March 31st, 2009 · No Comments


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The Week Ahead in the Capital Markets  -   March 30, 2009

“God Bless the Internet!” exclaimed one mortgage trader. Websites were pushed to their limits as the mortgage industry posted an all-time record rate lock day. When the Treasury announced its intent to buy mortgage securities two weeks ago, rates dropped and volume surged.

Record volume is once again beginning to make its way through the industry’s processing capacity, and the mortgage factories are straining. The result? Wide origination profit margins and wide spreads between best efforts and mandatory prices. And both spreads are likely to stay wide. Volume and volatility will take a while to work through the system. The spread between mortgage rates to the consumer and yields on MBS stands over 1.00%, near record highs.

Look out below. Although Treasury yields have reversed about half of their historic one-day decline, the Treasury rally may not be done. The yield on the 10-year note did manage to hit 2.00% when the Fed simply mentioned buying bonds last year. Now quantitative easing has begun in earnest, and yields could push much lower. The Fed is waging a classic battle, trying to prevent job losses and create growth while keeping inflation at bay. So far the job losses are winning; the unemployment rate is expected to have jumped to – gasp! – 8.5% last month. Another gruesome employment report is due this Friday morning.

Depressing? Yes. Are we in a depression? Yes. At least we are according to early first quarter GDP estimates (we’ll know for sure when the official numbers are reported in the coming weeks). First-quarter real GDP is likely to suffer a 7.2% drop, reports Barron’s. Couple that with the 6.3% decline from last quarter, and the cumulative decline is well over 10%, which as you may recall is the technical definition of a depression.

Don’t despair. Home prices in Cedar Rapids, IA rose 9% last year. That’s a tad better than the country’s worst market: home prices fell 30% in Riverside, CA.

A spoonful of sugar helps the medicine go down. I am writing, of course, of the Pee-Pip (PPIP — the Public-Private Investment Program). It’s the administration’s latest proposal for “society to borrow its way out of debt,” to use the words of John Gray. The sugar works like this: for every dollar of equity that you (the private investor) invest, the Treasury will match your dollar with one of their own, and throw in six more dollars of non-recourse debt.

Unfortunately, the medicine still tastes pretty bad, and could come with a range of pay restrictions and other rules. All of which assumes that the holders of toxic assets will sell. The problem has not been a lack of buyers; it has been an unwillingness of sellers to sell for a variety of valuation and accounting reasons. Regardless, early estimates call for about $1 trillion of assets to change hands under the new program.

A construction worker from Queens, New York, used Bernard Madoff’s prison number to play the lottery. The guy won $1,500. Madoff, of course, is in prison for luring money from rich people in a giant scam that promised to make them richer. But don’t confuse him with the state lottery, which lures money away from poor people in a giant scam that promises to make them richer. – Jay Leno

Thanks for your business and have a good week.            — Tom Millon

About Capital Markets Cooperative
Capital Markets Cooperative (CMC) provides mortgage bankers with the economies of scale and the expertise to reduce risk and maximize profit in the secondary market. Regarded as the premier secondary marketing specialist in the industry, CMC has worked with financial institutions nationwide to break traditional barriers in capital markets and take performance and profits to the next level. To date, CMC executives have managed more than $500 billion of mortgage volume. CMC board members are Tom Millon, Jeff Harry, and Harold Koegler.  For more information about Capital Markets Cooperative, visit or call 904.543.0052 or e-mail [email protected].

Tags: Commentary · Mortgage Market · Tom Millon

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