THE BASIS POINT

How Many Actually Qualify For Refis, Fate of Volcker Rule, Treasury Opposes Covered Bonds It Proposed

How Many Can Refi vs. How Many Qualify
There was a story in the Wall Street Journal wondering “But if rates are so low, why isn’t demand for new loans picking up? For one, most borrowers who could refinance probably did so last year, when rates fell below 5% in March, August, and December. Many borrowers with an incentive to refinance can’t qualify with today’s tougher lending standards or don’t think it’s worth paying the closing costs on a new loan. Credit Suisse estimates that around 61% of all borrowers with a 30-year fixed rate mortgage could lower their mortgage rate by 0.75 percentage point at current rates. But analysts estimate that only 38% of those borrowers could actually qualify at current standards. More borrowers can’t qualify because they don’t have enough equity in their homes, their credit scores have taken a hit, or they’ve seen their income reduced.”

Covered Bonds Rejected By Reform
It is one thing to pass financial reform, and other to actually implement and enforce financial reform. That may be what faces the mortgage industry after the Dodd-Frank (nicknamed “Frank ‘n Dodd”) reform bill passes. Votes on flood insurance and the extension of loans funding under the First Time Home Buyer Tax Credit are due this week. Due to opposition from the Treasury Department, an amendment that would allow covered bonds to get a start in the U.S. mortgage market was blocked (wait a second, didn’t previous Treasury Secretary Hank Paulson advocate for covered bonds during the crisis?). Federal regulators will oversee appraisal management companies that are affiliated with federally insured banks under the Dodd-Frank regulatory reform bill.

Lenders Selling Loans Must Keep 5%
It appears that “private lenders” will be required to keep at least a 5% stake in loans they package and sell as a form of risk retention. This would affect credit-card debt, auto loans, mortgages and other securitized debt. But originators of long-term, fixed-interest-rate mortgages would be among those that would not be required to retain risk. The exemption would not apply to mortgages with risky features such as negative amortization, interest-only payments and balloon payments. In addition, FHA, VA, and USDA loans don’t fall into this bucket. But loans guaranteed by Fannie Mae and Freddie Mac, the mortgage companies taken over by the government, are not specifically exempted in the legislation.

Fate of Volcker Rule
The bill creates two huge government entities: the Consumer Financial Protection Bureau and the Systemic Risk Council, which will have unprecedented power and authority to regulate the financial services industry in the years ahead. Also the conference agreed on a version of the “Volcker Rule” which bars proprietary trading, but provides numerous exemptions. It also permits banks to invest up to 3% of Tier 1 capital rather than 3% of tangible common equity in hedge funds and private equity funds. Expect a vote from the House tomorrow.

Latest Bank Failure
On Friday, the FDIC said Peninsula Bank (FL) was closed, and taken over by Premier American Bank (also of Florida). First National Bank (GA) was shuttered and taken over by National Association Bank (GA). And in New Mexico, regulators closed High Desert State Bank and First American Bank will assume its deposits. The newest failures on Friday were expected to cost the FDIC’s insurance fund a combined total of $284.6 million.

Rates Drop on GDP, Other Economic Worries
On to mundane things, like our economy. Friday we learned that GDP grew by 2.7% in the first quarter, less than previously reported. Conversely, the University of Michigan Consumer Sentiment increased to 76, the highest since January 2008, from 73.6 in May. After this news we had a nice rally (again) toward lower rates and investor price improvements. There is no Fed meeting in July, and the futures market is pricing in a 75% chance that the Fed keeps rates at .25% through November so don’t look for higher rates soon unless investors become nervous about the amount of debt in the US… Mortgage rates are low because investors, nervous about global economic stability and a volatile stock market are plowing their money into Treasury debt and mortgage securities, assets that investors perceive to be relatively safe bets.

Economic Preview For Week
The data calendar is full this week with the main highlight being the June employment report on Friday. This morning one can expect May personal income to rise 0.4% and for personal spending to be up 0.2%; the core PCE deflator is projected to come in at 0.1%. And so for economic news – today we have the Chicago Fed numbers, along with Personal Consumption and Income. Tomorrow we have the S&P/Case-Shiller Home Price Indexes, and the Conference Board’s Consumer Confidence stats. Wednesday some ISM numbers, Thursday Jobless Claims, ISM Manufacturing, and Pending Home Sales, but the biggest economic event next week will be the important Employment report on Friday. Early estimates are for a decrease of about 70K jobs in June.