A Better Mortgage

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - October 29, 2007

A Halloween rate cut in is the bag.  The parade of bad news in the housing market will likely drive rates lower for the foreseeable future.  This in spite of the dollar hitting new lows against major currencies and gold, and crude oil topping $90 a barrel. Odds are 100% for a 0.25% cut this week, and 100% for another 0.25% cut in December. 

“It felt like we were waiting for a monthly employment report on Friday, only we were waiting for Countrywide’s (CFC) earnings report.  CFC reported less loss than expected, which is good for Countrywide and good for the mortgage industry.  Everybody was nervous when CFC’s stock price nearly dropped below $12; it rallied all the way back to $17 in a relief rally on Friday.  CFC’s balance sheet improved on the liability side as well.  Barron’s reports that the yield on CMC’s debt fell 0.40%, and the cost of CFC credit default swaps – essentially an insurance policy against Countrywide going out of business – dropped 1.00%.  All of this good price action is predicated on CFC weathering the storm.  As for the rest of the credit spectrum, ABX indices hit new lows last week, but jumbo core spreads hung in at respectable levels.” 

While nearly half of consumers surveyed said they could not accurately explain what a sub-prime mortgage is, 75% of consumers say banks and mortgage lenders and brokers are “extremely responsible” or “very responsible” for the sub-prime mortgage crisis.  60% assign that level of blame to the real estate industry and 58% do so for borrowers who took out loans they could not afford, reports American Banker.  The survey also found that Americans ranked the sub-prime crisis above global warming and the federal deficit among their most pressing concerns — though it ranked below terrorism, health care, the war in Iraq, the overall economy, and illegal immigration. Seventy-six percent of those surveyed said the sub-prime crisis was “just as serious” as or “more serious” than the dot-com crash of 2000.

From 2004 to 2006, 43.6 million mortgages were issued across the county, 10.3 million of which were sub-prime.  In the prime mortgage space, about 10 million mortgages were originated each year, roughly half of which were refinance transactions.  Bear Stearns predicts that the tightening in mortgage credit will extract between 1.4 to 1.5 million purchase borrowers.  This implies a decline in purchase volume from a peak of 6.2 million units in 2005 to slightly under 4 million units by early 2008.   

Congratulations to Al Gore for winning the Nobel Peace Prize. I thought this was sad: Al had the Nobel Peace Prize for less than a week when O.J. broke in and stole it. – (David Letterman)

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - October 22, 2007

Just make it to May (the date of the next national secondary conference).  That was the mantra of attendees at the national mortgage conference in Boston last week, as they bemoaned the terrible condition of today’s mortgage market.  The upshot of the conference was that while volume is slow, the mortgage business remains a tale of two originator types:  those that can effectively compete with agency products, and those that cannot.  The spread markets (jumbo core, alt-A, sub-prime) have recovered somewhat since the Fed rate cut, but securitization volume is pitifully weak, and originators of spread products are still looking for answers.

“Jumbo loan prices are holding steady.  Two weeks ago, spreads moved tighter and they remain at decent levels, equal to pre-collapse levels of the summer.  A few jumbo securities have traded, and liquidity is creeping back.  The same cannot be said for sub-prime loans.  The BBB- ABX index set a new low last week, in spite of hopes for a bail-out from the master conduit proposed by the Treasury.  Regarding conforming products, mortgage rates did not fall as far as Treasury yields last week.  The prospect of greater volatility pushed mortgage rates 0.15% higher relative to Treasuries.  The yield curve, as measured by the difference between two- and ten-year Treasuries, also steepened by 0.15%.  Financial companies that borrow short and lend long cheered the news.”

Odds for a Halloween rate cut soared.  According to Fed-funds futures, a 0.25% cut next week is almost certain, and futures are predicting sub-4.00% Fed funds for next summer. 

Given the severity of the bond market collapse, the stock market has been surprisingly quiet.  Sure the Dow took 126 days to move from 12,000 to 13,000, and just 58 days to zoom to 14,000.  And then it was hit hard late last week.  But a recent blog put today’s volatility in perspective:  “Friday’s 366-point decline rates as only the 626th largest in since the start of the Dow in 1896.  Put in another way, we have seen drops of this magnitude or worse on 2% of all trading days over the past 111 years.”  Tread carefully because stocks could post some historically volatile numbers in the days and weeks ahead.

According to a new report, security screeners at our nation's airports -- this is scary -- failed to find fake bombs hidden on undercover agents 60% of the time. ... President Bush said today, “Well, who cares about fake bombs?” – (Jay Leno)

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - October 8, 2007

“Jumbo loan prices – of both the adjustable- and fixed-rate varieties – had a banner week.  Spreads, while not back to pre-collapse levels, are trading at levels that might even be called respectable.  Our sources tell us that while lower credit tranches are not yet trading well, the AAA pieces are as well-received as they have been in months.  Rate sheets came back in stair steps, with Wells posting strong fixed-rate bids early in the week, and CitiMortgage and Chase posting very strong ARM levels late in the week and today.  While spread markets are still volatile, we are getting more optimistic by the day.  Corporate bonds, junk bonds, and LIBOR swap spreads are all moving tighter because liquidity has returned to the financial markets.  Banks are lending, the commercial paper market has stopped its collapse, and LIBOR has returned to approximately 0.50% over Treasuries.”

Even the employment markets seem to be recovering.  “Was it all a dream?” asks Barron’s in reference to August’s terrible jobs report.  September’s report was right on the money (+110,000 jobs) and was full of upwards revisions that made the August report a whole lot better (+89,000 jobs instead of a loss of 4,000).  Friday’s report made trading interesting – the ten-year Treasury fell 100bps and has returned to where it was prior to the Fed rate cut. 

The odds for another rate cut on Halloween dropped to about 50/50, and plunged for any cuts beyond that.  The last three times the Fed initiated a new easing cycle, ten year bond yields dropped 20 basis points or more in the next five days. This time they rose by 20 basis points, which didn’t help mortgage rates a bit.

Are our dreams of lower rates turning in to nightmares?  Bill Gross and John Mauldin don’t think so.  They are both predicting that the Fed will cut rates to 3.75% before the housing mess is done.  At the moment, however, the bond market is clearly worried about inflation.  “The market should start worrying about something else,” said John Mauldin.  “Inflation is not a problem in a recession, and certainly not in one caused by the bursting of the largest housing bubble in US history. Be definition, those are deflationary events.  If we have a simple slowdown I think rates drop to 4% or less. If we see a recession, short term rates will drop below 3%.”

Here's good news: George W. Bush says that he is committed to fighting global warming.  Yeah, well, he nipped that in the bud, didn't he? – (David Letterman)

The Week Ahead in the Capital Markets

We have a world class secondary market department and they are kind enough to send out weekly updates to us sales monkeys. I like posting it as it is both a great source of technical and anecdotal information. Please let me know your thoughts!

The Week Ahead in the Capital Markets - October 1, 2007

Jumbo loan prices have improved dramatically from their lows.  Most notably in recent days, prices improved at Wells Fargo.  Other major jumbo investors also have moved pricing tighter.   Relative to conforming pricing, the average jumbo price has improved a full point from the worst levels.  Several investors improved their pricing by two points from the worst.  Spread markets are still too volatile to sound the ‘all clear’ bell, but recent market action bodes well.

Jumbo prices are but one of the markets showing improvement.  Citigroup said that certain homebuilders – D.R. Horton and Lennar – are a “buy.”  The Dow is trading above 14,000.  Corporate bond spreads have moved tighter, and investors are upping allocations to corporates.  The volume of commercial paper, on the other hand, continues to shrink.  Asset-backed commercial paper issuance remains in free-fall.  The decline (or increase) in the amount of CP outstanding is a key, forward-looking economic indicator.  Fortunately, energized by the Fed’s recent cuts to the discount rate, bank lending is replacing the lost CP liquidity.

“The bank was saved but the money was ruined.”  So says William Gouge (1796-1863), one of the best political economists of the American 19th century. He spoke of the panic of 1819, but his words are being repeated by critics of the Fed’s rate cut.  The core argument is that as the Fed works overtime to save banks from their bad mortgage investments, they are risking dollar-based inflation and a loss of confidence.  In the worst case, a collapse of the dollar would result, leading to inflation and high interest rates.

The outcome depends on whether or not the U.S. economy heads in to recession, and its broader effect on the global economy.  Which leads me to the hemline theory, as recently reported in Time magazine:  The length of hemlines predicts how the U.S. stock market will do – the shorter the hemlines, the better the performance.  The hemline theory’s record is hit-and-miss.  Hemlines were short in the Roaring Twenties and got longer just prior to the 1929 stock market crash.  Mini skirts in the 1960s were credited with, among other things, a stock market rally.  Short hemlines accompanied a great market in 2006.  Longer hemlines are showing up in fashions for spring 2008, perhaps predicting economic woes ahead.

As you know, the Iranian president said a lot of stupid things yesterday. My favorite is when he said there are no homosexuals in Iran. Many Americans disputed his claim.  In fact, Idaho Senator Larry Craig volunteered to go over there on a fact-finding mission. – (Jay Leno)

The market will close early on Friday.