The Daily Tearsheet

Stocks are higher this morning as we await earnings from Nvidia. Bonds and MBS are down.

The Secondary Conference was held Monday and Tuesday in NYC for the last time. It seemed relatively sparsely attended compared to prior years. There was no real exhibition hall – just maybe a dozen tables spread around the elevators on a single floor.

New investors continue to flood into the non-QM space, and appraisal issues are front and center as the hot button issue. Lots of investors are completely avoiding certain counties and property types. The buy side is laser-focused on collateral valuation. Delinquencies are beginning to tick up in the space, which is something to watch.

Pipeline hedgers should be paying attention to SOFR futures as a way to hedge mortgage-based products. They are a great way to hedge mortgage servicing rights and non-QM pipelines. They can also be a good options when TBA liquidity gets lousy. Instead of paying a 8-tick bid/ask spread for certain coupons, you could use SOFR futures to accomplish your hedging goals better liquidity and lower transaction costs.

Eris announced that open interest in SOFR futures has tripled and they are launching options beginning in June. Options are another interesting proposition for mortgage hedgers. When bond market volatility increases, gain on sale spreads generally decrease and being long options can help offset that.

Eris also announced an new funding round as more equity investors get interested in the product. “Buy-side hedgers and fund managers are savvier than ever these days, constantly evaluating how to deploy their capital most efficiently to reach their investment objectives, lest they fall behind their competitors,” said Jared Vegosen, Co-Founder of DV Trading. “Having provided liquid markets in Eris SOFR since inception, we are focused on bringing the same depth, consistency, and pricing discipline to Eris Options at launch.”

Pending home sales rose 1.4% in April, according to the National Association of Realtors. “Buyers are coming out with cautious optimism despite increasing economic uncertainty and a slight rise in mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun. “Demand will easily be even higher once mortgage rates retreat to the levels they were at earlier this year.”

“Historically low foreclosure sales imply minimal price discounts, with a majority of markets selling at a higher price from a year ago,” Yun said. “Unless supply meaningfully increases, home price growth could outpace wage growth and further erode the homeownership rate. All efforts need to be focused on boosting housing supply.”

Mortgage applications fell 2.3% last week as purchases decreased 4% and refis were flat. Rising mortgage rates have been a headwind ever since the situation in Iran began. “Ongoing concerns around inflation from higher fuel costs combined with rising concerns over global public debt pushed Treasury yields higher in the U.S. and abroad last week. This resulted in higher mortgage rates across the board, with the 30-year fixed rate increasing to 6.56%, its highest level in seven weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall applications were down to the lowest level in five weeks as purchase borrowers pulled back across conventional and government loan types. Refinance applications were essentially unchanged, with a decline in government refinances and an increase in conventional refinancing, likely as the increase in rates came late in the week.”

Stocks are flattish this morning after Trump called off strikes on Iran. Bonds and MBS are flat.

Trump has called off strikes on Iran after requests from Middle Eastern leaders. In a Truth Social post, Trump said: “I have been asked by the Emir of Qatar, Tamim bin Hamad Al Thani, the Crown Prince of Saudi Arabia, Mohammed bin Salman Al Saud, and the President of the United Arab Emirates, Mohamed bin Zayed Al Nahyan, to hold off on our planned Military attack of the Islamic Republic of Iran, which was scheduled for tomorrow, in that serious negotiations are now taking place, and that, in their opinion, as Great Leaders and Allies, a Deal will be made, which will be very acceptable to the United States of America, as well as all Countries in the Middle East, and beyond. This Deal will include, importantly, NO NUCLEAR WEAPONS FOR IRAN! Based on my respect for the above mentioned Leaders, I have instructed Secretary of War, Pete Hegseth, The Chairman of The Joint Chiefs of Staff, General Daniel Caine, and The United States Military, that we will NOT be doing the scheduled attack of Iran tomorrow, but have further instructed them to be prepared to go forward with a full, large scale assault of Iran, on a moment’s notice, in the event that an acceptable Deal is not reached. Thank you for your attention to this matter! President DONALD J. TRUMP”

Builder sentiment improved in May, according to the NAHB. That said, the index is still struggling. “Recent increases for long-term interest rates will continue to hold back home buyer demand,” said NAHB Chief Economist Robert Dietz. “Although some regional markets, including parts of the Midwest, are showing relative strength, the housing market continues to face significant affordability challenges.”

Nearly 1/3 of builders cut prices in May, with a typical reduction of 6%. We saw big decreases in gross margins for the big publicly-traded builders, so the price cuts seem to be universal. Builders are still sitting on inventory. The supply of homes for sale is quite elevated.

There is an article in the Wall Street Journal about builders getting sued for shoddy construction. The biggest homebuilders, from Lennar to Pulte are seeing increased legal liabilities. For example, D.R. Horton’s legal liabilities have increased from roughly $400 million in 2018 to $1.14 billion today. Lennar has also increased provisions.

Chicago Fed President Austan Goolsbee said “We’ve got an inflation problem … services inflation is high and rising and that’s probably not coming from oil, it’s probably not coming from tariffs.” On the subject of Kevin Warsh, Goolsbee said that the two were “foxhole buddies” from the 2007-2009 financial crisis: “I feel like I got a window into his character at a time of a lot of stress, and I think he’s coming in with some new ideas,” Goolsbee said. “I’m excited for him to get there.” Kevin Warsh is scheduled to be sworn in this Friday.

On the subject of tariff inflation, the clock runs out on them sometime in mid-June. At that point, it will take Congressional legislation to impose tariffs, which won’t be forthcoming. All of the tariffs will revert to pre-Liberation Day levels. This will certainly help push inflation lower, although it may take a while to flow through. Lower oil prices will go a long way there as well.

Stocks are lower this morning as oil prices and bond yields continue to climb. Bonds and MBS are down.

The week ahead is relatively data-light. The main numbers will be housing starts, pending home sales, consumer sentiment and the index of leading economic indicators. We will also get the FOMC minutes on Wednesday. Given the unusual dissent over language, the minutes should be interesting.

Average independent mortgage bank profits were flat in the first quarter, according to the MBA. “Average production profits in the first quarter of 2026 remained relatively flat at 16 basis points, despite a decline in production volume from the previous quarter,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Production costs grew by close to $800 per loan, but increases in production revenues offset these additional costs.”

Added Walsh, “Servicing net income improved during the first quarter, as markdowns on mortgage servicing rights slowed. Combining both production and servicing business lines, 75 percent of lenders were profitable in the first quarter. Still, disparities between the top and bottom performers remain wide.”

Industrial production rose 0.7% MOM and 1.4% YOY, according to the Federal Reserve. Manufacturing production increased 0.6% MOM and 1.3% YOY. Capacity Utilization increased to 76.1%.

Mortgage lock activity declined in April after a strong start to the year. “April looks more like a cooling from a strong first quarter than a real weakening in borrower demand,” said Mike Vough, senior vice president of corporate strategy at Optimal Blue. “Purchase activity held up well despite rate pressure, while refinance volume reacted more quickly to recent rate moves. That split reinforces how rate-sensitive borrowers remain, even as the spring purchase market continues to show resilience.”

“In a higher-rate environment, lenders are paying close attention to where execution value is showing up,” Vough added. “The move toward agency MBS execution, combined with higher MSR values and increased investor participation, continues to prove that lenders need to evaluate all potential execution options to maximize profitability.”

Stocks are lower as oil rises. Bonds and MBS are down.

President Trump wrapped up his visit with China yesterday. China wants “strategic” stability – “‘Strategic stability’ from strategic rivalry is a major shift,” said Henry Wang, founder and president of the Beijing-based Center for China and Globalization. “We are moving to a new normal. This summit was an inflection point after a tough relationship that began with the start of Trump.”

The public statements on Iran were sparse, but since China gets a lot of oil from Iran the situation had to weigh heavily in the background. China is looking for rhetorical shifts in the US’s stance against Taiwan.

Retail sales rose 0.5% last month, which was in line with expectations. Auto sales were a drag. Excluding vehicles, retail sales rose 0.7%. Sales overall were up 4.9% on a YOY basis. Census doesn’t adjust these numbers for inflation, so retail sales were up modestly on a real basis.

Stephen Miran has resigned from the Federal Reserve Board as Kevin Warsh takes over. Miran has been a consistent dovish voice, advocating for much lower rates.

The bidding war for Two Harbors continues, as United Wholesale launched a $12.50 cash tender offer for TWO. The Two Harbors Board rejects the offer, and advises shareholders to accept the Cross Country Mortgage offer. Cross Country has sort of sweetened the terms of its offer, giving TWO shareholders a prorated dividend in the quarter the deal closes, upping the consideration to $12.45 – $12.68. TWO is currently trading around $12.60 per share.

Mortgage delinquencies increased in the first quarter, according to the MBA. DQ rates rose to 4.44%, which was up 40 bps compared to a year ago. Much of this was driven by FHA loans.

“Mortgage delinquencies increased on an annual basis, with conventional loan delinquencies relatively flat but with notable increases among FHA and VA loans,” said Marina Walsh, CMB, MBA’s Vice President of Industry Analysis. “Last quarter, the delinquency rate for FHA loans was about 900 basis points higher than the conventional delinquency rate, and the VA delinquency rate was almost 225 basis points higher than the conventional delinquency rate. These are the widest spreads since 2021.”

Added Walsh, “We also saw movement of some delinquent FHA and VA loans into later stages of delinquency and into foreclosure. While the overall foreclosure rate remains well below historical averages, the first quarter’s foreclosure inventory rate for FHA loans reached its highest level since the fourth quarter of 2018, and the foreclosure rate for VA loans reached the highest level since the second quarter of 2017.”

MCT made its first AI TBA trade. “When we demonstrated the Hedge Recommendation Agent at MBA Secondary last year, we said AI execution was coming,” said Phil Rasori, COO at MCT. “The Trade Execution Agent is that reality. What we’ve built is a system that understands a pipeline, determines what action is warranted, and can complete that action responsibly. This is what MCT’s AI arc has always been building toward: making mortgage secondary marketers dramatically more efficient and their operations more competitive.”

Stocks are higher this morning as Trump meets in China with Xi Jinping. Bonds and MBS are up small.

Kevin Warsh was confirmed as the next Fed Chairman 54-45 on a party-line vote. Fed Chairman votes are usually pretty bipartisan affairs so this is unusual. Jerome Powell said he will stay on as a governor until the DOJ investigation is completed.

“The Senate’s confirmation of Kevin Warsh as the next Chairman of the Federal Reserve is a welcome step towards finally restoring accountability, competence, and confidence in Fed decision-making,” said White House spokesman Kush Desai.

Warsh is considered more dovish than Powell was, but after the recent CPI and PPI prints I think we can stick a fork in rate cuts for the rest of the year. The December Fed Funds futures are handicapping a tiny chance for any cuts

Minneapolis Fed President Neel Kashkari sounded hawkish in a speech yesterday. The situation in Iran has “upended” the inflation environment, with inflation having been “too high” for the past 5 years. The Strait of Hormuz closure is boosting fertilizer prices which will raise food prices. It isn’t just about energy.

Kashkari also poured cold water on the idea that the Fed might accept a higher level of inflation, say 3% to acknowledge the new reality. “We need to get back to 2% because we need to let people know that we’re not going to move the goalposts.” Kashkari characterized the labor market as “lukewarm” but “hanging in there.”

FWIW, the 2% inflation target is a pretty recent phenomenon. It was introduced in 2012, when the enemy was deflation, not inflation. It was intended to send a message to consumers that the Fed would not permit deflation, which was intended to get consumers spending. The US was still fighting a deflationary spiral after the burst real estate bubble in 2008.

If you look at inflation over the years, we have spend most of our time well above 2%. Generally speaking it took some sort of crisis to get inflation back to 2%. In the late 80s, it was the stock market crash. In the late 90s, it was the Asian Crisis. In 2002, it was the combination of the burst stock market bubble and 9/11. In 2009 – 2011 it was the burst real estate bubble, and in 2000 it was COVID. I am not sure what the catalyst was in 2015.

Inflation averaged above 3% in the 1990s and I think most people remember that period as a pretty comfortable time economically. My point is there is no magic in the 2% inflation target, and it was put in place to fight deflation not inflation. Will consumers and employees change their behavior if the Fed moves the target from 2% to 3%. Perhaps, but I doubt it.

Eris Future’s Geoffrey Sharp sat down with the Chrisman Podcast to discuss how mortgage bankers can hedge non-QM loans.

Stocks are higher despite a hotter than expected PPI print. Bonds and MBS are down.

The Producer Price Index rose 1.4% in April, which was well above the March increase of 0.7% and the consensus estimate of 0.5%. On a year-over-year basis, prices rose 6%, the biggest increase since 2022. If you strip out food, energy and trade services, wholesale inflation rose 0.6% MOM and 4.4% YOY. Higher energy prices were at the root of the issue, but we also saw big increases in the prices for machinery and equipment. Trucking and warehousing also rose.

Between the CPI yesterday and the PPI today, the Fed Funds futures don’t see rate cuts in the cards anymore this year.

Mortgage applications rose 1.7% last week as purchases rose 4% and refis fell 1%. “Mortgage rates were generally higher last week, with the 30-year fixed rate at 6.46%, its highest level in five weeks,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Purchase applications were higher over the week and 7% ahead of last year’s pace, with all loan types showing increases in purchase activity, as potential homebuyers shrugged off the current economic and mortgage rate uncertainties and returned to the market. Refinance applications declined slightly, led by conventional and VA refinancings, and accounted for a little more than 40% of applications last week, the lowest share since July 2025.”

Chicago Fed President Austan Goolsbee discussed how inflation remains a problem. “There’s a 2% target. We’re well above 2%, and we’ve been above 2% for many years,” Goolsbee said. “We stopped making progress last year, and now in the short run it’s getting a little worse. So I think it was close to what was expected. But what was expected isn’t that favorable. We’ve got to deal with this affordability issue.”

Stocks are lower this morning after the inflation numbers came in as expected. Bonds and MBS are down.

First of all, apologies for no Morning Report on Friday and Monday. I was on the road and my laptop was having issues.

The week ahead will be dominated by inflation data, with the consumer price index today and the producer price index tomorrow. We will also hear from Neel Kashkari, Austan Goolsbee and Beth Hammack amongst others. Hammack and Kashkari dissented at the April meeting over the easing bias and it will be interesting to hear more about it.

Consumer inflation rose 0.6% MOM and 3.8% YOY, while the core rate rose 0.4% MOM and 2.8% YOY. The headline number moderated from March’s 0.9% increase. Higher energy prices drove the jump. Interestingly, the index for shelter jumped from 0.3% to 0.6%. We saw home price inflation rebound in the Clear Capital Home Data Index in the same month, so perhaps home prices are rebounding. This will be something to watch. Used car prices fell.

The headline number was in line with expectations, while the core rate came in slightly hot.

Existing home sales rose 0.2% MOM in April, according to the NAR. “Despite mixed macroeconomic signals—including a record-high stock market and historically low consumer confidence—home sales were modestly boosted by the continued improvement in housing affordability,” said NAR Chief Economist Dr. Lawrence Yun. “Mortgage rates are lower from a year ago, and average income growth is outpacing home price gains.”

“Inventory still remains tight,” Yun added. “Multiple offers, though not as intense as a few years ago, are still occurring. At the same time, days on market are lengthening on average, implying that consumers are taking their time before making decisions.”

“The increase in second-home purchases reflects stronger finances among higher-income households, as well as the post-COVID rise in remote work and hybrid job schedules.”

There were 1.47 million units for sale at the end of the month, which represents a 4.4 month supply. The median home price rose 0.9% YOY to $417,700.

Problems continue in the private credit space. FS KKR Capital, a KKR-sponsored private credit fund reported a big drop in NAV, and KKR is injecting $300 million into the fund to stem losses.

Small Business Optimism barely budged in April, according to the NFIB. The uncertainty index declined, although it did it the wrong way – by businesses determining it is not a good time to expand. The employment index fell, as did capital expenditures. Inflation rose.

Economic growth picked up in the first quarter, posting 2% growth
after less than 1% in the fourth quarter of 2025. The driver was capital spending, as AI investments surged. Government spending added a little oomph; consumers stayed in the weeds. Job creation was a bit better, but the unemployment rate stayed the same. Powell conducted his last meeting as Fed chair. President Trump wants the new chair to cut interest rates, but the rest of the Federal Open Market Committee is unlikely to comply. Indeed, some on the Fed Board favor a rate increase to prevent the AI spending and higher energy prices from pushing inflation higher. This is a tough balancing act.

In April, when more small business owners reported paying higher interest rates on their loans, the market raised those rates, not the Fed. The frequency of price increases for goods and services also rose, adding more to inflationary pressures. The percent making capital outlays is down nine percentage points so far this year; there doesn’t appear to be an AI investment surge on Main Street. With the April 15 Tax Day behind us, the benefits of the OBBB should start to feed into the private sector, and perhaps capital spending will respond later in the year as owners sort out the actual changes in the bill. Corporate profits are booming and the stock markets are hitting records, so hopefully Main Street will follow. But consumers have been “quiet”; sales are lagging, and hiring is weak. Consumer and Small Business Optimism are weak. Many uncertainties remain unresolved, but this process will likely get underway over the next few months.

Stocks are higher this morning on continued optimism for a deal with Iran. Bonds and MBS are up.

Home prices rose 0.6% on a quarterly basis and 1.9% on an annual basis according to the Clear Capital Home Data Index. The quarterly number rebounded from a decline in March and indicates that the real estate market could be rebounding. The hip to be square trade continues, with the Northeast and Midwest seeing the fastest growth while the South and West lag. The top spots for growth were Rochester NY, Providence RI and Birmingham.

The private sector added 109,000 jobs in April according to the ADP Employment Survey. This was above the 85,000 consensus estimate and the 63,000 estimate for Friday’s jobs report. “Small and large employers are hiring, but we’re seeing softness in the middle,” said Dr. Nela Richardson, chief economist, ADP. “Large companies have resources to deploy, and small ones are the most nimble, both important advantages in a complex labor environment.”

Education / health services added 61,000 jobs while trade / transportation and utilities added 25,000. Professional / business services lost 8,000. Pay growth for job stayers moderated to 4.4%. Pay growth for job changers came in at 6.6%.

UWM reported earnings of $0.08 per share for the fourth quarter and $0.12 for the full year. Origination volume rose 28% YOY to $49.6 billion. Gain on sale margins rose to 122 basis points. UWM is bringing servicing in-house for cost and recapture reasons and launched a tender offer for Two Harbors. CEO Mat Ishbia is optimistic about the market in general: We’re very optimistic on the mortgage and housing industry. There’s a big tailwind behind all of us. A lot of it’s tied to the market, but the administration HUD, FHFA, Treasury, all these leaders in the country and in our industry are trying to find a way to help affordability and lowering rates to help more consumers.” The conference call was brief and the company took no questions from the Street.

Announced job cuts rose 38% in April according to the Challenger and Gray Job Cut report. “Technology companies continue to announce large-scale cuts and are leading all industries in layoff announcements. They are also often citing AI spend and innovation. Regardless of whether individual jobs are being replaced by AI, the money for those roles is,” said Andy Challenger, workplace expert and chief revenue officer for Challenger, Gray & Christmas.

Stocks are higher this morning on optimism for a resolution in the Persian Gulf. Bonds and MBS are up.

Trump posted on Truth Social last night that he was pausing “Operation Freedom” which would use US Navy vessels to escort shipping through the Strait of Hormuz, citing “great progress” on a deal. Apparently the two sides are close on a 1 page, 14 bullet point memorandum of understanding which would re-open the Strait.

New home sales rose 7.4% MOM and 3.8% YOY to a seasonally adjusted annual rate of 682,000 units. Housing inventory was 481,000, which represents a 8.5 month supply at current levels. Buyers have the upper hand in the new home market, which was confirmed in the numbers reported by the homebuilders.

The median sales price fell 6.2% YOY to $387,400. This is below the median existing home sale price of $408,800. First time homebuyers might want to take a look at new homes. Especially if the builder can give you a 5% mortgage.

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PennyMac reported originations of $37 billion in the first quarter, an increase of 28% on a YOY basis. Gain on sale margins increased to 86 basis points from 68 bps the year before.

Job openings fell to 6.88 million in March, according to BLS. Openings in professional and business services fell 318k, however hiring increased in that sector. The quits rate increased to 2% after falling briefly to 1.9% in February.

Mortgage applications fell 4.4% last week as purchases fell 4% and refis fell 5%. “The ongoing conflict in the Middle East continues to push rates higher. Mortgage rates last week increased to their highest level in a month, with the 30-year fixed rate rising to 6.45%,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “As expected, elevated rates and shrinking refinance incentives continued to weigh on activity, with refinance applications declining again from the prior week – most notably for conventional and VA loans. The refinance share of applications was the lowest since August 2025.”

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up small.

The UAE reported that it intercepted some Iranian missiles, which means the ceasefire is probably running on fumes at this point. Iran is also making noise about having “not begun yet” to close the Strait of Hormuz. So far the Trump administration has stopped short of saying the ceasefire is over but it appears hostilities will begin again.

The Fed Funds futures took Neel Kashkari’s piece seriously about the potential for rate hikes. The December futures now see a nearly 30% chance for rate hikes this year and only a 6% chance of a rate cut.

NY Fed President John Williams made numerous references to 5/4 as Star Wars Day yesterday in his speech “There Is No Try.”

Right now, the future is difficult to see, and the risks to both sides of our mandate have increased. The extent and duration of the effects of supply disruptions and higher energy prices that are emanating from the Middle East conflict are key factors that will shape the global economic outlook. We simply can’t know how this will play out. Market expectations of the future path of oil prices are fairly benign, but several plausible scenarios entail more severe dislocations in both prices and quantities.

Because the global economy is highly integrated, the emerging supply-chain issues will have wide-ranging consequences. For example, Asian countries that play a key role in the supply of high-tech equipment are particularly exposed to shortages of various commodities. Thus, the conflict could result in a larger and broader-based supply shock that has more severe adverse consequences for inflation and economic activity.

To paraphrase our Jedi master, “Much to learn we still have.”

Interestingly he expects the pass-through of tariffs to current prices will be played out in the next few months. He did not appear to reference the fact that they will expire across the board in about 5 weeks. This means that not only will the price hikes be finished, but prices will begin to decline as tariffs disappear. It sounds like the absence of tariffs is not being factored in here. Not sure why.

Remember Gamestop, the short squeeze darling of the COVID years that was on death’s doorstep? They put out a bear hug letter for Ebay, valuing the much larger company at $56 billion or $125 a share in cash and stock. Gamestop has $9 billion in cash and a “highly confident” letter from TD Bank that it can raise the rest. Note that banks don’t put out “highly confident” letters if they are highly confident they can do the deal. They make a commitment.

Gamestop has a market cap of $10.6 billion and has $4 billion in zero coupon debt. It seems to be in the crypto trading business as well, with a side hustle as a video game retailer. Ebay stock is trading at a big discount to the $125 bid so it is clear no one takes it seriously. Gamestop stock got hammered yesterday, falling 10%.

Gamestop has been buying Ebay stock already, so the goal is put Ebay in play, hopefully smoke out a real buyer, flip the stock it owns and move on to something else. Gamestop CEO Ryan Cohen, who draws no salary and is compensated solely on Gamestock’s stock performance is trying to turn the company around, and has had some success.

This one will be fun to watch.