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April 15, 2010 – Mortgage Modifications lag Foreclosures

Mortgage Modifications lag Foreclosures. JP Morgan tops estimates! My Guess is that the
Congressional Oversight Panel would have liked my “Mortgage Mulligan”. Bernanke re-iterates
low rates for an “extended period”. The President wants tighter control of derivatives. The
Federal Reserve Beige Book! The Dow approaches major resistance on overbought weekly
MOJO.
Mortgage Modifications lag Foreclosures - As I discussed in Wednesday’s “Four In Four” lower
appraised values for homes will take a bite out of mortgage modifications as more homeowners sink
underwater, and those that are already underwater submerge below being 25% below appraised
values.
With so much over-leverage still weighing on the banking system, with tighter lending standards, and
with tougher regulatory guidelines looming, banks will be less willing to lend and make mortgage
modifications.
Some banking industry executives are starting to frame this dilemma with the fairness statement. There
are many homeowners who are underwater on their mortgages, but are making their monthly
payments, so it’s unfair to give neighbors who default a break. This is why my “Mortgage Mulligan” plan
I proposed back in February 2008 would have worked. Every homeowner would have had the
opportunity for a “Mortgage Mulligan”. By the end of 2008 the yield on the 10-Year approached 2%,
which would have had a 30-Year fixed rate mulligan rate near 3%. That would have stopped the
deterioration, by putting the burden where it belongs, on the investors in mortgages and mortgage
backed securities around the world.
In Congressional hearings Chase told lawmakers that large-scale mortgage principal reduction “could
be harmful to consumers, investors and future mortgage market conditions.” Chase estimated the cost
of reducing all home loan balances to appraised values would cost up to $900 billion with $150 billion
cost to the government. This sounds cheap to me given all the monies wasted to date.
JP Morgan tops estimates! When do we start to look at bank earnings excluding trading profits? Do
we need to anticipate a ban on proprietary trading?
At JM Morgan, consumer and real estate delinquencies remain high, and when lower appraised values
for homes start to hit in the second half of 2010, the pause in the near term leveling of delinquencies
will end.
My Guess is that the Congressional Oversight Panel would have liked my “Mortgage Mulligan”
The COP describes the Obama plans to ease foreclosures as too little, too late. There are too
many homeowners being left out, as six million families are more than two month’s in default, and the
pace of foreclosure notices are averaging 200,000 per month. Elizabeth Warren the “Top COP” says
that after launching the program, a year and a half later, “Treasury is still fighting to get its foreclosure
programs off the ground."
Even with help, many mortgage payments are too expensive for many Americans to afford. Re-defaults
are too high and billions of taxpayer money is spent as families strike out in trying to save their homes.
As an indication of mortgage stress, Mortgage Applications declined 9.6% last week with purchases
down 10.5% and Refi’s down 9.0%. Despite the tax incentives for first time and existing home buyers,
the four-week moving average is declining. Part of the cause the fact that the FHA has raised the down
payment for new loans it guarantees. FHA loans had been 50% of the volume and that declined 19%.
The Cost of Living is on the rise – The CPI is up 2.4% year over year, and was up 2.7% in 2009. I do
not describe this as stable inflation given that inflation-adjusted weekly wages fell by 1.6% in 2009, the
sharpest drop since 1990.
Bernanke re-iterates low rates for an “extended period” - With the Fed chief saying that economic
growth will just be moderate, the federal funds rate will stay low for a long time. He argued that inflation
is not an issue and will stay low. Bernanke also stated that economic growth was still being weighed
down by weakness in the construction industry, and struggling state and city budgets.
The President wants tighter control of derivatives – Something I can agree with! More than two
years after “The Great Credit Crunch” began the notional amount of derivative contracts continue to
rise in the banking system, and stood at $213 trillion at the end of 2009. Mortgage related derivatives
were the most problematic in 2008 and 2009, and it’s hard to determine what this exposure is today.
These exposures need to be on bank balance sheets and marked to market.

The Federal Reserve Beige Book - When I look at the Beige Book I focus on housing and banking.
Stocks in these industries have provided upside leadership year to date, but the gossip from the Beige
Book does not jive with that market strength.
• Many Districts reported increased activity in housing markets from low levels.
• Commercial real estate market activity remained very weak in most Districts.
• Activity in the banking and finance sector was mixed in a number of Districts, as loan volumes
and credit quality decreased.
• While labor markets generally remained weak, some hiring activity was evident, particularly for
temporary staff. Wage pressures were characterized as minimal or contained.
• Retail prices generally remained level, but some input prices increased.

Dow 11,000 and weekly MOJO is strong. Holding today’s pivot at 11,081 targets my “Wall of
Resistances”; monthly resistance at 11,228, annual resistance at 11,235, weekly resistance at 11,330,
and semiannual resistance at 11,442.
 Chart Courtesy of Thomson / Reuters

That’s today’s Four in Four. Have a great day.

Richard Suttmeier
Chief Market Strategist
www.ValuEngine.com
(800) 381-5576
As Chief Market Strategist at ValuEngine Inc, my research is published regularly on the website www.ValuEngine.com. I
have daily, weekly, monthly, and quarterly newsletters available that track a variety of equity and other data parameters as
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