Morning Report - HARP 3.0 may have a steep climb

Vital Statistics:

	Last	Change	Percent
S&P Futures	1678.3	-5.5	-0.33%
Eurostoxx Index	2728.3	-24.0	-0.87%
Oil (WTI)	104.6	-0.8	-0.77%
LIBOR	0.264	-0.001	-0.19%
US Dollar Index (DXY)	82.06	-0.230	-0.28%
10 Year Govt Bond Yield	2.59%	0.01%
Current Coupon Ginnie Mae TBA	104.2	-0.2
Current Coupon Fannie Mae TBA	103.7	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are lower in spite of some strong earnings reports and a decent durable goods report. Initial Jobless claims were 343k. Bonds and MBS are down small / flat.

Mortgage REIT Hatteras Financial released earnings yesterday, and reported a 20% drop in book value. Hatteras invests in agency ARM product, so it is on the slightly more esoteric side, but they made one interesting observation: The MBS market (and the 7/1 ARM market in particular) suffered a powerful sell-off in the last two weeks of June, and has yet to bounce back. So it wasn't simply end-of-quarter liquidation. What does this mean for us? That non-QE supported MBS spreads are finding new levels. What does that mean in English? That once QE ends, we may find the TBA market experiencing the same thing - a permanent increase in spreads, which means higher rates, even if the 10 year bond doesn't move. Make hay now....

More than half the mortgage modified in 2009 under the Home Affordability Modification Program (HAMP) have defaulted, according to a report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP). This report will certainly make a push for HARP 3.0 even more difficult. Interesting fact: of the $38.5 billion allocated to housing support programs in 2009, only 22% (or about $8.6 billion) has even been spent. 

The Detroit bankruptcy is going to be interesting for municipal bonds, especially GOs (general obligations). There are two types of muni bonds - revenue bonds, where the principal and interest is paid for by some project (like a bridge) and general obligation bonds, where interest is paid for out of general revenues. Liquidity in munis is terrible to begin with - banks won't hold them as inventory because they aren't allowed to take the tax deduction on the interest payments, so nobody will make a market in them. Retail holders of these bonds may find themselves unable to sell. If banks won't buy them, then who will buy these things? Hedge funds, who are buying them with an eye towards going to the mat in bankruptcy court. And they aren't paying par. They probably care in the 40s.