Provident and Condos; Startling Utah Stats; Promising Signs for US Economy - Will Rates Creep Up?

Yes, Wells Fargo's CEO's was on CNBC this morning talking about the mortgage markets. Investor news is rarely "headline grabbing," but also this morning Provident Funding, often the nation's leading wholesale operation, turned some heads and notified brokers this morning ahead of this three day weekend, "Effective immediately for new locks, condominiums are now unacceptable properties except for high rise condominiums located in Chicago, Honolulu, San Francisco and Seattle. Existing locks will be honored and allowed lock extensions. Please refer to the updated Program Guidelines for complete details." (Editor's note: I received it from a few folks - I hope it is not some kind of prank.)

The land of Alta & Snowbird, the Bonneville Salt Flats, mountain bike riding in Moab, and... Nearly 1 in 10 borrowers delinquent or in default? Utah, where the first Kentucky Fried Chicken restaurant opened in 1952, has some startling stats.

Mortgage folks don't know whether to hope the Greek and European problems are solved. Fiscal soundness is a great goal, especially for a nation. But the problems over there nudge investors to buy U.S. securities, keeping demand and prices high and thus rates low. And now we have this headline: "Japan's debt levels have ballooned to a level that makes Greece look like a steward of capital. Wall Street has noticed, and it's placing its bets". Uh oh.

"The GSEs are exercising their near-monopoly power in harmful ways: Freddie Mac and Fannie Mae have reduced lending and increased fees. They have continued to sue banks and taken steps to reduce competition in originating mortgages." Say it ain't so!

For commercial real estate fans, Wells Fargo sent out some mixed news. "Economic activity appeared to turn up a notch toward the end of 2011, and data for the early part of 2012 suggest that this year has gotten off to a solid start. The apparent pickup in economic activity has done relatively little to boost the commercial real estate sector, however. Activity cooled off appreciably following last summer's debt ceiling debacle and S&P's credit rating downgrade, which were, in turn, followed by the intensification of the sovereign debt crisis in Europe. The dust up in the credit markets has whipped up a cloud of uncertainty that held back leasing activity and inhibited deal flow and new construction during the latter part of 2011. While glimmers of stronger economic growth are sporadically breaking through the clouds, the fog is still fairly thick."

We should know that it's not just homeowners seeking to refinance who are running into trouble: as sovereign debt problems loom, threatening access to both US and European markets, US companies with the lowest credit ratings could struggle to refinance about $80 billion of debt maturing in the coming years.  Such companies include Clear Channel Communications, Texas Competitive Electric, and Caesars Entertainment, all of whom owe more than $8 billion. The good news is that debt maturities for companies with sub-investment grade (junk) ratings are generally manageable, and such companies have been able to extend the bulk of upcoming maturities on their debt thanks to healthy financial markets in early 2011.  They're still looking at refinancing $668 billion of bank loans, though, with nearly 40% due by 2016, and things look worse for the 25 B3-rated companies. Continuing turmoil in the Eurozone further threatens companies with large exposure to European markets, and there is potential for European banks, which have played a big role in the US loan syndication market, to retreat while they look to deleverage and raise capital.  Were that to happen, capital constraints on US banks, particularly BofA and Citi, may mean that US banks may not be able to fill the vacuum their European cousins leave, which would also have negative implications for companies with junk ratings.

Politicians and diapers have one thing in common. They should both be changed regularly, and for the same reason. Here's a little Dodd Frank clarification. Dodd-Frank legislature holds that bank regulatory agencies must review any references to the use of credit ratings in regulations and then change these references so that they reflect standards of creditworthiness deemed to be appropriate.  Essentially, Congress didn't like the way financial investors had come to depend on credit ratings and the cozy nature of the business that showed up during the credit crisis, and Dodd-Frank seeks to eradicate that dependence.  The latest guidance from the OCC proposes amending the definition of "investment grade" such that it no longer references credit ratings but rather the issuer's "adequate capacity".  Banks have to be able to show their investment securities meet credit quality standards, but what's the protocol now that they can't just point to a credit rating? The OCC states that banks must have a risk management process that ensures credit risk is effectively regulated; that is, they had better be able to demonstrate that their actions make sense or risk getting increasingly definitive directions.  The OCC has placed special focus on due diligence, the thinking being that the process should ensure that the bank fully understands each individual security's credit rating, structural complexity and size-all crucial for predicting that security's behavior.

Its official: the economy is improving! Uh, at least some of it, and in some places. Statistics are always to be questioned, but things are looking up in the housing and jobs sectors in particular, and inflation at whole sale is on trend lower than earlier this year thanks to commodity issues smoothing over.  Be warned, though, that the process is just beginning. Jobless and continuing claims both fell to their lowest levels since 2008.  This recent movement suggests that the labor market is finally picking up again from the depths of the recession, though the Fed does remain cautious about the pace of recovery. As for housing, Housing Starts rose from 689,000 in December to 699,000 in January, aided in part by better than usual weather conditions.  Increases in permits, single-family starts, and multi-family construction all certainly point to a recovery, but the numbers themselves indicate that the market still has a long way to go.  As to how far, exactly, the current price of starts is still 25% of what it was in 2006 and even less than it was in the 90s.

Yesterday's news was filled with better-than-expected economic news (Initial Claims, Housing Starts and Philly Fed), along with some encouraging developments out of Europe on Greece's debt. Stocks rose, but the US 10-yr T-note dropped about .5 in price (1.99%); mortgage prices did slightly better, but still worsened by about .375. As Russ Middleton with Chase noted, "By lunch time mortgages had been pushed back more times than the end of the Mayan Calendar. One more day like this and your best hedging vehicle is going to be a fistful of Powerball tickets."

(Thomson Reuters points out that with the Fed buying $1.2 billion per day, and originators selling $2 billion per day, $800 million is being absorbed by banks, money managers, insurance companies, and so forth. Of particular interest in this latest report was 15-year share at 7.4% was at its lowest level since the Fed began reinvesting its paydowns back into MBS; its average has been 10.6%. Meanwhile, GNMA share was at its highest level at 23.0% (mostly IIs) versus an average of 14.2%.)

Overnight, and this morning, the latest round of optimism around the Greek bailout has the "risk-on trade" back. The latest plan would have the ECB will swap a portion its current bond holdings for lower coupon debt, while also locking in gains that will be used to plug gaps in the latest bailout. We've had our CPI +.2%, core rate +.2%, pretty much as expected. Year-over-year for both is up less than 3% - inflation is not an issue. We'll have Leading Economic Indicators later (expected +.5%), but look for things to become pretty quiet as folks head out early. In the early going the 10-yr is up to 2.03% and MBS prices are worse about .125-.250.

The only cow in the LSU Dairy in Baton Rouge stopped giving milk.
The Vets from the Large Animal Clinic did some research and found they could buy a cow from USL in Lafayette for $600. They bought the cow, and the cow was wonderful!  She produced lots of milk all of the time, and the LSU people were pleased and very happy. They decided to acquire a bull to mate with the cow and produce more cows just like it. Then, they would never have to worry about their milk supply again.
So, they bought a bull and put him in the pasture with their beloved cow. However, whenever the bull came close to the cow, she would move away. No matter what approach the bull tried, the cow would move away from the bull, and he could not succeed in his quest.
The Vets were very upset and decided to ask the Vet School Dean Boodro, who was very wise, what to do.  They told Dr. Boodro what was happening: "Whenever the bull approaches our cow, she moves away. If he approaches from the back, she moves forward. When he approaches her from the front, she backs off. An approach from the side, and she walks away to the other side."
Without hesitation, Dr. Boodro asked, "Did you buy dis cow in Lafayette?"
"Mais, yes!" said the vets, who were dumfounded and never mentioned where they bought the cow. "How did you know we got dis cow in Lafayette?"
Dr. Boodro replied with a distant look in his eye, " Becuz ma' wife is from Lafayette."  

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses residential lending and mortgage programs around the world, part 2. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.