Housing Bottom Watch, Callable Bonds, World Bank Dim Economic View

Housing Bottom Watch
Two blonds are facing each other across a large river. One cries out to the other, “How can I get to the other side?” The other responds, “Duh, you ARE on the other side!” Are we on the “other side” when it comes to the housing market? Not according to a Harvard study, in which a housing research group is definitely downbeat about an assessment of the nation’s real estate markets. “Although there are some signs of improvement or at least steadiness in new construction and sales, housing starts stand near 60-plus year lows and any life in home sales is coming from distressed foreclosure sales, temporary first-time buyer tax credits, and low interest rates that moved higher in recent weeks,” ” Nicolas P. Retsinas, director of the Joint Center for Housing Studies at Harvard, wrote in a statement accompanying the new report. One especially troubling finding was the continued number of households spending half or more of income on housing.” I guess that it is nothing that we didn’t already sense, right?

Oil Down on World Bank’s Dim Economic View
So far this morning oil is down after the World Bank said that the global recession will be deeper than expected, therefore we will be using less oil. But typically a slow economy means lower rates. And in fact, the cost of borrowing longer-term U.S. dollars in the London interbank market is going down. Data from the British Bankers’ Association showed three-month dollar Libor moved down to 0.61% from Friday’s 0.61188%. (It’s most recent peak was in early October at 4.8%.) The one-month Libor rate slipped to 0.315% from 0.31688%, although the overnight rate is slightly higher than our overnight rate target here, which is between 00-.25%. And in fact the big news of the week could be the June 24th meeting of the Fed. No one expects them to raise rates, but the market is looking to see what their assessment of the US economy is.

Callable Bonds
There has been some news recently about “callable” bonds. But what exactly is a “callable” bond? It is a bond that can be redeemed by the issuer prior to its maturity. Usually a premium is paid to the bond owner when the bond is called. Also known as a “redeemable bond”, think of it as a mortgage or first trust deed: if interest rates have declined since a company first issued the bonds (or borrower got a loan), it will likely want to refinance this debt at a lower rate of interest. In this case, company will call its current bonds and reissue them at a lower rate of interest. And just like mortgage rates being higher than Treasury rates, investors demand a higher rate of return in exchange for the borrower to have this option. Just like refinancing. Despite the recent underperformance in mortgages relative to Treasury securities, mortgage valuations look rich. And in such periods, investors often turn to agency callables as an alternative, and traders carefully watch the market as an indication of where mortgage rates might go relative to Treasury rates.

Flagstar Adjusts FHA Condo Approvals
Flagstar was busy late last week. They reminded their clients that “FHA no longer requires FHA Condominium Project Approval or Spot Loan Approval for “detached” site condominiums. All other condominium requirements (like the condo rider, certain appraisal forms, $1 million of liability insurance, etc.) remain in place for “detached” site condominiums: “In addition, when a bank forecloses on a property that is less than one year old and subsequently sells the property, FHA considers the bank to be a second owner and new construction documents are not required, which in turn means that for these properties Flagstar does not require items like Compliance Inspection Reports, a building permit, Builder’s Certification, warranty of completion, etc. Flagstar Bank does, however, require a copy of the certificate of occupancy prior to issuing a “clear-to-close” for any bank-owned property that is less than one year old.

Speaking of our friends in Michigan, starting today Flagstar Bank changed their price adjustments for the Freddie Mac Relief Refinance product. The adjustments, which are worse, are based on FICO and LTV’s.

GMAC Guideline Updates
GMAC correspondent clients (mortgage banks) saw GMAC remind them that “Loans are eligible for purchase by GMAC Bank with the Fannie Mae Approve/Ineligible decision and any of the following messages only if the loan amount is within the applicable county limit and the Temporary High Cost loan limit. Loan amount must be the only reason for the ineligibility. All other findings or reasons for ineligibility are not permitted. When the original LTV on the existing Fannie Mae loan was greater than 80 percent, and the existing Fannie Mae loan currently has MI, the lender may either obtain the amount of MI coverage in effect on the existing Fannie Mae loan or the standard level of mortgage insurance coverage.” GMAC also discontinued all of their ARM products with an initial fixed rate period of one year.

More Treasury Supply
In addition to the Fed meeting this week, we have yet another series of auctions: a record $104 billion in the form of $40 billion 2-year’s, $37 billion of 5-year, and $27 billion of 7-yr. Jun 23. For other scheduled economic news, it is relatively light: nothing today, and tomorrow we have Existing Home Sales. On Wednesday the 24th we have Durable Goods and New Home Sales, along with the Fed announcement. We wrap up for news on Thursday with Jobless Claims, GDP, Personal Income and Consumption, and the University of Michigan Consumer Sentiment Survey. The 10-yr seems happy around 3.73%, and mortgage security prices are about .375 better than they were on Friday afternoon.

Daily Humor
At St. Mary’s Church they have a weekly husbands’ marriage seminar. At the last session, the priest asked Giuseppe, who was approaching his 50th wedding anniversary, to take a few minutes and share how he had managed to stay happily married to the same woman for so many years.

Giuseppe replied to the assembled husbands, “Wella, I’ve a-tried to treat her nicea, spenda da money on her, but besta of alla is, I tooka her to Italy for our 25th anniversary!”

The priest responded, “Giuseppe, you are an amazing inspiration to all the husbands here! Please tell us what you are planning for your 50th anniversary?”

Giuseppe proudly replied, “I’ma gonna go get her.”