Sunday, February 22, 2009

Obama's Mortgage Plan Doesn't Help Most People I Know

In this housing market any plan is a good plan right? Well maybe. The proverbial "Let's throw money at the problem" may not work here.
Let me start by focusing on what I do like about the Obama Mortgage Bailout Plan. Yes I added a work. The national economist's vary greatly on the number of homes this plan might save or how many homeowners this plan might help. As to not fuss about the size of the plan or benefit, I thought we'd look at the merrits of it soley by each section.

Obama's focus on those individuals who are and have continued to make their mortgage payments is important and it shows that in part, he get's it.
There is a a "Shared Effort to Reduce Monthly Payments" section which allows for a homeowner with current housing payments adding up to 43 percent of his or her monthly income to be reduced to 38 percent. The existing lender (in many cases this would include Fannie Mae or Freddie Mac) would first be responsible for bringing down interest rates so that the borrower’s monthly mortgage payment is no more than 38 percent of his or her income. The challenge here is the large number of Alt-A and Subprime mortgages which have private ownership who many not be as "interested" in reducing their rate of return. Obama's initiative would match further reductions in interest payments dollar-for-dollar with the lender to bring that ratio down to 31 percent. If that borrower had a $220,000 mortgage, that could mean a reduction in monthly payments by more than $400. That reduction won't be in the form of principal reductions more than interest reductions to the end investor. This gracious "temporary" lower interest rate must be kept in place for five years, after which it would gradually be stepped up to the conforming loan rate in place at the time of the modification. The lenders will also be able to bring down monthly payments by reducing the principal owed on the mortgage, with Treasury sharing in the costs.

There a "Pay for Success” Incentives to Servicers: Servicers will receive an up-front fee of $1,000 for each eligible modification meeting guidelines established under this initiative. They will also receive “pay for success” fees -- awarded monthly as long as the borrower stays current on the loan -- of up to $1,000 each year for three years. This is at present servicing levels much more than they recieve today for the loan unless the firm refinances it.

The next one if my favorite and I'll be sure to ask my mortgage servicer about it: The "Incentives to Help Borrowers Stay Current" provision. Here the plan is to provide an extra incentive for borrowers to keep paying on time, the initiative will provide a monthly balance reduction payment that goes straight toward reducing the principal balance of the mortgage loan. As long as a borrower stays current on his or her loan, he or she can get up to $1,000 each year for five years.

This one will surely ake at the mortgage brokers turned loan modification expert, the "Reaching Borrowers Early" section. Here, the goal is to give lenders a little more incentive keep lenders focused on reaching borrowers who are trying their best to stay current on their mortgages, an incentive payment of $500 will be paid to servicers, and an incentive payment of $1,500 will be paid to mortgage holders, if they modify at-risk loans before the borrower falls behind. So homeowners not yet behind but deemed "at- risk"will be prompted to modify and "get there's".

My biggest challenge and the lone reason this Mortgage Plan would have not received my vote (had I one to give) is what I am calling the "rewrite" provision. Here local judges can modify home mortgages without permission of the lender. While this requires congressional approval, the "promoted" and continued judicial interference into existing market-making policies serviously concerns me. How much longer will investors participate in next generation investments deemed "fixed" and "secure" if those investments can be rewritten at the whim of a judge?

Wednesday, February 4, 2009

Back of the Mountain

I've been buried by mountain of things at work. Much of the economic drivers have taken a backseat to Macro-Economic events. If the President's decision to limit bank executive pay comes to fruition, this could be a VERY interesting development over the next several years. Always follow the money....

This week's economic calendar:

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis

Mon. Feb. 2, 8:30 a.m. ET
Dec. Personal Income
PCE Index
-0.4% vs. last -0.2%
-0.9% vs. last -0.6%
Further erosion in the employment sector has taken a toll on personal incomes and the pace of spending. The personal consumption expenditure index, one of the Fed’s favorite measures of inflation pressure at the consumer level, is expected to remain benign. This data is already priced into the fixed income market.

Mon. Feb. 2, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
32.6 vs. last 32.9
Market participants are well aware that the manufacturing sector is under pressure as last week’s durable goods orders report showed demand has contracted for five consecutive months while inventories continue to rise. This data drew nothing more than a passing glance from investors.

Tue. Feb. 3

Wed. Feb. 4, 10:00 a.m. ET
Jan. Institute of Supply Mgmt.
Service Index
39.0 vs. last 40.1
This broad barometer of economic activity is expected to show business conditions remained slack in January. Should the actual number fall close to the consensus estimate (a reasonable expectation) the impact of this data on the current level of mortgage interest rates will be negligible.

Thurs. Feb. 5, 8:30 a.m. ET
Initial jobless claims for the week ended 1/31
Down 5,000
Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. Today’s figures will likely draw little more than a passing glance from market participants.

Thurs. Feb. 5, 8:30 a.m. ET
1st estimate Q1 Productivity
Unit Cost
+1.1 vs. last +1.3
+2.9 vs. last +2.8
Declining productivity and rising unit labor cost will likely be slightly unsettling for fixed income investors. Probably not unsettling enough to cause homeowner mortgage rates to move notably higher but enough to make it difficult for rates to make much headway in any effort to move lower.

Thurs. Feb. 5, 10:00 a.m. ET
Dec. Factory Orders
-3.0% vs. last -4.6%
This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.

Fri. Feb. 6, 8:30 a.m. ET
Jan. Nonfarm Payrolls
Jobless Rate
Average hourly earnings
7.5% vs. last 7.2%
+0.2% vs. last +0.3%
Bond investors are keenly aware the labor market has fallen-off-of-a-cliff. A really nasty series of numbers have already been priced into the market here -- which means this report will likely have little, if any meaningful impact on the trend trajectory of interest rates if the actual numbers reasonably approximate the consensus estimate.