Morning Report: The MBA revises its origination forecast

Vital Statistics:

S&P futures36102.6
Oil (WTI)41.730.31
10 year government bond yield 0.87%
30 year fixed rate mortgage 2.84%

Stocks are flattish despite positive vaccine news. Bonds and MBS are up.

Housing starts rose 14% YOY to 1.53MM in October. Building Permits were up 2.8% compared to a year ago. Starts fell in the Northeast, but were up pretty much everywhere else, especially the South. Meanwhile, the NAHB Homebuilder Sentiment Index hit another record high.

The MBA revised upward its 2020 and 2021 origination forecasts. As a general rule, the MBA is conservative on origination forecasts. 2020 is now expected to be $3.4 trillion and 2021 is now expected to come in at $2.6 trillion. Interestingly, the MBA still thinks refi activity in 2021 will be below $1 trillion. They expect the 30 year fixed rate mortgage to end 2020 at 2.9% and then rise to 3.4% by the end of 2021. As I discussed in yesterday’s note, the Fed has a real incentive to maintain mortgage rates as low as possible to support the economy. The last thing it needs is for home prices to fall as rates rise.

One thing market participants need to understand is that the bond market, at least as it relates to mortgage rates, is not a market. The Fed is engineering rates by purchasing mortgage backed securities. Forget about inflation expectations, trade flows, etc. They don’t matter. Here is what you need to know. The economy is weak. The Fed’s playbook is to support the economy by supporting asset prices. Residential Real estate is the biggest asset most people own. The Fed doesn’t want to risk weakening the economy during a pandemic by letting mortgage rates rise. For mortgage bankers, this couldn’t be a better set of circumstances, although those that retain servicing will probably have a bumpy road ahead.

Mortgage applications were flattish last week as purchases rose 4% and refis fell 2%. There wasn’t an adjustment for the Veterans Day holiday. “Mortgage market activity was mixed last week, despite the 30-year fixed rate mortgage staying below 3 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market recovered from its recent weekly slump, with activity increasing 3 percent and climbing above year-ago levels for the 26th straight week. Housing demand remains supported by the ongoing recovery in the job market, and an increased appetite from households seeking more space because of the pandemic.”

Morning Report: Why mortgage rates are going nowhere for a while

Vital Statistics:

S&P futures3599-22.6
Oil (WTI)40.730.41
10 year government bond yield 0.88%
30 year fixed rate mortgage 2.84%

Stocks are lower this morning as COVID cases build. Bonds and MBS are up.

Retail Sales rose 0.3% in October, which was lower than expectations. The control group, which strips out autos, gas, and building products rose 0.2%. The retail sales print gave the bond market a boost, sending yields lower.

Industrial production in October reversed September’s big declines, rising 1.1%. Manufacturing production rose 1%, and capacity utilization rose from 71.5% to 72.8%. All numbers were better than Street expectations.

The share of loans in forbearance fell to 5.47% last week, a decline of 20 basis points. “Declines in the share of loans in forbearance continued this week, with a significant increase in the rate of forbearance exits – particularly for portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “More than 76 percent of borrowers in forbearance are now in an extension, as we are well past the six-month point for most borrowers’ forbearance plans.”

Interesting article in Bloomberg about the implications of the Fed’s support for the mortgage market. The article gets a little technical, however the main point is that the Fed is using its purchases of mortgage backed securities in order to support the economy. House prices are rising as rates fall, which has created a “house of cards” scenario. Essentially the argument is that the Fed has painted itself into a corner and has no choice but to keep mortgage rates down lest housing prices fall and knock out one of the remaining supports for the US economy. The piece is really from the perspective of an MBS investor, and it frets about what is happening to higher-coupon mortgage backed securities, because prepay speeds are rising so fast. The article suggests that since the Fed wants to create inflation, it might shift its Treasury purchases from shorter-dated bonds to longer dated ones, in order to keep long term rates low.

Here is what this means. When mortgage backed securities investors start talking about “prepay speeds,” mortgage bankers should smile, since a synonym for “high prepay speeds” is “refinance boom.” While I don’t share the author’s fear of a housing bubble, I do think he is correct that the last thing the Fed wants to see is a decline in house prices, at least as long as the economy is in a weakened state. This means that the Fed will continue to support MBS prices, and by purchasing lower coupon notes, aka the 1.5% bonds, it is taking affirmative steps to push mortgage rates even lower.

This is truly a nirvana situation for the mortgage banking industry. This means that as the Fed pushes mortgage rates even lower, more profitable refi opportunities open up. Remember that Black Knight believes that 75% of the $10 trillion mortgage market can save 75 basis points in rate by refinancing. The MBA thinks there will be under $1 trillion in refis next year and that mortgage rates will rise in the second half of 2021. If this article is correct, we won’t see an increase in mortgage rates for years.

Stock investors, take note. PennyMac Financial trades at 3 times earnings. Rocket trades at under 6 times 2020 expected earnings per share.

Morning Report: Judy Shelton will be joining the Fed

Vital Statistics:

S&P futures361432.6
Oil (WTI)41.730.41
10 year government bond yield 0.91%
30 year fixed rate mortgage 2.9%

Stocks are higher this morning on positive economic news out of China. Bonds and MBS are down.

The upcoming week doesn’t have much in the way of market-moving news, however we will get a lot of housing news, with housing starts, NAHB housing market index, and existing home sales.

The Biden transition team will focus heavily on what they see as systemic racism in the financial sector. Expect to see a flurry of fair lending suits once the new CFPB leadership is in place. The government will also focus like a laser on forbearance servicing.

Better Mortgage, a digital platform which connect homebuyers with lenders just raised capital which values the company at $4 billion. This is about the market cap of Lending Tree.

The CEO of Freddie Mac just stepped down. I am not sure what that means with housing reform, but my guess is that nothing will change for the time being. While we won’t know which party will control the Senate until the Georgia runoff election, chances are that Republicans will hold the chamber and we will be looking at divided government. True housing reform will have to be accomplished legislatively, and with COVID front and center it probably won’t have the urgency to get considered, at least in the near future. Given the new administration’s focus on perceived systemic racism in lending, the government will want to keep F&F on a short leash in order to push affordable housing goals.

Judy Shelton looks like she will be joining the Fed, assuming a vote on her this week. The left absolutely despises her for the apparent thoughtcrime of having positive things to say about the gold standard. Ron Wyden of Oregon said: “Her ideas are so wacky and outdated, giving her authority over the dollar would be like putting a medieval barber in charge of the CDC.”

Note to Senator Wyden: The Fed doesn’t have any authority over the dollar, that would be Treasury. Regardless, with global central banks in the midst of the most ambitious experiment in financial engineering, groupthink is a risk.

Morning Report: Mortgage Credit Eases

Vital Statistics:

S&P futures355522.6
Oil (WTI)40.830.41
10 year government bond yield 0.88%
30 year fixed rate mortgage 2.9%

Stocks are higher this morning despite a rise in COVID cases. Bonds and MBS are up.

Inflation remains muted at the wholesale level, with the producer price index up 0.3% MOM and 0.5% YOY. Even if you strip out the commodity and trade-related components it only rose 0.2% MOM and 0.8% YOY.

The bond market is starting to claw back some of its vaccine-related losses. The trader in me doesn’t sense that the path of least resistance has changed from lower rates to higher rates, at least not yet. The last time the Fed had rates at 0%, the 10 year was trading at 1.5% – 2%, so it won’t necessarily take a rate hike to get them back up to those levels. If the 10-year bond yield has indeed bottomed out, that would mark the end of the Great 40-year bond bull market in the US, which began in the early 80s as Paul Volcker broke the back of 1970s inflation. The last bond bear market lasted from sometime in the 1930s until 1980. Interest rate cycles are long. The first rule of bubbles is that they go on further and longer than you would ever expect.

Mortgage Credit eased in October, according to the MBA’s Mortgage Credit Availability Index. “Credit availability increased in October for the first time since July,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The ongoing economic recovery and improving labor market led to a rise in credit supply for various loan types. There was an overall increase in credit availability for low credit score and higher LTV loans, with conventional credit supply increasing 5.1 percent and government credit staying essentially flat.” That said, we still have a long way to go to get back to pre-COVID-19 levels.

Morning Report: Initial Jobless Claims fall

Vital Statistics:

S&P futures3555-20.6
Oil (WTI)41.830.41
10 year government bond yield 0.92%
30 year fixed rate mortgage 2.9%

Stocks are lower as COVID cases increase. Bonds and MBS are up

Initial Jobless Claims came in at 709,000 last week. While the trend is still going in the right direction, they are still at the highest levels ever recorded. Take a look at the chart below. The yellow highlighted area was the Great Recession

Inflation remains under control, at least according to the government statistics. The Consumer Price index was flat month-over-month in October and was up 1.2% on a year-over year basis. Ex-food and energy, prices were flat, and rose 1.6% YOY.

Jerome Powell will be speaking this afternoon. Probably won’t be market-moving, but nothing can be ruled out these days. The bond market has been volatile lately as positive vaccine news and negative COVID news battle it out.

Manhattan real estate prices and asking rent are falling, which could signal that it is turning the corner. Median effective rent fell 19% YOY to $2868, and leases are up 33%. FWIW, $2,868 sounds low to me. The young are supposedly moving back to Manhattan, but with the bars and restaurants shut, what is there to do?

2020 has been the year of the mortgage IPO. Loan Depot is the next to go public.

Morning Report: The Fed is probably going to increase MBS purchases

Vital Statistics:

S&P futures356420.6
Oil (WTI)42.330.91
10 year government bond yield 0.97%
30 year fixed rate mortgage 2.9%

Stocks are higher this morning as the risk-on trade continues. The bond market is closed for Veteran’s Day.

Mortgage Applications fell 0.5% last week as purchases fell by 3% and refis rose by 1%. “Mortgage application activity was mixed last week, despite the 30-year fixed rate decreasing to 2.98 percent – an all-time MBA survey low,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index climbed to its highest level since August, led by a 1.5 percent increase in conventional refinances. The purchase market continued its recent slump, with the index decreasing for the sixth time in seven weeks to its lowest level since May.”

Despite the news of a potential vaccine, the Fed is thinking about supporting the economy even more, and is having “robust discussions” about increasing them.

“We have asset purchases well in place and we are discussing what more we could do if more is needed and what should we do in terms of communicating a plan for asset purchases going forward,” [San Francisco Fed President Mary] Daly told CNBC’s Steve Liesman on “Squawk on the Street.”

“Those discussions are always ongoing, but we really had a robust debate” at least week’s Federal Open Market Committee meeting. “I would say discussion more than debate even,” she added. “We’re all dedicated to the same thing — continue the mission to serve the American people with our top policy tools. I would say our tools are powerful.”

Given that it is looking like we will have divided government in DC, any sort of major stimulus package should be off the table. The potential vaccine is giving investors more of an appetite for risk, which is why the 10 year is selling off. That said, mortgage rates are determined by the mortgage backed securities market, and that is much easier for the Fed to manipulate.

Rocket Mortgage reported third quarter numbers last night, with volumes increasing to122% YOY to $89 billion. The company reported net income of about $3 billion per share which works out to be a 3.4% profit margin. That is pretty fat as far as mortgage banking margins go. Gain on sale margins were wide at 4.5%

80.4% of renters paid their rent payment by November 6, according to the National Multifamily Housing Council. This is up from the 79.4% of renters who paid by October 6, but down from the 81.5% who paid by November 6 2019.

NAR weighs in on what a Biden Administration means for Fan and Fred. Punch line: probably nothing, as a full release will require legislation and that won’t happen under divided government. There is a lawsuit pending in the Supreme Court regarding the structure of the FHFA. However, the Biden Administration will probably be happy to keep the GSEs as wards of the state in order to prod them to increase affordable housing mandates etc.

Morning Report: Forbearances decline

Vital Statistics:

S&P futures3534-10.6
Oil (WTI)40.070.51
10 year government bond yield 0.96%
30 year fixed rate mortgage 2.89%

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are down.

Yesterday was a “hip to be square” day in the market, for those of us old enough to remember the early 1980s. Basically, every stock that has been hated for months had its day in the sun. Investors snapped up mall stocks, apartment REITs, retailers, lodging companies, cruise lines and sold off the big COVID momentum names. Mortgage originators got thrown overboard on fears that rates are going to rise and squash the refi boom.

Mortgage Backed securities are lagging the move in Treasuries, which means mortgage rates aren’t moving up as fast as the 10-year. This is typical, however remember the Fed is the 800 pound gorilla in the MBS market, so it can support rates wherever it wants.

JP Morgan is “going on the offensive” in the home lending business, reducing credit constraints.

Small business optimism was steady in October, at a historically high reading. “Leading up to the presidential election, small businesses continued to focus on stabilizing their businesses but were uncertain about the future economic conditions due to COVID-19 government regulations on all levels,” said NFIB Chief Economist Bill Dunkelberg. “We see solid momentum going into the 4th quarter, and another good quarter could get the GDP back to its 2019 closing levels.”

Loans in forbearance decreased 16 basis points to 5.67% last week, according to the MBA. “With declines in the share of loans in forbearance across the board, the data this week align well with the positive news from October’s jobs report, which showed a gain of more than 900,000 private sector jobs and a 1 percentage point decrease in the unemployment rate,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “A recovering job market, coupled with a strong housing market, is providing the support needed for many homeowners to get back on their feet.”

Morning Report: Vaccine news sends stocks higher

Vital Statistics:

S&P futures3646145.6
Oil (WTI)41.074.01
10 year government bond yield 0.92%
30 year fixed rate mortgage 2.83%

Stocks are higher this morning after Pfizer and BioNTech announced that its COVID-19 vaccine was successful in its Phase 3 trial. Bonds and MBS are down on the “risk-on” trade

Here is the press release from Pfizer about 2 hours ago. The vaccine supposedly has an efficacy rate of 90%. The vaccine has received fast track approval from the FDA.

While the election results may not have pleased partisans on either side, they are an absolute win for the markets and the mortgage banking business. Markets generally prefer gridlock since it means certainty. For interest rates, notwithstanding the market reaction to vaccine news, they should remain lower for longer with the Fed holding down rates and little chance for a big stimulus package. The best part of Biden (market friendliness, etc) will stay in place while the bad parts: tax hikes, green new deal, etc will not. Note we won’t have a final word on the Senate until January when the Georgia run-offs will determine the final make-up.

Note that divided government means that the big broke blue states like New York might go into default. The state and NYC bonds were downgraded already last month.

For stock investors, the promise of a vaccine means we should see some signs of life in lodging, airlines, and retailers. Interesting that the retailers rose 8% last week. Cruise line stocks are up 20% pre-market.

What the CFPB will look like under a Biden administration. Biden is almost assured to replace current director Kathy Kraninger as one of the first orders of business. Democrat Katie Porter is one name that has been mentioned. The CFPB will probably focus more on COVID related servicing issues at least initially.

Morning Report: Good jobs report

Vital Statistics:

S&P futures3499-5.6
Oil (WTI)38.07-0.71
10 year government bond yield 0.81%
30 year fixed rate mortgage 2.87%

Stocks are flattish this morning as it looks more and more like Biden will win. Bonds and MBS are down.

The Fed maintained rates yesterday and made little changes to the FOMC statement. Rates will remain low, and the Fed will continue to purchase Treasuries and MBS at a minimum of current levels to maintain stability and to support the economy. With divided government looking more and more certain, the chance of fiscal stimulus is probably off the table. This will push more of the burden of stimulus onto the Fed’s plate, which means lower rates for longer. Good news for the mortgage banking industry.

The economy added 638,000 jobs in October, according to BLS. The unemployment rate fell to 6.9% and the labor force participation rate increased to 61.7%. 21.2% of the US workforce is telecommuting due to COVID. Average hourly earnings rose 0.8% MOM and 4.5% YOY. The overall numbers were well above Street expectations.

The increase in wages is a good sign for the economy, and compensation is certainly rising in the mortgage banking space. The bond market has yet to start fearing inflation data, so the recovery should continue to gain momentum. Remember the Fed will let the labor economy run hot, so increasing wage growth shouldn’t trigger any response from the Fed.

PennyMac reported blowout earnings last night of $7.03 per share. Volumes were up 44% QOQ to a total of $54 billion. This is an increase of 55% from a year ago. The company has earned over $15 a share through the first 9 months of the year, and the full-year estimates are way too low. It is not out of the question for PFSI to earn $20 this year, which is wild with a stock trading at $58 per share. For those keeping score at home, it works out to be a P/E of 2.9. The next question will be what will they do with all that cash? The quarterly dividend is 15 cents and the company earned 7 bucks a share. A special dividend and massive buyback should be on the table.

I will be on a panel today at the MCT Exchange 2020. Rob Chrisman will be running the panel, where we will discuss the election and what it means for the mortgage banking sector. The panel starts at 11:00 am PST / 2:00 PM EST.

Morning Report: Predictions going forward

Vital Statistics:

S&P futures349055.6
Oil (WTI)38.91-0.31
10 year government bond yield 0.76%
30 year fixed rate mortgage 2.87%

Stocks are higher this morning as we continue to digest the election news. Bonds and MBS are up.

The FOMC is set to release its decision today at 2:00 pm. There will probably be no change in policy, and bonds are going to be driven by election news.

Initial Jobless Claims came in at 750k this morning, while productivity rose 4.9% and unit labor costs fell 8.9%.

I wanted to give my thoughts on the election and things going forward. I assume Biden goes on to win. Republicans keep the Senate and Democrats control the House.

Big picture: Biden wins after a long, drawn-out litigation. Bond yields will drift lower as the fear of a blue wave is off the table. Stock rally because, well, just because. 

Divided government means no big stimulus package. Republicans will re-discover religion re government spending, which means any stimulus will be small and targeted. Maybe we will see another check made out to people. Any bailout of the big broke blue states is DOA. Nancy Pelosi will have her hands full managing the backbenchers in the House who want to see Trump in an orange jumpsuit. Washington will settle into gridlock. 

Regulatory-wise, the CFPB will become more aggressive. HUD will resume suing local governments to reduce single-family zoning. Regulatory fears will tighten FHA lending even more, which will give the affordable housing types like Urban Institute conniptions. The government will continue to have a moratorium on evictions. Luckily, rising house prices will keep a lid on strategic defaults. Multi-fam construction will probably slow as financing gets tighter, exacerbating the home supply problem. 

A lack of any sort of fiscal stimulus means the Fed keeps the pedal to the metal for a while. Neel Kashkari will urge the Fed begin to repo baseball cards and Elvis plates. Black Knight estimates the 3/4 of the US mortgage market can save 75 bps on rate, which means the refi boom continues to have legs. The mortgage industry is at capacity, and bringing on new bodies from another industry takes time (just look at how long it has taken in construction, where there are no regulatory issues). Mortgage industry should have another $3 – 4 trillion year in 2021, and the MBA will grudgingly move their forecast up from 2.5 trillion sometime in September 2021.  Margins remain wide, and salaries will continue to rise for industry professionals. 

Longer term, a more aggressive regulatory state will keep a lid on economic growth. The recovery will be shallower and longer. Interest rates will stay around here, and the economy will look more like the Obama years than the pre-COVID Trump years. For the mortgage banking industry, we should see a few more great years, but once the music stops and mortgage banks are left with bloated cost structures, a wave of consolidation will take place.