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Bellevue Real Estate, Mortgage, and Economy 11/20/11

Posted on 20 November 2011

Here is the Bellevue Real Estate Report for November 20, 2011:

Interest Rates Move Within A Tight Range: This week is still all about what comes from Europe as it continues to tilt at windmills unable financially to step up and cover the troubled countries that hang on the cliff of default. Italy made a positive step last week with Berlusconi agreeing to step down and a new leader in place (Monti), a financial guy, to form a technocratic government ( no politicians) to work out a budget that will save the country from defaulting. Italy is so big and carries more debt than the European Union and European Central Bank can handle so, there is still a tremendous amount of anxiety that all of these autonomous nations can come together on an agreement that will undoubtedly be painful for all involved. Interest rates spiked in Italy to an unsustainable level and Spain is not far behind. At the same time there is encouraging economic news in the US. Unemployment numbers continue to improve, inflation remains under control, housing starts are better, mortgage delinquencies dropped and overall sentiment is improving. This is keeping interest rates from improving. Many are concerned that interest rates are running out of steam at the present levels. The 10 yr note hasn’t been able to move below 2.00% and hold it; recent turmoil in Europe that isn’t lessening but becoming worse hasn’t generated the kind of safe haven moves into treasuries the last few weeks. Mortgage rates also finding resistance at present prices and yields. Although buying has slowed there isn’t much to suggest interest rates should increase either; the 10 yr is comfortable between 2.10% and 2.00% while mortgage rates are stable at present rates.
As long as the 10 yr fails to break 2.00% the opportunity for lower mortgage rates is absent. MBS markets have been flat for over two weeks as has the 10 year Treasury Note. Investors still hold somewhat of a negative bias as a safe haven against the ever changing situation in Europe but for the last week or so there has been no additional bad news to drive rates down. No shocks but no actual progress that is aimed at the banks in Europe that are in as bad, if not worse, shape than US banks found themselves in 2008 when Lehman failed and the sub prime bubble exploded. US banks were extremely leveraged just as Europe’s banks are now.

They say it takes two to tango…. And Stocks and Bonds continue to battle for investing dollars and trade in seesaw fashion. What’s causing this dance in the markets? Read on for details.
First, there was more pessimistic news out of Europe last week, as German leader Angela Merkel said that Europe is going through its toughest times since World War II, plagued by political unrest and a severe debt crisis. Reports showed there was a slowing in manufacturing to the point where recession fears have now gripped Europe.
Here lies another enormous problem for Europe: One way–and probably the biggest way–to lower government deficits, is to grow your way out and elevate Gross Domestic Product (GDP). However, many of the Southern Europe economies are on the brink of recession, which will make lowering the deficit through economic growth impossible.
So what does all of this mean for home loan rates here in the United States?
The problems in Europe should continue to support the US Dollar and US Bonds (including Mortgage Bonds, on which home loan rates are based) to some degree, as investors will view our Bonds as a safe haven for their money. Yet, if we continue to see better-than-expected economic data here like we did last week, this will offset the continued uncertainty surrounding the European crisis. And this is part of the reason that the Bond markets and home loan rates saw limited gains last week.
Some of the good news last week included tamer than expected wholesale inflation in the form of the Producer Price Index (PPI) and improved New York Manufacturing. Also, as you can see from the chart, the year-over-year headline Consumer Price Index (CPI) was down from the previous reading, which is good news for people concerned about inflation. However, the closely watched Core CPI rose by 0.1%, and though this was inline with estimates, it did push the year-over-year rate to 2.1% from 2%…a touch above the Fed’s comfort zone.
The bottom line is that home loan rates are still near historic lows, which means now remains a great time to purchase or refinance a home. Let me know if I can answer any questions at all for you or your clients.
Europe Update for this last week: Italian bonds and stocks erased early gains and declined as Monti met with leaders of the country’s political parties to discuss Cabinet nominees. The yield on Italy’s benchmark 10-year bond rose 19 basis points to 6.64% this morning. The professor, as Monti is known, already faces resistance to appointing some politicians to his so-called technical Cabinet. Europe is a dead man walking when it comes to dealing with the debt crisis; even if the ECB wanted to pump funds to Italy, it doesn’t have enough to make a dent in the debt. Germany and France will not pony up anymore funds as their citizens resist the financial stress it would out on each country. The inability to contain a regional debt crisis that started in Greece more than two years ago led to a surge in Italian bond yields as investors bet on which nation may need aid next. Monti, an economist and former adviser to Goldman Sachs Group Inc., will try to reassure investors that Italy can cut a 1.9 trillion-euro ($2.6 trillion) debt load and spur economic growth that has lagged behind the euro-region average for more than a decade. The EU’s gross domestic product increased 0.2% from the previous three months, when it rose at the same pace, according to EU data. The euro weakened as the cost of insuring French bonds climbed to a record and Spanish yields rose at an auction. Mario Monti, Italy’s premier-in-waiting, faced political resistance on forming a Cabinet during talks in Rome yesterday. Monti wants a technocratic government without politicians, politicians in Italy refusing to go along. French and Italian interest rates increased today. Germany and Britain exchanging words over Britain’s refusal to go along with a tax on financial transactions. 25% of Britain’s lawmakers are calling for a referendum vote to exit the EU. Germany has been at the forefront of calls for a European transaction tax, a levy Britain is only willing to countenance if the U.S. and Asian nations join in to prevent financial services from deserting London’s financial center. The European Commission has proposed a plan that it says would raise 57 billion euros ($77B) a year. Now France and Germany squabbling; Germany’s Angela Merkel rejected French calls to deploy the European Central Bank as a crisis backstop, defying global leaders and investors calling for more urgent action to halt the turmoil. ECB itself has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB’s responsibility. The spread between French and German 10-year yields widened to as much as 204 basis points today as France sold 6.98 billion euros ($9.38 billion) of notes. Spanish bonds sank, driving 10- year yields to the highest since the euro was introduced in 1999, as borrowing costs climbed to the most in at least seven years at an auction of securities.

Real Estate Miscellaneous Stats:
Foreclosure Rates Rise But Delinquencies Drop: The national readings for the 3rd quarter of the year are encouraging even though foreclosure rates are higher. Most observers expected foreclosure rates to rise as banks got past the legal issues connected with the “Robo Signing” scandal. Many of the largest banks postponed their planned foreclosures for a large portion of 2011 while they worked through their exposure to litigation. Much of these increases were concentrated in the hardest hit area of the nation. The good news is the delinquency rate for mortgages dropped to levels not seen since 2008. The Mortgage Banker’s Association released their delinquency survey and it seems that the foreclosure trend may be changing course. The foreclosure start rate rose from .96% of all mortgages in the 2nd quarter to 1.09% in the 3rd. This is down from 1.34% during the same time last year. At the end of the 3rd quarter 4.43% of all mortgages were somewhere in the foreclosure process as compared with 4.39% at the same time last year. The good data was in delinquency rates. Delinquency rates include all mortgages where the payment is more than 30 days past due and are not in foreclosure. This includes loans where homeowners have not made payments for over a year. That rate was 7.99% in the 3rd quarter which is down from 8.14% last quarter and 9.13% last year. Even more encouraging is the 30 day delinquency rate is the lowest since the 2nd quarter of 2007 when the mortgage melt down began. The delinquency rate is still too high but a trend in the right direction is a welcome development. MBA officials predict that, at the current pace of distressed sales, it will be another 3- 4 years before we have a normal inventory of foreclosed properties. These same officials point out that 52% of all foreclosures are concentrated in 5 states. It is possible that many areas will recover more quickly than these hardest hit markets.
Housing Starts Encourage the Markets: October housing starts and permits were expected to be down 8.0% but came in much better as reported -0.3% at 628K. September starts were revised lower to +7.7% fr0m +15.0%. Single family starts up 3.9% while multi-family starts -8.3%. Permits were up 10.9% to 653K the best since March 2010.
Jumbo Loan Strategic Default Risk: Moody’s released a recently completed study of the risk associated with high dollar loans. These are loans that are above the standard conforming limit for Fannie Mae and Freddy Mac as well as above the temporary high balance conforming limit. These loans are portfolio loans originated and held by various financial institutions. In its study of mortgage backed bond portfolios, Moody’s found that about 50% had a negative equity position. Credit Rating Agency Fair Issac Corp, also has reported that strategic defaults on these loans is a growing problem. There are currently about 12 million mortgage borrowers who have negative equity and Fair Issac says that 30% of all foreclosures are strategic defaults. A strategic default is where a borrower can afford to make the payment but do not find it beneficial to do so. Many lenders are now using a new Fair Issac tool to predict which lenders are more at risk of walking away from their home. With the prospects of recovering lost equity being many years away in some markets, homeonwers are taking a long look at their options.

Loan Program Of The Week. New Portfolio Jumbo Loan: Guild Mortgage has just entered in to an agreement with a Jumbo Loan provider that offers some of the most flexible underwriting and creative provisions for loan approval. Here are a few bullet points:
• Loan Amounts Up to $5,000,000.00 and $10,000,000.00 on a case by case basis.
• True portfolio product with flexible underwriting policy. We just approved a loan that was declined with other portfolio lenders because of income problems.
• Asset Depletion can be used to supplement income. This can be done even if a client does not have a history of depleting assets on their tax retuBellevue Real Estate Reportrns. Income calculations from this source are based on age of the borrower. 4001K funds can only be used if the borrower is of retirement age.
• Pledged Assets can be used to reduce down payment. This allows the borrower to keep their assets invested. This can allow down payments as low as 10%. Pledge cannot come from a 401K, IRA or annuities.
This loan can be very helpful for high net worth borrowers that may not show a lot of income on their tax returns.

Bellevue Real Estate Report