Morning Report - The Mod Squad

Vital Statistics:

	Last	Change	Percent
S&P Futures	1416.2	2.7	0.19%
Eurostoxx Index	2665.1	16.6	0.62%
Oil (WTI)	91.18	0.2	0.22%
LIBOR	0.311	0.001	0.32%
US Dollar Index (DXY)	79.44	-0.182	-0.23%
10 Year Govt Bond Yield	1.77%	0.01%
RPX Composite Real Estate Index	192.3	0.5

Markets are quiet again as desks are understaffed both in Europe and the US. Initial Jobless Claims fell to 350k, back to the bottom end of our 350k - 390k range. Bonds and MBS are down small and continue to dismiss the possibility of a cliff-induced recession.

President Obama heads back to Washington to try and craft a deal to avert the fiscal cliff. The WH seems to have backed off its proposal to increase taxes at 400k and has moved back to 250k. It is looking more and more like we will go over the cliff on Jan 1 and then pass some sort of tax cut package soon thereafter.  Treasury informed Congress that we will hit the debt limit on Monday, but they can play some games to keep the government funded through Feb.

Of course, once we climb the fiscal cliff, we will go right into the battle of the debt ceiling. Moody's has already fired a shot across the bow, saying that they expect the government to raise the limit, but they may downgrade the U.S.'s credit rating unless we get a decrease in the debt / GDP ratio.

Yesterday's WSJ report on possible new initiatives to mitigate the effects of the housing bust have already been met with skepticism. The first plan involved allowing deeply underwater non-agency loans to refi into Fan and Fred loans.  James Pethokousis of the American Enterprise Institute points out that allowing the GSEs to refi underwater non-agency mortgages is a non-starter with virtually all Republicans and many Democrats as it shifts risk from the private sector to the public sector.  Plus, you have to get the originators on board, and they won't make 125%+ LTV loans without some sort of safe harbor against buyback risk.

A second plan would further expand HAMP, by changing the definition of "in danger of imminent default" to include anyone who is has a LTV over 125%, even if they are current on their mortgage. Such a move would not require Congressional approval. The American Securitization Forum is against the idea, given that these loans are worth their weight in gold.  They are current, have above-market coupons, and have virtually no chance of being prepaid for years. If enacted, investors would take an income hit (although Treasury would pay them the coupon difference for 5 years), and would see a capital loss as well. My sense is that ASF's argument will be met with very little sympathy in the Administration, although state and federal pension funds will be quietly making the same argument as well. Still another hurdle would be servicers, who would have to buy off on the idea that modding a current loan is somehow good for the investor.