Marc's Mortgage Matter's

If someone "about scares you half to death" twice, what happens?

What is more important to our debt markets, the weekly or monthly economic releases, or the news coming from overseas? Smarter minds than mine will argue that while our economic numbers can have a short term impact on rates, the news coming out of countries in Europe and Asia, along with the US debt numbers, impact the overall trends in rates to a much larger degree. Recently we've had more negative headlines in Europe, problems with the Greek bailout, concerns out of China, and Moody's, S&P, and Fitch discussing a possible US and UK debt downgrade. Portugal is expected to follow Greece, and last week's $463 billion Chinese bailout for local governments is getting some airtime. Here in the US the Jamie Dimon/Ben Bernanke questions are still being discussed. Regarding banks, as one trader put it, "It's sure hard to lend what you have to hold." Resolving our debt ceiling has still not been done - gee, why focus on that when we're fascinated with Weiner's problems?

Studies find it takes 2,000 times more energy to produce and ship bottled water than tap water and it costs 10,000 times more per gallon. It also takes 17 million barrels of oil to produce the plastic used to create all of the water bottles - about the same amount used to fuel 1 million cars for a full year. Finally, the suggested 8 glasses of water per day costs $1,400 per year for bottled, compared to only 49 cents for the tap. Need I repeat that last sentence or it is obvious?

Speaking of obvious things, no one is claiming that industry-wide, mortgage related employment is increasing. The latest example comes from Colorado, where a Denver Post article points out, "There were just more than 2,000 mortgage brokers in Colorado in 2009, down from a peak of about 5,300 in 2003, a 61 percent drop. Cool beans, and better for the consumer - that leaves mostly ethical folks left.

CoreLogic reported today that 27.7 percent of all homeowners with a mortgage are near or in negative equity.

Negative equity borrowers are “underwater” and “upside down” with mortgage debt greater than the value of their home.

(Click to enlarge)

The housing crash has created crippled zombie states which have incomprehensible negative-equity stats. In Nevada 63 percent of all mortgaged properties are underwater. In Arizona = 50 percent. Florida = 46 percent. Michigan = 36 percent. California = 31 percent. (Please see the chart above from Calculated Risk showing negative-equity by state. Click for expanded view.)

Only 18 percent of borrowers without home-equity loans were underwater while 38 percent of borrowers with home-equity loans were in a negative equity position. The stats say the average positive-equity homeowner has 1.2 mortgages per property while the average negative-equity homeowner has 1.6 loans.

“Many borrowers in negative equity are still able and willing to make their mortgage payments. Those in negative equity and impacted by an income shock of some kind, such as a job loss, divorce, or death, are much more likely to be at risk of foreclosure or a short sale,” said Mark Fleming, chief economist with CoreLogic.

Financial crisis watchers are aware that major commercial banks including Wells Fargo & Co., Bank of America Corp., J.P. Morgan Chase& Co., and Citigroup Inc. are huge holders of second mortgages.

Hong Kong raised minimum downpayments for home buyers, signaling no let-up in a 20- month campaign to cool prices even after sales slowed and a land auction raised less than estimates.

The economic sag of the second quarter has again pushed mortgage rates to new lows for 2011. The nascent slump in rates doesn't precisely mirror the decline of last fall, when the wane of QE1 gave way to a lull before QE2 took effect, but it does have some similarities. For one, the economy is still quite weak; the 1.8% GDP registered in the first quarter of 2011 is about the same as the 1.7% rise in the second quarter of 2010, which may have been a deciding factor to create a QE2 in the first place. For another, belief that the Fed's maneuvers would boost the economy lent some optimism and confidence to both businesses and consumers, a key ingredient in getting the recovery moving forward.
For a time, the economy responded, and optimism was growing. The came the damaging spike in oil prices and natural disasters both here and abroad, and we are back to square one in many ways. At least mortgage rates are increasingly attractive.

Given the tenuous nature of this recovery its little wonder confidence remains at an ebb. Far too many people are or know those who are un- or underemployed; the real estate market remains a mess, with millions deeply in debt there is little hope of recovering; bailouts, valuable to some or not, have propped up industries who now report profits even as many businesses continued to struggle. We are many trillions of dollars in debt, even as leaders argue about who to blame and how to solve problems of their own creation. Adding to the misery comes rising food and energy costs, not to mention issues in Afghanistan, Iraq and in many parts of the world filling the daily headlines.

Frankly, at the moment, there is little to be confident about.  At least a little optimism was noted in the Federal Reserve's survey of regional economic conditions, called the "beige book" for the color of its cover. In the report, eight of the twelve Fed districts reported the recovery was still underway, with four reporting at least some "deceleration" in activity. Consumer spending activity was said to be "mixed", residential housing markets continue to show "widespread weakness" but importantly, "Labor market conditions continued to improve gradually" across the country. Inasmuch that jobs produce incomes, and incomes produce spending (possibly after a catch-up period) we have a least a little hope that the economy will begin to more fully revive as the year progresses. Of course, many obstacles remain.

After a hard run up to about $115 per barrel, oil has settled back to "only" about $100. Gasoline prices have slowly begun to ease, and that should add a few more disposable dollars to consumer wallets and may begin to reduce fuel-related cost increases being passed down the supply chain before too long. That is also a reason for hope for an improved outlook down the road.

The accumulation of weak economic news of the second quarter still has yet to fully play out, but it is pretty clear even to a casual observer that more is yet due. However, the story is in some says starting to become familiar, and the disappointment which drives rates lower all too commonplace. To us, this suggests that, absent a true surprise on the downside, that the run down in interest rates may be coming to an end, with any better news getting more credence.

There is a full slate of news on tap next week. Producer and Consumer Price indexes, Retail Sales, Housing Starts and Builder Sentiment, LEI and a number of others. Most or all cover the May period, and it is unlikely that we'll see major surprises to the upside in any of them. Mortgage rates have probably fallen about as much as they are going to for at least the moment, and we think there will be no change in the averages for next week

On the first day, God created the dog and said, "Sit all day by the door of your house and bark at anyone who comes in or walks past. For this, I will give you a life span of twenty years."
The dog said: "That's a long time to be barking. How about only ten years and I'll give you back the other ten?"
So God agreed.
On the second day, God created the monkey and said, "Entertain people, do tricks, and make them laugh. For this, I'll give you a twenty-year life span."
The monkey said: "Monkey tricks for twenty years? That's a pretty long time to perform. How about I give you back ten like the dog did?"
And God agreed.
On the third day, God created the cow and said, "You must go into the field with the farmer all day long and suffer under the sun, have calves and give milk to support the farmer's family. For this, I will give you a life span of sixty years."
The cow said: "That's kind of a tough life you want me to live for sixty years. How about twenty and I'll give back the other forty?"
And God agreed again.
On the fourth day, God created man and said: "Eat, sleep, play, marry and enjoy your life. For this, I'll give you twenty years."
But man said: "Only twenty years? Could you possibly give me my twenty, the forty the cow gave back, the ten the monkey gave back, and the ten the dog gave back; that makes eighty, okay?"
"Okay," said God, "You asked for it."
So that is why for our first twenty years we eat, sleep, play and enjoy ourselves. For the next forty years we slave in the sun to support our family. For the next ten years we do monkey tricks to entertain the grandchildren. And for the last ten years we sit on the front porch and bark at everyone.