You are Officially On the Clock

If you have been holding off buying or refinancing your home in hopes of a lower monthly payment or perhaps to leverage some of the appreciation in equity your home undoubtable gained over the last 4-5 years, might I strongly suggest you start that process today. Like, this evening. When you get home. Today, the U.S. 10-year Treasury yield shot higher, taking mortgages and various consumer loan rates with it. There are a couple key reasons for this market movement and why this one has some legs. We are going go focus on two, both of which have little to do with the Fed.

1. The Bank of Japan (BOJ) who has been fighting negative interest rates in a market desperate for a steeping yield curve surprised the markets today (July 23rd) when the Japanese' Government pressed the 10-year Japanese government bond by 5 basis points, to 0.083 percent, the highest since February. The BOJ, which meets next week, announced it would buy bonds to curb the action, and the 40-year JGB also spiked, touching 0.92 percent. All Markets are interconnected. Fixed Income even more so.

2. The fight with China over US-China deficit GDP is just heating up. To understand how and why this affects US Mortgage rates is to simply understand that China is not only one of the largest buyers of US Treasuries, but they are also one of the largest owners of US Treasuries. The US buys over $500 billion in Chinese goods annually. China only buys $130 billion from the US. Quick math shows that a trade war focused on tariffs will hurt the Chinese more. How would they respond, we suggest they do it one of two ways. First by lowering or devaluing their currency (the Yuan). This is quick and they already do this as needed. Second, they slow or worse stop buying US Treasuries. Selling their $1 trillion in US Treasuries would also force bond yields could climb. That’s problematic as Treasury holders around the world, including the U.S. government and (you and I) will see their bond prices drop. Higher yields also make it more expensive for the U.S. government to borrow through new debt issues, while companies that issue corporate debt, would have to pay higher borrowing costs.

With the first already taking flight, we strongly suggest you move date night to another evening and spend some time getting your home loan in order.

Why Fall Is the Best Time of Year to Buy a Home

Few people know Fall is arguably the best time of year to buy a new home. The weather becomes cooler, the leaves begin to change, football season begins, and pumpkin-flavored everything is in abundant supply. But there's another great reason to love fall that might be less obvious...it's the best time of year to purchase a home.

Prices Are Typically Lower
The concept that buyers can get a better bang for their buck in the fall has been a popular notion for some time, but two recent reports validated that line of thought with data from actual home sales. According to a report by RealtyTrac, sales prices are typically 2.6% below fair market value during October — a steeper discount than any other month of the year. Another report by NerdWallet found that sales prices drop about 2.96% from summer to fall, which is roughly an $8,300 discount for the median home. It's also worth noting that while listing prices don't decrease much, sales prices do, and that's the price that counts for potential buyers.

There's Less Competition
The majority of people buy a home in spring or summer, when inventory is traditionally high. This gives families time to make their move before the school year starts, but the tradeoff is that buyers are faced with strong competition and often pay higher than asking price during that time. People who buy in fall, however, have less competition, and sellers are more motivated. This means more negotiating power for the buyer, which often results in a better deal.

There's Still Inventory
It's true that the inventory of homes for sale is at its peak during spring and summer, but when you buy in the fall, there's still a decent supply of homes left to choose from. Buying a home in the fall gives you the best of both worlds — lower prices and less competition but still enough inventory to find the home you want.

If you're serious about buying a home, doing so this fall may save you money or help you afford more than you expect. Plus, with interest rates on the rise, the longer you wait, the less buying power you may have. Click here to learn more about the impact that rising interest rates have on affordability. NMLS#1043983

The number of homes for sale is a problem; here's what to do about it!

In almost every major city in Texas there is solid demand from home buyers who struggle to find a home (any home) that meets both their housing and affordability requirements. This is especially true for first time home buyers. It’s a situation that requires both patience and creative solutions.

On the other hand, this may be an excellent time for you to explore options that may not be on your short list. Here are a few suggestions;

1.Look at a fixer-upper. That run-down house that’s been sitting on the market for months may be a diamond in the rough for a buyer with the vision to see its potential, especially if you have the time and skills to participate in renovations. Before making an offer, however, encourage your agents to assist in estimating renovation costs and identifying people in the trades to assist them. There are several different loan programs which make financing the improvements easy.

2. Buy a teardown and rebuild. If a thought of a fixer-upper doesn't excite you, perhaps a teardown, or a vacant lot, and building a new home. Fortunately, there are many ways to accomplish this without the expense of hiring an architect or a custom home builder. Learn who is supplying prefabricated and modular homes to your market—options that aren’t only economical and energy-efficient, but also increasingly popular with younger buyers.

3. Consider a duplex. While many don't love the idea of managing a property (much less a neighbor) the financial upside is hard to ignore. Improvements made to the property may be tax deductible and the additional income will never hurt.

As we indicated with our November 10th Blog,

https://efinitygroup.blogspot.in/2016/11/if-you-currently-are-or-have-been.html

the Federal Reserve voted yesterday (Wednesday March 15th) to again raise the key interest rate one-quarter percentage point. This is just the first of three hikes we anticipate for 2017. The rate was increased one-quarter percentage point just three months ago in December 2016. This was the probable outcome following encouraging employment figures in February.

We believe this consecutive increase marks a turning point in policy. The Fed raised the rate only twice in the past decade. Wednesday’s decision quickens the pace, signaling the potential for more aggressive action as the year unfolds.


Rising rates have been top of mind for members of the housing industry, especially those of us in residential finance. Raising interest rates with the unprecidented apprecition witnessed in Texas, makes the fear of affordability a viable concern. We know in speaking with many of our potential homeowners the anticipated monthly payments on homes in various price ranges have "felt" higher. This is something which will continue to play out throughout 2017.

The Fiscal Cliff

Following numerous requests from our clients, we thought we would put some effort on summarizing the tax related measures which resulted from the eleventh hour Fiscal Cliff agreement. These new laws are detailed in Senate Amendment to H.R. 8 and are collectively called The American Taxpayer Relief Act of 2012. For those unfamiliar with the Fiscal Cliff, hopefully this may provide valuable background information. We now await the political brinkmanship associated with the negotiations to raise the U.S. Debt Ceiling. Two New Taxes for 2013 Two new taxes go into effect starting January 1, 2013: 1. A 3.8% Net Investment Income Tax (NIIT) applies to individuals, estates and trusts that have unearned investment income above certain threshold amounts. Net Investment Income for the purpose of calculating this tax includes interest, dividends, capital gains, rental and royalty income, non-qualified annuities, income from businesses involved in trading of financial instruments or commodities and pass-through income from a passive business. The NIIT does not apply to municipal bond income. For an individual, the NIIT is equal to 3.8% of the lesser of two amounts: i. An individual’s net investment income or ii. The excess of the individual’s modified adjusted gross income (MAGI) over the threshold amount ($200,000 for individual taxpayers and $250,000 for married couples filing jointly). 2. A 0.9% additional Medicare Tax applies to individual’s wages and self-employment income that exceeds the threshold amount based on the individual’s filing status. Ordinary Income Tax There will be no change in Federal income tax rates for taxpayers earning less than $400,000 ($450,000 for joint filers). Individuals earning above this threshold, will now pay 39.6% on marginal income above $400,000 ($450,000 for joint filers). Capital Gains and Qualified Dividends Tax Effective January 1, 2013, the top tax rate on long term capital gains and qualified dividends reverts back to 20% on gains for taxpayers above the $400,000 ($450,000 joint) income threshold. For taxpayers below these thresholds, the 15% rate remains. This tax rate increase, along with the Medicare tax, will result in a top effective tax rate of 23.8% for long term capital gains and dividends. Similarly, short term capital gains will be taxed at ordinary rates plus the 3.8% NIIT, for an effective top rate of 43.4%. Estate, Gift and Generation Skipping Transfer Tax The credit amount remains at $5 million per individual donor and continues to be inflation-indexed from 2010 (rounded in $10,000 increments). The inflation adjusted credit was $5.12 million in 2012 and is expected to be $5.25 million in 2013. An important component of the new legislation is the reunification of the gift and estate tax credit amount. In other words, the $5.25 million credit is available for use with lifetime gifts or estate transfers at death. The top transfer tax rate on gifts exceeding the credit amount has increased from 35% to 40%. Phase Limitation on Itemized Deductions Before 2010 itemized deductions for taxpayers above a certain income level were partially phased out, thus increasing income taxes as a consequence of reduced deductions. In 2013, if a taxpayer’s Adjusted Gross Income (“AGI”) is above a threshold amount ($250,000 for individual taxpayers, $275,000 for head of households and $300,000 for joint filers), itemized deductions will be reduced by an amount equal to the lesser of 3% of the excess over the threshold or 80% of allowable deductions. Taxpayers apply 80% to the total of their itemized deductions other than the deductions for medical expenses, investment interest, casualty losses and thefts, and gambling losses. As a result of the phase-out of deduction for high income taxpayers, marginal effective tax rates are higher than marginal statutory rates for such taxpayers. Roughly speaking, the 3% reduction of a deduction against income taxed at 43.4% raises the tax rate on marginal income by 1.3 percentage points. Alternative Minimum Tax (AMT) The new bill increases the AMT exemption amounts from $33,750 to $50,500 for individual filers and from $45,000 to $78,750 for joint filers, indexed for inflation from 2013. IRAs The Pension Protection Act of 2006 allowed a taxpayer to exclude from income, distributions of up to $100,000 to a qualified tax-exempt organization (i.e., a public charity but not a supporting organization or a donor advised fund) from a traditional IRA. This provision has been extended for 2012 through December 31, 2013. The distribution must be made directly to the public charity and the IRA owner must have attained age 70½. The distribution will be counted for purposes of the required minimum distributions from an IRA but will be ignored for purposes of computing the limitations on charitable deductions in the year of the gift. Notably, the $100,000 exclusion is per taxpayer so married taxpayers (with their own IRAs) may each take advantage of the provision. Moreover, this provision contains a transition rule, which allows a distribution made in January 2013 to qualify as a 2012 distribution and allows an IRA distribution made December 2012 to qualify if subsequently paid to a qualifying charity in January 2013 (and meeting all other requirements). Roth Conversions In 2012, only the distributable amount (i.e. IRA balances or 401(k) s where the owner has either separated from employment or is over 59½) in pre-tax retirement plans could be converted to Roth accounts. The new bill allows any amount in a non-Roth account to be converted to a Roth account in the same plan, whether or not the amount is distributable. The conversion from a pre-tax retirement plan to a Roth plan results in the recognition of taxable income on all the gains and income in the plan. Retroactive Extension of 100% Exclusion of Small Business Capital Gains Generally, non-corporate taxpayers may exclude 50% of the gain from the sale of small business stock acquired at original issue and held for more than five years. For stock acquired after February 17, 2009 but by September 27, 2010, the exclusion was increased to 75 percent. For stock acquired after September 27, 2010 and before January 1, 2011, the excluded amount was increased to 100%. The 2010 Tax Relief Act further extended the 100% exclusion through December 31, 2011. The new legislation retroactively extends the exclusion of 100% of the gain from Qualified Small Business Stock to stock acquired after September 27, 2010 and before January 1, 2014. Qualifying Small Business Stock is from a C-corporation whose gross assets do not exceed $50 million (including the proceeds received from the issuance of the stock) and who meets a specific active business requirement. The amount of gain eligible for the exclusion is limited to the greater of ten times the taxpayer’s basis in the stock or $10 million of gain from stock in that corporation. Other The personal exemption phase-out has been reinstated, which means that high income taxpayers will have to reduce the total of their personal exemptions by 2% for every $2,500 by which their annual gross income exceeds the threshold amount for their filing status ($250,000 for individual filers, $275,000 for head of households and $300,000 for joint filers), indexed for inflation from 2013.

Securities Lending – Share Hypothecation

For the last several months, Efinity Finanical has quietly grown in the Dallas Fort Worth market. Those clients already presently working with our advisors are well aware of the weekly commentary we publish. Last week's was so good we felt it should repost here on the Efinity Report. Enjoy.

Securities Lending – Share Hypothecation
One of the main issues facing the financial world today is the difficulty investors have estimating the effect that a specific financial issue, such as a 50% haircut on Greek bonds, may have on the global or domestic financial and banking system.

So why can’t the people who run the European Central bank, the U.S. Central Banks Federal Reserve and Wall Street estimate the probability and effect of a bank going out of business? It looks like the reason some banks are classed as “too big to fail” is the fact that no one knows what will happen if they DO fail!

The reason is the financial system is based on everyone lending and making promissory contracts with each other. The system has evolved to a highly leveraged point where very little real cash or collateral exists. Looking at ‘cash in the bank’ has been replaced by credit ratings and rates as means to judge the fiscal security of a loan to a counterparty.

Unfortunately, these ratings and loan rates can change quickly; confidence is especially ephemeral these days. Take Italy, for example, whose cost of borrowing has nearly doubled in a period of weeks. This means the capital held by banks in the form of Italian bonds has shrunk by nearly 50%.

European banks are currently levered by approximately 30 to 1 – for every $1 they have in actual capital, they have $30 in borrowings. U.S. banks are current around half that level.

Shorting the System
Another reason for high volatility is the increasing ability of financial firms to profit from betting against markets - Shorting. Probably the most infamous example was Goldman Sach’s $550 million fine relating to fraud charges over the shorting of (seeking to profit from betting against) mortgage securities they had previously profited from by advising clients to buy. The fund was called Abacus.

Securities Lending
Securities Lending, a.k.a. Share Hypothecation, is a little known method for large financial firms to leverage the financial system - proponents call it the lubrication of securities markets. It certainly facilitates increased short selling activity. It is estimated that $1.9 trillion of securities are out on loan every day.

Securities Lending allows a Wall Street firm to loan shares to another firm in return for both a transaction fee and collateral to cover the loan. Although this may sound ‘normal’ among large companies, many Wall Street investor custody agreements include securities lending clauses allowing the firm to lend out shares owned by retail investors.

Yes, investment banks and the like regularly take their investors’ shares and loan them to companies looking to short the market.

For any financial relationship you have, check to see if the company participates in Securities Lending. If they do and the lender goes bankrupt, you will lose your shares!


Why Lend Securities?
Financial companies often “Lend” securities to facilitate short selling. Selling a stock “Short” means borrowing stock from a Lender for a period then selling the stock to a Buyer. At the end of the borrowing period, the Borrower has to give the stock back to the Lender.

If the price of the stock goes down during the lending period, at the end of the period the Borrower buys the stock in the market at the current reduced market price and gives it to the Lender. The Borrower therefore pockets the difference between the price they had originally sold to the Buyer at the start of the lending period and the price they had just paid for it at the end of the lending period.

If the stock rises in value during the borrowing period, the Borrower loses the difference in the original sale price and the price they have to buy it back to satisfy the loan. This practice avoids the short company for being accused of “Naked Shorting”, the practice of selling a stock short without owning the underlying stock.

Take a moment to think how frightening this concept is…in order to make a big negative bet against a company or country, all a Wall Street company has to do it find a counterparty who is willing to loan the representative securities for a nominal fee.

Even worse, the collateral to cover the trade is rarely “tangible”; it’s often other financial contracts. It is therefore very easy to see how confidence can rapidly evaporate in financial markets.

Company versus Country
One interesting result of the above is the changing risk/credit perception between many large corporations and a number of countries, chiefly those in Europe. Sovereign fixed income investments that were previously thought to be low volatility are now behaving like Tech stocks! At the same time, high yield corporate bonds are relatively stable.

Countries have been able to run whatever fiscal policy they wanted because their credit rating always allowed them to borrow and borrow at low interest rates. Companies generally had to maintain pristine balance sheets to enjoy anything like similar access to debt. Moreover, everyone assumed sovereign debtors were highly creditworthy whereas companies have to prove their creditworthiness on a quarterly basis.

Now that the confidence in the finances of many countries has disappeared, we are seeing massive swings in the prices of sovereign bonds; those securities that we all previously thought were very stable. Hedge Funds and short sellers are able to use leverage to bet against the debt of countries in the same way they contributed to the decline of Lehman Brothers.

In our opinion, large multinationals have managed their finances exceptionally well in recent years and their debt (Bonds) deserve the stability currently being shown. We have long stated that the world continues to grow in new areas and different ways. Companies and not countries seem to be doing much better at managing this change.

You can lead an Economy to Water, but can you make it Create Jobs?

You can lead an Economy to Water, but can you make it Create Jobs?

So it‟s now official, the U.S. Economy is going through a “soft spot”. According to the U.S. Federal Reserve Chairman Ben S. Bernanke, speaking last week at an International Monetary Conference in Atlanta:

• "The U.S. economy is recovering from both the worst financial crisis and the most severe housing bust since the Great Depression, and it faces additional headwinds ranging from the effects of the Japanese disaster to global pressures in commodity markets. In this context, monetary policy cannot be a panacea."
• …the economic recovery is “uneven …and frustratingly slow”
• The Fed will keep interest rates bottomed out for “an extended period.”

A few conclusions spring forth from these quotes:

• The Fed will keep Interest Rates low for as long as
possible; longer than most economists currently
believe. Bonds won‟t be under too much interest rate
pressure for a while yet.

• Chairman Ben Bernanke currently feels the launch of a
third round of monetary easing will probably do nothing
to stimulate „real‟ economic demand; principally
meaning create jobs.

• Ben is looking for help from the Government and
Private Sectors in his efforts to inflate the economy.

• The Fed expected QE2 to have more impact on jobs
and GDP. The money benefitted the banking industry
but not industry in general.

It‟s possible to explain away the „soft spot‟ as a result of the Spring 2011 Supply Shocks in Japan and the Middle East; it may even be possible to extrapolate this thinking to justify a return to GDP growth in the Fall.

But one thing remains, until the job market shows signs of sustained improvement, long term confidence in a persistent domestic economic recovery will be questionable.

“Until we see a sustained period of stronger job creation, we cannot consider the recovery to be truly established”, another quote from Ben Bernanke.
Monetary policy cannot be a Panacea
Is The Fed saying that it has done as much as it can through Monetary Easing; the printing and circulating of more money?
QE1 and QE2 achieved their objectives by:

• Saving the U.S. Banking System, and therefore the world‟s banking system.
• Raising the price of Equities
• Reducing Interest Rates and the Dollar

But QE2 or QE3 can‟t sustain economic growth. Quantitative Easing was initially a protective measure; pump liquidity into the economy and provide banks with copious amounts of free capital.

Thereafter, it was intended to be a box of matches that could set the economy ablaze. Well, now all the QE matches have been struck, the economic wildfire still refuses to spread.

Employment is the fuel necessary to get this fire to spontaneously combust.

How to Stimulate Employment?

Jobs are a common byproduct of economic activity; however, productivity increases (together with an amount of outsourcing) has created an economic recovery with fewer new jobs than expected.

So what‟s a government to do about job creation?

QE3?

The Fed obviously thinks: “QE1 and QE2 didn‟t ignite the job market, so why would QE3 do any better?” Additionally, the debt created by quantitative easing requires repayment at some stage (seriously). Repayment will require deficit reduction which will require cut backs in economic activity.

Conclusion: QE3 may ultimately hurt the job market.

Keeping Interest Rates and the Dollar Low?

The Fed may have ended the QE programs, but it will still try to keep interest rates and the dollar low by other means; means too complex to detail here.

Why keep Interest Rates and the Dollar Low?

• Lower interest rates encourage investment (loans cost less) and discourage savers (don‟t put your money in the bank; put it into riskier assets or a business).
• A lower dollar makes domestic goods cheaper and more competitive overseas while making imports more expensive.

Although recent balance of payments data shows U.S. exports have benefitted from a lower dollar, it‟s clear that low interest rates have failed to stimulate lending and economic activity. Why pump more money into the monetary system when it isn‟t finding its way to enough businesses and households. The Government needs to direct the monetary faucet where it can create jobs.
If the printing presses don‟t stop creating money soon, the risk of inflation will increase dramatically. In turn, this may cause interest rates to rise which would defeat the object of the stimulus exercise.

Rising interest rates are synonymous with monetary tightening. Monetary tightening normally means fewer jobs; a downwards spiral no one wants to see at the moment.

Failure to control spending can actually hurt jobs in a similar way to reducing spending.

Note: For all you bond investors, a domestic “rising interest rate environment” may yet be a year or two away if the Fed has their way.

Government & Private Sector Stimulus

Chairman Bernanke‟s comment: “monetary policy cannot be a panacea” begs the question “What else will help monetary policy to create sustainable growth?”

"Policymakers urgently need to put the Federal governments' finances on a sustainable trajectory," Bernanke said in Atlanta. "Establishing a credible plan for reducing future deficits now would not only enhance economic performance in the long run, but could also yield near-term benefits by leading to lower long-term interest rates."

Looks like Ben thinks it's now up to the politicians to help the economy by reducing the federal deficit.

And now the good news – it appears both sides of the political divide agree that the deficit must be reduced. The debate has moved on to:

• How to Reduce the Deficit: Reduce Spending or Increase Taxes?
• How much to Reduce the Deficit by

At a time when investors are looking for a clear direction, let us weigh in with a decisive conclusion:

Let’s wait and see what the Government agrees and what kind of earnings season we have starting early July…


PS: Have you noticed the increasing number of States and Municipalities implementing fiscal tightening activities. Nowhere near enough to make a difference yet, but a step in the right direction and a shining beacon for the route the Federal Government will have to follow soon.

As we called it, Double Dip Housing has arrived

Here are latest from S&P/Case Shiller report out this morning.

• 4.2 percent decline in Q1 of 2011, 2.9 percent from one year ago.

• The 10 cities fell .6 percent in March

• Top 20 cities fell .8 percent in March

What's probably most concerning and begs to question, what happened to the home buyer tax credits which were supposed to stimulate the economy and housing market (not necessarily in that order)?

Perhaps the best news to come out of this will be evidence that mortgage rates will remain low as yields become subject to basic economic supply and demand. With new mortgage transaction counts down, there just isn't enough fixed income products out there to buy outside of corporate bonds and US Treasuries..

To further the point, the National Association of Realtors released an article the other day verifying the median income of real estate agents has fallen 22% to $34,100? Median income….half make more and half make less. Also, a mere 16% of national real estate agents made 6 figures last year. I’m sure you’re curious to what that number represents and it’s 176,556 agents.

Ok, so all this wonderful news is out there. Here's our take on how to truly jumpstart both the housing industry and this economy.

• Bring back down payment assistance. I know the GSE's (Fannie Mae and Freddie Mac) despised these buyer assisted grant programs. Here's how the vast majority of them worked: Seller of the home (at closing) would make a "charitable donation" to a Non-profit organization (say a church), the church in turn work pocket a $900 admin. fee but remit the rest of the month (at times up to $10,000) towards the buyers closing cost. True the default in loans structured in the aforementioned way had higher default levels but now that HUD has grossly increased both the initial upfront Mortgage Insurance Premium and Monthly Premium, there's got to be a pretty decent model which supports a 3-6% default and still ensure "success" in homeownership.

• Housing is only so important to an already service oriented country like the US. Manufacturing MUST return. Leadership in Washington DC must bring back significant incentives to "defend" this countries manufacturing arm.

• Flat tax. If this county remains (as we suspect it will) a service oriented country, we must tax it accordingly whereby those leveraging the most services or consuming the most goods, in turn pay more.

Simple, now where do we petition these simple requests?

Who can you trust?

Here's a question I would like to pose for the loyal Efinity audience.

Is the economic environment in this country really improving or are we all being fed a stream of special interest commentary which want us to think things are getting better?

I have two separate examples for your collective review which point to the latter. I for one have a HUGE problem with this. It's important to note that I include our government included as one of the special interest groups.
Example #1
As reported by the Wall Street Journal, Federal Reserve Chairman Ben Bernanke Monday downplayed inflation fears which led some of colleagues to recently warn tighter monetary policy may be needed to keep prices in check. Bernanke said the rise in global commodity prices is likely to be temporary and shouldn't translate into a broader inflation problem. However, the Fed chief was quick to add that if his prediction is wrong and inflation begins to mark strong gains, the central bank would respond. "I think the increase in inflation will be transitory," Bernanke said when asked to further explain.
This has been a consistent them from the Fed Chairman for the past 18 months. In no way shape or form believe my limited view trumps the access to data the Fed Chairman has, however I do believe that statistics can be shown in many ways to shape many opinions. And if left-unchecked can fog the real issue which is that inflation is here, it will affect the economic recovery of this country and there is a strategic advantage for the Fed to not fully publicize the real issue.

Allow me to explain further (if you don't care to read through this, you can skip to my summary). First, one has to understand how the Bureau of Labor Statistics determines the Consumer Price Index (CPI). The CPI is a measure of the average change in prices over time of goods and services purchased by households. The Bureau of Labor Statistics publishes CPIs for two population groups: (1) the CPI for Urban Wage Earners and Clerical Workers (CPI-W), which covers households of wage earners and clerical workers that comprise approximately 32 percent of the total population and (2) the CPI for all Urban Consumers (CPI-U) and the Chained CPI for All Urban Consumers (C-CPI-U), which cover approximately 87 percent of the total population and include in addition to wage earners and clerical worker households, groups such as professional, managerial, and technical workers, the self-employed, short-term workers, the unemployed, and retirees and others not in the labor force. The CPIs are based on prices of food, clothing, shelter, and fuels, transportation fares, charges for doctors' and dentists' services, drugs, and other goods and services that people buy for day-to-day living. Prices are collected each month in 87 urban areas across the country from about 4,000 housing units and approximately 26,000 retail establishments-department stores, supermarkets, hospitals, filling stations, and other types of stores and service establishments. All taxes directly associated with the purchase and use of items are included in the index. Prices of fuels and a few other items are obtained every month in all 87 locations. Prices of most other commodities and services are collected every month in the three largest geographic areas and every other month in other areas. Prices of most goods and services are obtained by personal visits or telephone calls of the Bureau's trained representatives.

In calculating the index, price changes for the various items in each location are averaged together with weights, which represent their importance in the spending of the appropriate population group. Local
data are then combined to obtain a U.S. city average. For the CPI-U and CPI-W separate indexes are also published by size of city, by region of the country, for cross-classifications of regions and population-size classes, and for 27 local areas. Area indexes do not measure differences in the level of prices among cities; they only measure the average change in prices for each area since the base period. For the C-CPI-U data are issued only at the national level. It is important to note that the CPI-U and CPI-W are considered final when released, but the C-CPI-U is issued in preliminary form and subject to two annual revisions.

The index measures price change from a designed reference date. For the CPI-U and the CPI-W the reference base is 1982-84 equals 100. The reference base for the C-CPI-U is December 1999 equals 100. An increase of 16.5 percent from the reference base, for example, is shown as 116.500. This change can also be expressed in dollars as follows: the price of a base period market basket of goods and services in the CPI has risen from $10 in 1982-84 to $11.65.

Now that you have a better understanding, here's the most recent summary dates March 17th (see http://bls.gov/news.release/cpi.nr0.htm)
I'd like to point you to a few items once you've read through this list.

Seasonally adjusted changes from preceding month
Un-adjusted 12-mos.
Aug. Sep. Oct. Nov. Dec. Jan. Feb. ended
2010 2010 2010 2010 2010 2011 2011 Feb. 2011

All items.................. .2 .2 .2 .1 .4 .4 .5 2.1
Food...................... .1 .3 .1 .2 .1 .5 .6 2.3
Food at home............. .0 .4 .1 .2 .2 .7 .8 2.8
Food away from home (1).. .3 .3 .1 .1 .1 .2 .2 1.6
Energy.................... 1.6 1.1 2.5 .1 4.0 2.1 3.4 11.0
Energy commodities....... 2.6 2.2 4.4 .7 6.4 4.0 4.8 19.3
Gasoline (all types) .... 2.9 2.2 4.5 .7 6.7 3.5 4.7 19.2
Fuel oil (1)............ .9 .8 4.7 4.2 4.9 6.8 5.8 27.1
Energy services.......... .4 -.4 .0 -.8 .6 -.6 1.1 .2
Electricity............. .1 -.1 .2 .6 .3 -.5 .4 2.2
Utility (piped) gas
service.............. 1.4 -1.4 -.6 -5.3 1.7 -1.2 3.4 -5.9
All items less food and
energy................. .1 .0 .0 .1 .1 .2 .2 1.1
Commodities less food and
energy commodities.... .1 -.2 -.2 .0 -.1 .2 .2 .0
New vehicles............ .2 .1 -.1 -.2 -.1 -.1 1.0 .9
Used cars and trucks.... .9 -.4 -.6 .1 -.1 -.3 .1 1.9
Apparel................. .0 -.5 -.2 .1 .1 1.0 -.9 -.4
Medical care commodities
(1).................. .2 .3 .1 .2 .1 .5 .7 2.7
Services less energy
services.............. .0 .1 .1 .2 .1 .1 .2 1.5
Shelter................. .0 .0 .1 .1 .1 .1 .1 .8
Transportation services .0 .3 .3 .4 .2 .6 .5 3.5
Medical care services... .2 .7 .2 .2 .3 -.1 .4 3.0


Our SummaryWhile statically speaking, the adjusted 12 month index reflected a 2.1% increase (before seasonal adjustments), unless you're radically different than most people I know and don't spend equally on a whole range it items (including evidently a whole lot of apparel) this report summarized simply does not accurately reflect the present sign of the times. Which is; food, energy and gasoline are MAJOR drivers for people's spending. Car sales are down. Home sales are down. So if we were to focus on the net spending habits of people and clients (we deal with); here's the summary of inflation as it affects them:
• Food - 2.3 increase
• Food at home - 2.8% increase
• Energy - 11% increase
• Gasoline (all types) - 19.2% increase
Interesting that all of these figures are materially higher than the 2.1% reported CPI. The takeaway here is simply that disposable income is being reduced. As a country moving away from manufacturing and more towards consumer services, disposable income is imperative to a healthy and strong recover. Same goes for jobs. Perhaps this is a prime reason channels like CNBC dedicate some much talk of crude oil prices.

Example #2 forthcoming in the next Efinity Report post.

If you won't listen to us... perhaps the writers with the AP will sway you

Era of super-low mortgage rates is OVER


30-year benchmark rises to 5.05 percent from 4.81 percent
The average rate for a 30-year home loan rose above 5 percent this week for the first time since last April — just as Americans are feeling more secure in their jobs and confident about the economy, and just before the big spring home-buying rush.

Freddie Mac said Thursday that the average rate was 5.05 percent, almost a full percentage point higher than in November, when it hit a 40-year low.

Economic signals suggest the recovery is gaining momentum. New claims for jobless
benefits came in this week at the lowest in three years, and the unemployment rate has fallen nearly a full percentage point in two months. Americans are spending more and saving less.

The exception is the beleaguered housing market. Record foreclosures have forced home prices down, and last year was the worst for sales in more than a decade. About the only good news was that qualified buyers could get the deal of a lifetime from their lenders, if they had the means — and the stomach — for the market.

Now rates are rising, and analysts expect that will continue through the end of the year, to about 5.5 percent. The next few months are the busiest for the housing market — about one in three home sales happens in the spring.
It doesn't help," says Greg McBride, a senior financial analyst with Bankrate.com. "Any increase in mortgage rates takes away buying power and dilutes the incentive to refinance."

Rates have been rising since the fall, mostly because of fears that higher inflation is coming. Investors have been demanding higher yields on Treasury bonds ever since the Federal Reserve announced its program to pump up the economy by spending $600 billion to buy government debt. Mortgage rates tend to track the yield on the 10-year Treasury note.

"You'll see some effect on demand, but it's really how secure people are in their jobs and how much money they feel they have relative to their homes," says Cristian deRitis, an economist specializing in housing for Moody's Analytics.

"Many of those people just won't buy a house," says Wells Fargo senior economist Mark Vitner. "They'll hold off."

Home prices are expected to fall at least 5 percent more this year. Because of the feeling that the home isn't the failsafe investment it used to be, renting is more attractive. Especially when some analysts say it could be years before prices return to their pre-recession peak.

That may be contributing to the fact that, despite record inventory levels of affordable homes in nearly half of U.S. cities, mortgage applications continue their downward slide as buyers remain on the sidelines.

"Believe it or not, what I'm seeing, and I'm working with first-time homebuyers, they are not as affected by the interest rate as they are by getting a down payment," says Julie Longtin, a real estate agent with RE/MAX Cityside in Providence, R.I. "That's what is holding them back."

On a $200,000 loan, the payment difference between today's rate and November's is less than $100 a month — hardly enough by itself to spook a buyer.

If rates continue to rise, as many predict they will, the housing market will be in for yet more trouble. "Six percent would do serious damage if it happened in a very short period of time," said Patrick Newport, U.S. economist at IHS Global Insight.

Even 6 percent would be a bargain for homebuyers historically. Rates were in double digits through most of the 1980s. It wasn't until 1991 that rates consistently stayed below 10 percent. At the peak of the credit bubble in July 2006, the 30-year fixed mortgage was 6.76 percent.

All this leaves buyers wondering: What is the new normal for interest rates?

"We're turning to a more normal mortgage rate environment, says Guy Cecala, publisher of the trade magazine Inside Mortgage Finance. "That pretty much means the 30-year in the 6 percent range. I don't think rates will be going down." - AP writers JANNA HERRON, MICHELLE CONLIN

What this REALLY means for the market and housing over the next 3-5 years + will be detailed in the Efinity Report's next blog. Stay tuned...

Oh No They Didn't....

The US Debt Commission charged by the president on balancing the US’ budget, remitted their fiscal austerity plan. Within the proposal was a key ingredient which will greatly affect American homeownership, specifically the income-tax deduction for mortgage interest. The 18-member commission has been looking for ways to trim the federal deficit. Among the $3.8 trillion in debt-cutting options being considered by the “National Commission on Fiscal Responsibility and Reform” was initially written to include the eliminating for second homes mortgages of more than $500,000, and home-equity loans. The final release is a bit more aggressive. It includes a 12% non-refundable tax credit available to all tax payers with mortgages now caped at $500,000. NO credit from interest from second homes and home equity loans. As one might expect, the reaction from various housing industry leaders was a strident “Not A Good Idea”. With its release, the Congress and the President “must decide which tax expenditures to include in the tax code” of which mortgage interest for primary residences is specifically mentioned. I’ll highlight a few of the comments I have found around the news wires:

• “For a battered housing industry, which is struggling with a 21 percent unemployment rate among construction workers, this is absolutely the worst time to be considering changes,” said National Association of Home Builders President Bob Jones. Adding that diminishing or ending the deduction would exert further downward pressure on home prices, leaving more homeowners with mortgages larger than the value of their property and fueling even more foreclosures.
• Mortgage Bankers Association Chairman Michael D. Berman said that while his group’s members shared in the growing concern about the federal deficit, limiting the use of the mortgage-interest deduction “will have negative repercussions for consumers and home values up and down the housing chain.” Given “the fragile state” of the housing market, Berman said, “now is not the time to be scaling back incentives for homeownership.”
• Not to be left out, the National Association of REALTORS® has decided to take a wait and see approach.

There are some supports of this action, may of which are in the economics field. “The mortgage-interest deduction is to housing policy what Social Security reform has traditionally been to politics: the third rail,” says Kevin Gillen, vice president at Econsult Corp. in Philadelphia. He shares a consensus among economists is that the deduction is regressive and promotes overconsumption.

Out of pure selfish reasons, it’s no surprise that I oppose anything but a very limited change relating to interest and tax deduction on all types of homeownership. My suggestion would be to eliminate the interest deduction on all mortgages over $1.5 million and all Non-Owner properties as they typically have additional deductions taken with home improvement. This affects the super rich (or over extended) and the “investor”. The fact that it’s mentioned creates a slippery slope down the road should more severe additional cuts are required. The primary-residence tax and interest deduction is the one almost every American homeowner looks forward to as a way to be rewarded for the risks and costs of owning and maintaining a home. With almost half of the recent homebuyers consisting of first-timers, this tax and interest deduction is critical to the on-going recovery. Any changes in my opinion, even my own suggestions should not be implemented until the housing market is operating normally.


THE NATIONAL COMMISSION ON FISCAL RESPONSIBILITY AND REFORM
http://www.fiscalcommission.gov/sites/fiscalcommission.gov/files/documents/TheMomentofTruth12_1_2010.pdf

Financial Reform Bill Update

Congress moved on multiple fronts last week, bringing the financial regulatory reform bill to the edge of enactment and sending to the President's desk a pair of bills extending the flood insurance program and the settlement deadline for the home buyer tax credit. President Obama signed both bills on Friday.

The House approved the Dodd-Frank bill Wednesday by a 237-192 vote, though the week did not go by without some unexpected drama. While the legislation was expected to be approved by both the House and Senate in time to meet President Obama’s July 4 deadline, last-minute objections over a $19 billion bank tax added in the dead of night led to the bill being reopened in order to remove the provision. The passing early in the week of Sen. Robert Byrd, D-W.Va., also changed the vote count for passage.

The Senate is still expected to pass the financial reform package, but not until Congress returns the week of July 12.

House Passes Regulatory Reform Conference Report; Senate Passage Delayed
A week after passing what was thought to be the final Dodd-Frank regulatory reform bill out of the conference committee, prospects for final passage in Congress were complicated by two major events.

First, the death of Sen. Robert Byrd, D-W.Va., June 28 cost Senate Democrats a crucial vote for the legislation, and necessitated the Senate adjourning early for memorial services. Byrd’s passing, coupled with an announcement by Sen. Scott Brown, R-Mass., that he would oppose the legislation after a bank tax was added to the bill at the end of the conference process, left congressional leaders scrambling to wrap up the legislation before the July 4 deadline set by President Obama.

In an attempt to win back Brown’s vote, as well as several other moderate Republicans, the conference committee reconvened on June 29 and removed the bank tax, replacing it with an increase in Federal Deposit Insurance Corp. fees and an earlier sunset of the Troubled Asset Relief Program. With these changes, the House passed the conference report Wednesday evening by a 237-192 vote.

The Senate, however, delayed a final vote on the legislation until after the Independence Day break. That period will be critical to determining if the most recent legislative changes will sway enough Republicans to break the expected filibuster, and it will also provide time for the governor of West Virginia to fill that state’s vacant Senate seat.

MBA sent a letter to the conferees stating that while changes to the conference report modestly improved the legislation, it still believes that additional improvements can be made to limit the negative impact the bill will have on businesses and consumers. MBA will continue to monitor this issue as it develops over the next 10 days.

What Happened to November?

Better yet, what happened to October? The last 60 days have been a flash and have left the Efinity Report void of updates. Perhaps my New years resolution will include a more time spent on submitting these valuable nuggests. That said, thank you to many of you for the emails inquiring on the Efinity Report.

Release Date & Time
Economic Indicator
Consensus
Estimate
My Analysis

Mon. Nov. 30
Nothing of any significance.

Tues. Dec. 1, 10:00 a.m. ET
Nov. Institute of Supply Mgmt.
55.0 vs. last 55.7
Because auto manufacturing is contributing less to growth this measure of factory activity is expected to post a modest decline. Most mortgage investors will likely show little reaction to this data. This report to exert little, if any influence on the direction of the markets today. I would suggest to see how the Dubai World problem plays itself out. Given the lengthy and continued run up in fixed income pricing, it would not surprise me to see a fairly strong pull pack in late afternoon trading.

Wed. Dec. 2, 2:00 p.m. ET
Fed Beige Book released
This report, named for the color of its cover, is a compilation of economic reports from all 12 Federal Reserve districts. The brighter tones of recovery in most districts will likely be offset by still grim news in terms of employment. The chance any of the data in this report will surprise investors is small. Look for this data to be essentially “toothless” with respect to its impact on the trend trajectory of mortgage interest rates.

Thurs. Dec. 3, 8:30 a.m. ET
Revised Q3 Productivity & Unit Labor Costs
+8.6% vs. last +9.5%
-4.2% vs. last -5.2%
If the consensus estimate proves correct, this report may be a little unsettling for mortgage investors. A downward adjustment in productivity gains and an upward revision in labor cost is not typically the “stuff” that lower mortgage interest rates are made
of.

Thurs. Dec. 3, 8:30 a.m. ET
Initial jobless claims for the
week ended 11/28
Up 14,000
According to data provided by the Dismal Scientist initial jobless claims have shown a tendency to rise in the week including the Thanksgiving holiday in 7 of the past 10 years.
There is little reason to expect this phenomenon will not prevail once again this time around. Look for this data to draw little more than a passing glance from mortgage investors.

Thurs. Dec. 3, 10:00 a.m. ET
Nov. Institute of Supply Mgmt.
Service Sector Index
51.5 vs. last 50.6
The fractional improvement in the month-over-month value for this measure of activity in the largest segment of the economy is broadly anticipated. A reading that matches or lands close to the consensus estimate will likely result in little change to mortgage interest rates. Only in the most unlikely event that the ISM Service Sector Index falls below a reading of 50.0 would mortgage interest rates be expected to move noticeably lower as a direct result of this report.

Thurs. Dec. 3, 10:00 a.m. ET
Senate Banking Committee holds confirmation hearing on the nomination of Fed Chairman
Bernanke to a second term as chief of the U.S. central bank. Look for Committee members to attempt to lay complete blame for the swoon in the economy at the feet of Mr. Bernanke (a
hack job on a bureaucratic scapegoat is always a far better political option as opposed to accepting responsibility directly – especially with mid-term elections so close at hand). The exchanges here have the potential to be heated – but nothing in the way of market moving rhetoric is likely.

Fri. Dec. 4, 8:30 a.m. ET Nov.
Nonfarm payrolls
Jobless rate -130,000
10.2% vs. last 10.2%
Businesses accross most channels are still shedding workers. The headline nonfarm payroll number may have improved but the first-quarter average monthly loss still reflects loss of 691,000 jobs. It will likely take a headline job loss of 150,000 or more and/or a jobless rate of 10.3% or more to create enough stir in the markets and interest rates lower.

US Economy: Simply Not Sustainable

There was plenty of reasons to be optimistic with last week's unemployment report showing a sizable slow down in initial unemployment claims. This week's blog is going to be brief but I would like to present 5 reasons why our Economy may be headed for a substantial slowdown over the next 18 months. Let me repeat: I believe things may get much worse from here should any combination of the following happen:

1. China begins to back away from buying our debt
2. China's growth continues to drive up the demand (and price) for oil
3. Consumer spending slows as the cost of capital is driven higher because of the continued US Treasury drive for capital
4. Discussions continue in the global market about replacing the US dollar as the currency of choice to be replaced by the Euro
5. Housing slows even further as a huge backlog of REO properties makes its way onto the market. Add the large number of adjustable rate and negative arm mortgage products (most with negative HPA) and this appears to be the one most likely baked in the cake.

As you can see, we have a lot riding on another Country to facilitate us moving beyond this recession. The question I keep asking myself is, "what drives this next waive of growth?". From 2001 through 2007, it was housing. In all likelihood it appears that government spending will be the answer. So, what will facilitate that? Borrowing more money. Problem not solved.

As it relates to housing, I am afraid it will have many more dark days ahead of it. Rates are going up as is the cost of home ownership. Unlike the unemployment report, I am not seeing many things to get excited about. Unfortunately, I have more questions today than I did in August 2007 when I predicted a paradigm shift in our economy.

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis

Mon. June 8
Tue. June, 9. 10;00 a.m. ET
Apr. Wholesale Inventories
-1.1% vs. last -1.6%
This old stale data.

Tue. June 9, 1:00 p.m. ET
Treasury auctions $36 bil. of
3-year notes
The relative short maturity of this security should be attractive to a large number of investors. If so, this event will likely have little, if any meaningful impact on the direction of mortgage interest rates today.

Tue. June 9, before the end of the day
Most mortgage-backed securities "roll" to July delivery
This is a standard monthly administrative function of the mortgage market. The price impact of this event is already reflected on most investors’ rate sheets.


Wed. June 10, 1:00 p.m. ET
Treasury auctions $19 bil. of
10-year notes
The yield on this security has climbed above 3.9% - probably making this offering very attractive to a broad array of investors. If my comments above prove accurate, this will support higher mortgage interest rates.

Wed. June 10, 2:00 p.m. ET
Fed "Beige Book" is released
This report, named for the color of its cover, will provide an assessment of economic conditions in all 12 Federal Reserve districts. Most analysts anticipate the data will show that recessionary pressures are moderating in most of the country.

Thurs. June 11, 8:30 a.m. ET
Initial jobless claims for the week ended 6/06
Down 6,000
Look for this data to have little, if any meaningful impact on the market as investors discount today’s decline in the face of ramped-up expectations for a strong surge in jobless claims once the ramifications of the auto industry bankruptcies begin to work through the economy.

Thurs. June 11, 8:30 a.m. ET
May Retail Sales
Ex. auto
+0.5% vs. last -0.4%
+0.2% vs. last -0.5%
The government’s one time payment to Social Security recipients combined with tax refunds and other fiscal stimulus likely contributed strongly to the gains for both of the components of this report. If the consensus estimates proves accurate, mortgage investors will likely shrug the May Retail Sales gains off as a statistical aberration. Look for this data to have little, if any meaningful influence on the direction of equity markets today.

Thurs. June 11, 10:00 a.m. ET
Apr. Business Inventories
-1.0% vs. last -1.0%
This old stale bit of macro-economic news will likely do nothing more than take up space on this week’s calendar.

Thurs. June 11, 1:00 p.m. ET
Treasury auctions $11 bil. of
30-year bonds
The yield on this offering is above 4.5% -- a level that will hopefully be attractive to a large number of investors. If not, this event will likely serve to push fixed long term interest rates higher before the end of the day. This is not good news for mortgage rates as many a client are sitting out there waiting for things to turn around.


Fri. June 12,

HARP Program - Our Government's Next BIG Idea

This week, the Big 4 Mortgage Servicers/Investors (BofA, Citibank, Wells Fargo and Chase) release their varations of our governmment's
Making Home Affordable Program. The GSE's (Fannie Mae & Freddie Mac) have seperate versions of this program. Freddie Mac Relief Refinance MortgageSM and the Fannie Mae DU Refi PlusTM.

The concept behind these programs are to support potential borrowers who are under water on their home loans compared to their equity. Homeowners who might benefit from this action are the almost 50% of the homeowners who have loans secured by either GSE.

Some of the highlights are as follows:
Max LTV/CLTV -
105% LTV
Unlimited TLTV/CLTV

Loan Amount
Payoff of the first mortgage balance, including accrued interest
Actual closing costs, financing costs, pre-paids, and escrows
The borrowers may not receive any cash at closing
Note: No limit on closing costs, financing costs, pre-paids and escrows.
Example:
Payoff amount: $352,006
Actual closing costs, etc.: $3,672
Maximum loan amount: $355,678

I could go on but with most of the government's misguided programs, there's a kicker. Mortgage Insurance, which is required for the home loan where the Loan to Value is above 80% on the first mortgage would usually typify this potential client. Homeowners who are under water with the equity of their home loans usually had put down more than 20% (or took out a second). Either way, both GSE programs are currently not available for loans with MI; altough they may be offered at a later date.

So don't get too excited about the "latest" offering from our federal government.

This week's short economic calendar

Mon. April 6

Tue. April 7, 1:00 p.m. ET
Treasury sells $6 billion of
10-year inflation indexed securities
The “adjustable” feature of these securities should draw solid investor demand. If so, this will be a non-event in terms of its impact on the trend trajectory of fixed income interest rates.

Wed. April 8, 10:00 a.m. ET
Feb. Wholesale Inventories
-0.6% vs. last -0.9%
This old tidbit of macro-economic news will likely do nothing more than take up space on this week’s calendar.

Wed. April 8, 1:00 p.m. ET
Treasury sells estimated
$34 billion of three-year notes
The relative short-life of this security will likely result in a well bid offering. If so, this event will have little, if any impact on the direction of mortgage interest rates.

Wed. April 8, 2:00 p.m. ET
Minutes of the Federal Open Market Committee March meeting

Market participants will peruse this document for details surrounding committee members’ decision to commit $300 billion to the direct purchase of Treasury obligations as well as expanding their purchase of mortgage-backed securities by $750 billion. It will be an interesting read -- but in the end it will not likely influence the direction of interest rates.

Thurs. April 9, 8:30 a.m. ET
Initial jobless claims for the week ended 4/4
Down 9,000
Here's the report of the week. Further erosion in the employment sector is broadly anticipated by investors and has already been deeply priced into the current market. If this report proved lighter than anticipated, those still engaged with the equity markets in this shortened week may see a substaintial mid-morning rally in equities and a free fall in bonds, mortgage prices, ect.

Thurs. April 9, 1:00 p.m. ET
Treasury sells estimated
$18 billion of 10-year notes
This offering will likely require strong support from the Fed to keep the yield from skipping noticeably higher. A poorly bid auction here will almost certainly put some upward pressure on interest rates.

Thurs. April 9, 2:00 p.m. ET
The mortgage market will close early today for the Good Friday Holiday

Fri. April 10
The mortgage market is closed today for the Good Friday Holiday

Mon. April 13

How Do You Eat An Elephant?

Bank of America’s purchase of Countrywide is due to be ratified by CW’s shareholders later this month. This deal was hailed as such a win-win by the US Bank Regulators that a well established law, the Riegel-Neal Interstate Banking and Branching Efficiency Act, instituted a 10 percent cap on market share to prevent an institution from amassing too much power. Bank of America and Countrywide's banking unit will have $773 billion of combined deposits, equal to a 10.9 percent market share. Like Bear Stearns, the Federal Reserve couldn’t allow Countrywide to be insolvent and sought out a partner to take the fat girl to the prom. You can read about their justification here: http://www.federalreserve.gov/newsevents/press/orders/orders20080605a1.pdf
Bank of America is perhaps the most respected bank in the US along with Chase. They are the Goldman Sachs of the industry. That said my concern I’m sure thoroughly discussed in BofA conference rooms; Is B of A taking on to much risk at a time when capital is tightly held in the capital markets? The issue, Countrywide’s Servicing book. CW’ made its mark on the industry from 04’ to 07’ offering Option Arms. As a Thrift, Countywide would have to of secured the performance of many of the loans not sold to the GSE’s. I happen to be the proud owner of a said CW power point presentation (now removed from their website) where they boasted how 68% of the firm’s profitability was derived from Option Arms. Those of you who know about mortgages will understand the complexity of the situation. Option Arms typically have 4 payment options (not three as National City tried to rollout). Borrowers have an “option” to may a 30 yr payment, a 15yr, an Interest Only and a “Minimum Payment”. This amount is less than the interest earned for a given month. So, the remaining amount would be added back into the principal balance. Depending on the loan, when the loan reached 110% or 115% of the original note amount, the loans would move into a full amortization. I spend months on a local DFW radio show explaining how dangerous this product was:
http://radiotime.com/program/p_51173/Legacy_Financials_Power_Hour.aspx
Funny how my career carried me to Bear Stearns and National City, one prominent and one misguided player in this space. Anyway, so now as have a witches brew: A borrower who now has a larger payment than when he/she started, an interest rate which is 75 to 150 basis points higher than the market and less time to pay off the loan, usually 25-26 years if minimum payments were made month 1. Oh, and let’s not add a negative HPA environment which we now find ourselves in.
Countrywide’s story? Countrywide has $27 billion of negative amortization, or payment-option, adjustable- rate mortgages, according to a company regulatory filing. In the first quarter, 8.7 percent of those borrowers were at least three months late on payments, up from 5.4 percent in December and 0.6 percent in the fourth quarter of 2006, the company said. Two-thirds of Countrywide's negative amortization borrowers were making less than full interest payments, and 82 percent of them obtained the mortgages without providing pay stubs or tax returns to prove the income they reported on the loan applications was correct, according to the filings. Over the next 24 months, almost all of these transactions will come due. What then? Is BofA prepared to resolve perhaps up to $12.5B in distressed fixed income securities due to borrower delinquency and foreclosure? If not, things may be really interesting at BofA in the next 18 months.
On Tap for this week, one of the more fun filled weeks regarding this nations' economic situation.

Release Date & Time
Economic Indicator
Consensus Estimate
My Analysis

Mon. June 23,
Empty day.


Tue. June 24, 9:00 a.m. ET
FOMC meeting
This is the first day of a two-day Fed meeting.

Tue. June 24, 10:00 a.m. ET
June Consumer Confidence
57.0 vs. last 57.2
This report will not likely have a notable impact on the direction of mortgage interest rates today

Tue. June 24, 1:00 p.m. ET
Treasury Dept. auctions
$30 bil. of 2-year notes
Uncle Sam will almost surely have to bump up the yield on this offering to attract the desired capital. Investors will be very hesitant to take risks as they await the outcome of the Fed’s monetary policy deliberations currently underway.

Wed. June 25, 8:30 a.m. ET
May Durable Goods Orders
+0.1% vs. last -0.6%
The modest improvement in this index will almost surely go unnoticed as investors pace the floor awaiting the conclusion of today’s Federal Open Market Committee meeting.

Wed. June 25, 10:00 a.m. ET
May New Home Sales
Down 3.00%
New Home Sales are expected to reach a new cycle low in May. Such an outcome is already priced into the mortgage market -- which makes today’s report rather anticlimactic. Look for little, if any change in the trend trajectory of mortgage interest rates as a result of this report.

Wed. June 25, 2:15 p.m. ET
Federal Open Market Committee rate decision and post-meeting statement
Fed fund rate unchanged
Market participants see little chance the Fed will make any change to short-term interest rates. Investors expect the Fed’s post-meeting statement to attempt to strike a balance between policymakers’ increased concern over the chance that inflation pressures will escalate -- and worries that the economy is tracing along the edge of a possible extended recession. If the Fed achieves its objective of talking tough on inflation without leaving the impression an August rate hike is “baked-in-the-cake” -- mortgage interest rates will likely hover near current levels. On the other hand, if investors see the text of the post-meeting statement as containing thinly veiled hints that one or more rate hikes are likely before year-end -- it is almost a sure bet mortgage interest rates will move higher before the end of the week.

Thurs. June 26, 8:30 a.m. ET
Final Estimate Q1 GDP
+1.0% vs. last +0.9%
This old stale bit of economic news will likely do nothing more than take up space on the calendar today.

Thurs. June 26, 8:30 a.m. ET
Initial jobless claims for the week ended 6/21
Down 1,000
This report will likely have little impact on the direction of mortgage interest rates.

Thurs. June 26, 10:00 a.m. ET
May Existing Home Sales
+0.8% vs. last -1.0%
The National Association of Realtors is expected to report that existing home sales are beginning to stabilize. It is far too early to say the worse of the housing crisis has passed – but any sign of improvement is welcome. Look for this data to have little meaningful impact on the direction of mortgage rates today.

Thurs. June 26, 1:00 p.m. ET
Treasury Dept. auctions
$20 bil. of 5-year notes
A non-threatening monetary policy statement from the Fed on Wednesday will go a long way to ramping up demand for these securities. On the other hand, if the Fed leaves investors convinced a rate hike or series or rate hikes are likely before the end of the year the yield on these notes will move higher – dragging mortgage rates higher as well.

Fri. June 27, 8:30 a.m. ET
May Personal Income
Spending
Core PCE Index
+0.4% vs. last +0.2%
+0.6% vs. last +0.2%
0.2% vs. last +0.1%
It is going to be all about the core (excluding food and energy) personal consumption expenditure index today. A reading of 0.2% or less will be supportive of steady to perhaps fractionally lower rates while a number greater than 0.2% will almost certainly produce notably higher rates.

The answer to the question headlining this post is simple. One bite at a time. In dealing with our professional, personal and financial challenges in this market, the only way to address them is to tackle the problem one at a time.

Lastly, I added a survey. Will comment on the results September 1st.

The Fixed Income Week from Hell

Who needs a stiff drink? Good chances are anyone who focus in the RMBS, CMBS markets do. Becuase of global issues, sagging employment (who knew?) and a massive swoon in the stock market, the bond and fixed income rates took a huge beating last week.

As the week begins, the directional trend of mortgage interest rates will likely be most influenced by continued weakness in the stock market, saber rattling between the governments of Israel and Iran and its related impact on oil prices, and the presence of Uncle Sam in the credit market. The most influential economic report of the week will probably be Friday’s May Consumer Price Index figures. Consumers, Fed policymakers and fixed-income investors are becoming increasingly nervous about the likelihood that inflation pressures will continue to mount, even as economic activity levels remain weak.

Despite unemployment numbers, sky-high oil and food prices have pushed the inflation to 3.9% -- well above the Fed’s stated “comfort zone.” More bad news regarding inflation pressure at the consumer level will make it exceptionally difficult for mortgage interest rates to move to notably lower levels. Here's this week's

Release Date & Time
Economic Indicator
Consensus Estimate
Analysis

Mon. June 9, 10:00 a.m. ET
April Pending Home Sales
-0.5% vs. last -1.0%
The trend line still points to weakness in the housing sector. The fact that the rate of declined tapered-off a bit last month will likely leave most market participants unimpressed. This data will likely produce little if any significant change in the mortgage market today.

Tue. June 10,
Most mortgage-backed securities “roll” to July delivery
This is a standard monthly administrative function of the mortgage market. The roughly 25 basis-point downward adjustment in the price of mortgage-backed securities this event creates is already reflected on most investors’ rate sheets.
Wed. June 11, 2:00 p.m. ET
Fed “Beige Book” released
This compilation of economic surveys from each of the twelve Federal Reserve Bank districts will likely draw a bit more attention than usual. It is likely that the data will show an economy skating along the edge of recessionary conditions. If so, look for mortgage interest rates to remain steady to fractionally lower on the day.

Thurs. June 12, 8:30 a.m. ET
May Retail Sales
Ex. Auto
+0.5% vs. last -0.2%
+0.7% vs. last +0.5%
Look for these apparently stronger retail sales figures to be heavily discounted by mortgage investors. Higher prices for gasoline added a large part of the gain in the headline number and government stimulus checks undoubtedly contributed to the run-up in the ex. auto component. If the consensus estimate is within shouting distance of the actual numbers -- this data will not likely influence the trend trajectory of mortgage interest rates much one way or the other.

Thurs. June 13, 8:30 a.m. ET
Initial weekly jobless claims for the week ended 6/7
Up 13,000
Signs of more weakness in the labor sector will tend to be supportive of steady to fractionally lower mortgage interest rates.

Thurs. June 13, 10:00 a.m. ET
April Business Inventories
+0.3% vs. last +0.1%
It is unlikely mortgage investors will give this old bit of second-tier macro-economic data anything more than a passing glance and a yawn.

Thurs. June 13, 1:00 p.m. ET
Treasury auctions
10-year note
Traders try to push bond and note prices down in front of new incoming supply. If they are successful their actions will tend to drag your investors’ rate sheet prices lower as well.

Fri. June 14, 8:30 a.m. ET
May Consumer Price Index
Core Rate
+0.5 vs. last +0.2%
+0.2% vs. last +0.1%
This is one of the Fed’s favorite measures of inflation at the consumer level. Mortgage investors will be keenly focused on these numbers – particularly core consumer prices (a value that excludes the more volatile food and energy components). A core reading of 0.3% or more will almost certainly send rates spiraling higher before the end of the day. It will likely take a core reading of 0.1% or less to encourage mortgage investors to push rates even a fraction lower. Don’t hold your breath hoping for a mortgage market friendly number.