History buffs know that the dollar slang term "buck" came about in the mid-1700's when deerskin were used for currency. Here in the U.S., during the Confederacy's existence, paper money was not only issued by the central Confederate government in Richmond but also by the individual Southern State governments, local municipalities, numerous private banks and even merchants. As in turns out, a recent NPR story stated that Germany now has 12 "local currencies" in circulation. The euro is now being used by 16 out of the 27 EU members, including Germany, but regional businesses are using local currencies in addition to the euro. Similar to script, the money is connected to a region - you can only spend it there - and thus promotes a "buy local" mentality. The currencies are not backed by any government, though some banks are offering loans and checking accounts in regional currencies. Obviously Germans are not wild about using their savings in bailing out less-economically responsible European nations.

 

I bring this up because today at 12PM EST, 9AM PST, the Committee of European Banking Supervisors will release the initial results of stress tests conducted on 91 banks. Investors, analysts and bankers worldwide are anxiously awaiting the results, with some industry observers saying the tests' success depends on details offered by regulators about how they came to their conclusions. And their opinion about it, especially on a day when there is no economic news here in the United States, may move both the stock and bond markets. In fact, the world had some strong economic news out of Europe last night, causing our rates to ease higher this morning.

 

It hasn't replaced, "Hey baby, what's your FICO score?" at bars yet, but "WillCap", brought to us by CoreLogic, may be useful nonetheless.(In spite of it being yet another word with a capital letter in the middle of it.) "WillCap" is a "loss mitigation platform that predicts a distressed borrower's willingness and ability to make mortgage payments. The software analyzes probable borrower payment behavior and recommends either a loan modification, short sale or REO transaction when strategic default is likely." Besides making perfect coffee and walking your dog, "WillCap will recommend to users which loan treatment to make and provides optimal terms for each one. When recommending a loan modification, WillCap can specify the payment and principal amounts needed to keep the borrower current for set amount of time. When it makes an REO-sale recommendation, it gives a sale price most likely to move the property off the market at a specified time and maximize cash value."

Who is Talcott Franklin? He's the world's next zillionaire, that's who. Talcott is an attorney in Dallas who apparently is spearheading an effort to group together mortgage bond investors to gain power to challenge loan servicers over losses the investors claim resulted from violations in securities contracts. "A group holding a third of the $1.5 trillion mortgage bond market has topped the key 25 percent threshold for voting rights on 2,300 'private-label' mortgage bonds." Reaching this level supposedly gives holders the means to identify misrepresentations in loans, and possibly force repurchases by banks. Individuals don't have access to the information, but a large group may - so not only are Fannie & Freddie forcing buy backs, but now this group may be in a position to do the same. Talcott Franklin's clients, per his press release, represent more than $500 billion in securities (private label) managed for pension funds, 401(k) plans, endowments, and governments.

 

Speaking of repurchases, one is reminded of the old joke about the doctor who gave a patient six months to live. At the end of the six months, the patient hadn't paid his bill, so the doctor gave him another six months. Often, "in the old days", a repurchase request could sit on an Ops person's desk for months, and could often be negotiated away or refinanced. By most accounts those days are gone. FHFA, Fannie & Freddie's regulator, may identify as much as $30 billion of debt included in mortgage bonds that the companies can force sellers to repurchase, and they don't appear in the mood to negotiate too much away. A few weeks ago 64 subpoenas were issued seeking loan files and other documents related to so-called non-agency mortgage securities bought by F&F. The large investment banks and originators will, of course, argue that some misstatements weren't material, and things will drag on.

 

In mortgage-land, investors are focused on a) generally low rates, b) the apparent lack of huge refinance volumes, c) the impact of the Fed swapping out of their 5.5% holdings, d) the impact of Fannie & Freddie buying out delinquent loans, and e) the impact of financial reform on the mortgage process. Given all of that, mortgage traders continue to see strong investment from domestic & overseas banks, insurance companies, pension funds, & money managers for Ginnie, Fannie, and Freddie mortgages. Obviously clean paper with a decent yield will always attract investors. As any mortgage guy can tell you, despite great rate levels, many borrowers will not be able to take advantage of them due to the tight credit conditions. As such, prepayment risks are primarily seen in newer 4.5% and 5% MBS. Next week we have yet another Treasury auction, so mortgage prices are expected to do well on a relative basis.

 

For news yesterday, we learned that Existing Home Sales were down "only" -5.1% to 5.37 million units in June. The Northeast rose +7.9%, but the other three regions of the nation were all down, and the inventory of available homes now stands at almost 9 months, down from the high levels of last year but still high. The inventory of new homes is the lowest it has been in 40 years - who needs a new, expensive house when there are so many less expensive, used houses? For good news, the median existing home prices were up 5.2% in June and 1.0% over the past year. Additionally, FHFA home prices were up 0.5% in May, the third consecutive monthly gain. And analysts believe that the improvement, or at least stabilization, in home prices means that housing is unlikely to push the economy back into recession. (Psychologically housing is very important, although it makes up less than 3% of the GDP number.)

 

For other news from June, the index of leading indicators was down 0.2%, while May was revised up one tenth to +0.5% and April was revised down one tenth to -0.1%. Over the past 12 months, the index of leading indicators is up 8.4%, so something is helping the stock markets to rally. As I mentioned yesterday, Initial Jobless Claims came in slightly worse than expected, but the Existing Home Sales and Leading indicators both beat expectations - which pushed stocks higher but fortunately did not impact rates too much. The Treasury announced it will auction off $38bn 2s, $37bn 5s, and $29bn 7s next week.

After the dust had settled the U.S. 30-year Treasury bond lost 1 point in price, 10-yr notes fell 13/32 (to 2.92%), and mortgages prices worsened to the point of seeing a few investor rate changes. $1.9 billion of mortgages were sold - with almost 20% Fannie 3.5's! But will those securities actually have loans to fill them in the coming months? Today there is no news, but next week more housing related news will be on tap early next week with New Home Sales (Jun) reported Monday and the S&P/Case-Shiller (May) Index on Tuesday. Currently stocks are pointing to a higher opening, although Citi stock is down on the report of more government selling, the 10-yr yield is up to 2.97%, and mortgage prices are worse by about .250.