The Daily Tearsheet

Stocks are lower this morning amidst issues in the private credit space. Bonds and MBS are up small.

Personal Incomes rose 0.3% MOM in December and spending rose 0.4%. The headline PCE Price Index rose 0.4% MOM and 2.9% YOY. Excluding food and energy, the index rose 0.4% MOM and 3.0% YOY. These numbers were a touch above expectations, but the data is quite old, so the bond market is taking it in stride. Durable goods inflation rose 0.5% and food rose 0.4%, which were offset by declines in energy.

Fourth quarter GDP rose 1.4%, according to the BEA. This number was way below expectations. The Street was looking for 2.8%, and the Atlanta Fed GDPNow model was at 3%. Government spending was a drag on growth, driven by the shutdown.

On an annualized basis, consumption was up 2.4%, investment rose 3.8%, government spending fell 5.1%, and the trade balance was more or less flat. I suspect we will see a rebound in government spending in the first quarter which will boost the numbers.

The Trump Administration reportedly sent a memo to Congressional representatives, laying out more info on his plan to limit institutional investment in single family homes. His plan would prevent institutions that own more than 100 homes from buying more. The 100 home limit was much lower than forecast – the thought was that he would limit it to 1,000. This would presumably affect single family housing REITs like American Homes 4 Rent and Invitation Homes along with funds by companies like Blackrock.

The plan would include an exemption for companies that build or rehab homes for rent. The House passed a bill that didn’t include the investor ban, however the Senate is still working on one. The White House hopes to insert the ban into the Senate bill. “The President has made it clear that he is committed to signing legislation that truly makes purchasing a home affordable again, and a key ingredient is his popular proposal to ban large institutional investors from purchasing single-family homes,” White House spokesman Davis Ingle said.

Since the bill wouldn’t force institutional investors to sell their holdings my guess is that it probably won’t increase the supply of existing homes on the market much. It will probably encourage more homebuilding in general since that will be the only way for these companies to grow.

The Index of Leading Economic Indicators declined by 0.2% in December according to the Conference Board. “The US LEI registered its fifth consecutive monthly decline in December, indicating continued softness in the economy in early 2026,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “Alongside a rise in building permits, positive contributions to the LEI in December were led by the index’s financial components, with the yield spread notably turning positive in both November and December.

“However, persistently weak consumer expectations indicators and the ISM® New Orders Index made the largest negative contributions to the LEI in December. Labor market data also weighed on the Index, with an increase in unemployment claims and a decline in average weekly hours in manufacturing. Overall, the LEI signals weaker economic activity at the start of this year. The Conference Board projects a slowdown in growth in Q4 2025 and early 2026, with GDP set to expand by 2.1% YOY in 2026, from a forecasted 2.2% in 2025.”

Stocks are flattish this morning as tensions rise with Iran. Bonds and MBS are down.

The minutes of the January FOMC meeting were released yesterday, and they showed the Committee was generally comfortable with the current status of monetary policy. They noted the general push-pull in inflation between goods and services and view the recent softening of the labor market as over. They believe that inflation will continue to work its way towards the 2% objective and the labor market will gradually improve.

On inflation:

Regarding the outlook for inflation, participants anticipated that inflation would move down toward the Committee’s 2 percent objective, though the pace and timing of this decline remained uncertain. Participants generally expected that the effects of tariffs on core goods prices would likely start to diminish this year. Several participants remarked that the ongoing moderation in inflation for housing services was likely to continue to exert downward pressure on overall inflation. Several participants also expected higher productivity growth associated with technological or regulatory developments to put downward pressure on inflation.

On the labor market:

With regard to the labor market, participants observed that the unemployment rate had held steady, on net, in recent months, while job gains had remained low. Most participants noted that recent data readings such as those for the unemployment rate, layoffs, and job openings suggested that labor market conditions may be stabilizing after a period of gradual cooling. Almost all participants observed that while the level of layoffs remained low, hiring remained low as well. Consistent with that observation, several participants noted that their business contacts continued to express caution in hiring decisions, reflecting uncertainty about the economic outlook and the effect of AI and other automation technologies on the labor market.

It is important to note that perceptions and reality of inflation differ. Take for example housing services inflation. Housing services inflation indicators like owners equivalent rent are huge components of the inflation indices, but consumers (and voters) notice the level of prices, not the rate of change of prices. So while average asking rents have been declining for years, telling consumers that doesn’t erase the fact that they are expensive and that is what consumers feel.

The Fed is correct that tariff-driven inflation is probably over. We are coming up on the anniversary of Liberation Day and once that happens, all of the year-over-year comparisons of pre and post tariffs disappear. Not only that we have had enough time for corporations to make adjustments to lower-priced internal sources. That will again help the inflation numbers, but it probably won’t do much for consumer sentiment.

The FOMC considers the current Fed Funds rate to be in the upper range of neutral policy, which means they think they are close to r-star. That is probably correct, however r-star is thought to be in the 3% to 3.5% area. Bottom line is the Fed Funds futures are probably about right, and we see two more cuts this year.

The military buildup in the Middle East is starting to affect the data as well. Oil prices are spiking in anticipation of military action with Iran. That said, it sounds like Trump is looking for a deal, not a war, with Katherine Leavitt saying “Iran would be very wise to make a deal.” By now, the world should be used to Trump’s initial negotiating bluster followed by concessions to get a deal.

Industrial production rose 0.7% MOM in January according to the Federal Reserve. This was well above the 0.4% estimate. Manufacturing production rose 0.6%, again above the 0.2% estimate. Capacity utilization declined to 76.2%.

Initial jobless claims declined to 206k last week.

Stocks are higher this morning as tech stocks rebound. Bonds and MBS are flat.

Building Permits rose 4.3% MOM in December according to the Census Bureau. This is down 2.2% on a YOY basis. Housing starts rose 6.2% on a MOM basis but fell 7.3% on a YOY to a seasonally adjusted annual rate of 1.4 million units. Housing completions were flat on a YOY basis at 1.5 million.

Homebuilder sentiment decreased in February according to the NAHB Housing Market Index. “Builders reduced their expectations for future sales as buyers report affordability challenges, which is contributing to declining consumer confidence for the overall economy,” said NAHB Chairman Buddy Hughes, a home builder and developer from Lexington, N.C. “While the majority of builders continue to deploy buyer incentives, including price cuts, many prospective buyers remain on the sidelines. Although demand for new construction has weakened, remodeling demand has remained solid given a lack of household mobility.”

“Housing affordability remains an ongoing challenge at the start of 2026,” said NAHB Chief Economist Robert Dietz. “The solution for the housing market is the enactment of policies that will bend the construction cost curve and enable additional supply of attainable housing. On the positive side, easing inflation should continue to allow lower interest rates for mortgages and builder loans.”

It sounds like supply isn’t the problem these days, with the builders cutting prices and the supply of unsold new homes at the highest levels since 2008. Approximately 36% of builders cut prices and the average cut was 6%.

The Federal Reserve wants to encourage banks to originate more mortgages. Michelle Bowman spoke at the American Bankers Association conference and discussed the Fed’s concern that mortgage origination and servicing is being handled mainly by nonbanks. In 2008, about 60% of mortgage origination was coming from the banking system, and today it is around 35%.

The Fed believes that banks have an inherent advantage in mortgage servicing and recognizes that the regulators may have overshot in the risk weightings and capital requirements for servicing rights. Essentially the amount of capital that banks were required to hold for servicing rights made servicing a non-economic business for banks. If you were in the mortgage business in 2012 and 2013, you could buy servicing for a song as banks unloaded them.

The other measure that the Fed is considering is changing the way banks set aside capital for mortgages. Under the current situation a mortgage is a mortgage is a mortgage. The regulatory and capital requirements don’t distinguish between a 95% LTV loan and a 60% LTV loan. The Fed looks like they will introduce for comment some sort of formula to ease capital requirements.

Of course regulatory timelines are long and there are comment periods etc. The big question for the banks is whether holding mortgages originated in-house meets the opportunity cost test. Ultimately this should be good for borrowers, although we might see a tightening of margins as more competition enters the space.

Fed Governor Michael Barr said the Fed is on hold for the moment and doesn’t feel a need to keep cutting rates. “Based on current conditions and the data in hand, it will likely be appropriate to hold rates steady for some time as we assess incoming data, the evolving outlook, and the balance of risks,” Barr said in a speech given before a gathering of the New York Association for Business Economics in New York.

Mortgage applications rose 2.8% from a week ago according to the MBA. Refis rose 7% and purchases increased 3%. The Spring Selling season is upon us and we stand the cusp of a mini refi boom as mortgage rates work their way below 6%.

“Mortgage applications rose last week as the lowest rates in four weeks helped to revive some refinance activity. Treasury yields ended the week lower as weaker data on retail sales and home sales outweighed better-than-expected readings on the job market for January,” said Joel Kan, MBA’s vice president and deputy chief economist. “Mortgage rates moved lower with the 30-year fixed rate decreasing to 6.17%, and all other loan types in the survey also declined. Refinance applications increased across all loan types, marking the strongest week for refinancing since mid-January. There was a drop in purchase applications overall, although VA purchase applications bucked the trend and increased 4%.”

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Stocks are lower this morning as investors return from a 3 day weekend. Bonds and MBS are up.

The week ahead will be dominated by the personal incomes and outlays report on Friday which contains the PCE Price Index – the Fed’s preferred inflation gauge. We will also get the first estimate for Q4 GDP, along with housing starts, leading indicators and a few other reports.

We also get the FOMC minutes on Wednesday along with some Fed speakers.

Chicago Fed President Austan Goolsbee said that interest rates could fall further if inflation hits its 2% goal. “If we could get some more improvement on the inflation side, I think rates can still keep going down a fair bit more, but we just need to see the progress on inflation,” Goolsbee said in an interview with Yahoo Finance. “And we need to see that the job market remains steady like it has been for a couple of months here.”

Not sure what a “fair bit more” means, and the comment about the labor market is strange. I guess he means if unemployment doesn’t work its way lower and inflation gets closer to the 2% target the Fed can cut rates further. Ultimately the labor market’s low hire / low fire status might look good on the headline numbers, but consumers are edgy and the sentiment indices indicate people feel like their job situation is rather tenuous.

Homebuilder TriPointe Homes is being taken over by Japanese company Sumitomo Forestry. “For more than 20 years, Sumitomo Forestry has consistently invested in locally led builders across the U.S. homebuilding industry, with one of its stated strategic pillars being the continued expansion of the number of homes the Company delivers to U.S. homebuyers. Upon completion of the transaction, Sumitomo Forestry expects to make meaningful progress toward its long-term vision Mission TREEING 2030 target of 23,000 annual U.S. home sales. Over its 17-year history as a U.S. homebuilder, Tri Pointe Homes has delivered over 58,000 housing units to U.S. homebuyers and continues to increase its volume of annual home deliveries with more than 6,400 in 2024, further strengthening Sumitomo Forestry’s position in key growth geographies. Together, the companies are committed to delivering sustainable, high-quality housing while increasing the supply of new homes for families across the U.S.”

Tri Pointe is being taken over at just under 14x expected 2025 EPS, which is a high multiple for an industry as cyclical as homebuilding. With President Trump talking about concentration in the building space (a specious argument if you ask me) the merger timing expectation (Q226) doesn’t anticipate any sort of lengthy antitrust review.

I guess it makes sense to start seeing consolidation in the homebuilding space. Typically the builders are an early-stage cyclical business, which means they are the first stocks to recover coming out of a recession. The interesting thing here is that for all the focus on a lack of supply and affordability issues, the physical inventory of single family homes for sale is close to the highs seen in 2008 as the real estate bubble was bursting.

With the builders sitting on inventory, some may become worried about financing it – unsold lots cost a lot of money to carry – and might also look to sell out.

Stocks are lower this morning on no real news. Bonds and MBS are up.

The Consumer Price Index rose 0.2% MOM and 2.4% YOY in January, which was below expectations. The core index which excludes food and energy rose 0.3% MOM and 2.5%, in line with expectations. Shelter rose 0.2% MOM and had the biggest impact on the inflation number. On a YOY basis, the index for shelter was up 3.0%.

Big increases were noted in utility gas services which rose 1.0% MOM and 9% YOY. This was offset by big declines in gasoline. It is strange to see refined products drop in price while the services part increases. My guess is this is weather-driven. Other notable increases was restaurants and medical services. Used cars declined.

Existing home sales fell 8.4% in January to 3.91 million. This was down 4.4% compared to a year ago. Weather was probably a big factor in the decrease, especially out East. “The decrease in sales is disappointing. The below-normal temperatures and above-normal precipitation this January make it harder than usual to assess the underlying driver of the decrease and determine if this month’s numbers are an aberration,” said NAR Chief Economist Dr. Lawrence Yun. “Affordability conditions are improving, with NAR’s Housing Affordability Index showing that housing is the most affordable it’s been since March 2022. This is due to wage gains outpacing home price growth and mortgage rates being lower than a year ago. However, supply has not kept pace and remains quite low.”

“Due to low supply, the median home price reached a new high for the month of January,” Yun added. “Homeowners are in a financially comfortable position as a result. Since January 2020, a typical homeowner would have accumulated $130,500 in housing wealth.”

The median home price was more or less flat YOY at $396,800. Affordability improved.

Delinquencies popped in the fourth quarter according to the MBA. FHA DQs were up big. “Mortgage delinquencies increased across all three major loan types – Conventional, FHA, and VA – in the last three months of the year,” said Marina Walsh, CMB, MBA’s vice president of industry analysis. “The most pronounced uptick was with FHA loans, which reached a delinquency rate of 11.52%, the highest level since the second quarter of 2021. While earlier-stage FHA delinquencies remained relatively flat compared to the previous quarter, later-stage, 90+ day delinquencies increased by 76 basis points. The FHA foreclosure inventory rate also grew to the highest level since the first quarter of 2020.”

Added Walsh, “The fourth quarter results may have been impacted by the expiration of pandemic-era, FHA relief options as well as disparities in the labor market – a key determinant of mortgage delinquency levels.”

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

Investment grade Corporate credit spreads hit a 27 year low in January, while junk bond spreads are at an 18 year low. Credit spreads represent the increased yield over risk-free debt that investors require. It is a measure of risk / reward and at the moment it seems investors are comfortable taking more risk for less reward.

For all the consternation in the media about a flight from the dollar, that the US will lose reserve currency status, Trump’s destruction of international norms, etc. we aren’t seeing much evidence of that in global appetite for US corporate debt. Part of it is due to the fact that on an inflation and yield basis the US dollar is in a lot better place than, say the Euro.

How does this affect the mortgage space? The most obvious one is non-QM, which has been seeing incredible growth over the past 5 years. Money is flooding into the space and it seems that every day I get a email from some new DSCR wholesaler looking for paper.

The market for non-QM remains robust despite fraud issues in Baltimore in Philly and the general carnage we are seeing in Florida. MBS spreads are still normal on a historical basis, so perhaps there is more room for tightening there.

Kansas City Fed President Jeff Schmid spoke yesterday about monetary policy and the different flavors of growth. Essentially if growth is being driven by capacity increases or productivity, that is much more robust than growth that is driven by a spike in demand without any corresponding increase in supply. Productivity growth in the third quarter of 2025 was higher than any quarter between 2010 and 2019. The low churn labor market (low hire / low fire) may increase productivity further as employees gain skills and become more efficient. That said, he is still hawkish:

The job of monetary policy is to keep inflation near 2% and the labor market at full employment. With demand outpacing supply and inflation running closer to 3% than 2%, I see it as appropriate to maintain a somewhat restrictive policy stance. Restrictive monetary policy can help slow demand growth, giving supply time to catch up and alleviate inflationary pressures.

With the cumulative rate cuts carried out since 2024, the federal funds rate is now well off its post-pandemic high and arguably no longer restraining activity all that much, if at all. As I’ve said before, I think it is best to judge whether interest rates are restrictive or accommodative based on how the economy performs. With growth showing momentum and inflation still hot, I’m not seeing many indications of economic restraint.

Mortgage credit increased in January according to the MBA. “Mortgage credit availability increased in January, as lenders broadened their offerings of ARM loans, cash out refinances, and loans on second homes. Most of these require lower LTV and higher credit scores,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The beginning of the year is typically when lenders start to position themselves for the spring homebuying pick up, and recent dips in mortgage rates have provided windows of refinance opportunities, including refinances into ARM loans. Jumbo credit availability expanded almost 3 percent over the month, with the growth in supply of both jumbo and non-QM loan programs.”

Stocks are higher this morning after a decent jobs report. Bonds and MBS are down.

The economy added 130,000 jobs in January, according to the BLS. November and December payrolls were revised downward by 17,000. The unemployment rate fell to 4.3%. Average hourly earnings rose 0.4% month-over-month and 3.7% YOY. Health care, social assistance and construction accounted for the majority of the job gains, while financial activities and government declined.

The number of employed people increased by 528k, while the number of unemployed people fell by 141k. Those not in the labor force fell by 221k. This pushed up the labor force participation rate and the employment-population ratio.

The initial reaction in the bond market was a 7 basis point spike in yields. A March rate cut is looking highly unlikely. The Employment Cost Index rose 0.7% on a quarterly basis and 3.4% YOY.

Dallas Fed President Laurie Logan said she is cautiously optimistic that if the labor market remains stable no further rate cuts are needed. “If so, this would tell me that our current policy stance is appropriate and no further rate cuts are needed to achieve our dual mandate goals,” Logan said in remarks prepared for delivery in Austin, Texas. If instead inflation falls but the labor market cools materially, “cutting rates again could become appropriate. But right now, I am more worried about inflation remaining stubbornly high.”

Mortgage applications fell 0.3% last week as purchases decreased 2% and refis rose 1%. “Mortgage applications were relatively flat over the week, but it was a mixed bag for the different loan types. The 30-year fixed rate was unchanged at 6.21 percent, and conventional applications declined for both purchases and refinances as borrowers held out for another drop in rates or shifted to other loan types,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “FHA purchase and refinance applications increased, helped partially by the FHA rate declining and remaining 20 basis points lower than the conforming 30-year fixed rate.”

Mortgage delinquencies declined 16 basis points last month, while foreclosure starts rose 54% (probably seasonality). Foreclosures are up 27% on a YOY basis, but still below pre-pandemic levels. Foreclosure activity is being driven primarily by FHA.

We are seeing refi activity pick up as mortgage rates move lower. If mortgage rates fall to 6.0%, 5.5 million borrowers are in the money for a refi. At 5.875% that number jumps to 6.5 million. We are on the cusp of a refi wave if rates cooperate.

Stocks are flattish this morning on no real news. Bonds and MBS are up.

Small business optimism fell slightly in January according to the NFIB Small Business Optimism Index. Most subindices were unchanged, however we saw some improved optimism about future sales. That said, the uncertainty index also rose, which is a negative for sentiment. Employment fell slightly, capital spending rose, and compensation rose. Prices are still elevated, although inflation moderated.

NFIB Chief Economist Bill Dunkelberg discussed the disconnect between the official GDP numbers and sentiment:

“According to the official statistics, the economy is performing well. GDP is rising smartly while inflation remains relatively low and stable, as does the unemployment rate. Focusing on GDP, the economy is flying. A 4.2% gain in the latest release (Q3 2025) suggests we are in the middle of a boom. But meanwhile, small business owners aren’t “feeling the gain,” or at least not at that level of economic growth.

The NFIB Small Business Optimism Index hovers just above its historical average. The new Employment Index tells a similar story, with numbers just above their historical average, suggesting a balanced labor market, not a booming one. The official statistics show one story of the economy and small businesses show a more moderated one.

The “confusion” stems from the details of what GDP really means. This includes consumer spending, government purchases of goods and services, and investment (the creation of new productive assets). For example, new data center construction is booming to support AI growth. As such, one sector could be taking off, while most of the economy is more balanced. Major investment-led growth of one sector is not necessarily shared, and especially not right away. Bottom line, GDP growth is strong, but not equally distributed across the economy. Let’s see if 2026 brings more balance to these trends.

Dunkelberg’s point about GDP and vibes is important. While left econ will focus on the K-shaped economy, I come back to the concept of “junk GDP.” GDP is consumption, government spending, investment and the trade balance. Some components impact the general mood more than others. Consumption is the biggest part of GDP and that is generally associated with good vibes. When consumers are feeling flush and spending money the economy feels good. While the latest GDP numbers have been strong, they have been driven primarily by the trade balance, which means higher exports and lower imports. These measures have limited impact on the typical US citizen.

Investment generally increases jobs, so that is another impactful component. Government spending has less of an impact. Finally even consumption isn’t uniform: increased consumption of discretionary goods are associated with good vibes, while increased consumption of non-discretionary goods (food, gasoline, etc.) is not.

Retail Sales for December were flat on a month-over-month basis and rose 2.4% YOY. This was below expectations. The retail sales number is not adjusted for inflation, so if you subtract off the inflation rate of ~ 3%, real retail sales were down on a YOY basis. Autos and home furnishings saw the biggest YOY decreases.

The December retail sales number should drag down GDP estimates for Q4. It will be interesting to see what numbers the retailers put up in a few weeks.

Stocks are higher this morning on no real news. Bonds and MBS are down small.

The week ahead will have some big data reports with the Employment Situation on Wednesday and the Consumer Price Index on Friday. We will also get retail sales and existing home sales. We will also get plenty of Fed speakers as well.

The Super Bowl was last night, and that means the Spring Selling Season is unofficially underway. Buyers are in a much better position than they have been in years, however affordability remains a constraint. NAR expects existing home sales to rise 14%, which would imply something like 4.6 million units. Much will depend on mortgage rates continuing to work their way downward.

Consumer confidence improved in February, according to the University of Michigan Consumer Sentiment Survey. Most of the increase was driven by the stock market. Given the recent sell-off, it probably is a case of easy come, easy go. Concerns about the labor market continue.

Year-ahead inflation expectations slipped from 4.0% to 3.5%. This is the lowest reading since January 2025. Long-term inflation expectations increased from 3.3% to 3.4%.

Bloomberg reported that the Trump Administration is considering an antitrust investigation into the homebuilders, which caused their stocks to fall on Friday. On the face of it, the concept that the big publicly-traded homebuilders have any sort of monopoly market power to set home prices is dubious at best. The latest pace for new home sales in 2025 was 737k, according to the October new home sales report. Pulte delivered just under 30k homes in 2025. D.R. Horton sold just under 85,000 and Lennar sold 82,000 homes. If you calculate the Herfindahls (a measure of market concentration) you will conclude the homebuilding market is highly fragmented, not concentrated. The antitrust attorneys at DOJ are probably thinking “you have 4 health insurers which control the entire US healthcare system and you are worrying about this?” Given that the antitrust angle is largely a farce, this is Trump putting pressure on the builders to do something about housing affordability.

Speaking of housing affordability, the House is expected to vote on a package to help ease affordability with higher loan limits for multifam, support for construction and rehab loans, along with some other measures. The program is bipartisan, so it should pass.

Cotality noticed an uptick in fraud risk in the fourth quarter of 2025. “The percentage of refinances in the Cotality data set has increased year-over-year by 19%, yet the Fraud Index is up 1.5% over that time. This is significant because historically, refis bring a much lower risk of fraud than purchases,” said Matt Seguin, Cotality Mortgage Fraud Solutions senior principal. “The two riskiest segments of the fraud index, investment properties (+34%) and multi-unit properties (50%), have jumped significantly over the last year as a portion of the overall application volume seen by Cotality. The increase in volume in these two segments has led to a slight increase in the Fraud Risk Index. This change seems to have been driven, at least partially, by the surge in popularity of the DSCR loans.”   

Given the issues we have seen in Baltimore and Philly lenders should take close look at appraisals and ensure that any big increases in appraised value are documented.

Stocks are rebounding after a tough week in the markets. Bonds and MBS are down small.

Job openings fell to 6.5 million at the end of the year, according to the JOLTS job openings report. This is down 386k from November and just under a million for 2025. Professional and business services saw the biggest decline, dropping about 360k on a YOY basis. Manufacturing was flat, despite fears about the tariffs. Education and health services also had a sizeable decline. The quits rate was flat at 2.0%.

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Home price appreciation decelerated in January, according to the Clear Capital Home Data Index. The index declined 0.6% on a quarterly basis and rose only 1.7% on an annual basis. The Northeast was the only bright spot, with the South, Midwest and West showing quarterly declines. The New York City MSA took the top spot with prices rising 1.0% on a quarterly basis and 5.8% annually.

The laggards include a list of MSAs that were red-hot just a few years ago: Denver, Raleigh, Seattle, Nashville, etc. The hip-to-be-square trade continues.

Pennymac Financial Services stock got hammered on earnings last week, falling 38% over two days after releasing earnings. Production was up 10% on a YOY basis, lower than other companies but not terrible.

What was the issue with Pennymac? Prepays. The MSR portfolio exhibited higher than expected “realization of cash flows” which means loans were paying off faster than expected.

Mortgage companies had historically valued conventional mortgage servicing rights around 4 times the expected cash flow, however in the past few years, valuations have increased to the 5-6 range as companies accounted for potential recapture profits.

Recapture means what it sounds like – that if the company refinances its own MSR that potential p/l has some value. While Pennymac is complicated with its structure of two companies – PMT and PFSI – this stock behavior should serve as a shot across the bow for MSR valuations. If the loan prepays and you don’t get the refi, then a multiple over 5 simply doesn’t make sense.