Morning Report - Breakdown of the government shutdown.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1685.0	-7.5	-0.44%
Eurostoxx Index	2913.5	-9.5	-0.32%
Oil (WTI)	102.8	-0.2	-0.21%
LIBOR	0.248	0.000	0.10%
US Dollar Index (DXY)	80.22	-0.307	-0.38%
10 Year Govt Bond Yield	2.63%	-0.02%
Current Coupon Ginnie Mae TBA	105.4	-0.3
Current Coupon Fannie Mae TBA	104.7	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are lower ahead of Continuing Resolution Weekend. Personal income rose .4% in August, while personal spending rose .3%. The prior months were revised upward. Bonds and MBS are up.

The government's new fiscal year begins on Tuesday, and unless Congress comes up with a way to keep the lights on the government will shut down. You have all-out war between Democrats and Republicans and a civil war in the Republican party. Here is the state of play: The House passed a continuing resolution that funds the government through the end of the year, but it contains language that de-funds obamacare. The Senate passed a continuing resolution that funds the government through the end of the year, but it removed the obamacare language and sent it back to the House. So that leaves Boehner with 3 possible outcomes: 1) He can convince the Tea Party Republicans to go along with a clean continuing resolution, 2) He passes a bill with primarily Democratic party support (and that support won't be free, plus it will probably cost him the Speakership), or 3) He attempts to pass a clean CR and it fails, which shuts down the government. Democrats are confident that any shutdown will be a replay of 1995, where the public sided with Clinton. How to handicap it:  I think the fact that the Republican leadership is so vocal against the rebellious Tea Party republicans is important and it brings them on board. #1 is the most likely scenario, followed by #2. If we do have a shutdown, it will be short. 

If the government shuts down, what does that mean for the mortgage markets? Ginnie Mae will be open for business, according to HUD's contingency plan from 2011, which supposedly would be used in this case. I have yet to see what FHA will do. Bottom line, I don't foresee any major disruptions to the financial markets. Macroeconomic Advisers estimates that a 2 week shutdown will lop .3% off of 4Q GDP. Mark Zandi of Moody's estimates that number to be 1.4% if it goes 3 - 4 weeks. (Mark, you didn't get the Treasury Secretary gig - you don't need to keep carrying water for the Administration).

Pending Home sales fell 1.6% in August, according to the National Association of Realtors. The NAR blames the drop on an acceleration of home sales in early summer, as buyers accelerated purchase decisions as interest rates began to rise. The NAR is anticipating 2014 sales to be flat with 2013 and median existing home sale prices to increase 5% - 6%. Note that almost half of all home sales right now are all-cash transactions and that number is usually close to 20%. So even if existing home sales are flat next year, year over year, the mortgage business could still improve markedly as distressed / cash sales run their course. 

The number of loans in the process of of foreclosure at the end of the second quarter decreased 40% to 744k. This is an interesting statistic, MBA estimates the shadow inventory of homes to be 3.3 million. I know MBA also includes 90 day DQs, which may account for some of the difference - 90 day DQs in judicial states which haven't been permitted to move to the foreclosure process yet. Other tidibits - the overall percent of loans that were seriously delinquent fell from 15% a year ago to 3.8%. Almost 91% of all loans in the report were current and performing. 

Does the high shadow inventory number necessarily mean that cash sales will continue to be half of all existing home sales? Probably not. Professional investors who bought property for rentals are noting the increase in prices, and will certainly think about ringing the register. They won't be selling to other professional investors, so that inventory will be coming soon. Plus, as we have seen in the D, many of these homes will be bulldozed, not sold.