Rate Snapshot: Financial markets cool; regulators try to ease mortgage industry concerns

by MPA24 Oct 2014

By David Shirmeyer, CEO at Sigma Research

Not a lot of activity in the bond and mortgage markets today ahead of the FOMC meeting next week. Yesterday, the 10-year held its first support level at 2.3% but at 2.27%, it hasn’t moved away from it much. The stock indexes continue to climb; at times it appears nothing will stop stocks from increasing. The indexes have recovered all of the declines in the last two weeks.

This morning September new home sales were up 0.2% from August, August sales were originally reported up 18% from July that was revised to 10%. Sales moving along but slowing as the winter months approach. New home sales are signed contracts but not yet closed.

This week was thin on data; existing and new home sales and September leading economic indicators (+0.8%). Global data: China’s economy is struggling and in Europe the ECB started to engage the serious issues facing the EU, buying some covered bonds and hoping to buy corporate bonds to stimulate more bank lending. The bank tests in the EU found 26 banks that will fail the test; more evidence that the EU is climbing a very steep hill now.

Next week the FOMC meeting is the hallmark; other data includes September durable goods orders, personal income and spending, third quarter employment cost index, two readings on consumer attitudes, the Chicago October purchasing mgrs. index and Treasury will auction $93 billion of 2s, 5s and 7-year notes.

My friend Lou Barnes of Premier Mortgage Group as allowed me to print his weekly “Mortgage Credit News” once more. I love his writing and he always provides a different slant and insight. Happy Reading.

     Financial markets have stopped their hysterics for now, so let’s get some other things straight. Things about mortgage and other credit. Simple things.

     FDR’s first fireside chat in 1933 was devoted to simple explanations of banking. The next day Will Rogers said the president’s words were so simple that “Even the bankers understood.”

     This week, Mel Watt, the new head of the FHFA, conservator of Fannie and Freddie, announced a preliminary effort to restore 97% loans, and to ease Fannie/Freddie demands for buy-back of defaulted loans. That same day six federal agencies (Fed, HUD, FDIC, FHFA, OCC, and SEC) relaxed Dodd-Frank mortgage skin-in-game 5% retention, and dropped mandatory 20% down payments for some loans.

     Given headlines, you’d have thought something big happened. NAR yelled, “Dramatic Easing of Mortgage Standards.” The Economist snarled back, “Structurally Unsound,” joined by WSJ and NYT “Here-we-go-Bubble-again.”

     I will not attempt to describe the details. Fear not! Few consumers will ever know that any of these events took place. Properly underwritten 97% loans would help, but we survived the last four years without them. The FHA is the outfit that needs help, its target consumers suffering under last year’s nearly tripled mortgage insurance. We in the trade will enjoy some clarified underwriting from reduced buybacks, but we are so unreasonable on other grounds that borrowers won’t feel a thing.

     The new Dodd-Frank rules? 689 tortured and opaque pages. Might as well be blank. Civilization would move on unimpeded with them or without them.

     Why the shrill commentary from the press? The political right hates government, and hates government mortgages more than anything except taxes, and thinks anyone without 20% to put down is lazy. The left has rediscovered its ancient hatred of banks and bankers -- but vaults should open wide for constituents of Elizabeth Warren.

     All perfectly natural after a disaster like the Bubble. Everyone used to be pals with housing and Fannie. Hell hath no fury like a lover scorned. The media post-Bubble has set new standards for willful ignorance and unprofessional torch-and-pitchforking. The Bubble blew in 2007... seven years, and you still won’t get the story straight?

     Then good news, very good news. N.Y. Fed Prez Bill Dudley told assembled bankers that unless they stopped gaming the system their banks would be “dramatically downsized and simplified.” Thank you. Way past time. Generating bales of oppressive rules which paralyze the honest, while the crooked enjoy being chased by Keystone Cops, no personal consequences if caught... stupid.

     More good news. The Fed has unloaded on two specific credit products early, before damage. Junk bonds have their place: corporate access to credit via well-regulated securities. However, recovering banks have fallen into old booze: creatively underwritten corporate loans unlikely to perform as advertised, flipped out of the bank in CLOs. Maybe $130 billion this year in goofy paper known as “leveraged loans” and “covenant light,” as in the Bubble finding yield-hungry (and blind) buyers. The Fed has also made clear its displeasure with subprime loans for autos.

     Then, possibly more good news, although so poorly and wrongly covered that few will know. Two-bit pick-pocket Maurice Greenberg, ex-CEO of AIG, the world’s largest insurance company upon its collapse in 2008, filed suit for $40 billion in damages, alleging improper government taking. AIG required $185 billion in Fed cash to firebreak a systemic meltdown. Greenberg hired David Boies, one of the great litigators of our time, who hauled Ben Bernanke into court to testify over two days. One observer described Bernanke’s responses as either “annoyed, or very annoyed.”

     Greenberg should be in compact accommodations at Leavenworth, and Bernanke undisturbed. Greenberg as plaintiff demonstrates Wall Street’s completely backwards attitude to the world, and the foolishness of society chasing and fining institutions instead of holding individuals accountable. I have hope for the verdict in this case.
This week; the 10-year note yield +7 bps to 2.27%; 30 year MBS price for the week -20 basis points. The DJIA on the week +425, NASDAQ +226, S&P +87. Gold -$9.00, crude oil -$1.79
Technicals still looking good but as long as equity prices continue to increase rates are going to have a difficult time declining unless there is a geo-political event of some kind that sends the fear of god into markets. In retrospect, if you would have floated all week or locked everyday it wouldn’t have made much difference. The bond and mortgage markets are a traders’ venue these days. Week on week; last week and this week there has been little change when scoped on a weekly basis (Friday to Friday).
 PRICES at 4:00 p.m.
  • 10-year note:                   +1/32 (3 bp) 2.27% unch
  • 5-year note:                     unch 1.49% unch
  • 2-year note:                    unch 0.39% unch
  • 30-year bond:                  unch 3.05% unch
  • Libor Rates:                1 mo 0.153%; 3 mo 0.232%; 6 mo 0.323%; 1 year 0.542%
  • 30-year FNMA 3.5 Nov:   103.52 +2 bp (-3 bp frm 9:30)
  • 15-year FNMA 3.0 Nov:   103.83 -5 bp (-8 bp frm 9:30)
  • 30-year GNMA 3.5 Nov:  104.59 +8 bp (+2 bp frm 9:30)
  • Dollar/Yen:                 108.07 -0.20 yen
  • Dollar/Euro:               $1.2669 +$0.0023
  • Gold:                          $1230.50 +$1.40
  • Crude Oil:                  $81.22 -$0.87
  • DJIA:                         16,805.41 +127.51
  • NASDAQ:                   4483.72 +30.92
  • S&P 500:                    1964.57 +13.75



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