ABA Lending Survey results; Owning stock in the Agencies; Weekly Market Preview

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Certainly many statistics are showing us that things continue to pick up. But is the economy doing as well as the Fed thinks it is? If it is, the improvement is certainly not evident in the traditional sense, and the gap between the haves and the have-nots continues to widen. Family Dollar Stores announced that it will close 370 stores. Two weeks ago Brookstone filed for bankruptcy protection. There were similar moves by retailers Dots, Ashley Stewart, Sbarro and Quiznos. And last week Sandpoint Idaho retailer Coldwater Creek, faced with declining sales, annual losses, and mounting debt, filed for Chapter 11 bankruptcy protection. Yet LVMH's stock is trading near its all-time highs. What is LVMH? It is the company that owns Luis Vuitton, Dom Pérignon, Domaine Chandon California, Hennessy, Moët & Chandon, Veuve Clicquot, Dior, Donna Karan, Givenchy, Bulgari, Hublot, TAG Heuer, and so on - luxury goods.

Whether or not you're hiring, of interest to anyone skipping through this newsletter were the Fed's comments on housing. "Housing activity remained slow over the intermeeting period. Although unfavorable weather had contributed to the recent disappointing performance of housing, a few participants suggested that last year's rise in mortgage interest rates might have produced a larger-than-expected reduction in home sales. In addition, it was noted that the return of house prices to more-normal levels could be damping the pace of the housing recovery, and that home affordability has been reduced for some prospective buyers. Slackening demand from institutional investors was cited as another factor behind the decline in home sales. Nonetheless, the underlying fundamentals, including population growth and household formation, were viewed as pointing to a continuing recovery of the housing market.

Does anyone remember Lehman Brothers? I do, they had some of the best conference freebies out there. I think of them fondly every time I head for the store and use my canvass LB tote bag to haul my groceries. Unwinding the positions of Lehman has been a monumental challenge, and it is only now that analysts have started to quantify the total losses. The bankruptcy of Lehman Brothers and its 209 registered subsidiaries was one of the largest and most complex in history, with more than $1 trillion of creditor claims in the United States alone, four bodies of applicable U.S. laws, and insolvency proceedings that involved over eighty international legal jurisdictions. The New York Federal Reserve writes in Liberty Street Economics, "We estimate the payout ratio to Lehman's creditors thus far to be about 28 percent on estimated allowable claims of more than $300 billion, implying a loss to creditors and counterparties of more than $200 billion...We find that the recovery rate for LBHI creditors has been below average so far-about 27 percent versus more than 55 percent historically." The article, written by Michael Fleming and Asani Sarkar, concludes that the difficulties associated with Lehman's resolution under Chapter 11 resulted in part from Lehman's lack of bankruptcy planning and in part from the inherent complexity of Lehman's business and organizational structure.

I was recently doing a little mortgage related research and came across an online article written in early 2007 by an equities analyst who placed a "buy" on FNMA and FHLMC (along with Sears). I wonder if he ever found his true calling in life. It's important to realize that markets, and by extension the people who trade within its perimeters, are almost as wrong, as they are right. I read a recent BAML article, A Mortgage Misunderstanding: GSE Moving Markets, in which they address a common concern; market timers, and people attempting to front run "what may" happen with respect to Fannie and Freddie, are creating volatility. They write, "In our view, the Fannie and Freddie situation, which encompasses not only the agency debt, MBS, equity and preferred markets but also the housing market and the overall economy, is now generating more headline risk and spread volatility as markets oscillate between opposing possible outcomes. Our bottom-line outlook is that the markets have overreacted recently to the possibility of passing a new GSE bill this year."

Keep in mind that the American Bankers Association released its 21^st annual Real Estate Lending Survey. "More than 80 percent of banks expect new mortgage regulations to reduce mortgage credit availability - more than one-third of respondents will only make qualified mortgage loans, while another one-third will also make non-qualified mortgage loans but only to targeted markets or products. 'The new mortgage rules are a serious challenge, especially in the near term, for mortgage lending,' said Robert Davis, executive vice president at the American Bankers Association. 'The problem will last at least as long as bankers calibrate their compliance systems, and perhaps much longer.'" (On the commercial side, things are okay: commercial real estate loan demand is trending higher for 26 percent of respondents, but remains stagnant for 51 percent. The delinquency rate for commercial real estate loans remained little changed at 3.3 percent in 2013.) And this will stun you: according to the survey, bankers are most concerned about the increasing regulatory burden and compliance cost. Click here for a complete report: 2014 ABA Real Estate Lending Survey.

Is the FHA going to bring back "spot loans"? Perhaps, much to the joy of many lenders out there. Here is the latest But under the title of "oh well," Commissioner Galante made it clear that the FHA will not be lowering the MIP in the near future, and that they have included a lender paid fee in the 2014 budget that would raise up to $30mm to help offset increased QC fees on FHA loans. She did say they will be rolling out the Homeowners Armed With Knowledge (HAWK) program that will use consumer education to lower a borrower's MIP.

Turning to the markets, as opposed to last week with little scheduled news to move bond prices (and therefore rates), this week we have an abundance of titillating numbers. We start off with today's Retail Sales. On Tuesday, April 15^th (why does that date ring a bell?) we'll have Empire Manufacturing, the Consumer Price Index (CPI) to measure the level of change in the average price of a fixed basket of goods and services purchased by consumers, and the NAHB Housing Market Index. On Wednesday we have Housing Starts and Building Permits duo along with the Industrial Production and Capacity Utilization couplet, with the Fed's Beige Book thrown in for good measure. Every Thursday we have Initial Jobless Claims, and this Thursday is no exception. We'll also have the Philadelphia Fed Index. Friday is Leading Economic Indicators.

MBS OVERVIEW
***We have a holiday-shortened week***
Thursday - the Bond Market will Close early at 2:00EDT
Friday - the Bond Market will be CLOSED all day.

Even though we have a short week, we have a lot of big name economic data to digest like Retail Sales, CPI, Production and the Fed's Beige Book. Plus we have a few "Talking Fed's", most notably Janet Yellen.

It's Ground Hog Day all over again: As we once again start off the trading session with economic news that would normally pummel your pricing. But the "Teflon Bond Market" has shrugged it off. March Retail Sales were much stronger than expected and February's data was revised upward. But this was once again offset due to a flight to safety into anything U.S. due to more news out of the Ukraine. This time, Pro-Russian supporters have taken over at least two Ukrainian Police stations and are refusing to leave. This has traders concerned that Ukraine may respond with force and escalate things further. As a result, MBS are down only -9BPS in early trading. Typically, with this type of strong Retail Sales data, MBS would be down at least -50BPS.

Wednesday's release of the Fed's Beige Book will be key as we learn how the manufacturing, housing, lending, and labor markets are doing in each Fed district.

There are no major U.S. Treasury auctions this week. 

TODAY'S EVENTS
Retail Sales: Potentially, the most important economic release of the week. Headline Retail Sales for March were much stronger than expected (1.1% vs est of 0.8%). Plus, February was revised upward from 0.3% to 0.7%. Excluding Autos, Retail Sales were up 0.7% vs estimates of 0.5%. Retail Sales are the top of the economic pyramid, and these numbers come from a period where weather was an issue. This is certainly positive economic news and that means that this reading is negative for MBS pricing today.
Business Inventories: Generally not a major market mover. The consensus estimates are for a small improvement from 0.4% to 0.5%.

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