Morning Report - Undiversified Bond Investment?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1558.1	1.3	0.08%
Eurostoxx Index	2633.5	21.0	0.80%
Oil (WTI)	96.39	-0.2	-0.20%
LIBOR	0.283	-0.001	-0.35%
US Dollar Index (DXY)	83.07	-0.148	-0.18%
10 Year Govt Bond Yield	1.85%	0.01%
RPX Composite Real Estate Index	190.5	-0.3

Markets are flattish on the last trading day of the quarter. 4Q GDP was revised upward from + .1% to + .4%. Personal consumption was revised downward as well.  Initial Jobless Claims rose last week to 357k. Bonds and MBS are flat.

The bond markets close at 1:00 pm EST today. Expect very little action today as traders will probably flatten positions ahead of quarter end.

The Office of Comptroller of the Currency has released the 4Q mortgage performance metrics. 89.4% of all mortgages are current, up from 88.6% last year. Delinquencies and foreclosures are down as the pipeline gets cleared and real estate prices start rebounding. More and more servicers are turning to mods as opposed to foreclosure initiations. The recidivism rate on these mods is around 17%.

The Private Label Securitization market is returning faster than people thought. Prior to this year, the only deals were the occasional Redwood Trust jumbo deal.  JP Morgan recently announced a deal, and now Springleaf plans a $1 billion subprime deal. The palette of products originators can offer is expanding in a big way.

FHFA has made mods easier to do on delinquent mortgages - anyone who is more than 90 days delinquent is automatically eligible for a loan mod. Borrowers do not have to show a financial hardship any more. This will only apply to Fan and Fred loans, and mods will be rate / term, not principal reductions. So this begs the question:  Why won't everyone stop paying their mortgage in order to get a mod?  FHFA said they would use existing "screening measures to prevent strategic defaulters."  Whatever that means.

Is your house an undiversified bond investment? Was house price appreciation driven by falling interest rates? And does that mean that when rates start rising house prices will fall again? I would point out that interest rates aren't the only factors affecting home prices - population growth, incomes, the availability of credit, and even global capital flows play a role. He does have a point, which is that a rapid rise in home prices like we saw from the early 90's to 2007 is unlikely to be repeated given that we won't have the tailwind of falling interest rates to increase affordability. That said, low interest rates can last a long time - from the end of WWI to the mid 60's, short-term rates were 5% or lower. From 1932 to the mid 50's, short term rates were under 2.5%.  I would also point out that real estate prices increased during the 1970s, even as short term rates moved up to 15%.