New Loan Limits, MBS vs Treasuries, Thornburg Default, Dollar Decline

The last time mortgage rates were this bad compared to Treasury rates, dinosaurs roamed the earth…and this morning it continues. After Jobless Claims fell 24,000 to a much lower-than-expected 351,000, we find the 10-yr at 3.67% but 30-yr mortgage prices worse by .50 in price. Fixed income investors need to be reminded why they should invest in mortgages when housing continues to slump, defaults are still increasing, and servicers are selling mortgages: because credit guidelines are now strict and a recession could lead to lower rates!

Even the Fed’s Beige Book indicated that 2/3 of the districts are showing signs of weakening. Analysts will be closely watching the government’s unemployment report tomorrow: economists are expecting it to show 25,000 jobs were added bringing the unemployment rate up to 5.0% from 4.9%. The January pending home sales report is expected to show a decline of -1.0% over last month, which, if true, pending home sales will be down 32% from the peak reported in September 2005.According to a story in Bloomberg, Thornburg Mortgage said JPMorgan Chase sent a notice of default tied to a $320 million loan. The receipt of the notice triggered defaults on other financing agreements and the amounts involved are “material,” Thornburg said in a regulatory filing.

HUD released the new FHA loan limits for California, with the remainder of the country soon to follow. OFHEO has not, however, but in theory the median home price data could allow agents to calculate the new conforming loan limit for Freddie Mac and Fannie Mae (it’s 125 percent of the median home price, or $417,000, whichever is more, up to a maximum of $729,750). 14 California counties saw their loan limits for FHA bumped all the way up to the $729,750 cap. Most were in the San Francisco Bay Area or northern California (Alameda, Contra Costa, Marin, Monterey, Napa, San Francisco, San Mateo, Santa Cruz, and Santa Clara) with five more in the L.A. area (Los Angeles, Orange, San Benito, Santa Barbara, and Ventura).

In spite of making, in theory, imports more expensive, has the drop in the value of the dollar hurt you? If you travel overseas you may feel pinched, but here in the United States, perhaps not. Inflation is not out of control. There are several reasons for this. Remember that exchange rates move much more quickly than prices for goods, and it is a logistical issue for stores to change the prices of imported items when the value of the dollar goes down. Many of our goods come from China, and their government typically buys dollars to help the value and ensure that Americans can buy their exports. Large companies often use futures markets to hedge the need for price increases, or may just resist raising prices to keep prices constant and increase their market share. This is often the case with high-end electronics, beer, etc.

At least all real estate is local, right? Credit Suisse In the simplest terms, home prices are a function of what typical home buyers can afford, of which income growth and mortgage rates are two key components. CSFB, using these two metrics, concludes that for most MSAs the majority of home price declines are yet to come, and borrowers will be under increasing stress as equity continues to be squeezed and refinancing opportunities dry up. Over recent years, home price growth has far outpaced historical growth rates. They believe that homes in certain MSA’s like Phoenix, Miami, and areas of Southern California could decline by as much as 20%-40% in addition to what they may have already suffered.

Were Pay Options ARM’s such a good thing? Countrywide, as of the end of last year, had almost $29 billion in pay-option loans, and approximately $26 billion of the total have grown beyond the original loan amount.