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Homeowners Bail on Mortgage Aid

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And problems at the FHA plus Fannie and Freddie are the seeds for another mortgage meltdown.

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Editor's Note: This article was written by Richard Suttmeier, chief market strategist at ValuEngine.com, which is a fundamentally-based quant research firm in Princeton, New Jersey, that covers more than 5,000 stocks every day.


Homeowners Bailing Out of Mortgage Aid
-- So far I would have to say that the government's mortgage-modification programs cannot be considered successful. It seems that 25% of the 1.2 million homeowners who were offered mortgage help dropped out of the program. Those weeded out of the program risk being worse off than if they didn't apply for the program in the first place. If they simply walked away that would still have their savings and would eventually have a fresh start in a more affordable home.

The FHA Shares in the Housing Mess -- The Federal Housing Administration insures home mortgages and does so after giving homeowners a very low down payment of 3.5%. In 2006 the FHA insured just 3% of home mortgages, but today it's 33%. Together with Fannie Mae (FNM) and Freddie Mac (FRE) the FHA and these government agencies are at risk for nearly the entire $11 trillion US mortgage market.

Private mortgage lenders aren't a factor in today's mortgage market as they require 10% to 20% down payments versus the 3.5% for the FHA guarantee. The FHA is now under considerable financial stress as defaults have skyrocketed. As a result, the FHA has tightened credit standards -- including a 10% down payment for borrowers with low credit scores. At the end of February, the "seriously delinquent" rate for FHA-insured mortgages spiked to 7.5% up from 6.2% year over year. It seems that problems at the FHA plus Fannie and Freddie are the seeds for another mortgage meltdown extending "The Great Credit Crunch" and the "Nightmare on Main Street."

The America's Community Bankers Index (ABAQ) tried to trend above its 21-day simple moving average at $176.53 last Wednesday and today's close is below its 50-day simple moving average at $171.64. My monthly support at $165.51 is the key level to hold.



The Regional Banking Index (BKX), which tracks the "too big to fail" names, also tried to trend above its 21-day simple moving average at $55.64 last Wednesday and Friday's close was below the 50-day simple moving average at $53.84. My monthly support at $49.20 is just below the "flash crash" low of $49.94 with the 200-day simple moving average at $47.50.



Risk Aversion returned as the German's ban naked short sales and certain CDO trading.

(See Germany to Ban Naked Short Sales.)

10-Year Note -- The daily chart shows how the 200-day simple moving average at 3.579 has become the risk aversion support. My quarterly pivot is 3.467 with the May 6 low yield at 3.226. Supply test comes next week with $113 billion in 2-Year, 5-Year, and 7-Year note auctions.



Comex Gold
-- has become currency of last resort primarily on euro weakness, but profit-taking is alleviating an overbought condition. My semiannual support is $1186.5 with my monthly resistance at $1270.1.



Nymex Crude Oil
-- has been declining as a challenge to the global growth story, and is now extremely oversold. Quarterly support is $58.41 with my annual pivot at $77.05. A month ago Wall Street was touting $100 oil!



The Euro
-- has become extremely oversold and is trading below my quarterly pivot of 1.2450.



Daily Dow:
There's an up-trend resistance line that connects highs going back to November 2009 that was tested at the April 26 high. The daily chart profile is neutral with the Dow below its 21-day simple moving average at 10,942, but with rising MOJO. The Dow is below its 50-day simple moving average at 10,874 with the 200-day simple moving average as support at 10,234. It seems that the April 26 high at 11,258 ends the bear market rally since March 2009.



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