John Tuggle

Not a good day in the bond market; the 10 yr clearly broke its near term support and is now poised to move to 3.00% area. Mortgage rates also moved higher today, following the 10 yr note. Supply is the culprit; as we have talked many times, the long end of the curve is not likely to move much lower than what we saw on 3/18 when the Fed announced it would buy an additional $725B of MBSs and $300B of longer dated treasuries; the 10 fell briefly to 2.50%. It took two weeks to move back to where it traded prior to the Fed's announcement. With the government throwing everything but the sink into trying to revive the economy, Treasury borrowings will keep interest rates from falling. Traders are now turning to supply issues as the equity market is improving. Although we do not believe the economy will rebound much, and the present stock market improvement is a rally in a bear market likely to see new lows by the end of the year, the momentary reality is that investors and talking heads are calling the stock market rally the end of the declines.

Next week we expect Treasury to sell $59B in notes, last week it sold $93B. $6 billion in 10- year inflation-indexed notes on April 7; $35B of 3 yr notes on the 8th, and $18B of 10 yr notes on the 9th. The Congressional Budget Office is now saying a deficit of $1.38 trillion this fiscal year; the White House estimate, $1.17 trillion (low balling). We still look for the deficit to come in higher, at $1.50 trillion. Next year likely closer to $2.0 trillion.

Delinquency rates on the least risky home loans, which account for two-thirds of all mortgages, more than doubled last year, showing credit quality deterioration is spreading through the housing market, U.S. regulators said. Seriously delinquent prime loans climbed to 2.4% of total loans on Dec. 31, from 1.11% in the first quarter, the Office of the Comptroller of the Currency and Office of Thrift Supervision said today in a report. Mortgages in delinquency rose 30% in the fourth quarter, accounting for 4.6% of all home loans, the report showed. "We're in uncharted territory, we've never seen the number this high before," John Dugan, U.S. Comptroller of the Currency, said in a Bloomberg Television interview today.

Wells Fargo plans to expand its presence in warehouse lending using a platform it acquired when it bought Wachovia Corp. at year-end, according to industry officials familiar with the matter. Two sources at Wells confirmed the move but at press time a spokesman could not be reached for official comment. It's believed that at year-end Wachovia had commitments of about $1B. Very good news for non-depositories that need lines to fund mortgages.

On the week: the 10 yr note increased 15 BP to 2.91% at 4:00 -36/32; 5 yr note +8 BP at 1.88%; 2 yr +3 BP at 0.96%. Mortgage prices this week; 30 yrs -16/32 (most of it today); 15 yrs -3/32; FHA 30s -15/32. The spread between mortgage rates and the 10 yr note continue to narrow. Mortgages holding well against treasuries. Crude oil -$0.08; gold -$27.50.

Not yet much to worry about; as long as the 10 yr note doesn't trade over 3.04%. Still stuck in a 50 basis point range on the note but now has come almost all the way back up from the strong one day rally on 3/18 when the FOMC announced the increased mortgage buying and Fed to buy treasuries. Mortgage rates are increasing but continue to look technically stronger than the treasury markets. Not sure that will continue once the stock market enthusiasm wanes in the next week or two. Equities are in a bear market rally, not a turn in the tidal wave of negative economic outlook. The feel-gooders on CNBC are all lathered about the equity markets; misleading those that believe their euphoria.

The Federal Reserve Bank of New York announced Wednesday several additional days that it would purchase Treasury securities in April. Besides a previously announced operation on Thursday, it will hold five more starting next week. The Fed specified what securities it may purchase on given days, including the first scheduled buyback of Treasury Inflation Protected Securities, or TIPS, on April 16. So far, the central bank has purchased about $23.5 billion in U.S. debt, as it continues plans to buy $300 billion in Treasury securities over the next six months to improve conditions in private credit markets and spur lending.

Fannie Mae has issued the following Announcement:

•· Announcement 09-08, Temporary High-Cost Area Loan Limits and Revised Eligibility Requirements for High-Balance Mortgage Loans

Effective May 1, 2009, Fannie Mae will accept for delivery loans originated in 2009 using the higher of the current permanent high-cost loan limits, or the temporary loan limits that were in place for loans originated in 2008 that were applicable to jumbo-conforming mortgage loans.

In addition, new eligibility requirements will apply to high-balance loans, including:

•· Revised loan to value ratios for certain loan types

•· New minimum credit score requirements

•· Additional appraisal requirements

Refi Plus^TM options (manual underwriting or Desktop Underwriter^® [DU^®]) are eligible for the high-balance loan feature, including those using the temporary high-cost limits. Eligibility requirements specific to Refi Plus supersede all requirements that apply to high-balance mortgage loans.

High-balance loans may be underwritten manually or in DU. (For DU, lenders must manually apply the temporary high-cost area loan limits and eligibility requirements until DU is updated in a future release.)

For a summary of key eligibility, underwriting, pricing, committing, and delivery requirements, see the new High-Balance Feature Matrix on eFannieMae.com.

Housing data surprised everyone last week. Existing home sales in February rose 5.1% on expectations of a decline of -0.9%.

February new home sales increased 4.7% on estimates that called for a -2.9% decline. A substantial portion of the sales were from first time homebuyers and distressed properties.

While low interest rates and increased affordability are encouraging developments, the housing sector continues to face high levels of inventory, tight credit conditions and the deleveraging of consumers.

The Mortgage Bankers Association last week asked federal banking regulators to cut the capital requirement on warehouse lines of credit by as much as 80% to alleviate the funding crisis facing non-depositories that we explained was causing delays and major back-ups in closing loans. If this is accomplished, it will significantly help the mortgage industry.

The Georgia Senate overwhelmingly approved legislation Thursday that would give tax credits to buyers of single-family homes.

Senators passed the bill 42-4, dismissing objections that the state can't afford what the tax credits would cost in lost revenues during a recession.

Under the legislation, which originated in the House, home purchasers would receive income-tax credits of up to $3,600, or $1,200 for each of three years. To qualify, homeowners would have to apply for the credit within six months of the date the governor signs the measure.

A housing slump was the catalyst of the current recession in Georgia, and only a revitalized housing market would put the state on the road to recovery, said Sen. Chip Pearson, R-Dawsonville, who presented the bill on the Senate floor.

"There's nothing happening out there now to stimulate the market," he said. "This is a true stimulus in that (home buyers) have to act now. This won't be available next year."

But Sen. Nan Orrock, D-Atlanta, said the benefits the tax credits would bring to the state economy wouldn't be worth the cost.

Orrock cited a fiscal note accompanying the bill, which projected the tax credits would reduce state tax revenues by $166.3 million. Based on estimates that the legislation would result in the sale of an additional 1,100 homes, she put the cost of the initiative at about $150,000 per home.

Orrock raised similar cost/benefit arguments on Wednesday in opposing a package of tax credits for businesses that passed the Senate.

On Thursday, Pearson said the housing tax credits would pay off in the long run because the economic activity from the additional home sales would generate added tax revenues.

The Senate made several changes to the bill, sending it back to the House.