THE BASIS POINT

Zillow: 23.3% Of Homes Underwater, Parents Rely More On Kids’ Credit Scores, Europe’s Bailout Doesn’t Fully Solve Problem

 

Underwater Homes Drops In Q1
CoreLogic reflected some good news about the housing market. The number of homes where borrowers owe more on the mortgage than the house is worth has dropped to about 11.2 million in the first quarter, down from 11.3 million last year. But we still have about 24% of all residences have negative equity. Given that negative equity and unemployment are the two biggest causes of default, and both are relatively stable, it is good news. CoreLogic bases their numbers on 47 million mortgaged properties out of about 55.3 million using its AVM’s value estimation versus outstanding mortgage debt (from public records). There are few surprises in the top negative equity states: NV, AZ, FL, MI, CA, GA, ID, VA, MD, and UT. The top 10 states with lowest negative equity rates are OK, NY, MT, PA, ND, KY, AL, IA, NE, and HA.

Zillow: 23.3% Of Homes Underwater
Many have opinions about Zillow. But the Zillow Quarterly Real Estate Market Report indicated that home values continued to decline in the US during the first quarter of 2010. The firm reported that negative equity across the country remained high with 23.3% of single-family homes with mortgages underwater, up from 21.4% in the fourth quarter of 2009. Zillow’s chief economist believes that home values are more likely than not to remain above their lowest point last year, with several caveats including factors such as tax credits and inventories.

Parents Rely More On Kids’ Credit Scores
Kate Berry with American Banker put out an interesting article on a credit-related trend. It used to be common for children to piggyback on their parents’ credit to buy a car. Now the opposite is happening with increasing frequency: in some areas where unemployment and foreclosure rates are among the highest, parents are increasingly using their grown children’s higher credit scores to lease cars! According to one person in that industry, many of these adult borrowers can afford to take over a lease payment “but have issues qualifying for credit,” and are turning to their children for help.

Fannie & Freddie To Wind Down In 2 Years?
Fannie and Freddie continue to be in the spotlight. The latest proposed amendment to the financial regulation bill would wind both companies down within 2 years, with F&F reducing the size of their mortgage portfolios and begin paying state and local sales taxes. It is unlikely to pass, but with Fannie’s latest loss at $11.5 billion in the first three months of 2010 and needing $8.4 billion from taxpayers to stay afloat, the issue is not dead.

Europe’s Bailout Doesn’t Fully Solve Problem
The dust has settled from the nearly-$1 trillion aid package in Europe, and many agree that while it buys countries time, they still need to fix some deep-seeded economic problems. (One could say the same thing about some states here in the US.) The EU legislative and executive power base is a complex behemoth across different national borders, which makes the Euro area far less stable in any crisis times than a traditional national union. The market knows this well and the EUR exchange will surely suffer accordingly.

Fed Selling of Mortgage Bonds?
The press continues to conjecture on the Fed beginning to sell their $1 trillion plus of MBS’s. The Fed does not want to create economic instability, or wreak havoc on the housing market, but if rates indeed begin to creep up and our economy continues to strengthen look for the Fed to start nibbling away at the $1.097 trillion that it owns. (Yes, they bought $1.25 trillion, but mortgage portfolios have a way of running off for a variety of reasons, like refinancing, Fannie or Freddie buy outs, etc.)

Market Update
Once again, overnight news makes it tough to wait on a rate lock overnight, or over the weekend. Volatility never helps the spread between mortgages and Treasuries, and yesterday spreads improved somewhat after being relatively wide last week. The 10-yr Treasury note was down (worse) by about a point. Stocks garnered all the headlines, rallying after the aid package was announced, and the “flight to quality bid” left the US bond market. There is no scheduled news for today, and not too much for tomorrow aside from the MBAA report on applications. We do have a 1PM EST 3-yr auction today. With the dollar rallying, and stocks pointing down, the yield on the 10-yr is back down to 3.50% and mortgages are better by about .250.

Daily Humor
A mechanic was removing a cylinder head from the motor of a Harley-Davidson motorcycle when he spotted a well-known heart surgeon in his shop.

The surgeon was there waiting for the service manager to come take a look at his bike when the mechanic shouted across the garage, “Hey Doc, can I ask you a question?”

The surgeon, a bit surprised, walked over to where the mechanic was working on the motorcycle. The mechanic straightened up, wiped his hands on a rag and asked, “So Doc, look at this engine. I open its heart, take the valves out, repair any damage, and then put them back in, and when I finish, it works just like a new one. So how come I get such a small salary and you get the really big bucks, when you and I are doing basically the same work?”

The surgeon paused, smiled and leaned over, and whispered to the mechanic……”Try doing it with the engine running.”

 

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