The Economy

Mortgage Rates . Climate Change.

Rate Watch #700 Mortgage Rates Bouncy. Climate Change.

December 12, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.75%	1.00	4.96%
	5.000%	0.00	5.07%
15 Year Fixed Conforming
	4.25%	1.00	4.67%
	4.5%	0.00	4.61%
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Stimulus
	5.5	0	5.57
	5.25%	1.0	5.41%
15 Year Fixed Stimulus	4.75%	0	4.87%
	4.625%	1	4.90

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

If you know someone who wants to receive this RateWatch newsletter each week, have them go to:
http://www.loanmine.com/ratewatch

II) Fundamentals

University of Michigan consumer sentiment was very strong at 73.4. Retail Sales ex-autos was +1.2%. Import Prices ex-oil were +0.7%. Treasuries are selling as the good news for the economy = bad news for interest rates coincides with a technical bearish cycle.

Initial Jobless Claims were 474,000 which was above consensus and previous. This might be simply one bad week in a time when jobless claims were lessening. Bloomberg has an article noting that the Treasury yield curve is steepening. This, generally, indicates concern about inflation. The Secretary of the Treasury has extended TARP until October 2010. The original bill called for TARP to expire at the end of this year but gave the option to the Secretary of the Treasury to make this extension.

III) The Technicals

The daily downcrossed to bearish and the weekly will probably soon follow. The bullish divergence we had a couple of weeks ago gave us low rates which are likely to rise a bit for several weeks.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

The fundamentals continue to be mixed showing recovering GDP and lagging job recovery. This is the way recoveries always happen. What is in question is the length of time it will take to recover the lost jobs. Keep in mind that just to keep pace with the regular increase in population we need to add 150,000 jobs a month just to stay even.

The Federal Reserve is going to stop buying FNMA/FHLMC paper at the end of the 1stQ 2010. One change is going into place this weekend which will increase the quality of FNMA paper by making debt ratios more strict. In a month or so we will start to hear the media complain that FNMA is not making marginal loans. It would serve to remember that HUD's insistence that FHLMC & FNMA increase the amount of subprime lending destroyed both entities and was the greatest single factor in setting the mortgage mess into motion.

We will likely get one or two more weekly bull cycles before the end of 1stQ 2010 but don't wait. If you have out off refinancing get started now unless you gave a great fixed rate.

V) Climate Change

I wrote a newsletter four years ago expressing skepticism that the increases we had seen in temperatures (from 1978 until 2005) were largely man-made. What concerns me about the present issue (Climategate) with the tossed out data is that this is the worst possible thing which can happen to science. Climate science is complex. If a party which was the repository for much of the data tossed out the raw data then their conclusions are suspect. My opinions remain largely the same as they were four years ago: 1) human activity certainly creates greenhouse gases 2) the effect of those gases on average temperature may be near zero or may be significant. The science to show the correlation does not exist due to the sheer complexity of calculating the effects of increased anthropogenic CO2. 3) I do not believe that the fact that these folks scammed the data disproves the thesis that anthropogenic CO2 causes some increase in temperature. 4) I believe that we are nowhere toward understanding the issue 5) I believe that if someone wants to make substantial changes in laws and fiscal policy based on the thesis that man made CO2 is responsible for global warming they have the obligation to make a compelling case.

Let me repeat the conclusions I wrote back then: We should spend money on basic research with the purpose of better understanding the interactions between the oceans and the atmosphere, plants (and animals) and the atmosphere, cloud physics, a better Milankovitch model, and the effect of volcanoes before we spend any significant amount of money on the abatement of anthropogenic CO2.

Political correctness must take a back seat to science. Science needs to explain global warming and it needs to do so without predisposition as to the causes. Before science can make any accurate analysis of whether or not anthropogenic CO2 affects the climate in a significant manner those scientists need 4 things 1) accurate long term data 2) a mathematically sophisticated model (this would be a large set of differential equations which would describe the interactions of every significant thing which affects the weather) 3) an enormous amount of computer power which likely exceeds the ability of even the most powerful supercomputers we have today 4) objectively.

What is truly suspect is the notion that the increase in average temperature from 1978 to 2005 was due to anthrpogenic CO2. More likely this is evidence of a typical multidecadenal warming and cooling cycle. These cycles have happened for as long as we know. What is notable about the warming cycle which ended in 2005 was that it was not truly global. If you look at satellite temperatures from 1978-2005 you see that Arctic temperatures increased by 2.1 degree Fahrenheit while the southern 2/3'rds or the earth saw an increase of 0.29 degrees. (See: http://www.uah.edu/news/newsread.php?newsID=291. Greenhouse gases are distributed evenly around the earth but the warming happened to a much larger extent in the Arctic. Computer models which assume that CO2 is significantly contributory to global warming show that there should be significant warming in the tropics and this is not what happened. Since I am being serious here I will not suggest that the real culprit is obviously the Grinch in an effort to destroy Santa's habitat.

No one really understands what is going on but I believe that making CO2 output limits a political, social and economic issue without having a scientific understanding is plain dumb. Just as I don't believe that global warming advocates made the case that CO2 was responsible I do not believe that any of these Climategate messages disprove the thesis.

One more important thing must be understood. The consensus opinions of scientists is not science. The notion that the science of global warming is a done deal is blatantly false. Science is not "American Idol". The winning theory is not chosen by vote but by its ability to explain past data and forecast future data. Even with the best conceivable model and massive supercomputers weather and climate forecasting would likely remain an extremely tenuous thing because this is a complex system where a modest inaccuracy in assumptions about initial conditions or an unpredictable size and timing of an El Nino event can throw everything off.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
435 Pacific Avenue #350
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(415) 244-9383 (cell)
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Is Medicare a Ponzi Scheme?

Rate Watch #696 Rates Down Again. Is Medicare the World's Largest Ponzi Scheme?

November 13, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.625%	1.00	4.78%
	4.875%	0.00	4.97%
15 Year Fixed Conforming
	4.25%	1.00	4.55%
	4.375%	0.00	4.52%
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Stimulus
	5.25%	0	5.32%
	5.000%	1.0	5.16%
15 Year Fixed Stimulus	4.75%	0	4.87%
	4.5%	1	4.77%

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

If you know someone who wants to receive this RateWatch newsletter each week, have them go to:
http://www.loanmine.com/ratewatch

II) Fundamentals

University of Michigan Consumer Sentiment was 66.0 - lower than consensus and previous. Jobless Claims were down to 502,000 last week. Equities have been strong.

III) The Technicals

The daily is bullish while the weekly an monthly are bearish. Generally this does not mean better rates but that is what we have so rather than analyze it let's simply take advantage of it.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

Mortgage rates are back to the lowest they have been in years. If you missed a refi opportunity previously you are getting another shot at it. If you are interested you can fill out this form. At present, we are only lending in California.

V) World's Largest Ponzi Scheme?

Just about one year ago Bernard Madoff was arrested for running a Ponzi scheme wherein about $18 billion was lost by investors. There is a Ponzi scheme which is about 4,740 times the size of this. It is called Medicare.

Let me clarify that this is not an argument for or against whatever health care bills are being discussed. I am not making a case for or against public health care. This is not about Republicans or Democrats because neither party is paying any attention whatsoever to the enormous problem with the underfunding of Medicare. My point is that absent fiscal responsibility from Congress, disaster will ensue.

So What Am I Going On About?

We have had a lengthy discussion about health care reform which has missed the single biggest problem with our health care system. The biggest problem is Medicare underfunding. There is not enough going into the Medicare Trust Fund to pay the benefits promised.

The trustee of Medicare funds is the Social Security and Medicare Board of Trustees. There are, at present, four ex officio members: the Secretary of the Treasury, Secretary of Labor, Secretary of Health and Human Services and the Commissioner of Social Security.

The most recent report on the health of Medicare shows that the Medicare Health Insurance (Medicare "A") fund will be empty in 2017. This is two years earlier than in last year's report. Starting in 2008 Medicare "A" paid out more than it took in.

Last week I noted this speech by Richard W. Fisher President of the Dallas Federal Reserve, delivered here at the Commonwealth Club in S.F. last year. Fisher's point is that the present underfundings of social security and Medicare are not small and are not large - they are massive. The present value of the Medicare shortfall over the next 75 years is $89.5 trillion. That means that unless we increase premiums or decrease benefits we would have to put $89.5 trillion into it today to pay what is promised. The scale of this problem boggles the mind. The Medicare and Social Security underfundings have the ability to destroy our economy and there is nearly zero concern.

It is not as if the problem has no solution. As the trustee report indicates "HI Trust Fund could be brought into actuarial balance over the next 75 years by changes equivalent to an immediate 134 percent increase in the payroll tax from a rate of 2.9 percent to 6.78 percent, or an immediate 53 percent reduction in program outlays, or some combination of the two. Larger changes would be required to make the program solvent beyond the 75-year horizon". The present 2.9% comes half each from employer and employee. Unlike Social Security there is no maxing out of the Medicare tax. 2.9% of whatever the gross income is goes to Medicare.

Medicare "B" and "D" (doctor's visits and prescription drugs) are funded differently. Only about 20% of the money in those funds comes from premiums and the rest comes from the general fund which is to say that Treasury borrows it and puts it in the funds. We are underfunding Medicare "A" and, largely, deficit financing Medicare "B" and "D".

My predisposition would have been to fix this underfunding of Medicare "A" before expanding public health care. What I am uncomfortable with is that fact that this has barely been part of the discussion. Let me be clear: I am in no way suggesting that there should or should not be public health care. I am stating unequivocally that unless whatever is done is done with fiscal responsibility, economic disaster will ensue. I do not mean "a problem". I mean "a disaster".

I have no idea what, if any, health care reform will be passed by Congress but I am certain that these people have not addressed the already existing problem. I need someone to explain to me how they think that expanded public health care is going to be managed responsibly when Medicare has not. This is by no stretch about either political party. Each party have displayed zero willingness to address Medicare underfunding. Our political system and the commentary associated therewith does not hold elected officials responsible for the future outcomes of their actions.

In addition to Medicare, Social Security has similar problems with underfunding but those can be more easily addressed. Social Security could be fixed with an increase in the payroll tax (from a rate of 12.4 percent to 14.4 percent) or an immediate reduction in benefits of 13 percent or some combination of the two.

Some folks believe that health care costs are so expensive because of insurance company profits. Fortune Magazine list profits for various industries. In 2008 Health Care: Insurance and Managed Care was the 35th most profitable industry with profit at 2.2% of revenue. This is down from 2007 when it was the 24th most profitable industry. In 2006 this was the 33rd most profitable industry.

The underlying problem with Medicare and health care in general is runaway costs. Unless costs are contained even an increase to 6.78% in the Medicare tax will prove to be a disappointingly temporary solution. Why are costs so high in the U.S.? This is a complex issue but consider this sobering fact: France has health care comparable with the U.S. in terms of quality (by "quality" I mean survival rates for serious diseases) but health care costs in France are about half of what they are in the U.S. This article from Business Week points out the fact that the average U.S. doctor's cost of malpractice insurance is equal to 100% of the average French doctors net income of $55,000. (This data is from 2007. To make the comparison fair, it should be noted that French doctors have their equivalent of Social Security subsidized by the government and that the cost of their education is paid for by the state.) Some of the issues we should be thinking about to reduce health care costs are: tort reform, Medicare fraud abatement, and increased taxation of unhealthy foods as well as alcohol and tobacco. We need to greatly increase the number of doctors. That will increase the supply and help contain prices.

There is also an underlying demographic problem. There ratio people getting benefits to people paying into the funds will increase as baby boomers reach 65.

We also need increased funding on research to reduce the incidence of age related diseases which, at present, are very significant parts of Medicare expense. This last thing is something regarding which I have been active for the last year and a half and will talk about here in a few weeks.

One more point: almost all of the money in the Medicare and Social Security trust funds had already been loaned to the Treasury Department to fund deficits. While that might scare some, this may still be the safest investment. The problem of course is that even the assets of these trust funds plus interest need to be paid from future tax receipts.

So I ask again: why is no one demanding fiscal responsibility from Congress regarding Medicare?

If you have something to add to this discussion please post a comment on the blog.

---

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

California Department of Real Estate - real estate broker license #01201643

Medicare/Social Security Underfunding. Tougher FNMA Guidelines.

Rate Watch #695 Medicare/Social Security Underfunding. Tougher FNMA Guidelines Coming Soon

November 6, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Product	Rate	Points	Est. APR*
CONFORMING LOAN PRODUCTS (Loans less than $417,000)
30 Year Fixed conforming
	4.875%	1.00	5.04%
	5.125%	0.00	5.22%
15 Year Fixed Conforming
	4.5%	1.00	4.67%
	4.75%	0.00	4.85%
JUMBO CONFORMING (Stimulus) LOAN PRODUCTS (Loans greater than $417,000 and less that the new amount for your county)
30 Year Fixed Stimulus
	5.75	0	5.85
	5.375%	1.0	5.55%
15 Year Fixed Stimulus	4.875%	0	5.00%
	4.625%	1	4.85

* conforming loan limits for 2009 are:

1 unit $417,000
2 units $533,850
3 units $645,300
4 units $801,950

Note that the above table now means something different than it used to. "Conforming" now mean "traditional conforming" (<$417,000 for SFR is the new jumbo-conforming which depends on county. You can find the new Jumbo-conforming limit for your county here. That page says "FHA" but those amounts also pertain to FNMA & FHLMC.

You must not read these as quotes because the rate and price which you will get depends on your precise situation and is affected by but not limited to the following factors: credit scores, property type, occupancy, income, value of property, length of time of the rate lock, whether of not values in your area are declining.

To apply on-line go to: http://www.loanmine.com/LoanApplication.  Make sure that your pop-up stopper is disabled.

If you know someone who wants to receive this RateWatch newsletter each week, have them go to:
http://www.loanmine.com/ratewatch

II) Fundamentals

The BLS Employment Situation Report shows a loss of 190,000 jobs in October. Goods Producing jobs took a large hit. Only Education and Health (+45,000) and Professional & Business Services (+18,000) were up. The Unemployment rate rose to 10.2%. Crossing the 10% line may serve to erode consumer confidence. We are now a that phase in the economic recovery cycle where GDP is expanding and jobs are being lost and the average guy is confused. He is confused because he was not adequately informed about how economic cycles work. Jobs lag GDP. That is the way things happen.

Initial Jobless Claims were 512,000 last week. This is better than consensus and previous but still bad. Worker Productivity (GDP/hr worked) was up 9.5%. This is not the result of technology but of downsizing. Companies are getting as much produced with fewer workers. This, presumably, benefits the bottom line. Layoffs have been aggressive and hiring will be slow during the recovery in GDP. Some of those who lost their jobs do not have the skills for new jobs. Labor participation is going to be constrained by slowing birth rates and the demographics of a aging labor force. This may prove to be something other than "just another recession".

Factory Orders were +0.9%. This led a Bloomberg reporter to say "Orders placed with U.S. factories rose in September for the fifth time in six months, reinforcing signs that manufacturing will drive the economic recovery". Huh? The U.S. economy is a service based economy. Pending Home Sales +6.1%, ISM Index 55.7%, Construction Spending +0.8% - all are above consensus.

The SurePayroll monthly Small Business Scorecard survey shows: hiring up slightly (a 2.2% increase year-to-date), salaries down 7.3% and optimism down. Small business salaries are down so significantly because these are companies where the owners tend to take large pay cuts in hard times.

What is in fact happening us that large business are becoming more profitable but small businesses have not gotten the attention of the government and continue to hurt. The significance of this is that it is these small businesses which do the actual job creation and the implication is that economic recovery will be slower because the attention of the government has been elsewhere.

The report also shows the consistent correlation between average paycheck and number of jobs. Business are moving from high costs states to lower cost states. This has not gone unnoticed here in California.

The FOMC report revealed nothing new. Same story - increased GDP, no increase in jobs. The interesting thing is that the Fed is still saying that it plans of stopping its purchases of FHLMC/FNMA debt at the end of 1stQ2010. I do not believe that can happen without disastrous increases in mortgage rates and savaging of real estate prices in the high-value conforming counties.

III) The Technicals

The techs are bearish and we are likely to see higher Treasury yields and mortgage rates for at least 10 weeks. There is so much underlying angst in markets that the techs are probably not as useful at present than in times past.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

I am just going to slip this in here and try to comment on it at some later date. This is an interesting article by Nouriel Roubini a professor at NYU. Roubini is one of those people who is capable of generating some original thought. This piece makes the case that investors are borrowing at low rates, shorting dollars and making risky investments in foreign assets as well as driving up commodity prices. He states that this will come crashing down.

Investors short the dollar to buy high yielding and highly leveraged global assets. The problem of course is that when everyone tries to sell those assets those asset prices will crash and then dollar will rally.

This is a risk stemming from low interest rates. While the Fed is keeping interest rates low to spur economic growth when these speculative bubbles burst we will hear that it was the Fed's fault for keeping interest rates so low for so long. These "dollar carry trade" speculative investments are a side effect of low rates. This can create further economic disruption. Attempts to alter fiscal policy to quash speculation have been unsuccessful in the past.

Read Roubini's piece. Even if this is not precisely what will happen it does give insights.

One more word on health care reform. Read this speech by Richard W Fisher of the Dallas Federal Reserve delivered here at the Commonwealth Club in SF last year. The present underfundings of social security and Medicare are not small and are not large - they are massive. The present value of the shortfalls over the next 75 years is $34 trillion. That means that unless we increase premiums or decrease benefits we would have to put $34 trillion into it today to pay what is promised.

Could someone please explain to me why we are even thinking of expanding health care coverage when we are not even close to adequately funding the present system?

V) New FNMA Guidelines

There may be a new force which will soon undermine housing value. FNMA is making their underwriting more strict. We can get FNMA on-line underwriting done with something called Desktop Underwriter (DU). This is a great tool because it gives us an idea of what we need to close a loan. FNMA will issue a new release of this on December 12. It appears that the biggest concern is that debt ratio are stricter than they once were. In the past I have gotten approvals with debt ratios above 60%.

The new FNMA guidelines call for a max debt ratio of 45% with allowance to 50% with strong compensation factors. The expression "strong compensation factors" is not defined but I would guess that the two big compensating factors are high credit score and low loan-to-value.

The bottom line here is that anything with a debt ratio over 50% will no longer be sellable to FNMA and anything over 45% could be problematic. This will translate into fewer qualified borrower/buyers.

There are some additional restrictions. Two unit properties (like my house) have more strict LTV and CLTV guidelines. Trailing spouse income will no longer be counted. This is damaging to people who are relocating.

There are tougher guidelines about credit scores and documentation but from what I can see the 45% debt ratio is the 1,000 pound gorilla.

While the goal presumably is to make FNMA/FHLMC securities of higher quality and attractive to investors I don't know if folks are aware of what the effect will be on housing values.

If you have something to add to this discussion please post a comment on the blog.

 

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Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

A Look Inside This Week's GDP Report

Rate Watch #694 GDP

October 30, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

IV) Analysis

The better than expected GDP data will give a brief psychological lift to things. The jobs data points out what we already knew: namely that jobs lag GDP and we are going to have another jobless recovery. This is hardly new. This may create a problem for the administration which unrealistically pitched the stimulus as being something which would create jobs but that is a political issue not an economic one. I believe that the average person is capable of comprehending the fact that the economy is complex and that jobs recover after GDP.

I would like to squeeze one word in here about the health care debate. I have heard a lot of comments that insurance companies are the problem. Read this from Fortune magazine. It shows that Health Care: Insurance and Managed Care was the 35th most profitable (profit/revenue) industry in 2008. Health Care: Insurance and Managed Care has an industry profit of 2.2%. The pharmaceutical industry had a (profit/revenue) of 19.3%. In 2007 Health Care: Insurance and Managed Care was the 24th most profitable industry. In 2007 Health Care: Insurance and Managed Care was 34th.

V) The GDP Report

I rarely devote a newsletter to a single release of data especially one which will have been discussed so much by the time you read this but this one merits discussion.

Everyone would be well-served to read the synopsis of the data from the Bureau of Economic Analysis (part of the Commerce Department).

Overall, we have a 3.5% gain in GDP. That sounds excellent compared to recent GDP reports but 1.66% of that 3.5% was from motor vehicle output which was driven by cash-for-clunkers. The problem here is that the a significant part of the gain in 3rd Q is at the expense of future auto sales.

GDP = C+G+I+(X-M).

C= Consumer Spending

G = Government Spending

I = Investments (This is complicated because this is not "investments" in the sense that we use the word in personal finance. This does not mean stock purchases or even IPOs. I = capital deployed: new plants and equipment, for example.)

X= Exports

M= Imports

C (Consumer Spending) was +3.5% in 3rdQ2009 contrasted with -0.9% in the previous quarter. Even taking the subsidized pop in auto sales out this is still good news even if not as good as the headline 3.5%.

G (Government Consumption) was +7.9% in 3rdQ2009 compared with +11.4% in 2ndQ2009. Let's clarify: Federal Government Spending was +7.9%. State and local spending was -1.1% in 3rdQ2009 contrasted with +3.9% in 2ndQ2009. State and local governments do not have the ability to create money that the Federal government has and their ability to borrow is impaired.

I (Nonresidential fixed investments) was -2.5% in 3rdQ2009 as contrasted with -9.6% in 2ndQ2009. The good news is the move in the right direction. The bad news is that the which will drive sustainable economic growth are not happening. To some extent this is a consequence of the destruction of wealth from the mortgage mess. A lot of folks who were "rich" 2 years ago are no longer as wealthy as they once were. These are the folks who provide the seeds of the investments which would create jobs.

The export and import numbers were striking. Exports were +14.7% in 3rdQ2009 contrasted with -4.1% in 2ndQ2009. Some of this might be do to the declining value of the dollar. Imports were +16.4% in 3rdQ2009 contrasted with -14.7% in 2ndQ2009.

The good news is that we are on the road to recovery. The bad news is that this level of recovery may, in the short run, not be sustainable.

Some of this will be about public opinion. The stimulus was sold as a jobs creating package not as a GDP enhancing package. It would make more sense to me for politicians to explain that jobs lag GDP at the start of the process. Now we see silly reports from the Administration explaining that the Stimulus Bill may not have created jobs but prevented jobs from being destroyed.

This period of crappy economic times is going to last a while longer. We will not have real stimulus without investments.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

when will the housing market stand on its own?

Rate Watch #693 When Will the Housing Market Stand on Its Own?

October 23, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

V) Is the Housing Market Ready to Stand on Its Own?

This past Monday I read an article by my friend Ilyce Glink. I started to write a reply and realized how complex this question was so I stopped, sent her an e-mail thanking her for the inspiration and started writing this. I also stole the name of this article from her. We mortgage folks are nothing if not shameless.

Let's enumerate what Federal Government supporting the housing market in manners that it did not three years ago:

1) First Time Home Buyer Tax Credits

2) Takeover of FHLMC and FNMA

3) Now taking losses on FHA. FHA traditional is for low down payment or higher risk borrowers.

4) TARP bailouts of banks to help them maintain the semblance of liquidity because they are near the front line of mortgage lending. TARP was about more than mortgages but mortgages a) caused the problem and b) benefited along with other forms of lending from TARP. Also, TARP was about more than banks,

5) Conforming loan limits which are $417,000 should really be much less according to the traditional method of calculating conforming based on median sales prices in October.

6) Jumbo-conforming to $729,750 in high-value counties to accommodate the total lack of private Jumbo securitization. This points to the fact that few, at present, are making any mortgages which are not guaranteed by the Federal government.

7) FHLMC/FNMA backed refinancings to 105% - Home Affordable Refinance Program, or HARP

8) Federal Reserve buying of FHLMC/FNMA paper. This is not chump change but about $1.5 trillion. This supports low rates which supports the housing market.

9) an easing of bank's ability to not write off mortgage debt per the traditional rules. In short, losses are deferred for the sake of pumping up balance sheets.

10) The Homeowner Affordability and Stability Plan HASP - plan to avoid foreclosures.

11) This week the Administration announced new support under the authority provided to Treasury by the Housing and Economic Recovery Act of 2008 (HERA) to provide funds to local housing agencies.

I started writing this list and was stunned with the size of it. I looked at it and it is intimidating. Let's go back and discuss a few of these. TARP did many things. One was to put about $205 billion into 700 capital-short banks. About $70 billion has been repaid. Confidence in the banking system has increased but the risks are still there. Commercial Mortgage losses have yet to be taken and item 9) the relaxation of accounting standards compromises the traditional standards for judging the health of individual banks and the banking system in general. TARP will end at the end of 2009 in the sense that no more money will go out. Congress and the administration could see the money coming back as a new pool of something to spend money on. TARP is a gigantic program with many aspects. It it the primary thing which has brought the banking system back from the brink but there is much about it to criticize. See this article for example.

Item #8 is of significance to us mortgage folks. If the Fed stops buying FHLMC/FNMA paper someone is going to have to start buying it. Mortgage rates will go up at least 0.5% I would guess but this step must occur before and of the other FHLMC/FNMA items are implemented. If a markets develops for FHLMC/FNMA paper then at some future time several years from now Treasury can consider returning FHLMC & FNMA to their former GSE status. This is not going to happen any time soon. The Fed has announced that they will stop buying agency paper at the end of 1stQ2010.

If the Fed stopped buying FHLMC/FNMA paper there would be a problem with the jumbo-conforming loans because the professional organizations of security dealers will not regard any FHLMC/FNMA pool with > 10% jumbo conforming to be classified as investment grade. This creates two difficult choices: 1) toss out jumbo conforming and send property values in California into the abyss or 2) have the Fed keep buying these jumbo-conforming.

In fact, I see no way that the Fed can stop buying mortgages at the end of 1stQ2010. The consequences would be disastrous. No one else is going to buy this paper and real estate prices here in California will dive. Added into this is the fact that we are just starting to see a second foreclosure wave from Option ARMs which are mainly jumbo. There is a TV piece from KGO Channel 7 (S.F. ABC affiliate) shot this past week addressing this wave of problems. I am the guy at the end of the piece.

Amherst Securities Group estimates that there is a housing overhang or shadow inventory of 7 million units will will come on the market in the next 2 years consequent to foreclosures. There is a capsule of the report on Yahoo.

Remember that the Fed does not borrow money, it creates it out of nowhere. It's only consequent concern is inflation resulting from expanded money supply. I spoke with my mentor, Jim Grauer, and he suggested that the Fed might continue to buy mortgages and stop or decrease its purchases of Treasuries instead.

The First Time Home Buyer Tax credits have been much discussed this past week. Really, all they do is move future sales into the present. Every one who buys a home under this program now is a buyer who will not be buying their first home in some future year. This, like cash for clunkers, causes Treasury to spend more money that it does not have with the sole purpose or dressing up the present data at the expense of future data.

HARP and HASP need to be phased out if the housing market is going to begin to think about standing on its own. These programs got off to poor starts and if they start to prove effective next year they could buy themselves more time. This is a WSJ article on HARP. The other problem with reworking the mortgages of those delinquent is the traditionally high recidivism rate.

Somewhere along the way what is going to happen is that all of the massive amount of money poured out there to cure the problem will cause inflation and interest rates will rise. This will be a painful part of the cycle but what could arise from this is jumbo mortgage securitization. The conforming loan limits will be parked at $417,000 for years and the jumbo-comforing if not already discarded will no longer be needed.

By the end of 2011 we should go back to the realistic way of allowing banks to mark their assets to market. Give that at least 2 quarters and terminate

I want to make a couple of summary points: 1) the timeline suggested above is intended as a starting point. The precise timing and the order in which to terminate these various programs should be in the hands of the Fed and Treasury. Going forward to restore the housing market to normalcy, politicians are more likely to contribute to the problem than the solution. 2) it is unlikely that the housing market will be able to stand on its own (meaning the way things were 3 years ago) at any time during the next five years.

When will the housing market stand on its own? More than five and less than ten years from now.

Second Order Effects

If the above sounds complicated consider this. One the Fed stops buying agency paper (FHLMC/FNMA/FHA) that paper will have to be purchased by investors who will be less inclined to buy equities. Perhaps some of the runup we have seen in equities has been caused by that $1.5 trillion than investors did not used to buy agency paper. The implication is that the Fed getting out of the agency paper market might cause a decline in equity prices.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Ranked Choice Voting

Rate Watch #691 Rates Were Down but Moving Up. Ranked Choice Voting.

October 9, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

The good news is that Initial Jobless Claims fell to 521,000. The bad news is that 521,000 is good news. Wholesale Inventories were -1.3%.

ISM Services Index was 50.9 indicating mild expansion for the first time in a year.

Thursday's Treasury auction went well but not as well as expectation so the market started selling. Lower prices = higher yields.

 

III) The Technicals

The daily downcrossed Thursday and yields then moved up sharply. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

In a word if you have not refinanced you should start now if there is any benefit. Rates were very low but the bottoms are short-lived. If you are not sure e-mail of call me.

If you are concerned about where mortgage rates are going all I would say is that there is very little, if ay, room for lower rates and a lot more room for higher rates. We could go up 0.5% in rate as easily as we could go down 0.125% in rate.

I want to emphasize again that the Fed announced that it will stop buying mortgage debt at the end of 1stQ2010 so there is every reason to believe that mortgage rates will go up then.

I need to share something because maybe you folks can help me. I received my absentee ballot for next months election for "I have no idea what". The first page tells me that San Francisco is sophisticated and uses "ranked choice" voting and I would "Vote for my first, second and third choices" for City Attorney and Treasurer. The three choice for City Attorney are Dennis Herrera, Dennis Herrera, and Dennis Herrera. The three choices for Treasurer are Jose Cisneros, Jose Cisneros, and Jose Cisneros. I was in a quandry. Should I rank the three Herreras? I confess that I gave up and simply vote for none of these.

Since I started on Ranked Choice Voting I may as well make a point. Unless something has happened in the past few years that I am not aware of there is a mathematical theorem from the 1950's called "Arrow's Theorem" (http://en.wikipedia.org/wiki/Arrow's_impossibility_theorem). Ken Arrow was a sort of mathematical economist who won the Nobel Prize in Economics in 1972.

While the math part of this can be intimidating I believe that the point should be taken that Ranked Choice has some inherent problems. The most controversial part of the set of requirement for reasonableness is probably that part called Independence of Irrelevant Alternatives. This means, in simple form, that if I prefer A to B then the introduction of candidate C should not wind up with my re-ranking B above A. It is this point on which Ranked Choice fails most often.

Another issue is that all of this assumes that voters act rationally. Here the word “rational” has the strict definition that people vote in their own best interest. That is, in my observation, not the case. Thus we are cursed with trying to impose a rational system on people whose behavior is irrational.

The important point to note is that while Ranked Choice Voting seems like a good idea to most people they are unaware of its fundamental flaws.

I have started using Facebook recently and post these newsletters and some commentary on the economy there. If you want to see these add me as a "friend". There are not a lot of folks named "Dick Lepre". I am not one of those folks who tells everyone what I had for dinner. It is just not that interesting.

V) Mortgage This and That

I want to make a few points about what is happening with the mortgage business and where the markets may be going in 2010.

We have seen a couple of changes in the past for months which make what we do a bit more difficult. One item is the HVCC appraisal guidelines which make it necessary for the lender to order the appraisal. This hurts some brokers and benefits bank and mortgage banking operations such as ours. One inconvenience we face is that we cannot contact the appraiser at the start of the process and get an estimate of value. This means that some folks are going to pay for appraisals only to find that the value is too low to support the intended loan. In declining housing markets this is more than academic.

The other new thing is the rules about disclosures. We used to send out an initial Good Faith Estimate and Truth in Lending. Now if the rate lock is different from what is on the disclosure we need to redisclose. We have the technology to deliver these in a manner so that you can electronically acknowledge receipt. Otherwise we need to stop for 3 days if this is sent by fax or mail. This simply means that more cooperation is needed from borrowers to make sure that loans fund on time.

Overlaying all of this is an intense measure of scrutiny. Our underwriters and funders are demanding things which they did not previously demand solely for the purpose of quality control. We do not want to have to but a loan back from an investor because a page was missing from a bank statement.

All of these inconveniences are the price of the lax way the mortgage industry had acted. The Federal Government has a substantial measure of responsibility by demanding subprime lending from FHLMC & FNMA and demanding more subprime under CRA (Community Redevelopment Act) for banks and S&L's wanting to expand.

The Dollar

Somehow even Forex got politicized this week. If has always been my belief that mixing politics with economics is a good way to obfuscate economics. Blaming Obama for the weak dollar is silly. The dollar is weakening because of an abundance of supply and fiscal irresponsibility (too much borrowing). I still find it utterly insane that we are in a prolonged discussion about health care reform and the possibility that the Federal Government will expand Medicare (I am using the expression "expand Medicare" here only to refer to any increased responsibility to cover health care expense) when Congress has for 6 consecutive years refused to increase Medicare cost to match expense. This approach to Medicare has a similarity to predatory lending. Possible outcomes are: 1) significant inflation 2) higher taxes and lower GDP 3) significant cutback in healthcare for seniors 4) economic disaster. Underfunding Medicare is irresponsible.

About Those Jobs

I know I have said this at least 10 times but it is important that folks understand that the economy is not the jobs market. We will very soon see the recession end which only means that GDP will start expanding. This is of little immediate benefit to the large numbers of people who are out of work. Job creation will come later when investors, businesses and the banking system are comfortable. Jobs always lag in recovery. This is another reason not to mix politics and economics. This administration (like every other administration) sold its economic policies as creating jobs. If that does not happen voters will recall that and opponents of the incumbents will point to unfilled promises.

Jobs are created when business, labor and capital come together with opportunity. Opportunities in the future are likely to be tech driven and technological breakthrough occurs on its own schedule. We are likely to be in for a few years of high unemployment. This will not be solved by government spending.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

October 09, 2009 | Permalink | Comments (2)

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

September 18, 2009 | Permalink | Comments (1)

Regenerative Medicine

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

August 29, 2009 | Permalink | Comments (0)

Economics of Health Care Reform

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

August 21, 2009 | Permalink | Comments (2)

Elusive Leverage

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

August 14, 2009 | Permalink | Comments (2)

Next »

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

Rate Watch #688 Rates Down! Did the Fed Help Create the Mortgage Mess?

September 18, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com
V) Role of Fed in Housing Bubble

I have read a lot recently blaming the housing bubble on the Fed's monetary policy. In its most extreme form some believe that the Federal Reserve is largely responsible for the housing bubble by having made rates too low during the brief post-9/11 recession.

I believe that while low rates were contributory they were by no means the heart of the problem. The housing bubble was created by 1) HUD's insistence that FHLMC & FNMA do subprime and dictating the spread above prime that the interest rate on these loans was to be 2) Wall Street's dishonest packaging of subprime with prime to make all of these investment grade 3) the lack of ethics and lack of honesty of the loan officers who worked with the people who got mortgage they could not afford 4) the general lapse in underwriting standards which enabled more people to do stated income which both burdened people with mortgages they could not afford and served to buoy prices 5) non-securitized bad Option ARM loans which destroyed WaMu and World Savings/Wachovia.

The Federal Reserve controls short term interest rates. Longer term interest rates are set by the market and are largely a function of inflation not the overnight rate. It must be noted here that the Fed is at present a more important player in mortgage rates since the subprime collapse but that is after the fact.

Yes banks had low borrowing costs and those low borrowing costs were caused largely by the Fed but low borrowing costs had little correlation with bad lending practices. In fact if interest rates were too low the lower yield to investors should have discouraged any investor from buying what were in fact high risk securities. But investors were deceived by the investment banks and the debt rating firms into believing that securities backed by subprime loans were investment grade.

Other than HUD one other part of the government which enabled this was SEC when they increased investment banks leverage ability.

In summary, the Fed rate did not dictate mortgage rates. Mortgage rates were affected more by HUD and the Wall Street investment banks. The loan officers who did the actual connections with the borrowers did not suddenly have any lapse of ethics because that was minimal to begin with.

Regenerative Medicine

I want to relate this to my comments of last week about health care reform. I find it extremely shortsighted that a “stimulus bill” was passed and Congress is talking about health care reform and they missed the important fact that a very large amount of money needs to be spent on research to reduce both the suffering and the expense of the diseases which strike the elderly who are the large consumers of health care. We should be allocating money for research into heart disease and cancer. We should recognize that the things which we have come to accept as the inevitabilitable consequences of old age are not really inevitable. If we try we can find regenerative medical techniques to treat Atherosclerosis, cancer, macular degeneration, and Parkinson’s. Regenerative medical techniques may save lives and money.

Let me clarify this: at present medicine seeks "magic bullet" techniques into treatment of disease. It sees to understand the underlying metabolic process and prevent disease from happening. Regenerative medicine seeks to eliminate the effects of disease rather than stem the cause. For example, it seeks to find ways to remove the harmful chemical byproducts of cholesterol (the big cause of heart disease) rather than prevent them from coming into being.

Economics of Health Care Reform

Rate Watch #684 Economics of Health Care Reform

August 21, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

This cycle produced a small dip in rates. Existing Home Sales were +7.2% in July as prices were down 15% y-o-y. 31% of the sales were foreclosures or otherwise "distressed" sales. Housing prices will not stop falling until inventory diminishes. July brought inventory from 8.9 to 8.6 months. There are still a lot of foreclosures to come so while things are getting relatively better it is not as if the problem is about to end soon. What is important is that the market is working.

Initial Jobless Claims were 576,000. The share of mortgages which are delinquent rose to a record 9.24% for 2ndQ2009. While subprime delinquencies and foreclosures may have peaked we are now seeing late payments induced by these job losses.

Core PPI was -0.1%. Overall Housing Starts were down while single family construction was up. I suppose that implies folks are reticent to build apartment buildings. One problem I see is that banks are using lower cap rates (net operating income/loan amount) to determine how large a loan they will make on a commercial property. The situation is even worse for purely commercial properties such as office buildings.

III) The Technicals

It looks as if the technical daily bull is about to end. (Treasuries are getting killed as I wrote this.) The weekly is still bullish. The dip we called for was at best modest

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be at or near the August bottom I called for few weeks ago. The decrease in yields and rates has been rather small.

As if foreclosure statistics were not high enough check out this work of art.

V) Health Care Reform

I have found the very loud discussion about health care reform to be most interesting. I have read a lot about the discussion but still have no idea what "the plan" is. I suppose that this is by design. The Administration championed health care reform without being clear about exactly what plan it backed. It has left this up to Congress. This may have be a consequence of the very bad way that this went at the beginning of the Clinton administration when a plan was formulated out of view of Congress and then taken to Congress. Something went wrong here. Congress went on its summer recess and started talking to the electorate but the details are missing,

Consequently, the fact that the debate has spun out of control should be no surprise since no one knows what the details are. The worst possible thing has happened and that is that the discussion is close to becoming totally political.

The following are the questions which I would ask about any public plan:

1) what is the plan?

2) what will this plan cost?

3) where will the revenue to cover the cost come from?

4) will this decrease, increase or have no effect on current health care costs?

5) why are we not fixing the present structural deficits with Medicare before we expand public health care?

I am not implying that health care is all about economics but I do believe that we need to know what the economics are of any proposed plan. Any analysis should not come from politicians but from the Congressional Budget Office or an impartial panel of economists.

I would also comment that this is a complex topic and it is more important (I think) to get this done correctly that get this done quickly. I personally see too little sanity and objectivity in the present debate.

I also have concern about the timing. I would feel a lot better backing a government plan if we were not running a $1.8 trillion decicit.

The health care system in the United States is excellent. Whether you have cancer, heart disease, AIDS or pneumonia your survival rate is better in the U.S. than in any other country in the world. The problem, at least on the surface, is the health care in the U.S. expensive. While one might observe that American may consume too much health care and drive prices up I would offer that health care is not the worst way to spend money. Nonetheless, we should strive to make health care in the U.S. less expensive.

One point that is lost in the debate is that the U.S. govenrment already pays almost 60% of total health care expense. This is true is one allows for the indirect expense coming from the fact that health care benefits are untaxed income. The rest is Medicare, Medicaid, VA and other public health initiatives.

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643

Elusive Leverage

Rate Watch #683 Last Call for Refis? Elusive Leverage

August 14, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

At a time when some are concerned about inflation and some about deflation good old Core CPI came through - Core CPI was flat. Industrial Production was +0.5% and Capacity Utilization was up to 68.5%. I want to mention again that data about manufacturing is less important than it once was because it is but a small part of the economy yet it is still psychologically important. UMich Sentiment was down presumably on concern about jobs.

Retail Sales Overall was -0.1% and ex-Autos at -0.6%. This is significant because the auto sector received a steroid injection from Cash for Clunkers. Initial Jobless Claims were 558,000 indicative of continued softness in jobs. This reduces the probability that GDP will grow this quarter.

Home prices fell a whopping 15.6% year-over-year in 2ndQ2009. Supply was increased by foreclosures and demand was tempered by job losses. This has a nasty effect on appraisals for those contemplating refinancing. There are also potential fiscal effects. 90% of the mortgages being made at present are guaranteed by the US government through FNMA, FHLMC, and FHA. Good luck, taxpayers.

Worker Productivity (GDP/hour worked) rose at 6.4% annualized for Q2. Usually productivity is driven by technology but this time it is probably about getting the same work done with fewer workers rather than more machines.

One thing of interest is that the spread between mortgage rates and the 10 year Treasury has gotten down to 40 basis points (0.4% in rate). That number was running over 125 last year.

III) The Technicals

The daily is in a bullish divergence. This occurs when the price falls and the tech rises. This is a signal of potential strong upward movement in price and lower Treasury yields. The weekly is still bullish.

For those who are not long time readers the basis for these observations about technicals is the work of Jim Grauer which can be viewed at StoMaster.

IV) Analysis

We may be seeing a "last call for refis". We are about to have a technically induced dip (maybe) but concern exists because of the announced Fed policy of halting its Treasury buying program in October. It is difficult to see that failing to induce higher Treasury yields but these are strange times and the Fed could choose to continue to support mortgages.

My nomination for this week's most confusing piece on the economy is this article from Bloomberg. The article was headlined "U.S. Enters Recovery as Stimulus Refutes Skeptics" so it looks as if its intentions are more political than economic but the article states "The economy will expand 2 percent or more in four straight quarters through June, the first such streak in more than four years". This article has some amazing properties: the authors have apparently redefined "expand" as meaning "contract less" and somehow the stimulus bill had an affect 6 months before it went into effect.

One more cheap shot. This is from U.S. Senator Debbie Stabenow: "Global warming creates volatility. I feel it when I'm flying. The storms are more volatile. We are paying the price in more hurricanes and tornadoes." What is less funny is that this sensitive person is actually part of the Senate Energy Committee.

Let's be serious: it is good news that the economy is contracting at a slower pace and will likely start growing by the end of this year.. The major factors in influencing what GDP is doing at present are Fed intervention and last year's TARP related package. The Stimulus bill (American Recovery and Reinvestment Act of 2009) is not something on which judgment can yet be determined. One point is that the largest fiscal effect of that bill was really tax cuts but those tax cuts are temporary and that usually does not lead to increased spending but increased savings. There should be little surprise that the Stimulus Bill has not yet resulted in increased Consumer Spending.

 

V) Elusive Leverage

One thing we all have to deal with is that fact that it is harder for businesses and consumers to get the leverage they once did. It is a lot more difficult to get financing on commercial property. Some business which relied on short-term inexpensive debt (commercial paper) have taken to issuing longer-term debt (bonds) to make sure that they have cash.

None of this is surprising. Banks are reticent to lend much less lend on the insane terms of 3-5 years ago so money is less available.

VI) Other Stuff

This is a significant step forward more memory for devices such as Blackberries, iPhones, and digital cameras. This new SD card by Toshiba not only is 64 gigs but the underlying architecture will support future card capacity up to 2 terabytes. The new memory standard is called SDHC. This should be able to hold more than 500,000 songs with lots left over for girlie pictures. What more does a young man need?

If you have something to add to this discussion please post a comment on the blog.

 

---

 

Dick Lepre
RPM - SF
580 Pacific Avenue
San Francisco, CA 94133
DRE License # 01143973
dicklepre@rpm-mtg.com
Web site: www.loanmine.com
Blog: economy.typepad.com
(415) 343.6789 (direct dial number)
(866) 488-2051 fax

 

California Department of Real Estate - real estate broker license #01201643