Monday, February 20, 2017

Why Such Restrictive Mortgage Lending?

The Mortgage Corner

Earlier this month, researchers at the Urban Institute’s Housing Finance Policy Center published some of their research on lending standards. Drawing on data from the Home Mortgage Disclosure Act, they found that lower-credit applicants accounted for only 33 percent of all applicants in 2015. That compares to 62 percent in 2006, at the height of the bubble, and 50 percent in 2000, when market conditions were generally considered balanced.

What determines a “lower-credit applicant’, according to the Urban Institute? A FICO score below 700, a loan-to-value ratio less than 78 percent, and debt to income ratio less than 30 percent. That means prospective homeowners and borrowers are either easily discouraged, or other factors that tighter credit criteria are at play, since 700 is still a good credit score and even a 10 percent down payment with 45 to 50 percent debt to income ratios usually mean a credit-worthy borrower in today’s housing markets.

Of course it makes sense that borrowers with “less than perfect credit” would have a more difficult time qualifying for a mortgage. But why 7 years into this recovery would so many lower credit applicants still have problems qualifying?

There are a number of factors, including higher home prices, of course. And incomes are not rising as they should even with this low inflation environment, while mortgage rates remain historically low—still below 4 percent for conforming 30-year fixed rates—an incredible boon for prospective homebuyers given the low inflation environment..

In fact, it’s not so much that lending standards are stricter. Rather, thanks to the government ownership of conventional mortgage giants Fannie Mae and Freddie Mac, mortgages have become more expensive because of so-called fee addon’s with “less than perfect” credit scores below 700, which Fannie Mae and Freddie Mac have tacked on more recently.

Why discourage what are very credit-worthy borrowers in normal times? Costs go up exponentially with credit scores below 720 for Fannie Mae and Freddie Mac guaranteed mortgages—as much as 2.5 points, which translates to an equivalent 0.625 percent rate increase.

It seems that the US Treasury has been trying to discourage all but the most credit-worthy borrowers, all in the name of down-sizing the GSEs. In fact the Obama Treasury Department has made no secret of wanting to close down Fannie and Freddie, which is why it has been taking all of its profits since a 2012 modification to Treasury’s conservation agreement, rather than allowing them to build up their capital base.

Yet delinquency rates are almost back to historical levels. Fannie Mae reported that the Single-Family Serious Delinquency rate barely increased to 1.23 percent in November, up from 1.21 percent in October. Big Deal! The serious delinquency rate is down from 1.58 percent in November 2015. But that is close to the long term delinquency rate that is just under 1 percent. The definition of serious delinquency is mortgage loans that are "three monthly payments or more past due or in foreclosure".  

The Urban Institute’s Laurie Goodman, co-director of the Housing Finance Policy Center, sees the decline in lower-credit applicants as clearly problematic, and symptomatic of an overly-tight mortgage market, although it’s not clear whether would-be applicants are holding back because they are aware they may not qualify, or for some other reason, such as not having enough money for a down payment or losing interest in homeownership.

Earlier Urban analysis suggested that tight lending meant that 1.1 million mortgages that would have been made in 2001 were “killed” – never written – in 2015. The real answer to this problem of what is really a defacto denial of credit to lower income homebuyers is to pry Fannie Mae and Freddie Mac from the greedy grasp of Treasury and return them to the private marketplace.

There are many forms that could take, but it means Congress and the Trump Administration has to show some initiative.

Harlan Green © 2017

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Thursday, February 16, 2017

Low interest Rates Boost Housing Construction

The Mortgage Corner

Housing starts returned to trend, reports the National Association of Home Builders, dropping 2.6 percent to a seasonally adjusted annual rate of 1.246 million units, according to newly released data from the U.S. Department of Housing and Urban Development and the U.S. Census Bureau. Multifamily production fell 10.2 percent to 423,000 units after an unusually high December 2016 reading, whereas single-family starts ticked up 1.9 percent to 823,000 units.

But year-on-year both components are very positive, up 6.2 percent for single-family homes and at a very strong 19.8 percent for multi-units. And with interest rates still at historical lows, 2017 should be a very good year for new-home starts and sales.

Graph: Calculated Risk
“Some pull back in housing production is unsurprising after an overly strong multifamily reading last month,” said NAHB Chief Economist Robert Dietz. “As we move forward in 2017, we can expect the multifamily sector to continue to stabilize and single-family production to move forward at a gradual but consistent pace.”
Regionally in January, combined single- and multifamily housing production rose 55.4 percent in the Northeast and 20 percent in the South. Starts fell by 17.9 percent in the Midwest and 41.3 percent in the West, where skyrocketing housing prices have slowed sales.

Speaking of the western region, the California Association of Realtors reports rising wages and seasonal price declines held California’s housing affordability steady in fourth-quarter 2016, even while interest rates rose moderately.

The percentage of home buyers who could afford to purchase a median-priced, existing single-family home in California in fourth-quarter 2016 remained at 31 percent, unchanged from the third quarter of 2016 but was up from 30 percent in fourth-quarter 2015, according to C.A.R.’s Traditional Housing Affordability Index (HAI).

This is the 15th consecutive quarter that the index has been below 40 percent and is near the mid-2008 low level of 29 percent. California’s housing affordability index hit a peak of 56 percent in the third quarter of 2012, when both housing prices and interest rates were lower.

I project that mortgage rates will remain low, in what is becoming an interesting anomaly. Mortgage rates have fallen of late, while Treasury bond yields have been rising in anticipation of rising inflationary pressures if Republicans do increase federal spending.

Per Market Watch, Sean Becketti, chief economist of Freddie Mac, said something unusual is going on — the 30-year mortgage isn’t moving in line with the yield on the benchmark 10-year Treasury, as it has for the past 46 years.  Since Dec. 29, the 30-year has dropped 17 basis points, but the yield on the 10-year bond has stayed the same, he says. “While we expect mortgage rates to fall into line with Treasury yields shortly, this just may be a year full of surprises,” he said.

Mortgage rates slipped for a second week even as they retain most of the rise since Donald Trump was elected president, but not much. The 30-year fixed conforming rate is still at 3.75 percent for 1 origination point, 4.0 percent with no origination points.

Why? Banks are flush with cash and investors are snapping up mortgage-backed securities in search of higher yields. And while Fannie Mae and Freddie Mac continue as US Treasury wards, they provide as much security as Treasury bonds, but with a much better yield.

Just do the numbers—30-year Treasury yields have hovered around 3 percent, vs. 3.75 to 4 percent yields on Fannie and Freddie mortgage-backed securities.But the future of Fannie and Freddie are not certain. New Treasury Secretary Steven Mnuchin has said he would like to see the GSEs privatized. Economists have predicted that if that happened it could raise mortgage rates from 0.4 to as much as 1 percent.

That’s how valuable even an implicit government guarantee of such securities means, since banks would demand higher yields to be part of such a market. And let us not even try to imagine what life would be like for homeowners if Fannie Mae and Freddie Mac disappeared. They are responsible for more than 60 percent of all home mortgage originations at present.

Harlan Green © 2017

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Wednesday, February 15, 2017

Retail Sales and Consumer Prices Show Real Life

Financial FAQs

Retail sales rose 0.4 percent last month following a much bigger gain in December than originally reported, the government said Wednesday. Economists polled had forecast a 0.2 percent increase. Retail sales are now up more than 5 percent annually, approaching more normal spending. December spending was also revised upward to 1 percent from an already strong 0.6 percent.

Graph: Econoday

And gas prices are rising along with consumer spending, which is boosting retail prices. The headline year-on-year Consumer Price Index, reflecting easy energy comparisons with 2016, is moving higher, well above the Fed's general 2 percent target at 2.5 percent. This is up 4 tenths in the month and is the highest in nearly 5 years. The core rate is also up, at a year-on-year 2.3 percent for a 1 tenth gain.

This shows an economy returning to a more normal 3 percent GDP growth rate, as well. The question now is what does this mean for jobs and the workers to fill them, as we are already near full employment.

Every major retail sector reported higher sales except for auto dealers, whose business tends to tail off after the Christmas shopping season. Auto purchases account for about one-fifth of all retail spending. And if autos and gasoline are excluded U.S. retail sales rose a robust 0.7 percent, the Commerce Department said.

Outlets such as Best Buy that sell electronics and appliances saw a 1.6 percent rise in sales, the largest gain in a year and a half. Stores that sell clothing and sporting goods also posted sales gains of 1 percent or more. Even department stores, whose sales fell sharply in 2016, got into the act. Department-store receipts surged 1.2 percent in January to mark the biggest increase in more than a year.

One clue to where additional jobs may come is the National Federation of Independent Business survey for small businesses, which account for more than 60 percent of the hires these days. And their confidence has soared since Donald Trump’s election with his promise of lower taxes and regulations.
A majority of small business owners are making no secret of their love for freer markets. “The continued surge in optimism is a welcome sign that economic growth is coming, said NFIB Chief Economist Bill Dunkelberg. “The very positive expectations that we see in our data have already begun translating into hiring and spending in the small business sector.” 
Job openings and job creation plans both posted small gains, pushing the NFIB Jobs Report into a strong, positive direction. Dunkelberg, as well said the data could signal higher GDP growth in 2017. 

The recent growth in optimism looks similar to the surge in the Index in 1983, which was followed by years of economic prosperity, said the NFIB. After eight years of struggling with government barriers, small business owners are hopeful that policy proposals from the new administration and Congress will spur economic growth in a similar manner, said NFIB President and CEO Juanita Duggan.

However, one still uncertain factor is the direction of interest rates. Both mortgage rates and Treasury yields are still at historic lows, but how long will that last with faster growth?

Fed Chair Janet Yellen surprised markets with her congressional testimony yesterday when she told lawmakers that waiting too long to raise interest rates would be “unwise.” This comment, along with assurances that the Fed will raise rates at one of its coming meetings, inspired a sharp selloff in Treasury securities. Bond yields rise as prices fall.

The yield on the 10-year Treasury note rose five basis points to 2.52 percent today, while the yield on the two-year note gained 3.3 basis points to 1.27 percent. The yield on the 30-year Treasury bond rose 4.8 basis points to 3.10 percent. But these rates are still at historical lows, and would have to rise another 1 to 2 percent to accommodate inflation rates that have historically accompanied higher growth rates.

Harlan Green © 2017

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Monday, February 13, 2017

Let’s Make America More Equal Again!

Popular Economics Weekly

As defeated Democrats mull over what slogan can equal or overcome President Trump’s “Make America Great Again”, I have a suggestion, one that might even enthuse populist Republicans. Let’s make American more equal again, just as it was in the 1960s and 70s, when we had a thriving middle class in which its children could hope to exceed their parents’ station in life.

After all, it was our thriving middle class that kept the more extreme elements of both political parties and persuasions at bay, so that Republicans and Democrats actually talked to each other. And a middle class will only thrive where there is less income inequality, something that most well-meaning Americans support.

But that was then and we live in now, when most children of the baby boomers retiring do not hope to do better than their parents. Household incomes have stagnated since the 1970s, and the top income earners since the Great Recession now have garnered almost all of the increase.

That is why two out of three Americans are dissatisfied with the way income and wealth are currently distributed in the U.S. This includes three-fourths of Democrats and 54 percent of Republicans, according to a recent Gallup poll.

The Great Recession was brought on by Wall Street’s excesses, and the deregulation boom of the Clinton and GW Bush presidential reigns. So why not create programs that Make America More Equal Again?

Overall, the share of Americans living in middle-class households has declined from 61 percent in 1971 to 50 percent, reports a recent Pew Research study. The hollowing out of the middle class has been a source of consternation among many economists, politicians and the public at large, says those surveyed. They say as Americans move toward the economic extremes it is harder to find common ground, and a common sense of what it means to be an American.

Much of that inequality is in the Midwestern rust belt states that lost those blue collar manufacturing jobs during the globalization and multi-nationalization of US corporations that President Trump promised to bring back again.

So President Trump was no dummy in recognizing this fact. Then how could Democrats be so blasé and oblivious to this fact among their former supporters? Everyone saw it coming; the disenfranchisement of whole segments of working class voters that had descended into depression and drug use in those formerly blue and Democrat-voting states.

There have been many suggestions of how to bring back higher-paying jobs, but candidate Trump seems to have fastened on just three—building more infrastructure, destroying multi-lateral trade agreements like the TPP and NAFTA, as well as limiting immigration inflows to make more jobs available to those suffering American workers.

The first suggestion has been backed by both Democrats and Republicans, and now that President Trump wants it Republicans will stop opposing infrastructure spending, even if it busts the federal budget.

However, building more immigration and trade barriers won’t create greater equality, nor will opposition to minimum wage laws, such as advocated by the Trump pick for new Labor Secretary—CEO of fast food chains Andrew Puzder. Because most immigrant jobs are low-paying, jobs that Americans don’t want anyway. And higher trade barriers for the purpose of bringing jobs home will raise the prices of imported goods, cancelling out much of the income boost from higher-paying jobs.

What won’t work either is the blatant voter and collective bargaining-suppression laws enacted, or about to be enacted in the 25 all-red states with absolute Republican majorities. Such a blatant suppression of minority voters and the wages of working class Americans will suppress their wages, hardly the road to greater equality.

What also won’t work are the attempts to destroy Obama’s Affordable Care Act that have boosted the buying power of at least 20 million working class voters by reducing overall medical costs, as well as Dodd-Frank regulations that have suppressed some of the excessive profit-taking of Wall Street at the expense of State Street.

The same poll updated a long-time Gallup trend, finding that 54 percent of Americans are satisfied, and 45 percent dissatisfied, with the opportunity for an American "to get ahead by working hard."
This measure has remained roughly constant over the past three years, but Americans are much less optimistic about economic opportunity now than before the recession and financial crisis of 2008 unfolded. Prior to that, at least two in three Americans were satisfied, including a high of 77 percent in 2002.

So there are many reasons for Democrats and even truly populist Republicans to support programs that increase income equality. But they can’t be about building more walls. A robust and more politically temperate American middle class can only include Americans of all nationalities and ethnicities.

Harlan Green © 2017

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Wednesday, February 8, 2017

Surging Construction Sector Aids Home Sales

The Mortgage Corner

Construction payrolls were a positive surprise of the January employment report, rising 36,000 for the best gain since March. Construction was soft through most of last year though it did pick up at year end.

And this is why Pending and New-home sales are doing so well. Overall construction spending fell 0.2 percent in December but spending on new single-family homes rose 0.5 percent in the month with multi-family spending up 2.8 percent.

This is why sales of newly built, single-family homes rose 12.2 percent in 2016 to 563,000 units, the highest annual rate since 2007, according to newly released data by the U.S. Department of Housing and Urban Development and the U.S. Census Bureau.

Only public construction spending fell a sharp 1.7 percent in the month. Educational spending fell 2.2 percent with highways & streets down 0.6 percent. Private nonresidential categories (ie, commercial) are mixed with total spending for this component unchanged in the month.
“We are encouraged by the growth in the housing sector last year, and by the fact that builders increased inventory by 10 percent in anticipation of future business,” said Robert Dietz, chief economist of the National Association of Home Builders (NAHB). “NAHB’s forecast calls for continued upward momentum this year, with housing starts expected to rise 10 percent over the course of 2017.”
The inventory of new home sales for sale was 259,000 in December, which is a 5.8-month supply at the current sales pace, an improvement from the 5 percent range most of last year. The median sales price of new houses sold was $322,500, up from.

So we know why housing starts, or construction, is so important in building up inventories depleted by the Great Recession. Starts jumped 11.3 percent from the previous month to a seasonally adjusted annualized rate of 1226 thousand in December of 2016, beating market expectations of 1200 thousand. Multi-segment starts rebounded while single-family declined for the second month. Considering full 2016, housing starts rose 4.9 percent to 1166.4 thousand.
“This report represents firm growth for housing in 2016, as single-family starts rose 9 percent and multifamily production was down slightly,” said NAHB Chief Economist Robert Dietz. “We expect that 2017 will be another year of gradual, steady improvement in the housing market. Multifamily starts have been volatile in recent months, but should level off as supply meets demand. Meanwhile, single-family production continues to gain momentum but is limited by supply-side headwinds.”
So housing construction is returning to normal times. Starts in the United States averaged 1438.64 thousand from 1959 until 2016, reaching an all-time high of 2494 Thousand in January of 1972 and a record low of 478 Thousand in April of 2009.

Harlan Green © 2017

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Saturday, February 4, 2017

Homeland Security Rescinds Muslim Travel Ban

Popular Economics Weekly

It is a well-known fact that the US has had a history of labor shortages, dating from the Revolutionary War. Colonial America was defined by a severe labor shortage that employed forms of unfree labor such as slavery and indentured servitude and by a British policy of benign neglect (salutary neglect). Over half of all European immigrants to Colonial America arrived as indentured servants, says Wikipedia.

Then why would the Trump administration enact an immigration ban on seven primarily Moslem countries, when we need all the immigrants we can import to fill the 5.5 million job openings that remain unfilled, as well as find the workers for his promised $1 trillion in infrastructure projects?

Hence the need and tradition of immigrants adding new blood and man (and women) power to our workforce. The colonies were also characterized by religious diversity, with many Congregationalists in New England, German and Dutch Reformed in the Middle Colonies, Catholics in Maryland, and Scots-Irish Presbyterians on the frontier. Sephardic Jews were among early settlers in cities of New England and the South. Many immigrants arrived as religious refugees: French Huguenots settled in New York, Virginia and the Carolinas. Many royal officials and merchants were Anglicans.

They need to come from all religions, in other words, particularly Islam, which is the third most populous religion with 1.6 billion practitioners

So when will the Trump team get that message, especially after contempt citations are already being filed as he defies the latest court injunctions against his temporary travel ban?
At least one contempt of court citation has been filed against President Donald Trump and another is likely to be submitted on Friday, charging that the administration has defied court orders by denying entry to the United States by an untold number of immigrants from seven predominantly Muslim countries.

The Commonwealth of Virginia filed its contempt motion late Wednesday night in Alexandria federal court. Meanwhile, an attorney who is trying to assist more than 200 Yemenis in gaining entry into this country said Thursday that her office will file a contempt motion of its own on Friday in U.S. District Court in Los Angeles.

“The Trump administration is acting as if he is running a dictatorship,” attorney Julie Ann Goldberg said in a telephone interview from Djibouti, where her clients are being held in transit. “It’s as if he has forgotten there are three branches of government in this country and has totally disregarded any judicial order. He is ignoring them across the country.”
 Judges in Brooklyn, Boston, Alexandria, Va., and Seattle, as well as two more in Los Angeles have issued orders to stop the government from carrying out the executive order Trump signed last Friday that suspended for 90 days the issuance of visas to people from seven countries deemed by the U.S. government to present a terrorist threat. They are Syria, Libya, Sudan, Iran, Somalia, Iraq and Yemen. The president’s executive order also suspended refugee admissions from all countries for 120 days.

Federal officials have issued statements saying that they are taking steps to “immediately” comply with the court orders. As of Thursday, the government had recommended denials of boardings to 1,136 immigrants with visas or other documents who sought entry into the United States, while they had granted waivers to 87 immigrants. Restrictions appear to have been lifted nationwide on lawful permanent residents of the United States, some of whom had difficulty gaining entry into the country in the earliest stages of the order’s rollout.

And now we have the revelation that more than 100,000 entry visas were revoked in the middle of the night, without notifying the courts or agencies that are involved. But because a Washington State Federal Judge has granted a nationwide injunction to lift the travel ban, the Department of Homeland Security has just announced it has suspended all actions to implement the immigration order and will resume standard inspections of travelers as it did prior to the signing of the travel ban.

And now a State Department official tells CNN the department has reversed the cancellation of visas that were provisionally revoked following the President's executive order last week -- so long as those visas were not stamped or marked as canceled.

Harlan Green © 2017

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Friday, February 3, 2017

Yuge Payroll Jobs Gain Today

Popular Economics Weekly

The U.S. created 227,000 new jobs in January to mark the largest gain in four months, revealing an economy that has plenty of stamina nearly eight years into a recovery that shows little sign of ending. Retailers, construction firms, financial companies and restaurants led the way in hiring in January, the government said Friday.

The unemployment rate rose slightly to 4.8 percent last month, mostly because more people were looking for work, but there is a skills gap with most of the unemployed blue collar workers needing job retraining, rather than additional coal and manufacturing jobs the Trump team has promised and is hoping to generate. This is with job openings ear their record high (5.5 million) and that’s drawing a larger share of Americans back into the labor force.

And a tighter labor market is also forcing firms to pay more to workers, an emerging trend that’s likely to further underpin the recovery. In January, hourly wages rose 0.1 percent to $26 an hour. Over the past 12 months wages have climbed 2.5 percent—faster than the less than 2 percent annual gains that prevailed through most of the recovery.

What does this mean? Maybe some of those unfilled 5.5 million job openings will be filled. But only if the courts lift the immigration ban that will discourage the influx of skilled workers to fill those jobs, as the Trump administration seems caught in the grips of white nationalist wall-builders, at the moment (such as Breitbart’s Steven Bannon), who are very unskilled at writing Executive Orders, it seems.

One example is the chaos reigning over the immigration ban at the moment. The global confusion that has since erupted is the story of a White House that rushed to enact, with little regard for basic governing, a core campaign promise that Mr. Trump made to his most fervent supporters, reports the New York Times.

In his first week in office, Mr. Trump signed other executive actions with little or no legal review, but his order barring refugees has had the most explosive implications. Passengers were barred from flights to the United States, customs and border control officials got instructions at 3 a.m. Saturday and some arrived at their posts later that morning still not knowing how to carry out the president’s orders.

In the jobs report, there was a huge surge in retail payrolls (46,000), professional services (39,000), and construction jobs (36,000), signaling blue collar jobs are strong, with interest rates still near their record lows.

More big news was that the service sector is booming, though it dropped slightly in January. The ISM non-manufacturing, or service sector index "The NMI® registered 56.5 percent which is 0.1 percentage point lower than the seasonally adjusted December reading of 56.6.

Both prices and employment jumped 2.9 and 2.0 percent, respectively, again signaling a tighter labor market. The sector that includes Health Care & Social Assistance; Finance & Insurance; Public Administration; Accommodation & Food Services; Retail Trade; Construction; still reflects strong growth.
“This represents continued growth in the non-manufacturing sector at a slightly slower rate,” said Anthony Nieves, chair of the Institute for Supply Management® (ISM®) Non-Manufacturing Business Survey Committee. “Respondents' comments are mixed indicating both optimism and a degree of uncertainty in the business outlook as a result of the change in government administration."
So this uncertainty is another reason to cancel or modify Trump’s immigration ban, as it hurts more than the seven Muslim countries. Scientists worldwide are now cancelling their participation in US scientific conferences in protest.

Harlan Green © 2017

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