies the direct deposit, the warehouse and the agency’s requirements. It speeds up sale to the secondary market.” Nice!

Daily Humor
(As always, the joke does not necessarily reflect the views of the writer.)

A man was leaving a convenience store with his morning coffee when he noticed a most unusual funeral procession approaching the nearby cemetery. A long black hearse was followed by a second long black hearse about 50 feet behind the first one. Behind the second hearse was a solitary man walking a dog on a leash. Behind him, a short distance back, were about 200 men walking in single file.

The man was overcome by curiosity. He respectfully approached the man walking the dog and said, “I am so sorry for your loss, and this may be a bad time to disturb you, but I’ve never seen a funeral like this. Whose funeral is it?”

“My wife’s.”

”What happened to her?”

The man replied, “My dog attacked and killed her.”

He inquired further, “But who is in the second hearse?”

The man answered, “My mother-in-law. She was trying to help my wife when the dog turned on her.”

A poignant and thoughtful moment of silence passed between the two men.

“Can I borrow the dog?”

The man replied, “Get in line.”