In 1970, Marian McQuade began a campaign to establish a day to honor grandparents which finally paid off in 1978 when President Jimmy Carter signed a federal proclamation approving the first Sunday after Labor Day as National Grandparents Day. Did you know that one out of ten children in the U.S. live with their grandparents? That’s right – per the Census Bureau there are seven million grandparents whose grandchildren (younger than 18) living with them in 2010. Unfortunately, per the Bureau, $45,000 is the median income for families with grandparent householders responsible for grandchildren under 18. Among these families, where a parent of the grandchildren was not present, the median income was $33,000.

Huh? San Bernardino County might not need the eminent domain tool, given recent price appreciation? That would be good news indeed for the industry - here is the report on property values: http://www.clearcapital.com/company/MarketReport.cfm?monthSeptember&year 12. (For more information or to schedule a meeting to speak with Dr. Villacorta who is responsible for it, please contact Faith Murphy, Manager, Customer Development at Clear Capital, at faith.murphy@clearcapital.com.)

Speaking of changing values, I was asked by several folks about the USDA changes, specifically its list of communities which may be impacted by the October 1 changes. Here you go: http://ruralhousingcoalition.org/wp-content/uploads/2012/02/USDA-List-of-Impacted-Communities_06272012.pdf.

Are low rates great for everyone? Maybe not. PIMCO’s Bill Gross is warning the Fed’s actions to cut bond yields in the market to stimulate lending could hurt banks over the longer term and serve to contract lending. Mr. Gross has been wrong before (who hasn’t?), but he worries borrowing costs are so cheap that banks will stop making loans and be merged out given the difficulty of making a reasonable return on their capital if things go on too long.

Many wonder if the Republicans will abolish Dodd Frank and, thus, the CFPB, if they win the White House in two months. I doubt it, but here is a more educated view: http://www.washingtonpost.com/blogs/ezra-klein/wp/2012/08/30/what-would-a-gop-version-of-financial-reform-look-like/. Up until recently, Romney had said little to illuminate his views on the topic, except to say that when it comes to foreclosures, the government should butt out. “Let it run its course and hit the bottom,” Romney told the Las Vegas Review-Journal last October, per Fox News. And since then, the former Massachusetts governor has largely avoided references to housing policy, except when criticizing President Barack Obama’s. Romney’s 59-point economic growth plan contains no housing initiatives. Among two dozen issues addressed on his campaign website -- from taxes to trade policy -- foreclosures are not mentioned. But a Romney housing plan of sorts has been put forth, and here it is: http://www.mittromney.com/issues/housing. It includes, "A Plan To End The Housing Crisis: ‘Responsibly sell the 200,000 vacant foreclosed homes owned by the government’, ‘Facilitate foreclosure alternatives for those who cannot afford to pay their mortgage’, ‘Replace complex rules with smart regulation to hold banks accountable’, ‘Restore a functioning marketplace and restart lending to creditworthy borrowers’, and ‘Protect taxpayers from additional risk in the future by reforming Fannie Mae and Freddie Mac’.”

Here is a humorous note on current trends I received: “Hey Rob, there are some ‘funny’ things going on right now. The rally in MBS prices is due to the market believing that the Fed will probably do a MBS purchase program to lower rates, yet another agency - the FHFA announced that they are raising the g-fee s another 10 bps, or 35-40 basis points in price. On the political side, Obama’s campaign spent more than it brought in last month – a deficit - is that a surprise? And here is a political conundrum of the mortgage banker: Obama is going to do everything in his power to refinance everyone on earth, even renters, but it seems that Romney would like to do away with Fannie & Freddie & HUD. So do we want to have the wealth to distribute, or be taxed less on no money?”

NAR is good at statistics: who, what, when, where, and how. And now we have “how long?” Homes are spending less time on the market as supply conditions tighten: the median time (half above, half below) homes stayed listed was down about 30% to 69 days in July compared to 98 days in July 2011. While the overall median is down, the report stated one in five homes bought in July stayed on the market for at least six months. (Like the two on either side of my house!) Per NAR, at the current sales pace it would take 6.4 months to clear the supply of homes available as of the end of July, a 31% decrease from a year ago when there was a 9.3-month supply. Of course, all real estate is local, and there are still areas where houses just aren’t moving. But still, house prices are not falling off of a cliff, which is sure to help investor’s views of owning residential mortgages and MBS’s. In balanced market conditions, NAR said it’s typical to see prices rise by 1 to 2 percentage points above the rate of inflation as measured by the Consumer Price Index. Looking ahead, Yun said, “Our current forecast is for the median existing home price to rise 4.5 to 5 percent this year and about 5 percent in 2013, which is somewhat stronger than historic norms because of the inventory shortfall that is most pronounced in the low price ranges.”

But a person can buy a house using cash, or financing it. So will purchases replace refi’s? And if they don’t, then what? (Consultant Joe Garrett points out that consolidation in residential mortgage banking is alive and well, and I agree: the top five originators have funded 47% of all mortgages so far this year, and the top 25 lenders represent 85% of all loans!  Although not totally applicable, there's that old saying that in a consolidating industry, you either are the consolidator, you sell to the consolidator, or you go out of business. “The new factor in consolidation just might be compliance.  We're starting to hear from a few clients who are worried about the CFPB and the cost of compliance and might be interested in selling.”)

I received this note: “Having been through many refi cycles, we know that the end is generally not pretty as companies adjust to the drop in volume.  I think the end of this one could be the ugliest I've seen in my 25 years in the biz when - in the absence of a major purchase market bounce - we could see volumes decline by 60-70% (or more) when we finally run out of gas. Right now, all you have to do is own a home and be making your payments to get a refi loan, but once the refi train stops the feeling I have is that the fear of regulatory and/or repurchase retribution will continue to constrict lending for people who actually have to qualify for a new purchase mortgage.  Everyone that I know feels that there are all kinds of eyes looking over their shoulders and they don't want to be the ones who get thrown under the bus for a loan that has any issues later. Eventually, industry attrition will result in the fact that there will be very few people who really know how to make a credit decision. They've become nothing but paperwork assemblers and AUS submission specialists.  It's like a friend of mine once said about auto repair shops: ‘There are no more mechanics. They're all just 'parts replacers'."

We aren’t quite there yet, however, and I also received this note from someone within one of the agencies addressing the recent fantastic profit margins being seen in the industry. “I would expect Q4 profits to be even higher.  We saw a surge in the primary-secondary pricing during in Q1, the benefits of which we would have expected to see in Q2.  The spread narrowed a bit during Q2, so profit margins in Q3 could dip a bit as well.  However, the pricing spread rebounded to its highest point of the year during Q3.  This could manifest itself in a great 4th quarter in loan sale profitability.  It appears that many lenders are managing capacity through pricing.” I agree, although it seems like volumes are slipping just a shade. And we're only in the third quarter. The refi market's legs seem to be becoming a little tired - just a sense. Of course, thousands of companies and individuals are sure hoping this person is right.

And for some reader input on house flipping, Dan Stone expressed some views. “I think the Agencies and HUD have it right, by allowing only owner occupant buyers 1st right to purchase their foreclosed properties.  I have seen too many flippers supposedly upgrade a good home with cheap improvements which benefit the short-term look of a home.  A couple years down the road, the outdoor lamps are tarnished, the paint is chipping, the molding is separating from eaves, the cheap carpeting is worn, etc.  The flippers want to maximize their financial gain, not install quality improvements in the home.  By allowing the owner occupant buyers to upgrade when financially possible, I believe their emphasis is on quality that will last during their time in the house and longer, as they know they will be required to fix or maintain any upgrades or changes.”

Yesterday, early on, Mario Draghi delivered his highly anticipated speech and the big line was that the ECB is going to launch "monetary outright transaction", in other words, the ECB will be buying bonds of governments like Spain and Italy, whose high yields are threatening their economic recovery.  This was not a big surprise; in fact, the net effect after some of the details was a modest improvement from the lows on bonds and a pullback from the pre-market highs in stocks. Still, bonds sold off (don’t they like stability and happiness in Europe?) and stocks rallied.

Continuing with that news, there would be no quantitative limit to the bond purchases - this means what it says, the ECB is not putting in a limit like QE1 or QE2, but will instead purchase "whatever it takes to save the Euro." The ECB will not be printing money to purchase these bonds, but will sell other assets to raise this money - therefore the ECB doesn't expand its balance sheet or money supply and potentially stoke inflation – Germany likes this. And the purchases will be focused on the very short end of the yield curve, one to three year maturities.

By the time the dust settled, and after combining the Europe chatter with decent jobless claims, ADP, and ISM numbers here, our 10-yr yield closed at 1.68%. Agency MBS prices fell/worsened about .375 on above-average sales volumes. But geez – are rates really going to move that much before 2015? The Fed is continuing to buy $1-1.5 billion per day – that certainly helps the demand side of things (for now).

I’m heading to the airport, so won’t be able to see the Non-Farm Payroll numbers prior to sending out the commentary (they are expected +125k), but in the early going the 10-yr is sitting around unchanged as are MBS prices. Remember that not only do we have the employment numbers, but also August prepayments are reported late afternoon. And like payrolls warning, there is some talk that speeds could be faster than expected – that doesn’t help investor appetite. (Why would an investor buy an asset for 105 one day only to have it pay off at 100 in two months?)

The following list of phrases and their definitions might help you understand the mysterious languages of science and medicine. These special phrases are also applicable to anyone working on a Ph.D. dissertation or academic paper anywhere. (Part 2 of 3)
"In a series of cases" thrice.
"It is believed that" I think.
"It is generally believed that" A couple of others think so, too.
"Correct within an order of magnitude" Wrong.
"According to statistical analysis" Rumor has it.
"A statistically oriented projection of the significance of these findings" A wild guess.

If you're interested, visit my twice-a-month blog at the STRATMOR Group web site located at www.stratmorgroup.com. The current blog discusses the new CFPB Rule combining TILA & RESPA disclosures. If you have both the time and inclination, make a comment on what I have written, or on other comments so that folks can learn what's going on out there from the other readers.

Rob

(Check out http://www.mortgagenewsdaily.com/channels/pipelinepress/default.aspx or www.TheBasisPoint.com/category/daily-basis. For archived commentaries, go to www.robchrisman.com. Copyright 2012 Chrisman LLC.  All rights reserved. Occasional paid notices do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)