57 Failed Banks YTD, Parsing The FOMC Statement, Who’s Buying Mortgage Bonds?

Reshuffling Of Fed Members
Is the economy really in good enough shape for the Fed to start selling their $1.25 trillion of mortgage-backed securities? I don’t think so, but maybe the press doesn’t have enough else to talk about, so the Fed possibly lightning up on their balance sheet has been receiving some publicity. Federal Reserve Vice Chairman Donald Kohn declared on March 1 that he was planning to retire, and SF Federal Reserve’s Janet Yellen was immediately mentioned. But the nomination still hasn’t been made. In a story from the Washington Post, not only is that spot unresolved, but there have been two seats on the seven-member Fed board of governors that have been unfilled this year! MIT economist Peter Diamond and Maryland bank regulator Sarah Raskin have been mentioned. But unlike vacancies in the Supreme Court, open spots on the Fed don’t seem to garner many headlines in spite of the Fed determining short term interest rates, the pace of job creation and employment, even mortgage rates over the last year or two.

57 Failed Banks YTD
It’s Monday, so that means I get to write about the FDIC closing down banks. (We’re up to 57 this year compared to 140 for all of 2009.) In this case Illinois got whacked with seven banks from that state eliminated, with their mugs and t-shirts becoming collector’s items. The FDIC took over four banks in Chicago: New Century Bank, Citizens Bank & Trust, Broadway Bank, and Lincoln Park Savings. And just so the rest of the state didn’t feel left out, Amcore Bank (Rockford, IL), Peotone Bank and Trust Company (Peotone, IL), and Wheatland Bank (Naperville, IL) were shut down. MB Financial Bank agreed to acquire the deposits of both Broadway and New Century, Republic Bank (IL) assumed Citizens’ deposits, and Harris National Association (IL) agreed to acquire Amcore Bank’s deposits. Northbrook Bank and Trust Company took Lincoln Park Savings’ deposits; First Midwest Bank of Itasca agreed to assume Peotone Bank and Trust’s, while Wheaton Bank & Trust will acquire the deposits of Wheatland Bank.

FHA & VA Loans Going Strong
Recent statistics are showing continued strength in FHA and VA production volumes. Maybe not Streamline Refinances, but for purchases and non-streamline refi’s. With the reduction of lenders offering subprime loans at decent rates, the reliance on FHA/VA loans is now easily exceeding the experience of the 1990s or early-2000s. Any agent will tell you that there are currently only three options for borrowers: Very clean and well documented non-agency borrowing with low LTV’s, clean GSE loans with FICO’s well above 700 and LTV’s generally less than 80%, and FHA & VA often as a choice of last resort. Yes, everyone is excited about the Redwood/Citi deal coming to the market, but we have a ways to go until non-agency securities are welcomed by investors and non-portfolio lenders.

Mortgage Insurance Company Earnings
Wall Street has been pleased with the earnings of the MI companies, although cynics would say that they are still losing money. MGIC lost $150 million in the first quarter versus a loss of $185 million a year ago. RMIC had a net income of $25 million last quarter versus a loss of $54 million for the same period last year. And PMI lost $649 million for all of 2009 versus a loss in 2008 of $929 million.

Parsing The FOMC Statement
Do you think that, years from now, we’ll be telling our grandkids how analysts and traders would analyze every word of the Fed statement that was produced after they met just to look for microscopic clues on the markets? And how prehistoric that seems? This week we’ll hear from the Fed, and most expect that the Fed is seeing the same thing many are: slow but sustained economic growth, lagging consumer spending, tight credit, a muddling housing market, and little sign of inflation. The committee will likely conclude that conditions continue to warrant leaving rates “exceptionally low” for an “extended period.”

More on +27% New Home Sales
New Home Sales were up 26.9% in March. Granted, February was a pretty light number, but still it appears that the business is seeing yet another wave of folks taking advantage of the tax credits that won’t exist after this week. The South and Northeast posted the strongest gains, with sales in the South rising 43.5% in March, 35.7% in the Northeast, 4.3% in the Midwest and 5.7% in the West. March’s new home sales figure is up 23.8% from a year earlier even though new home sales growth has been sluggish. In March, the median price (half below, half above) for a new home increased 4.3% on a year-over-year basis to $214,000. In looking at home sales sorted by price, in the first quarter 45% of new home sales were below $200,000, while only 13% were above $400k. That certainly helps the argument that FHA/VA, Fannie/Freddie will dominate for most, if not all, of 2010 and possibly beyond.

Who’s Buying Mortgage Bonds?
Which entities were buying mortgages Friday, without the Fed? Asian investors, banks, hedge funds, and money managers were all reported to be in sniffing around. And originators were happy to oblige by selling an estimated $1.5 billion to them. And with a lot of Treasury supply coming in most every week, there’s a school of thought that suggests that investors buy mortgages rather than Treasuries. The mortgages being originated now are cleaner, better documented, and of better quality than in the last several years. Besides, with the Fed keeping short term rates near 0%, funds can earn 1% in 2-yr USTs, 2.5% in 5-yr Treasury notes… why not pick up a little yield by earning 5.25% on some 60% LTV full doc loan?

Economic Preview For Week
Greece actually requesting financial help, along with that solid New Home Sales figure and the thought of more auctions this week pushed rates higher on Friday. (One can argue that no one knows exactly what moves markets, but it was easiest to blame those factors.) This week presents us a mixed-bag of economic releases, on top of the auction. Today we have Building Permits. Tomorrow we have the S&P/Case-Shiller Price Index, along with Consumer Confidence. Wednesday is the Fed meeting mentioned above, Thursday is Initial Claims and the Chicago Fed numbers, and on the last day of April we have the GDP numbers, the Employment Cost Index, and Chicago Purchasing Managers’ numbers. Currently the 10-yr yield is 3.80% and the 5-yr Treasury and mortgage prices are both better by about .125.

Daily Humor
The local news station was interviewing an 80 year old lady, because she had just gotten married for the fourth time. The interviewer asked her questions about her life, about what it felt like to be marrying again at 80 and then about her new husband’s occupation!

“He’s a funeral director,” she answered.

“Interesting,” the newsman thought. He then asked her if she wouldn’t mind telling him a little about her first three husbands and what they did for a living.

She paused for a few moments, needing time to reflect on all those years. After a short time, a smile came to her face and she answered proudly, explaining that she had first married a banker when she was in her early 20’s, then a circus ringmaster when in her 40’s, and a preacher when in her 60’s, and now in her 80’s, a funeral director.
Astonished, the interviewer looked at her and asked, “Why did you marry four men with such diverse careers?”
She smiled and explained, “I married one for the money, two for the show, three to get ready and four to go.”