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HOUSING: POLICY & FINANCE

12/10/2012


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FED MBS HOLDINGS ARE REDUCING RATES BUT TRANSMISSION EFFECT VERY REAL

The biggest housing-related news came early this week when William Dudley, President of the Federal Reserve of New York, gave a speech summarizing a paper by
New York Fed sta titled The Rising Gap Between Primary and Secondary Mortgage Rates.` Dudley said the led`s decision in September to purchase an additional
$40 billion a month of agency mortgage-backed securities ,MBS, is a sign that Quantitatie Lasing` is working; current MBS yields declined roughly 45 basis points
while the Freddie Mac 30-year rate declined 23 basis points. However, there are impediments to current policy: the yield that the Fed is receiving in the primary market
is significantly lower than actual mortgage rates available to the consumer (Exhibit 1).

Historically, the spread hovered between 30 and 50 basis points. In September, it rose above 150 basis points. There are several reasons cited for this anomaly. Outside
of the actual paper, Nick Timiraos of the Wall Street Journal provides what we found to be the most concise news summary in his article titled Why Banks are Enjoying
Record Mortgage Revenue.` Among them are orced buy-backs, known as put-backs,` low equity leels that constrain reinancing ability and higher costs associated
with increased regulation of the mortgage market. Other areas of concern are market concentration, capacity constraints, higher barriers to entry and pricing power on
certain borrowers.

SUPPLY OF MORTGAGE CREDIT IS NOT WHAT IT USED TO BE

Although there are several reasons for the transmission effect, the most logical reason behind it is the current level of mortgage origination compared with prior to the
crisis. For example, according to a report titled the Future of the Housing & Mortgage Markets: Winners & Losers` by FBR Capital Markets & Co., using data from
Inside Mortgage Finance, the largest mortgage originators in 2005 were Bank of America (including Countrywide), Wells Fargo (including Wachovia and Golden West),
JPMorgan (including Washington Mutual), Citi (including ABN Amro) and GMAC. They estimate that roughly $1 trillion of capacity has left the market since 2005.
Bank of America exited the market and closed down Countrywide, JPMorgan closed down \ashington Mutual`s mortgage business, and Citi and GMAC now have
substantially smaller roles in the market. Of the top 20 mortgage originators of 2006 based on Home Mortgage Disclosure Act data - only five of the 20 remain
(Exhibit 2).

GIVEN MARKET CONDITIONS, EXPECTATIONS ARE FOR A PROLONGED PERIOD OF LOW INTEREST RATES

The market forecast is for continued sub-par economic growth. The current unemployment rate sat around 7.7 percent with the economy adding 146,000 jobs in
November. While not significant enough to alter sentiment, Hurricane Sandy may have played a role in the numbers. These diminished expectations, combined with
the end of Operation Twist and the expectation of tighter fiscal policy in the new year, will most likely lead the Fed to take further action. Fed action over the past year
has caused the yield curve to flatten. One year ago, the 30-year rate was at 3.04 percent; it is now at 2.81 percent (Exhibit 7).

1he led`s MBS holdings spiked in Noember ,Lxhibit 8,, and with potentially more accommodative policy, these holdings could rise. These purchases should drive
down the yield on MBS, which should result in lower mortgage rates for the consumer. While the transmission effects are somewhat muted, evidenced by the spread
between primary and secondary MBS (discussed above), expectations are for a prolonged low interest rate environment to support continued refinancings and
originations.


KEY DEVELOPMENTS
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12/10/2012


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WHAT TO WATCH FOR IN THE WEEK AHEAD (DEC. 10-14)

x The FOMC is holding its last 2012-policy meeting this Tuesday and Wednesday; releasing market forecasts on Wednesday afternoon. A press conference for
Chairman Bernanke will begin shortly thereafter at 2:15 PM. For a more in-depth summary o likely outcome, please see Bill McBride`s blog Calculated Risk.

x President Obama will speak in Michigan this Monday, most likely drumming-up support in fiscal cliff negotiations. Last Monday, the President reiterated his
long held iew that i top rates don`t rise, there is a danger the middle class could ace a cap on deductions, speciically mortgage interest.

x A number of public and private events are in Washington this week. Look to the House Financial Serices Committee`s meeting on the Volker rule this
1hursday to earn media attention. In addition, eents by both Cato and Brookings will discuss the llA`s recent actuarial report and future of housing,
respectively.

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12/10/2012


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Jobless Rate Edges Down to Its Lowest Level in 4 Years
The New York Times
12/7/2012
By: Nelson Schwartz
Despite ears o a slowdown caused by gridlock in Washington, the economic recovery moved forward at a steady pace in November, pushing unemployment to its
lowest level in four years. 1he nation`s employers added 146,000 jobs last month, in line with the aerage o 151,000 a month in 2012. But the pace was a substantial
improvement from earlier this year, when job growth slowed sharply and many observers feared a double-dip recession.`

Basel who? Mortgage servicing rights were already falling
SNL Financial
12/07/2012
By: David Hayes and Tahir Ali
Mortgage servicing rights, or MSRs, are now just a shadow of their former glory. Faced with falling interest rates and consequently rising prepayment rates, as well as
sales to nonbank servicers, the value of MSRs at U.S. bank holding companies has been in decline for years, even before the joint regulatory proposal on Basel III
implementation was announced last summer. Aggregate mortgage servicing rights in the industry fell in the third quarter to $35.65 billion, down from $38.14 billion
a quarter earlier and $44.12 billion in the year-ago quarter. Going farther back in time, the drop in MSRs is more substantial as MSRs stood at $52.36 billion in the third
quarter of 2010 and $67.57 billion in the third quarter of 2009.`

Lawmakers Press HUD Secretary on Possible FHA Bailout
American Banker
12/06/2012
By: Victoria Finkle
Donovan told the Senate Banking Committee what HUD is doing to prevent such a scenario, including what further actions might be needed to bolster the mortgage
insurer's finances. But lawmakers on both sides of the political aisle expressed strong dismay with the agency's financial health, raising the prospect of whether the next
steps may require additional legislative action.`

CoreLogic: House Prices up 6.3% Year-over-year in October, Largest increase since 2006
Calculated Risk
12/04/2012
By: Bill McBride
This CoreLogic House Price Index report is for October. The recent Case-Shiller index release was for September. Case-Shiller is currently the most followed house
price index, however CoreLogic is used by the Federal Reserve and is followed by many analysts. The CoreLogic HPI is a three month weighted average and is not
seasonally adjusted (NSA).`




TOP NEWS AND RESEARCH
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12/10/2012


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President Obama Weighs In on Mortgage-Interest Deduction
The Wall Street Journal
12/04/2012
By: Nick Timiraos
President Barack Obama waded into the issue Monday of whether or not the mortgage-interest deduction should be on the table during negotiations to avoid a series
of automatic tax increases and spending cuts that would take effect in the beginning of January.`

Mortgage Availability: Excessively Tight Credit Conditions
National Association of Realtors
12/04/2012
By: Scholastica (Gay) Coraraton, Research Economist
Recently released government data for 2011 from the Home Mortgage Disclosure Act (HMDA) shows just how tight mortgage credit has been. Incomes of
prospective purchasers have increased since 2004, but the loan to income ratio has declined. The median household income for a homebuyer using conventional
financing rose from $79,000 in 2007 to $ 90,000 by 2011, while the national median household income has remained flat since 2007 at about $50,000`

New York Trips Up Ocwen's Big Plans
The Wall Street Journal
12/04/2012
By: Liz Rappaport
New York's top financial regulator hasn't signed off on a pair of deals that would establish the biggest processor of subprime mortgages. Benjamin M. Lawsky, New
York's superintendent of financial services, has yet to approve Ocwen Financial Corp.'s OCN -0.57% plans to buy Homeward Residential Holdings Inc. and the
mortgage-servicing unit of Residential Capital LLC-companies that, like Ocwen, collect mortgage payments and rework troubled loans for U.S. homeowners.`

Industry Downplays Fears of Multifamily Housing Bubble
American Banker
12/04/2012
By: Kevin Wack
To some, these factors suggest that a bubble is forming in the multifamily market and that, a few years from now, developers will be sitting on so many empty
apartments that they will be unable to pay their bank loans. But others who follow the rental housing market closely argue that worries about a multifamily bubble are
overblown. They described some reasons for concern, but they also expressed a belief that the supply of rental units is in balance with market demand, except perhaps
in a few geographic areas

led`s Dudley Says MBS Buying Is lelping Lconomy
The Wall Street Journal
12/03/2012
By: Michael S. Derby
Declining mortgage rates show Federal Reserve monetary-policy stimulus is having an impact, a key Fed official said Monday. Since launching an open-ended
mortgage bond-buying program in September, agency mortgage-bond securities rates hae declined, and this is solid eidence that our policy has been, and continues
to be, effective-though it is certainly not all-powerul in current circumstances,` Federal Reserve Bank of New York President William Dudley said.`
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Final 3Q Tally: Originations at $486B, Wells Sees Share Slip
National Mortgage News
12/03/2012
By: Paul Muolo
\ells largo & Co., the nation`s ,constant, olume lender, saw undings jump by 56% compared to 3Q 2011 but also experienced a slight decline in market share:
29.94% compared to 30.35% in 2Q.`

Why Banks Are Enjoying Record Mortgage Revenue
The Wall Street Journal
12/03/2012
By: Nick Timiraos
Mortgage rates hae allen to their lowest recorded leels, but the spread between banks` cost o unding mortgages and the rates being offered to borrowers has
soared in recent months. The upshot, the thinking goes, is that mortgage rates would be even lower if banks were passing along their lower funding costs to
borrowers.`

led`s Dudley Sees Obstacle in Mortgage Bond, Rate Spreads
Bloomberg
12/03/2012
By: Caroline Salas Gage
Federal Reserve Bank of New York President William C. Dudley said a wider gap between yields on mortgage-backed securities and home loans is reducing the
potency o the central bank`s monetary stimulus. \hile there is solid eidence` the led`s monthly purchases o >40 billion in housing debt hae been eectie in
lowering yields, the impact o monetary easing on the economy through housing and mortgage inance has been impeded to some degree,` Dudley said today in
opening remarks at a workshop on mortgage rates held at the New York Fed.

Mortgage Bond Sales Jumping 45 lurt led`s Buying Lorts
Bloomberg
12/03/2012
By: Jody Shenn
Issuance of U.S. government-backed mortgage securities soared 45 percent last month to the highest since at least 2009 as lenders rushed to create bonds before
guarantors Fannie Mae and Freddie Mac increase their fees.`









WEEKLY BRIEFING
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12/10/2012


Hamilton Place Strategies | 805 15th Street NW, Suite 700 | Washington, DC 20005

Monday, Dec. 10, 2012

Tuesday, Dec. 11, 2012

International Trade
The U.S. international trade gap in September improved, largely on petroleum. And the best news is that exports rebounded. The trade deficit narrowed to $41.5
billion from $43.8 billion in August. Exports rebounded 3.1 percent, following a 1.0 percent decline in August. Imports increased 1.5 percent after slipping 0.2 percent
the month before. The shrinking in the trade gap was led by the petroleum deficit which decreased to $21.7 billion in September from $23.5 billion in August. The non-
petroleum goods shortfall actually grew to $35.2 billion from $34.9 billion for the prior month. The services surplus improved to $15.9 billion from $15.1 billion in
August.`

FOMC Meeting Begins
The Federal Open Market Committee meets eight times a year in order to determine the near-term direction of monetary policy. For monetary policy, the FOMC
evaluates the relative concerns over the outlook for economic growth (too strong, too weak, about right) and pending inflation (too high, too low, about right). The
FOMC then determines whether short-term interest rates should be raised, lowered, or left unchanged to accomplish its objectives of healthy economic growth and
low inflation. The FOMC consists of the seven Governors of the Federal Reserve Board (assuming no seats are vacant) and five Federal Reserve Bank presidents. The
New York Fed president is always on the FOMC and the other four seats for the District presidents are rotated yearly. Changes in monetary policy are now announced
immediately after FOMC meetings.`

Hearing: STREAMLINING AND S1RLNG1lLNING lUD`S RLN1AL lOUSING ASSIS1ANCL PROGRAMS, PAR1 II
Where: 538 Dirksen Senate Office Building
When: 10:30 AM

Wednesday, Dec. 12, 2012

MBA Purchase Applications
The Mortgage Bankers' Association compiles various mortgage loan indexes. The purchase applications index measures applications at mortgage lenders. This is a
leading indicator for single-family home sales and housing construction.`

FOMC Meeting Announcement

1he lederal Open Market Committee ,lOMC, is the policy-making arm of the Federal Reserve. It determines short-term interest rates in the U.S. when it decides the
overnight rate that banks pay each other for borrowing reserves when a bank has a shortfall in required reserves. This rate is the fed funds rate.`

FOMC Forecasts

ECONOMIC CALENDAR

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12/10/2012


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Chairman Press Conference

The Fed announced on March 24, 2011 that Fed Chairman Ben Bernanke will hold press briefings four times a year to explain the FOMC's latest quarterly economic
projections. Additionally, the purpose of the briefings is to provide additional context for the FOMC's policy decisions and to allow for Q&A with the press.
According to the Fed, the "introduction of regular press briefings is intended to further enhance the clarity and timeliness of the Federal Reserve's monetary policy
communication.`

Hearing: Challenges Facing the U.S. Capital Markets to Effectively Implement Title VII of the Dodd-Frank Act
Where: 2128 Rayburn House Office Building
When: 10:00 AM

Thursday, Dec. 13, 2012

Jobless Claims
Initial jobless claims fell 25,000 in the December 1 week to 370,000. This was the third straight major decline that together just about fully unwinds a giant 90,000
spike in early November tied to Hurricane Sandy. The latest level falls in line with the trend that preceded the giant storm, a comparison that hints at no significant
change in the nation's jobs market. Continuing claims showed a similar pattern of unwinding from Sandy. Continuing claims in data for the November 24 week fell a
very steep 100,000 to 3.205 million, a level that's in line with the month-ago trend.`

Producer Price Index
The Producer Price Index (PPI) of the Bureau of Labor Statistics (BLS) is a family of indexes that measure the average change over time in the prices received by
domestic producers of goods and services. PPIs measure price change from the perspective of the seller. The headline PPI (for finished goods) is a measure of the
average price level for a fixed basket of capital and consumer goods for prices received by producers.`

Retail Sales
Retail sales measure the total receipts at stores that sell merchandise and related services to final consumers. Sales are by retail and food services stores. Data are
collected from the Monthly Retail Trade Survey conducted by the U.S. Bureau of the Census. Essentially, retail sales cover the durables and nondurables portions of
consumer spending. Consumer spending typically accounts for about two-thirds of GDP and is therefore a key element in economic growth.`

Hearing: Examining the Impact of the Volcker Rule on Markets, Businesses, Investors and Job Creation, Part II
Where: 2128 Rayburn House Office Building
When: 9:00 AM

Event: Cato Institute: Is the Federal Housing Administration the Next Bailout?
Where: 1000 Massachusetts Avenue NW, Washington, DC 20001
When: 12:00 PM




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12/10/2012


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Friday, Dec. 14, 2012

Consumer Price Index

The Consumer Price Index is a measure of the change in the average price level of a fixed basket of goods and services purchased by consumers. That is the index
shows the change in price levels since the index base period, currently 1982-84 = 100. Monthly changes in the CPI represent the rate of inflation.
The consumer price index is available nationally by expenditure category and by commodity and service group for all urban consumers (CPI-U) and wage earners (CPI-
W). All urban consumers are a more inclusive group, representing about 87 percent of the population. The CPI-U is the more widely quoted of the two, although cost-
of-living contracts for unions and Social Security benefits are usually tied to the CPI-W, because it has a longer history. Monthly variations between the two are slight.`

Industrial Production
Industrial production declined 0.4 percent in October after having increased 0.2 percent in September. Hurricane Sandy, which held down production in the
Northeast region at the end of October, is estimated by the Fed to have reduced the rate of change in total output by nearly 1 percentage point. In October, the index
for manufacturing decreased 0.9 percent, following a 0.1 percent gain in September. Excluding storm-related effects, factory output was roughly unchanged from
September. The output of utilities edged down 0.1 percent in October, and production at mines advanced 1.5 percent. Capacity utilization for total industry decreased
0.4 percentage point to 77.8 percent in October.`

Brookings: The Future of Homeownership in the United States Featuring Bank of America CEO Brian Moynihan
Where: 1775 Massachusetts Avenue NW, Washington, DC 20036
When: 12:00PM




ABOUT HAMILTON PLACE STRATEGIES

This report was prepared by Patrick Sims and Russell Grote. Please do not hesitate to reach out if you have any comments, suggestions or concerns.

Hamilton Place Strategies is a policy and communications consulting firm based in Washington. As a firm, our focus and expertise lie at the intersection of
government, business and media. Our deep experiences on all of these dimensions allow us to serve industry leaders seeking to navigate the paths between Washington
and the private sector.