Fed Doves & Hawks Defined; More on USDA; ResCap & Goldman; Rent vs. Buy; Refinancing Government Debt
Not a day passes whereby an employee in a mortgage bank doesn't start a grease fire (which they claim is an accident) in the kitchen. In all seriousness, here's a worthwhile 45 seconds.
In a story from the New York Post, GMAC has hired Goldman Sachs to start the process of selling Res Cap. Between GMAC being mostly owned by the government ($17 billion for 56%), and Res Cap losing billions of dollars, and Warren Buffett's Berkshire Hathaway owning a sizeable chunk of ResCap's debt, it could make for an interesting story. Recently the committee overseeing how money from the Troubled Asset Relief Program is managed issued a report on how the government has handled the GMAC bailout, saying "it is deeply concerned that Treasury has not required GMAC to lay out a clear path to viability or a strategy for repaying investors."
Speaking of Goldman, they have more problems. Did you know the tax rate it paid on its profits last year was 0.6 percent? The CEO of Goldman Sachs was furious when he heard this. He said, "What? When did we start paying taxes? This is ridiculous."
I noted yesterday that the USDA's Rural Development loan program is scheduled to lose its funding next month, as it seems to do every year. A few savvy readers wrote to suggest that this time around, things are a little different. On the micro-sense, the USDA's program underwriters always issue a conditional commitment when they do their manual underwrite prior to funding, even when funds ran out. This time, USDA offices are telling brokers that they will not be issuing conditional commitments until Congress approves funds again.
I notice that gasoline prices are back up, usually attributed to demand by China and India. The price has been drifting around, not attracting too much attention, which is good because historically speaking any sharp spike in the price of oil leads to a sharp drop in consumer confidence. After all, gasoline prices are the most publicly visible prices in the economy - no other prices are displayed in bold, two-foot-tall numbers. But higher gasoline prices may not have the same impact as they did a year or two ago. To a great extent gas prices have already dropped the demand for SUV's, including the Hummer. This, in turn, impacted jobs, and to some extent housing since fewer people want or have a long commute to an over-priced suburb.
On the Ginnie Mae website is a useful "rent versus buy" calculator: RENT VS. BUY?
One curious thing to note about the deficit here in the United States is that as the budget deficit hits records highs, the interest on the public debt is hitting record lows. How is that possible? Just like borrowers who have refinanced their mortgage in the last year, the US Government is refinancing its debt - at very low rates. So although the government budget deficit is climbing (which could actually result in a downgrade by the rating agencies of our country's credit rating), the interest rate that the US is paying debt holders is low. In fact, and I know that this is a simplistic approach but one that is good if you're talking to your neighbor while washing cars, but the yield on the 10-yr Treasury note 10 years ago was above 6%. As that debt matures this year, and is replaced by new Treasury notes, the yield is in the high 3's, saving the government 3%.
Most agents and brokers seem to be "up" on the SAFE Act. Classes continue, as education is critical. Here in California, the California Mortgage Bankers Association is hosting a question and answer webinar on March 30th starting at 10AM PST, dealing with how the SAFE Act impacts originators and having real-live regulators do the speaking. Visit www.CMBA.com or check out THIS PDF
During a war, it is easy to remember what being a "hawk" or being a "dove" means. As it turns out, employees of the US Government who are involved in setting monetary policy are also classified as hawks and doves. In this instance, a "hawk" is someone who believes that the Fed's primary duty is to control inflation. Inflation has not been an issue in quite some time, and in fact in our country's history there have only been a handful of periods of high inflation. "Doves" believe in keeping unemployment low while at the same time raising interest rates quickly to fight inflation. The Fed meets today. No one is expecting them to increase the overnight Fed Funds rate, which has hovered between 0-.25% for many moons.
Of particular note is that yesterday mortgage traders saw light volumes, with only the Fed buying. Money managers, servicers, and Asian investors stayed on the sidelines - and mortgage prices were stable. The FOMC will likely acknowledge that rates will remain low for an extended period but possibly signal that they are ready to act if conditions warrant change. Although economic data has shown the recovery is taking hold, the Fed's main concern is employment. The news from the economy continues to fluctuate. For example, last week's Retail Sales was strong but there were three key reports on the labor market recently (Job Openings and Labor Turnover survey, Jobless Claims, and the unemployment data) which were mixed. One was slightly positive, while the other two pointed to continued trouble. In spite of heightened inflation expectations, it appears the FOMC wants a sustainable labor market before moving on rates.
In spite of the news yesterday, the fixed-income markets were pretty quiet. Industrial Production expectedly climbed for the 8th straight month. The Empire State Manufacturing Survey dropped slightly - but really, is news like that supposed to move rates when entire countries like Greece or Spain are worried about their debt and the impact on global markets? Speaking of which, it was reported by the TIC (Treasury International Capital report) that during the month of January net foreign purchases of US long-term securities was roughly $19 billion. READ MORE SEE CHARTS
Yesterday mortgage prices started off the day by improving about .125, and pretty much stayed there for the rest of the day. Today, of course, the Fed will announce the results of their two-day meeting. Most expect the Fed to note the approaching end of the MBS Purchase Program and reiterate that it will continue to evaluate its purchases of securities in light of the evolving economic outlook. One interesting thing to note is that long-term mortgage investors are beginning to receive cash from the Freddie & Fannie buydowns. The money is somewhat expected, given the performance of certain pools. Some of it is going back to work in buying mortgages on a forward basis, but for other investors they are sitting on the cash - concerned about the end of the purchase program and more desirous of shorter term instruments and cash flow.
This morning we've seen some import and export prices levels, along with Housing Starts and Building Permits. Import prices were -.3%, with a year-over-year change of +11.2%, and export prices were -.5%. Housing Starts were about as expected, down 5.9% from upwardly revised number, and Housing Permits were down 1.6% (versus January's 4.7%) to an annual rate of 612,000 down from 622,000. There was little impact on rates, and the 10-yr seems comfortable around 3.70%, and mortgage prices are worse by a shade. HERE ARE SOME CHARTS
The minister was preoccupied with thoughts of how he was going to ask the congregation to come up with more money than they were expecting for repairs to the church building.
Therefore, he was annoyed to find that the regular organist was sick and a substitute had been brought in at the last minute.
The substitute wanted to know what to play.
"Here's a copy of the service," he said impatiently. "But, you'll have to think of something to play after I make the announcement about the finances."
During the service, the minister paused and said, "Brothers and Sisters, we are in great difficulty; the roof repairs cost twice as much as we expected and we need $4,000 more.
Any of you who can pledge $100 or more, please stand up."
At that moment, the substitute organist played "The Star Spangled Banner."
And that is how the substitute became the regular organist!