THE BASIS POINT

1.3b Credit Cards Issued In U.S., California Real Estate Rebound?, How Far Can Rates Drop?

Non-depository mortgage banks had some good news: the FDIC notified personnel that Colonial’s warehouse relationships would continue under BB&T, at least in the short term. Many of Colonial’s assets were purchased by BB&T, including the warehouse facility which appears to be operating “business as usual” and funding loans. There is some nervousness, however, given the investigation into TBW and the Colonial warehouse unit, but it is rumored that BB&T has assured lenders that they will keep the business channel open – and why not? It’s a good business with lots of demand!

Some interesting news came out yesterday. Barclays reported that most major credit card companies saw positive performance in July: aggregate charge-offs declined and yields increased, payment rates were higher, and delinquencies continued to improve for the third consecutive month. Do you have a credit card? Does your child? How many? US citizens hold 1.3 billion credit cards, which means that there are roughly 4 cards for every man, woman, and child. In China, where there are about 1.25 billion people, there are only 5 million credit cards. The ability spend, and in some sense capitalism in general, makes it profitable for producers to sell what consumers want to buy, but it also makes it profitable to cause consumers to buy what producers want to sell. (Think about that one! Said another way, capitalism does not just sell people what they really want, it also sells them what they think they want.) Interestingly enough, studies indicate that Americans who don’t own a credit card save more than those that do.

California Real Estate Rebound?
Is California real estate turning around? SunTrust thinks that it is. Not only are they going to $2 million loan amounts, but they have updated the “SunTrust Declining Markets Index” to reflect only seven (7) Metropolitan Statistical Areas (MSA) in the State of California which remain in areas that continue show declines in property value. Those MSAs are Hanford-Corcoran, Madera-Chowchilla, Merced, Modesto, Riverside-San Bernardino-Ontario, Sacramento-Arden-Arcade-Roseville, and Salinas. All other MSAs in the State of California have been removed from the SunTrust Mortgage Declining Markets Index, which is obviously subject to change.

Loan Mod Software
First there was “Loan Prospector”. Now Freddie has introduced “Workout Prospector”. For the Home Affordable Modification program (HAMP), starting in November servicers will be required to use Workout Prospector for evaluating all borrowers for a modification under HAMP, and Freddie revised, and put on line, the HAMP Modification Agreement, Trial Period Plan, and Hardship Affidavit. “Workout Prospector helps you analyze and structure foreclosure alternatives on your Freddie Mac loans…evaluate a borrower for a modification under HAMP…In the future, Freddie Mac plans to require Servicers to use Workout Prospector to process all foreclosure alternatives.” For more details one should go to Freddie Mac’s Home Affordable Modification program Web site.

How Far Can Rates Drop
The roller coaster of economic news continues. (I guess it would be too easy if everything pointed to one outcome.) Last week rates improved, as they did again yesterday morning after Asian stocks fell significantly. Oil, gold, and other commodities were down (although sugar is at a 28 year high, which doesn’t help people who make jam at home and kids who eat Captain Crunch).

How far can rates drop? I haven’t heard too many agents complain about rates in general, as mortgage rates remain near their lows but the government’s borrowing needs are at historical highs. This limits the amount that rates will be able to fall so as to attract buyers of our debt, and most analysts believe that soon the buyers of our debt will be demanding higher yields. Last week the Fed left overnight rates unchanged. So what? If anything, what the last year or two has taught us is that mortgage rates have little or no correlation with Fed Funds, so even though CNBC and the media make a big deal out of the Fed’s decision, mortgage rates are not impacted. Granted, any changes in rates can impact the Prime Rate (currently 3.25%), but that obviously is not the same as a 30-yr mortgage rate. So how do mortgage rates change? Mortgage rates are the result of supply and demand forces, just like any other security that is bought and sold in the open market. Securities that are backed by mortgages trade in the market, just like other fixed-income debt, and just like stocks which garner the headlines, with the prices in turn determining rates.

Economic News
In spite of some second-tier news from the “Empire State General Economic Index” that showed growth, the equities market followed Asia and had their worst day since early July. So if an investor thinks that we’re not out of the economic woods yet, where can they put their money? One answer is fixed income securities, which rallied. The yield on the 10-year note hit 3.46%, the lowest level in almost a month. And it didn’t hurt that a) the Fed bought Treasury notes maturing in the next four to seven years, and b) the Fed officials said they will extend TALF loans against newly issued asset-backed securities and legacy commercial mortgage-backed securities through March 31, 2010.

PPI Down More Than Expected
Although we had some potentially market-moving data out this morning, the market hasn’t moved much since yesterday afternoon. The Producer Price Index for July was -.9%, a larger drop than expected and mostly due to gasoline prices being down last month. In June the PPI was +1.8%, so we are certainly seeing some volatility month-to-month, and versus a year ago the PPI is -6.8%! (Remember when the Fed was worried about inflation?) Ex-food & energy, the PPI was -.1%, +2.6% versus a year ago. On the residential front, Housing Starts dropped 1%, below expectations, although the June numbers were revised slightly higher. Multifamily unit starts dropped over 13%, but single family home starts were up almost 2%. New Building Permits were down almost 2%, and down over 39% versus a year ago. After the news we find the 10-yr yielding 3.49% and mortgage prices roughly unchanged from Monday afternoon’s levels.

Daily Humor
Three Rednecks were working up on a cell phone tower: Cooter, Ronnie and Donnie.
As they start their descent Cooter slips, falls off the tower and is killed instantly.
As the ambulance takes the body away, Ronnie says, “Well, someone should go and tell his wife.”
Donnie says, “OK, I’m pretty good at that sensitive stuff, I’ll do it.”
Two hours later, he comes back carrying a case of Budweiser. Ronnie says, “Where did you get that beer, Donnie?”
“Cooter’s wife gave it to me,” Ronnie replies.
“That’s unbelievable, you told the lady her husband was dead and she gave you a case of beer?”
“Well, not exactly”, Donnie says. “When she answered the door, I said to her, ‘you must be Cooter’s widow.’”
She said, “You must be mistaken, I’m not a widow.”
Then I said, “I’ll bet you a case of Budweiser you are.”