Perspectives After a Long Vacation
Back from vacation in Hawaii…certainly my definition of Paradise.
*An interesting item in today’s news is a story on Bloomberg that homeowners getting involved in loan modification programs can expect a serious drop in their credit scores. It makes sense that a person’s credit score should drop after seeking a mod, since they can’t meet their contractual obligations. “We view an account that has been settled or renegotiated for less than the full amount as a negative,” said one of their senior quants.
More to the point, the effect of modifications on borrowers’ credit scores is another factor complicating the attempts to mitigate the “foreclosure crisis.” Homeowners that experience a drop in their credit score are either forced to pay a lot more for credit, or have their access to it reduced. In a broader sense, the story reflects the many difficulties surrounding the various homeowner rescue programs, as well as their overall failure to have a significant impact on the problem. It was clear in the summer of 2007 that the problems plaguing both the housing and mortgage markets were going to be very resistant to “solutions” coming from the government. Programs such as FHA Secure, Hope Now, and Hope 4 Homeowners have failed to have any perceptible impact on foreclosure rates. Moreover, the various foreclosure moratoria instituted at both the national and state levels have slowed the foreclosure process and lengthened the amount of time it has taken for the supply overhang to work its way through the market.
*One piece of data receiving some notice today was a pop on housing starts, which rose to a seven-month high. However, I’d argue that the difficulties in the new-home market are a major factor in the stubbornly weak labor market. According to the Bureau of Labor Statistics (BLS), the number of unemployed construction workers has doubled over the past year, and the unemployment rate for construction workers is, at 17.4%, the highest for any industry.
With a huge supply of existing homes on the market (either through normal activities or due to foreclosures), I don’t expect the market for new homes to perk up any time soon. One of the things that contributed to the housing market problems, in fact, was the overbuilding in many less-than-thriving areas. In California, for example, a lot of homes were built in areas such as Riverside County, which now have extremely high levels of foreclosures. The problem with a lot of these homes is that they were built because of the availability of land and the ability to build homes cheaply, rather than factors that normally drive desirability (such as the proximity of potential employers). To me, this suggests that homebuilding won’t be approaching its old levels any time soon, leaving unemployment levels for workers in the construction trades very high. In turn, it suggests that overall unemployment rates will remain well above their previous lows.
*MBS have traded reasonably well over the past few weeks, with relative performance (versus Treasuries) having settled down from their volatile levels in late May/early June. For example, the 60-day standard deviation of the Fannie Current Coupon spread over the 10-year Treasury has declined from 20 basis points at the end of May to just under 10 bps today.
The sense I have, however, is that the MBS market is growing accustomed to having significant amounts of supply being removed by the Fed’s purchase programs. This is especially true given the record MBS supply hitting the market. Supply should tail off over the next few months, given the weakness in the application numbers since the end of May; however, it remains unclear what happens to spreads once the Fed’s buying power is exhausted. The good thing is that they still have some ammunition left.
Have a good weekend...BB