Monthly Archives: November 2013

Mortgage Rates Modestly Lower but Remain Near Recent Highs

Mortgage rates edged just barely lower today, but remain close to the recent highs seen on Wednesday.  Along with November 12th, these 3 days contain the highest rates since the September 18th FOMC Announcement where the Fed held off on reducing asset purchases.  On a positive note, despite the two month highs, they’re not far off from most of the recent activity.  Today’s most prevalent rate quotes are going out between 4.375% and 4.5% for top tier scenarios (best-execution), whereas most of the recent activity was 4.25%-4.375%.   Many lenders are closed today or are otherwise not issuing new rate sheets


With today’s slight improvement, the week ends up looking rather flat in terms of overall movement from last Friday.  This is about what you’d expect given the absence of significant events this week and extremely important events in the week ahead.  Next Tuesday is the only day next week that does NOT contain an important economic report in the morning.  Friday hosts the Employment Situation (aka “jobs report, official employment data, NFP”) which is the most important economic report for the rest of the year.


Investors increasingly believe the Fed may move to reduce asset purchases in December if the upcoming jobs report is strong enough, though a great deal of debate remains.  If that happens, it would likely result in an immediate move higher for rates–perhaps significantly.  Investors will draw conclusions about the Fed decision almost immediately on Friday and may begin leaning in one direction several days in advance.  The point is that we’re going from what has been a very flat few weeks to a potentially much more volatile December.


Home Prices Rise Overall, but Some Areas Seeing Sharp Declines

Home prices rose again nationally in September Lender Processing Services (LPS) said today, but in many areas, notably a lot of the older mill towns in the Northeast, prices are still declining, in some cases sharply.  LPS’s Home Price Index (HPI) was up 0.2 percent from August to $232,000 and has risen 8.2 percent since the beginning of the year and 9.0 percent since September 2012.

Nationally the HPI has climbed back to within 14.1 percent of the peak level reached in June of 2006 when the index was at $270,000.  In many states however, such as Florida (-35.1 percent) and even, despite its recent unprecedented gains, California (-25.3 percent) prices have far from fully recovered.

LPS derives its data from residential real estate transactions and its own property and loan-level data bases.  The HPI is the result of a repeat sales analysis representing the price of non-distressed properties by taking into account price discounts for bank-owned real estate and short sales.

Five states had increases in their HPI of half a percent or more from August to September, Nevada was up 0.8 percent, Georgia and South Carolina increased by 0.7 percent and both Florida and Illinois were up 0.5 percent.  The largest month-over-month declines were in Connecticut (-0.9 percent), New Hampshire (-0.6 percent), Massachusetts (-0.5 percent) and Colorado and Pennsylvania each of which declined 0.4 percent.

Colorado along with Texas established new peak prices in July but while Texas has gone on to even higher HPI levels and established another peak in September, Colorado has declined every month since.  The state is now down 0.7 percent from its recent peak.

The biggest price gains among metropolitan areas were almost all in the south.  Myrtle Beach, South Carolina gained 1 percentage point in September followed by Charleston South Carolina, Atlanta, and Miami with 9 percent increases.  There were five metro areas that were up 0.8 percent, Naples, Florida, Reno and Las Vegas, Ocean Pines, Maryland; and Key West. Austin, Texas gained 0.6 percent and established a new peak price at $241,000.

The big losers were mostly in New England.  Torrington (-1.0 percent), Bridgeport (-0.9 percent), and Norwich (-0.9 percent), Connecticut were followed by Springfield, Massachusetts and New Haven, down 0.8 percent.  York, Pennsylvania and Kennewick, Washington, down 0.7 percent.   Worcester, Massachusetts and Manchester, New Hampshire each lost 0.6 percent in value from September.  Denver, which had, along with Colorado, set a new peak in July is now off that peak by 0.8 percent after falling half a point in September.

Modest Growth Seen in Commercial Real Estate Markets

Commercial real estate leasing patterns are showing steady but modest growth, according to the National Association of Realtors® quarterly commercial real estate forecast.

Lawrence Yun, NAR chief economist, projects only modest changes in the coming year. “Jobs are the key driver for commercial real estate, and the accumulation of 7 million net new jobs from the low point a few years ago is steadily showing up as demand for leasing and purchases of properties,” he said. “But the difficulty of accessing loans remains a hindrance to a faster recovery.”

The gross domestic product rose from 2.5 percent in the second quarter to 2.9 percent in the third quarter. NAR’s recent Commercial Real Estate Quarterly Market Survey shows leasing activity rose 2 percent in the third quarter from the second quarter, and higher sales levels than a year ago.

Yun said there have been some shifts in commercial purchases. “Investors have been looking for better yields, and have found good potential in smaller commercial properties, notably in secondary and tertiary markets,” he said. “Sales of commercial properties costing less than $2.5 million in the third quarter were 11 percent above a year ago, while prices for smaller properties were 4 percent above the third quarter of 2012.”

Commercial investment in properties costing more than $2.5 million1 rose 26 percent from a year ago, while prices for large properties were 9 percent above the third quarter of 2012.

National vacancy rates over the coming year are forecast to decline 0.2 percentage point in the office market, 0.6 point in industrial, and 0.5 point for retail real estate. The average multifamily vacancy rate will edge up 0.1 percent, but that sector continues to see the tightest availability and biggest rent increases.

NAR’s latest Commercial Real Estate Outlook offers overall projections for four major commercial sectors and analyzes quarterly data in the office, industrial, retail and multifamily markets. Historic data for metro areas were provided by REIS, Inc., a source of commercial real estate performance information.

New York Home Price’s Rise As Well As Equity At A Record Pace

The number of Americans who owe more on their mortgages than their homes are worth fell at the fastest pace on record in the third quarter as prices rose, a sign supply shortages may ease as more owners are able to sell.

The percentage of homes with mortgages that had negative equity dropped to 21 percent from 23.8 percent in the second quarter, according to a report today from Seattle-based Zillow Inc. The share of owners with at least 20 percent equity climbed to 60.8 percent from 58.1 percent, making it easier for them to list properties and buy a new place.

“Home sales will pick up very nicely when people gain the equity they need to sell their house and have a down payment for the next one,” said Neal Soss, chief economist at Credit Suisse Group AG in New York. “There’s a magnifying effect on sales — people are able to list their home and sell it, and odds are they’re going to go on and buy another one.”

A shortage of inventory has forced homebuyers to compete, driving up prices and leaving some shoppers out of the market, said Thomas Lawler, a former Fannie Mae economist who now is a housing consultant. The number of homes for sale reached a low of 1.8 million in early 2013, the fewest in more than a decade, according to data from the National Association of Realtors.

“The pent-up demand from people who now have enough equity to sell their homes will help next year,” said Lawler, president of Lawler Economic & Housing Consulting LLC in Leesburg, Virginia. “We’ll see the effect during the spring selling season. Not a lot of people put their homes on the market during the holidays.”

While the supply of homes limited sales, it boosted price growth, said Michelle Meyer, a senior U.S. economist at Bank of America Corp. in New York. Shortages have caused buyers to compete for properties by raising the price they offer, she said. The median price of an existing home rose 12.8 percent last month, the Realtors’ group reported yesterday. In August, it jumped 13.4 percent, the fastest rate since the height of the real estate boom in 2005.

“We’ll see the pace of price growth moderate next year,” said Meyer. She estimates prices will gain 8 percent in 2014, compared with 10 percent in 2013.

The real estate recovery has supported economic growth for almost two years as buyers make ancillary purchases such as home decor and appliances, Meyers said. Consumer spending accounts for about 70 percent of the economy. Gross domestic product grew at a 2.8 percent pace in the third quarter, up from 2.5 percent in the prior period.

New York Purchase Mortgages Top 60 percent in October

Mortgage loan originations for the purpose of purchasing topped 60 percent in October Ellie Mae said on Wednesday, for the first time since the company began publishing its Origination Insight Report.  Quite naturally the refinancing share was below 40 percent for the first time as well.


Purchase mortgages represented 61 percent of all mortgages originated during the month compared to 58 percent in September and 31 percent in October 2012.  Refinancing dropped to 39 percent from 41 percent the previous month and 68 percent a year earlier.  Ellie Mae first began tracking this data in August 2011.


Sixty-eight percent of originations were conventional mortgages, down from 70 percent in September and 74 percent in October 2011 while FHA-backed mortgages remained at the 19 percent level where it has been for five of the last six months and where is stood in October 2012 as well.


The time to close a loan rose slightly for all mortgages, from 42 days in September to 45 days in October.  The time to close was up 3 percentage points for both purchase and refinance mortgages which increased to 46 and 43 days respectively.


The pull-through rate, that is the percentage of applications which close as loans, fell slightly from 52.3 percent in September to 51.4 percent in October.  The closing rate for purchase loans was 56.9 percent, down from 59.6 percent and for refis it was 44.6 percent compared to 45.2 percent.


Underwriting standards seem to be easing.  Ellie Mae said that 28 percent of closed loans had an average FICO score of less than 700 compared to 16 percent one year earlier.  The average loan-to-value ratio (LTV) has increased to 81 percent from 78 percent in October 2012 while the average FICO score is down to 732 from 750.  The debt-to-income ratio is now at 25/38 instead of 23/34.


Ellie Mae draws its data from a sampling of loan applications that flow thought its proprietary software and loan network.  That volume represents more than 20 percent of all U.S. loan originations.

Big Banks Prepared For U.S. Default

As the United States threatened to default on its debt last month, major U.S. banks set up war rooms, spent many millions of dollars on contingency planning and, in some cases, even prepared to underwrite federal government benefits.

In a series of interviews with top bank executives, new details emerged about the extent of the contingency planning that was undertaken before and during the 16-day government shutdown and as a potential default loomed.

The planning for worst-case scenarios didn’t come cheap. JPMorgan alone has spent more than $100 million on contingency planning for U.S. budget crises in recent years including this one, sources close to the bank say. It has reviewed and analyzed thousands of trading contracts, updated computer systems to handle fiscal emergencies, hired consultants, and built new models to figure out what might happen to securities prices.

It may not go to waste. The temporary budget agreement that President Barack Obama signed shortly after midnight on October 17 to end the shutdown and lift the default threat, authorizes government spending through January 15 and eases enforcement of the debt limit until February 7, creating the potential for another budget crisis early next year, even as some Republicans vow they will avoid it.

With each crisis, the once-unthinkable scenario of a U.S. default becomes a little more real, bank executives said.

“You could tell in the market that people were getting prepared much more this time for a potential default than last time,” said a person involved with contingency planning at a major U.S. bank. “The threat moved the market, and people were preparing, whereas the first time there was little movement because most people didn’t think it would happen.”

The latest budget dust-up was the third in two years. In August 2011, fiscal battles led to the downgrade of the U.S. credit rating by Standard & Poor’s, and then 16 months later, the discord resulted in across-the-board budget cuts at federal agencies known as “sequestration.”



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JPMorgan Chase to pay $4.5 billion in mortgage security deal



JPMorgan Chase & Co said on Friday it agreed to pay $4.5 billion to settle claims by investors who lost money on mortgage-backed securities before the collapse of the U.S. housing market.

The bank reached the agreement with 21 institutional investors in 330 residential mortgage-backed securities trusts issued by JPMorgan and Bear Stearns, which it took over during the financial crisis, according to the bank and lawyers for the investors.

The deal still has to be accepted by seven trustees overseeing the securities holdings, the parties said.

The settlement does not include trusts issued by Washington Mutual, which JPMorgan also acquired.

The deal is separate from the preliminary $13 billion settlement JPMorgan has reached with the U.S. government that would resolve a raft of actions over residential mortgage-backed securities.

“This settlement is another important step in J.P. Morgan’s efforts to resolve legacy related RMBS matters,” the bank said in a statement.

The 21 investors include BlackRock Inc, Metlife Inc, Allianz SE’s Pacific Investment Management Company, the TCW Group and Bayerische Landesbank.

Under the agreement, the trustees have until January 15 to accept the offer, which may be extended for another 60 days, according to JPMorgan and Gibbs & Bruns, the Houston law firm that represented the institutional investors.

Kathy Patrick of Gibbs & Bruns called the deal “an important milestone” in a three-year effort by the group of 21 bondholders.

The seven trustees over the bonds include Bank of New York Mellon Corp. Kevin Heine, a spokesman for the Bank of New York Mellon, said the bank would “evaluate the proposed settlement along with the other trustees.”

If accepted, the deal would resolve claims that JPMorgan and Bear Stearns misrepresented the mortgages underlying the securities, JPMorgan said.

JPMorgan is the third bank to strike a deal with investors over shoddy mortgage-backed securities issued in the run-up to the financial crisis.

Bank of America Corp agreed to a $8.5 billion settlement in June 2011 with 22 institutional investors. That deal is still awaiting court approval.

In 2012, bondholders in trusts issued by Ally Financial’s bankrupt former mortgage lending arm, Residential Capital, won an agreement to bring an $8.7 billion claim, although that was later reduced to $7.3 billion.

Gibbs & Bruns has represented investors in all three settlements. In 2011, the law firm said its investor clients had instructed trustees overseeing $95 billion of securities issued by JPMorgan, Bear Stearns and Washington Mutual to investigate whether the bonds were backed by ineligible mortgages.

Washington Mutual is not included in the deal because of litigation between the Federal Deposit Insurance Corp and JPMorgan over who is responsible for losses at the former mortgage lender, according to a person familiar with the matter.

The exclusion explains the difference between the amount of the announced deal and reports last month that JPMorgan was near an agreement with the investors for close to $6 billion, said another person familiar with the negotiations.

The separate tentative $13 billion settlement between JPMorgan and the U.S. government also has been complicated by that dispute, according to other sources.

JPMorgan CEO Jamie Dimon has vowed to resolve legal and regulatory issues that have been weighing heavily on the company since May 2012.

In October, JPMorgan reported its first quarterly loss under Dimon as it recorded more than $9 billion of expenses to build its litigation reserves.

JPMorgan is the biggest U.S. bank by assets.


New York Manufacturing drops to lowest levels in month’s.

New York state’s manufacturing sector unexpectedly shrank this month, but business optimism remained relatively resilient, a report from the New York Federal Reserve showed on Friday.

The New York Fed’s “Empire State” general business conditions index contracted to minus 2.21 from 1.52 in October. Economists in a Reuters poll had forecast an index of 5.00. A reading above zero indicates expansion. Friday’s was the first negative reading since May.

The report underscores some of the headwinds facing the world’s largest economy, where the recovery remains fragile. A federal government shutdown in October had been expected to drag on growth, but data in the wake of that congressional impasse has been mixed.

The new orders index slid to minus 5.53 from 7.75, and shipments dropped to minus 0.53 from 13.12. Labor market conditions also weakened, with the index for the number of employees slipping to 0.0 from 3.61 in October.

The average employee workweek index also sank to minus 5.26 from 3.61.

Nevertheless, the New York Fed noted that firms remained relatively optimistic in November, following on a buoyant outlook in October. The index of six-month business conditions edged down to 37.51 from 40.76.

The survey of manufacturing plants in the state is one of the earliest monthly guideposts to U.S. factory conditions.

Gains Despite Upcoming Treasury Auctions

Even with Treasury auctions coming up at 1pm today and tomorrow, bond markets are already pushing back against yesterday’s weakness.  This is happening in the absence of data or other event-based motivation.  It could be part of broader sideways momentum that stands a chance of remaining until next week’s FOMC Minutes.  It could also be something better than that, but we haven’t seen nearly enough positivity or volume in order to suggest it’s anything more than ‘leveling-off.’

MBS prices are up roughly 3/8ths of a point.  The 10yr Auction is coming up at 1pm and is the only significant event on the calendar.

Freddie Mac Signs $77 million Risk Share Agreement


Freddie Mac has signed a risk sharing agreement with Arch Reinsurance Ltd. Which will cover up to $77.4 million in possible credit losses from a pool of single family loans.  The agreement is similar to one announced last month between Fannie Mae and National Mortgage Insurance Corporation to cover $5.0 billion in risk.


This new insurance coverage is another initiative by Freddie Mac to meet a strategic goal set for it and Fannie Mae (the GSEs) to transfer at least $30 billion of its single-family mortgage risk to private sources of capital.  The Freddie Mac/Arch contract involves a portion of the credit risk of loans funded in the third quarter of 2012.


“This is part of our business strategy to expand risk-sharing with private firms, thus reducing taxpayers’ exposure to losses from mortgage foreclosures,” said David Lowman, executive vice president of single-family business for Freddie Mac. “We have brought to the market new sources of capital for transferring mortgage credit risk away from taxpayers. We’ve tapped into the global insurance community’s appetite for U.S. mortgage credit exposure, and would like to do more of these policies in the future.”


Freddie Mac has sought to further meet the strategic goals, set for the GSEs by the Federal Housing Finance Agency (FHFA) with two STACR debt offerings, the first of which closed in July and the second of which was priced last week.