All Things in Moderation

Vital Statistics

Markets are rising this morning after Greece successfully completed its sovereign debt restructuring and the BLS released its jobs report. Over 95% of bondholders tendered after Greece said it would trigger a collective action clause compelling participation. This should pave the way for another 130 billion in aid. While the market clearly does not consider the crisis solved – the new bonds are trading at a 22% yield in the when-issued market – this should at least put Greece on the back burner for a while. The 10-year is down 6 ticks, while mortgages are flat.

The BLS released its February Employment Situation report at 8:30 this morning. Feb payrolls came in a bit higher than expected – 227k vs 210k expected. The unemployment rate was flat at 8.3% and in line with expectations. The labor force participation rate edged up slightly from its Jan lows. Earnings and hours were up a hair. Professional and Business services added the most jobs, along with health care. Government and construction were flat.

CoreLogic released its monthly Market Pulse yesterday (you need to register to get it, but it is free). They note the building economic strength and signs of improvement in the real estate market. They note that the recovery was initially driven by productivity-increasing capital investment, which allows companies to increase output without increasing hiring. Productivity growth is tapering off, which suggests that business has pretty much extracted all it can from existing employees and will need to start hiring to increase output.

The report notes that 25% of MSAs are now experiencing price increases. The ones that are lagging the most are the ones with clogged foreclosure pipelines – for the most part judicial foreclosure areas. Just more proof that politicians who want to slow foreclosures in the hopes that keeping supply off the market will stabilize prices are shooting themselves in the foot. Of course some politicians are incorrigible. To be fair, most of these measures are small-ball things that won’t change the dynamics of the housing market, but will allow the administration to say they are “doing something” about the housing crisis. For some reason, letting the market clear does not constitute “doing something.”

Do you look at Zillow to get an idea of what your house is worth? The Washington Post dissects the Z-estimate and its accuracy. Punch line: Neighborhoods with high turnover tend to have Z-estimates closer to actual sales prices than neighborhoods with lower turnover. While it can be a useful (and fun) number, take it with a grain of salt.

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Vital Statistics:

Markets are stronger this morning a strong economic report out of Germany and optimism that Greece’s debt swap will go through without major problems. Markets are continuing yesterday’s rally that was sparked by QEIII hopes. Initial Jobless Claims were 362k.

I was at the JP Morgan Securitized Products conference all day yesterday. Congressman David Schweikert (R-AZ) spoke regarding the regulatory environment. It is an election year, so expect more initiatives out of the administration to provide relief. A couple takeaways from his talk:

• LIberals agitating for wholesale principal reductions are just conducting election – year posturing. Everyone in Congress is getting phone calls from their state pension funds (who are large holders or MBS) begging them not to do it. Liberals acknowledge in private they would annihilate pension funds and would do great damage to the future housing finance system if they allowed large-scale principal forgiveness in GSE paper. Which makes FHFA Director Ed DeMarco a very convenient figure at this point and means he probably isn’t going anywhere.
• The MERS headache is generating preliminary discussion of a global settlement fund (a la asbestos or tobacco) to settle all of the claims coming from the financial crisis. Probably a low-probability event, but it is out there.

• Origination margins have spiked – originators are probably making 3-4 points on new loans (pre-expenses)
• QEIII will not do much for housing. The Fed is pushing on a string at this point. Fund managers are at record overweight levels on MBS, which means the Fed could spend a lot of money and not move mortgage rates (or affect house prices) all that much.
• The Fed thought it would be cute to institute new fail charges right ahead of QE, thus adding a short squeeze to the mix. Dealers are having a tough time getting paper to satisfy the appetite of the Fed and won’t short due to the fail charges. This is part of what is driving MBS spreads so tight.
• Ally is scaling back the correspondent business, while Wells and Citi are getting more aggressive. Chase overshot in downsizing correspondent lending and plans to increase it this year.
• House prices will fall another 3% this year and that should mark the bottom
• The government is probably going to experiment with a “first loss” tranche in conforming paper. Expect this in the next 3 – 6 months. This would accomplish two things – first it would start the process of handing off mortgage financing to private capital and it would give a market-based indication of what it should charge for its guarantee (its G-fee). The G-fee is set on the basis of politics and funding needs (for example, it was just raised 50 bp for 10 years to pay for the 2 month payroll tax extension). It would be subordinated paper that absorbs the first 5%, making FHA more of a re-insurer. Concern is demand for the first loss tranche.  Banks would have to reserve 100% for it, so hedge funds would have to buy it. The concern is that they don’t have the capacity.
• JPM estimates the shadow inventory to be about 5.5 million homes and net demand for housing is 1.25 million per year. Household formation has fallen off a cliff.
• Basel III requirements for MSRs are extremely harsh (MSR value over 10% Tier 1 becomes a capital deduction) Expect MSRs to remain very cheap. Banks are contemplating cutting servicing fees to 12 basis points.
• Fan and Fred will remain wards of the state. It would take $250 – 300 billion to capitalize them and they already owe Treasury $160 billion. That is basically the enterprise value of Exxon Mobil. You can’t raise that kind of capital in the private sector.
• Once the economy picks up steam, the fiscal problems will become front and center. We are looking at about half a trillion of contraction in early 2013, with the expiration of the Bush tax cuts ($250B), the sequestration due to the failure of the debt supercommittee ($100B) and the expiration of the payroll tax cut ($120B). Don’t be surprised if we fall into a recession early next year.
• Household balance sheets are improving, (DTI ratios are falling) but this has been 100% due to defaults. Debt service ratios are at multi-decade lows due to low interest rates.

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Vital Statistics:

Markets are lower on concerns about global economic weakness. The European economy contracted in the 4th quarter, and concerns are mounting regarding China. Bonds and mortgage backed securities are stronger this morning.

Did the S&P 500 just fail at resistance again?

Some 20% of Greece’s private creditors will participate in the debt swap. These are the large European banks – Commerzbank, BNP Paribas, and the big Greek banks. These decisions were undoubtedly heavily influenced by politics, so I am not sure that they are a representative sample of the private creditors.

Greek Finance Minister Evangelos Venizelos said in an interview yesterday that “This is the best offer. This is the best offer because this is the only, the only existing offer.” Note the lack of “best and final” language. If enough holders are reading that statement to mean that Greece is prepared to go forward with a better deal if this one fails, then the 75% participation rate might become an issue. The business press will probably focus on the possibility of a disorderly default and not on the public negotiation between Greece and its creditors, so we could be in for some rough sailing.

Obama will hold a news conference this morning and it is rumored that another mortgage relief plan will be revealed. The plan would allow FHA refis at a reduced fee – from 1.15% to .55%.

No economic data this morning. No MR tomorrow as I will be in the City all day.

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Vital Statistics:

Markets are weaker this morning after China lowered its economic growth target from 8% to 7.5%, which was basically an acknowledgement of the economic weakness in Europe. Surprisingly, bonds and mortgages are off a few ticks as well. At 10:00 we have ISM and Factory Orders reports.

Private creditors will either accept or reject the Greek restructuring this week. The Greek government has set a minimum participation level of 75% in order to proceed with the transaction. If that number comes in less, the government could compel bondholders to go along, which would undoubtedly trigger a credit event which means all the credit default swaps linked to Greek debt will pay out.

HUD has released its February Housing Scorecard.There is nothing really earth-shattering in the document. The document claims it would take 6.1 months to turn over the supply of existing homes on the market, which obviously ignores the looming shadow inventory. It discusses HAMP, but doesn’t discuss REO-to-Rentals, which is surprising.

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Vital Statistics:

Markets are a touch weaker this morning on some negative reports out of Europe and a drop in Spanish government bonds. There are no major economic reports out this morning in the US. Bonds and mortgages are slightly higher this morning.

Yesterday, CoreLogic released its Q411 report on underwater homeowners. They estimate that 11.1 million (23%) of residential homes with a mortgage are underwater. Nevada is in the worst shape, with 61% of mortgaged houses with LTVs over 1. Of the 11.1 million, 6.7 have a first-lien mortgage only with an average balance of 219k and is underwater by 51k, for a LTV of 130%. The remaining have home equity loans as well, with an outstanding principal balance of 306k and a combined LTV of 138%.  Aggregate negative equity nationwide is $717 billion and is concentrated at the low end of the market.

The NYT has a good article on ISDA’s decision yesterday that the ECB bond exchange on Greek debt did not constitute a credit event. If Greece puts through an involuntary exchange, that would trigger a credit event and the swaps would pay out. The article also points out that the bond used to set the payout will be different than the bond underlying the contract. So even if you were right on the Greek default, you may not be getting paid what you think you were.

The sell-off in bonds over the last two days has driven mortgage rates higher. Conventional mortgages are now 4.0% vs 3.875% a few days ago. If you are thinking about refinancing or buying and have questions about your rate lock, here are some things to consider.

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Vital Statistics:

Markets are slightly better after a mixed bag of economic reports this morning. Personal income and spending were lower than expected, while the jobless report was slightly better. Initial Jobless Claims definitely seem to have found a new level around 350k, which for all intents and purposes represents “normalcy.”

Bonds and mortgage backs sold off on the data, continuing the slide that began after The Bernank offered his testimony yesterday.

Today is the first Thursday of the month, and that means retailers are releasing their same-store sales numbers for February. Reports are still coming in, but WalMart, Target, and the Gap are all up smartly on their reports. The unusually warm weather in the Northeast may have played a part in the comps. Most retailers have a January fiscal year, so some are announcing their fiscal year earnings as well.

So a default is not a default? According to ISDA that is the case. Bought credit default swaps on Greek sovereign debt? No credit event for you!

Remember the days of 5% commissions and going to the library to research a stock? – why there has never been a better time to be an individual investor.

Chart:  Initial Jobless Claims over the years:

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Prepared Testimony

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Vital Statistics:

World markets are slightly firmer this morning on the back of in increased commitment from the ECB to lend to European banks. The ECB said it will lend 529.5 billion euros, much higher than previous commitments and higher than economists were predicting. Most sovereign yields are lower this morning with the exception of Portugal, which is blowing out again.

4Q GDP (this is the 2nd of 3 reports) came in at 3% vs the initial 2.8% reports. Personal consumption improved to 2.1%. The GDP price index and core PCE came in higher than expected. Bonds and mortgage backed securities are slightly stronger on the data.

The banking system is on the mend. The FDIC released its quarterly report on the state of the banking system yesterday, noting that lending has increased and problem loans have decreased. Profits have increased, but decreases in loan-loss provisions have been the main driver in that increase. Return on Assets is a paltry .76%, as financial repression (Bill Gross’s term for ZIRP) continues to weigh on bank profitability.

HUD Secretary Shaun Donovan testified before the Senate Committee on Banking, Housing and Urban Affairs yesterday. The questioning focused on the health of the FHA and Administration initiatives to help prevent foreclosures. The second panel included acting FHFA Director DeMarco, and the questioning focused on allowing principal modifications for Fannie and Freddie loans. This issue has been a bone of contention between the liberal wing of the Democratic Party who want mass principal forgiveness and DeMarco who is charged with maximizing value for taxpayers.

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Vital Statistics:

Markets gave back most of their earlier gains on the back of a disappointing Durable Goods report. January Durable goods orders dropped 4% and durables ex-transportation dropped 3.2%. Cap goods were also weaker than expected.

S&P / Case-Schiller for December came in down 4% YOY. Atlanta showed the biggest decline, while Detroit showed the biggest gains. A couple of highlights from the report:

“After a prior three years of accelerated decline, the past two years has been a story of a housing market that is bottoming out but has not yet stabilized. Up until today’s report we had believed the crisis lows for the composites were behind us, with the 10-City Composite originally hitting a low in April 2009 and the 20-City Composite in March 2011. Now it looks like neither was the case, as both hit new record lows in December 2011. The National Composite fell by 3.8% in the fourth quarter alone, and is down 33.8% from its 2nd quarter 2006 peak. It also recorded a new record low.”

“In general, most of the regions also posted weak data in December. Eighteen of the cities saw average home prices fall in December over November. Seventeen of the cities have seen monthly declines for at least three consecutive months. In addition to both monthly composites, 10 of the cities saw home prices fall by more than 1.0% during the month of December. The pick-up in the economy has simply not been strong enough to keep home prices stabilized. If anything it looks like we might have reentered a period of decline as we begin 2012.”

Yesterday, we got Warren Buffet’s letter to shareholders; today we get Bill Gross’s investment outlook. The theme is defensive investing, which makes sense for a bond guy when interest rates are as low as they can go. Since the early 80s, the Fed has been printing money and providing bond guys like Gross built-in capital gains in addition to income. Bill’s punch line:  “Recognize zero bound limits and systemic debt risk in global financial markets. Accept financial repression but avoid its impact when and where possible.”

The FHA has released some details on the pilot REO-to-Rental program for the Hardest-Hit Areas. They are auctioning of 320MM of properties in 8 MSAs.  The FHA is recognizing the recent strength in rental prices as well as the glut of foreclosed properties and attempting to solve two problems at once. We’ll see if this gets any traction.

Chart:  S&P Case-Schiller Index:

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Vital Statistics:

Markets are weaker this morning after the G20 nations refused to increase support for the IMF. Oil is taking a breather after being on a tear for the last 3 weeks. Bond futures and mortgage backed securities are firmer this morning.

For people interested in the World According to Warren, here is his annual letter to shareholders. This annual letter, along with Bill Gross of PIMCO’s letters, are pretty much required reading on the Street. Buffetpalooza (the annual Berkshire Hathaway shareholder meeting) is May 5 which is when all of his admirers descend upon Omaha and paint the town red. Warren’s annual report gives you all the tips on the best shopping and root beer floats in Omaha. Don’t miss the newspaper toss.

Speaking of letters, Paul Singer (of Elliott Associates FD: my old boss) tends to pontificate on his view of politics and the economy.  Dealbook has the juicy parts.

Rick Santorum’s economic plan.  Cut taxes, cut spending.  Krugman must be tearing his hair out.

Lots of economic data this week.  Pending Home Sales and Dallas Fed are later today.

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