Rates Up on New Home Sales Of +27%, Can We Trust Ratings Agencies For New Mortgage Securities?

Rates Up On New Home Sales & Durable Goods Numbers
Today we had Durable Goods (very volatile) and a big New Home Sales number. Durable Goods were expected to be +.3% for March and originally reported as +.5% in February, the third consecutive monthly increase (although most of the gain in February’s number was due to a 4.7% monthly increase in machinery bookings). New Home Sales surged 27% in March, fueled by the Federal homebuyer tax credit which expires April 30. Mortgage bonds are currently down about 25 basis points on these better than expected economic reports. More on why rates are moving up in the last section below.

Varying Home Sales Data
Existing Home Sales rose 6.8% in March to an annualized pace that is the fastest since December. Total housing inventory is now at an 8 month supply. The median price was $170,700 in March, up 0.4% from March 2009. Distressed homes accounted for 35% of sales last month – unchanged from February. Sales have been above year-ago levels for nine straight months, and inventory has trended down from year-ago levels for 20 straight months. But FHFA’s Purchase-Only House Price Index (it covers only conforming loans) fell 0.2% in February and is down by 3.4% from its level in February 2009. The regional indices came in mixed, with declines in the South Atlantic, New England, and West North Central divisions offsetting moderate increases in the Middle Atlantic, Pacific, and West South Central regions.

The housing data is becoming hard to keep track of – so many numbers. Housing Starts data estimates how much new residential real estate construction began in the previous month, but does not include remodels. Building Permits data gives forward-looking data on planned construction, and thus is part of the Conference Board’s Index of Leading Economic Indicators. Hmmm.
Some folks in the mortgage business seem to be pretty clever at both naming websites and structuring deals, as evidenced by a site like this: I don’t know enough about this business to make a judgment about this advertising campaign. I think that it’s the standard mortgagee letter from HUD…but they appear to be stretching the guidelines. Just like the old days, right?

Can We Trust Ratings Agencies For New Private MBS?
Okay, everyone got excited over a new non-agency security that will soon be issued. But how will investors determine if the security fits their risk tolerance? The disclosure on the Redwood Trust/CitiMortgage issue is extensive, and the loans look excellent credit-wise. In the “old days” investors would rely on one of the top three rating agencies to tell them how safe a mortgage security was, but will anyone believe them now?

Rating agencies have been around for a century and their rating have been used by regulator since the 1930’s. They increased in popularity in the 70’s, with the SEC giving S&P, Moody’s, and Fitch “Nationally Recognized Statistical Rating Organization” status. The ratings often dictate what institutions like banks, insurance companies, and money market funds can and can’t do. For example, if a money market fund can’t have more than 5% of their assets in low-rated commercial paper, etc., it must buy higher credit quality paper.

Of course, just because a rating agency says a particular bond is AAA doesn’t mean that investors have to buy it – the rating should be only one part of the decision making. But not only did rating agencies contribute to the credit bubble, they also accelerated the crash. In late 2007 and early 2008, for example, the agencies downgraded almost $2 trillion in MBS’s. What was “AAA” one day was “C+” the next. And many institutional investors are prohibited from owning too many low-rated securities, so these downgrades led to forced selling, magnifying the panic. Buy high and sell low. Of course, the rating agencies are paid by the companies issuing the bonds – a conflict of interest? Sure it is. If you’re buying AAA securities, you can claim that you’re being responsible, but the rating agency might have missed correctly grading the risk. As one article put it, “working with a fake safety net is more dangerous than working without any net at all.”

New Freddie Mac Ops System For Servicers
Not that it impacts smaller originators, but anyone servicing Freddie Mac loans learned of a new system that the agency is rolling out. Titled the “Freddie Mac Reimbursement System”, the system will provide “operational efficiency to Freddie Mac Servicers”, and replacing its current Online Reimbursement System. No more paper claims, real time decisions on submitted claims, etc. But wait, there’s more! Freddie also updated its Guide to reflect new Broker Price Opinion (BPO) costs, a new expense code for the reimbursement of legal fees related to multiple bankruptcy filings, and a revised Form 1128, Loss Mitigation Transmittal Worksheet. Check it all out here.

Sterling Bancorp Entering Warehouse Lending Business
Sterling Bancorp (NY), the parent of Sterling National Bank, is entering the warehouse business. “The warehouse lending group will focus on serving established mortgage banking firms and will concentrate primarily on warehouse facilities secured by Fannie Mae, Freddie Mac and Federal Housing Administration residential loans.”

Baltimore Suing Wells Fargo
Baltimore first filed suit against Wells Fargo in 2008 accusing the bank of violating the Fair Housing Act by targeting minority neighborhoods with dishonest loans. That case was dismissed, but now a new complaint has been filed focusing on the alleged damages to the city caused by vacant houses. Apparently Baltimore would like Wells Fargo to foot the bill for the increase in annual cost per block of police and fire services.

Rates Up. Greece Woes Continue.
Unfortunately for borrowers or brokers waiting to lock, Thursday was not a good day (and today isn’t shaping up well either). Not only did the stock market come back from being down, but the Treasury announced a record large amount of new government debt issuance for next week. The Treasury said it will auction a total of $129 billion ($44 billion in 2-yr, $42 billion in 5-yr, $32 billion in 7-yr notes, and $11 billion 5-yr TIPS). Mortgage sales appeared heavy, with estimates of sales running at about $2 billion. Interestingly, the euro fell to a near one-year low against the U.S. dollar after the EU said Greece’s budget deficit was worse than feared and Moody’s cut its rating of Greek government debt (it’s 10-yr yield is 8.40%). It appears that Greece will need to receive emergency loans to avoid default – are Spain and Portugal next? But bailouts can create massive political instability, in addition to the Euro falling in value. The Greek problem is not going to be over in a month or two.

Daily Humor
I went fishing last weekend but after a short time I ran out of worms.

Then I saw a cottonmouth with a frog in his mouth. Frogs are good bass bait. Knowing the snake couldn’t bite me with the frog in his mouth I grabbed him right behind the head, took the frog, and put it in my bait bucket.

Now the dilemma was how to release the snake without getting bit. So, I grabbed my bottle of Jack Daniels and poured a little whiskey in its mouth.

His eyes rolled back, he went limp. I released him into the lake without incident and carried on fishing using the frog.

A little later, I felt a nudge on my foot. There was that same snake with two frogs in his mouth.

Life is good in the South.

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