April Fools has come and gone as has Opening Day for the Mets and Yankees but yet one thing that remains the same is an origination friendly interest rate environment. The fact that we are sitting at a 1.83% 10yr while stocks are trading at all-time highs should make us all stand up and applaud. Something that A-Rod will not see in Yankee Stadium for a very long time. We all know how we got here with the recent turmoil in Europe but we all have to be encouraged that we are managing to stay here in-spite of some presence of doubt. We did get a domestic boost to lower bonds yields this morning with the release of the ADP report for March which was 42k below consensus @ +158k. There was a revision to Feb which showed an additional +39k but people like headlines so the market reaction is a little bullish for bonds and bearish for stocks. Either way I do not expect any additional focus on this report as the day goes on as all eyes start to turn to Friday’s NFP report for March.

The consensus for this is +193k with the unemployment rate remaining unchanged @ 7.7%. As we know this is always a big number but who knows anymore. Yes, it is a big market mover for that day and even the next few days thereafter. However, if you recall we did have a very strong number last month that brought the 10yr to a 2.06% close back on 3/8. Yet here we stand @ 1.83% a few days before the next report. A very impressive 23bps rally fueled by our grappa enhanced banker friends in Cyprus that were seriously investment challenged. So in-spite of a strong domestic employment report, we clearly see what investors are more concerned about. Well at least bond investors because we all know that stock investors shrugged off the Cyprus situation like it never happened. However this latest bond rally has been a little quiet in a way but still very impressive.

Some industry news…yesterday FNMA reported profits for 2012 at a robust $17.2 billion. Now if you think that is some serious scratch then you are correct. In fact, it is its first annual profit since 2006 and its largest profit EVER. Now they did lose a mere $166.6 billion between mid-2007 thru 2011 but let’s just let bygones be bygones. There are many angles to this story. One is how they have got their act together and now have figured out how to manage risk. Another about how the rebound in the housing market has been another big factor in the turnaround. All true. The storyline that will not get too much press is how they have raised this mysterious G-fee by about 20-25bps over the last few years which basically is the vig that they charge for the implied government guarantee. This 20-25bps translates to about 1.0-1.5pts in total execution which does indeed filter down to the borrower in the form of a higher interest rate.

Now no one is really up in arms over this because we are at or near all-time lows in interest rates thanks to the artificial stimulus of the Federal reserve(makes you wonder how “independent” these gov’t entities are when they all benefit from the same course of action…food for thought). So we are all under this influence of a free money high. But when you take a step back and realize how insane the cash infusion of the higher g-fee’s are for the agencies, is there any wonder why they are breaking profitability records?? While I do believe steps have been taken to prevent the agencies from losing another $100+ billion again, there should be limited praise in this “accomplishment” when you consider how much money they are clearing from the start (or as Andy Jr. likes to say from jump street). To me it is like praising Paris Hilton for being wealthy.

Last but not least we had the Weekly MBA Application Survey. It was down and here are the highlights:

• Applications were down 4.0%
• The Refinance Index was down 6.0%
• The Purchase Index was up 1% thanks to the boost in FHA applications due to borrowers trying to get in before the increase in FHA premiums were to take effect on 4/1
• The refinance share dropped to 74% from 75%
• ARMS stayed at a anemic 5%
• The average 30yr conventional rate was 3.76% w/.43pts
• The average 30yr FHA rate was 3.48% w/.38pts
• The average 15yr rate was 2.99% w/.36pts
• The average 5/1 ARM was 2.60% w/.32pts

There is really very little to report regarding the markets today. So while the bond markets prepare for an early start to the weekend @ 2:00, there seems to be a calm in the markets in-spite of the very tense situation going on in Cyprus as the banks reopen. The video of depositors waiting outside the bank is just a scary thought that is reminiscent of the scene from the movie “It’s a Wonderful Life”. So I certainly feel those people’s pain and angst. Hopefully the significant losses are isolated to the people who deserve the bad karma. In the meantime we seem to be on solid footing for today with the 10yr trading @ 1.85%.

However, we did have some mortgage news that hit the tape yesterday. The Federal Housing Finance Agency announced a new, simplified loan modification program for 90+ day’s delinquent borrowers that will run from July 1, 2013 to August 1, 2015. Here are the highlights of the program:

• The new program is designed to lower monthly payments for 90+ days delinquent borrowers and help keep borrowers from foreclosure without requiring financial or hardship documentation.
• Eligible borrowers must show willingness and ability to pay by making 3 on-time trail payments after which mortgages will be permanently modified.

Program will be available to:

• Borrowers with mortgages guaranteed by Fannie Mae or Freddie Mac only.
• Must be 90+ days to 24 months delinquent.
• LTV at least 80.
• Already modified loans are eligible if they have only been modified once before.
• Mortgages secured by second homes, investment properties are eligible.

Now this program does not go into effect until 7/1 so the big aggregators do have time to assess it. I do expect this to initially be a servicer/borrower transaction. However, it would not surprise me if some correspondent lenders start to offer it once the program gets established. The biggest obstacles for this to ever be offered thru the correspondent channels is the wording that “servicers will be required to offer eligible borrowers”. This does not clearly indicate any allowable involvement for a 3rd party. I am sure that this will be clarified in the weeks ahead.

With the markets closed tomorrow there will be no Update so I hope everyone has a Happy Easter or just a pleasant weekend.

(Image courtesy of Canadian Pacific/Flickr)

It is real hard sometimes to make sense of everything. The Dow reached another all-time high close yesterday which sounds great. And if taken separately to all else that would indicate that the world is humming along without a care in the world except the task of trying to figure out where to spend all this money that we are all making. However, once we look past this we see a very different picture. We see a very unsettling situation in Europe where the banks in Cyprus have been closed for over a week now on the concern of a run on the bank. There are thousands rioting in the streets to protest against a bailout deal that they fear will push their country into an economic slump and cost many their jobs. Italy still has a uncertain government and investors spoke to that by bidding poorly on the Italian 5yr note auction yesterday that yielded 3.65% which is their highest since October. Even worse was the bid to cover ratio of only 1.22%. A >2.00% is considered a good auction(US auctions tend to be in the 3.00% range). The bid to cover is the ratio of bids received vs. bids accepted. So if the ratio is <1.00% then the auction is oversubscribed which is a rare and very unpleasant event. At 1.22% that is pretty close and signals very poor demand for investors willing in put any more money into a tumultuous political situation.

So needless to say there are concerns about the EU’s ability to contain the newest wave of the uncertainty that comes with forced austerity measures and political unrest. On top of all this we have a 10yr now trading at 1.84% which does, to a degree, support the concerns of the EU as well as the shaky ground that the US economy is on which we all know is being artificially supported by Uncle Ben and his very big wallet.

So who the hell has this figured out correctly? About a month or so ago we sent out a very telling graph that showed the marked disconnection between the equity and bond markets. Well since then it has only gotten worse. In my humble opinion they are both wrong but explainable. They are explainable because they all have a common link…the Fed. It is very obvious that the financial markets would look quite different if not for all the quantitative easing of the Federal Reserve. Many believe stocks are inflated because of this and we all know that interest rates are low for this as well. So is the Fed creating 2 bubbles? There has always been a valid concern that they were creating a bond bubble but have they officially started to create a stock bubble?

I for one think this is very possible. I know that Bernanke has stated that he believes that all these QE measures are necessary and outweigh the risks. That is very easy to say right now because the world is experiencing a cash high but what happens when the bar closes and it is time to go home. Yes, you usually wake up in the late afternoon feeling like Lindsey Lohan. So who the hell am I to question the President of the Federal Reserve. I mean he is obviously more intelligent than most, if not all of us, right? My answer to that is I also remember the accolades that former Fed President Alan Greenspan once got until the shit hit the fan. Years after he was the poster boy for all that was good prior to the bursting of the housing bubble, Greenspan is now viewed as the chairman for the financial markets version of the Legion of Doom (he and Countrywide’s Angelo Mozilo may be co-chairmen). So the legacy of Bernanke has yet to be written and time will either view him as a genius financial navigator or as the architect of 2 devastating financial bubbles. I am a little old school when it comes to financial markets and do not believe in messing with the natural balance of buyers and sellers so take a guess how I think this game ends.

Last but not least we have the Weekly MBA Application Survey. Here are the highlights:

• Applications increased 7.7%
• The Refinance Index increased 8%
• The Purchase Index increased 7%
• The refinance share remained unchanged @ 75%
• The ARM share decreased to 5.0%
• The average 30yr conventional was 3.79% w/.44pts
• The average 30yr FHA was 3.51% w/.43pts
• The average 15yr was 3.02% w/.42pts
• The average 5/1 ARM was 2.58% w/.32pts

σας ευχαριστώ!! What the hell is that?? Well that translates to thank you in Greek. Some of you may have heard that over the weekend Cyprus (technically not Greece) began a bailout of 10 billion Euro’s that includes a very controversial tax on bank accounts. This is something that in the past was off limits. A word that I read this weekend was sacrosanct. Yes I had to look that one up but it is always nice to add a word to your personal dictionary. The initial proposal is a tax of 6.7% on deposits under 100,000 euro’s and 9.9% over 100,000 euro’s. 100,000’s euro’s is about $130k so you get the idea.

Imagine how the US would react if the government taxed our savings accounts!!?? Needless to say it would not be met with silence so you could imagine what is going on in Cyprus with the 1.1mm residents (not to mention overseas depositors). Yes there is a run on the banks as everyone is flocking to the atm’s to withdraw their cash. Not a pretty sight. There is talk of modifying this for the <100 euro’s but negotiations are ongoing. I do make a little light of this because it helps our markets and I need some material to write this Update. However, it is anything but funny to those folks and it just shows the scary end game to excessive government spending that you just hope and pray that our politicians are noticing.

To think it would not happen to us down the road is just an exercise in ignorance. Think about the American institutions that did collapse (Bear Sterns, Lehman Brothers, American Home…just kidding on that one) or would have collapsed if not for government intervention (FNMA, FHLMC, AIG, GM, Ford). So how are we better than the others?? Yes they are smaller but at the end of the day what separates us from the others is that we can print money thru the Federal Reserve thru its free money policies while these countries that are struggling who are part of the European Union must do what they need to do per the directions of the EU. At the end of the day debt that cannot be paid is problematic regardless if it is a mortgage payment, 10 billion Euro’s or $16.5 trillion.

Anyway this is giving the bond markets the unexpected jolt in the arm that is welcomed for us originators. So while I expected a modest range over the next few days leading up to the FOMC announcement on Wednesday @ 12:30, we did get reminded that when it comes to the financial markets you need to expect the unexpected. We are @ 1.95% on the 10yr as the flight-to-quality trade is back on for the moment. Equities are down but a relatively modest .25-.375% change. I do not think we are going to see a meaningful shift in the 10yr down to 1.85% but we should see some support in bonds until at least Wednesday’s FOMC announcement.

Today’s news that started over the weekend does remind everyone that the EU crisis is far from over. It might have been out of everyone’s minds for a few months as the US focus shifted to our ridiculous problems in Washington but this just reminds us of the magnitude of the EU problems and its impact on the global economy. Like I said I just hope our credit happy leaders in Washington are taking notes between political fundraisers.

(Image courtesy of Thetaxhaven/Flickr)

So here we are sitting at 1.93% on the 10yr. Since the gift from Italy early last week followed by the mandated budget cuts on 3/1, we got what I had hoped we would get which was a lower shift in the trading range. Remember that we were at 1.95%-2.03% for about a month and then with last week’s events I was expecting a shift down to 1.85%-1.95%. The good news is that we were right in that and managed to spend most of last week on the lower end of that range between 1.85%-1.88%. The bad news is that we are now at the higher end of that range at 1.93%. Now we did get a lot of locks so it did look like a lot of our originators were smart and took advantage of last week’s rally. And if you did not lock then you really have to wonder how much higher stocks will go from record highs. Hopefully a little sanity sets in and we see a pullback which will help the bond markets. Would you put money into stocks at this level??

Part of this week’s cooling in the bond markets is that stocks have caught fire again. Now the fire never really went out but the ambers did cool a little bit. Once it became apparent that a 5%-10% correction was not going to happen, it was game back on. As a result we did hit a record high close yesterday on the Dow which was set back on October 2007. So for all those folks that lost over 50% of their investments back in March ’09, it took you 4 stomach wrenching years to get back to your investment highs( fyi…the ‘real” stock market highs were 13yrs ago once you account for inflation).

So with all this hoopla in the stock markets, it obviously took some of the buyers out of the bond markets. Yes, this is a very predictable pattern. Now we are down today for non-equity reasons. The ADP report, which we all know is the precursor to this Friday’s NFP report, came in better than expected. The consensus for Feb was +170k and it came in at +198k. Also there was an upward revision in Jan from +192k to +215k. But all this can change in 48hrs once Friday’s report comes out at 8:30.

To make matters a little bit worse today we are seeing weakness in mortgages. This very well could be the result of the strong MBA Weekly Application Survey that showed a marked improvement which adds to the markets supply. Here are the highlights:

• Mortgage applications increased 14.8% although I do not see how the MBA did not report it higher given the below info. Probably just rounding.
• The Refinance Index was up 15% and is at its highest level since mid-Jan
• The Purchase Index was up 15% and is at its highest level since the beginning of Feb
• The refinance share remained unchanged at 77%
• The conforming 30yr rate was at 3.70% w/.39pts
• The FHA 30yr rate was at 3.47% w/.33pts
• The 15yr rate was at 2.96% w/.36pts
• The 5/1 Arm rate was at 2.55% w/.37pts

Last but not least we did have some mortgage news out of Washington where Ed DeMarco, the director of the Federal Housing Finance Agency (FHFA), said the agency would begin forming a new company that would consolidate some of the back-office functions currently replicated individually by FNMA and FHLMC. The new company would have its own board and chief executive. It would be jointly owned by FNMA and FHLMC. This is viewed as an initial step to getting private capital into the mortgage market. There is a lot of skepticism about this eventual plan that lawmakers are pushing so the current impact on the mortgage market is minimal.