All Things in Moderation

Vital Statistics: 

Markets are up slightly in spite of weak guidance out of Caterpillar. CAT is forecasting a 5% decline in next year’s sales based on the weak global economy. This week is heavy with earnings reports with Dupont, Facebook, 3M, Coca Cola, Conoco, and Amazon.com. On the economic front, we will have the FOMC rate decision tomorrow and the first estimate of 3Q GDP on Thursday.  Bonds are down 25 ticks and MBS are down 6 or 7.

Mark Zandi of Moody’s is endorsing the the qualified mortgage rule. This rule should provide lenders some relief from litigation as long as the mortgage was underwritten in accordance with CFPB guidelines. As far as loans outside those guidelines?  They “will remain toxic water for most lenders.”

Many market participants are expecting the Fed to announce that treasuries will be included in future QE.  The Fed has already committed to buy $40 billion of MBS a month until unemployment is down and it surprised many observers by not including Treasuries in that statement. This caused MBS to rally way in excess of what the moves in the 10-year would predict.  In some ways, this would offset the buying that would be lost when Operation Twist ends this year.  Bank of America is predicting the Fed will buy $45 – $60 billion of Treasuries in addition to the $40 billion in MBS. 

Still, banks are understaffed as the volume of mortgage applications swells, where timelines are being stretched from the typical 45-days to 90. Banks undoubtedly believe that the current volume is being driven by refis, which they view as temporary.  The article goes on to say that mortgage rates to the consumer should be lower, but they do note the increase in guarantee fees. 

Ocwen and Walter Investment are teaming up to out-bid Nationstar for Rescap.  

The Bipartisan Policy Center is launching a Dodd-Frank initiative, where they try and do a “cost-benefits” analysis to Dodd-Frank. They frame it as a “stability vs growth” issue.

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Vital Statistics:

Markets are weaker this morning after earnings misses from bellwethers Google, Microsoft, McDonalds, and GE.  Euro sovereign yields continue to decrease.  Bonds and MBS are up about 1/4 of a point.

The CFPB is starting to put some more meat on the bones with respect to a qualifying mortgage. Lenders would be protected from penalties if the borrower is given a prime rate and the back-end debt ratio doesn’t exceed 43%. The NAR has already weighed in saying that “any partial safe harbor would need to go much further to avoid harm to the mortgage market.”

The Mortgage Bankers Association has sent a letter regarding proposed Basel III rules. They correctly note that the penalties on mortgage servicing rights are going to create a problem. Add the proposed new servicing standards out of the CFPB, and you may in fact turn mortgage servicing into a business nobody wants to perform.

While institutional investors are raising money to get into the REO-to-rental businesses, one of the pioneers, hedge fund Och Ziff, is looking to cash out.  Turns out that renting properties on such a vast scale isn’t as profitable as it initially appears.

Today is the 25th anniversary of the Crash of 87. I think in some ways, we can trace the origins of the financial crisis to this event. During the crash, newly appointed Fed Chairman Alan Greenspan pledged the Federal Reserve would provide liquidity to anyone who needed it. At the time, it was probably the right thing to do, as it prevented the stock market crash from ballooning into something bigger.  I think the Chairman recognized its success and used it every time the financial markets had a hiccup – from the Mexican Peso Crisis, to Long Term Capital, to the Asian Crisis. This behavior became affectionately known as the “Greenspan Put,” which means that even if you screw up, the Fed will come to the rescue. This created a underpricing of risk, which laid the groundwork for the real estate bubble.  Real estate prices became unmoored from their traditional relationship with incomes around the year 2000, just as the stock market bubble was going critical, and continued to inflate as the Fed flooded the system with liquidity in the aftermath. And since the Fed is still doing the same thing in response to the burst real estate bubble, this time on steroids, the game continues..

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