Morning Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1354.8	-3.7	-0.27%
Eurostoxx Index	2257.6	6.9	0.31%
Oil (WTI)	88.99	-0.2	-0.26%
LIBOR	0.455	0.000	0.00%
US Dollar Index (DXY)	83.24	0.210	0.25%
10 Year Govt Bond Yield	1.48%	-0.03%
RPX Composite Real Estate Index	184.5	0.4

Markets are a little weaker on no real news. A slew of banks reported earnings this morning, and most were  better than expected. Bond yields are back below 1.5% and MBS are up slightly. The Bernank's testimony continues today.

Housing starts came in at 760k in June, an increase from a revised 711k in May. While most other sectors in the economy are decelerating, the housing construction sector is accelerating. That said, housing starts are a long way from normalcy. Sentiment in the homebuilders has been improving as well, with the NAHB Builder Confidence Index rising smartly in July.

Housing Starts:

NAHB Housing Index

On the heels of San Bernardino's eminent domain proposal, Georgetown Professor of Law Adam Levitin lays out another avenue to deal with underwater equity - "quasi-voluntary" principal reductions. In his paper Clearing the Mortgage Market Through Principal Reduction, he makes the case that negative equity is the reason why the housing market hasn't bottomed and we need a policy response to it. The solution - make the banks an offer they can't refuse:  Either reduce the principal on your underwater mortgages to home value or we'll take away your ability to deal with the GSEs or FHA.  Since this more or less is a "reduce principal or get out of the business" it isn't much of a choice.  While he mentions that there could be political consequences of these various actions (he looks at involuntary takings as well), he never mentions the possibility that lenders may in fact decide to adjust their risk calculations accordingly, thus drying up credit even more. What good is a new re-negotiated mortgage to the system if the existing homeowner can only sell to cash buyers or buyers that put up 40%?  Amazingly, he doesn't consider the knock-on effects to lender behavior at all. He assumes that things will just continue as before and lenders will write off this intervention as a necessary "one-off" that is really good for them and good for the country. If that is an indication of how liberal policy makers in general think - that the private sector will not react to their policy changes - that explains a lot.