St Louis Fed’s Bullard had to come out and say that Bernanke misspoke and The Fed is not near pulling out. After all, the economy has not achieved “escape velocity.”

May 23 (Bloomberg) — Global stocks fell, led by the biggest drop in Japanese shares since the aftermath of the Fukushima disaster (-7.3%), while metals sank as Chinese manufacturing unexpectedly contracted and speculation mounted the Federal Reserve will cut bond purchases. The yen and Treasuries rose.

The MSCI All-Country World Index declined 1.6 percent at 10:17 a.m. in New York. Japan’s Topix Index slumped 6.9 percent, the most since March 2011. The Standard & Poor’s 500 Index fell 0.7 percent, extending yesterday’s 0.8 percent retreat. The yen
strengthened against its 16 major peers, surging 1.5 percent to 101.69 per dollar. The yield on 10-year Treasuries lost three basis points to 2.01 percent after rising above 2 percent yesterday for the first time since March. Copper retreated 2.9 percent and oil slipped 1.6 percent.

Lumber continues to swoon.

Along with oil.

And what has happened to the Japanese Sovereign curve since they announced their Fed-like monetary plans?

Yesterday, Fed Chairman Ben S. Bernanke indicated he has little appetite for a premature slowing of the central bank’s asset purchase program because of persistent weakness in the U.S. labor market and a general lack of confidence in the self-sustaining nature of the recovery. At the same time, he hinted that personal credit was too tight.

Well, with California, Arizona and Nevada house prices racing like a scalded cat, I shudder to think what will happen if the credit floodgates open wide.

Mortgage purchase applications remain stable and back at levels last seen in 1997.

And according to Zillow, about 22 million Americans may lack enough home equity to move, keeping property listings tight and limiting sales as the housing market recovers. Forty-four percent of homeowners with mortgages owed more than their properties are worth or had less than 20 percent equity in the first quarter, the Seattle-based real estate data company said in a report today. Those people probably are locked in to their residences, because listing a house and purchasing a new one generally requires equity of at least 20 percent to meet costs such as a down payment and broker fees.

Tight inventory. low mortgage rates. The result?

The FHFA house price index came out today and posted a 1.3% MoM growth for March (only 0.8% was expected).

Here is a comparison of the FHFA house price index compared with FNC’s 30 Metro RPI, Case-Shiller 30, and the Loan Performance HPI. All are pointing to large gains in house prices over the past year.

New home sales were up 2.3% for April versus expectations of 1.9%. Hey, we are back to 1982 levels!

House prices rising fast in the West but on limited inventory and cheap money from The Fed. A tiny bubble or a BIG bubble?

Fannie Mae MBS current coupon rates have been rising.

And the Bankrate 30 year spread over the Fannie current coupon rate remains about 100 basis points.

The primary/secondary spread remains elevated from before Fannie and Freddie were put into conservatorship.

And as Treasury rates trend upward, Fannie MBS durations are also rising.

This results in a slower burn off rate for The Fed’s massive portfolio and MBS (dark blue).

May 22 (Bloomberg) — Sales of previously owned U.S. homes rose in April to the highest level in more than three years as housing continued to gain momentum. Purchases of existing houses increased 0.6 percent to an annual rate of 4.97 million, the most since November 2009, according to the National Association of Realtors. The median forecast called for a pickup to a 4.99 million pace.

Meanwhile, the Mortgage Bankers Association (MBA) announced that mortgage applications fell 9.8% from the previous week.

Mortgage purchase applications fell 3% from the previous week. But purchase applications remain at 2010 levels.

Mortgage rates remain very low and have not translated into a spike in mortgage purchase applications. Here is the MBA purchase application (SA) index and the Bankrate 30 year mortgage rate since 2008.

House prices are exploding in much of the US, particularly California where prices have risen over 20% over the past year (Zillow).

Finally, Fed Chairman Ben S. Bernanke testified in the US Senate today. At first, Bernanke said that easing would continue, but added that it could change (as in reduced).

May 22 (Bloomberg) — Federal Reserve Chairman Ben S. Bernanke said the U.S. economy remains hampered by high unemployment and government spending cuts, and tightening policy too soon would endanger the recovery.

“A premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further,” Bernanke said today in testimony prepared for a hearing at the Joint Economic Committee of Congress in Washington. Monetary policy is providing “significant benefits,” he said.

The S&P 500 rose suddenly … then declined.

And the 10 year Treasury yield also spiked … then fell.

This is proof positive that when BS Bernanke talks, people listen.

According to Zillow, Phoenix AZ, Sacramento CA, San Jose CA, San Francisco CA, Modesto CA, Vallejo CA, Las Vegas NV, Reno NV, Stockton CA and Santa Rosa CA all grew over 20% Year over year in terms of house prices. Even Detroit rose 13.97%.

While California housing is on fire, not all US cities are rising. Rockford IL is the biggest loser in terms of house prices. And Chicago is down slightly.

Are California, Arizona and Nevada on fire in terms of their economies? Not according to the Philadelphia Fed. While State coincident indexes increased in 45 states in April, California, Arizona and Nevada are not among the leading states.

Investors are still a major driving force in the west for housing. A by product of The Fed’s easy money policies.

Here is the FNC house 30 metro area house price index against the Fed Funds rate.

Rounding out the top 20 foreclosure metro areas are Toledo, Cleveland, Cincinnati, and Canton. You know, pretty much the entire state.

Huh. I would have thought that Richard Cordray, the current Robo-cop at the Consumer Financial Protection Bureau (CFPB) and former attorney general of Ohio, would have cleaned up the foreclosure mess before heading up the CFPB.

Here is a chart of underwater mortgages in Ohio. Ohio is at 32.48% underwater.

The striking thing is that the other state on the list with horrible foreclosure problems is Florida, the state when many Ohio residents buy vacation and rental homes in Florida (particularly Naples for some reason).

Let’s be honest. Scant few purchase vacation and second homes in Akron and Columbus. But many did in Florida and Las Vegas NV.

The Ohio foreclosure problem is distinctly different than the Florida/Nevada vacation/2nd home problem. Ohio was hit hard by the Great Recession and unlike Phoenix and Las Vegas, investors didn’t rush in to buy foreclosed homes.

Here is a chart of Cleveland’s rise in home prices and crash along with Cuyahoga County’s unemployment rate. Notice that Cleveland home prices are beginning to rise again.

But investors have rushed in to Florida and it is still suffering. What do Florida and Ohio have in common?

Both Ohio and Florida are judicial foreclosure (or quasi-judicial foreclosure) states. Scheduled foreclosure auctions increased from a year ago in 15 of the 26 judicial or quasi-judicial foreclosure states, including Maryland (199 percent increase), New Jersey (91 percent increase), Ohio (73 percent increase), Oklahoma (57 percent increase), and Florida (55 percent). Scheduled foreclosure auctions reached a 68-month high in Ohio, a 31-month high in Maryland, a 27-month high in New Jersey, and an 18-month high in Oklahoma.

Perhaps Mr. Cordray should have tried to encourage the Ohio state legislature to convert to a non-judicial foreclosure model. It is faster and allows the market to heal at a much faster rate.

Tell that to taxpayers who had to bail out the S&L industry to the tune of more than $124 billion. Bert Ely has a nice discussion of what happened to the S&L industry here. In short, S&L’s were regulated as to how much interest they could pay on deposits (Reg Q) and when Fed Chairman Paul Volcker and The Fed decided to restrain the money supply growth in October 1979, interest rates skyrocketed.

Enter the Federal government.

Regulation Q ceilings for savings accounts and all other types of accounts except for demand deposits were phased out during the period 1981-1986 by the Depository Institutions Deregulation and Monetary Control Act of 1980; as of March 31, 1986, all interest rate ceilings had been eliminated except for the ban on demand deposit interest, which was then the only remaining substantive component of Regulation Q.

The result of deregulation? It encouraged increased risk taking by S&Ls. And that ended badly when combined with reducing capital standards.

What happened to financial sector profits as a percentage of corporate profits after 1980? Financial sector profits as a percentage of corporate profits actually fell for several years then rose again. But in the end, financial sector profits as a percentage of corporate profits remained unchanged. No regulatory surge in financial sector profits.

As we know, the S&L industry (aka, thrifts) blew up in the early 1980s. The Federal government responded with yet another barrage of regulation. This time it was The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). FIRREA gave both Freddie Mac and Fannie Mae additional responsibility to support mortgages for low- and moderate-income families.

After FIRREA, financial sector profits as a percentage of corporate profits rose and then declined. But the level rose compared to where it started.

Finally, the third leg of the regulatory trifecta was the Gramm–Leach–Bliley Act (GLB), also known as the Financial Services Modernization Act of 1999, (Pub.L. 106–102, 113 Stat. 1338, enacted November 12, 1999) that repealed part of the Glass–Steagall Act of 1933 (removing barriers in the market among banking companies, securities companies and insurance companies that prohibited any one institution from acting as any combination of an investment bank, a commercial bank, and an insurance company). With the passage of the Gramm–Leach–Bliley Act, commercial banks, investment banks, securities firms, and insurance companies were allowed to consolidate. The legislation was signed into law by President Bill Clinton.

Like FIRREA, Gramm-Leach-Bliley resulted in a surge in financial sector profits as a percentage of corporate profits. And again, the surge declined until today we have … Dodd-Frank!

But back to the thrift industry. As the thrift industry melted, their share of mortgages declined dramatically while banks share remained pretty stable.

So, who took the place of the thrift industry? The Government Sponsored Enterprises (GSEs) including Fannie Mae, Freddie Mac and the FLUBS (Federal Home Loan Banks).

And The Fed has been purchasing not only US Treasuries, but Fannie, Freddie and Ginnie MBS for its balance sheet.

Bear in mind that Freddie Mac and Fannie Mae are NON-depository institutions. And now we have GOVERNMENT-SPONSORED SHADOW BANKS with 90%+ of the mortgage market. Throw in the FHA into the soup.

And here we sit. So, who is now the George Bailey (standing) and who is the Henry Potter (sitting) of the financial sector? George Bailey (S&Ls) is gone and has been replaced by the GSEs (under conservatorship with Uncle Sam). But Uncle Sam (and The Fed) have essentially replaced Henry Potter (banks) as well due to government mandated loan modifications, principal reductions, Attorneys General settlement, etc.

Le’s see what Congress decides to do (if anything).

I wonder if Harry Potter is aware how similar his name is to Henry Potter? Now that I think about it, Harry Potter looks like a young Henry Potter.

Say, I hope the folks at Department of Homeland Security enjoyed this piece!!

And FBI!

Mortgage rates continue to decline (longer-trend) making housing more “affordable.” Thanks mostly to The Fed’s unorthodox monetary policy.

Other economic indicators are positive as well. The University of Michigan Consumer Confidence index is at its highest level since 2007.

And the Conference Board’s Leading Economic Indicators increased this morning.

The US dollar has been spiking.

And the S&P 500 has been on a roll.

Once again, The Fed can be thanked.

And The Fed thinks that Real GDP will grow above 3% in 2014.

Now for the not-so-good news.

For housing, here is an interesting chart. Lumber futures have been declining since March. Hmmm.

In April 2013, America was 15.9 million full-time equivalent* (FTE) jobs away from full employment. This is actually 1.6 million FTE jobs worse than when the recession ended 46 months earlier, in June 2009. So, from an employment point of view, there has been no recovery at all.

Real household income continues to fall {(blue line).

And the duration (risk) of Fannie Mae 4.0% MBS is growing.

Bubble, economic growth … or both?

The current activity index has shown no pattern of sustained growth over the past seven months, generally alternating between positive and negative readings (see Chart). The number of firms reporting decreased activity this month (29 percent) edged out those reporting increased activity (24 percent).

So, Philly’s Steak isn’t sizzling. Rather, it’s getting cold.

Sovereign yields around the globe continue to decline between a rush to safety and Central Bank easing.

More bad economic news will likely keep The Fed involved in the market longer.

And there is nothing more vile than a cold Philly Steak sandwich with coagulated cheese sauce.

May 16 (Bloomberg) — Starts of new homes in the U.S. fell more than forecast in April to a five-month low, indicating a pause in the industry’s progress as builders slowed work on apartments. Building permits surged to an almost five-year high. Housing starts slumped 16.45 percent, the most since February 2011, to an 853,000 annualized rate after a revised 1.02 million pace in March.

The real jolt is the decline in multifamily starts of -37.77% for 5+ units.

But on the other hand, 5+ unit PERMITS rose 40.60%. Building permits overall rose 14.3%.

And the driver of housing – employment – took a turn down this morning. Initial jobless claims rose to 360,000, an increase of 32,000 from the previous week.

And the Consumer Price Index for Urban Dwellers fell 0.4% in April.

Finally, Bloomberg Consumer Comfort fell. It has not been above -20 since the recession started.

Look for The Fed to keep on rolling the dice!

May 15 (Bloomberg) — The U.S. Treasury Department said it will suspend sales of State and Local Government Series non-marketable securities to help keep funding the government to stay within the statutory debt limit.

The move is the first of several possible “extraordinary measures” the Treasury can take to avoid breaching the nation’s debt limit while the Obama administration and Congress negotiate a longer-term solution.

Here is the US government debt limit and US government debt outstanding.

And here is your share of debt.

How much SLGS are outstanding? Just enough to squeeze under the debt limit.

One month SLGS rates are virtually zero, but were above 5% in 2007.

SLGS are a drop in the Federal bucket, so look for additional tricks to avoid breaching the ceiling.

It figures.

First, France experienced a double dip in real GDP. This is France’s second recession in four years with a 0.2 percent contraction.

And France is helping to drag down the Euro-area into its sixth quarterly decline.

The Shadow Economy is former Soviet-bloc countries remains high along with Greece, Cyprus and Malta. Hmm. The further away countries are from Brussels and Luxembourg, the greater the Shadow economies (I don’t think this would surprise Nigel Farage!)

Second, the Empire State Manufacturing Survey General Business Conditions SA contracted -1.43%, the first contraction since January.

Industrial production fell 0-5% in April while capacity utilization declined to 77.8%.

We still can’t get to the magic 80% CAPUT reading, last seen in 2008.

Third, according to the Mortgage Bankers Association, the Refinance Index decreased 8 percent from the previous week. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier.

After declining for seven weeks straight, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) increased to 3.67 percent from 3.59 percent,with points increasing to 0.41 from 0.33 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans. This rate is at its highest level since the week ending April 12, 2013.

But, of course, with the Central Banks on a low rate crusade, …

As Prince sang in Purple Rain, “Let’s Go Crazy!“

Here is the CBO’s budget forecast from 2008. The budget forecast was actually rosy!

Here is a comparison of the two forecasts:

Why the change from a rosy forecast to a gloomy one? Healthcare and interest costs. Both are expected to rise until 2013 (and beyond).

A recent study by Congress revealed that Obamacare (aka, the Affordable Healthcare Act) will increase healthcare insurance premiums by 100% up to 400%.

And Obamacare will cost $1.8 trillion, twice the original estimate.

“Affordable” health care?

With growing government spending, interest costs will increase even if the rate remains the same. We shall see if interest rates rise when The Fed slows down its asset purchases.

Here is a photo of the Bronze Obamacare plan chasing consumers, the least expensive of the expensive healthcare plans.

Here is the report:

DistrictReport_Q12013

Mortgages, the largest component of household debt, fell in the first quarter of 2013. Mortgage balances shown on consumer credit reports stand at $7.93 trillion, down $101 billion from the level in the fourth quarter of 2012. Balances on home equity lines of credit (HELOC) dropped by $11 billion (2.0%) and now stand at $552 billion. Household non-housing debt balances were roughly flat, with increases in auto and student loans, by $11 billion and $20 billion respectively, offset by decreases in credit card balances ($19 billion) and other consumer loan balances ($10 billion).

About 309,000 consumers had a bankruptcy notation added to their credit reports in 2013Q1, a 16.8% drop from the same quarter last year, and the ninth consecutive drop in bankruptcies on a year-over-year basis.

On the housing front, the combined Real Estate Owned (REO) by Fannie, Freddie and the FHA declined to 189,5291 at the end of Q1 2013, down from 192,720 in Q4 2012, and down 9% from 209,077 in Q1 2012. The peak for the combined REO of the mortgage giants was 295,307 in Q4 2010.

Nevada and Florida are improving in mortgages 90+ days late, but still lead the nation.

Now for student loans. Washington DC and Maryland lead the nation in student debt per borrower. DC leads the league with the average loan balance over $40,000.

Colorado and New Hampshire join DC in the share of consumers with student debt.

And like serious mortgage delinquencies, Florida is once again a leader. The lowest delinquency rate is South Dakota, at just over 6.5 percent, while the highest is in West Virginia, at nearly 18 percent.

Here is the city’s emergency manager, Kevyn Orr’s, “Orr Report.” city-of-detroit-final-financial-operational-plan-45-day-plan5

Orr’s solution? Cut back on pay and restructure the debt (a coy way of say default). On the other hand, “It’s not as bad as what they’re trying to make it out to be,” Edward L. McNeil, a local official for the American Federation of State, County and Municipal Employees, said on Sunday.

“Without a significant restructuring of its debt, the city will be unable to break the cycle of damaging cutbacks in essential municipal services and investments,” according to Orr’s report. He also cited the need for concessions from unions, and revamping the police and fire departments to protect residents beset by crime and arson-inviting blight.

Detroit’s long-term obligations are at least $15.7 billion, including unfunded pension and retirement benefits. The general fund this fiscal year, with revenue of about $1.1 billion, will pay about $461 million for debt and health costs, according to the report.

The municipal bond market is already penalizing city securities after Orr’s report. A tax-exempt Detroit general-obligation bond maturing in April 2015 traded today at an average yield of 8.52 percent. That’s the most investors have demanded to hold the debt since before March 5, according to data compiled by Bloomberg. On May 10, it traded at a 7.27 percent yield.

Detroit has suffered from a declining population, job loss and falling house prices. Until recently.

Foreclosures have been a major problem, particularly since they are clustered.

And crime remains a problem, which is a challenge to the government and Mr. Orr.

I wish Dave Bing (one of my childhood basketball heroes) and Mr Orr all the best. Particularly when they try to cut union wages.

I wonder if Robocop is in the police union?

The Bank of Israel, led by Governor Stanley Fischer, lowered the lending rate by a quarter of a percentage point to 1.5 percent, sending the shekel down the most since January. The bank said the steps were “in light of the continued appreciation of the shekel, taking into account the start of natural gas production from the Tamar gas field, interest rate reductions by many central banks — notably the European Central Bank, the quantitative easing in major economies worldwide and the downward revision in global growth forecasts.”

Here is the downward shift in the Israeli sovereign yield curve from one month ago.

Today, we have seen double digit basis point increases in Greece, The Ukraine, Russia, Slovenia and Turkey (dollar denominated). Israel’s 10 year sovereign yield fell only 2 basis points.0

This makes the 512th interest rate cut by a Central Bank since June 2007.

We can always rely on The Dallas Fed’s Richard Fisher for a pithy comment:

“I don’t want to go from wild turkey to cold turkey,” Richard Fisher, president of the Federal Reserve Bank of Dallas, said in an interview Friday. “I think we ought to dial it back.” Mr. Fisher is part of a contingent of Fed hawks who are wary of the central bank’s easy-money policies.

After all, Central Banks have lowered interest rates 511 times since June 2007 in an attempt to jump-start economic growth.

Of course, house prices have risen quite a bit since Q2 of 2012, mostly due to investors.

And of course the stock market has been frothed to dizzying heights by Fed intervention.

If we adjust for inflation, the S&P 500 is still below its previous peak.

Will the stock market or housing “bubble” decline with a slow paring of the asset purchases? That is the $3 trillion dollar question.

“The economic future, like the political future, will be determined by future human behavior and decisions. That is why it is uncertain. And in spite of the enormous and constantly growing literature on business cycles, business forecasting will never, any more than opinion polls, become an exact science.”

The Fed will not go cold turkey, even though they went wild turkey since 2007.

“In light of the current low interest rate environment, we are watching particularly closely for instances of ‘reaching for yield’ and other forms of excessive risk-taking, which may affect asset prices and their relationships with fundamentals,” Mr Bernanke said.

I was waiting for questions or hints as to if or when will take their foot off the monetary accelerator, but NADA.

Global sovereign yields rose across the board this morning (except for Greece).

The dollar is rising …

while commodities plunged this morning (look at gold!).

Little reaction in the stock market. M1 money multiplier and M2 money velocity remain at or near historic lows.

Like EF Hutton, when Bernanke talks, people listen.

Will The Fed take away the punch bowl? Not likely.

Sputh Korea just reduced their interest rate making it the 511th rate cut by a Central Bank since June 2007.

That’s a whole lot of rate cuts! Sovereign rates are dropping towards the zero barrier.

But the GDP growth rates in Europe are stagnant at best.

At least China and Australia are experiencing above 3% real GDP growth.

In honor of Australia, I am eating at Outback Steakhouse tonight and having a Shrimp on the Barbie. And a Foster’s.

G’Day Mate!

This is not surprising given the general decline in seriously delinquent mortgages

And rising house prices since March 2012.

• Fannie Mae reported quarterly net income of $58.7 billion following release of a $50.6 billion valuation allowance on its deferred tax assets.

• Beginning this year, pursuant to August 2012 amendments to the terms of Treasury’s bailout, Fannie Mae and Freddie Mac will pay quarterly dividends to Treasury equal to their net worth in excess of a gradually declining capital reserve. The result is that Fannie Mae and Freddie Mac effectively will pay all of their quarterly earnings to Treasury going forward.

• After paying a planned $59.4 billion dividend in June 2013, Fannie Mae will have paid $95.0 billion in dividends to Treasury, leaving the net cost to taxpayers of Fannie Mae’s bailout at $22.1 billion.

• These substantial dividends will help Treasury delay hitting the debt ceiling.

• One open question is whether the CBO will amend its baseline to reflect the expectation of future GSE profitability and, if so, whether PAYGO would require new taxes or spending cuts to offset any GSE reforms that reduce the dividends paid to Treasury.

Right now, Fannie and Freddie are cash cows for Treasury. And with Mel Watt as Obama’s nominee, Fannie and Freddie will likely be “taxed” via principal reductions.

How will things fare once The Fed takes its foot off the accelerator? THAT is the $3 trillion question!

The Japanese Yen has risen from around 80 in November to 98.89 today. In fact, it was pretty flat from May to October. The Yen spiked on the announcement of the Bank of Japan’s change in monetary policy.

And here is the Dollar/Yen volatility surface.

Will it work? It is too early to tell, but here is a chart of Yen forecasts for 62 banks and other entities.

To highlight the divergence in Yen forecasts, I highlighted the high forecast (Credit Suisse) and the low forecast (RBC Capital). The mass of the forecasts are above 95, but there are those below 95 as well.

That is a pretty large divergence in the Yen forecast. Apparently, the various economists/analyst are having trouble developing a consensus. The same applies to the Euro.

If we look at the Japanese sovereign 10 year yield and the US Treasury 10 year yield, we see a spread compression as both dive for the bottom. As we approach the zero bound, we are truly in the “Land of the Lost.”

As a result of improving property values and historically low interest rates, commercial mortgage distressed rates have dropped.

May 8 (Bloomberg) — The overall distressed rate (60+ DLQ / SS) decreased this month by 26bps to 12.5%, Deutsche Bank analysts led by Harris Trifon write.
• Marks “one of the largest improvements in recent history”
• Majority of decrease came from 2005, 2006 loans where agg. balance of delinquent loans declined by $1.4b
• “If we were to include the $80b of currently performing deals that have priced since 2008, our headline rate would drop to around 10.6% from nearly 12.5%”
• $4b from ~450 loans paid off without a loss ($1.8b across 245 loans were prepays)
• Of the total loan dispositions, ~87% of loans were resolved by its maturity date

As you can seen, CMBS bond spreads to swaps have been declining over the past year.

And Detroit and Philadelphia lead the US in 60+ days delinquent loans.

Finally, multifamily housing leads commercial real estate in terms of 60+ day delinquencies. Multifamily once again returns to the best performing property type.

Let’s hope this patterns of rising prices and improving mortgage performance continues!

Here are mortgage purchase applications over the past 12 months.

On a longer view, you can see that this is the highest level since 2010.

Mortgage refinancing applications continue to rise as well.

Also from the MBA, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,500 or less) decreased to 3.59 percent, the lowest rate since December 2012, from 3.60 percent, with points increasing to 0.33 from 0.30 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.

On a related front, the mortgage giant Freddie Mac just posted their second largest quarterly profit in history. And Freddie Mac will pay Treasury $7 Billion on their quarterly profits.

And Bill Gross tweeted that The Fed will have to keep their foot on the gas to sustain this rally.

Hardly a disastrous increase. In fact, when I saw the increase from 1.80% to 1.81%, I did a double-take. That’s it??

May 8 (Bloomberg) — Bank of Japan Governor Haruhiko Kuroda’s stimulus policies are backfiring in the housing market, where mortgage rates are rising even as the central bank floods the financial system with cash.

Fixed 35-year home-loan costs rose to 1.81 percent this month, the first increase since February and up from an all-time low of 1.8 percent in April, according to data compiled by the Japan Housing Finance Agency. The rate climbed as Japanese government bond yields rose back above levels before Kuroda announced unprecedented monetary easing measures on April 4. Ten-year yields were at 0.595 percent yesterday, 4 1/2 basis points higher than they were on April 3 and compared with 1.76 percent for similar-maturity U.S. Treasuries.

And Japan’s house prices continue to deflate. Not much has worked in stopping Japan’s house price deflation.

Actually when we look at the Japanese sovereign curve change since April 4th (slightly), it has increased MORE than the increase in mortgage rates.

So while the Japanese sovereign curve is rising (slightly) rather than falling, Japanese mortgage rates are staying low and house prices continue to deflate. Let’s see if the Bank of Japan can push down their sovereign and mortgage rates and turn around the economy and housing prices.

Reuters had an interesting piece on the Las Vegas “rebound” entitled “Special Report: Cheap money bankrolls Wall Street’s bet on housing.” According to the Reuters article, The Vegas market has unsteady legs. Statistics compiled by the University of Nevada at Las Vegas show some 40,000 homes are largely vacant – 8 percent of the metropolitan area’s single-family housing stock. Housing research firm RealtyTrac estimates there are 20,000 single-family homes in the metro area either owned by a bank or in some stage of foreclosure.

Some 52 percent of all homeowners still owe more on their mortgages than their residences are worth, more than any other state, according to CoreLogic. It’s even worse in some neighborhoods. An analysis by RealtyTrac for Reuters found that in about half of the zip codes in the Vegas metropolitan area, at least 70 percent of homeowners not in foreclosure were under water on their mortgages.

Economists say with unemployment in Nevada at 9.7 percent, there’s not much real growth underpinning the surge in home prices and new construction.

So, what is fueling the investor housing mania in Las Vegas? The Fed’s Zero Interest Rate Policy (ZIRP).

Low interest rates with The Fed purchasing $88 billion a month in Treasuries and Agency MBS is finally stimulating the real estate market. More on the investor side, but stimulating the market nonetheless.

Where in Las Vegas are the prices the highest (and lowest)? Here is a Trulia heat map for Las Vegas.

The Fed’s ZIRP policy is a blunt instrument and it has benefited the stock market earlier and longer than the housing market.

In fact, the stock market adjusted by The Fed’s Balance Sheet is just limping along … on Fed support!

And Bill Gross wants to know if The Fed will continue its pump priming.

Both the M1 Money Multiplier and M2 Money Velocity are at all-time lows which is not good news. Even so, Las Vegas … and the stock market are booming.

Eventually, The Fed’s QEs and Twists run out of gas and another round has to be undertaken. But what happens to the stock and housing markets if cheap money wears off and The Fed is generating more inflation than desired?

Stay tuned.

Beginning January 10, 2014, Fannie Mae and Freddie Mac will no longer purchase a loan that is subject to the “ability to repay” rule if the loan:

 is not fully amortizing,
 has a term of longer than 30 years, or
 includes points and fees in excess of three percent of the total loan amount, or such other limits for low balance loans as set forth in the rule.

Effectively, this means Fannie Mae and Freddie Mac will not purchase interest-only loans, loans with 40-year terms, or those with points and fees exceeding the thresholds established by the rule. Here is Fannie Mae’s letter to single-family sellers.

If President Obama’s nominee to replace Ed DeMarco, Rep. Mel Watt (D-NC), is approved, watch for this to change.

Does Mel Watt know something that we don’t know?

The March Mortgage Monitor report released by Lender Processing Services found that new problem loan rates (seriously delinquent mortgages that were current six months ago) have fallen below 1 percent for the first time since 2007. At 0.84 percent, the March new problem loan rate is approaching pre-crisis levels, and nearing the conditions of 2000-2004 when the rate averaged 0.55 percent.

Non-current loans have fallen below 5 million for the first time since 2008.

Most vintages (year of origination) are improving. The 2005 cohort remains problematic.

In terms of negative equity, it continues to improve.

Of course, house prices rose from 2012 through early 2013, helping improve the negative equity problem.

Bad News! It had to be helped by a 193,000 increase due to the BLS Birth/Death adjustment. So, it appears that the actual gain was only 50,000. And 9.55 million Americans have given up looking for work. Not to mention 89,936,000 NOT in the labor force.

May 3 (Bloomberg) — Employment picked up more than forecast in April and the jobless rate unexpectedly declined to a four-year low of 7.5 percent, showing federal budget cuts failed to destabilize the U.S. labor market.

Payrolls expanded by 165,000 workers last month following a revised 138,000 increase in March that was larger than first estimated. The median forecast of 90 economists projected a 140,000 gain. Revisions added a total of 114,000 jobs to the employment count in February and March.

The BLS’ Net Birth/Death Adjustment added 193,000 all by its lonesome. Ah, an assumed recovery!

Although unemployment declined, U6 unemployment rose to 13.9%.

The number of discouraged workers rose from 803,000 to 835,000, an increase of 33,000.

And labor force participation remained the same.

Civilian employment to population ratio actually increased!

The employment to population ratio tracks the Case-Shiller 20 house price index.

And here is where the job creation was … or wasn’t.

The US economy allegedly added 165,000 jobs but US businesses paid $323.2 million less in total wage compensation. Aggregate weekly hours worked in retail plunged by 0.7% in April, which is the equivalent of cutting 11,000 jobs.

Declining hours, BLS “adjustments,” etc. Not as good an employment report as some thought.