U.S. stocks remained under pressure as the latest data on mortgage delinquencies and foreclosures hit new highs, and of course Eurozone troubles continue to hover.  But stocks did pare morning-session losses, the day’s nadir was hit at about 11 CDT, on speculation the ECB will intervene to halt the euro’s slide. 

Talks of bailout and interventions will probably continue to offer the market intraday support, but such actions will ultimately signal just how precarious things are right now. 

Nine of the 10 major industry groups declined during the session, with industrials leading the weakness.  Financials was the only group to close up.  That sector turned higher just after lunch when it was reported that a vote on the financial regulation bill would be delayed and a controversial provision on derivative would be removed.  The problem is FinReg was delayed for the wrong reasons.  A roll call fell short of the number to end debate and proceed with a vote on the bill, not because reasonable heads prevailed but because too many Senators want the legislation to be stricter on bank activities. 

The U.S. dollar retreated from a 14-month high as the euro recouped nearly all of Tuesday’s bludgeoning on that speculation the ECB (European central bank) is prepared to intervene in the currency markets to prop up the euro.  Of course full-fledged intervention would take a concerted effort from other central banks, which have reportedly been in the process of reducing euro reserves (although there was word that the Swiss central bank did intervene to boost the EUR/CHF pair – buying euros to boosts its value against the Swiss Franc.  I still do not believe a concerted intervention will occur prior to EUR/USD of 1.15 – it currently sits at 1.23.  No matter the level at which this occurs, you’ve got to expect it as government interventions are all the rage.  It’s tough to know intrinsic values of anything right now as markets have not been allowed to find true prices. 

Market Activity for May 19, 2010

Mortgage Applications

The Mortgage Bankers Association reported that their applications index fell 1.5%, but it was actually much worse than that as the latest decline in interest rates helped refinancing activity buoy the index.

Refinancing activity jumped 14.5% last week, following a similar increase in the week prior, as the average interest rate on the 30-year fixed mortgage fell to 4.83% -- second-straight week below 5.00%.  Refis shot back up to 68.1% of all mortgage applications – had fallen to 51.9% in the final week of April as the expiration of the home-buyers tax credit incited purchases.

But purchases are showing that the hangover following the removal of the government subsidy can be quite harsh.  Applications to purchase a home slid 27.1%, slammed down to the lowest level of this cycle, making a new 13-year low. 

Consumer Price Index (CPI)

The Labor Department reported that the CPI suggested inflation remained benign in April, falling 0.1% for the month (an increase of 0.1% was expected) and decelerated to 2.2% on a year-over-year basis, down from 2.4% in March.  The Fed will be under no pressure to tighten policy with readings like this.

The housing component, which makes up 42% of the index, fell 0.1% and continues to hold CPI down.  However, this wasn’t the only segment to show price decline.  The overall energy component declined 1.4% (but up 18.5% y/o/y); the apparel component fell 0.7% (fourth-straight month of decline); transportation prices fell 0.5% (led by a 2.4% fall in gasoline); personal computer prices slipped 0.4% (down 8.7% y/o/y). 

Among the components that showed an increase in prices: Medical equipment rose 0.2% (up just 3.6% y/o/y, which is quite contained but I’m not sure this matches with reality); food was up 0.2%; and the recreation component rose 0.3%. 

Mortgage Delinquencies

For the first quarter of 2010, the National Delinquency Survey (NDS) showed mortgage delinquencies rose to 10.06% (as a percentage of all mortgage loans) from 9.47% during the final three months of 2009.  Both prime and subprime delinquency rates deteriorated – prime-loan delinquencies increased to 7.32% from 6.73%; subprime delinquencies increased to 27.21% from 25.6%.  Subprime delinquencies had improved during the previous quarter. 

(Erosion occurred in 60-90 day delinquency rates across all categories.  One would think if the economy were improving as much as so many people seem to believe that at least some categories of 60-90s would have improved.) 

Among fixed-rate mortgages, prime delinquencies rose to 6.17% from 5.60% and subprime increased to 25.69% from 23.83% (this segment improved in the prior quarter, falling to 7.95% from 8.66%).  For adjustable-rate mortgages, prime-loan delinquencies rose to 13.52% from 12.10% and subprime rose jumped to 29.09% from 26.69% (this segment improved in the prior quarter, falling to 26.69% from 28.23%).   I state the prior quarter’s improvement among subprime loans because there was plenty of premature excitement surrounding those figures back in February (when the fourth-quarter data was released). 

In terms of actual foreclosures, they rose for the 17^th-straight quarter to 4.63% from 4.58% during the fourth-quarter of 2009.  As the chart below illustrates, the rate of increase has eased.  However, considering the delay in foreclosure filings, as banks have been instructed to push these borrowers through the government’s loan modification program, I suspect the rate of increase will accelerate again.  (Bank of America has indicated that they expect a big boost in filings by the fourth quarter of this year.)  This NDS report has the “shadow inventory” at 4.3 million loans.  These are homes in which the mortgages are at least 90 days late or already owned by the bank but have not yet been place on the market.  Ultimately, a significant percentage of these properties will turn into distressed properties, putting pressure on prices – this is exactly why I believe there is some further downside to the housing market.

Prime-loan foreclosures drove the overall results, rising to 3.41% from 3.31%; the subprime foreclosure rate fell, down to 15.39% from 15.58%.

As a result of the increase in both foreclosure and delinquency rates, the combined percentage of loans either in foreclosure or at least 30 days past due hit a record 14.69% from 14.05% in the fourth quarter.  The percentage of loans seriously delinquent (90 days or more past due) did improve, falling to 9.54% from 9.67% in the previous quarter – this was due to a decline in subprime seriously delinquents, prime serious delinquents rose.

The National Delinquency Survey represents about 85% of the outstanding first lien mortgages.

FOMC Minutes

Dominating the minutes, the notes from the FOMC’s April 27-28 meeting, was the agreement among policymakers that there was no rush to begin selling the $1.25 trillion in mortgage-backed securities they just completed buying on March 31.  A majority of FOMC members preferred waiting until they begin to raise rates before proceeding with these sales – most preferring to sell these assets (to reduce the Fed’s balance sheet and drain some of the money they’ve pumped into the system) in a gradual manner over a five-year time horizon.

So the Fed is talking about selling mortgage-backed securities, some may recall we spent a decent amount of time talking about this a month back or so.  I’m going to go out on a limb and say they’ll be buying even more bonds (be it Treasury or MBS) before they end up selling.  

Within that last meeting, the Fed also raised their economic growth estimate for 2010 and lowered their outlook for unemployment – this is the third revision in about six months, by my recollection, and they’ve been in both directions; ie. they haven’t a clue.

They now believe that the economy will expand in a range of 3.2%-3.7% (prior was 2.8%-3.5%) and left their 2011 estimate range unchanged at 3.4%-4.5% -- that 2011 expectation is the one I find most amusing, but not in a ha ha way.  These estimates are known as the Fed’s “central tendency estimates.”  But don’t expect that improved outlook for 2010 to lead Bernanke & Co. to removed ZIRP. 

For the jobless rate, they now expect 9.1%-9.5% official unemployment by the end of 2010, an upward revision from their prior 9.5%-9.7% central tendency forecast.  For 2011, they forecast unemployment to range 8.1%-8.5%, up from the prior estimate of 8.2%-8.5%. 

For 2012, which is really stretching things in the economic forecasting world, the Fed believes 3.5%-4.5% GDP, 6.6%-7.5% unemployment, and 1.2%-1.6% inflation. 

I too like to dream.

Have a great day!

Brent Vondera, Senior Analyst

Phone: 636-449-4900