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HPS Housing Policy Brief Dec 10, 2012

HPS Housing Policy Brief Dec 10, 2012

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A weekly analysis and summary of news coverage from the prior week plus upcoming events and key data to watch.
A weekly analysis and summary of news coverage from the prior week plus upcoming events and key data to watch.

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Categories:Types, Research
Published by: Hamilton Place Strategies on Dec 10, 2012
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 WEEKLY BRIEFINGHOUSING: POLICY & FINANCE12/10/2012
Hamilton Place Strategies| 805 15th Street NW, Suite 700 | Washington, DC 20005
FED MBS HOLDINGS ARE REDUCING RATES BUT TRANSMISSION EFFECT VERY REAL
 The biggest housing-related news came early this week when William Dudley, President of the Federal Reserve of New York, gave aspeech summarizing a paper by  New York Fed sta
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in September to purchase an additional$40 billion a month of agency mortgage-
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is working; current MBS yields declined roughly 45 basis points while the Freddie Mac 30-year rate declined 23 basis points. However, there are impediments to current policy: the yield that the Fed is receiving in the primary marketis significantly lower than actual mortgage rates available to the consumer (Exhibit 1).Historically, the spread hovered between 30 and 50 basis points. In September, it rose above 150 basis points. There are several reasons cited for this anomaly. Outsideof the actual paper, Nick Timiraos of the
Wall Street Journal 
provides what we found to be the most concise news
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ability and higher costs associated with increased regulation of the mortgage market. Other areas of concern are market concentration, capacity constraints, higher barriers to entry and pricing power oncertain borrowers.
SUPPLY OF MORTGAGE CREDIT IS NOT WHAT IT USED TO BE
 Although there are several reasons for the transmission effect, the most logical reason behind it is the current level of mortgage origination compared with prior to thecrisis. For example, according to a report titled
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Future of the Housing & Mortgage Markets: Winners & Losers
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FBR Capital Markets & Co.,using data fromInside Mortgage Finance,the largest mortgage originators in 2005 were Bank of America (including Countrywide), Wells Fargo (including Wachovia and Golden West), JPMorgan (including Washington Mutual), Citi (including ABN Amro) and GMAC. They estimate that roughly $1 trillion of capacity has left the market since 2005.Bank of America exited the market and closed down Countrywide, JPMorgan closed
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and Citi and GMAC now havesubstantially smaller roles in the market. Of the top 20 mortgage originators of 2006 based on Home Mortgage Disclosure Act data
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only five of the 20 remain(Exhibit 2).
GIVEN MARKET CONDITIONS, EXPECTATIONS ARE FOR A PROLONGED PERIOD OF LOW INTEREST RATES
 
 The market forecast is for continued sub-par economic growth. The current unemployment rate sat around 7.7 percent  with the economy adding 146,000 jobs in November. While not significant enough to alter sentiment, Hurricane Sandy may have played a role in the numbers. These diminished expectations, combined withthe end of Operation Twist and the expectation of tighter fiscal policy in the new year, will most likely lead the Fed to take further action. Fed action over the past yearhas caused the yield curve to flatten. One year ago, the 30-year rate was at 3.04 percent; it is now at 2.81 percent (Exhibit 7).
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and with potentially more accommodative policy, these holdings could rise. These purchases should drivedown the yield on MBS, which should result in lower mortgage rates for the consumer. While the transmission effects are somewhat muted, evidenced by the spreadbetween primary and secondary MBS (discussed above), expectations are for a prolonged low interest rate environment to support continued refinancings andoriginations.
 
KEY DEVELOPMENTS
 
 WEEKLY BRIEFINGHOUSING: POLICY & FINANCE12/10/2012
Hamilton Place Strategies| 805 15th Street NW, Suite 700 | Washington, DC 20005
 WHAT TO WATCH FOR IN THE WEEK AHEAD (DEC. 10-14)
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 The FOMC is holding its last 2012-policy meeting this Tuesday and Wednesday; releasing market forecasts on Wednesday afternoon. A press conference forChairman Bernanke will begin shortly thereafter at 2:15 PM. For a more in-
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President Obama will speak in Michigan this Monday, most likely drumming-up support in fiscal cliff negotiations. Last Monday, the President reiterated his
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mortgage interest.
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 A number of public and private events are in Washington this week. Look to the House Financ
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rt and future of housing,respectively.
 
 
 WEEKLY BRIEFINGHOUSING: POLICY & FINANCE12/10/2012
Hamilton Place Strategies| 805 15th Street NW, Suite 700 | Washington, DC 20005 Jobless Rate Edges Down to Its Lowest Level in 4 Years  The New York Times12/7/2012By: Nelson Schwartz
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slowdown caused by gridlock in Washington, the economic recovery moved forward at a steady pace in November, pushing unemployment to itslowest level in four years.
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month in 2012. But the pace was a substantialimprovement from earlier this year, when job growth slowed sharply and many observers feared a double-
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 Basel who? Mortgage servicing rights were already falling  SNL Financial12/07/2012By: David Hayes and Tahir Ali
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Mortgage servicing rights, or MSRs, are now just a shadow of their former glory. Faced with falling interest rates and consequently rising prepayment rates, as well assales to nonbank servicers, the value of MSRs at U.S. bank holding companies has been in decline for years, even before the joint regulatory proposal on Basel IIIimplementation was announced last summer. Aggregate mortgage servicing rights in the industry fell in the third quarter to $35.65 billion, down from $38.14 billiona quarter earlier and $44.12 billion in the year-ago quarter. Going farther back in time, the drop in MSRs is more substantial as MSRs stood at $52.36 billion in the thirdquarter of 2010 and $67.57 billion in the third quarter of 2009.
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 Lawmakers Press HUD Secretary on Possible FHA Bailout  American Banker12/06/2012By: Victoria Finkle
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Donovan told the Senate Banking Committee what HUD is doing to prevent such a scenario, including what further actions might be needed to bolster the mortgageinsurer's finances. But lawmakers on both sides of the political aisle expressed strong dismay with the agency's financial health, raising the prospect of whether the nextsteps may require additional legislative action.
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 This CoreLogic House Price Index report is for October. The recent Case-Shiller index release was for September. Case-Shiller is currently the most followed houseprice index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is notseasonally adjusted (NSA).
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 TOP NEWS AND RESEARCH

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