Mortgage interest rates were mostly flat this past week on mixed economic data. Economic data better than expected included December Building Permits, December Leading Economic Indicators, and continuing jobless claims. Economic data weaker than expected included December Housing Starts, weekly jobless claims, and the January Philadelphia Fed Business Index. On the inflation front, the December Producer Price Index (PPI), a measure of wholesale prices, was up 0.2% on expectations that it would be unchanged. Excluding the volatile food and energy components, core PPI was unchanged on expectations that it would be up 0.1%. Year over year PPI was up 4.4% and core PPI was up 0.9%.

Big week. Since last summer, economic policy and markets have been frozen in anticipation of recovery. This period of apparent stability has been an illusion, tension building, and markets and politics have begun disorderly moves to catch up.
Stocks have cracked, which should have helped mortgage rates, but the aid has been intercepted by on-rushing Treasury borrowing. Mortgages are stuck above 5.00%.

The economics of the moment are the easy part. There is no recovery worthy of the name, especially in jobs. Housing in half the country is in deep trouble. We are living on Treasury borrowing that must slow, but we dare not. The administration has no functioning plan for economic recovery, and average citizens are mightily annoyed.
The political consequences... holy smokes. First the ricochets and collateral damage, then one bright light of effective action, at the FHA of all places.
Coverage of the Massachusetts upset has focused on partisan triumph and consequences to health-care reform. Wrong and wrong. Voters for senator-elect Brown were asked, was the economy the key to your vote for Brown? Yes. Nine to one.
During the last many immobile months in the White House a quiet coup took place. The do-nothing Summers-Geithner axis has been replaced by the Volcker-Axelrod populist-and-punish front. At first I thought this week's announcements of taxes on banks and break-'em-up plans were political ploys to get out in front of national anger and health-care failure.
No such luck. The White House thinks the plans are good policy. Warren Buffet denounced the tax plan within hours as the idiocy that it is. Banks already pay heavy fees to replenish the FDIC after their fellows' disasters; yanking more capital would mean fewer loans, and we must have loans to get out of this.
Paul Volcker was easily the most punishing Fed Chairman ever (created the worst post-war recession previous to this to break the back of inflation), but his world is long gone. This whole "too-big-to-fail" argument is mistaken. If all of America's top-20 banks were half their 2007 size, nothing in this disaster would have been different. We suffered a systemic failure. In dominoes, size doesn't matter.
Threatening to bust up the banks may buy a pause in the national gathering of tar and feathers, but not for long. Recovery, dammit. Focus on recovery, not retribution.
The political breakdown has immobilized the Fed, the only part of government to rise to the crisis. A bi-partisan mob in Congress has decided: since the Fed has been doing lots of things, they must have been the wrong things. Stop them. Forever.
Under attack, the Fed has already begun to withdraw, specifically to end its direct purchases of Treasurys, Agency debt, and MBS. No political cover, no Fed. Like 2008: criticized for its Bear Stearns firebreak, next time... let Lehman go.
Just when faith in good government seemed a lost hope, FHA Commissioner David Stephens provided an example to all the bumblers and mobs. Under great pressure to tighten loan standards beyond anything in its 74-year history (in the name of prudence thereby choking off the last support for housing) Stephens left loan criteria alone, raised some revenue, and tightened standards a different way.
He will publically expose lenders making too many bad loans. He will hold them accountable. If they continue to misbehave, he will put them out of business.
What a concept. Instead of one-size regulatory paralysis, he will focus on the bad guys. Make it personal. Name names. When Mr. Obama took office, he expressed disinterest in the size of government in favor of government "that works."
Could we try that, please, on banks and Wall Street? Put the whole system in capital forbearance and form long-term recapitalization plans under consent decree. Make good loans and assure recovery. Misbehave and we will remove you. During recovery make plans for future systemic soundness; no experimental axe-work until then.
There is more than one way to quiet an angry nation.

Real Estate Markets Across the Country Will Have a Tough Recovery This Year

Okay, okay, I know that you might be focused on the word "Tough" in that title, but please don't focus on the negative in this article. It's well worth the read, and is accurate for national averages. Luckily it doesn't really apply as much to the Boulder/NW Denver Markets. Either way, please focus your attention on the words:

"Real Estate Markets Will Have a ... Recovery This Year."

http://online.wsj.com/article/SB20001424052748703521904574614833750873314.html

Although prices of mortgage backed securities moved higher yesterday, lenders were unwilling to move mortgage rates lower. This was a frustrating event for most originators and borrowers who were expecting to see at least modest improvements in the primary market (mortgage rates) as the secondary market (MBS trading) rallied. While a few lenders repriced for the better towards the end of the day, the gains were weak.

The market absorbed two economic reports this morning.
First, the U.S. Department of Commerce released the Factory Orders report. This data represents the dollar amount of new orders made for both durable and non-durable goods.
Durable Goods are products that have a life expectancy of at least three years (cars, computers, machinery). Non-durable goods are products that can only be used one time OR a product with a life span of less than three years. Nondurable goods make up about half of Factory orders so this data, although on a two month lag, can have some influence on the marketplace. If orders are increasing, it would indicate factories will be busier in the months ahead. Busier factories could lead to additional jobs which is good for the overall economy and the equities markets.

October’s report indicated factory orders increased 0.6%. Economists surveyed expected November’s orders to post another increase of 0.5%. Forecasts were right to be optimistic, but they were not optimistic enough! The report indicated factory orders improved much more than expected by 1.1%. October’s report was revised higher to an 0.8% increase too.
The second release was more relevant to housing professionals: The Pending Home Sales Index
In October, the Pending Home Sales Index, increased 3.7 percent to 114.1 from 110.0 in September. This was 31.8 percent above October 2008 when it was 86.6. The year over year expansion was the biggest annual increase ever recorded for the index.In the data released today, which reported on contract activity in November, the pending home sales index fell more than expected to 96.0 from a revised higher read of 114.3 in October. This was a 16.0 percent decline, much worse than the 2.0 percent contraction economists had forecast.

AQ wrote an in-detail analysis of the housing market data and discussed expected trends. MUST READ
Reports from fellow mortgage professionals do indicate lender rate sheets to be improved from yesterday. The par 30 year conventional rate mortgage has fallen back to the 4.875% to 5.125% range for well qualified consumers. To secure a par interest rate you must have a FICO credit score of 740 or higher, a loan to value at 80% or less and pay all closing costs including an estimated one point loan origination/discount/broker fee. You may elect to pay less in closing costs but you will have to accept a higher interest rate.
MBS prices have been moving higher throughout the day so some lenders may reprice for the better. That said I recommend floating UNTIL THE END OF THE DAY to give lenders a chance to reprice for the better.
Yes just until the end of the day. Looking forward we have a major economic event on the horizon: NON FARM PAYROLLS. This is the grand daddy of 'em all in terms of economic data. This is the Employment Situation Report. Last month the economy saw the fewest amount of job losses since December 2007, when the recession officially began. Adding more optimism were revisions to the previous two reports. The October NFP job loss number was cut from -190,000 to -111,000 and the September report was trimmed from -219,000 to -139,000. That is 159,000 less job cuts!After the December jobs report, mortgage rates rose all the way into the new year. This month the market is expecting more positivities from the labor market. If these forecasts are accurate, the bond market will not react well and mortgage rates will move higher. The reason I recommend floating UNTIL THE END OF THE DAY is because tomorrow the ADP Employment Report is released. This is a pre-cursor to Friday's NFP report. If tomorrow's ADP report implies the labor market is continuing to improve...mortgage rates will rise.
While a corrective rally would likely ensue if labor market data is worse than expected, floating is a very risky move. With that in mind I would recommend locking. There is much to lose if the jobs report is as expected. It would essentially confirm the month long trend of rising rates we dealt with in December. This would put a firm level of resistance under mortgage rates, making lower rates even more unlikely in the future.
Current market mortgage rates are still aggressive, locking is the safe move ahead of these major reports. If you are feeling risky, float into tomorrow. You will get an idea of how the market reacts to labor market data in the morning when ADP is released. The market expects -73,000 lost jobs in the private sector. Compare that to last month's read of -169,000 jobs.


by Victor Burek -

T’was The Week Before Christmas



T’was the week before Christmas

When all through the lands,

LO’s and Closers were wringing their hands.



RESPA changes are coming,

They all started to worry,

We’d better get trained, and get trained in a hurry!



We all kept on hoping

There would be a delay.

But HUD said, “No Way,” it’s all here to stay.



“We love our new HUD

And our new GFE,

Don’t fret, don’t worry, it’s as simple as can be.”



We all shook our heads,

Threw our hands to the sky.

What were you smoking? You must have been high!



You took a one page doc

And changed it to three.

Easier? More simple? How can that be?



The Regs don’t match up,

So now what do we do?

HUD says, “No comment, It’s all up to you.”



No info on TILA,

HMDA, REG B.

We are totally screwed, why can’t they see??



In a time when some borrowers

Think lenders are scary,

You’ve given 3 pages to make them more wary.



This doesn’t make sense,

Not one little bit.

We are all trying hard to not throw a fit.



So we will all do our best

To put borrowers at ease.

But make more reform, please, please, please!



Please bring someone in

Who knows just what to do.

What is best for both borrowers AND lenders too.



We are all still waiting,

Though not holding our breath

And hoping the government doesn’t “Reg” us to death.

By Louis S. Barnes December 24, 2009



Markets quiet, it is time to look back.

One year ago, the terrible market panic post-Lehman had begun to abate, and all mice in the mortgage house eagerly awaited the Fed's purchases of mortgages. The economy itself was still in a freefall that would not to slow until spring, and tentative recovery in early summer flattened in fall. However, flat beats panic. By a lot.

Most citizens still grope for a handle on the crisis. What had happened that made us so vulnerable? Four years ago housing began to burst its bubble. Two-and-a-half years ago, summer 2007, bad mortgage assets undercut the whole, immense pile of bad IOUs from here to Europe, firesales and credit collapse fed on each other, and financial assets throughout the West began abrupt decline.

That was and is "asset deflation" -- not monetary or CPI deflation, just assets. The Fed prevented the mistakes of the '30s: the banking system did not close, no deposits were lost, the money supply did not decline, and consumer prices held. However, great damage was done to household net worth, unlike any downturn since the '30s.

Net worth is what we have after we subtract liabilities from assets. Thus asset deflation after an all-time debt party cut net worths of all kinds, and the highly leveraged saw their net worths go negative. The best detail and description of that stomach-dropping experience resides at www.federalreserve.gov, right-side of homepage "Z-1," page 104, account B.100, "Balance Sheet of Households."

Household net worth crested in 2006 at $64.5 trillion. (Those gloomy about US prospects might note. Not bad). The total diminished a bit as home values faded, but was still north of $60 trillion on the 4th of July 2008. Then through an open manhole dropped $11.5 trillion by April Fools' Day 2009 to $48.5 trillion.

In the whole period, 2006 peak to spring '09 bottom, household liabilities changed hardly at all, just about $14 trillion, mortgages $11 trillion of that total. Our net worth did not decline because we continued to balloon our borrowing and spend, but because our assets unwound, and the unwind centered in stocks and housing.

From 2006 to spring '09, stocks and mutual funds held by households fell from $14.3 trillion to $8.4; the value of homes fell from $23 trillion to $15.7. Un-leveraged stocks and funds fell 41%; homes minus loans, net equity fell from $12 trillion to $4.7, a 60% collapse.

Z-1 says household stocks and funds have recovered $3.2 trillion, and total net worth is up $5 trillion since spring bottom. However, the Fed includes a $1 trillion rebound in home values, and I find that hard to believe. No, impossible.

The home-value accounts are terribly unreliable. Everybody's estimates -- Fed, Zillow, Case/Shiller, 1st American CoreLogic, RealtyTrac -- are based on tweaking assessed value by estimated impact of recent sales. Notoriously inaccurate assessed values aside, recent sales reflect the values only of homes that have sold, not the many millions in "shadow inventory," delinquent or under water. Nor the fraction fallen so far that sellers won't try to sell, as evidenced by nationwide drop in homes listed for sale.

So, looking backward and forward... the persistence of this recession is due to the damage in home equity, our most tender spot. However, our resilience and long-term prospects show in our remaining net worth: $53.4 trillion, down only 8% from peak. A glance at the Z-1 chart of accounts shows the astounding amount of money we have stashed in various squirrel holes: pension reserves larger than all mortgages, deposits and bonds more than stocks.... May take a while, but we'll make it.



I learned last week that Oliver Cromwell, Protector of England (its merciless dictator) and arch-Christian Protestant, suppressed Christmas celebration on three grounds: "mass" is a thing of hated Catholics; the whole show is really a pagan celebration of solstice; and besides, the peasants drank too much. Speaking for peasants everywhere, on those last two, non-religious grounds, Merry Christmas to all!!

Mortgage and long Treasury rates are rising toward four-month highs this morning (5.25% and 3.49%) on a happy surprise in the job market.The monthly survey of big business "non-farm payrolls" found an end to job losses, and got some confirmation from an abrupt drop in the last two weeks' claims for unemployment insurance. Other fresh data from November did not confirm: the twin surveys by the purchasing managers' association (ISM) came in below expectation and below October actual, the service-sector declining sharply.The hunch here: the economy began to bifurcate in spring, big business and big finance stabilizing, even recovering (IT and international sectors). The weakness and pain shifted from Wall to Main, still deepening here on the sidewalk, false strength in economic aggregates in spring and summer now fading into an "L" -- no matter how well the big boys are doing after ruthless cost and job cuts.The Administration this week redoubled its effort to resolve housing distress, unfortunately by reinforcing prior failure. Perhaps the extra effort will cause faster failure now, and then someone inside may suggest trying something else.The first surge: threaten loan servicers with penalties if they don't modify more loans. Never mind that Fannie and Freddie report 346,559 trial modifications since June (www.fhfa.gov, November 23). It is a bit embarrassing that only 8,719 survived the trial to permanent mod status, but that might have more to do with the condition of the borrowers than the diligence of the servicers. During the period of 8,719 successes, 441,000 additional Fannie/Freddie loans entered 90-day+ delinquency.Common problems: many borrowers would like never again to hear from a lender, no matter how helpful they say they'll be. Second, the Home Affordable Mortgage Program (HAMP) requires an evaluation of the troubled borrower -- really a new and thorough loan application. Taking a good loan application is interactive, cannot be scripted, and requires training and talent; most borrowers contacted by HAMPers tell us they are clumsy, circular, and forgetful. Third, many delinquent borrowers are beyond help, and dumping them into the HAMPer is cruel busywork.Surge two: the HAMPers on Monday gave a new set of orders to loan servicers: its Home Affordable Foreclosure Alternatives Program (HAFA) requires that ALL delinquent campers failing HAMPer mod must -- must -- be offered a short-sale price before foreclosure can take place. The 45 pages of HAFA rules at www.hmpadmin.com, November 30 release, including uniform short-sale contracts, although a bureaucratic tangle (try to read it!) may help Realtors and may smooth the short-sale process.However, HAFAloaf has problems as a solution to the housing crisis. The new program adds a lengthy step to the foreclosure process, and to the depth of troubled water rising behind flimsy dams. It also fails in scale: total Fannie/Freddie YTD short-sales: 32,400, less than 10% of new serious delinquency. Bailing by spoon. A short-sale does little for the underwater owner: gotta deal with Realtors, showings, contracts, and still come out with wrecked credit and equity wiped. HAFAloaf does require that servicers begin to pay short-sellers and deed-in-lieuers. $1,500 a pop. Thanks, guys, but instead I think I'll live here payment-free for a year or so. HAFAloaf also requires servicers to offer $3,000 to second mortgage holders in exchange for their suicide-by-release. Right. Uh-huh. Can't wait to try that one.The real problem, of course, is too few buyers to offset the immense volume of owners hopelessly underwater and with cheap rental alternatives available. Honorable people, if left exposed long enough without serious help from the nation, will walk from homes in a form of civil disobedience. One authentic solution: adequate credit for buyers, including pre-packed loans for resale of foreclosures and shorts. Instead, this is official policy: if you default you get a re-written, sweet loan; but if you want to buy, and don't fit the ever-shrinking credit box, forget it.

Setting up for the Nov employment report tomorrow morning. The rate markets fell apart rapidly on Tuesday, more selling yesterday and another big price decline today. As we noted previously the rate markets had become overbought on beliefs the fed would keep interest rates low through most of next year; not starting any tightening until into the third quarter. Recent comments from Fed officials however have dampened that outlook; Fed's Plosser (Philly Fed) said Monday he wants the Fed to begin tightening sooner rather than later. His comments and those of Richmond Fed Pres Lacker cooled the idea that the Fed was in no hurry to withdraw the punch bowl. When the Fed does step up to withdraw monetary support the first moves will be to drain liquidity from the banking system by offering reverse repos that will pay banks interest while the money is at the Fed. Don't look for the Fed to begin increasing the FF rate soon unless there is more strength demonstrated in the economic outlook.
Bernanke was at the Senate Banking Committee for his confirmation hearing. As expected Senators took the opportunity to launch into Bernanke and the Federal Reserve for allowing financial excesses to drive the economy into the deepest recession since the Big One in the 30s. The Fed is also being highly criticized for its bailout deals; the committee specifically focused on the AIG bailout where every party came out whole using taxpayers money. As if politicians really give a hoot; haven't seen a Congress in my lifetime that didn't waste billions, and now trillions on junk pork spending.
Legislation pending in both the House and Senate would limit the central bank’s ability to lend to troubled institutions and remove its rule-writing authority on consumer financial products. The House on Nov. 19 advanced a proposal to remove a three- decade ban on congressional audits of Fed interest-rate decisions. Bernanke today said the proposal could subject the Fed to political pressure and undermine its credibility. “My fear is that if we were to take what might be perceived as an unpopular step, that Congress would order an audit, which would be a way, essentially, of applying pressure or be perceived as a way of applying pressure on our policy decisions,” Bernanke retorted. After all the posturing, Bernanke will be confirmed by the Senate.
Then there was the job summit; have little to report but likely a lot of chatter but nothing material. The administration is hand-cuffed with the mostly failed stimulus package that didn't do what Obama said it would. No monetary policy is likely, if there is an actual plan of consequence it will have to be fiscally. The Fed and treasury are out of bullets; if more monetary stimulus were on the table the dollar would fall like the rock of ages.
This morning's Nov ISM services data was weaker than expected but really didn't have much negative impact, nor did it add any support to the rate markets. Weekly jobless claims were less than expected, possibly offsetting the ISM data.
Tomorrow the mother of all monthly reports; Nov employment. After the weaker than expected ADP estimate for private sector jobs yesterday (-169K against -150K expected) estimates for tomorrow's non-farm payrolls has seen an increase in the estimates; the consensus however is still at 100K jobs lost with the unemployment rate unchanged at 10.2%. While the markets want to ignore it; estimates of unemployment may be as high as 17% when those that have given up looking are taken into account.
Treasury announced the auction details for next week; $40B of 3 yr notes, $21B of 10 yr notes on a re-open of the current on the run 10 yr, $13b of 30 yr bonds, also a re-open of the current 30 yr.
The technical picture on the 10 yr; it sits right on its 20 day moving average on the yield chart. So far it has held. On the mortgage market it is the same thing, the 4.0 Dec FNMA coupon is trading on its 20 day moving average. Any additional selling will ad to the negative near term outlook. Likely the key is the employment report tomorrow; less job losses than expected will add to the price declines in treasuries and mortgages.

RATES FLAT ON MIXED ECONOMIC DATA
STRAIGHT STATS
Mortgage interest rates didn’t move this week while economic reports came in mixed and the stock market was relatively flat. The Dow Jones Industrial Average has held last week’s gains, currently at 10,292. Retail sales increased 1.4%, led by a 7.4% rebound in auto sales, without auto data retail sales increased .2% on expectations of a .4% rise. The Producer Price Index (PPI) rose .3% and Industrial Production rose .1%, despite declines in manufacturing, with both indicators coming in just below forecast. Consumer Price Index (CPI) increased .3%, slightly more than expected. New Housing Starts dropped 10.6%, continuing the slide to a 529,000 annual pace, lower than the forecast of 600,000.
COMMENTARY
As mortgages slip below 5.00%, refi demand will shortly insert a floor. The big news of the week was an all-sector weakening in housing (mercifully for Colorado, NOT all-location). From new-builds to existing delinquencies, everything deteriorated badly in October — so much so that I think the Fed et al will soon revisit ways to help, possibly extending or increasing MBS purchases. The tax credit won’t do it: it takes little suction to pull nearby demand from the future hose, but once that’s in the market it takes larger and larger incentives to pull farther future demand into the present. Also, I think serious parties (Fed, Treasury), know that a “jobs program” will have political effect only. Markets will freeze for Thanksgiving week, then the December 4 employment report will be the next big mover.

As you may have heard, the legislation to extend and expand the homebuyer tax credit has passed Congress and was signed by President Obama. In addition to extending the deadline for the current $8,000 new homebuyer tax credit to April 30, 2010, an additional $6,500 credit has been introduced for existing homeowners.
KEY FEATURES OF NEW TAX CREDIT
For New Homebuyers
Maximum $8,000 tax credit (equal to 10% of home price).
Must purchase by April 30, 2010 and close by July 1, 2010.
Cannot have owned a primary residence for 3 years prior to purchase (rules vary if there are multiple buyers where one has previously owned, talk to your CPA).
Income limits of $125,000 for singles and $225,000 for married couples (credit phases out for incomes above these limits).
Maximum home purchase price of $800,000.
Purchases by dependents no longer allowed.
Must attach documentation of purchase to tax return.
Cannot claim the tax credit if you are purchasing the home from a “close” relative (as defined by the IRS, or from a business you own).
Tax credit is not available for use as a downpayment (unless you are financing through a state housing finance agency that has a program for this).
For Existing Homeowners
Up to $6,500
Must purchase between November 6, 2009 and April 30, 2010, and close by July 1, 2010.
The homeowner must have lived in their current home as a principal residence consecutively for 5 of the previous 8 years.
Same income and home price limits as for new homebuyer tax credit.
You can find answers and some more detailed scenarios for situations with multiple borrowers at this site (they do not yet have much detail about the new $6,500 tax credit for existing homeowners):http://www.irs.gov/newsroom/article/0,,id=187935,00.html
We always recommend speaking with your CPA or a tax professional before making a purchase decision based on the tax credit.

Mortgage interest rates improved slightly this past week supported by a weaker than expected October jobs report. Non-farm payrolls dropped by 190,000 on expectations that payrolls would drop by 175,000. The unemployment rate increased to 10.2, higher than the 9.9% level expected. The unemployment rate is at its highest level since April 1983. On the flip side, though, the job losses from the August and September employment reports were revised lower. Other economic data of note included the October ISM Manufacturing Index, September Construction Spending, September Pending Home Sales, weekly jobless claims, and Q3 Productivity, all of which were better than expected. The October ISM Services Sector Index was slightly weaker than expected.