President Truman (pictured) was distrustful of “Two Handed” Economists, for their habitual equivocation. Fitch seems to have inherited this trait; which is unfortunate because it was observed in Housing Smoke and Mirrors “Sell Your House in May and Go Away” that the rating agencies were trying to get ahead of the emerging housing correction. In its latest report, Fitch states that whilst on the one hand rising interest rates will expand bank lending margins on the other hand they may cause losses on the balance sheet[i]. Banks will then be forced to raise more capital to comply with the Basel III rules.
It is becoming clear that the rating agencies have understood what Sarah Bloom Raskin[ii] and Charles Plosser[iii] are signalling about tighter bank capital adequacy, to deal with volatility as the Yield Curve is Normalized by the Fed. Fitch is trying to finesse it, by being conservative without being alarmist. In doing so, it has just provided another key signal that supports the thesis that the Fed is Normalizing the Yield Curve. Freddie Mac seems to also have given the Fed the green light to go ahead and “Taper” the Yield Curve back to normal[iv]. Freddie opines that although the mortgage origination and refinance markets would take a hit, that the housing market is now on a sustainable path which can withstand higher interest rates.
CoreLogic’s June 2013 Market Pulse was a definite attempt to use the other hand. This other hand opined the reasons for the sudden negative picture developing in the housing market[v]. It was acknowledged that speculators were driving demand, fueled by lower interest rates and QE.
On the supply side, inventory was acknowledged as being abnormally low because sellers refused to take the negative equity hit. In addition, developers have awoken from their hibernation; and are using low financing costs and cheaper building commodities to crank up supply. Combining supply and demand conditions, it therefore came as no surprise to CoreLogic that prices were hitting resistance. It was also no surprise that these dynamics were leading to greater price volatility.
CoreLogic thus far has been cheerleading using the one hand; so this latest report comes as quite a shock. Clearly the analysts have imbibed the rhetoric and price action surrounding the “Taper”. On the one hand when prices were rallying it was a recovery; on the other hand now it has become volatility.
From our perspective, it was the section on Mortgage Performance that was the most interesting. The Housing Smoke and Mirrors series began with an analysis of mortgage performance.
From Housing Smoke and Mirrors (3) –Update “April Fools”[vi]
Source: February Mortgage Performance Data – Loan Processing Services
Click to enlarge
In Housing Smoke and Mirrors (3) – Update “April Fools”[vii] the rising deterioration in the 2009 Vintage was observed, along with a stable but elevated 2008 Vintage. This was observed on data from February 2013.
CoreLogic is still using March 2012 data and it is now June 2013. What are they hiding and/or what are they missing?
The HOPE NOW Alliance recently released modification data for April 2013. This analysis shows a sudden drop in Proprietary Modifications combined with a rise in Foreclosures and Sales. Proprietary Modification is a voluntary programme, which reflects a compromise achieved by lenders, borrowers and servicers. In April this consensus broke and the lenders became more motivated to become sellers. Lenders saw a level of prices at which it was more attractive to sell and reduce risk. Since then mortgage interest rates have continued to rise and price increases have slowed.