America is a great country, but... Over the weekend I was talking to my two kids about not spending more money than you have. "Neither one of you makes much money, so you shouldn't go out and buy stuff that you can't afford - talk to your grandparents who lived through the Depression." No sooner do I finish my lecture when an ad comes on the TV. "Do you have more credit card debt than you can afford? Eliminate that debt - don't let the credit card companies gang up on you! Settle those debts for pennies on the dollar..." What are we teaching our kids? And when did "credit card companies" become the bad guys?
How much debt did we, or do we, have? The Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income. This is much higher than the "usual" 100% that is more typical! As debtors default, it causes losses at banks, more foreclosures, trouble for neighborhoods, etc. Will the government programs, such as the "Making Home Affordable" program, convince people to pay their debts instead of defaulting? Stay tuned...
Enough ranting, since we have our hands full with rates moving up, the stock market moving down, and we have a busy week ahead of us. We had plenty of re-pricing for the worse on Monday. The stock markets were also worse, similar to the action that we saw in both markets on Friday. Who says that they both always move in opposite directions? We continue with more third quarter company results this week, and key economic data. The Treasury will be selling $116 billion in 2, 5, and 7-year notes, as well as 5-year inflation protection notes. Mortgage rates will follow Treasury rates higher if the auctions are soft.
Yesterday's TIPS auction (Treasury Inflation Protected Securities) went very well and still rates worsened. The worry about this week's sales is the massive size. For example, today is $44 billion of 2-yr notes. The only news out today is the S&P Case-Shiller Home Price Index and the 7AM PST Consumer Confidence number. And ahead of those numbers, and the 2-yr auction, we're seeing a slight rebound in prices with the 5-yr and mortgages better by about .125 and the 10-yr at 3.53%.
Not only have rates slid up, but the latest thinking on the tax credit for anyone who hasn't bought a home in three years is that it will be phased out. Bloomberg published a story that ISI Group (I don't know exactly who they are, but they are important enough to be quote in a Bloomberg story) thinks the tax credit will be phased out. "There could be an agreement reached as early today on the Reid/Baucus amendment that would phase out the home buyer tax credit," ISI analysts said in the note. Of course advocates would like to see the program extended and maybe have the credit expanded to $15,000. (I tried arranging for my 15-yr old to qualify, but there was a reporter waiting at the broker's office so I chickened out.) But really, in order for the economy to stabilize don't home prices have to settle on more normal levels that are supported by normal financing?
On the other hand, an opinion piece in the Washington Post this morning states that Congress and the administration "seem likely to extend the first-time home-buyer credit". "Senate Majority Leader Harry M. Reid wants to extend it through December 2010 but phase out the amount over time; Republican Senator Johnny Isakson, a former real estate agent, wants to extend it through June but double the income limit and make it available to all home buyers."
If you are an investor, would you rather own more securities backed by FHA & VA loans (Ginnie's) or conventional loans (Freddie & Fannie)? Our government has been buying mostly securities backed by conventional loans. As it turns out, analysts are pointing out the "Ginnie Mae Buyout Option". The overall serious delinquency levels in GNMA's are above the threshold levels for some servicers and more FHA/VA loans going delinquent every month. In addition, not buying out an FHA insured delinquent loan from a premium coupon pool is a massive negative carry trade for servicers. Thus, we should continue to see elevated levels of buyout related speeds in GNMAs for the next several months - which help account for the popularity of conventional securities.
SunTrust revised their minimum credit score requirements for traditionally underwritten loans, following Fannie Mae. (The minimum credit score requirements for DU and LP processed transactions remain unchanged.) After the 30th, their clients will see cash-out refinance FICO score requirements rise slightly.
GMAC came out with some changes to their manufactured housing eligibility for FHA loans. Specifically, GMAC states that manufactured homes will not be eligible for cash out refinances, streamline refinance deals without an appraisal, non-credit qualifying streamline refinance loans, and properties that are secured by leasehold estates.
Two old guys, one 80 and one 87, were sitting on their usual park bench one morning.
The 87 year old had just finished his morning jog and wasn't even short of breath.
The 80 year old was amazed at his friend's stamina and asked him what he did to have so much energy.
The 87 year old said, "Well, I eat rye bread every day. It keeps your energy level high and you'll have great stamina with the ladies."
So, on the way home, the 80 year old stops at the bakery. As he was looking around, the lady asked if he needed any help.
He said, "Do you have any Rye bread?"
She said, "Yes, there's a whole shelf of it. Would you like some?"
He said, "I want 5 loaves."
She said, "My goodness, 5 loaves ...... by the time you get to the 5th loaf, it'll be hard."
He replied, "I can't believe it, everybody knows about this stuff except me!"