Morning Report: Inflation remains below the Fed’s target

Vital Statistics:

S&P futures335022.6
Oil (WTI)37.17-0.24
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.92%

Stocks are higher this morning after we end a volatile week. Bonds and MBS are up.

Inflation at the consumer level rose 0.4% MOM and 1.3% YOY. Ex-food and energy, it rose 0.4% MOM and 1.7% YOY. You can see that inflation has been on a general downtrend since peaking around 1980. The Fed is deeply concerned about inflation going below 0%, and has set a 2% target rate.

Here are some possible changes to the QM rule. Note that a change in administration will bring in a new head of the agency, which could mean other possibilities. The CFPB wants to get away from the current QM patch, which allows loans guaranteed by Fan and Fred to be exempt from the 43% debt-to-income limit.

Fannie Mae says that about half of all lenders expect profit margins to increase over the next 3 months. FWIW, on its second quarter conference call, Rocket mortgage guided analysts to to contracting margins this quarter. As refis dry up, lenders will get more competitive, although that might not be a Q3 phenomenon.

“This quarter’s MLSS results align with the strong housing recovery amid the larger economic downturn due to COVID-19,” said Doug Duncan, Fannie Mae SVP and chief economist. “Purchase demand growth expectations for the next three months reached the highest third-quarter readings since survey inception. For the third consecutive quarter, lenders’ profitability outlook has remained a strong positive.”

Manhattan apartment vacancies hit 15,000, up from 5,600 a year ago. “The rental market is weak and getting weaker,” said Jonathan Miller, CEO of Miller Samuel. “The first-time buyers in outlying areas are largely coming from the Manhattan rental market.” Rents are falling as well, as studio rents are down 9% and one-bedroom rents are down 5%. Landlords are on average offering 2 months of free rent.

Morning Report: Job openings rebound

Vital Statistics:

S&P futures34066.6
Oil (WTI)37.81-0.24
10 year government bond yield 0.71%
30 year fixed rate mortgage 2.92%

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

Initial Jobless Claims were flat last week at 884k. Separately, there were 6.2 million job openings in the US, according to the JOLTs report. This was a big improvement which is at least one bright spot in the labor economy.

Inflation remains well below the Fed’s target according to the producer price index. The headline PPI rose 0.3% MOM and fell 0.2% YOY. The core numbers were up 0.3% MOM and 0.3% YOY. The Fed is sweating bullets about the low inflation numbers as they fear the US slipping into a Japanese-style deflationary stagnation.

New listings are up 7%, according to Redfin. Pending home sales are up 21% YOY and the median price is up 12% to $318,473. 47% of homes had an offer within two weeks – the fastest pace since 2012. What is going on? People are ringing the register as home prices rise. The demand was always there – the persistent issue in the housing market has been limited supply. The sale=to-listing ratio is 99%, and bidding wars are becoming the norm.

Problems for landlords: The National Multifamily Housing Council reported that only 75% of renters had made their September rent payment so far. In August, that number was 79%.

“The initial rent payment figures from September have begun to demonstrate the increasing challenges apartment residents are facing. Falling rent payments mean that apartment owners and operators will increasingly have difficulty meeting their mortgages, paying their taxes and utilities and meeting payroll,” said Doug Bibby, NMHC President. “The enactment of a nationwide eviction moratorium last week did nothing to help renters or alleviate the financial distress they are facing. Instead, it only is a stopgap measure that puts the entire housing finance system at jeopardy and saddles apartment residents with untenable levels of debt. Federal policymakers would have been better advised to continue to provide support as they successfully did through the CARES Act.”

It is possible that the Labor Day weekend is introducing some noise into these numbers, but the trend is a worrisome sign.

Mortgage Credit Availability continues to move south as originators find little appetite for jumbo loans. I wonder if the surprise 50 basis point LLPA affected things as well.

“Mortgage credit supply fell to its lowest level since March 2014, driven by a reduction in supply from both conventional and government segments of the market,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Additionally, both conforming and jumbo sub-indexes fell by almost 9 percent each, with the conforming index declining to the lowest reading since MBA’s series began in 2011. Credit continues to tighten because of uncertainty still looming around the health of the job market, even as other data on loan applications and home sales show a sharp rebound. A further reduction in loan programs with low credit scores, high LTVs, and reduced documentation requirements also continued to drive the overall decline in credit availability.”

Morning Report: Origination volume hits a record in the second quarter

Vital Statistics:

S&P futures336730.6
Oil (WTI)37.500.77
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.93%

Stocks are rebounding today after a tech sell-off. Bonds and MBS are flat.

Mortgage applications increased 3% last week as purchases and refis rose by the same amount. Purchase applications were up 40% year-over-year, however there was some noise due to the Labor Day holiday last year.

Black Knight Financial reported that $1.1 trillion worth of mortgages were originated in the second quarter

“Despite the nation being under pandemic-related lockdowns for much of the quarter, a record-breaking surge in mortgage originations occurred in Q2 2020, driven by the record-low interest rate environment,” said Graboske. “Nearly $1.1 trillion in first lien mortgages were originated in Q2 2020, which is the largest quarterly origination volume we’ve seen since first reporting on the metric in January 2000. Refinance lending grew more than 60% from the previous quarter and more than 200% from the same time last year, accounting for nearly 70% of all Q2 originations by dollar value. At the same time, purchase lending declined 8% year-over-year as the traditional spring homebuying season was impacted by COVID-19-related restrictions. However, mortgage loan rate lock data – a leading indicator of lending activity – suggests that the homebuying season was simply pushed forward into the third quarter.

More than half of Redfin offers faced bidding wars in August, according to the company. Competition was most pronounced in San Diego and San Francisco, as well as Phoenix, Austin and Salt Lake City.

“The market is on fire. There just isn’t enough on the market to supply the huge demand for homes,” said San Diego Redfin agent Lisa Padilla. “A lot of military buyers are trying to take advantage of the low interest rates for VA loans. Anything on sale for less than $600,000 has multiple offers, and sometimes they’re getting more than 20 offers. Only condos are a little slow, as most buyers want a home with a yard.”

Forbearance numbers fell to 7.16% from 7.2% last week, which was the lowest level in nearly 5 months. 4.8% of Fan and Fred loans were in forbearance while FHA loans in forbearance rose slightly to 9.62%.

Morning Report: Tech sell-off continues

Vital Statistics:

S&P futures3373-44.6
Oil (WTI)37.34-2.47
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.93%

Stocks are lower this morning as last week’s market sell-off continues. Bonds and MBS are up

Small business sentiment improved in August, according to the NFIB. The index rebounded back to its historic level. Hiring plans were definitely the bright spot in the report, as a net 21% of firms plan to hire in the next 6 months. Demand for skilled construction workers is high, but finding them is tough.

Intercontinental Exchange, the parent company of the New York Stock Exchange has completed its $11 billion purchase of Ellie Mae. ICE already owns MERS and Simplifile. “We are excited to begin the next important chapter in our journey to digitize the residential mortgage industry,” said Jeff Sprecher, founder, chairman and CEO of Intercontinental Exchange. “Ellie Mae’s industry leadership and best-of-breed technology will better enable us to further accelerate the automation of the mortgage origination workflow, which will benefit stakeholders across the production chain, including consumers.”

Productivity improved for the mortgage industry last quarter. The median productivity for sales employees (mainly LOs) was 7.4 loans per month, compared to 4.5 loans in the first quarter. Fulfillment employees were closing 8.4 loans a month versus 5.5 in the first quarter.

Urban apartment REITs are seeing big cuts in rent, as they try and “buy occupancy.” NYC rents are down 15%, while Bay Area rents are down 9%. The eviction moratorium (put out by the CDC) isn’t helping things. When the Center for Disease Control is making apartment regulations, you have to wonder if HUD is about to weigh in on vaccine efficacy. Note that campus housing REITs are struggling as well, as colleges move towards remote learning.

Morning Report: No W-shaped recovery

Vital Statistics:

S&P futures34632.6
Oil (WTI)40.94-0.47
10 year government bond yield 0.71%
30 year fixed rate mortgage 2.90%

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

Jobs report data dump:

Nonfarm payrolls up 1.4 million

Unemployment rate 8.4%

24.3% of people teleworked due to COVID

Labor force participation rate 61.7%

Overall, this is a strong report that pours cold water on the idea that we could be experiencing a W-shaped recovery (aka a double-dip recession). The labor force participation rate last year was 63.2%. It bottomed out just above 60% in April, which means we have retraced about half the COVID-related decrease.

I took a look at Quicken’s numbers and found some truly astounding things. First, their gain on sale margins are 519 basis points. I think the average according to the MBA is something like 429 bps. The more impressive number is the net profitability. Quicken made $3.5 billion on $72.3 billion in origination, or a whopping 484 basis points in net income. The MBA average for bankers was 167. Of course comparing Quicken to Pennymac or Mr. Cooper isn’t really the right model – those guys are largely aggregators while Quicken doesn’t really have much of a correspondent footprint (non-del only).

Another thing I found interesting from the conference call is that Quicken looks at its MSR book as a source of future business. In other words, they aren’t looking at the book solely as a return on assets game or even a hedge for the origination business – they are actively soliciting their borrowers for a refi. I wonder if people who are buying their spec pools are aware of this – prepay speeds are probably going to be quite higher than the rest of the industry.

Quicken is trying to build the infrastructure to get to $40 billion a month in origination and has a goal of achieving 25% market share by 2030. Finally, Quicken guided for $82 – $85 billion in origination in Q3, however margins are going to drop from 4.05% – 4.3%.

Morning Report: Jobless Claims Fall

Vital Statistics:

S&P futures3562-17.6
Oil (WTI)40.64-0.87
10 year government bond yield 0.65%
30 year fixed rate mortgage 2.90%

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

Rocket Mortgage (aka Quicken) reported second quarter numbers after the close yesterday. Origination volume rose 126% YOY to $72 billion. Margins were 519 basis points. For the third quarter, Quicken is projecting volume of $82 – $85 billion with a drop in gain on sale margins to 405 – 430 basis points. About 4.7% of the company’s servicing portfolio was in forbearance. Despite the strong numbers, the stock is down 10% pre-open.

Initial Jobless Claims fell to 881,000, which was below the 958k the street was looking for. Separately, companies announced 116k job cuts in August, according to outplacement firm Challenger, Gray and Christmas. “The leading sector for job cuts last month was Transportation, as airlines begin to make staffing decisions in the wake of decreased travel and uncertain federal intervention. An increasing number of companies that initially had temporary job cuts or furloughs are now making them permanent,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Nonfarm productivity increased 10% in the second quarter, according to BLS. Unit labor costs increased 9%. Given the chaos in the labor market during Q2, I suspect there is a lot of noise in these numbers.

The Center for Disease Control has declared evictions a national health hazard. You would be forgiven for wondering what a bunch of MDs have to do with real estate, but here we are. Needless to say, the industry is dead set against it:

“If tenants are unable to pay their rent, then millions of our nation’s housing providers – many of whom are individual landlords and small business owners – will be unable to meet their mortgage obligations, make payroll to their own employees, maintain a safe and healthy living environment for their tenants and pay their state and local government property taxes,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “The result would be a cascading reaction that would only exacerbate the current economic crisis, leading to more job loss, financial pain, and long-lasting economic effects.”

and the left doesn’t think it is enough:

“The CDC order is really quite extraordinary, but if it’s not coupled with rental assistance, it’s just pushing the issue down the line and it will snowball into a crisis that landlords and tenants will be recovering from for decades,” said Emily Benfer, a law professor at Wake Forest University and co-creator of the COVID-19 Housing Policy Scorecard with the Eviction Lab at Princeton University.

“We need $100 billion to cover this deficit and that investment is far less expensive than the cost of eviction, the cost of homelessness — all of the downward effects that this causes,” Benfer said.

PIMCO is warning that releasing the GSEs without an explicit government guarantee will raise mortgage rates. The company is one of the biggest buyers of Fannie and Freddie mortgage backed securities, and the amount it is willing to pay to invest in MBS directly influences what borrowers pay. PIMCO is not interested in returning to the vague “government sponsored entity” status of Fan and Fred that existed pre-2008. It would view them as “wholly-owned private companies with no accompanying government guarantee.”

Morning Report: Highly profitable Q2 for independent mortgage bankers

Vital Statistics:


Last Change
S&P futures 3546 20.6
Oil (WTI) 42.84 0.17
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.93%


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


Mortgage Applications fell by 2% last week as purchases were flat and refis fell by 3%. “Both conventional and government refinancing activity decreased last week, despite 30-year fixed and 15-year fixed mortgage rates declining to near historical lows,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates have remained below 3.5 percent for five months now, and it’s possible that refinance demand may be slowing and will not significantly increase again without another notable drop in rates.” Are we seeing prepayment burnout? Or was the 50 basis point adverse market fee adding some noise? I suspect it was the latter.


Independent mortgage banks made a profit of $4,548 on each loan in the second quarter, up from $1,600 in the first quarter. Average volume for the quarter was $1 billion. 96% of firms were profitable. Total production revenue increased to 429 basis points from 362 bp in the first quarter.


ADP reported 428,000 new jobs in August. The Street was looking for 900k. The consensus for Friday’s jobs report is 1.4 million.


Rental prices are collapsing in New York City and San Francisco. “Since [COVID-19] really started to affect the U.S. market in March, it has dramatically decreased the amount of people commuting to work every day—either because of social distancing measures or layoffs resulting from COVID-19’s effect on the economy. Given this, there is less of a reason for Americans to cluster in urban centers,” says Zumper analyst Neil Gerstein. “We believe this has caused a migration shift, and a subsequent demand shift, to historically cheaper cities.”



Morning Report: Forbearances are flat

Vital Statistics:


Last Change
S&P futures 3496 2.6
Oil (WTI) 42.94 0.17
10 year government bond yield 0.72%
30 year fixed rate mortgage 2.93%


Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.


The percentage of loans in forbearance was flat at 7.2% last week, according to the MBA. Fannie and Freddie loans decreased by 5 basis points while FHA and private label increased. The share of loans in forbearance was unchanged, as the decline in the share of GSE loans was offset by increases for Ginnie Mae, and portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The pace of new forbearance requests has been relatively flat across investor types, but for those with GSE loans, the rate of exits from forbearance regularly exceeds the rate of new requests. The exception in these trends are borrowers with Ginnie Mae loans. The loss of enhanced unemployment insurance benefits, coupled with a consistently high rate of layoffs and uncertainty about the job market, are having a disproportionate impact on FHA and VA borrowers.”


Rep Maxine Waters (D-CA) laid into the FHFA over the 50 basis point adverse market fee. “Just two weeks ago, Director Calabria approved an outrageous penalty – in the middle of a pandemic and an economic recession – that would apply to homeowners looking to use today’s historically low mortgage rates to refinance their mortgages and reduce their mortgage payments,” Waters said. “Now, after bipartisan backlash, Director Calabria is attempting to save face by delaying the penalty until December 1st and then only providing very narrow exemptions moving forward. While this delay will buy homeowners looking to refinance some time, at the end of the day, the vast majority of homeowners will still pay the penalty – and homeowners in higher-cost areas like Los Angeles will disproportionately be excluded from the narrow exemptions provided. I am calling on Director Calabria to terminate this penalty altogether, not just delay it.”


CoreLogic reported that home prices rose 5.5% in July. CoreLogic CEO Frank Martell said: “On an aggregated level, the housing economy remains rock solid despite the shock and awe of the pandemic. A long period of record-low mortgage rates has opened the flood gates for a refinancing boom that is likely to last for several years. In addition, after a momentary COVID-19-induced blip, purchase demand has picked up, driven by low rates and enthusiastic millennial and investor buyers. Spurred on by strong demand and record-low mortgage rates, we expect to see more home building in 2021 and beyond, which should help support a healthy housing market for years to come.” That said, CoreLogic forecasts a deceleration for home price appreciation going forward of sub-1% for the July 21 – July 20 period.


Many companies who were planning on re-opening offices after Labor Day are rethinking that idea.

Morning Report: The death of the Phillips Curve

Vital Statistics:


Last Change
S&P futures 3506 2.6
Oil (WTI) 43.24 0.17
10 year government bond yield 0.74%
30 year fixed rate mortgage 2.93%


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


The stock market has been rocking this month. It turns out this is the best August in 30 years.


We will have a decent amount of data this week, with the jobs report, construction spending, ISM and productivity. The markets will be closing early on Friday ahead of the Labor Day weekend.


Fed Vice Chairman Richard Clarida said the Fed isn’t looking to raise rates even if unemployment starts falling. “My colleagues and I believe that this new framework represents a critical and robust evolution of our monetary policy strategy that will best equip the Federal Reserve to achieve our dual-mandate objectives on a sustained basis in the world in which we conduct policy today and for the foreseeable future,” Clarida said in prepared remarks for a speech to the Peterson Institute for International Economics. The “new framework” he is referring to is the asymmetric risks around inflation, which means that the Fed will let the labor market run hot before raising rates. Essentially this is the death of the Phillips Curve.

The Phillips Curve was a theory that came from the 1960s which said that as unemployment falls, inflation will rise. The Fed had used that sort of model in the past to help guide monetary policy, and the new monetary framework basically says that the Fed will no longer slow the economy pre-emptively as unemployment falls. The Fed will now wait until inflation is running above its 2% target before raising rates. We saw unemployment in the mid 3% range, and inflation remained under control. The punch line is that rates will stay at the zero bound for years unless we get some sort of unexpected increase in inflation.

Morning Report: The Fed’s challenge

Vital Statistics:

Last Change
S&P futures 3495 8.6
Oil (WTI) 43.04 -0.17
10 year government bond yield 0.72%
30 year fixed rate mortgage 2.91%


Stocks are higher this morning as personal incomes and spending came in better than expected. Bonds and MBS are down.


Personal incomes rose 0.4% in July, which was well ahead of the expectations of a 0.2% drop. Personal spending was up 1.9% versus expectations of a 1.5% increase. June’s numbers were all revised upward as well. Inflation remains well below the Fed’s target, rising 1% on a YOY basis.


Pending Home sales rose 5.9% in July. “We are witnessing a true V-shaped sales recovery as homebuyers continue their strong return to the housing market,” said Lawrence Yun, NAR’s chief economist. “Home sellers are seeing their homes go under contract in record time, with nine new contracts for every 10 new listings.”


Luxury home builder Toll Brothers reported record contract signings in June and July this year.


Jerome Powell discussed the Fed’s new policy yesterday, and there is some skepticism in the markets that the Fed can get inflation up above its 2% target. For what its worth, there is ample evidence that this can take longer than people think. Japan has been trying to create inflation for 30 years, and it has been unsuccessful. In fact, the younger generation which grew up post 2000 has the deflationary mindset, which is to save, and to wait for products to get cheaper. Inflation and deflation are monetary phenomenons of course, but they are also psychological. The Fed will discuss inflationary and deflationary expectations, and that word is deliberate. The Fed doesn’t want to see Americans get into the trap of saving too much (I know that seems counter-intuitive), so it is jawboning the markets saying essentially “we are going to create inflation, so spend now, before prices go up!” But if people feel like the economy is going to get worse, they will save what they can, pay off debt, and hunker down. This becomes a self-fulfilling prophecy. And anecdotally, that is exactly what is happening now. I was listening to an earnings call from PRA Group (a debt collector) and they said that collections have been better than normal. In a pandemic. People are saving more (paying down debt is considered saving). The Fed sees this and wants to get people spending, which is what gets the economy going.