THE BASIS POINT

Home For Bad Home Loans, Fate of Fannie and Freddie, Food Price Report

Spencer D writes, “One of the little known effects of the economic slowdown is a dramatic drop off in the portable john business as the home building industry was one of their biggest customers. You might say their business is in the toilet! I don’t know whether or not they have applied for a bailout or a stimulus but right now they are just sitting on their assets waiting on people to start buying again.”

Home For Bad Home Loans
Where do bad loans go? Kondaur Capital, a “scratch & dent” owner & servicer, plans to jump its portfolio of distressed assets from 2,000 loans to nearly 30,000 by the end of 2009 according to its CEO. Given those plans, they are projected to increase their workforce from 300 to 1,000 to handle the increased workload in the very “high touch” business.

And where do good loans go? One place is Arvest, who through a related company takes in many loans that are sold to Fannie. Based in Arkansas, Arvest Bank announced that its mortgage company had originated more than $1 billion in mortgages (mostly servicing retained) halfway through the year, which is almost twice as much as they had done in the first half of 2008.

Fate of Fannie and Freddie
What is new with Fannie Mae and Freddie Mac? According to the Treasury Secretary, the government doesn’t have time now to deal with the future of the two mortgage-finance companies it seized in September. “We did not believe that we could at this time — in this time frame — lay out a sensible set of reforms to guide, to determine what their future role should be,” Treasury Secretary Geithner told the Senate Banking Committee in Washington. “We’re going to begin a process of looking at broader options for what their future should be.” Given that the two companies have lost $150 billion since late 2007, it is not a problem that can be ignored.

Food Price Report
Here is a report from the trenches regarding food prices. “A client of mine that is a big harvester of crops throughout the West Coast. He mentioned that the dairy farmers in the central valley are having real problems as the price of milk has dropped tremendously by ½ while the price of feed grain, while down over last year, is still elevated from where it was 2-3 years ago. Consequently it is costing more to produce the milk then they are receiving for the sale of milk on the open market. He feels that 10-20% of the dairy farmers may go out of business.” No boom times there…

Bond Supply Still Weighing on Market
There is no scheduled economic news today, nor much early next week, so look for the bond market (hence, interest rates) to either drift around this area or be driven by whatever is taking place over in the stock market. Yesterday, as we know, the psychology of the market headed off in the direction that the economy is gaining a foothold on recovery. Unfortunately this was combined with our friend “supply issues” as the government increased the size of next week’s debt supply. Leading Economic Indicators were up 1.2%, which, when combined with April’s figure, is the biggest two-month jump since late 2001. And the Philly Fed survey was better than expected as well. There was some selling from mortgage servicers and managers of mortgage-backed securities (what tends to happen is rising bond yields lengthen the average maturity of MBS portfolios, and to hedge against such unwanted extension in duration, managers sell Treasury securities, adding more downward pressure on bond prices). Regardless, with little new this morning the yield on the 10-yr is back up to 3.84% and mortgage prices are worse by about .125.

Daily Humor
Bob had finally made it to the last round of the $5,000,000 Question. The night before the big question, he told the M.C. that he desired a question on American History.

The big night had arrived. Bob made his way on stage in front of the studio and TV audience. He had become the talk of the week. He was the best guest this show had ever seen. The M.C. stepped up to the microphone.

“Bob, you have chosen American History as your final question. You know that if you correctly answer this question, you will walk away $5,000,000 dollars richer. Are you ready?”

Bob nodded with a cocky confidence-the crowd went nuts – he hadn’t missed a question all week.

“Bob, your question on American History is a two-part question. As you know, you may answer either part first. As a rule, the second half of the question is always easier. Which part would you like to take a stab at first?”

Bob was now becoming more noticeably nervous. He couldn’t believe it, but he was drawing a blank. American History was his easiest subject, but he played it safe. “I’ll try the easier part first.”

The M.C. nodded approvingly. “Here we go Bob. I will ask you the second half first, then the first half.”

The audience silenced with gross anticipation . . .

“Bob, here is your question: And in what year did it happen??”