THE BASIS POINT

5 Questions With Elizabeth Warren. Are Rates Headed To High 6s? Why Loan Modifications Are So Hard.

Elizabeth Warren on Consumer Protection
For some reason the mortgage industry already doesn’t seem to like presidential and Treasury advisor Elizabeth Warren, who’s also tasked with setting up the new Consumer Financial Protection Bureau (or Agency). Here’s the Treasury’s ‘5 Questions’ interview with Warren, which is posted on ‘Treasury Notes’ the blog that Treasury announced last week.

Are Rates Headed to High 6s?
Is the economy going back down, stable, recovering, or expanding? Place your bets – lots of folks believe that we’re moving toward expansion. During the last week or so rates went up around the world. The primary explanation is that growth expectations have increased because of better economic data and the “second stimulus” provided by the US government. But others argue it could be due to higher government deficits. Some forecasters are predicting a 5% 10-yr T-note, which puts mortgage rates into the high 6’s. The hoped-for good news is that if the economy picks up more steam, as does the employment picture, it could help housing.

You can bet any borrower or loan agent who didn’t lock in a week or two doesn’t like being part of this economics experiment. Last week rates were hit with the proposed deal between the White House and some members of Congress to extend Bush-era tax cuts, reduce payroll taxes and renew emergency unemployment benefits dominated headlines. But that is not the only reason rates have gone up. Economists feel that GDP growth should get a slight boost in 2011. Thursday’s weekly first-time unemployment claims for the prior week fell to their lowest reading of the year. This is on top of the potential tax deal that is expected to boost economic growth but also increase the budget deficit – neither of which would help fixed income securities.

The Complications of Loan Modifications
It is rumored that Freddie & Fannie, via the FHFA, are in talks with administration officials to help out in the efforts aimed at reducing loan balances for underwater mortgages. The goal of this would be to reduce the threat to the U.S. housing market from the glut of homeowners believed at risk of default, but F&F have been hesitant for a variety of reasons to join the FHA’s ongoing efforts. F&F collect claims from mortgage insurers or force banks to buy back certain loans when a loan defaults, and these options might go away. And if you hold the first lien, wouldn’t you want the 2nd lien holder to also sacrifice? “Federal officials estimate that 500,000 to 1.5 million homeowners could benefit from the program-a fraction of the estimated 11 million borrowers who were underwater as of June 30 – 23% of all US households with a mortgage, according to CoreLogic.

Preview of Market Week
So is this what we can expect from QE2? I mentioned a few weeks ago that its goal was inflation – and the bond market has begun to react accordingly. Personally, I think that the market is a little ahead of itself – but what do I know? Last week we had very little scheduled economic news to hang our hats on; this week we have a lot. Tomorrow’s FOMC announcement is important, but no one expects any material changes to it, or to overnight rates.

Tomorrow morning we have Retail Sales, expected +.6%, and PPI expected +.5%. On Wednesday we’ll learn what the CPI did in November, along with Industrial Production and Capacity Utilization. We’ll see some minor NY Fed and Philly Fed manufacturing numbers, along with Jobless Claims, Housing Starts & Building Permits, and Leading Economic Indicators. Ahead of this, the sell-off continued, with the 10-yr now up to 3.36% and MBS prices worse by about .125-.250.