THE BASIS POINT

What If All Mortgages Were 1% Lower?, TARP Taxpayer Cost Dropping, Record Low Home Sales

What If All Mortgages Were 1% Lower?
A Wall Street acquaintance of mine wrote to me about dropping trillions of dollars of mortgages by 1%. “I think that something like it may just happen. Many people I’ve talked to have said the same thing: ‘The money would go directly to the borrowers to help our economy, and totally bypass our government. There would be no claims of the government wasting the money on projects or programs at the taxpayer’s expense.'”

TARP Taxpayer Cost Continues To Drop
The government’s $700 billion bailout of the financial system (TARP) will be argued about well into the future, but the cost to the taxpayer for TARP continues to drop. The Congressional Budget Office projected that the overall deficit impact of the TARP will be about $66 billion, down from the $109 billion estimate the Congressional Budget Office made earlier in the year, and a significant drop from the initial projection of $350 billion. TARP, as we all recall (or maybe not) gave the government the authority to use $700 billion to prevent the collapse of the financial industry (and a few automakers along the way). Banks are repaying bailout money and automakers are continuing to payback their loans.

S&L Loan Volume Up
According to the OTS, the 753 federally chartered savings and loans, also known as thrifts, originated more single-family loans in the 2nd quarter (about $31 billion, or about $500 million per day) than in the 1st quarter. These thrifts sold $28 billion in single-family loans in the second quarter, up slightly from the first quarter, but down from the $60+ billion they did a year ago.

Loans Getting Harder For Property Flips
There’s growing sentiment among lenders that property flips—buying a home that was previously foreclosed on at a discount, doing some small cosmetic touch ups, and quickly selling it for more—may represent an unacceptable risk. For example, flips create quick and substantial profits for the property sellers, but potentially high losses for the investor, and the properties are typically located in areas with a high percentage of distress sales. Investors believe that second home occupancy is often dubious, and borrowers who purchase investment properties out of flip transactions are often gullible, inexperienced in property management and unfamiliar with the area where they are buying. The projected rental income may not be realistic because of an imbalance between rental properties and available tenants, or borrowers may be attracted by supposed guaranteed rental income not disclosed to the lender – which is unacceptable. There is a high potential for severe property abuse by foreclosed borrowers, vandals or squatters, and some properties purchased from institutional sellers do not include interior inspections that would discover plumbing or electrical problems. And often times any renovation is merely cosmetic.

Record Low Existing Home Sales
On to the markets. Tuesday bonds rallied and stocks got whacked with a huge drop in Existing Home Sales. Yesterday we learned that New Home Sales fell over 12% to the lowest levels since 1963 and giving us 9 months’ worth of inventory at current sales levels. Initially we saw the same reaction as we did on Tuesday, with prices improving and stocks selling off. The 10-yr Treasury moved into the low 2.40% range. But then the psychology changed, for no particular reason other than “we’ve come a long way, and nothing goes up or down forever – the markets are over-extended”. The 5-yr Treasury note auction came with a coupon of 1.25%, and 5 years is a lengthy amount of time to tie up your money and “only” earn 1.37% the entire time. Are things really that bad here, and expected to be that bad for 5 years, in the US? Mortgages went from better by .375 in price to roughly unchanged, which resulted in rate changes from investors zipping around e-mails like flying monkeys.

Today’s Market Activity
This morning we had the weekly Initial Jobless Claims number, and $29 billion 7-yr note auction. Claims were 473,000 from a revised 504,000 – a drop of 31,000. Treasuries sold off slightly, nudging rates higher. We need to see evidence in next week’s August employment report that the labor market continues to expand, even if only modestly. This morning’s number not a particularly great number, but stocks like it because it is not a terrible number. After it we find the 10-yr up at 2.54% and mortgages worse between .125 and .250.