Sep. 10, 2009: economy strengthening but rates improving, news on foreclosures and Option ARM’s

Sep. 10, 2009: economy strengthening but rates improving, news on foreclosures and Option ARM’s Rob Chrisman

Why do people constantly return to the refrigerator with hopes that something new to eat will have materialized? Is that like economists and analysts continuing to go back to the news about the economy hoping something is better? Yesterday’s Beige Book, which summaries the economic activity in the 12 Fed regions here in the US, indicates that economic activity is either stabilizing or improving in most regions. Of course, consumers have to have confidence and start spending money to help push it along – most folks that I know seem more inclined to save their money than to go out and buy a car or a new TV. All but one region (St. Louis) indicated economic activity either was “stable,” showed “signs of stabilization” or had “firmed,” according to the Fed’s survey.

So let’s reconcile that versus the latest U.S. foreclosure numbers, if that’s possible. Filings in August were 18% higher than a year ago, although they were down about 1% from July. According to RealtyTrac, 1 of every 357 U.S. housing units is in grim shape. In Nevada, where Las Vegas has 70% of that state’s population, 1 in every 62 units was subject to a foreclosure filing in August. Florida was #2 at 1 in every 140 units receiving a filing, and California was #3, at 1 in every 144 units. And talking about foreclosure losses, take a look at this one: http://www.nytimes.com/2009/09/10/nyregion/10stuy.html?_r1&hp

Foreclosure rates on prime jumbo loans, which many in NY, FL, and CA made their livings doing, surpassed the 2.98% average for all loan types in July, and continue to rise faster than any other loan type. Prime jumbo foreclosure rates are up a staggering 634% versus January 2008 levels, according to LPS Applied Analytics. And other figures show that Alt-A loan problems could stabilize in the coming months.

In addition, a good chunk of brokers and originators made some ducats off of the Option ARM product, in the days when most thought that real estate prices and incomes did nothing but go up. According to Fitch Ratings, who like S&P and Moody’s miscalculated the risk on mortgage securities in the last 2-3 years, determined $134 billion of loans with option ARM’s will recast in 2011. And many of those have seen negative amortization. According to their report, an option ARM recasts when it reaches a balance cap typically ranging from 110%-125% of the original mortgage or 60 months of age, at which point the monthly payment obligation then increases from the minimum amount to a fully amortizing principle and interest payment resulting in a payment shock. Just what we need…

And when one talks about a recovery driven by the consumer, if you’re out of work, or in foreclosure, you’re not going to be a big spender. Typically, rates will move higher if the economy is doing well, or expected to do well, since basic supply & demand rules apply. But so far rates have been relatively steady, even in spite of the huge debt needs of our government, suggesting that the bond market is not convinced that the economy is going to take off.

Yesterday’s markets saw a little improvement in both stocks and bonds. In the bond market, the Treasury’s $20 billion 10-yr auction went pretty well, with a bid-to-cover ratio of 2.77 and indirect bids hitting 55%. Today we have a 30-yr bond auction today, and traders are hoping it goes as well as the last two. We did have some news this morning. The U.S. trade deficit widened the most in more than 10 years in July, with imports up almost 5% attributed to our demand for foreign cars, consumer goods and oil. The trade gap expanded 16.3 percent in July to $32.0 billion. We also saw weekly Jobless Claims drop last week to 550,000, compared to forecasts of 560,000 versus 576,000 the prior week. After the news we find the new 10-yr yielding 3.44% and mortgage security prices better by between .125 and .250.

I caught some flack yesterday for a mention of the UN’s suggestion that the world moves to one currency. Hey, I don’t make this stuff up. http://www.cbsnews.com/blogs/2009/09/09/taking_liberties/entry5298305.shtml One person wrote to me saying, “Have you lost your mind? I could talk for days on the cons associated with a unified currency. And the UN? The UN couldn’t break up a food fight at a Cub Scout jamboree, and we’re supposed to base our international policy on their whims?”

A Sheriff in a small town in Texas walks out in the street and sees a blonde-haired cowboy coming toward him with nothing on but his cowboy hat, his gun and his boots. He arrests him for indecent exposure. As he is locking him up, he asks, ‘Why in the world are you walking around like this?’ The cowboy says, “Well it’s like this Sheriff …I was in this bar down the road and this pretty little red head asks me to go out to her motor home with her. So I did. We go inside and she pulls off her top and asks me to pull off my shirt. So I did. Then she pulls off her skirt and asks me to pull off my pants. So I did. Then she pulls off her panties and asks me to pull off my shorts. So I did. Then she gets on the bed and looks at me kind of sexy and says, ‘Now go to town cowboy.’” “And here I am.”

Blonde men do exist.

Rob

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