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Jul. 26, 2011: The budget issue & mortgage rates; Kroll bond ratings; LPS earnings; 2011 origination & housing predictions from the Fed & Fannie
Rob Chrisman
Today
marks the 21st anniversary of the signing of the Americans with
Disabilities Act, which guarantees “equal opportunity for people
with disabilities in public accommodations, commercial
facilities, employment, transportation, government services and
telecommunications.” According to the Census Bureau, 36 million
people here in the US have a disability - 12% of the population
– which certainly
includes existing and potential borrowers. (Disabilities
include problems with hearing, vision, and difficulty
concentrating, or walking.) State-wise, West Virginia leads the
nation with almost 19% having a disability, while Utah has the
lowest with 8.9% of its residents reporting a disability.
On
a fortune cookie: "Your problem is another's solution; your
solution will be his problem." The budget issue grinds on, which
is useful for the press as the public was growing wearing of
hearing about the crisis in Europe. "Rob, the problems we face
today are there because the
people who work for a living are outnumbered by those who vote
for a living."
I
was "spanked down" by a few folks about my analogy yesterday
about the US deficit
being like someone who runs up their credit card. "The debate
about the debt ceiling isn’t analogous to asking for an increase
in one’s credit card limit; it’s analogous to a strategic
default on one’s mortgage. The real question is this: If I earn
$3,000 a month and the limit on my credit card is $5,000, and I
spend $6,000 every month, is it better for me to decrease my
spending and/or increase my income, or after debating with the
missus for several weeks, just stop paying the bills? I mean,
after all, she’s the one who made all those purchases (why do
women need all those shoes, anyway?), and she bought most of the
stuff before I married her…and besides, I thought we’d be
earning more by now, and the interest on all this debt is just
killing me, and the house isn’t worth what I paid for it…”
And
another:
“Let’s face it. A responsible family would decrease their
spending in the immediate term, look for ways to increase their
income in the longer term, cut up the credit cards, and figure
out a way to pay the bills. And if they didn’t pay the bills,
they would face the consequences … an embarrassing credit score,
no more easy credit, and any credit they could get would come at
a very high price.”
How
do the budget crisis and a potential government shut down
impact mortgage banking? One should remember
that since 1976 there have been 17 shut downs, with the 1995/96
shutdown of 21 days the longest in modern history. If on August
2nd there is no budget deal, then we should see number 18. Oddly
enough, the last shutdown occurred precisely when Italy and
peripheral Europe were going through their last major crisis of
confidence. If there is no deal in the early part of this week,
the Treasury will issue a statement to the market and outline
it's directive to the Fed as to the priority of payments and it
will outline an alternative auction structure for Treasury notes
and bonds . Most other governments never shut down as parties
bicker over spending - in fact Belgium hasn't even had a
government since 2010 and there has been no shutdown. The world
will not end and the US government will eventually keep on
spending, with the financial markets hoping for growth to cure
the US debt problems combined with some spending cuts.
But
markets (stocks, bonds, whatever) don’t like uncertainty, and
certainly would not like a downgrade of the United States. One
can expect this uncertainty to continue to weigh on risky assets
in the short-term – like the stock market. There is the
potential that banks could see higher capital requirements for
mortgage securities. (Currently, Ginnies are a zero risk
weighting, while conventionals are 20%.) Banks may not rush to
sell MBS’s, but their appetite for the product could drop.
Central banks could sell, or reduce their future purchases of,
mortgages in a downgrade scenario. But from a cash flow
perspective, few experts expect Ginnie, Fannie, or Freddie cash
flows to be affected. But
they could be downgraded if US government debt is downgraded,
and this would lead to higher mortgage rates.
Those
who follow LPS (Lender
Processing Services) saw a 73% drop in earnings reported
yesterday for the 2nd quarter. This included a charge
from personnel reductions and a charge for writing down certain
investments, including $26.6 million for discontinued
operations. Corporate expenses, which include legal and
compliance costs, nearly doubled to $33.9 million in the second
quarter from $18 million last year. In April, LPS signed a
consent order with the Federal Reserve to settle a federal
investigation into foreclosure practices at the firm and major
mortgage servicers, was required to boost oversight of its
processes, and also faces a separate investigation from Michigan
Attorney General into alleged documentation problems related to
the robo-signing scandal that surfaced last year.
When will the housing market return to normal, per the SF Fed?
"If the foreclosure inventory is worked off at this rate and
house prices change as described above, then housing starts are
predicted to return to normal levels by the beginning of 2014." http://www.frbsf.org/publications/economics/letter/2011/el2011-23.html
Under
the "what else can happen" category, Fannie downgraded its
housing predictions for this year. Fannie’s economists
believe that mortgage interest rates will move up just slightly
over the year to finish at 4.7% and rise again in 2012 to an
average of 5%. Total mortgage originations in 2011 will decline
to $1.07 trillion from $1.51 trillion in 2010 (about 30%) and
decline further still next year to $999 billion. Single family
mortgage debt will fall an additional 2.6 percent from $10.54
trillion to $10.26 trillion. Home prices are expected to decline
further this year and next. The median price in 2010 for a new
home was $221,800. This year it is expected to be $216,900 and
in 2012 $214,100. Existing homes are expected to sell for a
median price of $165,600 this year and $163,700 next, compared
to $173,000 in 2010.
Many
in the industry wonder why the rating agencies seem to have
escaped a good portion of the blame for mis-rating countless
securities and helping to cause the credit crisis. It is a
complex question, but some rating agencies are working to solve
it. Kroll Bond Ratings,
for example, recently published an “Investor Bill of Rights” for
bond investors. “Article l: Kroll Bond Ratings will make its
research reports, including criteria and analysis, supporting
its published, non-subscriber ratings available to every fixed
income investor without charge. Article II: Kroll Bond Ratings
will make its transaction analyses available on its website in a
timely manner and will provide a forum to respond to investor
questions. Article III: All ratings and analyses will be clear,
transparent and usable for investors, thereby avoiding rating
conclusions derived from a ‘black box.’ Article IV: Kroll Bond
Ratings will confirm that its analysis includes appropriate and
professional due diligence as part of the rating process.
Article V: All ratings will be subject to ongoing review
throughout the life of the security or entity to ensure that the
rating is accurate.” For more information go to www.krollbondratings.com.
Speaking
of Kroll, in commercial mortgage security rating news, Kroll
Bond Ratings came out with WFDB Commercial Mortgage Trust
2011-BXR, which is collateralized by a $1.0 billion mortgage
loan that is secured by a portfolio of 107 community and
neighborhood retail centers located across 27 states. The
portfolio has over 1,100 tenants with no single tenant (or
parent company of a tenant) accounting for more than 5.2% of
aggregate net rentable square feet. The mortgage loan has a
five-year term that is interest only for the first two years
before amortizing based on a thirty-year schedule: http://www.krollbondratings.com/index.php?actionlogin.
Looking
at the markets, current coupon MBS prices ended Monday where
they began: down/worse by about .250, and the 10-yr T-note was
down about .375 to a yield of 3.00%. There were no economic
releases, which is just as well since the focus is on
Republicans and Democrats who continue to talk at and blame each
other for the debt ceiling impasse with no resolution yet in
sight. Tradeweb reported below normal volume at 84% of the
30-day average.
After
no news Friday or yesterday, things pick up a little today with
the S&P Case-Shiller Home Price Index for May (expected to
record a year over year decline of 4.5%), Consumer Confidence
for July (expected to drop), and New Home Sales for June
(expected slightly higher). The US Treasury also begins its
latest round of auctions with $35 billion in 2-year notes at 1PM
EST. We find the 10-yr
slightly worse at 3.02% and MBS prices worse by about .125.
A
teacher was reading the story of the Three Little Pigs to her
class.
She came to the part of the story where first pig was trying to
gather the building materials for his home.
She read, “And so the pig went up to the man with the
wheelbarrow full of straw and said: 'Pardon me sir, but may I
have some of that straw to build my house?'”
The
teacher paused then asked the class, “And what do you think the
man said?”
One
little boy raised his hand and said very matter-of-factly, “I
think the man would have said ‘I'll be a son of a gun!! A
talking pig!'”
If
you're
interested, visit my twice-a-month blog at the STRATMOR Group
web site located at
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