by Calculated Risk on 7/29/2010 07:56:00 PM

From the American Trucking Association: ATA Truck Tonnage Index Fell 1.4 Percent in June

The American Trucking Associations’ advance seasonally adjusted (SA) For-Hire Truck Tonnage Index decreased 1.4 percent in June, although May’s reduction was revised from 0.6 percent to just 0.1 percent. May and June marked the first back-to-back contractions since March and April 2009. The latest reduction lowered the SA index from 110.1 (2000=100) in May to 108.5 in June.
...
Compared with June 2009, SA tonnage climbed 7.6 percent, which was just below May’s 7.7 percent increase and the seventh consecutive year-over-year gain. Year-to-date, tonnage is up 6.6 percent compared with the same period in 2009.

ATA Chief Economist Bob Costello said that the two sequential decreases reflect an economy that is slowing. Furthermore, growth in truck tonnage is likely to moderate in the months ahead as the economy decelerates and year-over-year comparisons become more difficult. Nevertheless, Costello believes that tonnage doesn’t have to grow very quickly at this point since industry capacity has declined so much. “Due to supply tightness in the market, any tonnage growth feels significantly better for fleets than one might expect.”

This graph from the ATA shows the Truck Tonnage Index since Jan 2006 (no larger image).

This index is at about the same level as in December 2009.

Rail traffic also weakened in June.

by Calculated Risk on 7/29/2010 04:40:00 PM

CR NOTE: There have been a couple of "stimulus" proposals making the rounds over the last couple days from major analysts. Housing economist Tom Lawler takes a look at one proposal from Morgan Stanley ... the following lengthy discussion is from Lawler:

“Slam-Dunk” Stimulus? MS = Missing Something!!!!

Early this week Morgan Stanley put out a piece entitled “Slam Dunk Stimulus,” in which MS analysts argue that changing mortgage refinance “requirements” (for GSE or government mortgages) would “inject a significant amount of stimulus into the US household sector,” have “zero impact on the budget deficit,” and would “not require an exit strategy” and would “not distort markets.”

Here is the gist of their argument:

“If it were possible to inject a significant amount of stimulus into the household sector of the US economy over the near term and this stimulus had zero impact on the budget deficit, did not require an exit strategy, did not distort the markets, and took effect almost immediately, wouldn’t it seem like a slam dunk? Such an option actually exists in the form of a change to mortgage refinancing requirements. The Fed – and market forces – have pushed mortgage rates to historic lows. However, many homeowners are unable to take advantage of the low rates because they are blocked from refinancing by a high loan-to-value ratio (LTV), appraisal problems, unemployment, and low credit score, etc. This problem could be addressed if the Government merely recognized the guarantee that already exists on the principal value of a very large portion of the mortgage market – specifically, the mortgages that are backed by Fannie, Freddie and Ginnie – and acted to streamline the refi process.”

The analysts note that with the “median” universe of outstanding 30-year fixed-rate mortgages being around 5.75%, and with current 30-year FRMs being around 4.50%, the potential rate reduction could average about 125 bp, which could translate into stimulus of around $46 billion a year.

The “logic” of the proposal is straightforward: if the GSEs, FHA, and VA already “own” the credit risk on the mortgages they own or guarantee, then allowing a more “streamlined” refi process “makes sense.” The authors note that “(t)he notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications for refinancing has been raised by others in the past.”

What the authors do NOT note, however – and this is truly shocking -- is that this “notion” was a major reason why the Administration/the GSEs rolled out the well-intentioned but poorly executed Home Affordable Refinance Program, or HARP!!!!! Recall that originally this program allowed GSE-owned refis up to a CLTV of 105% (the original reason for the restriction being that loans with higher CLTVs were NOT “TBA[to-be-announced]-eligible (which is NOT determined by the GSEs, by the way!!), though later this maximum CLTV was upped to 125%. In addition, FHFA “ruled” that loans with original LTVs at or below 80% that did not require mortgage insurance, but which today had current LTVs above 80%, did NOT require new mortgage insurance under the program despite wording in the GSEs charter suggesting otherwise – with the explicit rationale for the exemption being that the GSEs already “owned” the credit risk on the mortgages!!!!

How these analysts could roll out this “slam dunk” proposal without even MENTIONING the HARP is astounding! The analysts also don’t even MENTION the FHA’s streamlined refinance program!!!! (The underwriting requirements of which were tightened up a bit last September because of program “abuses.) This is an almost inconceivable miss on their part!!!!

The analysts also display a complete lack of understanding about the refinance process, transactions costs, and mortgage rates. E.g., the authors, presumably citing Freddie Mac’s Primary Mortgage Market Survey on average 30-year mortgage rates, note that current rates are about 4 ½%. However, that 4 ½ % “quote” (the latest survey showed 4.56%) includes a 0.7 point fee. More important, however, there are SIZABLE transactions costs associated with refinancing a mortgage.

As an example, I went to Chase Mortgage’s website this morning, trying to get a quote for a refinance of a $180,000 mortgage on a property currently valued at $200,000 in Virginia. I “clicked” that my credit was “very good” (one below “excellent,” which is actually closer to the truth!!!). The first quote was 4 ¾% with 1.125 “loan discount points.” Here was the associated closing cost information Chase’s website produced.

Closing Costs, $180,000 refinance, 30-year FRM, interest rate of 4.75%, Chase Mortgage
Title Insurance	$446.40
Courier/Messenger Fees	$35.00
Processing/Underwriting Fee	$595.00
City/County Tax/Stamps	$585.00
Application Fee	$395.00
Recording Fees	$46.00
Abstract Title Search	$180.00
Settlement/Closing Fee	$387.50
Tax Service Fee	$84.00
Loan Discount Points	$2,025.00
Total Closing Costs	$4,778.90
Prepaid Fees:
Harzard Insurance Premium	$450.00
Mortgage Insurance	$144.00
Per diem interest (18 days)	$374.72
Mortgage Insurance Premium	$0.00
Escrow Fees
Hazard Insurance Reserves	$75.00
Real Estate Tax Reserves	$500.00
Total Cash Needed at Closing	$6,322.62

The website also said that for a 5% rate my discount points would be reduced to 0.25, but my total closing costs would still be $3,203.90 (and total cash needed at closing would be $6,322.62).

Now if I were in a situation that I either couldn’t or didn’t want to pay any closing costs, I’m not sure what Chase’s quote would be for a no-closing-cost loan (they don’t show that option). But using a quick and dirty “yield per point” approach, I’d probably get a rate quote of around 5 ½% -- 100 basis points above the rate used by the hapless Morgan Stanley analysts in their “stimulus” piece!!! In the mortgage (and housing world) transactions costs are a BFD¹, and it’s pretty shocking the MS analysts don’t appear to know that!

What the analysts SHOULD have done, of course, was to focus on the HARP and the FHA streamlined refi programs, and suggest potential changes that might make the programs more successful.

Fannie Mae, by the way, earlier this week put out an updated “frequently asked questions” piece on the Home Affordable Refinance Program.

Here is a poorly written piece I wrote to someone else early this morning who asked what I thought of the Morgan Stanley piece. (I just don’t feel like rewriting/editing).

Actually, HARP attempted, badly, to "do" this (streamline the GSE refinance process for high LTV loans) by "allowing" qualified borrowers whose loans were owned/guaranteed by the GSEs to get refi loans with current LTVs up to 125%. Moreover, for loans with original LTVs of 80% or below that did not have private mortgage insurance, the requirement that the borrower get private mortgage insurance on the new loan if the current LTV were above 80% was waived. The logic was explicitly related to the fact that the GSEs already “owned” the credit risk. However, it's generated a surprisingly low level of activity, for a couple of reasons:

1. The GSEs have "loan level price adjustments" for high LTV/low credit score combos. E.g., in the Fannie refi plus program, the loan level price adjustment for borrowers with a LTV over 97% and a credit score under 640 is 2% (actually it shows a higher number, but the cumulative fees are capped. See here.) Thus the "savings" to some borrowers isn't as great as it first appears. Note that some of the loans eligible for refi had higher guaranty fees to begin with because they were "riskier².”

2. If the current loan has mortgage insurance, the new loan has to have mortgage insurance (with the same coverage) as well. Apparently this has been a troublesome process. The GSEs' reason is obvious: it had credit enhancement on the existing loan, so ... But, as I noted before, for loans that didn't originally have MI but whose current LTV exceeds 80%, the FHFA opined that new MI was "not needed" despite some folks' interpretation of the GSE charters, with the logic being that the GSEs already owned the credit risk.

3. There's no "cash out" option (except I think for a $250 de minimus). This makes sense as well.

4. Borrowers underwater or with very little equity in their homes are extremely averse to having to pay ANYTHING at closing on a refi (or to roll such costs into the loan balance, although the HARP does allow “typical” closing costs to be financed). As a result, to "make sense" most such borrowers would need to take out a "no closing cost" mortgage where the rate charged is higher but the originator recoups its costs/fees by packaging the loan into a "premium" (above par) MBS. As a result, such borrowers’ interest rate on a refi is materially above, say, the Freddie PMMS rate – by at least 50-75 bp.

5. Loans with LTVs above 105% are not eligible for inclusion in a "TBA-eligible" MBS/PC, but must be included in a separate type of pool with a separate prefix³. This can adversely impact pricing of the MBS, and as such on the loan.

6. The HARP is limited to borrowers who are current on their loans.

7. Many borrowers aren’t that aware of HARP, and don’t know if their loan is owned or guaranteed by Fannie or Freddie – though both entities have an easy to use website that borrowers can use to find out. When I’ve gone to online sites to get refi quotes, none of the lenders really mention the HARP on their refi quote page, though some mention it if you do a site search – and a few suggest that the HARP is only available to loans that they service, which if believed by the borrower enables lenders to be “less aggressive” on HARPs (and refis in general), offering not great rates and charging more fees than “needed.”

Obviously, the GSEs would not be and should not "refi" FHA/VA/other loans with high CLTVs, as they do not currently own the credit risk.

The FHA has had a streamlined refi process for quite a while. However, last year it "tightened up" some of the underwriting requirements because of some of abuses. See, Letter 09-23.

So...the HARP was sorta/kinda designed to make LTV less of an "issue" for borrowers with loans owned/guaranteed by the GSEs to refinance. However, for a number of reasons (including those shown above), the "effective" rate borrowers with not great credit scores AND with high LTVs are able to get on a refinance is a lot higher than many expect. And given the transactions costs involved in a refi, even very good credit borrowers cannot get a no-closing-cost rate anywhere close to 4 ½% on a 30-year FRM.

The "winners and losers" section of the “more streamlined refi ‘proposal’” -- including the losers, which would be holders of the "premium" MBS that are paid off -- misses a big point. MBS investors would "lose" the cash flow associated with holding the "premium" MBS that are paid off faster, and this loss would not be "ameliorated" by a resumption of MBS purchases by the Fed. In simple terms: If I'm getting a 6% MBS coupon and you are paying, say, 6.5% on your mortgage (with 25 bp going to servicing and 25 bp being a "guaranty fee"), and you are able to refi into a, say, 5% mortgage and I find my 6% MBS pay off and have to "reinvest" in a 4.5% MBS, you "save" 150 bp a year but I lose 150 bp a year. Now it is true that the Fed holds a lot of MBS (though not many with that high a coupon); the GSEs also hold a lot; and as a result "the government" would "lose" (resulting, of course, ultimately in higher future taxes), other losers would be banks/thrifts (and their owners/shareholders), pension funds, MBS funds, etc. In other words, some folks interest income would fall even as other folks mortgage interest expense would fall, and if the GSEs/FHA offered “more aggressive” streamlined refis the result would in part at least be a sorta/kinda transfer or wealth, and the net stimulus effect wouldn't be anywhere close to what Morgan Stanley analysts say.

So..."The notion that the Federal government should recognize the mortgage guarantee that is already in place when establishing the qualifications of refinancing" has not only "been recognized by others in the past" (page 4); that notion was explicitly behind the Home Affordable Refinance Program. There have been a number of technical issues and other impediments that have significantly limited the amount of refinancing done under the HARP (and the FHA streamlined refi program), and these programs can and probably should be “tweaked” (and quite frankly I think the GSE loan-level price adjustments should be lowered). However, in assessing the potential volume and the likely “savings,” analysts need to take into account the non-trivial costs associated with refinancing, How MS analysts could not take these into account, and not even MENTION the HARP and the FHA streamlined refi programs is something that is almost inconceivable.

Footnotes:
¹ BFD: Big Financial Deal
² Since Fannie Mae already has the risk on the existing mortgage loan, why are LLPAs required?
"LLPAs are required because Fannie Mae is putting a new loan on our books, which involves certain basic processing/administrative costs, accounting considerations, and the requirement for us to hold capital (based on the current risk) against every loan we acquire. Some Refi Plus loans may get better pricing than the borrower’s original loan did because risk characteristics may have changed."
³ Why are loans with LTVs above 105 percent not permitted to be commingled in standard Fannie Mae TBA-eligible MBS pools?
Permitting loans with LTVs greater than 105 percent in TBA (to-be-announced) securities would have tax reporting implications for investors that are subject to certain income and asset tests for federal income tax purposes (e.g., REITs must derive at least 75% of their income from real estate assets). Right now, 100 percent of Fannie Mae’s TBA MBS qualify as real estate assets, and thus there is no need for additional tax reporting. In addition, the introduction of LTVs in excess of 105 percent could create greater uncertainty around prepayment speeds for TBA pools since there is no significant track record of data on prepayment of loans with LTVs above 105 percent.

CR Note: This post was from Tom Lawler.

by Calculated Risk on 7/29/2010 02:26:00 PM

Home builder Ryland announced Q2 earnings today. From Briefing.com (ht Brian):

Ryland says that the big question from last quarter's conference call was what impact the expiration of the tax credit will have on the new home market. Says they found out the answer to that question in Q2, as sales slowed significantly. ... Says they knew there would be a slowdown in May once the event passed, but they didn't expect it to be as severe or prolonged as it's been...

by Calculated Risk on 7/29/2010 01:17:00 PM

Hotel occupancy is one of several industry specific indicators I follow ...

From HotelNewsNow.com: STR: Strong luxury results week ending 24 July

Overall [year over year], the industry’s occupancy increased 7.3 percent to 71.8 percent, ADR rose 1.3 percent to US$99.60, and RevPAR increased 8.6 percent to US$71.54.

The following graph shows the four week moving average for the occupancy rate by week for 2008, 2009 and 2010 (and a median for 2000 through 2007).

Click on graph for larger image in new window.

Notes: the scale doesn't start at zero to better show the change. The graph shows the 4-week average, not the weekly occupancy rate.

On a 4-week basis, occupancy is up 7.0% compared to last year (the worst year since the Great Depression) and 4.8% below the median for 2000 through 2007.

On a weekly basis this is the second week since summer 2008 with the occupancy rate above 70%. However last week was probably the peak for the occupancy rate for 2010 - although the 4-week average will move up over the next few weeks.

In 2009, the occupancy rate peaked at 67% in mid-July.

Data Source: Smith Travel Research, Courtesy of HotelNewsNow.com

by Calculated Risk on 7/29/2010 11:00:00 AM

Note: Usually I don't post all the regional manufacturing surveys, however with the inventory adjustment over, export growth appearing to slow, and domestic consumer demand sluggish, these surveys might provide a hint of weakness in the manufacturing sector.

From the Kansas City Fed: Tenth District manufacturing activity rebounded moderately in July

Tenth District manufacturing activity rebounded moderately in July, and expectations for future production remained positive. However, plans for future hiring and capital spending were essentially flat. Price indexes were mostly unchanged.

This was a little more positive than the other regional reports that are all showing a slowdown in growth:

From the July 15th Empire State Manufacturing Survey: "[T]he pace of growth in business activity slowed substantially over the month."

From the Philly Fed on July 15th: Firms See Slower Growth Rate

From the Dallas Fed on July 26th: Texas Manufacturing Activity Remains Sluggish

From the Richmond Fed on July 27th: Manufacturing Activity Moderates in July; Expectations Slip

It appears overall that growth in the manufacturing sector moderated in July, and some of the internals are even weaker.

Toss in the weaker tone of in the Fed's Beige Book (released yesterday), and this raises the question: Is Fed Chairman Bernanke and the FOMC behind the curve (again)? In his testimony last week, Bernanke said:

My colleagues on the Federal Open Market Committee (FOMC) and I expect continued moderate growth ... Most FOMC participants expect real GDP growth of 3 to 3-1/2 percent in 2010

That seems pretty optimistic.

by Calculated Risk on 7/29/2010 08:30:00 AM

The DOL reports on weekly unemployment insurance claims:

In the week ending July 24, the advance figure for seasonally adjusted initial claims was 457,000, a decrease of 11,000 from the previous week's revised figure of 468,000. The 4-week moving average was 452,500, a decrease of 4,500 from the previous week's revised average of 457,000.
...
The advance number for seasonally adjusted insured unemployment during the week ending July 17 was 4,565,000, an increase of 81,000 from the preceding week's revised level of 4,484,000.

Click on graph for larger image in new window.

This graph shows the 4-week moving average of weekly claims since January 2000.

The four-week average of weekly unemployment claims decreased this week by 4,500 to 452,500.

The dashed line on the graph is the current 4-week average.

The 4-week average of initial weekly claims has been at about the same level since December 2009 (eight months) and the 4-week average of 452,500 is high historically, and suggests a weak labor market.

by Calculated Risk on 7/28/2010 10:41:00 PM

For those interested, here is the paper by Alan Blinder and Mark Zandi that I mentioned last night: How the Great Recession Was Brought to an End

by Calculated Risk on 7/28/2010 06:04:00 PM

CR Note: This is from housing economist Tom Lawler.

Meritage Homes, the 11th largest US home builder in 2009, reported that net home orders in the quarter ended 6/30/10 totaled 900, down 21.5% from the comparable quarter of 2009. Home deliveries, in contrast, jumped by 35.6% from a year ago to 1,207, reflecting buyers’ (and the builders) rush to close prior to the expected 6/30 closing date deadline for the federal home buyer tax credit. Compared to the previous quarter, net orders fell 15.4% while home closings surged by 49.4%. As a result, the company order backlog as of 6/30/10 fell to 1,044, down 22.7% from 3/31/10 and down 34.4% from a year ago.

Company officials were reportedly “surprised” by the extent of the post-tax-credit slowdown, and some analysts were a little spooked by the company’s move to increase active communities this year in California, Arizona, and Florida, while reducing its footprint in “lower-margin” Texas markets, as well as its recent acquisitions of land/lots. Meritage noted that margins on its newer communities have been higher than on older communities, in part because it purchased “deeply discounted” lots – especially in CA/AZ/FL. The company also said that it had “reduced our incentives while maintaining prices,” though whether it can do so in the post-tax-credit world remained unclear. Meritage, btw, appears to be one of those builders cited in yesterday’s WSJ article that may increase building in troubled markets that have not fully recovered yet because of land/lot acquisitions. (“Housing Glut is Likely to Build,”, July 27th, p. A2. This article, by the way, vastly overstates the potential for an increase in housing production related to SOME builders buying land/lots, often mainly either from other troubled builders or from banks. It also ignored surveys of builders indicating that most have dramatically cut their building production plans following the post-tax-credit plunge in sales, and ignored the sharp drop in SF building permits in May and June!!!)

M/I Homes, the 16th largest US home builder in 2009, reported that net home orders in the quarter ended 6/30/10 totaled 602, down 20.7% from the comparable quarter of 2009. Home deliveries last quarter totaled 790, up 60.6% form a year ago, as buyers (and the builder) rushed to close prior to the expected 6/30 closing date deadline for the federal home buyer tax credit. Compared to the previous quarter, net orders in the latest quarter fell by 21.3% while home deliveries surged by 64.9%. As a result, the company’s order backlog fell to 748 on 6/30/10, down 20.1% from 3/31/10 and down 32.4% from a year ago.

M/I CEO Robert Schottenstein noted that “coincident with the expiration of the tax credit on April 30, 2010 (for contract signings), we experienced a noticeable decline in our sales activity for May and June, resulting in a 21% decline in sales for the quarter” (implying BIG declines in May and June!) – breaking the company's previous string of six consecutive YOY gains in net orders.

At the risk of repeating myself (yet again!!!), the incoming data on home builders highlight that new home sales based on settlements actually surged in Q2/10 vs. Q1/10, even though contracts signed on a seasonally adjusted basis declined. Similarly, existing home sales closed in Q2 increased from Q1, even though new pending home sales declined. So for you “home data folks” who I guess because of ignorance add closed existing home sales to new SF home sales based on contracts signed/deposits taken (as reported by Census) to measure total home sales – stop it, it’s just wrong, and doing so makes you look like a fool!

CR Note: This was from Tom Lawler.

by Calculated Risk on 7/28/2010 04:01:00 PM

From the Sacramento Bee: Schwarzenegger orders more furloughs

[Gov. Arnold Schwarzenegger's] new executive order requires employees take three unpaid days off per month. But unlike that policy, it has no termination date: Furloughs will end when lawmakers pass a 2010-11 budget.
...
The governor made the decision this week after Controller John Chiang said that unless lawmakers enacted a budget soon, the state's cash would go into the red by October. Chiang said he'll start issuing IOUs in August or September to conserve funds as long as possible.

And the beat goes on ...

by Calculated Risk on 7/28/2010 02:00:00 PM

Note: This is based on information collected on or before July 19, 2010.

From the Federal Reserve: Beige book

Economic activity has continued to increase, on balance, since the previous survey, although the Cleveland and Kansas City Districts reported that the level of economic activity generally held steady.
...
Manufacturing activity continued to expand in most Districts, although several Districts reported that activity had slowed or leveled off during the reporting period. Districts also noted improved conditions in the services sector.
...
Reports on retail sales during the early summer months were generally positive, although in most Districts the increases were modest.

And on real estate:

Nearly all Districts reported sluggish housing markets in the months since the homebuyer tax credit expired on April 30. While some Districts, such as Boston and St. Louis, reported an increase in May and June home sales on a year-over-year basis, some contacts noted that these sales may reflect closings of homes under contract by the April tax credit deadline. The Boston, Philadelphia, Atlanta, and Kansas City Districts reported that home sales are expected to weaken going forward. Residential construction remained limited in several Districts. In the Atlanta District, residential construction activity softened from already weak levels. Homebuilders in the Cleveland District do not expect a turnaround in new home construction any time this year. Builders in the Chicago District are not introducing new inventory without a signed contract on a home. Housing starts were expected to decline for the second half of the year in the Dallas District and to increase slightly over the next three months in the Kansas City District.

Commercial and industrial real estate markets continued to struggle in all twelve Districts. Overall, vacancy rates were flat to slightly increased and continued to exert downward pressure on rents. Construction activity remained weak in most Districts. ... The outlook for commercial and industrial real estate across the Districts ranged from further declines in activity to slow growth.