The Daily Tearsheet

Stocks are higher despite oil rising above $100 a barrel again. Bonds and MBS are up.

The week ahead will be dominated by the jobs report on Friday. We will also get job openings, ISM data, consumer confidence and home prices. We will also have a slate of Fed Speakers, including Jerome Powell on Monday.

Consumer sentiment declined in March, according to the University of Michigan Consumer Sentiment Survey. The index fell 6% to the lowest level since December 2025, due to the fallout from the war in Iran. “These patterns suggest that, at this time, consumers may not expect recent negative developments to persist far into the future. These views are subject to change, however, if the Iran conflict becomes protracted or if higher energy prices pass through to overall inflation.”

Year-ahead inflationary expectations increased from 3.4% to 3.8% while longer-run expectations fell to 3.2%.

Private credit’s exposure to the software sector is bigger than advertised according to research from the Wall Street Journal. Valuations in this SaaS sector have been taken down dramatically over fears that AI will upend their business model.

Many of these funds have put up gates, which restrict the amount investors can withdraw because the underlying investments are illiquid or unsaleable. The funds are massaging their sector definitions in order to minimize perceived exposure.

The risk to folks in the mortgage industry is largely non-QM as some of the ultimate buyers of non-QM paper have exposure to software. Credit problems have a habit of spreading, and non-QM’s proximity means it would be impacted. Any impact on conventional lending would be de minimus and could potentially be positive.

The bidding war between Cross Country Mortgage and United Wholesale over Two Harbors is over, with Cross Country winning. Two Harbors has entered into a definitive merger agreement with Cross Country, terminated its deal with United Wholesale and paid the termination fee.

Homes remain unaffordable in the first quarter, according to research from ATTOM. “Over the last several years, wages haven’t kept up with rising home prices in many markets,” said Rob Barber, CEO of ATTOM. “Mortgage rates dropped throughout last year, which offset some of that growing affordability gap, but shifts in the broader economic environment can still influence rates and home purchasing power.”

During the first quarter, mortgage rates generally declined, with the 30 year fixed rate mortgage falling below 6% before the war in Iran pushed up rates back towards 6.5%. Rising taxes and insurance costs are also impacting affordability. California and New York have the most unaffordable housing markets, while many of the most affordable are in Texas.

Stocks are lower this morning as hostilities continue in the Middle East. Bonds and MBS are down again.

Part of the problem in the bond market is being driven by fears of rate hikes in Europe. The German Bund yield (sort of the benchmark for Euro rates) is at a 15 year high. The move follows comments from ECB President Christine Lagarde that the Central Bank was prepared to raise rates if inflation spikes in response to the situation in Iran.

Note that we are seeing movement in the Fed Funds futures market. The December Fed Funds futures are handicapping a 51% chance that rates stay the same, and a 49% chance that the Fed hikes rates:

Fed Governor Michael Barr said that the Fed is in a good place with respect to monetary policy.

At the same time, a key concern right now is the trajectory for inflation. Separate from the effects of tariffs on goods inflation, nonhousing services inflation has also remained elevated. Core inflation, which excludes volatile food and energy prices and is a good guide to future inflation, likely was 3 percent in February, about where it was a year ago. The longer inflation remains above 2 percent, the greater the risk that it becomes entrenched in expectations, making it harder to achieve the FOMC’s goal.

Given the considerable uncertainty about the potential effects of developments in the Middle East on our economy, as well as the other factors I mentioned, it makes sense to take some time to assess conditions. Our current policy stance puts us in a good place to hold steady while we evaluate incoming data, the evolving forecast, and the balance of risks.

Prepay speeds and delinquencies increased in February, according to the ICE First Look. At the end of the month, 878,000 loans were seriously delinquent or in foreclosure, which is the highest level since June of 2022. This number is up 25% over the past 4 months. Foreclosure rates are coming off the pandemic-driven lows.

“February saw a clear rebound in prepayment activity, with speeds rising 14% month over month and 80% year over year as the wave of refinances triggered by lower rates in January reached closing,” said Andy Walden, Head of Mortgage and Housing Market Research at ICE. “Delinquencies also edged higher, driven by seasonal increases in early-stage delinquencies and a notable rise in seriously past-due loans, though overall delinquency rates remain below pre-pandemic levels. These dynamics bear watching in the coming months, as default activity continues to trend off recent record lows.”

DV01 reported a big increase in non-QM delinquencies. Total impairments were up 60 bps to 7.4%. Overall new DQs rose to 1.5%, while cure rates fell 180 bp to 20%. Payment made rates fell 160 bp to 42.4%.

Between the performance of NQM lending and the issues in the private equity market, the credit markets will not be amenable to an increase in rates.

Stocks are lower as the Iranian war drags on. Bonds and MBS are down.

Initial Jobless claims were flat at 210k last week.

President Trump has told aides that he wants to wrap up the Iran war in the next couple of weeks. Trump has a meeting with China in mid-May and wants the conflict resolved by then. He believes the conflict is in its final stages. Separately, Israel killed the Iranian Naval Commander responsible for blocking the Strait of Hormuz.

The situation in Iran is not helping prices. Import prices rose 1.3% in February after advancing 0.6% in January. Unsurprisingly energy prices drove the increase. Non-fuel import prices rose 1.1%, driven by increases in capital goods and food.

Export prices rose 1.5% in February, driven by capital goods and industrial materials.

14% of home sales fell through in February, according to research from Redfin. “Homes are falling out of contract left and right,” said Juan Castro, a Redfin Premier agent in Orlando. “Sometimes buyers make an offer but never send the deposit because they get nervous, sometimes they revisit numbers with lenders and don’t feel comfortable with the monthly payments, and other times they use a minor inspection issue as an excuse to back out. I’m also seeing buyers negotiate aggressively–for instance, maybe they ask for a brand-new roof because three shingles are missing on an otherwise perfectly good roof–then cancel the deal if the seller says no.”

Buyers have the upper hand these days and are backing out if they don’t like the results of an inspection. Oversupplied markets like Tampa and San Antonio are seeing the biggest number of cancellations.

Stocks are higher this morning on hopes of peace talks in Iran. Bonds and MBS are up.

The US issued a 15 point peace plan which calls for a 30 day ceasefire. Optimism over this plan is pushing down oil prices. While Iran and the US / Israel continue to be far apart, don’t forget that China needs Gulf oil and will increasingly lean on Iran to cut a deal.

Mortgage applications fell 10% last week as purchases fell 5% and refis fell 15%. Blame rising rates. “The threat of higher for longer oil prices continued to keep Treasury yields elevated, and mortgage rates finished last week higher. The 30-year fixed rate rose to 6.43%, more than 30 basis points higher than at the end of February and at its highest level since October 2025,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Given this period of increasing mortgage rates and diminishing refinance incentives, refinance applications decreased 15% as applications across all loan types declined. Purchase applications were also down last week, as higher mortgage rates, coupled with affordability constraints and economic uncertainty, pushed some potential homebuyers to the sidelines.

Business activity slowed to an 11 month low, according to the S&P Flash PMI. The war in Iran has increased uncertainty and rising energy prices aren’t helping things either. Input costs are rising, leading to the biggest jump since 2022.

“The flash PMI survey data for March signal an unwelcome combination of slower growth and rising inflation following the outbreak of war in the Middle East. Companies are reporting a hit to demand from the additional uncertainty and cost of living impact generated by the conflict. Travel, transport and tourism related issues are compounded by financial market jitters and affordability constraints, notably including concern over the impact of higher interest rates, surging energy prices and supply chain delays.

“The PMI data are indicative of GDP rising at an annualized rate of just 1.0%, with a modest 1.3% expansion signaled for the first quarter as a whole. The survey’s price gauges meanwhile point to consumer price inflation accelerating back to around 4%, hinting at a growing risk of the US moving into an environment of stagflation.”

Something to keep in mind about the Strait of Hormuz: not only oil is affected. Fertilizer prices are being pushed up as supply is choked off, and that will affect food prices. In the US, farmers import about 50% of urea fertilizer and stocks are 25% below normal. Nitrogen fertilizer has seen prices spike 40%. About a quarter of global nitrogen and LNG feedstock goes through the Strait. This will impact food prices, which is the last thing the US consumer needs.

The problems in the US are not only in commodity prices – the private credit issue shows the classic signs of a contagion according to ex-PIMCO chief Mohammed El-Arian. “The proliferation of such headlines increases the risk of what I call the ‘ATM’ scenario: investors forced to liquidate other healthy funds simply because they become the go-to source of available cash—even if those funds are fundamentally sound or operating in an entirely different asset class,” he wrote.

“It’s a classic contagion phenomenon: ‘If you can’t sell what you want, you sell what you can.'” He suggested that the problems we are seeing with Blue Owl and Apollo could be the “canary in a coal mine” like when BNP Paribas halted withdrawals in 2007, which is considered the precursor to the 2007 financial crisis.

Could we see another situation like 2008? I highly doubt it. 2008 was the end of a residential real estate bubble, which is not the case this time around. Yes, real estate prices are expensive compared to incomes, but the vast majority of residential real estate debt is Fannie and Freddie, which means it is guaranteed by the US Government. While there are non-QM DSCR loans out there, they are a very small fraction of the entire mortgage universe. The subprime and negative amortization (remember pick-a-pay loans?) are a distant memory.

Since the investors in DSCR and private credit play in the same sandbox, we could see some restriction of credit there, but it shouldn’t impact Fan and Fred lending. In fact, if the Fed senses that credit problems are spreading in the banking system, it will cut rates inflation be damned. This would cause the mortgage industry to de-emphasize non-QM loans and focus on easy rate / term refis.

Stocks are lower this morning as the Iranian war drags on. Bonds and MBS are up small.

Nonfarm productivity increased 1.8% in the fourth quarter as output rose 1.5% and hours worked decreased 0.2%. Unit labor costs rose 4.4%, driven by a 6.3% increase in compensation and a 1.8% increase in productivity. This was a substantial downward revision from the second estimate, driven primarily by an increase in unit labor costs.

The rise in labor costs is driven by rising compensation, which is generally a good thing but it won’t help the Fed with inflation. On the plus side, it does work at (slowly) attacking the affordability problem.

Construction spending fell 0.3% MOM in January according to the Census Bureau. It rose 1.0% on a YOY basis. Private residential construction fell 0.8% MOM and rose 2.3% YOY. Single family residential fell 0.2% MOM and 5.4% YOY. Multi fell 0.7% MOM and rose 0.2% YOY.

Chicago Fed President Austan Goolsbee said that monetary policy could go in either direction depending on what inflation does in the coming months: “We could be back to the environment with multiple rate cuts for the year, if inflation behaves. I could see circumstances where we would need to raise rates if it was going a different way and inflation was getting out of control,” Goolsbee said. He added that inflation is a bigger problem than the labor market: At the moment, I think inflation has got to be a little ahead of the employment.” Finally he is “fairly optimistic” that rates can move lower this year, although the war has “thrown a wrench into the plans.”

Stephen Miran is more dovish on rate cuts. “Looking 12 to 18 months out, there’s still not enough clarity to think that monetary policy itself should adjust in response to what has happened,” Miran said during an interview on Bloomberg Television. It’s still too early to conclude that the oil shock will bleed into inflation expectations, he added.

“If it looks like the oil shock is bleeding into inflation expectations beyond the first year, then you get really concerned about second-round effects,” he said. He’d also be worried if the shock appeared to cause a wage-price spiral.

Miran also drew a comparison between the oil shock when Russia invaded Ukraine and now. When Russia invaded Ukraine, monetary policy was highly accommodative: “That’s not the case right now. We’re not hitting the gas on demand that would interact with the higher oil price in a way that would reverberate through the economy right now. That’s not the case at all.”

The December Fed Funds futures see no further action out of the Fed as the most likely scenario, and are handicapping a 13% of 25 basis point increase in rates and 22% chance of a 25 basis point cut.

The private equity fund issue continues, with Apollo limiting withdrawals and paying out to investors about 45% of the capital they have requested. “Today’s decision reflects our ongoing commitment to long-term value creation for the Fund’s shareholders,” Apollo said. “As long-term stewards of capital, we have a fiduciary duty to act in the best interests of all Fund investors, balancing the interests of shareholders seeking liquidity with those who choose to remain invested.”

The private equity meltdown has the potential to spill over to the mortgage market, particularly the non-QM sector. Apollo has a lot of different funds, however it has been a big buyer of non-QM loans.

Mortgage REITs are generally a sleepy sector of the stock market. They are bought more for their high dividend yields than their stock price appreciation. Aside from moments of abject terror like the early days of COVID, they tend to be good additions for investors looking for yield. That is why it is unusual to see a bidding war for one.

Two Harbors is the subject of a 3 way bidding war between United Wholesale, Cross Country and an undisclosed third party. Two Harbors owns Roundpoint Servicing and a portfolio of agency RMBS and MSRs. The stock got caught up in the liquidity air pocket of 2020 with the whole sector and never really recovered. It does pay a fat dividend yield of 12.4%.

Stocks are higher on positive developments in the Middle East. Bonds and MBS are up.

The week ahead will be relatively data-light, with a revision to productivity and consumer sentiment. We will get plenty of Fed speakers.

President Trump told Iran he would postpone strikes on critical energy infrastructure for 5 days, citing progress in talks to re-open the Strait of Hormuz. Trump said earlier in a post on his Truth Social platform that the U.S. and Iran had “VERY GOOD AND PRODUCTIVE CONVERSATIONS REGARDING A COMPLETE AND TOTAL RESOLUTION OF OUR HOSTILITIES IN THE MIDDLE EAST.”

That said, Iranian state media denied it. “There is been no negotiation and there is no negotiation, and with this kind of psychological warfare, neither the Strait of Hormuz will return to its pre-war conditions nor will there be peace in the energy markets,” state media reported the official as saying.

Regardless of the back-and-forth we are seeing positive developments in the markets, with stocks moving higher, oil lower and are even seeing some signs of perkiness in the erstwhile dour bond market.

One of the surprises so far has been MBS spreads. MBS spreads are the difference in yield between mortgage backed securities and their correspondent Treasury rate. MBS spreads are a function of a lot of things, but their biggest driver is interest rate volatility. Despite the spike in Treasury yields, MBS spreads have moved up marginally, but not dramatically.

Bond market volatility is captured by the MOVE Index, which is published by ICE. Bond volatility has spiked in response to the Iranian situation. Both charts below cover the past 5 years, so you can see how they correlate and spikes in volatility will drive increases in MBS spreads.

What does this mean for rates? Lower mortgage rates are on borrowed time. They should be higher given what is happening in the bond market. It seems like MBS investors are looking through the situation in Iran and concluding that it will be short. If that proves to be incorrect, expect mortgage rates to move significantly higher. Conversely, if the situation in Iran ends as quickly as it started, don’t expect a huge move downward in mortgage rates because they never properly adjusted higher in the first place.

The Chicago Fed National Activity Index decreased in February, suggesting growth is slowing. The CFNAI is sort of a meta-index of 85 different indicators which look at production, employment, sales and consumption. In February, sales and production were generally flat, while employment was a negative contributor to the index. The February jobs report, which showed a decrease in payrolls explains the employment number.

Stocks are lower this morning as hostilities continue in the Strait of Hormuz. Bonds and MBS are flat.

New home sales fell 18% MOM and 11% YOY to a seasonally adjusted annual rate of 587,000 units. This was an inauspicious start to the 2026 season. Note that new home sales estimates have huge standard deviations, so you should take any big moves with a grain of salt.

There were 476,000 new homes for sale at the end of the month, which represents a 10 month supply. There are a lot of new homes for sale right now, and inventory (as represented by month’s supply) is higher than the long term average of around 6 – 7 months.

The Index of Leading Economic Indicators fell slightly in January, according to the Conference Board. “The U.S. LEI fell further in January, as consumer expectations retreated again and building permits softened,” said Justyna Zabinska-La Monica, Senior Manager, Business Cycle Indicators, at The Conference Board. “While the topline LEI continues to signal headwinds to economic activity, the strengths among its components on the six-month basis were widespread for three straight months (November 2025–January 2026), with 7 out of 10 components advancing. As the latest LEI data do not yet reflect the impact from war in Iran, The Conference Board revised GDP growth down by 0.1 ppt to 2.0% y/y for 2026, which will be lower than growth in 2025.”

Market indicators (stock market performance, credit spreads), were positive contributors, while housing and consumer confidence had negative impacts.

Home flipping profits are the lowest since the Great Recession, according to data from ATTOM. This is interesting because it seems a lot of capital is flowing into the RTL space. Last year, about 297k homes were flipped which was the lowest since 2020. The flipping business boomed in the aftermath of the Great Recession as a glut of undervalued properties hit the market. Now it is harder as inventory is more picked-over and margins are lower.

“Competition for homes remains strong in many markets due to constrained supply,” said Rob Barber, CEO of ATTOM. “With prices staying elevated, investors are finding it harder to secure deals that deliver strong returns.”

“Flippers are having to get more creative to maintain profitability,” he added. “That could include taking on older homes, as the median flipped property in 2025 was built in 1978, the oldest since we began tracking, along with tighter cost control and more disciplined renovation strategies.”

The MBA put out a statement of support for the proposed new Basel regulations for banks. The proposal would eliminate the harsh treatment of mortgage servicing rights, and also take a more nuanced approach to the required capital for mortgages in general. Right now, mortgages are treated the same, whether or not the underlying property has a lot of equity or very little.

The federal banking agencies’ updated Basel III proposal represents a pivotal step toward a more balanced and risk-aligned approach to capital standards affecting mortgage lending and commercial real estate finance.

Capital rules are notoriously complex, but based on our initial review, the re-proposal incorporates several priorities long advocated by MBA, including more risk-sensitive capital requirements using loan-to-value ratios and the opportunity to consider the recognition of credit enhancements such as private mortgage insurance. It also takes important steps to reduce the punitive treatment of mortgage servicing rights and commercial real estate loans.

MBA will review the proposal closely and looks forward to engaging in the formal comment process, including on key technical elements such as the appropriate capital treatment of mortgage servicing assets and the broader application of these reforms across the banking system. We stand ready to work with the agencies on a final framework that better supports sustainable mortgage origination and warehouse lending, robust servicing capacity, and continued access to affordable home financing offered by both depositories and independent mortgage banks.”

Stocks are lower this morning after a wave of strikes in Iran. Bonds and MBS are continuing the sell-off after yesterday’s hot PPI report.

As expected, the Fed maintained rates at current levels, with Stephen Miran dissenting, who wanted to cut rates. The statement referred to “somewhat low” job gains and “somewhat elevated” inflation.

“The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. Uncertainty about the economic outlook remains elevated. The implications of developments in the Middle East for the U.S. economy are uncertain. The Committee is attentive to the risks to both sides of its dual mandate.”

The forecast for economic growth was nudged up for 2026 and 2027, while the unemployment forecast was steady at 4.4%. The PCE Price index forecast was bumped up from 2.4% to 2.7% while the core rate was raised from 2.5% to 2.7%

The dot plot looks like we might get one more rate cut this year. The range of outcomes has compressed compared to December, however we are slightly more hawkish.

At his press conference Jerome Powell said: “The forecast is that we will be making progress on inflation, not as much as we had hoped, but some progress on inflation.” He also pushed back on the use of the term stagflation: “I always have to point out that that was a 1970s term, at a time when unemployment was in double figures and inflation was really high,” he said. “We actually have unemployment really close to longer-run normal, and we have inflation that’s 1 percentage point above that.”

He added, “I would reserve the term stagflation for a much more serious set of circumstances.”

The Fed Funds futures see about a one-in-three chance of another rate cut this year, and is pricing in some small probability of a rate increase. Separately, the Bank of England maintained rates at current levels, citing uncertainty in the Middle East. Until the Strait of Hormuz is back open, oil will remain elevated and central banks will have inflationary pressures to deal with.

Separately, Powell said he isn’t going anywhere until the DOJ ends its probe into him over the Fed renovations.

Independent Mortgage Bank profits declined in the fourth quarter to $674 per loan compared to $1,201 in the third quarter. Given that the mortgage business is pretty seasonal this sequential decline is to be expected. The gain of 17 basis points compares favorably to a loss of 4 basis points in the fourth quarter of 2025.

“Net production profits averaged 17 basis points in the fourth quarter of 2025, an increase from losses of 4 basis points in the fourth quarter of 2024,” said Marina Walsh, CMB, MBA’s vice president of industry analysis. “Combining both production and servicing operations, 68% of mortgage companies in MBA’s sample posted overall profits in the fourth quarter of 2025, a modest increase from 61% one year ago.”

Added Walsh, “Despite these improvements, fourth-quarter production profits were down from the previous quarter. Compared to the third quarter of 2025, production volume rose, production revenues dropped, and the cost to originate stayed relatively flat.”

Stocks are flattish despite a lousy PPI report. Bonds and MBS are up small.

The FOMC decision is due at 2:00 pm this afternoon. We will get a new dot plot and updated economic forecasts. The Fed is not expected to make any changes to policy, although markets will be focusing intently on their forecasts for inflation.

The Fed Funds futures still predict two more rate cuts this year, but now see only one cut as the second most likely outcome.

Inflation at the wholesale level rose 0.7% in February, after rising 0.4% in December and 0.5% in February. Final demand services drove the increase. About 20% of the increase was driven by a 5.7% increase in hotel prices. Rising food prices also contributed to the increase.

The PPI ex food and energy rose 0.5% MOM and 3.9% YOY,

Mortgage applications decreased 10% last week as purchases rose 1% and refis fell 19%. “Mortgage rates continued to move higher, driven by increasing Treasury yields as the conflict in the Middle East kept oil prices elevated, along with the risk of a broader inflationary shock. Mortgage rates increased across the board, with the 30-year fixed rate rising to 6.3%, the highest rate since December 2025,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Rates were around 20 basis points higher than they were two weeks ago and this caused a reversal in refinance activity, particularly for conventional refinance applications, which decreased 27% over the week. Government refinances also declined but by 5%, as FHA rates have not increased quite as rapidly. Purchase applications remained steady despite the higher rates, with conventional purchase applications unchanged and growth in both FHA and VA segments. Overall purchase applications remained ahead of last year’s pace, continued to be supported by higher inventory and slowing home-price growth in many markets.”

Pending Home Sales rose 1.8% in February, according to the National Association of Realtors. “The slight gain in pending contracts appears to be driven by improved affordability conditions. However, those conditions could reverse if higher oil prices lead to an uptick in mortgage rates,” said NAR Chief Economist Dr. Lawrence Yun. “The Midwest—the most affordable region of the country—was the strongest performer in February. But the Northeast was held back by a combination of higher home prices and a shortage of supply.”

Stocks are higher this morning as the Fed begins its meeting. Bonds and MBS are up.

Homebuilder sentiment improved in March according to the NAHB Housing Market Index. Rates have been improving, but affordability remains a big constraint. The latest events in Iran certainly aren’t helping things. More than a third of builders reported cutting prices by an average of 6%.

“Affordability for buyers and builders remains a top concern,” said NAHB Chairman Bill Owens, a home builder and remodeler from Worthington, Ohio. “Many buyers remain on the fence waiting for lower interest rates and due to economic uncertainty. Builders are facing elevated land, labor and construction costs and nearly two-thirds continue to offer sales incentives in a bid to firm up the market.”

“While the Freddie Mac 30-year fixed rate mortgage averaged 6.05% in February, the lowest since August 2022, downpayment hurdles and uncertainty from the conflict with Iran and the price of oil will be headwinds going forward,” said NAHB Chief Economist Robert Dietz. “The administration’s executive orders issued last week to reduce regulatory burdens associated with home building are a positive step toward increasing attainable housing supply.”

I am not so sure new home supply is the big issue here given the glut of inventory:

We are at levels last seen during the housing bust of 2006-2008. The homes are out there.

The NAHB is also happy with the recent executive orders and legislation on housing:

“NAHB commends President Trump for taking bold actions to empower home builders to build the housing supply America needs. Today’s executive orders get at the root of the housing affordability problem by eliminating obstacles to build more homes and providing better access to financing.

“The president’s executive order to remove regulatory barriers will enable builders to build more housing by reducing red tape, streamlining permitting requirements and easing costly environmental regulations. The executive order for access to mortgage credit also takes important steps to provide better financing options for home buyers and home builders and make it easier for families to achieve the American dream of homeownership. NAHB looks forward to working with the Trump administration to implement these important directives.”

Industrial Production and Manufacturing Production both increased by 0.2% MOM in February. Capacity Utilization increased to 76.3%