Feb. 27, 2008: rates heading down, FNMA loses $3.6 billion, and who owns 9.4% of Wells Fargo?

Feb. 27, 2008: rates heading down, FNMA loses $3.6 billion, and who owns 9.4% of Wells Fargo? Rob Chrisman

Last night I was reading about OFHEO’s housing report while my son was trying to figure out how he was going to spend $5 million (the amount that was promised to him by his new internet friend, who is a Nigerian prince looking to move $50 million into this country through someone’s bank account, and will happily pay 10%). I suggested that he use the money to shore up property values here in California. “Pockets of Strength Remain; Coasts, Midwest Show Biggest Declines” were the headlines of OHFEO’s seasonally-adjusted purchase-only house price index. U.S. home prices fell in the fourth quarter of 2007, and were 1.3% lower on a seasonally-adjusted basis in the fourth quarter than in the third quarter of 2007. “Although prices for home purchases in the quarter fell in every state except Maine, only 16 states plus the District of Columbia showed price declines for the full year 2007,” said the report. “However, both OFHEO’s purchase-only index and the all-transactions index show relatively greater house price stability than do other nationwide house price indexes. That may reflect, in part, the greater stability in the prime, conforming mortgage market served by the Enterprises than in other segments of the mortgage market,” said Jim Lockhart.

If you hear “Wells Fargo is holding for you on line 3!” is that a bad thing? Perhaps not. Wells Fargo chairman Dick Kovacevich said last week that they have plans to acquire larger banks than it has previously bought. Wells could acquire up to 15 companies in the upcoming year. Kovacevich told Bloomberg News that declining prices have helped. Warren Buffett seems to like both Wells Fargo and U.S. Bancorp: as of the end of 2007, Berkshire Hathaway had upped its stake in Wells by 331.4 million shares, valued at close to $9 billion, so Buffett now owns 9.4% of Wells Fargo. (Wells is the only top five U.S. bank to have maintained its Triple-A credit rating this year.) Buffet also increased his share of U.S. Bancorp by three million shares.

• Last week FHLMC announced their new fee structure based on both FICO and LTV. It decreases the fee on low LTV/low FICO borrowers while penalizing high LTV borrowers. In a piece published by Bear Stearns, they believe that in the current housing market, the new prices are likely to have a large impact on refinancing.  “It is important to note that in declining home price markets, the GSE’s require a new appraisal when refinancing with the delivery fee based on the updated LTV. Therefore, this change is likely to significantly increase the cost of refinancing in areas where home prices are declining.”
• Is HUD doing your FHA marketing for you? Check out http://www.hud.gov/local/ca/news/pr2008-02-20.cfm
• FNMA reported a $3.6 billion quarterly loss, sending its shares to a 12-year low. Analysts are worried about their ability to buy, and stand behind, the new crop of jumbo conforming loans given their current financial situation.

The market’s roller coaster ride continues this morning! The 10-yr is around 3.80%, mortgages slightly better, but Tuesday was quite the day. Yesterday, mortgage prices started off slightly-worse-to-unchanged, due to the PPI report coming in higher than expected at 1.0% driven by higher fuel, food, and drug costs, signaling possible inflation while growth declines. And then February Consumer Confidence dropped to a 5-year low, falling to 75.0 from a revised 87.3 in January, and the S&P/Case-Shiller composite showed that home prices in 20 metropolitan areas fell in December by the most on record (-9.1%).  Interestingly, stocks closed higher for the third day in a row, and oil prices hit another record high – now over $102 per barrel.

This morning we had Durable Goods come in much weaker than expected, -5.3%, ex-Transportation it was -1.6%. Granted, this number is volatile, but Treasuries and mortgage prices have improved again this morning. We still have Federal Reserve chairman beginning his semiannual testimony on monetary policy to the House Financial Services Committee at 7AM PST. As the Wall Street Journal points out, “just as almost everything under his direct purview seems to be moving in the wrong direction”: in spite of rate cuts, the economy is slowing, long-term fixed-mortgage rates are rising, and inflation is obvious with oil, gold and wheat at record highs. The dollar is at a record low against other major currencies. Today’s New Home Sales report is expected to show a 0.7% decline.

We have a $26 billion 2-yr note auction at 11AM PST, the largest 2-yr auction since 2004. Speaking of auctions, state and local governments often raise cash in the auction-rate bond market, but this has “collapsed” recently and demonstrates that regulators may have to deal with the hundreds of auctions that have failed this month. This has sent borrowing costs as high as 20% because Wall Street firms have stopped using their own capital to support the sales. For example, the rate that Citizens Property Insurance a Florida state-run insurer that protects homeowners against hurricane losses, pays on a portion of the $4.75 billion in securities it has sold jumped from 5% to 15% at an auction run by UBS that failed earlier this month. In the past, if investors weren’t that interested, investment banks would pick up the difference and the auction would have appeared to go well. They would then either hold the securities or re-sell them on the secondary market.

As a trucker stops for a red light, a blonde catches up. She jumps out of her car, runs up to his truck, and knocks on the door. The trucker lowers the window, and she says "Hi, my name is Rhonda and you are losing some of your load." The trucker ignores her and proceeds down the street. When the truck stops for another red light, the girl catches up again. She jumps out of her car, runs up and knocks on the door. Again, the trucker lowers the window.

As if they’ve never spoken, the blonde says brightly, "Hi my name is Rhonda, and you are losing some of your load!" Shaking his head, the trucker ignores her again and continues down the street. At the third red light, the same thing happens again. All out of breath, the blonde gets out of her car, runs up, and knocks on the truck door. The trucker rolls down the window.

Again she says "Hi, my name is Rhonda, and you are losing some of your load!" When the light turns green the trucker revs up and races to the next light. When he stops this time, he hurriedly gets out of the truck, and runs back to the blonde. He knocks on her window, and after she lowers it, he says… "Hi, my name is George, it’s winter in Buffalo and I’m driving the salt truck!"

Rob