|10 year government bond yield||1.97%|
|30 year fixed rate mortgage||4.15%|
Stocks are lower this morning despite continued Ukraine / Russia fears. Bonds and MBS are down.
Initial sanctions on Russia seem to be less severe than initially feared. The main piece is a halt on the Nord 2 pipeline. That said, this is apparently a “first tranche” of sanctions, so more might be coming if things don’t change.
Consumer confidence fell in February, according to the Conference Board.
“Concerns about inflation rose again in February, after posting back-to-back declines. Despite this reversal, consumers remain relatively confident about short-term growth prospects. While they do not expect the economy to pick up steam in the near future, they also do not foresee conditions worsening. Nevertheless, confidence and consumer spending will continue to face headwinds from rising prices in the coming months.”
Consumer confidence is still much better than the aftermath of the financial crisis, however it remains below pre-COVID levels. Interestingly, the University of Michigan Consumer Sentiment Index is much worse, having fallen back to 2012 levels. I suspect the Conference Board is more accurate. The labor market is much stronger today than 2012 and that is a big driver of consumer confidence. Well, that and gas prices.
Mortgage Applications fell to December 2019 lows, according to the MBA. Purchases fell by 10% while refis fell by 16%. Refinances now account for about half of all mortgages.
“Higher mortgage rates have quickly shut off refinances, with activity down in six of the first seven weeks of 2022,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Conventional refinances in particular saw a 17 percent decrease last week. Purchase applications, already constrained by elevated sales prices and tight inventory, have also been impacted by these higher rates and declined for the third straight week. While the average loan size did not increase this week, it remained close to the survey’s record high.”
ARMs increased to 5.1% of total applications. I suspect we will be seeing more activity in this space, however the spread between an ARM and a fixed is still pretty tight, which means there isn’t much incentive to go with the ARM versus the 30 year. That said, if you plan on moving in 5 years, why not take out a 5/1 and save some money?
The non-QM space has been having issues lately, and I have been hearing about some lender out West not honoring locks. The rapid move in interest rates is exposing one of the big issues of NQM, and that is the difficulty in hedging the product. NQM loans are not deliverable into TBAs, and the rates seem to move much less frequently than TBAs. But, when they move, they move. We saw a lot of reprices last week as buyers of NQM rates re-adjusted upwards.
The big question is how does one hedge the interest rate risk? TBAs might be the least worst choice, but there hasn’t been a long enough track record of this product that you can use to come up with a correlation between conforming loans and NQM. I think a lot of people are flying blind here, and maybe some risk managers said “Wait a minute. We have no idea what our interest rate risk here is. Let’s hold off buying more paper until figure out what our exposure is.” This is all speculation of course, but I suspect that conversation is happening a lot right now.