THE BASIS POINT

No More MBS Buying From Fed, FDIC Banks Report $22b 2Q Profit, Commercial Real Estate Update

No More MBS Buying From Fed
Rates continue to trend lower, helped yesterday by the release of the FOMC meeting’s minutes which alluded to the possibility of the Fed reinvesting in MBS’s. (But heck, as one trader told me, low mortgage rates are helping agency-qualified borrowers, not others in the economy like renters who can’t qualify, not those that don’t have jobs or those that simply pay cash for houses.) “A few members worried that reinvesting principal from agency debt and MBS in Treasury securities could send an inappropriate signal to investors about the Committee’s readiness to resume large-scale asset purchases,” the Fed said in the report, referring to mortgage-backed securities. The minutes from the August 10 meeting made it clear that the Fed is far from ready to restart Quantitative Easing Round 2.

FDIC Banks Report $22b Aggregate Profit
“It’s hard to make a comeback when you haven’t been anywhere.” Conversely, banks have certainly made a comeback: FDIC-insured institutions reported an aggregate profit of almost $22 billion in the second quarter of 2010, a $26 billion improvement from the $4 billion net loss the industry posted in the second quarter of 2009. This is the highest quarterly earnings total since the third quarter of 2007. Earnings remain low, however; the primary factor contributing to the year-over-year improvement in quarterly earnings was a reduction in provisions for loan losses.

Commercial Real Estate Update
“Commercial real estate markets showed surprising resiliency during the second quarter, with property transactions rising solidly and leasing activity holding up better than expected. We remain cautious in our outlook for commercial real estate and construction.” So states Wells Fargo’s economics department. “The rise in delinquency rates in recent years was mostly caused by the sharp contraction in employment, retail sales and the rate of household formation growth. The apparent improvement in demand may be overstated, as many firms are taking advantage of soft market conditions to upgrade space and locations. The larger immediate issues with commercial real estate continue to be the overhang of commercial real estate loans coming due over the next few years and the large number of development projects that have been partially completed or less, which continue to weigh on community bank portfolios. After showing some resiliency earlier this year, commercial real estate prices fell sharply in June.”

Mortgage Apps Up, ADP Employment Down
Today we’ve already had the MBA’s application index (apps were up 2.7% last week, with refi’s up 2.8% and purchases up 1.8%), and the ADP numbers which were down 10,000 but notoriously questionable about predicting overall employment data (the ADP # does not include government hiring).

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