Today's Yellow Shoot: The MBA Mortgage Report

As the bringer of doom, gloom and potential yellow shoots, I eagerly await an economic report for the first time in ages. The last 3 months of reports have been meaningless; all I know is when it's bad news ignore it (it's backwards looking anyway), buy stocks. And when it's better than expected, it is no longer backwards looking... and you should buy stocks. As gas prices surge higher, I buy consumer discretionary stocks. When interest rates jump, I buy consumer discretionary stocks. Notice the theme? Just buy stocks.

But today I wave a potential yellow shoot - the weekly MBA mortgage report.

We've spoken at length in multiple posts about the Ben Bernanke manipulation... err, assistance to interest rates and summarized late last week in [May 29: Bloomberg - Bernanke Bid to Lift Housing Scuttled by Housing Rates]. As we've discussed in the charter for the Federal Reserve it clearly states their job is to push rates to a level that makes no sense so an indebted nation can continue bad behavior and we can keep home prices at incorrect levels with easy money policies. You think I am being facetious - it is right there in Article X Section 4.2 with this picture just above it. Easy to find...

Before I get to the meat of this post, let me share a chuckle with you. Yesterday green shoots were seen all over the stock-based internets (and financial entertainment TeeVee) based on a "better than expected" housing number. So let me give you a backdrop so we can put our situation in perspective

1. Billions upon billions have been thrown at the mortgage market by the Federal Reserve to suppress the mortgage rate to a level below 5%.
2. Billions upon billions have been thrown at the housing market by the federal government, with such proposals as offering $8000, not just as a tax credit to first time home buyers, but indeed now as a handout to buyers to use as their down payment... i.e. opening the housing market to just about anyone who can make a monthly payment. [May 13, 2008: Tax Credit as Mortgage Down Payment Now Official Federal Government Policy].
3. After denying that home prices could EVER fall nationally, the same pundits who showed their face on TV month after month now speak of green shoots as home prices in many regions have fallen 30-40% versus a year ago time frame. And we're down to 2002 pricing in many markets.
4. 50% of all sales nationally are now foreclosures... most of which are much heavier discounted than the 30-40% "natural" price drop listed in point 3.
5. We are in the heart of home selling season - late spring/early summer.
6. Home affordability measures (some convoluted measure of median income vs prices vs mortgage rates) are at the 2nd highest EVER after only January of 2009.

With all 6 of those points combined, and with literally hundreds of billions thrown at the problem, what growth did we see in pending home sales versus a year ago when prices were much higher, foreclosures were a fraction of sales, interest rates were somewhat normal and tax credits...err down payments were not being handed out like candy? Wait for it... a 3.2% year over year increase. Wow.... overwhelming.

Exhale. This is where you say "green shoots!". I gave you never-seen levels of mortgage rates courtesy of billions of new obligations to your grandchildren, an $8000 handout (courtesy of those same grandchildren) so first time buyers can walk into a home with nothing down, 30-40% drops in prices in many of the largest markets in America, 2002-2003 pricing in many markets, 50%+ price discounts in foreclosed homes... and you give me 3.3% year over year increase? Kool Aid.

Wow, just imagine a world without $8000 handouts, interest rates at still historically low 6%, and 'stable' home prices. Fuchsia shoots.

Folks this is not to say home sales will never rise, in fact I'm posting the stories that show some "positive" signs ... I am just making a point. Obviously lower prices = more demand. [May 7, 2009: Where Home Prices Crashed Early, Signs of Rebound & More Homes Get Multiple Bids] [Mar 28, 2009: Some Real Estate Markets Warming Up] That's economics 101 - but why are we wasting money to stop us from going where we are going to go anyhow. [Dec 8, 2008: More than Half of Homeowners with Modified Loans are Back in Trouble] We literally are stealing from the future to subsidize now, and yes it will work to some degree on the margin. As we've been saying we only look at the benefit (today) and no one cares about the costs (tomorrow) - that's for another generation to bear. It's all good... look what's under shell A, not under shell B.

So while most of these day to day reports are just knee jerk reactions for lemming nation, I actually will be interested in this week's report out in a few hours. It might not capture all of the jump in mortgage rates from upper 4%s to lower 5%s, since much of it happened late in the week, but let's indeed see how much of this magic in the refinance market gets stifled, and if there is any effect on new home mortgage applications.

Just remember, if the news is bad - summarily dismiss it and get busy buying stocks- because higher energy prices and higher interest rates can be easily absorbed by this roaring US consumer. Even though those were the 2 main tenets of why we were going to recover (but that was last quarter's thesis, we're onto a new thesis - China will save us).

A few fun stories.

Remember how we've been saying for nearly a year now the master plan is to move the losses from the private sector, esp. banking and onto the public's balance sheet? We've been saying that since Bear Stearns, through Fannie, Freddie and that was just the beginning. The losses can be suffered there in dark closets... quietly, instead of on public corporations' balance sheets. Since only geeks look at the Federal Reserve it's a great place to hide it.

Well folks, your grandchildren already took a $5 Billion hit (on paper) in just a few months on the Federal Reserve's waste of money to suppress interest rates in the mortgage market. And we're just truly getting started. Thankfully the Federal Reserve is doing the same 'magic' as our banks - they are not marking to market. (that's how we "fixed" a good portion of our banking problems... lying about what we are holding).

The laughable excuse is if you never sell the bond then the losses don't need to be marked. Or to put it in parallel terms: it's as if you bought Citigroup at $30 and now it's $5 or whatever it is... as long as you don't sell, it's not a loss! It's still worth $30 on your balance sheet. That's our current 'accounting' for losses; because as we have seen already and in the years to come, people who walk away from mortgages defaulting, usually come back to pay them say 15 years later... Yep.

Via WSJ

• The U.S. Federal Reserve's program to keep mortgage rates low by buying securities and Treasury bonds so far has been costly and seems to be having a fleeting impact. An analysis of the timing of the Fed's purchases of mortgage-backed securities by J.P. Morgan Chase & Co. shows the Fed is "under water" on its portfolio by about 1%, and it would have to take about $5 billion in losses if it were to mark its portfolio to the market. (nice work! that was quick!)
• Since last autumn, the Fed has purchased more than $480 billion, out of an allowance of $1.25 trillion, in mortgage-backed securities and more than $130 billion, of $300 billion, in Treasury bonds to help keep mortgage rates low. (let's focus on the mortgage backed securities because clearly the Treasury bonds are "AAA" rated - backed by full faith and credit of an empty storehouse that is the US national savings - so we've wasted... err, invested half a trillion on MBS - why again?)
• Keeping rates low lets people refinance their mortgages to reduce payments and stay in their homes. It also encourages them to consider snapping up bargains in the still-ailing housing market. (aha! as the Federal Reserve charter says is the central bank's job - inflating assets to create prosperity and encourage the American consumer to 'shop')
• Many analysts believe the Fed plans to hold these securities until they mature in 10 years or so, with no plans to sell them into the market, so the losses will probably never be realized. (remember, if you don't sell AIG for 10 years, you did not lose a penny on the stock - just use bank [central or otherwise] accounting and whatever price you bought AIG for is still what it is today - so forget about the $5 billion in losses suffered in short order)
• The central bank owns the majority of securities sold in 2009, with interest payments of 4%, 4.5% and 5%, according to J.P. Morgan's research. As interest rates rise, the value of these securities falls because new bonds are backed with higher-interest mortgage loans and thus pay higher coupons. (so if you are a long term bear on bonds, which I know many of my readers are, you can imagine the losses to come as interest rates 'normalize' to 6%+ in the years to come. But again, as long as you never sell a bond apparently you never suffer a real loss. Hmm, why am I bothering with equities when I can buy bonds and never lose? What's that? Oh, it's a fantasy? Hmmm...)
• The Fed has spent about $2,500 per borrower, by J.P. Morgan's analysis -- more than it costs a typical mortgage borrower to refinance their debt. ($2500 here, $8000 there - it's ok, the grandkids are good for it. Subsidizing people to stay in homes, many of which they overpaid for, and borrowed from through serial refinancing - instead of being renters is the right thing and our grandchildren will understand this. Once they are born)
• The Fed's purchases have enabled about two million borrowers to refinance who otherwise wouldn't have been able to, J.P. Morgan estimates. ("creating a permanent house ATM so people don't have to actually save money via old fashioned methods", bylaw 14.2 of Fed charter)

But in the end all we are doing is buying time. And folks, time is mighty expensive... in this case it's already cost $620 trillion. But the Fed's balance sheet is theoretically unlimited, as are your grandchildren's obligations. So we can play this game for a long time if we wish - just stalling what will happen one way or the other.

• "The Fed's purchases have had only a transitory impact," said Thomas Atteberry, a partner and portfolio manager at First Pacific Advisors LLC.

• Last week, the average 30-year mortgage rate rose from about 5% to at least 5.25%, by most estimates, reaching as high as 5.5% for some lenders late in the week. Earlier this year, it was steady around 4.8%. Its recent peak was 6.5% last autumn.
• "If mortgage rates remain at this level, refinancing activity will have dropped by half within two weeks," said Mahesh Swaminathan, an analyst at Credit Suisse. (gasp!)
• Some prospective buyers may have qualified for a certain loan at 5%, but won’t qualify at 5.5% because the higher mortgage payments may push their debt-to-income ratios above qualifying levels.
• Rates at 5.5% would normally be considered quite low. (They stood at 6.5% last October.) But consumers have grown used to rates being at or below 5% over the past few months. “The rug has been pulled out from people,” says Michael Menatian, a mortgage banker in West Hartford, Conn.

The horror of it all... mortgage rates at 5.25%. How will this country go on?

Even as we waste hundreds of billions of money we don't actually have, people are still going delinquent at maddening rates... I reinforce for newer readers that what we've just exited is not the normal housing bust. That is the next phase - people losing homes due to job losses and recession. What we've experienced thus far is the new phase of a housing cycle: the "ridiculous mortgage" housing bust.

• Credit-report provider TransUnion.com said the number of borrowers at least two months behind on their mortgage rose for the ninth quarter in a row, hitting 5.22%. (keep in mind we have $75 Billion in yet another program to refinance people helping to keep this number lower than it would be - kids, we've got programs out the wazoo... and bankers laughing on beaches across the globe they got away with this) [May 3: What the Fed (WTF)? I Want by 1% Mortgage]
• The first-quarter national average is 14% higher than the fourth-quarter average and is up 62% from a year earlier, when the average was 3.23%. TransUnion.com senior consultant Keith Carson called the sequential increase "troubling." The current downturn's quarterly delinquency-growth rate is nearly double that seen during 2001's recession. (because that was a just a "recession" housing bust, not a "bad loan" housing bust)

And to finish I want to reinforce one more point... if you buy a home now you are buying an asset inflated (our national ethos) by historically low rates. So when rates return to "non manipulated" levels, home prices will have another leg down. As affordability will take a step backward. But that's behind shell Z so don't worry about it.

• Lower mortgage rates had made homes even more affordable at a time when prices have been falling, but higher rates could offset some of that affordability. Each 0.10 percentage point increase in mortgage rates is equivalent to a 1% rise in home prices, according to estimates from Credit Suisse. That means if higher rates stick, they could push down demand and send prices even lower.

So let's see if just one half week of increases in mortgage rates have any sort of strong sway on the weekly applications or if I'm just trying to create a semi-glossy yellow shoot.

In conclusion:

Ignore everything above except for the "better than expected pending sales". Green shoots. Buy stocks. The American consumer is back. Grandchildren are cool to steal from.

[May 16, 2009: WSJ - Housing Rescue Plan Now Includes Short Sales]

[Apr 23, 2009: As More Homes Fall Underwater Trapped Americans Cannot Migrate]

[Apr 8, 2009: Recession Causes Relatives to Move in Together & Sharp Drop Off in Divorces. Housing Bubble 2.0? (Not)]

[Dec 8, 2007: Analysis - What Should Housing Prices Be Today?]

Comments

[Fitz919:]

Greenspan's comment today went something like this: "The risk of a system wide financial breakdown is unavoidable. Do not count on the ability of regulators to forecast the future, because they cannot, at least not accurately."

My translation:

"The Risk Inherent In Our Financial System Is Unavoidable. Don't Trust Government Forecasts That Say The Recovery Will Happen In The Second Half of 2009."

I remember Greenspan about 2 years ago saying we have a 50/50 chance of Recession.

Guess what?

Greenspan is right again.

Jun 03 06:38 PM

[Prudent Man...:]

On Jun 03 06:38 PM Fitz919 wrote:

> Greenspan's comment today went something like this: "The risk of
> a system wide financial breakdown is unavoidable. Do not count on
> the ability of regulators to forecast the future, because they cannot,
> at least not accurately."
>
> My translation:
>
> "The Risk Inherent In Our Financial System Is Unavoidable. Don't
> Trust Government Forecasts That Say The Recovery Will Happen In The
> Second Half of 2009."
>
> I remember Greenspan about 2 years ago saying we have a 50/50 chance
> of Recession.
>
> Guess what?
>
> Greenspan is right again.

Greenspan's methodology for economic analysis is flipping a coin. Like a stopped clock he is correct twice a day. If he would have spoke up during the housing bubble when he had the authority and power to do something about it he would have a modicum of credibility with me.

Jun 03 07:58 PM

[traden4alpha:]

Thanks for another nice article.

Delinquencies are both a lagging and leading indicator in this mess. Delinquencies lag because they tend to occur some months AFTER unemployment or some other damaging event for the home owner. As long as unemployment is high and growing, delinquencies will be high and growing some months later. But delinquencies are also a leading indicator in that delinquencies lead to foreclosures, distressed property sales, further housing price declines, additional damage to banks' balance sheets, and further tightening of credit (either due to banks' capital limitations or due to banks' tightening of lending criteria). This positive feedback loop will take a very long time to halt, especially given other delinquency-inducing factors such as ongoing mortgage resets and people who are forced to migrate but who can't sell underwater homes.

I doubt the Fed can wrangle long-term rates for that much longer. At some point, agency bond investors will bail and the Fed will be forced to buy a rather large amount of agency debt and T-bills. Rates will rise and further crimp home buying.

Jun 03 08:45 PM

[John Galt:]

You make good points. The government throwing the entire kitchen sink at the problem and when one stupid statistic goes up a tiny bit "HEY LOOK, we got our desired result", so now you the investor is supposed to jump in and buy banks and have "restored confidence" at your local mall. They are trying to engineer YOU the investor into a desired outcome and the best part is that they are trying to manipulate the market with you and your grand kids tax dollars. And for what you ask?

The good thing about economics is that " there is always round 2". If you are going to try and squeeze a balloon, yeah it might get smaller where you squeeze it, but the other side inflates. If you set a price ceiling on gas, then guess what, people pay with their time in gas lines when we have shortages.

The government throwing all that money at the "problem" will have consequences, and people WILL have to pay.

In reality all this TIME means that we will have a longer slower drawn out real estate bursting much like the one Japan faced for oh, the last 20 years. Prices might not go down for more than a couple of years but do you think Real Estate will go back to the huge 15-20 percent price appreciation per year?

Who the hell has the money for a 20% down payment in these major cities? 300k for a town house, show me the young people who have 60 grand saved up to buy the place? I'd say to show me some people in their late 20's early 30's with NO Debt and they are ahead of the game nevermind having 60 grand to throw down to buy a town home...

When this is over the paradigm will shift, people will no longer look at a home as an "investment" but a place to live. I still have people ( that aren't rich by the way) asking me if real estate bottomed and if they should try and buy and investment property? What???

$

Jun 03 10:58 PM

[PastTense:]

"the number of borrowers at least two months behind on their mortgage rose for the ninth quarter in a row, hitting 5.22%"

Well, actually it often makes economic sense for people who could afford to be current with their payments to get behind on their mortgage: this is because the banks and the government programs only do the mortgage modifications (the reduced interest rates, etc which save homeowners tens of thousands of dollars) for those behind on their mortgages.

Jun 04 12:19 AM

[Fighting Yoda:]

Bond investors have already fled from the mortgage market; sovereigns do not even buy GSE debt. Everyone is sticking to treasuries, and even treasuries are falling.

I will just stick with Peter Schiff's recent forecast of "another 37% drop in the housing market."

It is not yellow shoots, it is deadly yellow weeds that are being watered by the market.

Jun 04 01:00 AM

[Roger Knights:]

"we only look at the benefit (today) and no one cares about the costs (tomorrow) - that's for another generation to bear."

Manaña republic.

Jun 04 02:12 AM

[Roger Knights:]

Oops--make that: Mañana republic.

Jun 04 02:18 AM

[2houndz:]

John Mauldin points out in this week's column that Fitch estimates that 75% of the people getting the Obama mortgage relief program will be in default anyway in just a few months. Remember that the program is supposed to lower mortgage payments to 31% of household income, which is historically a sensible number, so this failure rate doesn't make sense, right?
John called Fitch and they said that no one is taking into acount the enormous amount of debt in these households OTHER THAN the mortgage. Apparently their research shows that with credit card debt, car loans, 2nd mortgages and so forth, this new program will not save 3/4 of the recipients. More money shot down the rathole directly to the bankers thanks to those benevolent grandchildren.

Jun 04 08:48 AM

[TraderMark:]

thanks for that info.

It is wasted money. If 1 in 3 people are saved, 2 of 3 people will default. I dont know of any investment where that is good odds but these are politicians who are playing with other people's money so why do they care?


On Jun 04 08:48 AM 2houndz wrote:

> John Mauldin points out in this week's column that Fitch estimates
> that 75% of the people getting the Obama mortgage relief program
> will be in default anyway in just a few months. Remember that the
> program is supposed to lower mortgage payments to 31% of household
> income, which is historically a sensible number, so this failure
> rate doesn't make sense, right?
> John called Fitch and they said that no one is taking into acount
> the enormous amount of debt in these households OTHER THAN the mortgage.
> Apparently their research shows that with credit card debt, car loans,
> 2nd mortgages and so forth, this new program will not save 3/4 of
> the recipients. More money shot down the rathole directly to the
> bankers thanks to those benevolent grandchildren.

Jun 04 11:28 AM

[John Wake:]

Minor correction on the $8,000. It is indeed a "first-time homebuyer" program, can't have owned a home in previous 36 months.

It turns out that the $8,000 can NOT be used for the down payment, although a HUD official previously announced otherwise. I guess they thought better of the idea.

Nevertheless, last Friday HUD announced it would allow FHA-approved lenders to create bridge loans to buyers who qualify for the $8,000 and the bridge loans can pay for closing costs but can NOT pay for any of the 3.5% minimum down payment required on FHA loans.

Jun 04 12:59 PM

[TraderMark:]

It was the HUD head honcho
and there was a press release

do you have a source showing a retraction? A lot of the states are already doing it, so this was just a federal standard of approval. I'd love to see the retraction if it exists! Thanks


On Jun 04 12:59 PM John Wake wrote:

> Minor correction on the $8,000. It is indeed a "first-time homebuyer"
> program, can't have owned a home in previous 36 months.
>
> It turns out that the $8,000 can NOT be used for the down payment,
> although a HUD official previously announced otherwise. I guess
> they thought better of the idea.
>
> Nevertheless, last Friday HUD announced it would allow FHA-approved
> lenders to create bridge loans to buyers who qualify for the $8,000
> and the bridge loans can pay for closing costs but can NOT pay for
> any of the 3.5% minimum down payment required on FHA loans.

Jun 04 04:05 PM

[TraderMark:]

(May 12, 2009) Shaun Donovan, secretary of the U.S. Department of Housing and Urban Development, said that the Federal Housing Administration is going to permit its lenders to allow homeowners to use the $8,000 tax credit as a downpayment.


On Jun 04 12:59 PM John Wake wrote:


>
> It turns out that the $8,000 can NOT be used for the down payment,
> although a HUD official previously announced otherwise. I guess
> they thought better of the idea.
>
>

Jun 04 04:06 PM

[Whippet:]

Did anyone read the countless studies about the moral hazard of having no skin in the game when buying a home??? This is nothing more than another underhanded attempt at wealth redistribution. More gasoline on the fire. I like Roger Knights's phrase- manana republic.

And Mark- I believe the increase on the Fed balance sheet due to QE is $5 Trillion, not Billion. You need scientific notation to discuss government spending numbers anymore...


On Jun 04 04:06 PM TraderMark wrote:

> (May 12, 2009) Shaun Donovan, secretary of the U.S. Department of
> Housing and Urban Development, said that the Federal Housing Administration
> is going to permit its lenders to allow homeowners to use the $8,000
> tax credit as a downpayment.
>

Jun 04 04:21 PM

[TheSnail:]

Hey Mark,

Rich in Oak Park Michigan.

I just got approved for a conventional mortgage at Capital Mortgage Funding on Twelve mile. They are not participating in this, even if it is possible.

Jun 04 04:22 PM

[T.Geiger:]

I would suggest that future generations will not benefit from the wealth that would have otherwise been created had not the government & the fed spent and monetized as they have. Future generations will not pay for the spending, we are paying for it now...

Government spending displaces private spending. Consider www.thefreemanonline.o.../

Jun 04 04:25 PM

[dcb:]

knw you are smarter than me, so call it what it is. the willful destruction of the united states in order to bail out wall street by 1)maintaining artificially elevated housing prices so they don't have to make write offs 2) ensuring profits via the yield curve 3) allowing inflation to wipe away debt.

This way congress and the white house have someone to blame if things go wrong. there is no accountability. the legislative branch doesn't have to authorize more unpopular bailout money. the banking industry gets back what it paid for in lobby money. Unlimited never ending cash flows that make them richer, keep their bonus, and make us worse off. And we don't talk"socialist nationalization" which would have saved us money and time. Got to love the right wing proplaganda machine. Once more we have been convinced to back policies that harm us.

"We are america, the greatest country on earth, can't have that european sociialsim, slippery slope and one step away from communism". Never mind inflation, currency destruction, budget deficets for ever.

The idiot majority doesn't even see these things. They see the evils of "socialism". Anybody who tells me we aren't living through 1984 doesn't have a clue. Reality is perception, manipulate perception of the masses and you have created reality. It breaks down at the end, but as long as we keep falling for the same old lines each and every time we deserve what we get.

Let me add if you worked on wall street name a policy that our government has adopted that wouldn't be your wet dream. The fed policies essentially amount to an unlimted cash flow for ever until the country is destroyed. The tarp money we give goes to asset price purchases (stocks, commodities, etc) it aint going to lending.
would you lend your money out in this enviroment. I'd be buying commodities (which I'm sure they are). The worse part about it is that Bernanke will try to fix things by throwing more money at the problem. Does anyone wonder why I feel a popular uprisisng is justified against the united states government is justified?

The policy will break down the dollar, raise the price of goods again, in a setting of diminshed wages and savings, resulting in an inflationary recession. By that time every americans savings will be worth nothing.

Jun 04 04:57 PM

[History Buf...:]

So, Mark, if I can extrapolate correctly from your article, in a few years we will have:

No money
No jobs
No houses

and our children will have to pay for all the stuff we DON'T have.

I thought serfdom and slavery was abolished ... guess I was wrong.

Jun 04 05:07 PM

[Bill Zielinski:]

Awesome article; you put together a lot of data points to show what the real situation is.

Jun 04 05:36 PM

[Investing1:]

We just bought a home this week. It is just 9.6% of our monthly NET income and we put 32.4% down and qualified for a loan at 3.25% on a fixed 25 year ammo on a 5 year term. Yet, they are restricting us from only being able to pay off our mortgage by 15% more per year!!!!

We decided to step in after selling at the top of the market 2 years ago. For some reason they are giving homes away here, 1 block from a new canal district, 6 doors down from a new $120 M medical center, 6 doors the other way from the Detroit River water front and its miles and miles of walking and biking paths. 22 blocks from the new $100M engineering university and 24 blocks from the new 800M boarder crossing which is just 4 miles as the crow flies from a different new 1.2B boarder crossing.

We decided it was time to stop renting our condo and live like the common folks again. To celebrate our poorness, we made reservations for a vacation to unwind in Hawaii for a few weeks.

Now all I have to do is find an out of work home rennovation specialist and designer to gut the place and make it what we want.

Jun 05 02:21 AM