Morning Report: Big bank merger

Vital Statistics:

 

Last Change
S&P futures 2714 -15.5
Eurostoxx index 363.36 -2.16
Oil (WTI) 53.62 -0.41
10 year government bond yield 2.67%
30 year fixed rate mortgage 4.43%

 

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

 

Initial Jobless Claims increased to 234,000 last week.

 

When was the last time we saw a big bank merger, at least one that wasn’t a shotgun wedding organized by the government? BB&T and Suntrust are merging in a stock-for-stock merger of equals. BB&T is already a player in the national mortgage market, while Suntrust is still more of a super-regional commercial bank. Bank mergers had a moratorium in the aftermath of the financial crisis amidst worries about too big to fail. Despite those concerns, the US banking system is probably the least concentrated in the world – most other countries have a handful of giants that dominate the market. Note as well for the Glass-Steagall nostalgics: the US was the only country in the world that separated commercial and investment banking, or even drew a distinction between the two.

 

The BEA has announced they will combine the first and second estimates for GDP and release them on Feb 28. Of course this assumes the government will be open on the 28th, which is not a given.

 

Older baby boomers aging in place is supposedly making it tougher for younger Americans to break into homeownership. That is an interesting theory, however I think older boomers are primarily concentrated in the move-up and luxury markets, especially since in the years after the crisis, the homebuilders focused on the only sector that seemed to be working – luxury and urban. Starter home supply is probably more of a function of the REO-to-rental trade, which should probably start being unwound.

 

The House Financial Services Committee is going to hold a hearing on credit scoring: “Who’s Keeping Score? Holding Credit Bureaus Accountable and Repairing a Broken System.” Not sure what the hot-button issues are, but they probably concern data security, fixing false information, and potential disparate impact issues.

 

House Democrats are introducing a bill to require lenders who originate more than 25 mortgages per year to release detailed reports to the government regarding the demographic data and quality of these loans. House Republicans raised the limit to 500 loans last year in an attempt to ease the regulatory burden on smaller lenders.

Morning Report: Foreclosure starts lowest in 18 years

Vital Statistics:

 

Last Change
S&P futures 2720 4
Eurostoxx index 362.25 3.31
Oil (WTI) 54.26 -0.3
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

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

 

Donald Trump stressed bipartisanship and unity at the State of the Union address, and reiterated his demands for border wall funding but stopped short of invoking emergency powers to get one built. Predictably, the reaction to the speech fell along partisan lines.

 

Mortgage Applications fell 2.5% last week as purchases fell 5% and refis rose 0.3%. This was a disappointment given that rates fell about 7 basis points, however the prior week had the MLK holiday adjustment so maybe there is some technical adjustment noise happening. Despite lower rates on a YOY basis, applications are down about 2% annually.

 

The service sector continued to grow in January, albeit at a slower pace, according to the ISM Non-Manufacturing Report. Some of this may have been government shutdown-driven. Employment rose, while new orders fell.

 

Foreclosure starts in 2018 decreased to 576,000, the lowest level in 18 years. Foreclosure completions were 175,000, another 18 year low. These numbers are 40% below their pre-recession averages. Higher loan quality in the aftermath of the credit crisis is a contributing factor, however the performance of refinances are better than purchases, which also is driving these numbers.

 

Housing reform and CFPB regulations may be headed for a conflict if what is called the “GSE patch” is not renewed when it expires in 2021. The CFPB discourages loans with debt to income ratios above 43%, but also permits GSE backed loans to fall under the QM umbrella, even though they permit DTIs up to 50%. Roughly a third of GSE loans fall in the 43-50% DTI range, which could become non-QM loans once the patch expires. The Urban Institute recommends that the GSEs replace the DTI rule with a 150 basis point cap over APOR to determine eligibility under QM.

 

Home prices rose 0.1% MOM and 4.7% YOY according to CoreLogic. Since house prices have been rising faster than incomes, affordability has suffered. Falling interest rates masked that issue most of the post-crisis period, but the music has stopped. CoreLogic now estimates that 33% of the housing stock in the US is now overvalued.  Separately, Redfin now estimates that the West Coast is a buyer’s market.

 

Corelogic overvalued

Morning Report: REO-to-Rental exit time?

Vital Statistics:

 

Last Change
S&P futures 2706 1
Eurostoxx index 359.39 -0.56
Oil (WTI) 55.07 0.02
10 year government bond yield 2.70%
30 year fixed rate mortgage 4.40%

 

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

 

The upcoming week will be data-light, as is typical the first week of every month. Jerome Powell speaks on Wednesday, and that is about it. Productivity and costs on Wed could be interesting, but there just isn’t going to be much to move bonds.

 

The money for the government runs out on Feb 15 and we are back to a possible shutdown. Judging by the jobs report, it doesn’t appear the government shutdown had much (if any) effect on the overall economy. If we have another shutdown, we should probably see the same old situation of the inability to process VOEs for Federal employees, but that is it.

 

Rental prices for 1 bedroom apartments fell a couple of percent last year. Not sure about the methodology for the study, but it does comport with several other studies that show rental prices falling, at least in luxury areas. For the real estate sector, this is probably good news. One of the best post-crisis trades has been the REO-to-Rental trade, where professional investors and hedge funds purchased distressed foreclosures, fixed them up and rented them out. Cap rates in the aftermath of the crisis were high single digits, which were super attractive given the 0% interest rate environment. Tack on home price appreciation and you have a phenomenal trade. Unfortunately, phenomenal trades rarely stay that way, and between rising mortgage rates and falling rents, cap rates are getting squeezed, and it might be time for some of these investors to exit the trade. Ultimately that means we should see a lot more starter homes for sale which will alleviate the inventory problem we are currently experiencing.

 

Bill Gross is retiring from money management. The Bond King ruled the Great Bond Bull Market of 1982 – 2016 and is stepping out as we head into what should be a decades-long secular bear market in bonds.

 

Fannie and Fred will be released from Federal conservatorship subject to tight market-share restrictions under a new plan released by Senate Republicans. Fan and Fred would retain their role as mortgage guarantors, and would be subject to competition. “We must expeditiously fix our flawed housing finance system,” Crapo, an Idaho Republican, said in a statement. “My priorities are to establish stronger levels of taxpayer protection, preserve the 30-year fixed-rate mortgage, increase competition among mortgage guarantors and promote access to affordable housing.” That is a tall order and pretty much forecloses any sort of radical change of the housing finance system. If the social engineering aspect (affordable housing) and the subsidies (30 year fixed rate mortgage) will remain, we are pretty much looking at the same system we had pre-bubble. The model that seems to have gained the most traction is putting the government in the second-loss position, with PMI taking the first loss position. It would represent a bit of a step of re-introducing free market economics in what is one of the most nationalized housing finance systems on earth.

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 2701 -2.75
Eurostoxx index 358.09 -0.56
Oil (WTI) 53.82 0.02
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.35%

 

Stocks are flattish after the jobs report. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls up 304,000
  • Labor force participation rate 63.2%
  • Unemployment rate 4%
  • Average hourly earnings up 3.2% YOY
  • Employment-population ratio 60.7%

Overall, an exceptionally strong report. The uptick in payrolls was almost double the market expectations, and the government shutdown had no appreciable effect (Furloughed employees were counted as “employed” by the survey.  The uptick in wages probably knocked bonds down a touch, but we have been seeing real wage gains in the employment situation report and the employment cost index. Sad trombone for partisans and the business press rooting for a shutdown-depressed report.

 

The unemployment rate has been rising, but that is actually good news as it means more and more of the long-term unemployed are being drawn back into the labor force. The labor force participation rate is a bit of a nebulous number because people who have been unemployed for a long time may not count as unemployed. The employment-population ratio is a much better measure, although you have to deal with demographic noise. The employment-population ratio rose 0.1% to 60.7%. A year ago it was 60.2%. While that is much higher than the 58.5% we saw at the depths of the Great Recession, it is still lower than the 62% – 63% pre-crisis level. Retiring baby boomers are being replaced by Millennials, but there is a lag.

 

employment population ratio

 

New home sales rose to a seasonally-adjusted average of 657,000 in November. The new home sales number is extraordinarily volatile – it is up 17% from October, but down 8% from a year ago – but it is somewhat encouraging as we head into the spring selling season, which despite the polar vortex upon us, unofficially starts about now.

 

Employment compensation costs rose 0.7% in the fourth quarter, as wages and salaries rose 0.6% and benefit costs rose 0.7%. For the prior 12 months, employment compensation costs rose 2.9%, with wages and salaries rising 3.1% and benefit costs rising 2.8%. With core inflation stuck around 2%, we are seeing over 1% real wage growth, which is strong indeed.

 

Wapo published a story about Trump possibly naming erstwhile R politician Herman Cain to the Fed. Cue the snide jokes: Can’t wait for his 3-3-3 plan: 3% Fed funds rate, 3% interest on excess reserves, 3% of QE portfolio runoff per year. In all seriousness though, he ran the Kansas City Fed from 92-96. So what appears at first to be an applause line in fact might not be. That said, these jobs generally go to academics and he is not one.

Morning Report: The Fed maintains rates

Vital Statistics:

 

Last Change
S&P futures 2683.5 1
Eurostoxx index 358.58 0.07
Oil (WTI) 54.26 0.03
10 year government bond yield 2.67%
30 year fixed rate mortgage 4.59%

 

Markets are flat after the Fed maintained interest rates. Bonds and MBS are up.

 

The FOMC held interest rates steady at their January meeting. The statement was taken as dovish, but it is hard to read much into it. The Fed noted that job gains and household spending was “strong” while inflation remained “muted.” They said they can remain “patient” with respect to future moves. In his press conference, Powell mentioned there was talk about slowing the pace of balance sheet reduction, which will make interesting reading once the minutes come out. Bonds initially yawned at the decision, but picked up momentum throughout the afternoon to close on their highs.

 

The Fed funds futures cut the probability of another hike in 2019 from about 19% to 10% and bumped the probability of a cut up to 12% as well. The consensus remains no changes for all of 2019 however.

 

fed funds futures

 

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 6%. There is some noise from the MLK Birthday holiday. Rates were largely unchanged.

 

The economy added 213,000 jobs in January, according to the ADP jobs report. This was well above expectations and is much higher than the 158,000 estimate for tomorrow’s jobs report. So far, it looks like the government shutdown didn’t spill over into the real economy, which makes sense – it was only a partial government shutdown – and the whole thing was more about tribal signalling than anything else.

 

Pending Home Sales fell 2.2% in December, according to NAR. Year-over-year contract signings were down 10%, which is the 12th consecutive month of declines. All geographies saw a drop, with the South being affected the worst. Blame higher rates and home prices which are decreasing affordability.

 

FINRA has again delayed the implementation of Rule 4210, which mandated risk limits and margin requirements for TBA transactions, spec pools, and CMOs. The net effect will be to increase liquidity for smaller mortgage originators. The rule has been delayed until March 2020. The rule treats mortgage originators (who hedge their pipeline with TBAs) the same as hedge funds who speculate in commodity contracts, which doesn’t make a lot of sense.

Morning Report: Fed Day

Vital Statistics:

 

Last Change
S&P futures 2648.75 6
Eurostoxx index 357.92 0.9
Oil (WTI) 53.82 0.51
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.59%

 

Stocks are higher after good numbers out of Apple. Bonds and MBS are flat.

 

The FOMC announcement is scheduled for 2:00 pm EST. Nobody expects the Fed to make any changes to the Fed Funds target rate, but there is talk that the Fed might announce an early end to balance sheet reduction. Note there will be a press conference after the announcement – apparently Powell will hold one after every meeting, unlike Janet Yellen who only held them after the Mar, Jun, Sep and Dec meetings.

 

Pulte reported fourth quarter numbers that disappointed the Street, but the 11% drop in orders is what got everyone’s attention. Gross margins also fell. The company said that traffic decreased YOY in October and November, but rebounded in December. That said, the company said there is less certainty about demand heading into this spring selling season than the industry has experienced in recent years. The stock was down about 6% early in Wed trading.

 

Home price appreciation continues to slow, according to the Case-Shiller Home Price Index. Prices rose 5.2% YOY, down from 5.3% the prior month. “Home prices are still rising, but more slowly than in recent months,” says David M. Blitzer, Managing
Director and Chairman of the Index Committee at S&P Dow Jones Indices. “The pace of price increases are being dampened by declining sales of existing homes and weaker affordability. Sales peaked in November 2017 and drifted down through 2018. Affordability reflects higher prices and increased mortgage rates through much of last year. Following a shift in Fed policy in December, mortgage rates backed off to about 4.45% from 4.95%. Housing market conditions are mixed while analysts’ comments express concerns that housing is weakening and could affect the broader economy. Current low inventories of homes for sale – about a four-month supply – are supporting home prices. New home construction trends, like sales of existing homes, peaked in late 2017 and are flat to down since then. Stable 2% inflation, continued employment growth, and rising wages are all favorable. Measures of consumer debt and debt service do not
suggest any immediate problems.”

 

The Trump Admin poured cold water on the notion that they would release Fannie and Fred from government control without Congressional involvement. Earlier in January Joseph Otting, head of the FHFA said:  “The Treasury and White House viewpoint is that the [FHFA] director and the secretary of Treasury have tremendous authority and that they would act, I think, independent of legislation if they thought it was the right thing to do.” This was taken as bullish for the stocks, sending Fannie Mae up from about $1.00 at the end of 2018 to close to $3.00. Since housing finance reform is going to be politically difficult, investors have been betting that the government would be more likely just to recapitalize and release the GSEs.

 

Freddie Mac’s survey is out for 2019. They anticipate one more Fed Funds rate hike, and think mortgage rates will average around 4.7% and GDP growth will slow to 2.5% in 2019 and 1.8% in 2020. They anticipate a slight uptick in housing starts, to 1.3 million per year, which is still well below the historical 1.5 million level. Home price appreciation is set to decelerate as well, to 4.1%. Mortgage originations are expected to finish 2018 at $1.6 trillion and increase to $17 trillion next year.

 

Home prices are falling in Silicon Valley – the first YOY declines since 2012. In San Jose, prices fell 8%, although they are so high – the median price is almost a million – that they are probably still overvalued by a wide margin. What is driving this? Believe it or not, the stock market. Many buyers rely on stock compensation to make the downpayment, and with the FAANG stocks having sold off, that is getting harder to do. Second, high house prices have made people reluctant to move there – after all a high salary is not as enticing if you end up giving it all back in rent or mortgage payments.

Morning Report: Ginnie is increasing scrutiny of non-bank lenders

Vital Statistics:

 

Last Change
S&P futures 2642 0
Eurostoxx index 357.3 2.93
Oil (WTI) 52.35 0.36
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

Stocks are flat as we begin the FOMC meeting. Bonds and MBS are up small.

 

Despite the end of the shutdown, we will have to wait for economic data. Two big reports this week – GDP and personal incomes – have been delayed.

 

Economic activity picked up in December, according to the Chicago Fed National Activity Index. Production-related indicators and employment drove the increase. Note that the CFNAI is a meta-index of a number of announced economic indices, and the government shutdown has decreased the amount of data going into the index. We’ll see the same effect next month as well, so the index won’t be as accurate as it usually is. Regardless, the CFNAI is an amalgamation of previously released data, so it doesn’t move markets.

 

Ex-Fed Head Narayana Kochlerakota thinks the Fed should consider easing at the next meeting. His argument is that the Fed has been falling short in maintaining inflation at its 2% target and that notwithstanding the latest unemployment data we are still not at full employment. He is looking at the percentage of prime age people (age 25-54) who are currently employed. We are just south of 80%, and were closer to 82% during the late 90s. Given that the number of prime age people in the US is roughly 100MM, then we have about 2 million more jobs to create in order to get to back to where we want to be. Interestingly, he not only advocates maintaining the current balance sheet, he thinks it should increase about 4% a year to grow in lockstep with the economy.

 

employment population ratio

 

Guess what has been one of the best performing assets so far this year (almost tripled in under a month). If you guessed the GSEs, you would be correct. The market is betting that shareholders won’t get wiped out when / if housing reform happens this year. Check out this chart of Fannie Mae:

 

fnma chart

 

Ginnie Mae is stepping up oversight of its partners, particularly non-bank lenders, telling some that they must improve some financial metrics before they will be granted more commitment authority, which is the ability to securitize FHA and VA loans. The government is concerned that non-bank lenders have replaced a lot of the traditional banks in servicing government loans. Indeed, they have – nonbanks now service 61% of government loans, up from 34% at the end of 2014. FHA was largely a backwater of the mortgage market pre-crisis, however post crisis, it has picked up the load that subprime left. Servicers for government loans have a lot more liquidity demands than servicers for GSE loans – and in a downturn the advances liability could take out undercapitalized mortgage bankers. VA lenders can face what is called no-bid risk, which can be a disaster for many servicers without a line of credit to cover advances and loan buyouts.

Morning Report: Is tapering behind the sell-off?

Vital Statistics:

 

Last Change
S&P futures 2651 -12
Eurostoxx index 356.08 -1.82
Oil (WTI) 52.76 -0.93
10 year government bond yield 2.76%
30 year fixed rate mortgage 4.62%

 

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

 

We have a temporary reprieve of the government shutdown, with agencies to -re-open until Feb 15. This will allow Congress more time to work on some sort of deal on border security. Trump is willing to shut down the government again, or use emergency powers to secure funding. Note that Trump said over the weekend he is skeptical that Congress will come up with anything he would be willing to sign.

 

With the government shutdown over, we should start getting economic data again. We will have a big week for data, with GDP on Wednesday and the jobs report on Friday. Not sure what is going to happen with the missed data from the shutdown.

 

The FOMC meets Tuesday and Wednesday, however no change in the Fed Funds rate is expected. Jerome Powell will hold a press conference after the meeting, which is unusual for January meeting. The Fed Funds futures are pricing in only a 1% chance of a hike, so the press conference will be about something else – probably balance sheet runoff and the idea that the Fed’s balance sheet will probably end up closer to current levels than it will be to pre-crisis levels.

 

Note there has been some criticism that the Fed’s balance sheet reduction is behind the sell-off in the market. They believe that the Fed’s reduction in Treasury purchases, combined with higher borrowing amounts is causing rates to rise and that is spooking investors. The idea is that government borrowing is crowding out other investments by soaking up all of that excess liquidity in the market. The Fed isn’t buying that argument: “It’s hard to fathom the [Fed] balance sheet is having some dramatic effect,” Minneapolis Fed President Neel Kashkari said in a Jan. 17 interview. FWIW, if Fed buying was the catalyst for the sell-off, we should be seeing a steepening of the yield curve (in other words higher long term rates). In fact, we are seeing the opposite. IMO, the biggest reason for the sell off has been the re-introduction of money market instruments to the investment menu. For the past 10 years, they have paid nothing and therefore money market investors have been forced to invest in stocks and longer term bonds. Now that short term rates are rising again that money is returning to its natural home, which means some selling in the stock and bond markets as the trade is unwound.

 

D.R. Horton reported fourth quarter net income increased 52% YOY, although that was partially driven by a tax charge in Q4 last year. Orders were up 3% in units and flat on a dollar basis. Donald Horton, Chairman of the Board said: “Sales prices for both new and existing homes have increased across most of our markets over the past several years, which coupled with rising interest rates has impacted affordability and resulted in some moderation of demand for homes, particularly at higher price points. However, we continue to see good demand and a limited supply of homes at affordable prices across our markets, and economic fundamentals and financing availability remain solid. We are pleased with our product offerings and positioning for the upcoming spring selling season, and we will adjust to future changes in market conditions as necessary.”

Morning Report: Initial Jobless Claims break 200,000

Initial Jobless Claims broke 200k, falling to 199k last week. This is the lowest level since the 1960s. For all of those fretting over a possible economic slowdown, we aren’t seeing any evidence of that in the initial jobless claims numbers. These numbers are impressive enough in of themselves, however if you correct for population growth, we are in pretty much uncharted territory.

 

initial jobless claims divided by population

 

The Index of Leading Economic Indicators fell 0.1% in December, according to the Conference Board. This follows a 0.2% increase in November. “The US LEI declined slightly in December and the recent moderation in the LEI suggests that the US economic
growth rate may slow down this year,” said Ataman Ozyildirim, Director of Economic Research at The Conference Board. “While the effects of the government shutdown are not yet reflected here, the LEI suggests that the economy could decelerate towards 2 percent growth by the end of 2019.”

 

Adjustable rate mortgage are making a comeback, at least according to the latest Ellie Mae Origination Insight Report. ARMs accounted for 9.2% of all originations in December, up from 8.8% in November. Purchases accounted for 71% of all originations, and other indicators like FICO, DTIs, and cycle times were largely unchanged.

 

Dueling bills to re-open government failed in the Senate yesterday. Talks have resumed between the parties to find a compromise everyone can live with.

 

The Fed is contemplating an earlier end to the tapering process than the market has been anticipating. The Fed’s balance sheet pre-crisis was about $800 billion. It peaked around $4.5 trillion and has fallen to something like $4.1 trillion since they began letting some of the portfolio run off (i.e letting bonds mature and not re-investing the proceeds). The market thought the Fed would likely return to pre-crisis levels, however the consensus is that probably won’t happen as it could create issues with banking reserves. What does that mean for the mortgage industry? At least for the moment it means that there will be more incremental demand for TBAs from the Fed, which will mean lower rates, at least at the margin.

 

Housing reform may be a front-burner issue again, as lawmakers pledge to do something with Fan and Fred.

Morning Report: Dueling bills to end the shutdown

Vital Statistics:

 

Last Change
S&P futures 2643.25 4.75
Eurostoxx index 356.16 1.08
Oil (WTI) 52.37 -0.25
10 year government bond yield 2.73%
30 year fixed rate mortgage 4.62%

 

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

 

Dueling bills to end the shutdown will be voted on in the Senate today, with neither one having much chance of passing. The point of holding these votes is to hopefully create some avenue for compromise. Separately, Trump will postpone the State of the Union address until after the shutdown is over.

 

The government estimates that first quarter GDP could be flat if the government shutdown lasts for the whole quarter. There is always some seasonal noise that depresses Q1 GDP relative to the rest of the year, and the added effects of the shutdown would exacerbate that.

 

House prices rose 0.4% in November, according to the FHFA House Price Index. On a YOY basis, they were up 5.8%. Take a look at the chart below – you can see how much the hot markets out West have cooled down.  That said, the FHFA index is holding up better than indices like CoreLogic or Case-Shiller. This is because the index focuses on conforming loans only, which makes it a starter-home heavy index and that is where the demand is.

 

fhfa regional

 

There has been another major leak of financial data, this time affecting mortgage and loan data from Citi, HSBC, Wells, Capital One, and HUD. The data contained names, social security numbers, and bank account numbers. Much of the data was quite old, dating back to the bubble years.