FYI – a chance to comment on a proposed regulation

The U.S. Department of the Treasury and the Internal Revenue Service (IRS) today will issue initial guidance regarding qualification requirements for tax-exemption as a social welfare organization under section 501(c)(4) of the Internal Revenue Code.  This proposed guidance defines the term “candidate-related political activity,” and would amend current regulations by indicating that the promotion of social welfare does not include this type of activity.  The proposed guidance also seeks initial comments on other aspects of the qualification requirements, including what proportion of a 501(c)(4) organization’s activities must promote social welfare.

The initial guidance is expected to be posted on the Federal Register later today.

There are a number of steps in the regulatory process that must be taken before any final guidance can be issued.  Given the significant public interest in these and related issues, Treasury and the IRS expect to receive a large number of comments.  Treasury and the IRS are committed to carefully and comprehensively considering all of the comments received before issuing additional proposed guidance or final rules.

“This proposed guidance is a first critical step toward creating clear-cut definitions of political activity by tax-exempt social welfare organizations,” said Treasury Assistant Secretary for Tax Policy Mark J. Mazur.  “We are committed to getting this right before issuing final guidance that may affect a broad group of organizations.  It will take time to work through the regulatory process and carefully consider all public feedback as we strive to ensure that the standards for tax-exemption are clear and can be applied consistently.”

“This is part of ongoing efforts within the IRS that are improving our work in the tax-exempt area,” said IRS Acting Commissioner Danny Werfel.  “Once final, this proposed guidance will continue moving us forward and provide clarity for this important segment of exempt organizations.”

Organizations may apply for tax-exempt status under section 501(c)(4) of the tax code if they operate to promote social welfare.  The IRS currently applies a “facts and circumstances” test to determine whether an organization is engaged in political campaign activities that do not promote social welfare.  Today’s proposed guidance would reduce the need to conduct fact-intensive inquiries by replacing this test with more definitive rules.

In defining the new term, “candidate-related political activity,” Treasury and the IRS drew upon existing definitions of political activity under federal and state campaign finance laws, other IRS provisions, as well as suggestions made in unsolicited public comments.

Under the proposed guidelines, candidate-related political activity includes:

1.      Communications

  • Communications that expressly advocate for a clearly identified political candidate or candidates of a political party.
  • Communications that are made within 60 days of a general election (or within 30 days of a primary election) and clearly identify a candidate or political party.
  • Communications expenditures that must be reported to the Federal Election Commission.

2.      Grants and Contributions

  • Any contribution that is recognized under campaign finance law as a reportable contribution.
  • Grants to section 527 political organizations and other tax-exempt organizations that conduct candidate-related political activities (note that a grantor can rely on a written certification from a grantee stating that it does not engage in, and will not use grant funds for, candidate-related political activity).

3.      Activities Closely Related to Elections or Candidates

  • Voter registration drives and “get-out-the-vote” drives.
  • Distribution of any material prepared by or on behalf of a candidate or by a section 527 political organization.
  • Preparation or distribution of voter guides that refer to candidates (or, in a general election, to political parties).
  • Holding an event within 60 days of a general election (or within 30 days of a primary election) at which a candidate appears as part of the program.

These proposed rules reduce the need to conduct fact-intensive inquiries, including inquiries into whether activities or communications are neutral and unbiased.

Treasury and the IRS are planning to issue additional guidance that will address other issues relating to the standards for tax exemption under section 501(c)(4).  In particular, there has been considerable public focus regarding the proportion of a section 501(c)(4) organization’s activities that must promote social welfare.  Due to the importance of this aspect of the regulation, the proposed guidance requests initial comments on this issue.  The proposed guidance also seeks comments regarding whether standards similar to those proposed today should be adopted to define the political activities that do not further the tax-exempt purposes of other tax-exempt organizations and to promote consistent definitions across the tax-exempt sector.

Morning Report – NAR forecasting home prices to moderate in 2014 11/27/13

Last Change Percent
S&P Futures 1805.0 3.0 0.17%
Eurostoxx Index 3084.1 21.5 0.70%
Oil (WTI) 92.22 -1.5 -1.56%
LIBOR 0.2376 0.001 0.42%
US Dollar Index (DXY) 80.67 0.059 0.07%
10 Year Govt Bond Yield 2.73% 0.02%
Current Coupon Ginnie Mae TBA 105.234 -0.2
Current Coupon Fannie Mae TBA 104.344 -0.2
RPX Composite Real Estate Index 200.67 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.33
Markets are higher this morning after a mixed bag of economic reports. Due to the Thanksgiving Day holiday, this morning included reports scheduled for tomorrow. Bonds and MBS are down small.
Initial Jobless Claims came in at 316k, the lowest level in 2 months. Durable Goods orders fell 2%, which was more or less in line with Street expectations. Consumer Confidence came in higher than expected. Chicago Purchasing Managers dropped, but not as much as expected. Finally leading economic indicators rose .2%. Bottom line: so much for the theory that the government shutdown affected the economy outside of the luxury car dealerships around Tyson’s Corner.
Mortgage Applications fell slightly as rates ticked up a couple of basis points. Surprisingly, refis rose while purchases fell.
FHFA decided not to change the conforming loan limits, which really isn’t much of a surprise. Incoming FHFA Chairman Mel Watt does not have an appetite for reducing the government’s footprint in the mortgage market. Whether that means anything for FNMA shareholders (and pref holders) is an open question. Ralph Nader (yes) is agitating in defense of shareholders.
Again, I think the under-appreciated story is that Mel Watt will in fact be the new FHFA Chairman. This means principal reductions on loans held by F&F, a probable extension (and loosening) of the HARP plan, and definitely more focus on low-income lending. Watt is a CRA guy to the bone. The reason why the MBA has supported his candidacy was because he would presumably usher in a wave of refis.
Pending Home Sales dropped .6%, according to the National Association of Realtors. This is unsurprising given the government shutdown and the inability of mortgage bankers to get tax returns out of the IRS. The NAR is warning that the new QM rules may depress sales in early 2014. They also forecast home price growth to slow from 11% in 2013 to 5% in 2014. It is an interesting dynamic with tight inventory on one hand, and decreasing affordability on the other. If the job market improves, especially for the Millenials, there will be a wave of pent-up demand that is going to enter the market. Household formation has been severely depressed over the past 6 years, not due to demographics, but due to a lousy economy. Homebuilders have underbuilt for ten years, and foreclosures remain tied up in the courts in the judicial states. And while affordability may have decreased, anyone with gray hair remembers the days when a 4.5% mortgage was considered unheard-of, something that your dad might have been able to get in the 1960s, but a relic of a bygone era.

Morning Report – Harry goes nuclear, Watt does that mean? 11/26/13

Vital Statistics:

Last Change Percent
S&P Futures 1802.7 0.3 0.02%
Eurostoxx Index 3068.0 -4.8 -0.16%
Oil (WTI) 94.1 0.0 0.01%
LIBOR 0.2366 0.001 0.32%
US Dollar Index (DXY) 80.865 -0.055 -0.07%
10 Year Govt Bond Yield 2.71% -0.01%
Current Coupon Ginnie Mae TBA 105.365 0.0
Current Coupon Fannie Mae TBA 104.477 0.1
RPX Composite Real Estate Index 200.67 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.34
Sorry I haven’t put one of these out in the last couple of days – been traveling for the holidays.
Markets are flattish on no major news. This week should be relatively dull, with no major economic reports. Bonds and MBS are flat as well.
We have had some economic data over the past couple of days. Pending Home Sales came in at -.6%, which is evidence the housing recovery may be slowing down a bit. That said, prices are still rising at a rapid clip, with the Case-Shiller index up 13.3% on a year-over-year basis and the FHFA House Price Index up 2% for the third quarter.
Building Permits came in at 974k, higher than the Street estimate. We didn’t get housing starts today due to the government shutdown.
One piece of news from last week – Harry Reid “went nuclear” and changed the rules regarding Presidential nominations. Now, nominees cannot be filibustered. Watt does that mean? It means Mel Watt will be the next FHFA Chairman. Mel Watt is basically a CRA guy, so expect a lot of fair-lending scrutiny. Also, he will do everything he can to expand HARP and HAMP. Watt does that mean for originators? Maybe one more refi wave.
Mel Watt wouldn’t take a position on the use of eminent domain to handle underwater mortgages, which is pretty much tacit approval of the strategy. Expect a lot of consumer friendly / investor unfriendly stuff to come down the pike. Principal mods are almost a given, although there will be push-back from investors. Not that the government is going to care about hurting hedge funds or mortgage REITs, but there are investors they do care about, namely pension funds. Pension funds have been begging the government not to do this, and this will certainly lead to interesting political dynamics.

Saturday Football Open Thread, Week 13

None of the early games were terribly interesting (Rice beat UAB in OT 37 – 34, UCF trounced Rutgers 41 – 17, and UNLV crushed Air Force 41 – 21 on Thursday, then Navy beat San Jose State 58 – 52 on Friday). Today’s action:

MSU is at Northwestern (line: MSU, spread 7)(Noon EST/ESPN). This should be a rout–go, State! UPDATE: MSU wins handily, 30 – 6.

Michigan is playing Iowa (line: Iowa, spread 3.5) and that will probably be a closer game, especially since they’re playing in Iowa City. BTN at noon EST, if you’ve got it. UPDATE: Iowa wins 24 – 21. It was a much better game.

Oklahoma is at Kansas State (line: KSU, spread 3)(Noon EST/FOX Sports 1). Boomer, Sooner! UPDATE: Boomer, Sooner indeed! Oklahoma 41 – 31.

Pittsburgh is at Syracuse (line: Pitt, spread 1.5)(12:30 EST/ESPN3) in ACC action. Go Orange! UPDATE: Pitt squeaks out a win, 17 – 16.

Alabama A&M is playing Georgia Tech (line: GT, spread 51 [!!!])(1:30 EST/ESPN3). Sting ’em, Jackets! UPDATE: Georgia Tech wins 66 – 7. Damn!

Oregon is at Arizona (line: Ducks, spread 17.5)(3:30 EST/ABC)–go, Wildcats! UPDATE: “Carl’s” ‘Cats pull off a stunner and beat Oregon 42 – 16.

BYU visits Notre Dame (line: ND, spread 1)(3:30 EST/NBC). I’ll leave it to your imagination which team I’m rooting for in this game. UPDATE: Notre Dame wins 23 – 13.

BC is risking their eyesight today here in Maryland (line: BC, spread 1). Go, Eagles! Try to not be blinded by those uniforms. . . UPDATE: BC comes from behind to win 29 – 26.

Wisconsin is playing Minnesota (line: UW, spread 14.5)(3:30 EST/ESPN) and Indiana is at osu (line: osu, spread 31.5)(3:30 EST/ABC). C’mon Hoosiers–osu has to lose sooner or later! UPDATE: Wisconsin cruises past UMinn 20 – 7 and osu (dang it!) beats the Hoosiers 42 – 14.

Nebraska is in Happy Valley (line: PSU, spread 2.5). UPDATE: Nebraska pulls it out in OT 23 – 20.

Utah travels north to Washington State (line: WSU, spread 7). UPDATE: WSU wins 49 – 37.

SMU plays a late game at USF (line: SMU, spread 5.5). UPDATE: SMU wins 16 – 6.

Texas is resting up for Texas Tech on Thanksgiving.

Housekeeping note: I’ll be on the road between Michigan and home next Saturday, so there won’t be a football thread next week unless someone else wants to throw one up.

What else?

For History Buffs

50 years ago: Austin was ‘all agog’ to greet JFK

Posted: 9:35 p.m. Thursday, Nov. 21, 2013

By Patrick Beach – American-Statesman Staff

Austin was ready.

The city was bedecked in holiday decorations and lights. Mayor Lester Palmer and Emma Long, the first woman elected to the City Council, were among the dignitaries set to greet President John F. Kennedy when Air Force One touched down at Bergstrom Air Force Base on the afternoon of Nov. 22, 1963 — 50 years ago today.


About 2,500 people were expected

A tent was up outside the Governor’s Mansion for a reception before the big event of the day. The invitations to that affair, scripted in handsome cursive, had gone out.

Largely because Gov. John Connally and others had tirelessly worked the phones, checks poured in for the $100-a-plate fundraising dinner at Austin Municipal Auditorium. The caterer didn’t know exactly how many plates to set. Connally said sales had “far exceeded” his predicted 2,500.

The excitement was such that Superintendent Irby Carruth announced that Austin schools would close at 2:30 p.m. so students could see the motorcade. A hand-drawn map of the route was printed in the newspaper. Unlike Dallas — where Kennedy people and the press were braced for a possibly hostile reception — Austin was giddy.


A photo of Lyndon Baines Johnson being sworn in

“The man on the street, the kids, clerks and stenographers will have ample opportunity to see and wave their greetings to President John Kennedy and the presidential party when the president visits Austin Friday,” the Austin Statesman declared on Nov. 19. On Nov. 21, the headline: “Austin all agog over Kennedy visit.” And a second story: “Till just before departure/Jackie held up wardrobe decision.”

The plane was to land at 3:15, and Kennedy would be taken by motorcade along a published route to the Commodore Perry Hotel — “Austin’s hotel of distinction” — at Eighth and Brazos streets at 3:30, attend a reception on the lawn of the Governor’s Mansion and head to what is now part of the Long Center for the fundraising dinner, the only overtly political event on the president’s Texas itinerary.

After steaks and a speech that Kennedy hoped would reunite the liberal and conservative wings of the Texas Democratic Party, they’d fly by helicopter out to Vice President Lyndon B. Johnson’s ranch in the Hill Country to kick back after a long and tiring trip.


A page from the Austin American-Statesman’s special section from Nov. 23, 1963, on the John F. Kennedy assassination.

Longtime LBJ caterer and self-proclaimed barbecue king Walter Jetton, almost certainly cowboyed up to the nines in his trademark Stetson and pressed white shirt, would tend to the barbecue pit at the ranch. It was whitetail season, and rumor had it that Johnson had ordered deer be positioned in such a way that the president could get a good shot. (The details of Johnson’s scheme, if in fact it existed, are lost to history.) Richard “Cactus” Pryor was booked to entertain, as he frequently did at the ranch.

Local and White House press were invited to a post-deadline cocktail party with “grazing food” in Colonnade Room III of the Commodore Perry Hotel, hosted by the local chapter of what later became the Society of Professional Journalists. Democrats from all over the state were checking in there and at other Austin hotels to settle in and get ready for the big dinner. During the visit, University of Texas coach Darrell Royal was going to give the president a football autographed by the soon-to-be national champion Longhorns.

Neal Spelce, who was working as news director and anchor at a TV station in town, was ready. They had filmed the preparations at the auditorium, tables and folding chairs filling the lower level, programs laid out.

“The idea was this was to be a big unity-type dinner,” said the veteran Austin broadcaster. “John Connally pretty much personified the conservative wing and (Sen. Ralph) Yarborough personified the liberal wing, and there was all this tug-of-war for control of the party. They wanted a show of unity, plus it was a big fundraiser, raising a bunch of money for the Kennedy re-election campaign.”

Amid intraparty fighting and even rumors that Kennedy might be preparing to dump Johnson from the 1964 ticket, the president planned to deliver a galvanizing speech in which he called Johnson “my strong right arm” and spoke of past promises fulfilled and future growth, concluding: “So let us not be petty when our cause is so great. Let us not quarrel amongst ourselves when our nation’s future is at stake. Let us stand together with renewed confidence in our cause — united in our heritage of the past and our hopes for the future — and determined that this land we love shall lead all mankind into new frontiers of peace and abundance.”

Fourteen members of Texas’ congressional delegation would be along for at least some part of the trip. “Never before in the storied history of Austin has such a large concentration of state and national leaders been here,” the Austin American reported on Nov. 22. For the people of Texas, it was to be their first chance to see Kennedy as president, and the first lady’s first official trip since the death of her infant son Patrick in August.

Johnson, in his remarks at the Austin dinner, intended to mention the pockets of antipathy directed at Kennedy from political extremists in Dallas and elsewhere. He was to conclude: “And thank God, Mr. President, that you came out of Dallas alive.” The line was sure to get a great reception.

Anything but ominous’

In Dallas, spectators lined the motorcade route, including a group of children with a sign that said, “Please stop and shake our hands.” The president complied.

Connally aide Julian Read was in charge of herding reporters on a press bus that day. Despite the dark warnings about the reception the president could receive in Dallas, “the mood inside the bus was anything but ominous,” Read wrote in his book, “JFK’s Final Hours in Texas.” “The air was filled with light banter akin to a holiday outing. Reporters were uniformly surprised by the warm reception for the president and his wife.”

In the president’s limousine, Texas first lady Nellie Connally turned and said, “Mr. President, you certainly can’t say Dallas doesn’t love you.”

The press bus was following the limo. Read heard “a pop. And then pop-pop,” and then the limo rocketed away.

In Austin, Spelce was at the Driskill Hotel meeting with Police Chief Bob Miles and finalizing details for covering the visit when the news from Dallas broke, a UPI bulletin. It was 12:36 p.m.:


The chief was informed. Spelce sprang out of his seat and dashed to his TV station a few blocks away to begin days of wall-to-wall coverage. The three Connally children were pulled out of Austin High, O. Henry Middle and Casis Elementary schools and taken to the Governor’s Mansion where, because of three gunshots, there would be no reception since — as the world would learn in about an hour — there was no President Kennedy to be received.

Shock and numbness

Spelce went to the auditorium and found a scene he described as eerie — everything perfect, everything ready, the catering staff weeping.

For days, Spelce said, “People were walking around with blank stares. Just numb. And glued to the TV sets. People were mesmerized, maybe a little more here because there was this anticipation that he was going to be here in just a few hours. The community had rallied around the idea that this was a historical occasion. Over the weekend, downtown was almost a ghost town. People started showing up in church who hadn’t been there in a while.”

Ben Barnes, freshly elected to the Texas Legislature and an early supporter of Connally’s campaign for governor, had spent seven or eight weeks plotting out the trip, working closely with Kennedy advance man Jerry Bruno, who for decades would blame himself for the assassination.

“This was a political trip,” said Barnes, who would go on to become lieutenant governor. “He came to raise money. He was also down in the polls. Connally was 10 or 11 points higher than Kennedy.”

Barnes remembers Nellie Connally spotting a problem in the proposed itinerary: a short turnaround for the first lady to freshen up at the hotel before the governor’s reception.

“She’s going to be mad as hell if she only has 15 minutes to change clothes,” Barnes recalls Connally saying.

Barnes, among others, had lobbied against a motorcade in Dallas. But Yarborough wanted it. And, more importantly, so did the president. He wanted people to see him.

“We delivered (Lee Harvey Oswald) a home run when that parade route was planned to get the most people out,” Barnes said.

Barnes was having lunch at the Forty Acres Club on the UT campus with Frank Erwin, a powerful state Democrat, and Bill Moyers, then deputy director of the Peace Corps and soon to become Johnson’s press secretary. Moyers got a call from the Secret Service: Johnson wanted him to proceed immediately to Love Field in Dallas. The Texas Department of Public Safety called Barnes, saying Kennedy and Connally, the latter a close political ally and personal friend, had been shot. Barnes arranged for a DPS plane to take Moyers. The door was open and both engines were running when they got to the airport.

“I never saw a plane take off like that,” Barnes said. “It was a terrible ordeal. We didn’t know if Connally was going to live or not.”

In Dallas, the president’s limo sped to Parkland Hospital while a press bus full of reporters covering Kennedy’s visit went to the Trade Mart as planned. Upon arrival they all rushed to the bank of pay phones as Connally aide Read told event organizers they feared something awful had happened.

Read had planned to return to Austin to work on Connally’s speech that night after the morning breakfast event in the Crystal Ballroom of the Hotel Texas in Fort Worth, where the first couple had spent the night in room 850. Jacqueline Kennedy, as she was wont to do, was late in arriving to the event, but when she did it was like a movie star walked in. Read decided to stick around. The rain had passed, the bubbletop was removed from the president’s limo, the sun was out, and the crowds were much larger and more welcoming than expected. It was going to be a great day.

No more. Barnes went to the state Capitol and with Texas House Speaker Byron Tunnell arranged a memorial and prayer service in the chamber that night. Calls were made to area hotels and motels, and programs printed on a mimeograph.

“We had to do something,” Barnes recalled. “People were beside themselves. There was some comfort to that.”

Earlier, Westinghouse Broadcasting’s White House reporter Sid Davis had arrived at Love Field just as the president’s casket was being loaded onto Air Force One. A number of seats had been removed to accommodate it, and Secret Service agents had to use a hammer or mallet to knock off the casket’s handles to get it on the plane. It was broiling inside. Davis remembers Johnson saying, “I feel like I’ve lived a year since this morning.”

Johnson asked Jacqueline Kennedy, still wearing her blood-soaked outfit, if she would like to stand with him as he was sworn in. When she appeared, Davis said, “the sobbing turned to outright bawling.”

The oath was administered in 28 seconds. Davis got off the plane to file his solemn report.

Shame we’ll never live down’

Shock, grief and fear gripped the nation — if not the world — especially in Austin, where high expectations were replaced with horror. How could this have happened? How could it have happened here? Was it a conspiracy?

“Oh, no,” a woman described as a “gray-haired mother” told an Austin newspaper reporter. “All through the war, all over the world, and we in Texas have to do this. The shame we’ll never live down.”

Two days later, Dallas cabaret owner Jack Ruby shot and killed Oswald in the basement of the Dallas police headquarters — on live television and in a crowd of lawmen numerous enough to quell a riot.

Margaret Berry, long considered UT’s unofficial historian, remembers walking to lunch when someone told her the news that Kennedy had been shot. She didn’t have tickets to that night’s dinner; her mother was quite ill at the time. But she knew people who did. Those people were now possessing grim keepsakes.

She also remembers a memorial service sometime later at University United Methodist Church, which she said President Johnson chose because it was a pretty church on campus. She sat in the balcony.

At the time, some predicted that the assassination was the event that would unleash an era of violence and madness. And so it was to be.

“Dallas, Oswald, Ruby, Watts, Whitman, Manson, Ray, Sirhan, Bremer, Vietnam, Nixon, Watergate, FBI, CIA, Squeaky Fromme, Sara Moore — the list goes on and on,” Austin journalist Gary Cartwright wrote in a 1975 Texas Monthly article on Ruby, whom he knew. “Who the hell wrote this script, and where will it end? A dozen years of violence, shock, treachery and paranoia, and I date it all back to that insane weekend in Dallas and Jack Ruby — the one essential link in the chain, the man who changed an isolated act into a trend.”

Fifty years on, the aftershocks remain more faint but ongoing. Something — call it innocence or confidence or plain, naive hope — has eroded, forever melted away.

When, Berry was asked, did things return to normal? Her answer was bitter and rhetorical:

“Did they ever?”

About this story

Patrick Beach conducted roughly 10 interviews of people who were in Austin, Dallas-Fort Worth and the Washington, D.C., area on Nov. 22, 1963; reviewed the archives of the Austin American and the Austin Statesman in the days preceding and following the assassination; and examined period documents and photos at the Austin History Center.


The Cortaca Jug

I went to one of the two schools that participate in the Cortaga Jug

Cortaca Jug

Morning Report – Parsing the FOMC minutes 11/21/13

Vital Statistics:

Last Change Percent
S&P Futures 1783.8 4.1 0.23%
Eurostoxx Index 3050.5 3.2 0.10%
Oil (WTI) 94.25 0.4 0.43%
LIBOR 0.238 -0.001 -0.21%
US Dollar Index (DXY) 81.08 -0.035 -0.04%
10 Year Govt Bond Yield 2.81% 0.01%
Current Coupon Ginnie Mae TBA 105.3 -0.4
Current Coupon Fannie Mae TBA 104.3 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.38
Markets are higher this morning on no real news. Bonds and MBS continue their post-FOMC minutes sell-off.
Initial Jobless Claims came in at 323k, lower than the 335k street forecast. Inflation at the wholesale level remains muted.
The bond market sold off on the FOMC minutes, as people who had been holding out hope that the September non-move meant QE4EVA were disabused of that notion. The Fed largely dismissed the effects of the government shutdown as “temporary and limited.” Given the October jobs report and October retail sales, they are correct – we just didn’t see any effect from the shutdown except for a temporary spike in the 1 month T-bill. They again repeated the view that the economy is strengthening, and if things play out as we expect, we should be tapering QE in the next few months.
Sometimes you have to parse the Fed’s characterization of things. On the Fed’s scale:
Economic Growth – “moderate”
Inflation – “modest”
Corporate Credit – “robust”
CAPEX – “tepid”
In other words, growth is just ok, inflation is too low, business investment is way too low, and the Fed is beginning to worry about bond investors reaching for yield. This means that QE’ days are numbered as the risks of an overheated credit market are becoming larger than the risk of a credit crunch. However, low interest rates are probably here to stay until business investment, inflation, and employment are closer to where the Fed wants to see things.
One thing to keep in mind is that the Fed’s footprint has been increasing in the MBS market as issuance drops. The end of the refi boom meant lower overall MBS issuance but the Fed has been been maintaining a constant $40 billion a month. As a percentage of total volume, their footprint has been increasing. You can see it in MBS spreads, which have tightened to Treasuries. While the market has been of the view that the Fed would taper Treasury purchases first, lest it derail the nascent housing recovery, an adjustment in MBS is probably in order. This could mean a double-whammy for mortgage rates – The benchmark (Treasuries) increases in rate, and the spread to Treasuries increases as well. Float at your own peril..
I find it ironic that the Fed worries about people conflating a reduction in QE with a tightening of monetary policy, yet at the same time refers to “fiscal headwinds.” Reality Check: fiscal policy is about as loose as it gets, unless you compare it to a completely artificial benchmark of the past 5 years. Post WWII, government spending averaged around 19% of GDP. We have averaged 24% over the past 5 years. We are still at 22%. 5 of the 7 largest postwar deficits as a percent of GDP have been in the past 5 years. Calling a slight reduction in government spending as a “fiscal headwind” makes as much sense as characterizing a reduction in asset purchases from 85 billion a month to 65 billion a month as “tightening monetary policy.” It is the dieting equivalent of having a diet coke with your triple whopper value meal.
As home prices rise, negative equity has continued to fall, according to Zillow. The percentage of homes with negative equity dropped to 21% in the third quarter from 23.8% in the previous quarter. Negative equity has been a big reason why existing home sales have been so depressed. Yesterday we saw an annualized pace of 5.12 million, which is slightly below average. IMO, there is pent-up demand that is being held back by negative equity. As that condition rights itself, we should see existing home sales numbers well in excess of historical averages. The mortgage bankers who do purchase activity well will reap the benefit.

Morning Report – Median House price increases 12.8% 11/20/13

Vital Statistics:

Last Change Percent
S&P Futures 1788.5 3.3 0.18%
Eurostoxx Index 3043.7 -5.5 -0.18%
Oil (WTI) 93.71 0.4 0.40%
LIBOR 0.238 -0.001 -0.42%
US Dollar Index (DXY) 80.64 -0.066 -0.08%
10 Year Govt Bond Yield 2.73% 0.02%
Current Coupon Ginnie Mae TBA 105.6 -0.1
Current Coupon Fannie Mae TBA 104.8 0.0
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.3
Markets are higher after retail sales came in a bit better than expected. Bonds and MBS are down small. Later on today, we will get the minutes from the October FOMC meeting. It will be interesting to see if the credibility argument is still being made.
Existing Home Sales dropped to an annualized pace of 5.12 million in October according to the National Association of Realtors. The median house price rose 12.8% from a year ago to $199.500. Days on market increased to 54 and months of supply increased to 5. Inventory on the West Coast is still tight.
Mortgage applications fell 2.3% during the holiday-shortened week. Purchases jumped 5.8%, while refis dropped 6.5%. Not sure what drove the jump in purchases. Refis as a percent of total number of loans fell to 64.3%.
Chart: MBA Purchase Index

The Consumer Price Index came in as expected, with a .1% decrease month-over-month and a 1% increase year over year. Ex food and energy, prices rose .2% month-over-month and 1.7% year-over-year. Certainly not enough of an increase to get the Fed worked up about inflation. If anything, they probably think it is too low.

Retail Sales came in at +.4% for October, which is yet another sign that the consumer (and the economy) basically yawned at the government shutdown. For all the sturm and drang out of guys like Mark Zandi saying the shutdown would lop 1.4% off of 4Q GDP growth, we have yet to see any tangible evidence it so far. Payroll was par for the post-recession course, retail sales were above average.

Housing-related expenditures make up about 17.6% of GDP, according to CoreLogic. This is up slightly from a year ago, but well below the peak of 20.6% in 2005. Part of the reason why this recovery has been so maddeningly tepid has been the absence of housing spending, particularly housing starts. Housing starts used to average around 1.5 million units a year from the sixties to the bubble years. Since then, we have been averaged under half of that. Since housing construction usually leads us out of a recovery, it absence has meant this slog of 1% – 2% GDP growth. Note that the homebuilders were noting mid teens increases in average selling prices amidst a drop in traffic. At some point, they are going to have to pump up the volume in order to meet achieve further growth. And that could be what we have been waiting for.

I went on Louis Amaya’s show yesterday and talked about the mortgage originators, servicers, and some of the REITs. I also discussed the origination business in general and trends going forward. The link is here.

Morning Report – 11/19/13 – Fedspeak

Vital Statistics:

Last Change Percent
S&P Futures 1787.7 -1.0 -0.06%
Eurostoxx Index 3059.2 -22.1 -0.72%
Oil (WTI) 92.83 -0.2 -0.21%
LIBOR 0.239 0.002 0.74%
US Dollar Index (DXY) 80.73 -0.098 -0.12%
10 Year Govt Bond Yield 2.69% 0.03%
Current Coupon Ginnie Mae TBA 106.1 0.0
Current Coupon Fannie Mae TBA 105 -0.1
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.33

Markets are lower this morning on no real news. The employment cost index rose .4% in the third quarter, lower than expected. Bonds and MBS are down small.

Yesterday we had some Fed-speak with Philly Fed Head Charles Plosser urging the Fed to stop playing “this bond buying game by ear” and to tell the markets how much the Fed intends to buy and then to stop once it gets to that level. Plosser also claimed that the recent low inflation numbers were transitory due to lower government spending on things like Medicare. Separately, New York Federal Reserve Chairman William Dudley said he is becoming more optimistic that 2014 and 2015 will be much stronger than 2013. He said the “fiscal drag” of the sequester is abating. Pet peeve – the Fed goes out of its way to say that reducing tapering is not “tightening,” yet refers to a tiny reduction in unprecedented postwar fiscal stimulus as “fiscal drag.” Even with the sequester, fiscal policy is still highly, highly accommodative and looks miserly only if you compare it to 2009 or 2010.
Good story out of Bloomberg on the pickle the Fed is in with respect to QE.  How to reduce tapering without increasing interest rates. The Fed would really, really like to avoid a repeat of last summer where the 10 year bond increased by 100 basis points. Yellen said in her testimony that the answer was better communication, however as everyone has acknowledged, we are in uncharted territory here. Separately, the Senate Banking Committee is scheduled to vote on Yellen Thursday, which will set the stage for a full Senate vote later this year.Tomorrow starts the big data dump for the week with a slew of economic reports. We will get the minutes from the October FOMC meeting, existing home sales, retail sales and the consumer price index.

Speaking of retail sales, the holiday shopping season is shaping up to be on the weak side. We have already seen two warnings out of Wal Mart this year, and now Best Buy is saying that promotional activity is going to hurt margins. I keep hearing anecdotal evidence that the retailers are getting promotional already, which is a bad sign ahead of Thanksgiving. On the other hand, the Despot reported better than expected 3rd quarter earnings as people are taking advantage of the increase in house prices to do some remodeling.

Remember the 2012 jobs report ahead of the election where Jack Welch tweeted “”Unbelievable jobs numbers…these Chicago guys will do anything…can’t debate so change numbers,” He was fired from Fortune over that. Well, it turns out that he may have been correct. Census may have been doing some monkey business with the report.

Small banks asked for some temporary relief from some of the new edicts coming out of CFPB and were given the Heisman. CFPB has said that they will take into account good faith efforts to comply with the rules, but as Rob Chrisman points out, the plaintiffs’ attorneys definitely will not.

Morning Report – Slowish week ahead 11/18/13

Vital Statistics:


  Last Change Percent
S&P Futures  1796.1 2.6 0.14%
Eurostoxx Index 3082.4 27.9 0.91%
Oil (WTI) 93.46 -0.4 -0.40%
LIBOR 0.237 -0.001 -0.31%
US Dollar Index (DXY) 80.67 -0.176 -0.22%
10 Year Govt Bond Yield 2.70% -0.01%  
Current Coupon Ginnie Mae TBA 105.9 0.0  
Current Coupon Fannie Mae TBA 104.8 0.0  
RPX Composite Real Estate Index 200.7 -0.2  
BankRate 30 Year Fixed Rate Mortgage 4.3    
Markets are up small this morning on no major news. Bonds and MBS are up small.
We don’t have a tremendous amount of economic data this week, although we will get the minutes from the October FOMC meeting. Analysts will be looking for clues regarding December. Remember the state of play from the Sep meeting – the Fed didn’t think the economic data warranted reducing asset purchases, but some felt like they had to do it anyway, just to maintain credibility. I don’t think the credibility argument really applies anymore, although the Fed may do a token move just to say they did it. Also the market seems pretty convinced that any changes will be on the Treasury side, not the MBS side. (That doesn’t mean mortgage rates won’t go up, they will)
Earnings season is largely over, except for the retailers. I think the consensus is that this year’s holiday season will be nothing to get all excited about. We will hear from the Despot tomorrow and Lowe’s on Wednesday. Wal Mart is watching closely to see if the obamacare insurance mandates hurt sales.
The future of Fannie and Fredie is still being worked out. The Senate has to balance the demand from liberals that the mortgage market serve all markets equitably and from conservatives that the taxpayer has to be protected. The goal is to wind down F&F and replace them with a re-insurer which will cover losses over 10%. Will Ackman and Fairholme play a role in this? That will be up to the courts.
Eminent Domain:  The bad idea that won’t die. Now Irvington, N.J. is considering. How many of these loans were CRA-driven in the first place? I wonder…
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