Morning Report – Merry Christmas edition 12/24/12

Vital Statistics:

Last Change Percent
S&P Futures 1421.8 -4.1 -0.3%
Eurostoxx Index 2648.3 -3.0 -0.15%
Oil (WTI) 88.38 -0.28 -0.31%
LIBOR 0.31 0.000 0.00%
US Dollar Index (DXY) 79.46 0.156 0.15%
10 Year Govt Bond Yield 1.77% +0.04%
RPX Composite Real Estate Index 191.8 -0.1

Markets are quiet this morning as most shops have skeleton crews on the desk.  Stock and Bond markets will be open until 1:00 pm.  There is no economic data this morning. Bonds are down while MBS are flat.

The fact that bonds have not rallied in the face of the machinations of the fiscal cliff has me scratching my head. Mohammed El Arian of PIMCO believes a recession is now more likely. If we enter a recession, we could be looking at a 1.25% 10-year.  We broke 1.4% in late July. Yet here we sit at 1.77%.  Liquidity is typically low this time of year, so you can’t read too much into it, but unless we get a deal on the cliff soon, we could be looking at a big rally in Treasuries come January.

With the collapse of Boehner’s Plan B, all attention turns to the Senate which hopes to devise some sort of band aid to prevent the worst of the fiscal cliff. In particular, Mitch McConnell has been more of an observer than a participant as negotiations have centered on the WH and House. Apparently Joe Biden has better luck dealing with the Minority Leader than Obama, and has earned the reputation as the “McConnell Whisperer.” Democrats are urging Boehner to re-enter negotiations with a bipartisan bill. Ironically, by rejecting Boehner’s Plan B, Tea Party Republicans in the House have lost their seat at the table.

Lender Processing Services is out with their first look at November delinquency numbers. Delinquencies are up sequentially, while foreclosures are down.

The Fed is disappointed that mortgage rates are not responding to the Fed’s MBS purchase program. At least the story mentions the reason – increases in guarantee fees. Most stories about this (The Washington Post is absolutely terrible on this) don’t mention the fee increase. Even the WSJ does it, by mentioning “higher fees charged by Fan and Fred” in a generic fashion, as if they are inconsequential.  People don’t understand how much G-fees matter. There is the perception in Washington that lenders are simply pocketing the difference when in reality their costs have increased. The media has glommed onto the idea that the financial industry is inherently crooked and there is no disabusing them of that.

Merry Christmas to all.

5 Responses

  1. Merry Christmas, Brent!


  2. Feliz Navidad from Peru. Off to Manchu Picchu tomorrow.


  3. I wish everyone here and our correspondent in Inca land Merry Christmas, again, in case it was missed on yesterday’s post.

    Brent, thanks for the work and the analysis. I truly would not have picked up on the guarantee fees angle.

    Can you explain why G-fees have an outsized effect? Why aren’t they a nominal consideration?


  4. Can you explain why G-fees have an outsized effect? Why aren’t they a nominal consideration?

    HUD increased the Fan and Fred guarantee fees by 12 basis points starting Nov 1. So if the Fed lowers rates (by buying MBS) by 25 basis points, you have to add back the 12, so borrowing rates only drop by 13 bps, in spite of the Fed’s QE. Theoretically, you could charge points up front in lieu of folding the fee into the loan rate. Most lenders realize borrowers tend to run screaming when you mention the word “points” so it shows up in the rate. Rates are falling, just not in lockstep with the implied yields of MBS. G-fees were around 26 bps in 2010, 28 in 2011, and are now 40. Also, the g-fee will continue for the life of the entire mortgage, which is new. They used to phase out over a period of years.

    I have been to several presentations with speakers from FHA and FHFA. Both agencies are well aware of the outsized role the government is currently playing in the mortgage market and they are eager to reduce it. They believe that the government has been under-pricing its guarantee and the result has been a crowding out of private capital. They intend to increase the guarantee fee until it is roughly the same cost as PMI. Some of the estimates I have seen have that level at 75 basis points or so.

    But with rates so low, all of a sudden people really notice a 12 basis point jump in the G-fee, whereas it would be (relatively) inconsequential in a normal interest rate environment where mortgage rates are 6% or so.


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