Earlier this week, the country’s first marijuana cafe opened up, which not only sells medical marijuana, but also has a restaurant where customers can eat. In a related story, the recession is over!
Rates Touching Record Lows
Whoever wants a 4.50% 30-yr fixed rate conforming loan with a point back to cover closing costs, raise your hand! Well, we’re just about there. Fannie 4% securities are shuffling around 99 or 100, and when you throw some servicing-released premiums on the price, you’re easily above par. And who wouldn’t want to own this servicing? Even I am thinking about refinancing, and I don’t even own a place! Seriously, heck, I have a 7-yr ARM that closed in 2003 at 4.75% (so it starts adjusting next year) that I am thinking about refinancing. Given the 30% LTV maybe I can even find an investor!
So if rates are so great, why are applications dropping and agents continuing to work twice as hard for half as much business? For last week, the MBAA’s weekly application index dropped 4.5% with applications to buy a home up 9.6% and refi’s down 9.5%. (“The MBA revised the indices for the prior week.) Does this data support what many in the business already are feeling: That most people who can refinance already have, that the economy would have to go further into the tank for mortgage rates to drop much more, and we’d better get used to a purchase market in the coming months and next year?
Analyzing Fed Minutes
The Federal Open Market Committee is responsible for open market operations. It has the ability to influence “the demand for, and supply of, balances that depository institutions hold at Federal Reserve Banks and in this way alters the federal funds rate. The federal funds rate is the interest rate at which depository institutions lend balances at the Federal Reserve to other depository institutions overnight.” What do they see in their crystal ball? The FOMC sees growth strengthening in the next two years, although commercial real estate has a lot of potential for risk. They still see bank credit as “tight”, not much capital spending, and don’t seem overly concerned by the orderly decline of the dollar but do see the potential for inflation. (Think of the photos of wheelbarrows of money being used to buy bread in some countries…)
Can Stocks Sustain Rally With 10% Unemployment?
The bond market has low rates, the stock market has improved dramatically this month, yet the unemployment rate is hitting new highs. Many experts believe that the “odd man out here” is the stock market. The Fed and the Treasury have placed a huge bet on a recovery driven by asset prices. Stock prices have improved because corporate earnings are up due to cost cutting measures. The biggest single cost they’re cutting is their payrolls. Apparently some companies are cutting payrolls even below where they were 3-6 years ago, either outsourcing the work to other countries, contracting it out, or using automation. So obviously productivity looks great because companies are generating almost as much output with fewer workers and fewer hours. And if a large company can borrow money cheaply, it’s easy to substitute capital for labor, and to buy foreign assets with cheap American money.
This Friday is the traditional start of the holiday shopping season, although it seems some stores like Costco have had a holiday motif ever since Labor Day. (The bond market is open all day today, but has an early close Friday, and there will be no commentary.) No economy can recover without consumers, which still make up about 70% of the U.S. economy, but we are still grappling with increasing unemployment, part time work, pay cuts, and empty commercial buildings.
Case Shiller Data
In addition to the FOMC minutes mentioned above yesterday, and GDP, we had the S&P/Case-Shiller Home Price Index which increased .27% from the prior month, although their numbers are down over 9% from September 2008. Not content to have only one measure, they produce both a 10-city and a 20-city index; tthough still negative, annual returns for both the 10-city and the 20-city index showed some level of improvement in every month since the beginning of the year. And over the third quarter, the US National Home Price Index — which covers all nine US census divisions — recorded a 3.1% increase.
Not-So-Hot Treasury Auction
Unlike the mediocre-at-best 2-yr auction on Monday, yesterday’s 5-year note auction was extremely strong. The yield came in at about 2.18%, and the bid/cover ratio was 2.81 (much higher than the average 2.28 for 2009). The indirect “takedown” (think foreign buyers, give or take a little) was almost 61% of the auction versus the 2009 average of 48%. Are you slightly more confident than you were last month? Join the crowd: Consumer Confidence increased slightly from October to November.
Other Economic Stats
In addition to gold hitting another high on dollar weakness (nearing $1,200 per ounce), and the final auction of the week ($32 billion of 7-yr Treasury notes), today we have many economic numbers to digest. Personal Income and Consumption, Durable Goods, Housing Starts and Building Permits, New Home Sales, and the University of Michigan Consumer Sentiment Survey. Jobless Claims dropped 35,000 last week, which surprised forecasters – is the labor market really improving or are folks just not filing? But October’s Durable Goods number, always volatile, was down .6% in October, and ex-transportation it was -1.3%. With more news ahead, we find ourselves about where we were yesterday with the 10-yr at 3.34% and mortgages about unchanged.
Multifamily Lending 40% Lower…In 2008
How long does it take the MBAA to compile multifamily statistics? I guess eleven months, since Monday’s headline read, “MBA Reports Multifamily Lending 40 Percent Lower in 2008 Than 2007; Market Remained Broad and Diverse”. Their report stated that “2,877 different multifamily lenders provided a total of more than $88 billion in new financing for apartment buildings with five or more units, which is a 40% decline from 2007 levels, and the top five were PNC Real Estate, Wachovia, Wells Fargo Bank, N.A, Capmark Financial Group Inc, and Deutsche Bank Commercial Real Estate. The report also mentioned that 26% of lenders who made multifamily loans in 2008 made just one, and two-thirds made five or fewer!
Removing Loans From Pools Is A Problem
Why would anyone care about Fannie’s ruling on removing loans from MBS pools to complete HAMP modifications? Well, if you’re an investor who paid 102 for a pool, and suddenly loans turn up missing, it creates concern. This month “Fannie Mae suspended some MBS mortgage loan reclassifications to provide servicers with an opportunity to confirm the completion and validation of required HAMP documentation. For loans not reclassified in November 2009, servicers must review the Query/Cancel Manual Reclass Request link (the “Reclassification Request Report”) through HomeSaver Solutions Network (HSSN) in December 2009 and comply with these new requirements based on receipt and validation of all of the required HAMP documentation.”
To remove a loan, Fannie’s requirements are based on the number of payments received by the servicer and notifications to Fannie Mae of the receipt of the payments before the servicer’s reclassification date. “Before a mortgage loan is removed from the MBS pool to facilitate a HAMP modification, a servicer must receive all of the required trial period payments; receive all of the required documentation (other than the Home Affordable Modification Agreement and if required, reevaluate the borrower for HAMP eligibility and confirm that the borrower is eligible. Servicers, I am sure, have the full details on the forms required by Fannie, along with the procedure – as you can imagine it involves more than just a phone call.
A young man named John received a parrot as a gift. The parrot had a bad attitude and an even worse vocabulary. Every word out of the bird’s mouth was rude, obnoxious and laced with profanity. John tried and tried to change the bird’s attitude by consistently saying only polite words, playing soft music and anything else he could think of to “clean up” the bird’s vocabulary. Finally, John was fed up and he yelled at the parrot.
The parrot yelled back.
John shook the parrot and the parrot got angrier and even ruder. John, in desperation, threw up his hand, grabbed the bird and put him in the freezer. For a few minutes the parrot squawked and kicked and screamed. Then suddenly there was total quiet. Not a peep was heard for over a minute.
Fearing that he’d hurt the parrot, John quickly opened the door to the freezer.
The parrot calmly stepped out onto John’s outstretched arms and said “I believe I may have offended you with my rude language and actions. I’m sincerely remorseful for my inappropriate transgressions and I fully intend to do everything I can to correct my rude and unforgivable behavior.”
John was stunned at the change in the bird’s attitude. As he was about to ask the parrot what had made such a dramatic change in his behavior, the bird continued, “May I ask what the turkey did?”‘