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Mortgage Industry Update: Rates, News & More

***Smart Financial Weekly Mortgage & Business Update January 8, 2010***

Something New! We decided to start the New Year by upgrading this publications name to be more in line with what we are trying to accomplish. So, please note our new name is Smart Financial Weekly Mortgage & Business Update. I hope you like it! Finally, there is a lot of jobs news below and as we have said before our view is jobs are the key to recovery not only for housing but also the economy as a whole.

 

Interest Rates

We start off the year with mortgage rates stable from 2009. The good news continues but as we have said before there are forces at play that will mean higher rates in the near term. Most observers believe that the Federal Reserve’s support of rates will end in late March as they have said recently. This will almost certainly mean an uptick in rates. However, a minority of observers think that if it is clear the housing market is not getting better the Fed may make a move to help. In the meantime you may want to watch the ten year Treasury yield as mortgage rates typically move with it. You can see it at www.cnnmoney.com/markets/bonds and you may want to add the link to your favorites. Note that the 10 year Treasury yield increased 1.62% in 2009 from 2.22% to 3.84% which was the highest yearly increase since 1999. The yield finished this week at just over 3.80%. Finally, Freddie Mac has reportedly said it believes that mortgage rates could be as high as 7%+ in the last half of 2010. I hope they are wrong!

 

When	Rate
This Week	N/A
1 Month Ago	4.71
1 Year Ago	5.10
2 Years Ago	6.07

Note that actual market rates vary geographically and by lender, credit score and Loan to Value.

Source: Federal Reserve Statistical H.15.

 

Mortgage Industry Update

·         According to MSN Money the administration is set to announce changes to FHA lending in late January that include an increase in the down payment, increase in the minimum credit score, increase in the mortgage insurance premium along with how it is paid and a reduction in what sellers can pay toward closing costs.

 

Good News

·         The American Bankers Association (ABA) said late this week that delinquency in seven categories declined in the third quarter. Only home equity loans and mobile home loans increased and they increased to a record 4.3%. The ABA defines delinquency as 30 days or more. Also, home mortgages were not included in the report and are treated separately.

·         ISM Manufacturing Index for December was the highest in four years rising to 55.9 from November’s 53.6.

·         SBA (Small Business Administration) lending increased 37% in the fourth quarter from the previous year.

·         The Commerce Department said that factory orders increased 1.1% in November which was much better than the forecast of .5%.

·         ISM Services Index increased to 50.1 in December from 48.7 in November forecast was for 53. Anything over 50 suggests expansion.

 

Statistics of Interest/Concern

·         Pay Net reported severe delinquency (180 days late or more) on business lending to small and mid-sized businesses rose in November for the 22^nd consecutive month. These are loans, leases and lines of credit to run businesses.

·         Pending home sales declined 16% in November much more than expected.

·         Vacancies for strip malls hit an 18 year high in the fourth quarter at 10.6% and regional malls vacancy rates were at the highest level in 10 years.

·         Business bankruptcies rose in 2009 to 89,402 up from 2008 64,584 according to Jupiter eSources LLC.

·         According to the Federal Reserve consumer borrowing declined by $17.5 billion in November much more than the forecast of $5 billion. November was the 10^th consecutive monthly decline in consumer borrowing and the decline is the lowest in decades.

 

Foreclosure Headlines

·         Economy.com estimates 2.4 million homeowners will lose their homes to foreclosure in 2010.

·         Silicon Valley is experiencing the biggest office glut since the dot com bust 5 years ago with more than 43 million square feet of commercial space vacant at the end of the third quarter according to CB Richard Ellis Group LLC. It is expected that foreclosures on commercial property will double in 2010.

·         Commercial real estate loan losses pose the biggest threat to banks in 2010 said U.S. bank examiners. The losses will be “quite high by historic standards” and “hundreds of banks will fail” said Eugene Ludwig former head of the OCC. Most of the banks will be regional and local banks that made commercial and real estate loans in the last few years.

·         The Office of the Comptroller of the Currency (OCC) reported on December 21^st that prime mortgages 60 days or more delinquent more than doubled to 838,000 in the third quarter 2009 from the year before.

 

Job Market Headlines

·         The Department of Labor reported 85,000 jobs lost in December compared to forecast for no gains or losses. The unemployment rate came in at 10% in line with forecast. For 2009 4.2 million jobs were lost. After the 2001 recession which lasted several months job losses continued for two years and resulted in 1.1 million job losses. The current recession started in late 2007 and ended in the third quarter of 2009.

·         More December jobs data shows the November jobs loss number revised to PLUS 4,000 the first increase since December 2007. However, more distressing data shows 661,000 left the work force. These “discouraged workers” as defined by the Department of Labor have not looked for work in four weeks. In addition, the number of unemployed, discouraged workers and those working part time but looking for full time work was 17.3%. Finally, in the methodology used by the government is something called the “household survey” and it showed 589,000 jobs lost in December.

·         Initial weekly jobless claims were 434,000 up only 1,000 from previous week for a 16 month low.

·         Four week moving average for weekly jobless claims was 450,250 down 10,250 from previous week.

·         Continuing jobless claims were 4.80 million down 179,000 from previous week. The peak for continuing claims was in June 2009 when they hit 6.9 million. Note that the number of emergency claims those for more than 26 weeks increased from 4.91 million to 5.1 million.

·         The number of U.S. cities with unemployment rates above 15% increased in November to 17 up from October’s 15.

·         Outplacement firm Challenger, Gray & Christmas Inc. reported 45,094 job cuts in December the lowest since December 2007.

 

Commentary/Observations

One definition of “shadow inventory” of homes has three elements. First, homes not listed for sale but likely to hit the market within a year (Arm re-sets on interest only loans and Option Arm’s for example). Second, bank owned homes that have not yet been listed. Third, homeowners who are waiting to sell but only at a price they feel good about. It is unclear how many homes this represents but some estimates have the number at 7 million. In estimating the shadow inventory first American Core Logic is assuming 68% of homeowners 90 days or more delinquent are “cured”. Cure means their default is fixed by either a short sale or loan modification for example. Many think the 68% is too high and as that percentage goes down the number of foreclosures goes up.

 

Thursday Lennar the third largest home builder released its fourth quarter earnings which showed a profit of $36 million. The problem is that the profit was driven by a $353 million tax gain. They and other companies (mostly home builders, auto industries and financial firms) will benefit from a change in how corporate losses are treated. The new change was part of the legislation extending the first time home buyers tax credit. This new change allows companies to apply losses in 2008 and 2009 to income earned in the previous five years up to 2007. The old law required the losses be applied to two years. Because of this tax benefit Lennar will get a $320 million tax refund this year. The National Bureau of Economic Research estimates that the total cost of the tax credit will be $53 billion.

 

During the week the yield curve steepened to its highest level since 1990 suggesting chances of a recession by the end of the year are slim and that the economy is expected to grow. The steepness of the yield curve is measured by the difference between the yields on the two year Treasury note compared to the ten year note.

If you have any mortgage or related questions I can be reched at (602) 803-9660 or by e-mail at burt@gosfm.com.