Senate Bill’s Mortgage Provisions, China vs. U.S. GDP and Public Debt, Credit Cards As Economic Indicator

Summary of Senate Bill’s Mortgage Provisions
The big news du jour comes from Washington DC, where the Senate approved its version of overhauling our financial-sector regulations. The legislation passed the Senate 59 to 39 and must now be reconciled with a similar bill passed by the House of Representatives in December, before it can be sent to President Barack Obama to be signed into law. There are many things to note that will impact mortgage lending, not the least of which is that the bill will create a new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.

There appears to be little that is directly pointed at resolving any issues with Freddie and Fannie’s role in the housing finance area, but there are key mortgage-related passages as follows.

The Senate’s version limits the ability of mortgage lenders to assess penalties on borrowers who pay off the loan early, and prohibits paying brokers and loan officers more to steer borrowers to higher interest rates or certain risky features; commissions would be based on the size or number of loans originated. The Senate’s version also requires lenders be required to obtain proof from borrowers that they can pay for their mortgages. The borrower would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents, therefore aimed at eliminating stated income loans from passing through government lending channels.

There are, however, many differences between the Senate’s version and the House’s (passed in December on a vote of 223-202). These will need to be reconciled during negotiations in the “conference process” that are expected to start within days but last for a while, possibly into the summer. This will provide one last lobbying opportunity to mortgage companies and investment bankers who have already spent hundreds of millions trying to influence lawmakers.

Given the size of the Senate bill (over 1,100 pages), it’s impossible to summarize here, but there are some links for more details on HR 4173 and S 3217.

Full Senate Financial Regulatory Reform Bill

Library of Congress Links For Bill (Amendments link is particularly interesting, there are 150 amendments!)

Refi Boom Cut Off By Borrower and Property Issues
These low rates are helping loan production, right? In some areas the answer is “yes”, in many areas the answer is still “no”. Mortgage traders are seeing “average volumes” and although volumes are picking up a little, most originators are not seeing much of a jump in activity even with rates dropping. Often borrowers or properties don’t qualify. Rates are low, but if someone is out of work there will be little chance for them to buy a house or refi. One top agent wrote to me and said, “It seems like the single biggest deal killer is appraisals nowadays. Values are trying to move upward but appraisals being so strict are keeping it from happening. Remember back in 1998 +- when values were moving up, but appraisals weren’t as strict? It allowed the values to increase. That is not happening now.”

China vs. U.S. GDP and Public Debt
Sometimes things are simpler than they seem, other times not. For example, China’s consumer spending grew at an 8% rate for the last 10 years. But interestingly, consumer spending in China only accounts for 35% of its GDP compared to 70% here in the United States. China’s public debt as a percent of their GDP is only 18%, in this country it is 53% – a telling statistic. The average Chinese puts aside 25% of their disposable income in savings, which as a country adds up to about $2.5 trillion a year. Many of us live beyond our means; most of them live beneath them. There are differences, however, that account for the reduced consumer spending: prices are expensive there, health care rare, unemployment benefits scant, and pensions are poorly administered. There are virtually no student loans. But overall, consumption is king here in the US whereas production is more important in China. At this point, much of the world is relying on the Chinese consumer to start spending more – but don’t count on it.

The 1st quarter GDP here in the US showed an ongoing recovery in household spending, but household confidence metrics remain in extremely low territory and the recent sell-off in the stock market is not helping. Employment and housing are obviously critical components, neither of which is doing much. And spending itself is broken down into non-discretionary (“We have to buy food”) versus discretionary (“It would be cool to have a new 3-D TV”). Discretionary spending accounted for roughly 36% of total retail activity at the end of the first quarter, and tends to be watched closely as a sign of economic recovery. Isn’t economics fun?

Credit Card Delinquencies As Economic Indicator
Many economists follow credit card delinquencies to gauge the temperature of the economy. As one would expect, the most recent numbers show that major bank credit card trust collateral performance is mixed. Charge-offs and delinquencies are improving, but yield and excess spread are declining, and analysts charge-offs to continue declining through the summer, in line with recent delinquency improvements.

Short-Term Mortgage Delinquencies Declining
Along those lines, in mortgage-land short-term delinquency rates are declining. The percent of loans behind one payment had been declining as first-time claims for unemployment began falling in March 2009. Before everyone starts cheering, however, it is wise to note that overall delinquencies are not improving, and the situation is still bad on historical terms. In recent years the sand states of Florida, Arizona, Nevada, and California have dominated these stats. “A bad situation that’s not getting worse is still bad”. Florida is still worsening, but California is showing signs of improvement. However, Washington, Maryland, Oregon, and Georgia showed the greatest overall increases in foreclosures started compared to last quarter. Maybe servicers are still overwhelmed with the logistical problems in scaling-up their problem loan workout efforts, particularly in light of government mod requirements. Just ask anyone who is involved in the process: there’s no shortcut to clearing up the modification or foreclosure backlog, which will probably take at least 2 years to work through.

Markets Dominated By Europe & Washington DC News
There is no economic news today, not that it would make much difference with what is going on in Europe and with the Senate’s passage. Yesterday, in the late morning, the Conference Board’s Leading Economic Indicators dropped .1% in April. Although the drop was attributed to a smaller money supply, lower building permits, and shorter manufacturing times, it was the first drop in LEI in more than a year. But with stock markets around the world continuing to fall, and the jobs picture here in the US still bad, the flight to safety bid for our fixed-income securities continues. Who would have ever thought that a “flight to safety” would take place into our mortgage market!? Yesterday in Treasuries, 30-yr bonds were better by over 2 points, and 10-yr notes were better by over a point in price. This morning the 10-yr’s yield is currently down to 3.13! Mortgage prices are better by about .375 in price.

Daily Humor
One day a florist goes to a barber for a haircut.

After the cut he asked about his bill and the barber replies, “I cannot accept money from you. I’m doing community service this week.” The florist was pleased and left the shop.

When the barber goes to open his shop the next morning there are a ‘thank you’ card and a dozen roses waiting for him at his door.

Later, a cop comes in for a haircut, and when he tries to pay his bill, the barber again replies, “I cannot accept money from you. I’m doing community service this week.” The cop is happy and leaves the shop.

The next morning when the barber goes to open up there are a ‘thank you’ card and a dozen donuts waiting for him at his door.

Later that day, a businessman comes in for a haircut, and when he tries to pay his bill, the barber again replies, “I cannot accept money from you. I’m doing community service this week.” The businessman is very happy and leaves the shop.

The next morning when the barber opens his shop, there are a ‘thank you’ card and a dozen different books, such as ‘How to Improve Your Business’ and ‘Becoming More Successful’.

Then, a politician comes in for a haircut, and when he goes to pay his bill, the barber again replies, “I cannot accept money from you. I’m doing community service this week.” The politician is very happy and leaves the shop.

The next morning, when the barber goes to open up, there are a dozen politicians lined up waiting for a free haircut.