Tuesday, April 30, 2013

Today's links

1---U.S. Stocks Fall as Business Activity Unexpectedly Drops, Bloomberg

Business activity in the U.S. unexpectedly shrank in April for the first time in more than three years, a sign manufacturing may be a smaller contributor to economic growth this quarter. The MNI Chicago Report’s business barometer fell to 49 in April, the lowest since September 2009, from 52.4 last month. A reading less than 50 signals contraction...

Earnings season has been OK, but it’s not like it’s growing strongly,” Brad Thompson, director of research at Frost Investment Advisors LLC in San Antonio, Texas, said in a phone interview. His firm manages $9 billion.

2---Congressional Democrats Pushing Back Against Obama’s Austerity Budget, Firedog Lake

3---Consumer agency risks credibility on new ruling, Firedog Lake

the “qualified mortgage,” set by the CFPB, and the “qualified residential mortgage,” set by a different committee of regulators. This short primer from the Virginia Association of Realtors explains the difference.
The standard for QMs is fairly broad: A lender must ensure that any borrower has the ability to repay the loan. (There are nine standards that determine this.)
Just about every loan is going to be a QM — there are legal penalties for banks that write loans that don’t meet the standards. And by meeting the standards, lenders are shielded from some liability. (Borrowers won’t be able to say “The bank should have known I couldn’t pay.”)
QRMs, on the other hand, are a subset those loans. They have to meet stricter standards — standards that still haven’t been determined, and could include the infamous 20%-down requirement.
 Banks and other lenders are free to make non-QRM loans, but there are discouragements. For one, the lender could only sell 95% of the loan to the secondary mortgage market; it would have to keep 5% on its books as “skin in the game.”
More importantly, neither Fannie Mae nor Freddie Mac will buy any part of a non-QRM loan. Considering they own 90+ percent of the secondary mortgage market, that means it will be pretty hard for any lender to sell a loan that doesn’t meet QRM standards.
The part I highlighted the blockquote is pretty revealing. The industry assumed last year that lenders would get a shield from liability on qualified mortgages. But the statute always granted an undefined set of protections from liability, presumably just on the concept of ability to repay, as stated above.
But there’s no real reason to provide this gift to the mortgage industry for doing their job. Mortgages happen to be more profitable than ever; the spread between what lenders get for selling loans in the secondary market and what they charge in an interest rate to a borrower have never been higher.

Every major bank that reported earnings this quarter so far showed that their mortgage business brought in massive profits. Lenders will be enticed to sell qualified mortgages because there’s lots of money to be made in qualified mortgages.

But lenders want something more. They want to basically short-circuit the judicial foreclosure process as much as possible, getting a blanket safe harbor for as many qualified mortgages as possible. Liability wasn’t determined specifically in the statute, so the rule has some leeway here. The Mortgage Bankers Association is quoted in the WSJ piece as seeking protections for subprime loans as well as higher-quality ones. ...

Obviously CFPB is concerned about writing a rule that leads to a perception of constricting credit. But they are going way too far in the direction of leniency toward the banks. The last industry to which anybody should be granting legal safe harbor is the mortgage industry, given past (and present) experience. This just invites lax lending standards and all the abuses of the bubble years, without any of the aftermath for lenders.

CFPB’s credibility is on the line with this rule.

4---CBO: Deficit Shrinking At Fastest Pace Since WWII As GDP Sputters, investors

The main take-away from the Congressional Budget Office's new fiscal and economic outlook is that, collectively, Washington has put deficit reduction way ahead of jobs and growth.

After a burst of stimulus and financial rescue outlays in 2009, the
fiscal retrenchment over the past three years was arguably steeper than at any time since World War II (see chart). Now, with stimulus and bailouts no longer clouding the picture, there's no question that the deficit is shrinking faster than it has in more than 60 years. Based on existing policies, CBO projects the deficit will shrink to 5.3% of GDP in fiscal 2013, down 3.7 percentage points since 2010.

Even during the '90s economic boom, the deficit never fell by more than 3 percentage points over any three-year period, but at that point the economy was growing twice as fast in real terms, producing a revenue windfall.

Now, after the economy crawled ahead at a growth rate barely above 2% over the past three years, the confounding response from inside the Beltway has seemingly been, "Too fast!"
Thanks to the fiscal cliff tax hikes approaching $200 billion in 2013, as well as automatic spending cuts set to take effect in March, the new fiscal and economic outlook from the Congressional Budget Office projects real GDP growth of 1.4%.
The jobless rate, now 7.9%, is seen ending the year at 8%, with the average 100,000 jobs added a month not enough to keep up with growth in the working population.
A look at U.S. fiscal history would seem to confirm that the deficit is shrinking much too fast.

Outside of the demobilization from WWII, the only time the deficit has fallen faster was when the economy relapsed in 1937, turning the Great Depression into a decadelong affair.
Other occasions when the federal deficit contracted by much more than 1 percentage point a year have also coincided with a recession, including 1960 and 1969.

A long-term deficit problem needs to be addressed, but we're going about it the wrong way, at an unnecessarily high cost.

 Even if the automatic spending cuts did not go into effect this year, the deficit of 5.5% of GDP would still show by far the biggest three-year improvement since World War II.
On the one hand, it seems that the deficit scolds need to get their priorities right.
On the other hand, it seems that until we wrestle with the full spectrum of entitlement programs, our deficits and demographics will create a psychological hurdle to growth

5---A scary graph from G Sax, WA Post


 On Friday,” writes Alec Phillips, an economist at Goldman Sachs, “we lowered our outlook for federal spending, to take into account the increased likelihood that cuts under sequestration take effect.”

With that built into their baseline, the cuts to federal consumption and investment look deep in the coming years. Here’s their graph, which adds a bit of historical perspective:

Goldman Sachs
Goldman Sachs
“Sequestration, spending caps, and reduced war spending will together reduce real federal consumption and gross investment by 11% over the next two years,” writes Phillips. Ouch. That’s a very big drop in a very weak economy

6---Maybe no housing rebound for a generation: Shiller, Reuters

7---No doc refis, DS News

8---Report: Originations Total $500B in Q1, DS News

Additionally, with rates low and origination volume remaining strong, FBR expects the second quarter is well-positioned to surpass the first.

“As such, we continue to believe our expectations for a $1.7 trillion market in 2013 are realistic given a significantly longer tail to refinancing volumes than expected by [Wall] Street,” the firm said. “Additionally, we believe the upcoming government marketing campaigns and improving housing/purchase markets will act as further boons to already strong tailwinds

9---Fitch: Recent Price Gains May Not Be Here to Stay, DS News

10--Pending home sales at a 3-year high, USA Today

11---Moody's: Home Prices to Increase, Loss Severities to Remain High , DS News

Recent price gains have resulted from high affordability, soaring investor interest, and low inventories with declining foreclosure inventories playing a major role. ...

Distressed and foreclosed homes “will still distort house price trends over the next year or two, but to a far lesser extent, particularly for the states with especially wild swings,” Moody’s said.
States with lengthy foreclosure timelines will continue to be hindered by their foreclosure inventories, but the slow pace will prevent a flood on the market.

Nationally, the market holds about 3 million homes in serious delinquency or foreclosure—which is about 3 times the normal level, according to Moody’s.

Foreclosures increased 12 percent year-over-year in February, according to RealtyTrac. However, Moody’s points out a few states claim the lion’s share of this increase—New York, New Jersey, Illinois, Ohio, and Florida. When these states are taken out of the equation, foreclosures declined 11 percent over the year.

Outward economic factors will play positively on housing markets in the South and West, while the Northeast and Midwest will continue to struggle in the near future.

Regardless of the overall price increased expected across the nation, Moody’s expects residential mortgage-backed securities (RMBS) loss severities to remain elevated for the next year.
Almost 40 percent of delinquent loans have been delinquent for three or more years, which translates to much greater losses than on loans in delinquency for shorter time periods.

Aged delinquencies are more likely to encounter hiccups with titles, documentation, and judicial backlogs, while expenses continue to accumulate.

Bank of America and Chase hold high levels of delinquencies aged three years or more—46 percent and 43 percent, respectively—when compared to their counterparts, according to Moody’s.
Therefore, they “will generally realize higher loss severities than others,” Moody’s said.

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