Morning Report: The CFPB updates the QM rule

Vital Statistics:

S&P futures3638-22.3
Oil (WTI)46.810.04
10 year government bond yield 0.89%
30 year fixed rate mortgage 2.80%

Stocks are lower this morning on fears of a nasty Brexit. Bonds and MBS are up.

The FDA is working aggressively to get Pfizer’s COVID-19 vaccine approved for emergency use.

The CFPB updated its QM rule by going with a price-based rule as opposed to strict DTI. Essentially, the new rule compares the rate on the loan and compares it to the average prime offer rate (APOR) of comparable transactions. If the rate is higher by less than 1.5%, then it is QM. If it exceeds the APOR by 1.5% – 2.25%, there is a rebuttable presumption that the borrower has the ability to repay.

“Through this General QM Final Rule, we are working to create an appropriate, more flexible General QM loan definition,” said CFPB Director Kathleen L. Kraninger.  “Our final rule’s price-based approach strikes the best balance between assessing consumers’ ability to repay and promoting access to responsible, affordable mortgage credit.”

Inflation at the wholesale level remains below the Fed’s target. The Producer Price Index rose 0.1% MOM and 0.8% YOY. Stripping out food, energy, and trade services, it rose 0.1% MOM / 0.9% YOY.

Morning Report: You have to pay to lend to Portugal

Vital Statistics:

S&P futures3653-19.6
Oil (WTI)46.430.94
10 year government bond yield 0.92%
30 year fixed rate mortgage 2.80%

Stocks are down as stimulus negotiations stall. Bonds and MBS are up.

Initial Jobless Claims rose to 853,000 last week. Meanwhile job openings increased to 6.52 million.

Inflation at the consumer level remains under control. The Consumer Price Index rose 0.2% month-over-month and 1.2% year-over-year. If you strip out food and energy prices, it rose 0.2% MOM and 1.6% YOY.

Homeowner equity rose 10.8% in the third quarter, which was the highest gain since 2014. Overall equity rose by $1 trillion, which works out to be about $17,000 on average for each homeowner. The average home with a mortgage had $194,000 in equity. The increase in home prices has been a huge boost to an otherwise difficult economy.

Lawmakers are looking at including an eviction moratorium until February 2021. This would only apply to people earning less than 50% of their area’s median income, so we would be talking about people making in the $30k and below range.

Remember the PIIGS crisis from about 8 – 10 years ago? The PIIGS was an acronym for the struggling European economies of Portugal, Italy, Ireland, Greece, and Spain. These countries had severe economic problems, which drove up the funding costs. Greece actually defaulted on its debt in 2015. Fast forward to today. The Portuguese 10 year is trading with a negative yield. Yes, if you want to lend money to the Portuguese government, you have to pay them. Spanish 10 year bonds yield 2 basis points. Italy and Greek yields are lower than the US 10 year. Let’s not forget that the Greek 10 year yielded 35% 5 years ago.

We are truly in the midst of a government-created experiment in direct market intervention like the world has never seen before. Global central banks have manipulated interest rates to the point where the signal-to-noise ratio is close to zero. Academics are setting the price of money the way Soviet bureaucrats set quotas for the Volograd Tractor Plant. There is zero market-driven influence on risk-free interest rates in the world right now.

If these rates were market-driven it would mean the market is telling you that we will experience a global deflationary wave, similar to what Japan has experienced for the last 30 years.

The planet’s collective bond markets are at a party. Germany and Japan are passed out in the corner. Spain and Portugal are puking in the bathroom, and the US and the UK are still staggering at beer pong table. But hey, they are the most sober ones there.

What does this mean for investors? No idea, since this is completely unprecedented. In the short term, I cannot see how US bond yields manage to escape the global vortex pulling down rates. While it is hard to argue that US rates will go negative, I think that the path of least resistance for rates in the US is down, even after the economy recovers. In other words, the mortgage business should continue to experience a refi boom.

Morning Report: Rent collections fall

Vital Statistics:

S&P futures37075.6
Oil (WTI)46.01-0.34
10 year government bond yield 0.94%
30 year fixed rate mortgage 2.80%

Stocks are higher this morning on hopes for a stimulus bill. Bonds and MBS are down.

Mortgage Applications fell 1.2% last week as purchases decreased 5% and refis increased 2%. The numbers include an adjustment for the Thanksgiving Day holiday. “Refinance activity increased last week in response to mortgage rates for 30-year, 15-year and FHA loans hitting their lowest levels in MBA’s survey,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The increase in refinance applications was driven by FHA and VA refinances, while conventional activity fell slightly. The ongoing refinance wave has continued through the fall, with activity last week up 89 percent from a year ago.”

Mortgage credit increased in November, according to the MBA. “Mortgage credit availability increased slightly in November to its highest level since July, as the job market improved, and the housing sector continued to show strong borrower demand,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “There was an increase in credit availability for jumbo loans, as well as loan products with low credit scores, higher LTVs, and adjustable-rate features. Home purchase and refinance activity have remained strong in recent months, and the increased credit supply should help qualified borrowers still looking to capitalize on record-low mortgage rates. However, credit availability is still more than 30 percent below pre-pandemic levels and close to the restricted standards seen in 2014. This has especially impacted government borrowers and first-time buyers.”

Note that mortgage credit is basically back to 2014 levels. It has still tightened dramatically post-COVID. Still we are nowhere near where we were during the mid 00s.

Toll Brothers recently reported earnings with contract signings up 63% on a YOY basis. Douglas Yearly, CEO said that the current market is the strongest he has seen in his 30 years at Toll Brothers.

“We attribute the strength in demand to a number of factors, including historically low interest rates, an undersupply of new and resale homes, and a renewed appreciation for the home as a sanctuary. The work-from-home phenomenon is also enabling more buyers to live where they want rather than where their jobs previously required. And since most of our customers have a
home to sell, the tight resale market gives them confidence they can sell their home quickly at an appreciated value that can then be re-invested in their new home.”

About 75% of renters made a full or partial rent payment in the first week of December, according to the National Multifamily Housing Council. In the first week of November, that number was closer to 80%, so this drop is a concern. “While the initial rent collection figures for the first week of December are concerning, only a full month’s results will paint a complete picture. However, it should not come as a surprise that a rising number of households are struggling to make ends meet. As the nation enters a winter with increasing COVID-19 case levels and even greater economic distress – as indicated by last week’s disquieting employment report – it is only a matter of time before both renters and housing providers reach the end of their resources,” said Doug Bibby, NMHC President.

Morning Report: Small Business Optimism declines

Vital Statistics:

S&P futures3675-15.6
Oil (WTI)45.38-0.34
10 year government bond yield 0.91%
30 year fixed rate mortgage 2.82%

Stocks are lower this morning as hopes for a stimulus package fade. Bonds and MBS are up.

Small business optimism declined in November according to the NFIB. “Small business owners are still facing major uncertainties, including the COVID-19 crisis and the upcoming Georgia runoff election, which is shaping how they’re viewing future business conditions,” said NFIB Chief Economist Bill Dunkelberg. “The recovery will remain uneven as long as we see state and local mandates that target business conditions and disproportionately affect small businesses.” The bright spot remains labor markets with a net 20% of firms raising compensation. 89% of employers said that finding qualified employees was difficult.

Productivity in the third quarter was revised downward to 4.6%. COVID is introducing a lot of noise to these numbers. Unit Labor Costs fell by 6.6%.

Mortgage delinquencies rose in September to 6.3% compared to 3.8% a year ago. “Although delinquencies remain high, it’s clear the economy has passed an initial stress test. High home equity balances and structural protections put in place as a result of the Great Recession contributed to surviving this test. Housing demand remains strong, and rates low, which provides optimism that the housing market will continue to be a bright spot in this COVID-ravaged economy.” The hardest-hit states for delinquencies are Louisiana, Mississippi, New York, New Jersey, and Florida.

Redfin sees the housing economy absorbing any COVID-19 related foreclosures with relative ease. “In my experience selling foreclosed properties, some people don’t take advantage of forbearance because they aren’t educated on what it entails,” said Redfin agent Gina Sapnar. “There are people who are in forbearance who don’t understand how repayment works. For some people payments are tacked on to the end of the loan, but for others it may be a large payment due immediately at the end of forbearance as a lump sum, which could be very tough for people to repay. Some homeowners are underwater because they took on more debt than they could handle. I know of a restaurant owner who took equity out of his home to pay his workers during the pandemic. There are people suffering who have depleted their entire life savings, are drowning in debt and they aren’t paying their mortgages. But even those people have options. The lenders are really trying to work with occupants and educate them on how to avoid the scarlet letter of a foreclosure.”

The demand for homes is so insatiable that the excess supply will be taken up quickly.

Morning Report: Corelogic predicts low mortgage rates for the next 3 years.

Vital Statistics:

S&P futures3689-8.6
Oil (WTI)45.92-0.34
10 year government bond yield 0.94%
30 year fixed rate mortgage 2.82%

Stocks are lower this morning as California institutes a strict lockdown amidst a rise in COVID-19 cases. Bonds and MBS are down.

The upcoming week should be relatively quiet with the Fed in the quiet period ahead of next week’s FOMC meeting and limited economic data. We will get inflation and productivity data this week and that is about it.

CoreLogic released its three-year economic outlook, and it predicts low mortgage rates through 2023 as well as rising home prices. They forecast that mortgage rates will average around 3.2% for 2021 through 2023. This means that the refi boom will continue.

They anticipate rates will remain below 3% for early 2021.

Second, they see the Millennial generation will be a huge tailwind for housing demand. The largest age cohort of the Millennial generation is in their late 20s and, and the median age for the first time homebuyer is age 33. The first time homebuyer has been underrepresented in the homebuying population, averaging about 30% of home purchases. Historically that number has been closer to 40%. So, as homebuilders ramp up to satisfy this demand, the purchase side of the business should remain robust for the next several years.

Finally, CoreLogic expects home price appreciation to slow as builders ramp up production and the supply / demand imbalance gets fixed. As the first time buyers become a bigger percentage of the mix, lower-priced starter homes will be act to pull the average prices down.

Overall, the report is bullish for housing and the mortgage origination industry. The Fed seems to be in no hurry to increase rates, and the global vortex of low and negative sovereign yields should keep a lid on the 10 year. Plus the Fed is thinking of increasing MBS purchases, which will keep mortgage rates low. Overall, this should be a great environment for the origination business going forward.

Morning Report: Disappointing jobs report

Vital Statistics:

S&P futures36738.6
Oil (WTI)45.87-0.21
10 year government bond yield 0.95%
30 year fixed rate mortgage 2.78%

Stocks are higher this morning on stimulus hopes. Bonds and MBS are down.

The jobs report showed the economy added 245,000 jobs last month, which was well below expectations of 500,000 jobs. The unemployment rate ticked down to 6.7%. The labor force participation rate fell to 61.5% as 400k workers left the workforce. Average hourly earnings increased 4.4%. The jobs report can only be looked at disappointing, and the payroll number is getting a seasonal boost from temporary holiday hiring. The only bright spot is wage growth, however even that is probably due to lower paid service employees fallout, which boosts the overall average.

The ISM Services Index came in right about in line with expectations. Business activity and new orders are growing, however the rate is decelerating. Employment is improving, and the trend seems to be for a further acceleration.

A stimulus bill is in reach for this year, according to Mitch McConnell and Nancy Pelosi. It will probably be around $900 billion, which is much less than the pre-election talk of a “skinny” $2 trillion bill.

Morning Report: Mortgage bank profitability soars.

Vital Statistics:

S&P futures36682.6
Oil (WTI)45.17-0.31
10 year government bond yield 0.94%
30 year fixed rate mortgage 2.78%

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

Initial Jobless Claims fell to 712k last week, while the Challenger and Gray job cut report showed companies announced 64,700 job cuts last month.

Independent mortgage banks earned $5,535 on each loan in the third quarter, an increase from $4,458 in the second quarter, according to the MBA. This works out to be 203 basis points compared to 167 basis points in the second quarter. Average production volume increased from $1.02 billion to $1.34 billion.

“With the surge in mortgage production volume in the third quarter, net production profits among independent mortgage bankers increased, surpassing 200 basis points for the first time since the inception of MBA’s report in 2008,” said MBA Vice President of Industry Analysis Marina Walsh, CMB. “Soaring production revenues – led by strong secondary marketing gains – drove these results and more than offset an increase in production expenses.” 

The FHFA extended the moratorium on foreclosures and evictions through January 31, 2021.

The Fed’s Beige Book reported modest growth for most of the country. Employment growth remains slow, and inflation is under control. Overall, the economy has a lot of work to do in order to recover to pre-COVID levels.

The CDC has lowered its quarantine time recommendations. The 14 day period has dropped to 7 or 10 days, depending on test results and symptoms.

Morning Report: ADP jobs report disappoints.

Vital Statistics:

S&P futures3648-12.6
Oil (WTI)44.07-0.31
10 year government bond yield 0.94%
30 year fixed rate mortgage 2.78%

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

Jerome Powell speaks at 10:00 am today. Bonds and MBS have been a touch volatile based on clues for added Fed purchases.

The share of loans in forbearance increased last week to 5.54%, up from 5.48% the week before. “For the second week in a row, the share of loans in forbearance has increased, driven by a rise in new forbearance requests and another slowdown in the pace of forbearance exits,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The increase was across all loan and servicer types. Even GSE loans, which had previously declined for 24 straight weeks, saw an increase last week.”

Mortgage applications fell 0.6% last week (which included the Thanksgiving holiday) as purchases increased 9% and refis fell 5%. Refi activity is up 100% on a YOY basis, while purchase activity is up 28% YOY.

The ADP jobs report showed the economy adding 307,000 jobs last month. Big gains were reported in leisure / hospitality, professional and business services, and social services. FWIW, the Street is looking for 500k payrolls in Friday’s jobs report, so this is a bit of a miss.

Given the ADP report, it looks like the rebound is beginning to lose some steam. This should be positive for bonds, as it will encourage the Fed to increase purchases. Note that mortgage rates continue to move lower despite the uptick in interest rates.

I think the breakdown in correlation is largely due to mortgage banks beginning to decrease margins, as well as the Fed’s purchases of MBS in the market anchoring rates. With rates in the rest of the world stuck at 0% (or even negative), I don’t think the 10 year yield will be able to generate that much momentum.

Morning Report: Home prices continue to rise

Vital Statistics:

S&P futures365932.6
Oil (WTI)45.07-0.31
10 year government bond yield 0.89%
30 year fixed rate mortgage 2.78%

Stocks are higher on positive vaccine news. Bonds and MBS are down.

Home prices rose 1.1% MOM and 7.3% YOY in October, according to CoreLogic. Detached home prices rose 7.9% while attached rose only 4.5%. This is almost certainly due to COVID and buyer preference for isolation from neighbors. Phoenix experienced the biggest gains, rising 12%, while the New York City area MSA only grew by 2%.

Jerome Powell will head to the Hill today for testimony. Here are his prepared remarks. He mainly discussed the various lending programs for small businesses and municipalities. He didn’t really talk about MBS purchases.

A bipartisan group of lawmakers are preparing a $908 billion stimulus plan. It will provide an additional $300 a week in unemployment benefits, which is lower than the $600 a week Democrats want. It will provide $240 billion in aid to state and local governments, which Republicans oppose, and another 6 month moratorium on COVID-related lawsuits which Democrats oppose. We will see if this plan has any White House support.

New home inventory is at a 3 year low. A picture is worth a thousand words:

Construction spending rose 1.3% MOM and 3.7% YOY, according to the Census Bureau. Residential construction spending rose 2.9% MOM and 14.6% YOY.

Morning Report: New Home Sales up big

Vital Statistics:

S&P futures3629-7.6
Oil (WTI)45.470.31
10 year government bond yield 0.85%
30 year fixed rate mortgage 2.78%

Stocks are flattish this morning despite positive COVID-19 vaccine news. Bonds and MBS are flat.

Today is Cyber Monday and investors are hoping that it will offset the weakness we saw on Black Friday, where traffic was down 50% due to the pandemic. That said, retailers are expecting a robust holiday, with spending expected to rise 3.6% according to the National Retail Foundation.

We will have a lot of data and Fed-speak this week as we enter the final month of 2020. Data-wise, we have construction spending, the jobs report, and PMI data. Jerome Powell will be speaking Tuesday and Wednesday.

New home sales rose 23% YOY to 999,000 in October, which was more or less flat with September’s million unit print. As a general rule, new home sales can be a volatile number and I kind of thought September’s big print would be revised away. Turns out, it wasn’t. This will be an under-appreciated economic boost to the country going forward. Housing is back.

Janet Yellen is Biden’s nominee for Treasury Secretary. She will be confirmed easily, as she is liked by the banks and is a known quantity. She is considered a bipartisan pick, and will advocate for additional federal spending to combat the economic weakness caused by COVID.

Pending Home Sales fell 1.1% in October, according to NAR. “Pending home transactions saw a small drop off from the prior month but still easily outperformed last year’s numbers for October,” said Lawrence Yun, NAR’s chief economist. “The housing market is still hot, but we may be starting to see rising home prices hurting affordability.”