Markets

Today marks the 21st anniversary of the signing of the Americans with Disabilities Act, which guarantees "equal opportunity for people with disabilities in public accommodations, commercial facilities, employment, transportation, government services and telecommunications." According to the Census Bureau, 36 million people here in the US have a disability - 12% of the population - which certainly includes existing and potential borrowers. (Disabilities include problems with hearing, vision, and difficulty concentrating, or walking.) State-wise, West Virginia leads the nation with almost 19% having a disability, while Utah has the lowest with 8.9% of its residents reporting a disability.

How do the budget crisis and a potential government shut down impact mortgage banking? One should remember that since 1976 there have been 17 shut downs, with the 1995/96 shutdown of 21 days the longest in modern history. If on August 2nd there is no budget deal, then we should see number 18. Oddly enough, the last shutdown occurred precisely when Italy and peripheral Europe were going through their last major crisis of confidence. If there is no deal in the early part of this week, the Treasury will issue a statement to the market and outline it's directive to the Fed as to the priority of payments and it will outline an alternative auction structure for Treasury notes and bonds . Most other governments never shut down as parties bicker over spending - in fact Belgium hasn't even had a government since 2010 and there has been no shutdown. The world will not end and the US government will eventually keep on spending, with the financial markets hoping for growth to cure the US debt problems combined with some spending cuts.

But markets (stocks, bonds, whatever) don't like uncertainty, and certainly would not like a downgrade of the United States. One can expect this uncertainty to continue to weigh on risky assets in the short-term - like the stock market. There is the potential that banks could see higher capital requirements for mortgage securities. (Currently, Ginnies are a zero risk weighting, while conventionals are 20%.) Banks may not rush to sell MBS's, but their appetite for the product could drop. Central banks could sell, or reduce their future purchases of, mortgages in a downgrade scenario. But from a cash flow perspective, few experts expect Ginnie, Fannie, or Freddie cash flows to be affected. But they could be downgraded if US government debt is downgraded, and this would lead to higher mortgage rates.

When will the housing market return to normal, per the SF Fed? "If the foreclosure inventory is worked off at this rate and house prices change as described above, then housing starts are predicted to return to normal levels by the beginning of 2014." Fed

Under the "what else can happen" category, Fannie downgraded its housing predictions for this year. Fannie's economists believe that mortgage interest rates will move up just slightly over the year to finish at 4.7% and rise again in 2012 to an average of 5%.  Total mortgage originations in 2011 will decline to $1.07 trillion from $1.51 trillion in 2010 (about 30%) and decline further still next year to $999 billion.  Single family mortgage debt will fall an additional 2.6 percent from $10.54 trillion to $10.26 trillion. Home prices are expected to decline further this year and next.  The median price in 2010 for a new home was $221,800.  This year it is expected to be $216,900 and in 2012 $214,100.  Existing homes are expected to sell for a median price of $165,600 this year and $163,700 next, compared to $173,000 in 2010.

Many in the industry wonder why the rating agencies seem to have escaped a good portion of the blame for mis-rating countless securities and helping to cause the credit crisis. It is a complex question, but some rating agencies are working to solve it. Kroll Bond Ratings, for example, recently published an "Investor Bill of Rights" for bond investors. "Article l: Kroll Bond Ratings will make its research reports, including criteria and analysis, supporting its published, non-subscriber ratings available to every fixed income investor without charge. Article II: Kroll Bond Ratings will make its transaction analyses available on its website in a timely manner and will provide a forum to respond to investor questions. Article III: All ratings and analyses will be clear, transparent and usable for investors, thereby avoiding rating conclusions derived from a 'black box.' Article IV: Kroll Bond Ratings will confirm that its analysis includes appropriate and professional due diligence as part of the rating process. Article V: All ratings will be subject to ongoing review throughout the life of the security or entity to ensure that the rating is accurate." For more information go to KrollBondRatings .

Looking at the markets, current coupon MBS prices ended Monday where they began: down/worse by about .250, and the 10-yr T-note was down about .375 to a yield of 3.00%. There were no economic releases, which is just as well since the focus is on Republicans and Democrats who continue to talk at and blame each other for the debt ceiling impasse with no resolution yet in sight. Tradeweb reported below normal volume at 84% of the 30-day average.