Morning Report QM vs QRM

Vital Statistics:

	Last	Change	Percent
S&P Futures	1515.2	-2.0	-0.13%
Eurostoxx Index	2637.2	-19.7	-0.74%
Oil (WTI)	97.3	0.3	0.30%
LIBOR	0.29	0.000	0.00%
US Dollar Index (DXY)	80.52	0.426	0.53%
10 Year Govt Bond Yield	2.05%	0.02%
RPX Composite Real Estate Index	193.1	-0.4

Markets are weaker this morning in spite of better than expected initial jobless claims and couple of new mergers (Berkshire Hathaway buying Heinz, and US Airways / American Airlines). The Eurozone economy weakened. Bonds and MBS are flat.

In the State of the Union, President Obama referred to "overlapping regulations" and called for streamlining the mortgage process.  The housing industry is hoping that means that the Qualified Residential Mortgage rule (promulgated by the banking regulators) and the Qualified Mortgage Rule (promulgated by CFPB) will become consistent with each other.  The sticking point is that the QRM rule is much more strict than the QM rule (QRM: 20% down, 36% DTI), vs QM (43% DTI). Bankers and consumer groups hope to have the down payment rule removed, and would ultimately like to see the QRM rule to match the QM rule.  It seems that there is some bipartisan consensus on this.

Speaking of the SOTU, Obama's agenda drew little support from Republicans, who "called it dead in the water."  John Boehner objected that his plan raises the price of employment and noted that when you increase the cost of something, you get less of it.  Mitch McConnell referred to it as "liberal boilerplate that any Democratic lawmaker could have given at any time in recent memory."  John Thune noted that Obama would have a hard time getting Democrats to go along with portions of it.  Six Senate Democrats seeking re-election next year in states that supported Mitt Romney are going to be hard pressed to vote fore new tax revenues beyond what has already been approved.  At the end of the day, it will depend on whether Obama chooses to demagogue or deal. On the minimum wage, one Republican said it would have a chance if it was accompanied by a business package of tax credits and expensing rules to help small business.  Paul Ryan noted that Obama chose not to politicize immigration reform, which means that something can be done there.

Sen Tom Coburn, R-OK says the sequestration cuts are going to happen. I still think it is much ado about nothing.  Some facts:

Spending Side:

• Total Sequestration cuts:  $85 billion
• Requested increase in the budget from FY12 - FY13: $75 billion
• Net change in spending: ~ $10B (or about 6 basis points of GDP)

Revenue Side:

• Payroll tax Holiday expiration:  $160 billion
• Tax hike on the rich:  $40 billion
• Obamacare tax hikes $42 billion

So we have added $242 billion in new revenue this year (which apparently won't hurt the economy) yet we are wringing our hands over the fact that the government is being asked to make do with what it got last year, which, at 24% of GDP, is pretty much a post-WWII high. Call me an optimist, but I don't think anyone outside of the Beltway is even going to notice if the sequestration cuts happen. 

St Louis Fed Head James Bullard gave an upbeat presentation at Arkansas State University, noting that the Euro sovereign debt crisis seems to have calmed down and that some of the uncertainty in the US economy has been dissipating. The most important news came with the Q&A with reporters - he is not ready to call for an end to QE, and would defer any decision-making until this summer to see if the economy continues to improve.