All Things in Moderation

Vital Statistics:

Markets are flattish this morning on no real news. We will get the monthly budget statement at 2:00 pm this afternoon. Bonds and MBS continue to sell off, and the 10 year is at 1.84%

The Mortgage Bankers Association reported that 90 day delinquencies ticked up to 7.25% in Q1 from 7.09% in Q4. Separately, foreclosures as a percent of total mortgages fell to 3.55% from 3.74%. This is still an elevated numbers; prior to the bubble, foreclosures were in a 1% to 1.5% range. Similarly, with delinquencies, pre-bubble the typical 90 day delinquency rate was in the 4% to 5% range. It peaked at just over 10% in Q1 2010.

Fannie and Freddie’s profits have moved the debt ceiling limit to September from August. Treasury Secretary Jack Lew said that the statutory debt limit will be reached in a few days, but that there are measures the government can take to shift around funds and that we won’t really start having issues until after Labor Day. Republicans have proposed a prioritization of creditors, which will go nowhere in the Democratically controlled Senate. My question:  How much of the interest owed is going to the Fed due to quantitative easing? They have been buying up 90% of Treasury issuance. And since the Fed’s profits and losses are just sent right back to Treasury, isn’t that just money we effectively owe ourselves? 

Anyway, the debt ceiling debate is coming up this summer and the Administration and House Republicans are sure to butt heads over raising the debt ceiling. The Administration will not accept spending cuts without tax increases and the House will not accept tax increases at all. Just saying, since the S&P 500 has been a one-way bet since last Fall. There are two exits at the front of the plane and two exits over the wings. Please take a moment to locate the nearest exit, and remember that your nearest exit may be behind you.

Philly Fed President Charles Plosser is skeptical that Dodd Frank can end Too Big To Fail (TBTF). He proposes a more systematic process, in which the ultimate decision-making would be rest with a judge and and deviations from priority would be cleared through a judicial authority and not through regulatory discretion. Derivatives and repos would be treated like other claims. Separately, he is skeptical that QEIII is going to do much good. It would be refreshing to have someone on the hawkish side replace Bernake after having doves for the past 25 years, but we’re probably going to get an even bigger dove in Yellen.

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Vital Statistics:

Markets are slightly weaker this morning.  Initial Jobless Claims came in at 323,000, better than expected. Bonds and MBS are up small.

I was surprised by the magnitude of last Friday’s reaction to the jobs report and the persistence. The jobs report was good, but not great. I do not see anything in the report to prompt the Fed to end QE early. Perhaps the strength in the equity market is causing people to rotate out of stocks and into bonds. If you believe in technicals, you might be looking for the 10 year yield to do a 50% retracement, hit 1.85% and then bounce back.

Tonight is the Fannie / Fred MBS roll as we go from May to June. MBS prices will look like they just fell tomorrow morning, but it is just the roll.

Freddie Mac reported $4.6 billion in earnings in the first quarter, its second-largest in history. They required no Treasury draw and paid $5.8 billion to the government in Q1. So far, they have paid $29.6 billion. This is after Fannie Mae reported $7.6 billion in Q4.  One almost certainty is that G-fees are going up. The government wants to “crowd in” private capital and price credit risk more in line with private mortgage insurers. The game for originators going forward may well be to stick with qualified mortgage (QM) loans and compete with the government on the guarantee fee. The other sense I got from the conference is that QM is not enough of a safe harbor to really encourage lending outside of the QM box. Which means that anyone with dinged credit is more or less stuck in the FHA box. 

The sense I got from the MBA Secondary Conference is that despite the Obama Administration’s white paper that claims they would like to replace Fannie and Fred with some private entity, they are slow-walking reform. Certainly Mel Watt was not nominated to preside over the orderly dissolution of the GSEs. After the Administration changed the terms of the deal, the GSEs now just distribute all of their profits to the government, which has created a slush fund for general government purposes. And $13 billion a quarter isn’t chump change. I think at the end of the day, Fan and Fred are going nowhere and will stay on as quasi-nationalized entities until they are fully re-capitalized and then they will be sold. 

The big questions regarding Mel Watt as the new FHFA Chairman concern principal mods and an extension of the HARP window (HARP 3.0). As of now, HARP eligibility does not extend to anything originated or refinanced after  May 31, 2009. There is talk that the window might be extended to allow people who took out conforming loans in 2009 and 2010 to be HARP eligible. Also, there is talk of allowing people to “re-HARP.” Anyway we could see another refi boom if Watt is confirmed. Regarding the principal mods, CBO gave FHFA the ammunition to permit mods. If Watt is rejected, expect Mark Zandi to be the next guy nominated and he fully supports principal mods.

60-day delinquencies dropped to 4.56% according to Transunion, which is the fastest drop since they started keeping records in 1992. This decrease was higher than expected.

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