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Market Indicator 8/1/8
- Friday, August 01, 2008
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Quote of the Week
"Time, and a better balance of buyers and sellers in the dodgiest of housing assets, is the longer term cure for what ails us."
William O'Donnell, UBS, 07.29.08
August 1, 2008
Market Indicators
7/30/08 Last Week Last Year
MBA 30 Yr FRM
6.46% 6.59% 6.50%
10 Yr T
4.05% 4.15% 4.80%
Fed Funds
2.00% 2.00% 5.25%
Refi Index*
1074.4 1392.7 1724.1
Purch Index* 309.5 335.6 416.6
Government Index*
332.4 365.9 139.9
S&P 500
1284.26 1282.19 1473.91
MI Index**
32.50 34.49 94.43
Genworth 16.71 17.60 31.09
*seasonally adjusted ** Mkt Cap Index Based on MTG, PMI, RDN, TGIC & GNW
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Click on the following links to jump to MIcroscope sections
Feature
Economy
Competitors
Housing
Rates
Upcoming Events
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Feature
Report Summarizes Factors Influencing Affordability in Today's Housing Market
Last month, Homes For Working Families - an organization that works with the public, private, and nonprofit sectors to share research and promote state and local solutions that will increase the supply of workforce housing - released a report in partnership with Moody's Economy.com titled Analyzing Affordability in Metropolitan Housing Markets ("Analyzing Affordability "). The report provides a summary of housing and household factors that impact those earning between 60% and 120% of area median income. Analyzing Affordability utilized a variety of data sources including the Case-Schiller tiered price indexes, the U.S. Census Bureau's American Community Survey and the Consumer Expenditure Survey.
Affordability in this report is "measured by ratio of income to the amount of income needed to cover mortgage payments." Here are highlights from the report:
Home Prices and Sales
• Deceleration in home sales and price increases in 4Q07 have resulted in better affordability ratios for low- and middle-income workers in many cities across the U.S. Despite the improving trends, housing continues to be prohibitively expensive, even for households earning 120% of the area's median income, in nearly half of the metro areas examined in the study.
• As the housing market continues to deteriorate, home sales in the lower-price tier remain erratic. According to Case-Schiller, this tier showed the greatest run-up in prices during the peak of the boom (2004-2006) and will register the steepest declines from peak to the forecasted bottom in 2009. Once the market recovery commences, the lower-price tier is expected to appreciate at the quickest pace.
Credit and Economic Conditions
• In recent months, banks have adopted stricter lending policies that have tightened loan qualifications, raised mortgage rates and added or increased fees. These changing guidelines offset the impact of lower home prices, and the subsequent improvement in affordability, as many households cannot access credit in this restrictive environment.
• Rising unemployment, flat median incomes and record-low household net worth are also cancelling out the benefits of lower home prices -- as these factors are contributing to larger debt burdens and decreasing purchasing power.
Foreclosures
• The rise in foreclosures has had a contradictory effect on affordability. The foreclosures contribute to lower home prices but at the same time they have also diminished the credit quality of an entire pool of future buyers.
Though some progress has been made towards greater affordability in housing, it will take time to correct the boom's overexpansion of credit so that low- to moderate-income families can benefit from lower home prices. Either home prices must continue their decline or incomes must begin to materially rise in order to realize meaningful gains in affordability.
" ... households today are not in a good position to take advantage of lower housing prices because of tighter conditions on both the demand and supply sides of credit markets."
Analyzing Affordability in Metropolitan Housing Markets, June 2008
Click here to read the full report
Return to topics
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Competitors
Dowling and Partners ("D&P") initiated coverage on MIs on July 24, 2008. Geoffrey Dunn, former analyst at KBW, will be covering the MI sector.
Highlights from the report include:
• Initiating coverage on MIs with a Buy rating on MGIC and a Neutral rating on PMI and Radian
o MGIC has already raised capital ... D&P believes there is significant capital in MI operations to support growth and credit needs
o Believes uncertainty created by incomplete capital efforts creates a level of risk that warrants caution for Radian and PMI
• Believes Radian's US MI business needs an additional $500MM-$600MM of capital to weather credit cycle
o Options are limited to either extracting capital from financial guaranty business or selling that asset
o Mentions S&P's year-end conclusions that Radian's FG business had $550 -$600MM of excess capital over the AA required threshold
• Estimates that PMI needs capital relief of $800MM-$1.1B after giving consideration to the $200MM of recently drawn debt funds
o Could raise $800MM or more by recapturing capital committed to its Canadian venture, selling its ownership in CMG, and selling a large minority interest in its Australian business
• Loss outlook is challenging ... incurred losses will peak in 2008 and decline steadily on a quarterly run-rate basis through 2010 ... paid losses will peak in 2009, with much of 2006 and 2007 losses materializing earlier than historical norm
o Still expects a material amount of paid losses in 2010 as late 2008 and 2009 delinquencies make their way through the system
o MIs will not return to more "normalized" paid loss results until 2012
• Delqs will peak in 1Q09 and then decline at an accelerating rate through 2010
o Expect growth in IIF, RIF and earned premiums to decelerate materially versus the trends posted for 2007
o Persistency will remain favorable, stabilizing in the mid- to upper 80% range for the next few years
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RMIC Reports Net Loss in 2Q08 Earnings Call
Highlights from the call:
• Reported pre-tax operating ("op") loss of $141MM vs. pre-tax op income of $37MM in 2Q07 and pre-tax op loss of $122MM in 1Q08
• 2Q08 losses incurred up 6% variance to prior quarter ("VPQ") and 249% variance to prior year ("VPY") to $287MM from $267MM and $82MM, respectively
• Management expects average loss ratio to be in the ~175 - 200% range for 2H08 ... 193% in 2Q08
• Does not expect to return to profitability until 2010
• Primary production down in 2Q08 to $6B ...driven by 24% VPQ decrease in flow NIW due to tighter underwriting
• Management will not infuse any additional capital to MI company until it reaches 20:1 risk-to-capital ratio ... 2Q08 at 16.4:1
Click here for a Summary of RMIC's 2Q08 Earnings Call
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KBW Responds to RMIC's 2Q08 Earnings Results
• Expects higher reserving trends to continue for US MI
• Ultimate duration and severity of the housing crisis will play a significant factor in investors' comfort with the company
• Positive impact to the top line from the price increase, won't be sufficient to offset the impact of performance of existing book
• Believes ORI's current plan not to raise any additional capital increases the probability of further ratings agency downgrades, which would require the company to work closely with the GSEs in order to maintain Type I insurer status
• Does not believe that ORI is considering any additional equity issuance or plans to sell any assets
• Believes company would, and has the ability to, raise capital to support the mortgage insurance business, if necessary
2008 EPS Target Price
Old New Old New
KBW $(0.02) $(0.72) $13.00 $13.00
FPK NA $(0.15) NA $11.45
KeyBanc NA $0.12 NA $11.80
Avg $(0.02) $(0.25) $13.00 $12.08
Click here for the Weekly Competitor Update
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Rates
"The Treasury market continues to idle in a relatively tight range as yields appear somewhat trapped in a vice for the near term."
William O'Donnell, UBS, 07.30.08
• 10Y T yield rose 13bp this week to 4.11% ... highest weekly average in five weeks per the Federal Reserve Board
• A dip in oil prices and generally better than expected 2Q08 earnings have lowered demand for safety of Treasury bonds (demand?, price?, yield?)
• 10Y T yield likely to remain volatile as investors continue reacting to threats of inflation (yields?), weak economy (yields?), second quarter earnings (?) and an increase in supply of Treasury bonds
"We now know that it's open season for more 10's and 30's in the months ahead ... Even so, we feel it premature to draw direct links between higher supply and higher rates as we expect the economic conditions that spurred the supply changes will continue to dominate the overall effects of higher supply itself."
William O'Donnell, UBS, 07.31.08
• This week the Treasury Dept. announced upcoming 10- and 30-year Treasury bond auctions ... $171B will be auctioned during 3Q08 including next week's $17B in 10Y Treasury bonds
• U.S. Treasury Department holds auctions to raise money for government funded activities such as war, helping financial markets (Bear bailout), assisting struggling state and local governments hurt by falling tax revenues due to lower home prices and rising foreclosures, etc.
• In theory, higher supply puts downward pressure on prices and takes yields higher ... and while that may be the long-term effect, in the short-term, the same factors that led to the government auctions may also keep demand for Treasury bonds strong enough to offset the impact of higher supply (demand up, price up, yield down)
• "Economic conditions will continue to dominate the rates scene (lower rates and a steeper curve still to come) until we see home prices stabilize-a key precondition for an economic recovery in our view." William O'Donnell, UBS, 07.31.08
Mortgage Rates Fall As Spreads Tighten
• 30Yr FRM fell 13bp this week to 6.46% from last week's YTD '08 peak, 6.59%
• Higher 10Y T yield (+13bp) was offset by 26bp decline in spread ...
o Spread between 30Yr FRM and 10Y T yield fell to 235bp from last week's 261bp
o As noted in the chart below, the spread averaged 156bp last July and has been on an upward trend (~20bp per month) since May's 207bp spread
o A 156bp spread on a 4.00% 10Y T Yield would have resulted in a 5.56% 30Yr FRM this July ... a level not seen since the beginning of this year
• Passage of the housing bill has potential to ease fears about Fannie Mae's and Freddie Mac's ("the GSEs") ability to purchase mortgages which could reduce this spread and bring mortgage rates lower
• Conversely, mortgage-related write-downs increase risk perception of mortgages and put upward pressure on this spread
• Recent forecasts predict the spread between 30yr FRM and 10Y T yield will peak near 230bp in 3Q08 and land nearer 200bp by end of 2009 but higher 10Y T yield will offset that tighter spread and keep the 30Yr FRM near its July 2008 level
• Higher mortgage rates, along with tighter underwriting criteria, are adding to falling home prices and dampening demand for mortgages
• MBA Application activity down for a second consecutive week and ~9% lower in July vs. June
o MBA purchase application index fell ~8% to 340 ... lowest weekly level in two months
o Purchase index dropped 9% in July which marked the fourth straight monthly decline
o MBA refi index sank 23% this week to 1,074 ... on a seasonally adjusted basis this is the lowest weekly level since December 2000 at which time the 30Yr FRM was 7.07%!
o Refi index (not-seasonally adjusted) averaged 1,261 in July, down 8% from prior month as it continues its downward trend that started in Jan. '08 (Jan. '08 = 3,654)
o Refi's held their 36% share of conventional applications in July - matching June's level - although this week's 32.1% share was the lowest weekly level since June '04's 30.9%
o Government index, measuring FHA/VA application activity, was also down 9% this week to 353 ... lowest level since May '08
• ARM apps ticked lower for a third straight week to 14% based on dollar volume - down from ~20% at the beginning of July - and were down 4 points to 7% this week based on number of loans
• The 1Yr Treasury ARM rate in MBA's weekly survey rose to 7.35% this week and has now held above 7% for eleven straight weeks
• Weak investor demand for ARM mortgages has driven the rate for ARMs above FRMs thereby reducing the attractiveness for these mortgages
What This Means For MI
A greater number of fixed rate mortgages is beneficial to U.S. MI since more than 90% of 1H 2008 GSE volume was in FRMs and the GSEs require credit enhancement on loans with LTVs above 80%
Monthly Rates and MBA Survey Data
July 08 June 08 May 08 July 07
10Y Treasury Yield 4.00% 4.11% 3.88% 5.03%
30Yr FRM Average 6.42% 6.38% 5.95% 6.59%
Spread 30Yr v 10Y T 242bp 227bp 207bp 156bp
30Yr FRM Low 6.22% 6.24% 5.82% 6.50%
MBA Purch App Index 355 390 406 451
MBA Refi App Index 1,261 1,371 2,053 1,611
MBA Government App Index 378 383 386 140
% Conv'l Refi App 36% 36% 46% 40%
% ARM Apps (conv'l, $) 16.8% 17.8% 17.3% 35.2%
% ARM Apps (conv'l, #) 9.1% 9.8% 9.8% 21.9%
Click here for this week's US MI Metrics of Interest
Return to topics
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Economy
"The good news is there's been no acceleration in the official data.
The bad news is there's nothing about the data that suggests improvement anytime soon."
Robert Barbera, Chief Economist, ITG - quoted in The New York Times, 08.01.08 regarding July's Labor Market Report
Job Losses Continue for Seventh Straight Month ... But Were Fewer Then Expected in July
Unemployment Rate Rose to 5.7% in July From 5.5% In Both May and June
• July's labor market report showed a 51,000 job loss figure ... beating predictions for 75k job losses
• Job losses in May and June were upwardly revised to reflect 26,000 fewer job losses in those two months
• Job losses have averaged 66k over the seven months of 2008 ... last year's Jan.-Jul. monthly average was a 100k job gain
• Additional job losses are expected in the upcoming months
• Unemployment climbed to 5.7% in July ... highest rate since Mar. '04's 5.8% rate
• Economists expected the unemployment rate to climb to 5.6% in July after holding at 5.5% in both May and June
• Increase in unemployment rate in July driven by 285,000 more unemployed workers in July vs. June
o Unemployment rate = # unemployed divided by # workers in the labor force
o July's 5.7% unemployment rate = 8,784k / 154,603k
o June's 5.5% unemployment rate = 8,499k/ 154,390k
• Once again, the teenage unemployment rate claimed the high spot rising to 20.3% in July from 18.1% in June
• Current forecasts call for the unemployment rate rising to 6.0% by year-end 2008, peaking in 1H 2009 at 6.2% with total year 2009 averages ranging from 5.8%-6.2%
• Average hourly earnings rose 0.3% to $18.06 in July and are up 3.4% in the past twelve months
• Average work week fell to 33.6 hours in July from 33.7 hours in June
o Many businesses are reducing wage expenses by cutting employees' hours rather than laying off workers
o A reduction in hours may mask how difficult labor market conditions actually are as workers receive a smaller paycheck but a bigger charge for both food and energy
o According the Census Bureau release, there are 5.7 million persons now working part-time jobs who would prefer, if they were available, to work full-time - this figure increased by 308,000 during July
? Part-time is defined as fewer than 35 hours per week
? Part-time workers are counted as employed and in the labor force figures used to calculate the unemployment
"A weakening labor market intensifies pressure on consumers, who are already confronted with over-extended balance sheets, declining home prices, tight lending standards, and expensive food and energy. After the temporary and modest beneficial impact of tax rebate payments, consumers will have nothing left to fall back on, and the underlying trend of consumption growth will therefore weaken even further in the latter part of the year."
Joshua Shapiro, MFR Inc, 08.01.08
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"It's hard to put a shiny gloss on this confidence report."
Robert Brusca, Chief Economist, Fact and Opinion Economics, 07.29.08
Consumer Confidence Index Rose in July Ending Its Six-Month Downward Trend
Chart source: The Conference Board
• Consumer Confidence Index increased to 51.9 in July from June's upwardly revised 51.0
• July's consumer confidence was expected to dip slightly to 50.0 from June's original 50.4 level
• Rise in consumer confidence attributed to the recent decline in oil prices which increased the outlook for conditions six months out more so than the outlook on current conditions
• Expectations Index climbed 1.6 points to 43.0 in July
• Present Situation Index held at 65.3 in July vs. 65.4 in June
• Confidence was strongest in the West and weakest in the East North Central Region in July
• Younger households (head of household 35 and under) maintain their rank as most optimistic with a 68.8 July '07 reading while the index declined to 43.6 for those 55 and older head of households that were surveyed
• Increase in consumer confidence in July ended the declines that began in Dec. '07
• Last July the Consumer Confidence Index hit a five-year high, 111.9, but has remained below 100 since Sep. '07 as uncertainty about the health of the economy, inflationary fears and a weaker labor market have dampened consumers' optimism
• The Consumer Confidence Index is based on a monthly survey of 5,000 households
• Economists track the Consumer Confidence Index to provide clues on consumer spending since consumer spending makes up two-thirds of U.S. GDP
"We believe that the U.S. is still in a financial crisis but has now moved into the recuperative stage."
Richard Hoey, Chief Economist, Bank of New York Mellon, 07.29.08
• GDP rose a point (seasonally adjusted annual rate) in 2Q08 to an estimated 1.9% ... past GDP figures were also revised in this release - see table below for more details including predictions for the remainder of the year
• This GDP figure will be updated two more times as additional data is collected and analyzed
• Wide range of expected readings for 2Q08 GDP from 1.0%-2.2% due to increase in stimulus check spending activity during this quarter
• Activity in the third quarter of the year is now widely expected to dip into negative territory as the stimulus checks have been spent
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08E 3Q08E 4Q08E 2006 2007 2008E 2009E
GDP - Revised (07.31.08) 0.1% 4.8% 4.8% (0.2%) 0.9% 1.9% (1.0%)-2.0% (0.8%)-1.5% 2.8% 2.0% 0.5%-1.4% 1.8%-2.8%
GDP - Prior to Revision 0.6% 3.8% 4.9% 0.6% 1.0% 2.9% 2.2%
"For many decades, economists have observed that a housing slump precedes a recession and that a stabilization of housing is a prerequisite for recovery.
We believe that in 2008, history is repeating itself again."
Maury Harris, UBS, 07.25.08
What This Means for MI
Weak consumer confidence and GDP raise the odds that unemployment will continue to rise. Existing mortgage borrowers may have difficulty keeping their mortgage payments current (MI Losses?) and there may be fewer new borrowers able to afford homes (MI NIW ?).
"The three top economic concerns are weakness in housing, elevated energy prices, tight credit conditions, and the labor market."
Greg Robb, Marketwatch, 07.28.08
Return to topics
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Housing
New Home Sales Narrowly Beat Expectations In June
"[June's numbers offer] a few positive flickers, but the housing market remains extremely fragile"
Brian Bethune, Chief U.S. Financial Economist, Global Insight, 07.25.08
• New home sales fell 3.9% to 0.530MM units in June from 0.533 in May
o June sales showed slight improvement on a variance to prior year ("VPY") basis ... 33.2% VPY vs. 37.8% in May and the record breaking 40.2% VPY decline in Apr. '08
o 31st consecutive month of VPY declines
o June's data was received with some optimism as it was running slightly ahead of various Wall Street projections ... analysts agree that it is still too early to infer that a correction could be coming for the housing market
• Median sales price of new homes rose in June - to $237,900 - a 2.94% improvement over May
• Inventory of new homes declined 5.3% variance to prior month ("VPM") in June to 0.426MM with a 10 months' supply (seasonally adjusted)
• Regional new home sales data was mixed
o Sales declined in the South and West, (2%) and (0.9%) VPM, respectively
o Improvement in sales on a VPM basis was seen in the Northeast at 5.3%, and Midwest at 2.5
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Housing and Economic Recovery Act of 2008
On July 30, the President signed into law the Housing and Economic Recovery Act of 2008. The comprehensive legislation addresses numerous housing-related issues, including foreclosure prevention, FHA modernization, GSE reform, GSE "rescue", loan disclosure requirements, tax proposals and homebuyer counseling.
The provisions of this new law that are of most note to the MI business are:
FHA Rescue
• Permits FHA to insure up to $300B of refinanced loans that have been written down by current holders
• Eligible borrowers must have DTI ratios above 31
• Lender participation (write downs) voluntary. Current holder cannot receive more than 85% of new appraised value as payoff of old loan
• Caps LTV on new loan at 90% of new appraised value
• 3% upfront (financed) premium and 1.5% annual premium
• HUD gets a percentage of increases in home value when the refinanced loan repays (exit premium)
• No direct involvement for private MIs, but could incent more workouts of loans that currently have MI
• Timing for FHA's implementation of these provisions not yet determined
FHA Modernization
• Permanently increase FHA base amount ($271K) and upper loan limits ($625K) (after current "temporary" increases expire)
• One-year moratorium on risk-based pricing (which went into effect in mid-July under FHA rulemaking authority. See discussion below.)
GSE Reform
• Creates a new, independent regulator for Fannie Mae and Freddie Mac
• Requires prior notice and comment on new products
• Increases GSE loan limits to $625,500 after current, temporary increases expire.
GSE "Rescue"
• Temporary (18 month) increase of line of credit to Treasury
• Temporary authority for Treasury to invest in GSE equities
• Gives Federal Reserve "consultative" role in setting GSE capital requirements
Tax
• Temporarily extends federal deduction for local property taxes to filers who don't itemize, creates standard deduction for first time homebuyers up to $7500 - subject to repayment over 15 years and subject to income phase out
FHA Risk Based Pricing
Separate from the legislation, on July 14, the FHA implemented risk-based premiums. Upfront premiums range from 125-225 basis points, and annual premiums range from 50-55 bps. Pricing is based on LTV (bucketed at 90 and below, 90-95 and above 95) and FICO (with FICOs less than 600 getting higher premiums). As discussed above, the new housing legislation imposes a one-year moratorium on this pricing, beginning October 1, 2008.
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Upcoming Events
ISM Manufacturing Index (Jul) 8/01
Triad's 2Q08 Earnings Call 8/04
ISM Non-manufacturing Survey (Jul) 8/05
FOMC Policy Statement 8/05
AIG's 2Q08 Earnings Call 8/07
Radian's 2Q08 Earnings Call 8/11
The MIcroscope is a weekly publication of the Genworth Mortgage Insurance Business Intelligence Group.
To request reports and articles mentioned in The MIcroscope, please contact Amy Davis
Click here for Past Editions of the MIcroscope
Editor-In-Chief:
Carol Bouchner
Publisher:
Amy Davis
Contributing Editors:
Carol Bouchner - Housing (Housing and Economic Recovery Act)
Amy Davis - Feature and Housing (New Home Sales)
Malissa Davis - Competitors
Phyllis Gordon- Market Indicators
Renata Pirog - Competitors
Marcy Zeplin - Rates and Economy
For internal Genworth Financial use only
Copyright 2008
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