The demand for mortgages declined. Bernanke’s exit strategy shows lack of confidence. I wish Treasury Secretary Geithner had an exit strategy as well. We are not out of the woods when it comes to mortgage defaults and foreclosures.
The Mortgage Bankers Association's index for mortgage applications declined 1.2% last week for both purchase and refinance loans. My take on this is that homeowners and prospective homeowners are getting skeptical about the heavy reliance on the government modification programs, and the risk that neighbors are considering “strategic” foreclosures.
A future drag on mortgage rates is expected to occur when the Fed’s purchase program for Fannie (FNM) and Freddie (FRE) debt and mortgages ends at the end of March.
Another issue is a renewed home price decline, which is necessary to handle an expected increase in defaults and foreclosures as 2010 continues. With one in five homeowners underwater, the situation on Main Street could deteriorate further.
I had hoped that Bernanke’s exit strategy was for the Fed Chief to get on a helicopter back to Princeton, but we are stuck with his foolish Fed policy for another four years. It appears that we may be stuck with a zero percent funds rate for most of his second term, when the rate should never have been pushed below 3%. Bernanke shows a lack of confidence in his own policy choices and needed to be replaced. I guess Main Street USA has to have its fingers crossed for another four years.
Treasury Secretary Geithner claims that the Financial Stability Plan put into place a year ago has worked to restore economic growth and financial stability. The plan addressed four problems that have not necessarily been resolved - sure the credit markets are not frozen, zero percent rates helped that. Weakening bank capital has improved from TARP payments and trading profits on the dollar carry trade.
Troubled toxic mortgage assets were pushed off balance sheet, but they will return in worse shape than when they were hidden in off balance sheet trusts. Falling home prices stabilized, but another down trend will occur since Main Street was left out of the Wall Street bailout.
Geithner tells us that TARP has a “get out of debt” free card given the adoption of the Financial Responsibility Fee that is paid by those “too big to fail” banks whom just paid back TARP.
The Treasury Secretary ignores the unlimited bailout of Fannie and Freddie, which alone will exceed the $400 billion commitment by the amount of losses for the next thirteen quarters.
Yet even Geithner’s upbeat view has an out-clause saying, “the financial system is healing, but still damaged, and we have a lot of repair work still ahead.”
Propublica.org shows $629 billion allocated as promised to 771 companies and 11 programs.
Foreclosures were down in January, but stability is fragile as US homeowners facing foreclosure increased 15% YOY in January. But according to Realty Trac the number was down 10% sequentially to 315,000. Banks repossessed 87,000 homes, down 5% sequentially, but up 31% YOY.
Don’t cheer this as a sign of a housing bottom as a record 2.8 million homeowners faced foreclosure in 2009, and the number is expected to rise to between 3 and 3.5 million in 2010. This puts downward pressure on home prices and reduces property taxes, which hurts the coffers of state and local governments. Federal mortgage modification programs have failed to stop this troubling trend.
The US Treasury auctions $16 billion in 30-year bonds this afternoon following the C- grade for Wednesday’s 10-year auction. My semiannual support is 4.823 with a weekly pivot at 4.629, and semiannual resistance at 4.543. The 10-year is cheaper than its risk aversion yield of 3.675.
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The daily chart for the Dow shifts to positive on a close today above 10,093. My daily and weekly pivots are 10,113 and 10,144 with my annual pivot at 10,379. Friday’s low remains support at 9,835. Above is the negative 21-day and 50-day cross-over as shown on the chart.
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Disclosure: No Positions
