The Daily Tearsheet

Stocks are lower as markets assess whether the ceasefire in the Persian Gulf will hold. Bonds and MBS are down.

The FOMC minutes were released yesterday. The situation in Iran was still fresh, so the expected effects were still pretty uncertain. The gist of the meeting is that they consider inflation to be the bigger threat and the labor market to be in good shape. The overall consensus was that monetary policy was close enough to neutral that they could wait and see how the economy develops.

On inflation:

Participants generally observed that overall inflation remained above the Committee’s 2 percent longer-run goal. Some participants remarked that further progress in reducing inflation had been absent in recent months. Participants anticipated that, under appropriate monetary policy, inflation would gradually move down toward the Committee’s 2 percent objective after the effect of increased tariffs and higher oil prices had faded. Participants also expected that higher oil prices would increase inflation in the near term and delay the anticipated decline in inflation toward the Committee’s 2 percent objective. Several participants remarked that the ongoing deceleration in housing services prices was likely to continue to exert downward pressure on overall inflation. Several participants also expected higher productivity growth, associated with technological or deregulatory developments, to put downward pressure on inflation. Participants noted that a prolonged conflict in the Middle East would likely lead to more persistent increases in energy prices and that these higher input costs would be more likely to pass through to core inflation.

On the labor market:

With regard to the labor market, participants observed that the unemployment rate had been little changed in recent months, while job gains had remained low. Most participants judged that the recent data readings, such as those for job openings, layoffs, hiring, and nominal wage growth, continued to suggest that the labor market was broadly in balance, with the low rate of job growth roughly in line with slower labor force growth. With respect to the outlook for the labor market, the majority of participants expected the unemployment rate to remain little changed and for net job creation and labor force growth to remain low, while a couple of participants expected labor market conditions to soften. The vast majority of participants judged that risks to the employment side of the mandate were skewed to the downside.

On monetary policy:

Against this backdrop, almost all participants supported maintaining the current target range for the federal funds rate at this meeting. With the policy rate having been lowered 75 basis points in the second half of last year, these participants generally viewed the policy rate as within a range of plausible estimates of its neutral level. They judged that leaving the policy rate unchanged kept the Committee well positioned to determine the extent and timing of additional adjustments to the policy rate based on the incoming data, the evolving outlook, and the balance of risks. Most participants commented that it was too early to know how developments in the Middle East would affect the U.S. economy and judged it prudent to continue to monitor the situation and assess the implications for the appropriate stance of monetary policy.

There are two important considerations to the inflation story. First, SCOTUS declared the Trump Tariffs unconstitutional, and the temporary extension expires in June. That inflationary support will wane. The second concerns transit through the Strait of Hormuz. The closure is pushing up prices in fertilizer, petrochemicals, plastics, etc. The longer this goes on, the more that higher energy prices will flow through to other goods and services.

Fourth quarter GDP was revised downward to 0.5% from 0.7%. Downward revisions in consumption and investment drove the decrease. The PCE Price Index was unchanged at 2.9% on the headline and 2.7% on the core rate.

Stocks are higher after Trump agreed to suspend attacks on Iran for two weeks in exchange for Tehran to open the Strait of Hormuz immediately. Trump cited progress on a 10 point proposal for ending hostilities. Oil is down 17%, bond yields are down about 10 basis points from yesterday’s close and stocks are soaring.

House prices fell 0.1% on a quarterly basis and were up 1.8% annually according to the Clear Capital Home Data Index. The Northeast is still the top performer both on a quarterly basis and annually.

In the commentary, I talk about how the situation in Iran will affect real estate prices going forward. Even if the situation is over (or close to it), the economic shocks will reverberate for a while.

Mortgage applications fell 0.8% last week as purchases rose 1% and refis fell 3%. “Higher mortgage rates and continued economic uncertainty weighed down on mortgage applications again last week. While mortgage rates saw a slight reprieve, with the 30-year fixed rate decreasing to 6.51%, many potential refinance borrowers have been frozen out by the sharp increase over the past month. The pace of refinance applications was at its lowest level since December 2025,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “Overall purchase activity has also been adversely impacted by current conditions – purchase applications were 7% lower on a year-over-year basis, the first annual decline since January 2025. However, certain loan types and geographic segments are faring better than others because of lower rates on ARM and FHA loans as well as growing housing inventory in some local markets. Applications for FHA purchase applications were up 5 percent over the week, supported by the FHA mortgage rate being about 30 basis points lower than the conventional mortgage rate.”

Chicago Fed President Austan Goolsbee spoke in Detroit yesterday, and expressed concern about rising inflation. “We’ve got to get our heads around an oil shock, which is gonna drive up prices in a stagflationary way potentially, before the other one has gone away,”

“And if we’re headed to 4%, that’s not a stable,” Goolsbee said. “The longer you go and the higher you are above the 2% target, the more it just gets ingrained into cost-plus contracts where people come down and they say, ‘Well, if inflation is gonna be 5%, I need a wage increase of 6%.’ And then the business says, ‘If we gotta pay wage increases of 6%, we gotta raise prices 7%.’ And that’s a very uncomfortable situation for the central bank or for anyone.”

This is what happened in the 1970s, which was the classic wage-price spiral.

Stocks are lower as we await the deadline for Iran to open the Strait of Hormuz. Bonds and MBS are down.

Iran has rejected a proposal to delay strikes for 45 days in exchange for re-opening the Strait. The deadline is set for 8:00 pm EST and Trump is threatening Iran’s infrastructure: “The entire country can be taken out in one night, and that night might be tomorrow night,” he said during a news conference on Monday.

The two sides are talking though. Trump rejected an Iranian counter-proposal with “They’ve made a proposal, and it’s a significant proposal…it’s not good enough, but it’s a significant step,”

The situation in Iran is ironically affecting oil prices more in the US than overseas. Typically US domestic oil (West Texas Intermediate) trades at a discount to North Sea Brent, the global benchmark. Since a lot of oil is trapped in the Gulf, demand for WTI is high enough to have it trade at a $5 premium to Brent.

The jump in oil prices is expected to cause a huge jump in the inflation numbers set for Friday. The forecast for the annualized March CPI is to increase from 2.4% in Feb to 3.4% in March. The core rate is expected to rise from 2.5% to 2.7%.

The services economy continued to expand, according to the ISM Services Index. The index declined from 56.1 to 54, which is still a strong reading. New orders increased while business activity declined. Employment declined, while prices increased.

“March’s Services PMI^® features the third month in a row with an increase in the 12-month PMI^® average, up 0.6 percentage point from 51.7 percent in December 2025 to 52.3 percent. However, six of the 10 subindexes decreased month-over-month. The Prices Index increased, as expected, amid higher oil and fuel costs, and the Supplier Deliveries Index indicated slower performance compared to February, also unsurprisingly with shipping issues and flight disruptions due to the Middle East conflict and winter weather. Continuing strength in business activity, new orders and backlog of orders are positive economic signals, so the Employment Index dropping to its lowest level since December 2023 (43.5 percent) was a surprise.

“There are other signs of economic strength. Exports and imports activity have expanded for two months in a row for the first time since September and October 2024. The predominant commentary this month was about impacts and adjustments due to the conflict with Iran and the expected flow through of higher oil prices at some point. Companies across many industries reported seeing higher gas and diesel pricing, and inventories of multiple goods increased to withstand supply chain disruptions or short-term oil price impacts. Such construction products as lumber, copper and steel were noted as up in price. Although tariff impacts were still noted by panelists, Iran-related impacts dominated the comments in March.”

A tailwind for business overall is the end of tariffs. Trump extended them after SCOTUS declared them unconstitutional, but that extension only lasts 150 days, which means things revert back to normal in late June. Respondents reported that we are already seeing adjustments to this.

The decline in employment is surprising given than BLS reported an increase in payrolls during March and most of the gain was in the services sector.

The Spring Selling season is off to a good start despite the increase in rates according to the ICE Mortgage Monitor. “Mortgage rates bottomed near 5.95% early this year, pushing affordability to its best levels in four years and helping drive two of the firmest monthly home price gains we’ve seen in over a year,” said Andy Walden, head of mortgage and housing market research at ICE. “Since then, 30‑year rates have risen roughly 40 basis points, pulling about four percent of buying power back out of the market and reshaping conditions from those early‑year peaks. Even so, 99 out of 100 major markets still saw improved affordability from a year ago, and inventory continues to rebuild. That combination is helping this spring market feel better supplied and more balanced than in recent years, even as rate volatility reasserts itself.”

The increase in rates has taken back some of the improvements in affordability and reduced refinance incentives. That said, home price appreciation is stalling out, incomes are still rising, and we should see rates return to normal once the Iran situation is sorted out. Inventory is increasing, albeit still below pre-pandemic levels.

Stocks are higher after investors return from a long weekend. Bonds and MBS are down.

The week ahead is relatively data-light, although we will get the consumer price index on Friday. Given the strong jobs report, a hot CPI reading will get the markets worrying about possible rate hikes this year.

Over the weekend, the two airmen shot down over Iran were rescued, and Trump gave a Tuesday ultimatum for Iran to open the Strait of Hormuz. Oil prices remain elevated and the 10 year bond yield is pushing 4.4%.

Jamie Dimon’s letter to shareholders was released over the weekend. The letter did spend a lot of time discussing how the wars will affect the economy, although he talked a bit about how much the relationship between banks and non-bank financial institutions have changed over the past 20 years.

The private credit market is getting a lot of attention these days, and this is ground zero for the discussion. The letter had a chart showing the change from 2010 (left column) and 2025 (right column)

One thing that jumps out is the nonbank share of mortgage originations. It was 9% in 2010. I guess that makes sense since Countrywide was dead and the new institutions that would dominate going forward were early on. The growth in loans held by nonbanks roughly mirrors the loans held by banks, but the private credit market is now $1.8 trillion, which is bigger than the high-yield bond market and the bank leveraged loan market.

On credit, he said:

I do believe that when we have a credit cycle, which will happen one day, losses on all leveraged lending in general will be higher than expected, relative to the environment. This is because credit standards have been modestly weakening pretty much across the board; i.e., more aggressive and positive assumptions about future performance (called add-backs), weaker covenants, more use of PIK (payment-in-kind; not paying interest in cash but accruing it), more aggressive private ratings (particularly in insurance companies) and more arbitrage (not always a great sign). Also, by and large, private credit does not tend to have great transparency or rigorous valuation “marks” of their loans — this increases the chance that people will sell if they think the environment will get worse — even if actual realized losses barely change. Additionally, actual losses right now are already a little higher than they should be, relative to the environment. Finally, if rates or credit spreads ever go up, the companies that borrowed will have to borrow at even higher rates, putting them under even greater stress. However this plays out, it should be expected that at some point insurance regulators will insist on more rigorous ratings or markdowns, which will likely lead to demands for more capital.

It has always been true that not everyone providing credit is necessarily good at it. There are many players who are late to this game, and it should be expected that some credit providers will do a far worse job than others. We have not had a credit recession in a long time, and it seems that some people assume it will never happen.

I think these comments could be applied to non-QM. We have a lot of new entrants in the DSCR space, and credit spreads have been quite frankly a lot tighter than they should be given the risks involved (specifically no government guarantee). Credit spreads overall remain tight.

The services economy declined in March, according to the S&P PMI. The index came in at 49.8 (any reading under 50 means a decline) which was the lowest level since January 2023. The war and price levels in general are depressing consumer confidence.

“The service sector has slipped into contraction for the first time since
January 2023, dragging the overall economy down to a near-stalled
0.5% annualized rate of growth in March. Worst hit is consumer-facing
service sectors where, barring the pandemic lockdowns, the downturn
reported in March was among the steepest recorded since data were
first available in 2009. However, financial services and tech, both of
which performed strongly last year, have shown some signs of weaker
performance amid financial market volatility and concerns over higher
interest rates, which have deterred investment.

“Key to the deteriorating growth trend is a pull-back in spending amid
worsening affordability, with costs and selling prices surging higher
in March amid spiking energy prices. The survey data are broadly
consistent with consumer price inflation accelerating close to 4% as
firms increasingly seek to push through higher costs onto customers in
the coming months.

The stock market is closed for Good Friday. Bonds and MBS close early today.

Note the futures markets are also closed today so the table below is yesterday’s closing levels.

The economy added 178,000 jobs in March, which was well above expectations. The unemployment rate fell from 4.4% to 4.3%. January’s payroll estimate was revised upward by 34,00 while February was revised downward by 41,000. This means we had a pretty unusual February, with January adding 160k, February losing 133k and now March adding 178k. Not sure what was driving the unusual activity in Feb.

That said, the internals of the household survey weren’t great. the drop in the unemployment rate was driven by people exiting the labor force. The labor force participation rate and the employment-population ratios declined by 10 basis points. The number of people not in the labor force rose by 488k, and the labor force itself declined by 400k. The number of people actually employed declined by 94k.

Regardless, since the Fed focuses on the unemployment rate, this report indicates that the labor market is not falling apart and makes them more concerned about inflation.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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The woes in private credit funds continue, with Blue Owl noting higher-than-expected redemption requests. The company has capped redemptions at 5%. “We continue to observe a meaningful disconnect between the public dialogue on private credit and the underlying trends in our portfolio,” Blue Owl said in the shareholder letters.

Stocks are lower after Trump vowed to strike Iran harder, which sent oil higher. Bonds and MBS are down.

Last night Trump addressed the nation and said that military ops in Iran would be completed “very shortly” however we said the final days would see an escalation where he would hit Iran “extremely hard.”

The markets had been improving lately on hopes that the Iranian conflict would be completed sooner, rather than later. Last night’s speech did not support that forecast.

Separately, Trump has indicated that re-opening the Strait of Hormuz is a problem for other countries to solve. China and India get most of their oil from Iran, and Europe gets a lot from the Middle East as well. The US gets most of its oil from the US, and what imports it has it gets from the Americas – either Canada or Brazil.

The private sector added 62,000 jobs in March, according to the ADP Employment Report. Pay is improving. “Overall hiring is steady, but job growth continues to favor certain industries, including health care,” said Dr. Nela Richardson, chief economist, ADP. “In March, this solid performance was accompanied by a boost in pay gains for job-changers.”

Education / health services and construction saw the most job gains while Trade Transportation / Utilities saw the biggest decrease. Note Oracle just did a huge layoff announcement. Job stayers saw a 4.5% increase in pay while job changers got a 6.6% raise.

Job cuts rose 25% in March, according to outplacement firm Challenger Gray and Christmas. US employers reported 60,620, which was down big on a YOY basis given that the Federal Government was shedding workers at this time last year.

Technology is seeing a lot of cuts due to AI. “Companies are shifting budgets toward AI investments at the expense of jobs. The actual replacing of roles can be seen in Technology companies, where AI can replace coding functions. Other industries are testing the limits of this new technology, and while it can’t replace jobs completely, it is costing jobs,” said Challenger.

“The importance of upskilling and reskilling cannot be overstated. Workers need to familiarize themselves with AI, including prompting and generating assets. Many companies are now including goals for their workers on AI use and redefining job descriptions based on what AI can do.”

“One thing that is clear is that AI is changing work and the workforce. Workers will need to be more strategic as they lead AI-powered agents that handle increasingly complex tasks. Human workers will need strong decision making and judgment skills in the age of AI,” he added.

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Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

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The manufacturing sector continued to expand in March according to the ISM Manufacturing Report. That said prices jumped due to problems in the Middle East. Most indicators fell.  

“In March, U.S. manufacturing activity remained in expansion territory, growing at a slightly faster pace than the month before. Of the five subindexes that make up the PMI^®, the New Orders Index indicated slower growth compared to the previous month, the Production Index grew at a faster rate, and the Employment and Inventories indexes remained in contraction. This month also marks the first report with panelists citing the Iran war as a new impact to their business, along with ongoing uncertainty with U.S. economic policy, despite the recent Supreme Court ruling striking down International Emergency Economic Powers Act (IEEPA) tariffs. In March, 64 percent of comments overall were negative. Among the negative comments, about 20 percent cited tariffs and about 40 percent the war in the Middle East. (Some panelists referenced both topics within a single comment or in mixed sentiment.)”

Stocks are higher as we begin a new quarter. Bonds and MBS are up. Markets are more optimistic of a quick resolution in Iran and for the Strait of Hormuz to re-open.

Home prices fell 0.11% on a MOM basis but still rose 0.9% annually in January, according to the Case-Shiller Home Price Index. The hip-to-be-square trade continues, with the New York, Cleveland and Chicago MSAs leading the charge, with erstwhile darlings like Tampa declining. Home price appreciation has been flattening out after the huge run up during the COVID years

The deceleration was prominent in the second half of the year, with home prices rising at a slower rate than inflation. This means that real (inflation-adjusted) home prices are slightly declining. While prices are elevated, affordability is improving albeit slowly.

Separately, the FHFA House Price Index rose 0.1% on a MOM basis and rose 1.6% annually.

Despite the situation in Iran, consumer confidence improved in March according to the Conference Board. “Consumer confidence ticked up again in March, as a modest improvement in consumers’ views of current conditions outweighed a slight downshift in expectations for the future,” said Dana M Peterson, Chief Economist, The Conference Board. “Three of five components of the Index firmed in March, and overall confidence improved modestly for a second month. Nonetheless, the Index has been on a general downward trend since 2021.” The present situation index improved markedly and was offset by a decline in expectations, undoubtedly driven by the war in Iran and worries over gas prices. Note that consumer sentiment indices tend to negatively correlate with prices at the pump.

__________________________________________

Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

____________________________________________

Job openings fell to 6.88 million, in February, while January’s number was revised upward. The quits rate, which is a good barometer of the overall sentiment in the labor market continued to work its way lower, falling to 1.9%.

Mortgage applications fell 10% last week as purchases fell 2% and refis fell 17%. Rising rates from the Iran situation drove the decline. “The 30-year mortgage rate, now at 6.57%, reached its highest level since last August and is up half a percentage point from just one month ago. Refinance application volumes declined sharply again last week, dropping 17%, and are down more than 40% compared to last month,” said Mike Fratantoni, MBA’s SVP and Chief Economist. “Seasonally adjusted purchase application volume also declined over the week, but only by 3%. The headwinds of higher rates are being offset somewhat by the buyer’s market in many parts of the country – there are more homes for sale than buyers have seen in some time. Moreover, purchase applications for FHA and VA loans continue to hold up better than those for conventional buyers. However, the shocks of the jump in rates and the increase in overall economic uncertainty are likely having an impact on buyer confidence.”

Stocks are higher this morning as we wrap up a lousy Q1. Bonds and MBS are up.

Jerome Powell spoke yesterday and said that the increase in oil prices due to the war in Iran was not a reason to hike rates. “Inflation expectations do appear to be well anchored beyond the short term, but nonetheless, it’s something we will eventually maybe face the question of what to do here,” he said during a question-and-answer question with a moderator and students. “We’re not really facing it yet, because we don’t know what the economic effects will be, but we’ll certainly be mindful of that broader context when we make that decision … By the time the effects of a tightening in monetary policy take effect, the oil price shock is probably long gone, and you’re weighing on the economy at a time when it’s not appropriate. So the tendency is to look through any kind of a supply shock.”

Powell’s comments caused the Fed Funds futures to become more dovish, with the odds of a rate hike in April falling to a negligible amount from double digits just a few days ago. The December futures see no further action this year, although the odds favor a cut over a hike. A week ago, the December futures saw a 30% chance of a hike and a 6% chance of a cut. Today it is handicapping a 19% chance of a cut and a 4% chance of a hike. This is partially what is causing Treasury yields to work their way lower.

____________________________________________

Do you have a pipeline of non-QM locks you are looking to hedge? Or perhaps a portfolio of loans sitting on a conduit awaiting securitization? How do you hedge your exposure? A new paper from Eris Innovations on the topic outlines several methods used for hedging this growing market.

Hedging non-QM loans is different than conforming loans because they are not deliverable into a TBA. This means that hedging with TBAs can be ineffective. TBAs are probably better than nothing, but they aren’t the ideal solution. Other methods include using regression analysis to find the correct Treasury hedge, however this method is fraught with potential spurious errors or even non-sensical strategies due to data mining. 

Another method hedgers have tried is estimating prepay speeds and using SOFR swap futures to hedge accordingly. There is a wealth of prepay models out there for conventional loans. The problem is that non-QM loans often have prepayment penalties which means existing prepay models are unsuitable, but this method aligns hedges with the hypothetical funding that would hold the loans to their repayment and as such is a very effective method. 

The most advanced method is to use a discounted cash flow model using stochastic (i.e. probability) analysis. SOFR swap futures used to build the model are then used to hedge the portfolio. As a more precise method than the first three above, this method can result in the lowest hedging costs, and is the method of choice for sophisticated long term investors, but is equally effective for pipelines and inventory. 

If you want to learn more about hedging non-QM portfolios, read this article or contact John.Douglas@erisfutures.com.

______________________________________________

Non-QM delinquencies are picking up according to the latest research from DV01. “Since reaching an impairment low in Summer 2022, the Non-QM market continues to deviate from overall mortgage market strength, with performance trends mirroring those of the weaker credit FHA and VA markets. The past two years represent the toughest stretch of performance in the sector’s history even as the broader mortgage universe was setting record-low delinquency rates in March 2023 and more recently in June 2024. This trend magnified substantially in February, with performance rapidly deteriorating.”

Impairments are highest in the 80+ LTV space, with bank statement / P&L products having the highest rates. DSCR seems to be behaving a bit better.

Overall delinquencies in the government-guaranteed space are well below pre-pandemic levels, so this issue seems to be specific to non-QM.

Home insurance premiums are driving increases in delinquencies and relocations, according to a new research paper. Note that rising insurance premiums can make DSCR ratios thinner than they otherwise appear, especially in the context of flat asking rents.

Insurance premiums are rising relative to P&I payments:

“When insurance premiums rise, homeowners have limited ways to respond,” the paper said. “They can shop for cheaper coverage by switching insurers. Some people relocate to areas where insurance is less expensive. However, income-constrained households may be less likely to shop for lower-cost insurance and may find moving out of reach.”

“Instead, higher premiums can lead to greater reliance on credit cards, delayed mortgage payments and potential home loss. Because mortgages constitute a substantial share of household debt and bank assets, rising delinquencies can threaten broader financial stability,” the authors said.

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.