The Economy

Health Care. Mortgages.

Rate Watch #680 A Few Things About Mortgages.

July 24, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

II) Fundamentals

Consumer Sentiment is down. People are concerned about their jobs. Initial Jobless Claims were 554,000 last week. This is happening despite an increase in equity values and a general feeling that the recession is near bottom and GDP will start increasing later this year. This is the picture of another jobless recovery. Maybe this is the picture of a jobless recovery much worse that the last one. There are some facts that are at the root of this: 1) technology eliminates some jobs and creates others but it generally supports an increase in Worker Productivity (GDP/hour worked) 2)the other big factor is that we have moved into a world economy.

We are moving into an era where the same amount of stuff and services can be performed with much less labor and no one is preparing for this.

III) The Technicals

The daily is down crossed. The techs say that we should see higher Treasury yields for the next week. The next bottom for mortgage rates should occur at or after the middle of August. The daily cycles usually last 15-20 days. That is 15-20 days of up and then 15-20 days of down.

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 going to wedge into this section a very brief statement about the discussion of health care reform. My point of view is that we are missing entirely the problem. The problem is not who is going to pay for it. The problem is that health care is too expensive and that neither the present system nor the President's plan addresses the issue of how to reduce costs. We need technologically sophisticated solutions to health care. The present paradigms for developing new sorts of medical care seem incapable of bringing it here and reducing the overall cost. We need transformation of medicine away from chasing and treating pathologies to a more cost-effective approach of maintaining health. When I say "maintaining health" I am not simply talking about diet and exercise but sophisticated therapies to remedy the ongoing effects of aging.

This is a topic in which I am actively involved and will address in detail in a future newsletter. This is too important to treat piecemeal here.

One of the present systems of U.S. Government supported health care - Medicare - is irresponsibly run. Congress should first fix it so that it makes fiscal sense.

V) About Mortgages

I want to cover a few topics about mortgages this week rather than lecture about how the federal government should be run. We can get back to that next week.

Home Affordability Refinance Program

First these were refinance mortgages which did loans up to 105% of the value. A revised bit of legislation moved this up to 125%. The notion was that rates were low but people who had lost equity could not benefit because they could not refinance.

These loans do not have relaxed underwriting apart from the loan-to-value guideline so it makes sense that allowing a lower rate refi does not increase the risk that the loan will default. Even if these loans eventually have higher than traditional default rates it will not be because the borrowers lowered their rate.

These do not allow cash out and do not allow you to pay off an existing HELOC. You can only do a HARP refinance of a FNMA loan with FNMA buying the new loan from the investor and you can only refi a FHLMC loan with FHLMC buying the loan from the investor. If your loan is not presently owned by FNMA or FHLMC you cannot get a HARP loan.

You can find out if your loan is FNMA or FHLMC by visiting their web sites at:

http://loanlookup.fanniemae.com/loanlookup/

or

https://ww3.freddiemac.com/corporate/

If you have a FNMA loan you can, at present, refinance it with any FNMA lender. If you have a FHLMC loan you need to refinance with your present lender but on September 1 FHLMC is supposed to be allowing any FHLMC lender to refinance.

I can refi any FNMA HARP loan to 105%. If a current loan is owned by FHLMC I can refi only some of them.

Jumbo/Conforming and Jumbo Mortgages

We have see a stabilization of the jumbo-conforming of Stimulus FNMA/FHLMC mortgage pricing. The vast majority of these seem to wind up being owned by the Federal Reserve because there is still a rule put in place by security dealer associations that no investment grade security may contain more than 10% of these mixed with traditional conforming.

Securitization of Jumbo Mortgages

Securitization of jumbo mortgage does not exist at present. Loans above the jumbo-conforming limits are made only by lenders who portfolio these. I see few early warning indicators that jumbo securitization will reemerge soon.

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

Rate Watch #679 Rates Up. Next Dip in 3-4 Weeks. Congress & the Fed.

Rate Watch #679 Rates Up. Next Dip in 3-4 Weeks. Congress & the Fed.

July 17, 2009
by Dick Lepre

II) Fundamentals

Retail Sales were +0.6% in June. Industrial Production was -0.4%. Core CPI was +0.2%. I think that the most important thing here is that there is no sign of deflation. Deflation scares the heck out of economists. This is something I wrote 5 years ago on deflation. It could stand a bit of updating with more current references but the gist of it is there.

The potential bankruptcy of CIT is an interesting story. This is a bank which provides credit to a large number of businesses. I asked Michael Alter the President of SurePayroll if this would have a noticeable effect and he replied, "I believe it will be bad and likely could be really bad. They loan to thousands of small businesses. Without capital, these businesses will either not have capital to grow (read – won’t be hiring new workers) or they will be forced to go to more expensive sources of capital. The decline in available capital without CIT lending will further raise the pricing on alternative, more expensive capital sources for small businesses as demand grows in an already tight supply market".

I believe that it will not be so drastic if someone takes CIT over and can provide that credit. This may not be an easy sell. CIT is a bank which has loaned money to business that other banks would not lend to.

While CIT does not pose the systemic risk to the banking system posed by something such as AIG it may be the case that their demise could create job loss.

Alter's point about the increased cost of capital is well taken, It is not only the customers of CIT which will pay higher rates. The disruption of the commercial paper market has caused many large business to seek longer term debt (bonds) and has increased their cost of credit.

III) The Technicals

The daily is down crossed. The techs say that we should see higher Treasury yields for the next two weeks. I addressed this last week. The next bottom for mortgage rates should occur at of after the middle of August. The daily cycles usually last 15-20 days. That is 15-20 days of up and then 15-20 days of down.

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

There is one overwhelming concern which I have at this time. That is that Congress could try to mitigate the power of the Federal Reserve. That is all I'm saying. Otherwise I will start ranting. I mean really ranting.

The economy shows signs of slowing down its rate of deterioration. I am not yet buying the "things are getting better" story. They just are not getting worse at as bad a pace as they were. I still believe that recovery from this down cycle is going to be painfully slow and the greatest lasting effect will be on jobs.

V) Where Are We?

Let's try this as a series of questions and answers.

Q: Where are we?

A: We are in a recession.

Q: Is the recession getting worse?

A: Probably not. It appears that the rate of loss in GDP is subsiding so while GDP is still decreasing is is not decreasing as rapidly as it was.

Q: How did this happen?

A: The proximate cause was the liquidity crisis. The cause of that was largely bad mortgage lending practices.

Q: What caused bad mortgage lending?

A: An oversupply of lendable funds encouraged easy credit. Combine that with greed and stupidity and we are lucky that the planet still rotates on its axis.

Q: Was this due to the housing bubble?

A: I don't see it that way. I see the housing bubble as the result of bad lending not the cause. It should be noted that similar easy lending occurred almost simultaneously with commercial mortgages. So there must have been an "office bubble" there.

Q: Whose fault is this?

A: Hey that is a trick question. The following are to blame: HUD for insisting that FHLMC & FNMA do subprime, FHLMC and FNMA for not screaming about subprime and then for some dubious accounting, banks, S&Ls, investment banks, the debt rating firms for going along with the subprime scam, mortgage lenders and all the loan officers who did "overstated" income, borrowers who agreed to make payments which they could not possibly afford, Realtors for insisting that buyers and loan agents do stated income to make sure they got their commissions, investors who bought this crap without knowing what they were buying, the Federal Reserve for not recognizing the size of the problem early enough. Did I leave anyone out?

Q: Is there reason to be optimistic?

A: Depends. On Tuesday Bloomberg quoted a guy from BNP Paribas Securities Corp. who used the expression "cautious optimism in the market". I would prefer optimistic caution. I am not creating a semantic quibble here. It is more important that we be cautious. The US and world economies have been damaged and we really do not need more damage. Economic news concentrates on equities and there is, in my opinion, an underlying bias toward spinning good news encouraging equity buying. In a parallel universe they may be less concerned about daily fluctuations is equity values. In that universe wealth holders would buy equities and take their share of the profits as dividends.

Q: Is the banking system really stabilizing?

A: Most definitely. An objective measure of this is what is called LIBOR-OIS. Read this paper if you want to understand this The LIBOR-OIS Spread as a Summary Indicator. This essentially is a measure of banks distrust with one another. By "distrust" I mean banks assessment of the credit risk in lending money to one another. This is a number which is usually around 25 basis points (0.25%) which shot up to 365 and is now down at about 31.

Q: So is the worst behind us?

A: Depends on what you mean. GDP will likely continue to decrease for at least 1 or 2 more quarters and unemployment will likely increase but the rate of deterioration has slowed. The worst of the banking crisis is most likely behind us. Banks still have to deal with Wave #2 which is Option ARMs and foreclosures are up for the first half of 2009. Job loss + owing more than your home is worth is a good formula for foreclosure.

Q: So what should the Federal government be doing?

A: The Federal Reserve should stay on top of things and pump liquidity where needed. I do not believe (and I made a big issue of this last week) that we need more deficit spending to stimulate the economy. I do not believe that the political process lends itself to economically sound fiscal decisions. My personal view is that Congress and the Administration should control the spending part of fiscal policy but they should follow the advice of a Fed like entity which would advise them about the tax side of fiscal policy. But that is for another time. Congress is not about to give up any powers to the Fed. These are people whom we elected so we get what we asked for.

Q: Are we going to have inflation as a result of expanded money supply?

A: While Milton Friedman said, "Inflation is always and everywhere a monetary phenomenon" there were several things different about this monetary expansion. Much of the recent expanded money supply was for temporary things such as CPFF (Commercial Paper Funding Facility). The Fed took over the commercial paper market because banks did not want to lend anything to anyone. That money can easily be taken out of the supply. Also, what happened here was that money supply increased and money velocity decreased. This minimized the chances of any inflationary effects from increased supply.

Q: Are we going to have deflation as a result of lower GDP and spending?

A: I don't believe so. I mean we are unlikely to have Japan-style deflation because the spending habits of the American consumer are still very different from the Japanese. I do not see Americans suddenly adopting a culture of "let's not buy this today because it will cost less next year".

Q: So what is going to happen?

A: I do not think that anyone knows. One also has to factor in macroeconomic consequences from a potential health care bill. This was a particularly bad recession because the banking system was at the center of it. The fast actions of the Fed along with support from Congress for TARP which became a bank recapitalization bill seem to have saved the banking system. I just had breakfast at a restaurant in S.F. There was a charge added of 3.8% of the bill for city mandated health care. The macroeconomic effect of taxes for health care is a reduction in discretionary spending. I am not implying that this is bad. I am stating that it should be taken into account.

Q: For the economy what is the worst risk at present?

A: The worst possible thing which could happen is for Congress to mitigate the power of the Federal Reserve.

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

Is It Time for Fiscal Restraint?

Rate Watch #678 Is it Time for Fiscal Restraint?

July 10, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

Fiscal Restraint

There was talk this week in D.C. polarized in the usual manner as: the Stimulus Bill is a bust or we need another Stimulus Bill.

I have been reticent to criticize the Stimulus Bill but let's take a look at where we are.

There are (to be a bit simplistic) three schools of economic approach. Classic economics as postulated, for example, by Adam Smith views markets as being self-regulating. Classic economics views a higher unemployment rates as something which will be fixed in the marketplace by lower wages. Classic economics, even if it is still operational, cannot operate at the pace which we demand. Classic economics might fit the notions of Libertarians in as much as it saw little role for government intervention. Libertarian institutions such as the Cato Institute see minimal government intervention as desirable. Cato believes that the role of the Federal Reserve should be more about price stability that anything else. I want to comment here that the previous two sentences were my own understanding of the opinions of Cato Institute. I did e-mail Gene Healy of Cato for comment and he said 1) that he is not an economist but a lawyer and 2) that he thought that different Cato scholars had different views of what the role of the Fed should be.

Keynesian economics based on John Maynard Keynes "General Theory of Employment, Interest and Money" published in 1936 revised classic economics by postulating that aggregate demand for goods was insufficient during economic downturns creating high unemployment and negative or low GDP growth. Keynes called for government intervention in such time with 1) low interest rates and 2) spending on infrastructure.

The third school is the monetarists. Monetarism, which is associated with Milton Friedman, saw the path out of recession as being an increase in money supply. Friedman saw the appropriate level of money supply as being deterministic. In other words, give the data a computer program could determine the appropriate level of money supply.

Greenspan was a monetarist in as much as he believed that control of the money supply was the key to maintaining health of the economy but he did hot believe in a doctrinaire computerized approach but more of a use of that as a baseline supplemented with a bit of seat of the pants decision making.

Let's Get Back to the Stimulus Bill

There are two problems which I have with the Stimulus Bill: 1) the situation which exists did not arise from any inherent lack of demand for goods. It had to do with the disastrous consequences which bad mortgages had on commercial banks, S&Ls and investment banks. These institutions had their balance sheets blown to crap and were unable to lend. Some were unable to survive. In a real sense it was the TARP Bill of last year and the facilities created by the Fed such as the Commercial Paper Funding Facility which addressed this problem. Demand is credit based and it was not the case that demand simply dried up but more the case that the credit which enabled demand dried up.

The problem was not classic or Keynesian but more about money supply. It was about liquidity and it was TARP and the unilateral interventions of the Fed with items such as the Commercial Paper Funding Facility which enabled credit to start flowing again.

The Stimulus Bill if it was based on Keynesian thought should have poured more money into infrastructure. But infrastructure takes time and politicians crafted this bill based not on any economic principles but more on a sort of mindless "If we spend money things will get better" thought. The problem is that the political process give little consideration to wisely spending this money but a lot of consideration to the politics.

There were at least two alternatives: 1) tax cuts and 2) temporary investment tax credits which would have essentially gotten the Federal government and investors pushing in the same direction. To me the problem is that tax cuts seemed to much like a Bush thing and this was anathema to Congress and investment tax credits were simply not thought about enough.

The "Stimulus Bill" had too little infrastructure spending. It was about expansion of unemployment benefits, social welfare, education, health care and infrastructure. The bill did have substantial tax relief in the form of payroll tax credits and changes to AMT (Alternative Minimum Tax).

One might argue that infrastructure takes too long to see economic benefit and these other thing were more likely to get quick results.

Let me be clear that I am by no means judging the results of this bill by its effect on the economy to date. Very little of the money has been spent and even if more had been spent it would still be too early to see the results.

The Administration did a very good job of selling the bill but is cursed with the fact that the bill was poor and has not produced what the Administration promised. I do not believe that the public is going to accept the notion that since a bad $750 billion stimulus bill has no worked a "Son of Stimulus" will.

The reality, in my opinion, is that there is little more that fiscal policy can do at present. The ills of the economy are best fixed by the Fed. Also, the political process is unlikely to produce good results because politics works best when there is a coming together of opposing views. If one party controls the White House, the House and a supermajority in the Senate I believe that it is less likely that good ideas will surface. It makes no difference which party has control. The party in control may indeed be able to pass legislation which otherwise would not get passed but I see no way in which good fiscal policy can result when one party runs the show.

Suggesting that we need a "Son of Stimulus" when there are massive consequences from the energy tax bill and potential changes to health care is just foolish.

My advice, "Slow down, folks". It would also serve well to be more honest and realistic about the stimulus bill, the energy tax bill and health care. These are bills with mega-massive fiscal effects and being realistic about these effects is essential.

It would also be wise for the Administration and Congress to admit to the populace that their ability to stimulate the economy at the present time is minimal. But that is not something which is about the happen.

Nonetheless we would all be better off if more people realized that politicians do not create jobs. Jobs are created by a coming together of business, labor and capital.

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
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

The Energy Tax

Rate Watch #677 The Energy Tax
July 3, 2009
by Dick Lepre
dicklepre@rpm-mtg.com
www.loanmine.com

The Energy Tax

I want to apologize at the start for the somewhat disjointed nature of this piece. I want to get it out Thursday because of the Holiday and my wife was ill yesterday and I had to take her to the ER. She has asthma which triggered a respiratory infection. In any case, I started this and really did not have enough time to finish it as well as I could have. The ideas are all here but not pulled together as well as they could have been.
The House passed an energy tax bill last week which will probably be revised substantially by the Senate. As written by the House this bill is a bit bizarre. It starts from doubtful premises, increases taxes and threatens our trading partners with tariffs if they do not constrain emissions.
I am by no means convinced that man-made global warming is really significant. I wrote about this a few years ago and my views have not changed substantially. My newsletter of four years ago is here.

There is a Good Side to This

To me, the House Bill starts with the dubious proposition that there is an almost existential problem created by our production of CO2. I want to give another view. Since the start of the Industrial Revolution humans have vastly changed the face of the planet. This is done through farming, dam building, creation of cities which are "urban heat islands", and we have created industries which spew stuff into the atmosphere and water. Our consciousness of this is much greater than ever before and our intentions are much better but getting the science correct is still vital.

Concluding that CO2 is the main culprit of the way mankind had reshaped the surface of the planet is a bit narrow. The reality is that this is complex. No one really knows how much man made CO2 has caused temperature increases. The science is simply too complex. I do want to make a very important point about science. Statements such as "most scientists believe that humans are responsible of global warming" or "IPCC concluded that they are 90% certain that global warming is due to man-made CO2" are not scientific. Science is not done by consensus. Any statement that something is 90% likely to be true is, by definition, not scientific. That does not mean that such an opinion is not of value. It only means that it is not science.

Just because a vast majority of scientists believe something does not make it scientific. Science is not the collective opinions of scientists. Science is a process of formulating theories and having them stand by having attempts to disprove them fail. Science rarely reached ultimate answers. It yields our best intellectual estimates of out understanding of the physical world at the present.

I certainly believe that CO2 is a greenhouse gas and causes increases in temperature. I am by no means convinced about the relative impact of man-made CO2 on temperature variations. My opinions are detailed in that piece from four years ago.

Even though I may not believe that anthropogenic global warming is a significant factor in explaining the multidecadenal changes in average temperature and even though I may be concerned about the consequences of the House Bill which also has some "this will never work" pieces decreeing that the US will tariff nations which do not follow suit the fact is that lurking here is the heart of a really good idea. Unfortunately the really good idea was lost.
That really good idea is clean energy independence. Contriving a method of encouraging a method for eliminating imported oil and eliminating shocks associated with energy produced by commodities with volatile prices is a good idea. If the cost of this energy is as low or lower than energy from fossil fuels that this becomes a great idea.

The history of our dependence on oil follows this form: oil prices rise, everyone gets upset, we start talking about alternatives, oil prices fall making alternatives too expensive, we give up on alternatives. The nice things about this very bad bill is that it potentially breaks this mold.

The two obvious present sources are nuclear and solar. While I, as a guy with a degree in Physics who has spent enough times at places like the Nevada Test Site am not afraid of dealing with rad waste I have no interest in spending time convincing others of this. We spent a ton of money developing a place in Nevada to store this and politicians have taken this apart.

A large part of the solution in the short run is solar photovoltaic (PV) power. The disadvantages of solar are that it is much more effective in Arizona than it is in Minnesota. Electrical power has losses when delivered over large distances. PV generates nothing at night. A dependence on PV likely will require more advanced methods of storing energy. The advantage of PV is that it makes use of a source of energy which will not vary in cost.
There is an article on a sort of Moore's Law for PV from IEEE. I would regard that as an optimistic view of the path of PV.
While one might make a case that this cap-and-trade system will help new technologies it would have made a lot more sense to me to simply help these new technologies rather that create more government infrastructure.

I believe that getting into the mind set that energy is a bad thing and we have to use less of it is nonsense. What I believe we need is more research in physics to find massively large new sources of energy which do not have any of the annoying environmental effects of coal or the rad waste storage problems or nuclear.

If I am going to be technical what we need is new sources of power. This is defined in physics which starts with arbitrary units of length, time and mass and goes on from there. Power = work/unit of time. Work = Force x distance (an oversimplification to make a point). Force can be defined by the unit of force called the newton. A newton is the amount of force necessary to accelerate a 1 kilogram object so that its speed increases by 1 meter/second each second.

To make this more casual: work is getting something done (moving a car), energy is the ability to do that work and power is the ability to do that work quickly.
What is lurking in the nether regions of my mind here is the following: we may find that there is nanotechnology which enables us to created macroscopic objects - let's call these "ham sandwiches" - but that these require a lot of energy. It is only breakthroughs in physics which will give us access to these energies. The only such thing out there at present is controlled fusion. This is research which has been going on a very long time. The hope is that the NIF facility here in Livermore will lead to the long sought breakthrough. All of the NIF lasers were fired up in May and the hope is that this machine can achieve fusion in 2010.

It is interesting and rarely discussed that NIF just happens to be at what was one of out two nuclear weapons research facilities - Lawrence Livermore Laboratory. In the 1970's and 1980's there were underground nuclear test done using the basic concepts which NIF seeks to use. That all stopped when testing ceased in 1988.

To me, as someone who used to work there, the amusing part of the NIF story is that is was pitched as "stockpile stewardship". "Stockpile stewardship" more or less means methodologies of testing nuclear weapons so that we are sure they still work after years of storage rather than having underground nuclear test which we agreed by treaty not to do.

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