Morning Report: The Fed changes its language regarding MBS purchases

Vital Statistics:

S&P futures4,4016.2
Oil (WTI)72.740.45
10 year government bond yield 1.28%
30 year fixed rate mortgage 3.02%

Stocks are higher after GDP missed. Bonds and MBS are down.

The advance estimate for second quarter GDP came in at 6.5%, which was below the Street’s 8.5% estimate. First quarter GDP was revised downward by 0.1% to 6.3%. Despite the tremendous lack in real estate, housing was again a drag on GDP.

Initial Jobless Claims came in at 400k, higher than expectations.

Yesterday’s FOMC announcement was largely uneventful, however the language regarding asset purchases changed.

Last December, the Committee indicated that it would continue to increase its holdings of Treasury securities by at least $80 billion per month and of agency mortgage‑backed securities by at least $40 billion per month until substantial further progress has been made toward its maximum employment and price stability goals. Since then, the economy has made progress toward these goals, and the Committee will continue to assess progress in coming meetings.

This statement about making progress (bolded and italicized) is new and indicates that the Fed is beginning to think about tapering. MBS spreads have been widening in anticipation of this event over the past quarter, so at least some of the adjustment has been made already.

Ex-MBA President Dave Stevens penned an article discussing the new Ginnie Mae proposal for increased capital requirements. This capital proposal basically imposes Basel capital requirements for non-banks. It would impose a 250% capital requirement on Ginnie Mae mortgage servicing rights, which would push lower-capitalized non-bank Ginnie Mae servicers out of the business of Ginnie Mae servicing. The government’s use of the False Claims Act in the aftermath of the financial crisis pushed a lot of banks out of the FHA business, and now the government wants to chase non-banks out of FHA servicing.

The punch line is that this missive is going to whack Ginnie Mae MSR valuations, which is only going to make FHA loans more expensive. If the government wants to see more credit extended to first time / marginal borrowers, this is a strange way to go about it.

Pending Home Sales decreased 1.9% in June, according to NAR. “Pending sales have seesawed since January, indicating a turning point for the market,” said Lawrence Yun, NAR’s chief economist. “Buyers are still interested and want to own a home, but record-high home prices are causing some to retreat. The moderate slowdown in sales is largely due to the huge spike in home prices,” Yun continued. “The Midwest region offers the most affordable costs for a home and hence that region has seen better sales activity compared to other areas in recent months.”


Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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