April 17, 2008

Capital Markets:

Wells Fargo posted a $2 billion profit in the first quarter on record revenue of $10.6 billion, whereas Washington Mutual, the nation's sixth-largest originator, lost $1.14 billion. And JPMorgan Chase did better than both, reporting net income of $2.4 billion for the first quarter 2008. And poor Merrill Lynch posted its third straight quarterly loss: $6.5 billion.

Yesterday’s  CPI more or less met forecasts (.3% increase in the overall reading and the 0.2% rise in the core data), March’s Housing Starts report was a surprise, however, and showed a much larger than expected decline in starts of new homes: the nearly 12% drop in starts of new homes is their lowest level in 17 years. (Mostly blamed on multi-family starts.) March’s Industrial Production report showed a 0.3% rise in output at U.S. factories, mines and utilities, stronger than the 0.1% decline that was expected, pushing rates higher. All in all, in spite of longer-term rates heading up, most economists still believe that the Fed will cut overnight rates again at the end of the month.

• On March 31,  Fannie Mae sent out new guidelines to lenders intended for walkaways and  other foreclosure situations. Fannie will now prohibit foreclosed  borrowers from funding another mortgage for five years unless there are  "documented extenuating circumstances." Even in those cases, the mortgage  prohibition is for three years, and after five years, borrowers with  foreclosures in their files will have a maximum LTV of 90% and will need  minimum FICO credit scores of 680. Freddie Mac, counts a foreclosure as a  major credit hit for 7 years, should announce a similar policy. A number of  web sites have begun claiming to cut the hassles of bailing out of a mortgage  and letting the borrower walkaway, which most agents don’t approve of.  
• PMI announced that  Limited Documentation loans will no longer be eligible for mortgage  insurance, effective June 1. This includes  any loan with stated income or stated assets such as Stated Income/Verified  Assets (SIVA), Verified Income/Stated Assets (VISA) or Stated Income/Stated  Assets (SISA). This change does not include Full Documentation loans that  receive DU or LP approvals, and alternate documentation is still  acceptable.  
• Chase is eliminating  certain mortgage features for conventional loans with an LTV greater than 80%  when the property is located in a Declining Market. (These  changes do not impact FHA and VA loans.) For example, cash out and non-owner  loans are eliminated.
  

THE FED
Turmoil creates formidable 'to-do list,' Kohn says

Fed vice chairman notes 'major weaknesses' in U.S. financial system
The ongoing turmoil in financial markets has "revealed major weaknesses" in the U.S. financial system that need urgent attention from the private sector and regulators, Federal Reserve Vice-Chairman Donald Kohn said Thursday.

In order for a safer, more resilient financial system to emerge, commercial banks should consider raising more capital, and investment banks must come up with plans in case their access to short-term funding is impaired.
Banks must also improve their risk management and counterparty-risk practices. Regulators have to come up with rules to guard against excessive reliance on the Fed as a lender of last resort.

"I acknowledge that this is a formidable "to do" list," Kohn said. "But it has been a formidable episode of financial turbulence that has revealed major weaknesses in our financial turbulence that has revealed major weaknesses in our financial system," he said.

Kohn agreed with many commentators that the roots of the current crisis lie back in the 1990s when Congress tore down the walls separating investment banks from commercial banks.

The most dramatic changes occurred at the very largest U.S. banks, Kohn said. These banks began to act more like securities firms than traditional banks, moving into securitization, derivative trading, and financing of hedge funds.

"Together the very large commercial and investment banks have become indispensable to the efficiency and stability of the securities markets," Kohn said.

But this is one of the reasons that the current financial turmoil is so severe, he said. In past banking crises, U.S. businesses could access the equity market for capital.

Bank management didn't stay on top of things, says Kohn

The current crisis has shown that bank managements were not up to some of the challenges, Kohn said.

"I believe it is fair to say that the creation of new, innovative financial products outstripped banks' risk-management capabilities," he said.
In addition, banks did not have a grasp of the reputation risks of providing services to hedge funds.

And banks did not a firm handle on the management of counterparty risks.
As big banks concentrated of securitization, small banks have gravitated toward commercial real estate lending because these loans defy securitization, Kohn said.

But this concentration carries its own risks in weak economic conditions, Kohn said.

For commercial and investment banks, robust contingency plans need to be developed for situations in which their access to short-term secured funding also becomes impaired, Kohn said.

This will likely entail more costly funding, and therefore less leverage in the system.

"But a financial system with less leverage at its core will be a more stable and resilient system, and recent experience has driven home the very real costs of financial instability," Kohn said.

Market Update – Thursday – 04/17/2008 –

There has been some serious damage done to rates over the past few days, with the general theme being lessened expectations for the Fed to act forcefully at the end of the month due to inflation pressures and renewed optimism about the health of our banking system after JPM and Wells reported decent results.  This morning bond and mbs prices are off again but only slightly with news that weekly jobless claims rose and a few sorry quarterlies from Pfizer and Nokia helping to limit the selling.  At 8:40, the 10yr is off 1/32, the FNMA 5.5% MBS is off 3/32, and the DJIA is down 40. Rates have risen sharply of late and morning rates will be roughly similar to yesterday afternoon or a bit higher IMO.



source: Randy Plankey. Astoria

April 15, 2008

BOND REPORT
Treasurys slump as March producer prices heat up
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Wholesale prices surged 1.1% in March, led by rising energy and food prices, the Labor Department reported. The core producer price index, which excludes volatile food and energy, rose 0.2%. Economists surveyed by MarketWatch had expected the PPI to rise 0.4% and the core to rise 0.2%.

Inflation erodes the value of fixed-income assets, such as bonds, over time, with longer-term bonds therefore more vulnerable to higher readings on inflation.

In addition, inflation complicates things for the Federal Reserve, which has been cutting interest rates to boost growth down the line, while remaining wary of inflation pressures. Shorter-term notes normally gain when expectations of lower interest rates rise.

"Ongoing hefty gains in headline prices, and continued strength in core rates as well, will continue to needle the [Fed] despite the Fed's near-term focus on economic risk," Analysts at Action Economics said in a note.

"The Fed faces an inflation problem that likely has greater shelf life than the problems in the financial industry," they said.

Meanwhile, the Empire State index jumped by nearly 23 points in April to 0.6 from negative 22.2 in March. Readings over zero indicate more firms are optimistic than are pessimistic. The index had been negative for two straight months.
 
Odds of a half-point cut to fed funds dip after PPI report

Fed funds futures slid early Tuesday after a U.S. wholesale inflation report for March showed a sharper-than-expected rise in price growth. The May contract fell to 98.08 mid-morning on the Chicago Board of Trade from a settlement of 98.11 Monday. The contract is now pricing in a 32% chance of a half-point cut to the fed funds target rate when the Federal Open Market Committee meets April 29-30. It fully prices in a quarter-point cut. Late Monday, the contract reflected about 44% odds of a half-point cut. The fed funds target rate is currently 2.25%; a half-point reduction would bring the rate to 1.75%.

Source:  Randy Plankey – Astoria Federal

April 14, 2008

Capital Markets:

What do WAMU and Wachovia now have in common?? They both need/needed at least $7 billion in additional capital to stay afloat. Wachovia, the fourth-largest U.S. bank, reported an unexpected loss because of subprime- infected mortgage holdings, cut its dividend, and said it will raise about $7 billion in a share sale to replenish capital. The company's market value has dropped 50% since its $25 billion takeover of Golden West Financial Corp. in 2006 at the peak of the housing market. (Talk about good timing on Golden West’s part!) Wachovia also announced that it will cut 500 investment banking jobs.
 
Legislation update: The Bush administration announced last week steps to help more homeowners head off foreclosure by using an existing Federal Housing Administration program to enable more low- and moderate-income homeowners to refinance into government-insured mortgages with monthly payments they can afford. But the administration's idea would reach far fewer borrowers than the Democrats' proposal -- roughly 100,000 rather than 1 million to 2 million -- without requiring lenders to take large losses. While this was happening, the Senate passed a package of measures including a tax credit for buyers of foreclosed properties, funds to state and local governments to buy and rehabilitate foreclosed homes, and tax breaks for home builders. It has not yet gone to the House.
 
The housing market is showing signs of stabilization! Housing starts and sales have both increased slightly since December, while inventories of homes for sale have declined significantly. Although home prices are still falling, this is now viewed as a necessary condition to bring buyers back into the market. Home affordability has jumped to a level consistent with housing starts 75% higher than currently but this positive impact is on hold until consumer confidence rises from the current recession level reading. How quickly housing starts recover depends on how long and deep the economic recession is.
 
This is a big week for economic data. After Retail Sales this morning (unexpectedly +.2%), we’ll have the Producer Price Index tomorrow, expected +.4%, core +.2%, and then on Wednesday we have the Consumer Price Index, March Housing Starts, Industrial Production and Capacity Utilization, and finally Leading Economic Indicators. Expectations for future Fed eases increased slightly last week, and economists are giving a 46% chance of a 50 bp easing to 1.75% at the next FOMC meeting on April 29-30.  Speaking of the Fed, they will post the Fed Beige Book report at 2PM EST Wednesday. This report, which is named simply after the color of its cover, details economic conditions throughout the U.S. by region. Since the Fed relies heavily on it during their FOMC meetings, its results can have a fairly big impact on the financial markets and mortgage rates if it reveals any surprises. After the Retail Sales number, the 10-yr languishes in the mid 3.40’s and 30-yr A-paper prices are a tad better than Friday afternoon.
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From MARKET ALERT:
Mortgage investors will be paying close attention to Wednesday’s read on inflation pressures at the consumer level -- and to earning reports from the financial sector.
In my opinion, Wednesday’s Consumer Price Index is the “pivot point” for mortgage interest rates this week. If the core rate of the consumer price index posts a gain of 0.2% or more it will sharply reduced expectations for more mortgage interest rate friendly cuts from the Fed after April 30th.

The trend trajectory of mortgage interest rates may also be heavily influenced by trading activity in the equity markets.

The stock market is viewed by most market participants as a measure of credit market stress. If corporate earnings fall short of expectations (particularly in the financial sector), analysts will ramp up their forecast for more downside risk to the economy -- and that will almost certainly be an event that causes boatloads of cash to flee stocks in search of sanctuary within the Treasury and mortgage-backed securities markets. Be patient and play by the numbers this week.
 
Market Update – Monday – 04/14/2008 –

The news out of Wachovia that they had some bad loan losses and will sell additional stock to raise $7 Billion didn’t have the usual ‘tape bomb’ effect of prior disclosures by others recently, and morning news that Retail Sales rose .2% in March and .1% ex-autos has the markets mixed so far this morning.   This week is a biggie on the fundamental front, with CPI, housing, leading economic indicators, and the Fed’s beige book just to name a few.  Wachovia is blaming their current problems on their acquisition of Golden West/World due to heavy loan losses on their pay option arm portfolio largely in CA.  Interestingly, when World was around their lending practices were admired everywhere.  I guess giving a neg-am arm to a subprime borrower with 20-30% equity wasn’t enough in a housing downturn.  At 7:35 A.M. PST, the benchmark 10yr Note is down 2/32 and the FNMA 5.5% MBS is off 2 ticks also.  The DJIA is roughly flat and overall it’s the proverbial ‘kiss your sister’ trade so far this morning.  Rates will be roughly similar to Friday’s.

BOND REPORT
Treasurys lose steam after retail sales data
Treasury bonds lost some steam early on Monday, after March retail sales data came in better than expected.

The benchmark 10-year Treasury bond gained 0.1% to 100.15, yielding. Ahead of the data, the bond stood at 100.18, while its yield, which moves inversely to price, was at 3.431%.
The 2-year note rose 0.02% to 100.02, yielding 1.705%, while the 30-year bond rose 0.04 points to 101.09, yielding 4.301%. The 30-year bond yield stood at 4.280% ahead of the data.

Retail sales rose 0.2% in March. Excluding autos and gas, sales rose 0.1%, the Commerce Department reported Monday. Economists expected a 0.1% decline in March sales, while the rise in sales ex-autos was in line with expectations.
But the bond market remains well supported after disappointing quarterly results from General Electric on Friday rekindled concerns about the impact of the credit crisis and of a weak economy.

The market fully expects the Federal Reserve to cut interest rates by at least a quarter point at the end of April, while market bets that it will cut by half a point stand above 50%, according to Action Economics.

Source:  Randy Plankey – Astoria Federal

April 11, 2008

Capital Markets:

The University of Michigan’s Index of Consumer Sentiment will be posted later today, giving us an indication of consumer confidence which hints at consumers' willingness to spend. As one would expect, if confidence is rising an average person might be more likely to make large purchases, but if they are growing more concerned of their personal financial situations they probably will delay making that large purchase. In March we had a reading of 69.5, and current forecasts are calling for a reading of approximately 69.0 – a 16-yr low.
 
That is the only news out today, as once again the 10-yr has crept below the 3.50% mark, into the high 3.40’s, and mortgage prices are roughly unchanged from Thursday afternoon. How are locks doing this week industry-wide? Lenders have been reporting that origination volumes have been slow-to-average, and yesterday’s weak TIPS auction didn’t help rates. But with consumer confidence and spending down, unemployment rising, more paychecks going toward food and gas, it is not wonder that many economists are calling for a continued slow down in the US economy accompanied by lower rates.
 
BOND REPORT
Treasurys rise as equities set to slump on GE results

Treasurys gained in early action Friday, sending yields lower, as stocks were headed for a sharply lower open after downbeat earnings and forecasts at diversified industrial giant General Electric Co. The benchmark 10-year Treasury bond gained 0.8% to 100.01, yielding 3.495%. The 2-year note rose 0.8% to 100.01, yielding 3.495%, while the 30-year bond rose 0.9% to 101.01, yielding 4.312%. Bonds showed little reaction to news that import prices rose an unexpected 2.8% in March, the most since November 2007

Market Update – Friday – 04/11/2008 –

GE posted some dismal results along with a downbeat forecast, and since they are so huge and own almost every conceivable business you can imagine their earnings report is seen as a barometer of economic conditions overall.  Since their report, the DJIA went into the red quickly and currently stands down about 150 points as of 8:05 A.M PST. The 10yr is up nicely, and MBS prices are positive but to no great degree.  Rates should be roughly static vs. yesterday or slightly better.  Until Monday…

Source:  Randy Plankey – Astoria Federal

April 1, 2008

Capital Markets:

Ok… April Fools – at least for two of them! There haven’t been any press releases that John Stumpf & Wells Fargo have been asked to participate in a Fed-assisted bail out of any particular large lender. But who knows? There have been rumors of Wachovia, WaMu, and SunTrust – but they are only that: rumors. Stumpf was recently quoted in a San Francisco newspaper as saying, “I would not be averse to a Fed-assisted transaction.”
 
Thornburg Mortgage raised $1.35 billion from a sale of debt and warrants to buy common stock, receiving $1.15 billion of the proceeds, and that the other $200 million will be held in escrow until the completion of a tender offer for preferred stock. The new subordinated secured notes carry an initial interest rate of 18% - is that the risk premium on an A-paper lender? Existing shareholders will see their interests significantly diluted: common shareholders will hold about only 5.5% of its common stock. But their choice appeared to be this or if it failed to complete a large capital raising, it would be forced to sell its mortgages at depressed prices, which could have led to a bankruptcy filing.
 
Two weeks ago, the spread between 30-year fixed rate mortgages and the 10-year note was at 309 basis points. As of last week, the spread narrowed to about 2.5 points. We still have a way to go as the historical average of 100-150 basis points, but spreads have improved! Although this morning the 10-yr is back up into the high 3.40’s, and mortgage prices have more than given up their improvement from yesterday.
 
And under the category of “I wish that these were April Fools’ stories, but aren’t”:

• UBS, the largest  Swiss bank, said that it would write down another $19  billion and that its chairman would step  down. UBS said the write-down would result in a first-quarter loss of about  $12 billion, and that it would seek new capital of about $15 billion, in the  second time it has announced plans to raise new funds since the credit crisis  began.  
• Deutsche Bank, the  biggest German lender and owner of MortgageIT, said  that it expected a first-quarter loss of about $3.9 billion on write-downs.  
• Global banks  have now written down more than $200 billion.
• Congress returns to  work today and they are no doubt thinking  about more forms of intervention in the mortgage market.
• For Wells  Wholesale, effective April 7, a complete IRS Form 4506-T will be required  for all loan submissions. In addition, Wells Wholesale and  Correspondent announced a new price adjuster for conventional conforming  for loans with LTV’s greater than 97%. They also rolled out new pricing for  self-insured loans (are they and others down the path of doing away with them  altogether?) and non-conforming adjusters based on FICO and  LTV.  
• Chase eliminated  their Flex 100 Product – Market Type 668, Freddie 100  Product – Market Type 568, DU SISA Feature – Retired from all Agency Market  Types. Chase also made changes to their DreaMaker Opportunity, MyCommunity  Mortgage™, and Home Possible programs, effective tomorrow.
• Housing and Urban  Development (HUD) Secretary Alphonso Jackson resigned  Monday. He is under criminal  investigation, fending off allegations of cronyism and favoritism involving  HUD contractors for the past two years. The FBI has been examining the ties  between Jackson and a friend who was paid $392,000 by Jackson's department as a construction manager in  New Orleans  after Hurricane Katrina. When the existence of the criminal probe was revealed  in October, the White House said President Bush supports Jackson and that Jackson "expects that the investigation will  clearly establish that he did nothing improper or unethical." Last week  senators said that Jackson's problems represented a "worsening  distraction" at HUD.
  

Market Update – April Fool’s Day – 04/01/2008 – 8:45 A.M. PST –  

The stock market is playing an April Fool’s Day joke on us as stock jocks apparently think all is well in the world after UBS announced another write-down and Lehman had heavy demand for a preferred stock offering.  Stock market participants must be thinking the worst is behind the financial sector (I don’t see how…but who am I?)  We had some better than expected economic news both yesterday and today in manufacturing and construction spending also.  The next big thing comes along Friday when we see the overall employment report for March.  Between now and then not so much happening…  At 8:55 A.M. PST, the DJIA is up 261 points, the 10yr is off 32/32 to yield well above 3.5%, and the FNMA 5.5% MBS is off 10/32.  Rates are up this morning everywhere.  
 
BOND REPORT
Treasurys slide on data while risk-aversion abates
Treasury bonds fell sharply Tuesday after a report on U.S. manufacturing in March came in better than expected.

Bonds had opened under pressure after both UBS and Lehman Brothers issued new equity, moves taken by markets as signs that risk aversion from the credit crisis is abating.
The benchmark 10-year Treasury bond was down 1.05% at 99.17, yielding 3.553%. Ahead of the data, the bond yield, which moves inversely to price, stood at 3.508%.
The two-year note lost 0.8% to 99.31, yielding 1.758%, while the 30-year bond fell 1.9% to 99.23, yielding 4.390%.

Short-term bills, meanwhile, also fell back, "as collateral has been freed up now that quarter-end demand is no longer effective, and as safe haven bets are unwound amid increased optimism in equities that the worst of the credit dislocations may be over," Action Economics wrote in a note.
The Dow Jones Industrial Average  rallied over 200 points, with the market fueled by financial stocks, after Lehman Brothers' well-received preferred share offering boosted confidence in the broader sector's access to capital.

Stocks received another leg up and bonds dipped further after the Institute for Supply Management reported a better-than-expected reading for its March manufacturing index.
While the nation's manufacturers continued to cut back production last month, the ISM index inched higher to 48.6% in March from 48.3% in February.

The rise was unexpected. The consensus forecast of estimates collected was for the index to slip to 47.0%. Readings below 50 indicate contraction.

Meanwhile, U.S. construction spending fell a smaller-than-expected 0.3% in February from the prior month to a seasonally adjusted annual rate of $1.122 trillion, the Commerce Department said Tuesday. Economists surveyed were expecting a 1% drop.

Source:  Randy Plankey – Astoria Federal

March 28, 2008

The hottest product on the market is a 40 year Jumbo loan at 6.125% at 1.0 point (or 6.50% at no points). You can pay Interest Only for the first 15 years and then it turns into a 25 year fixed rate loan based on the FNMA index plus .5. 6.125% on a Jumbo fixed rate is incredible in this market.

New Conforming-Jumbo guidelines are as follows:

We now have lenders offering loans with the Temporary Loan Limits. The 30 year fixed rates are available. The 5/1 ARMS are priced out of the market right now. Please look at my rate sheet for current rates. This pricing is better than the current Jumbo rates but higher than the regular Conforming. Call me for what areas are eligible for these higher loan amounts.

• Owner Occupied Purchase- Fixed Rates- 90% LTV ARMS- 80%
• Owner Occupied Rate & Term Refi - 75% LTV
• Existing seconds cannot be combined with the new first. They must be re-subordinated.
• Second Home/Non-Owner Purchase & Rate & Term Refi- 60% LTV.
  

These quoted rates are for Full Doc Purchase transactions with either no prepay penalties or a 1 year penalty and good credit:

• 10 year (then ARM) Interest Only Jumbo 6.375% at  No points ($417,001-$ 2,0 00,000, APR 6.55%)
• 10 year (then ARM) Jumbo- 6.00% at 1.0 Point  ($417,001-$ 2,0 00,000, APR 6.31%)
• 5 year (then ARM) Interest Only Jumbo-5.625% at  no points ($417,001- $ 2,000,000; APR 5.80%)
• 5 year (then ARM) Jumbo- 5.625% at No points  ($417,001 to $ 2,000,000, APR 5.80%)
• 5 year (then ARM) Jumbo- 5.25% at 1.0 point  ($417,000-$ 2,000,000, APR 5.56%) (perfect for a Relo client)
• 7 year (then ARM) Jumbo-5.625% at 1.0 point  ($417,000-$ 2,000,000, APR 5.80%)
• 30 year Conforming-Jumbo fixed 6.75% at no points (Up to $729,750, APR 6. 88%)
• 30 year Conforming fixed 5. 875% at no points (Up to $417,000, APR  5.93%)
• 15 year Conforming fixed 5.00% at 1 point (Up to  $417,000, APR 5.31%)
• Teaser ARM's starting at 2.50%. (Up to $750,000,  APR 7.28%)

June 2007
How to make interest only loans work for you

Interest only real estate loans have become very popular in the last five years.  Due to the relatively high price of real estate in this area interest only loans have made it much easier for many homeowners to purchase properties and keep their payments down.  The alternative to an interest only loan is a loan that is amortized.  This means that there are principal payments combined with the interest payment, which lower the loan balance.

Many homeowners who opted for the interest only loans took them with loans that were fixed for a period of three to ten years.  When those loans reach the end of their fixed period the loan balance is the same as the day the loan started unless principal payments were added to the interest only payments. With rising interest rates these loans can be a rude awakening for borrowers who were stretching to make the monthly payments.

When you are considering a loan that is fixed for less than fifteen years it is generally best to have it fixed for the time you are in the property.  Homeowners who took short term fixed loans for periods less than the time they lived in the property were asking for trouble.  When the fixed period ends the loans usually adjusts yearly and rates have gone up.

It has been easy to blame interest only loans for the payment shock that has and will come to many homeowners.  These loans have been criticized by many.  I still feel that when used properly interest only loans are a great tool for many borrowers for the following reasons.

1. Interest only loans allow you to make principal payments.  And you can make the principal payments at anytime.  This can work very well for people who receive bonuses or have income that fluctuates. 
2. When principal payments are made the monthly interest only payment also goes down.  This can work very well for people who want to lower their payments.
3. There are thirty year fixed loans that have an interest only option for the first ten years.  This means you can pay interest only for the first ten years and then have a twenty year fully amortized loan thereafter.  This loan is a great insurance policy and really is the best of both worlds. You can have the lower payments and the fixed rate.
4. Interest only payments give you the same tax deduction as amortized loans because only the interest is tax deductible.
5. You can use the extra money that would have been applied to principal for college, retirement, investment or to improve the property.