Lehman in the news; Down payment assistance study; Fitch's Forecast for MBS market in 2015

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"What I don't like about office Christmas parties is looking for a job the next day." Here are a few tips on how to avoid that. And avoiding mortgage application fraud is even more important - but according to this story in the New York Times this type of fraud is increasing. And how are we in the last non-holiday week of 2014 already?

Here's your legal puzzle for the day. What company's t-shirts are now collectibles and has an estimated 209,000 loans that must be reviewed one by one? The answer is Lehman Brothers. Reuters reports that "Judge Shelley Chapman declined a motion for Lehman to increase the amount of reserves it must hold to make payments on 255 residential mortgage-backed securities (RMBS) from US$5bn to US$12.1bn. Chapman also said all 209,000 mortgages underpinning the bonds must be reviewed one-by-one." There's some job security for some out-of-work mortgage folks!

 

Seventy percent of U.S. adults are unaware of down-payment assistance programs available for middle-income homebuyers in their community, according to findings from the second annual America at Home survey commissioned by NeighborWorks America, a national nonprofit community development corporation based in Washington, DC. 

Many Millennials face unexpected hurdles when looking to purchase a home for the first time such as not being able to qualify for a loan due to student debt, low starting salary and the inability to come up with a large down payment.  Zillow analyzed how affordable it is for the average millennial or first-time buyer, given their economic hardships, to purchase a home in certain metro areas. To analyze the data, Zillow assumed that the average first-time buyers makes the median income of $54,000, attains a 30-year fixed rate mortgage with only 5% down and looks for a home priced according to the 33.3 percentile of all home values. Most first time home buyers put less than 20%, so primary mortgage insurance and upfront fees have to be considered and in Q3 of 2014, MI added an average of 1.3 percentage points to the effective mortgage rate. First-time home buyers should expect to pay about 17.4% of their income on a mortgage, compared to 15.3% for more traditional buyers. Despite the hurdles that most millennials face, current affordability for first-time buyers still looks more favorable than the pre-bubble standards from 1985 to 1999, when they could have allocated 22.5% of their income to a mortgage. You can utilize the interactive map to determine how first-time home affordability compares in your area. 

Besides downgrading countries like France to AA, Fitch Ratings also publishes reports on residential mortgage-backed securities. And it came out with a forecast for 2015. "While the vast majority of structured finance sectors maintain stable of positive outlooks for 2015, the residential mortgage-backed securities sector faces a 'challenging' environment next year. "Despite strong credit attributes, RMBS issuance is expect to remain anemic as the industry continues to face challenges including ongoing GSE dominance; more attractive financing alternatives such as whole loan sales; new mortgage regulation; and a weak 'AAAsf' investor base," Fitch said in its 2015 Outlook: U.S. Structured Finance. "Fitch expects many of these same challenges will persist in 2015 and keep U.S. RMBS a small niche market with projected issuance in the $15 billion-$25 billion range." 

Analysts knew what Fitch said about regulations. Namely that this year global regulators finalized many outstanding regulatory issues, most notably, risk retention, Regulation AB II, and Basel III, along with regulatory capital and liquidity guidance for financial institutions. Fitch said it expects issuers will spend "significant efforts" implementing processes to comply with the new regulations throughout 2015. It also noted that with the Federal Reserve's sunset of quantitative easing, market attention will turn to timing of Fed tightening and a higher rate environment in general. "The effect of higher rates will be felt across all sectors, albeit to varying degrees," Fitch said. It said rising interest rates and unwinding QE will not destabilize the global recovery or financial markets, although an increase in financial market volatility is expected. 

In general, the news last week reinforced views that the fourth quarter of 2014 is doing pretty well - which ordinarily would push rates higher. The most impressive data point this week came from the November retail sales report that showed sales climbing 0.7 percent for the month while October sales were revised higher. Inflation data for November reflected the continued slide in oil prices with declines in both the producer price index and the import price index. 

But there are two sides of every coin, and every economic statistic. Paul Jacob with Wunderlich Securities points out that, "The rally of 2014 has stampeded through virtually every counter-argument:  strengthening economy, solid stock market, the end of QE balance sheet expansion, rumblings from the Fed about the Funds rate. Sitting from 2.09% on the 10-year in Dec. 2014, it's a useful place to step back and review the bullish and bearish arguments for the bond market." And so we have the dual meanings of oil weakness & dollar strength, inflation, the Federal Reserve's actions, the labor market, consumer spending, the volatility in the stock market, and so on. 

The markets will continue to be driven by the price of oil although this week's FOMC meeting will give us more information. The 8th and final meeting of 2014 for the Federal Open Market Committee (FOMC) is scheduled for December 16-17.  It was at the Fed's December 2008 meeting (held on 12/16/08) that the FOMC voted unanimously to cut short-term interest rates to near zero from its then current level of 1%.  Since then, the FOMC has met 47 times and voted on each occasion to leave rates unchanged 

Certainly lower gasoline prices are stoking consumer confidence (the University of Michigan's preliminary Consumer Sentiment Index for December surged to 93.8, well above consensus expectations) and more confident consumers are buying more stuff. The Libyan National Oil Company says that the oil ports of As Sidra and Ras Lanuf had stopped operating because of fighting - and it is tough to forecast our economy when our markets are driven by news like this.

 

Hey, only a short period left to do your Christmas shopping! Or maybe I should say, close your loans. Regardless, we're faced with another week of titillating economic news here in the U.S. starting with today's Empire Manufacturing number, the Industrial Production & Capacity Utilization duo, and the NAHB Housing Market Index. Tomorrow is another duo - Housing Starts and Building Permits. Wednesday we'll see the Consumer Price Index and the Federal Open Market Committee's rate decision (don't look for any excitement). Thursday is Initial Jobless Claims, a Philly Fed number of little consequence, and the Leading Economic Indicators figures. The 10-yr closed Friday at 2.09% and this morning we're up to 2.13% with agency MBS prices worse .125-.250.

 

Rate Market Report:

After a 678 point decline in the DJIA, the 10 yr note falling 23 bps and MBS prices 92 bps higher last week, this morning the stock indexes are better and the 10 yr note yield higher. Not surprising, it was expected after those kinds of moves last week and ahead of the FOMC meeting that begins tomorrow and ends Wednesday afternoon with Yellen’s press conference. Last week the 10 ended at 2.08%, at 9:00 this morning 2.11%; 30 yr MBS prices -20 bps. Crude oil in early trading +$0.27.

Four reports this morning. The Dec NY Empire State manufacturing index fell to -3.58 against forecasts of 12.0. Nov industrial production expected up 0.7%, increased 1.3%, the most since May 2010. Nov capacity utilization expected at 79.3% jumped to 80.1% and Oct revised to 79.3% from 78.9%. The Dec NAHB housing market index 57 from 58.

Another Bloomberg survey; 90% of those responding to the question about the ECB’s ability to launch large scale buying of government bonds believe the ECB will actually do it; last month the same question got just 57% that believed the ECB would be able to do it in the face of Germany’s resistance against sovereign-bond purchases, saying they undermine the incentive for governments to make structural adjustments. The ECB’s next meeting is six weeks off so this survey may change dramatically before the meeting actually occurs. Europe teetering on deflation with oil prices declining and very soft economies has to do something but one serious problem with the EU is 18 nations looking out for themselves. Nov inflation in the EU 0.3%.

The DJIA opened +105 at 9:30, NASDAQ +26, S&P +12; 10 yr 2.13% +5 bps and 30 yr MBS price -20 bps from Friday’s close.

This week is all about the FOMC policy statement and how the phrasing of the statement will be translated about when the Fed is going to begin increasing interest rates. More than likely the statement will change the previous phrasing but it will still leave investors and traders debating when the Fed will start. The economic performance in the US will dictate when no matter the new wording markets are looking for.

NAHB just released its housing market index, expected at 59 from 58, the index . Home builders appear to be more optimistic than the reality in the housing sector; as the WSJ said in an article today; builders are smiling like the boom in 2005 but are building at 2008 levels. In recent years, builder confidence has appeared detached from the actual construction of houses. The index is based on survey responses from about 400 members, who are asked about sales, expected sales and traffic from prospective buyers for newly built single-family homes. The index declined to 58 from 59; current conditions down 1 point, future outlook down 1 point, buyer traffic unchanged. Overall a soft report.

Technicals still bullish for the interest rate outlook with China, Europe, India, and Japan and other emerging markets are slowing and crude oil and all commodities declining on lower demand as global economies fail to gain any traction. We noted last week we expected an increase in market volatility, we see that today with stocks better to start and the bond and MBS markets weaker. Last week’s huge moves in al US financial markets was, in terms of time and price, somewhat overdone; this week it’s the FOMC meeting on Wednesday that is the focus, crude oil price also a factor. Crude fell $8.00 last week and has been free-falling for a month now; it too is likely to settle this week before declining further. Is it more supply or weak demand, or both; we believe it is both but the price will continue to decline to at least $50.00/barrel.

This Week’s Economic Data:

Monday,

8:30 am Dec Empire State Manufacturing index (12.0 from 10.6); as reported -3.58
9:15 am Nov Industrial Production (+0.7%); as reported +1.3% Nov Capacity Utilization (79.4%); as reported 80.1% from 79.3% in October, Oct originally reported 78.9%
10:00 am Dec NAHB housing market index (59 from 58); as reported 57.

Tuesday,

8:30 am Nov housing starts and permits (starts +2.8%, 1038K; permits -1.8%, 1060K)
10:00 am FOMC meeting begins

Wednesday,

7:00 am weekly MBA mortgage applications
8:30 am Nov CPI (-0.1% overall, ex food and energy +0.1%) Current account balance (-$96.3B)
2:00 pm FOMC policy statement
2:30 pm Janet Yellen press conference

Thursday,

8:30 am weekly jobless claims (295K +1K)
10:00 am Dec Philadelphia Fed business index (25.0 from 40.8 in Nov) Nov leading economic indicators (+0.6%)

PRICES @ 10:15 AM

• 10 yr note: -10/32 (31 bp) 2.12% +4 bp
• 5 yr note: -8/32 (25 bp) 1.56% +5 bp
• 2 Yr note: -2/32 (6 bp) 0.57% +3 bp
• 30 yr bond: -15/32 (47 bp) 2.76% +3 bp
• Libor Rates: 1 mo 0.160%; 3 mo 0.240%; 6 mo 0.338%; 1 yr 0.600%
• 30 yr FNMA 3.5 Jan: @9:30 104.14 -20 bp (-17 bp from 9:30 Friday)
• 15 yr FNMA 3.0: @9:30 103.89 -33 bp (-16 bp from 9:30 Friday)
• 30 yr GNMA 3.5 Jan: @9:30 104.92 -28 bp (--5 bp from 9:30 Friday)
• Dollar/Yen: 118.57 -0.18 yen
• Dollar/Euro: $1.2432 -$0.0030
• Gold: $1210.10 -$12.40
• Crude Oil: $75.68 -$0.13
• DJIA: 17,327.48 +46.65
• NASDAQ: 4662.67 +9.08
• S&P 500: 2009.68 +7.35

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