The Daily Tearsheet

Vital Statistics:

	Last	Change
S&P futures	3434	6.6
Oil (WTI)	40.95	-0.79
10 year government bond yield		0.82%
30 year fixed rate mortgage		2.89%

Stocks are higher this morning on hopes for a pre-election stimulus package. Bonds and MBS are down.

With the 10 year bond breaching the 80 basis point level, we are finally starting to see mortgage rates tick upwards. The inflation data seems tame, but maybe the street is starting to wonder whether the demand will be there for the huge issuance coming down the pike.

Mortgage applications fell 0.6% last week as purchases fell 2% and refis rose 0.2%.

The GSE patch has been extended “indefinitely” according to the CFPB. The final rule is here. Under the QM rules (Reg Z), loans with debt-to-income ratios (DTI) over 43% are not considered qualified mortgages (QM loans). The QM patch allows Fan and Fred loans with DTI ratios up to 50% to be considered QM loans. The CFPB has been wrestling with the issue, hoping to come up with a more flexible standard than DTI, however it isn’t ready to finalize anything yet.

The FHA is extending forbearance requests through year-end. “Homeownership is the largest wealth-builder for the majority of our nation’s families, which is why one of our top priorities is providing relief from foreclosure and eviction due to circumstances beyond [homeowners’] control,” Carson said at the Mortgage Bankers Association’s virtual Annual Convention & Expo. “This will ensure that homeowners have the resources and support they need to get back on their feet as our country continues its economic recovery.”

Fannie and Fred defended the 50 basis point adverse market fee at the MBA conference. “As you know, safety and soundness is one, two and three,” Frater said. “For us to play our role in all markets, both good and bad and large and small, we have to do it safely and soundly with long-term risk management in mind. That’s the rationale for this change. The GSEs are shouldering significant risks associated with the pandemic. As the principal risk-taker, we have to price that risk appropriately.”

Vital Statistics:

	Last	Change
S&P futures	3438	16.6
Oil (WTI)	40.92	0.39
10 year government bond yield		0.78%
30 year fixed rate mortgage		2.87%

Stocks are higher as third quarter earnings are turning out to be better than expected. Bonds and MBS are down.

Homebuilder sentiment reached a record in September, according to the NAHB Housing Market Index. Tight supply plus strong demand has created a perfect environment for the builders. Increasing input costs, especially lumber and labor do remain an issue, however lower rates are allowing them to pass on those added costs.

Housing starts increased 2% MOM and 11% YOY to come in at 1.42 million. Building Permits rose to 1.55 million.

Delinquencies are increasing, according to CoreLogic. In July, 6.6% of all loans were 30 days or more delinquent, which was up by 2.8 percentage points compared to a year ago. The 120 day rate rose to 1.4%, which is the highest in 21 years. Note that these are July numbers, and things have probably improved since then.

Market strategist Jim Bianco thinks inflation may be coming sooner than expected. The COVID-19 crisis has restricted supply of many goods, which is causing shortages, which lead to price hikes. “The Fed is like a post in the ground and the market is like a horse tied to that post,” he said. “When that horse gets spooked by something — call it inflation — it could tear the post right out of the ground and run wherever it wants. It will run, and the Fed might have no choice but to follow it.” FWIW, the Fed would be delighted to see a return of inflation, but the global bond markets are “markets” in name only. Central Bankers are in full control of them and the bond vigilantes will struggle to make a dent given the Fed’s daily purchases of Treasuries. Also, if you sell Treasuries, what do you invest in? Bunds at -61 basis points? Japanese government bonds at 2 basis points? Tesla? FWIW, I do see hints of early 70s inflation, where product sizes are shrinking while maintaining the same price, however inflation is more than just what you see at the supermarket.

Vital Statistics:

	Last	Change
S&P futures	3488	26.6
Oil (WTI)	40.92	0.39
10 year government bond yield		0.77%
30 year fixed rate mortgage		2.87%

Stocks are higher this morning on stimulus hopes and data out of China. Bonds and MBS are down.

There won’t be much in the way of market-moving data this week, however we will get housing data with the NAHB Housing Market Index, housing starts and existing home sales.

The MBA Annual Virtual Convention kicks off today.

Low mortgage rates are driving the rise in home prices according to NAR. A tight inventory situation is also an issue. I wonder if we will even see the normal seasonal downtick in prices during the winter months this year. Potential buyers are wary of rising rates in the future and may be pushing to buy now.

San Diego based lender Guild is the latest mortgage banker who has filed to go public. Like most companies these days, there will be a dual voting class structure, which means McCarthy Partners will still control the vote. Based on the midpoint of the price talk, Guild will have roughly a billion dollar market cap. Over the 12 month period ending June 30, Guild originated $27.8 billion and earned $163 million. At $18 a share, Guild would be trading at 6.6 times earnings. Guild has a pretty strong purchase business and a decent recapture rate.

I find it interesting that issuing dual voting classes is so popular these days. Theoretically investors should be willing to pay less for non-voting stock, because there is no chance of the company being taken over, and the vote should be worth something. Historically, dual voting shares were largely limited to media companies who wanted to maintain editorial control over the content. The big social media companies did the same thing, and I guess that must be an editorial control decision as well. But mortgage companies? I guess since the market doesn’t appear to penalize Google and Facebook for a dual-class structure, why not do it? I wonder if ESG funds are the reason, especially when they push for companies to do things that don’t maximize shareholder value, like we have seen in natural resource companies.

Vital Statistics:

	Last	Change
S&P futures	3489	11.6
Oil (WTI)	40.42	0.39
10 year government bond yield		0.74%
30 year fixed rate mortgage		2.91%

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

Retail Sales increased 1.9% in September, which was well above what the Street was looking for. The control group, which strips out autos, gas and building products rose 1.5%.

Meanwhile, industrial production fell 0.6% last month and capacity utilization inched up to 71.5%. The numbers were below expectations, however July and August numbers were revised upward. We are still about 7% below pre-COVID numbers.

It is looking more and more like any sort of stimulus package isn’t going to happen before the election. The Republican Senate is going to put through a $500 billion package, which will go nowhere in the House because it is too small.

New home sales are outpacing housing starts, which is depressing inventory and increasing prices, according to the NAHB. Given the demand out there, housing and home construction should be a big driver of the economy for the next few years. Housing was the missing link in the post Great Recession recovery.

About 8.5% of renters missed their September payment, according to the MBA. “Rent and mortgage payment collections improved over the summer as more people went back to work, but high unemployment continues to place hardships on millions of U.S. households,” said Gary V. Engelhardt, Professor of Economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University. “There is growing concern that absent a slowdown in the number of coronavirus cases and another round of much-needed federal aid, millions of renters in the coming months face the prospects of falling further behind. With the current eviction moratorium expiring in January, the situation could be even more challenging. Many renter households across the country could find themselves with no place to live and no means to repay missed payments.” Student loans are even worse; 40% of student loan borrowers did not make their payment.

Vital Statistics:

	Last	Change
S&P futures	3439	-41.6
Oil (WTI)	39.82	0.79
10 year government bond yield		0.70%
30 year fixed rate mortgage		2.91%

Stocks are lower this morning after it looks both parties are throwing in the towel on further stimulus. Bonds and MBS are up.

Initial Jobless Claims rose to 899,000 last week as more and more small businesses succumb to social distancing.

While restaurants and bars are struggling, housing continues to be the bright spot in the US economy. The MBA just reported that mortgage applications for new homes are up 38% YOY. “The strong year-over-year results for non-seasonally adjusted new home sales applications – up 38 percent – and estimated home sales – up 20 percent – are indicative of the fundamental strength seen in the housing market since the spring,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Demand for newly built homes is strong, as many buyers appear to seek more space for work, in-home schooling, and leisure.”

Wells announced that mortgage origination volume increased 5% from Q2 to a total of $62 billion, while Bank of America reported a 44% decrease in originations. Surprising to see a major bank pull back during one of the best years the industry has ever seen.

Rents have been falling, although the decline moderated in September. There have been fears that apartment landlords have been buying tenants by cutting rent. It looks like that might be going away.

Vital Statistics:

	Last	Change
S&P futures	3510	5.6
Oil (WTI)	40.82	0.79
10 year government bond yield		0.72%
30 year fixed rate mortgage		2.91%

Stocks are flattish this morning as stimulus talks fizzle. Bonds and MBS are up.

The big banks are all reporting this week and the takeaway is that loan loss provisioning is much lower than expected. The new CECL format which was instituted this year could be playing a part, but it looks like loan performance is stronger than people anticipated.

Mortgage Applications fell 0.7% last week as purchases fell 2% and refis fell 0.3%. “Mortgage applications for refinances and home purchases both decreased slightly last week, despite the 30-year fixed mortgage rate declining to a new MBA survey low of 3.00 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications for government mortgages offset some of the overall decline by increasing 3 percent, driven by a solid gain in government purchase applications and an 11 percent jump in VA refinance applications.”

United Wholesale reported that it closed over $54 billion in loans in the third quarter, up 81% from a year ago. “This is our best quarter in the company’s 34 years, showing that borrowers are recognizing that independent mortgage brokers offer better rates, greater speed and deeper experience,” said Mat Ishbia, president and CEO of UWM. “I’m grateful to the over 6,800 team members whose commitment to superior service, together with our proprietary industry-leading technology, support the success of our broker clients by enabling them to offer a best-in-class borrower experience.”

Inflation at the wholesale level remains well below the Fed’s target. The Producer Price Index rose 0.4% MOM and 0.4% YOY.

Fed Vice Chairman Richard Clarida said that it may take a year for the economy to reach pre-COVID levels. “That said, the Covid-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak,” the central bank official told the Institute of International Finance. “It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.” That last statement means that rates are going nowhere for a while.

Vital Statistics:

	Last	Change
S&P futures	3521	-11.6
Oil (WTI)	40.22	-0.79
10 year government bond yield		0.74%
30 year fixed rate mortgage		2.91%

Stocks are lower as we kick off earnings season. Bonds and MBS are up.

JP Morgan reported better-than-expected earnings this morning. The biggest news from the bank was that it took no further provisions for loan losses. Mortgage banking revenue and income increased due to wider spreads, however volumes were up 20% on a QOQ basis but down 10% compared to a year ago. The number of mortgages with payment deferrals dropped about 50% compared to June 30, which is about 4.4% of the portfolio. 91% of borrowers who exited payment deferrals were current. JPM stock is flat on the open.

Inflation at the consumer level rose 0.2% MOM and 1.2% YOY. The increase was driven mainly by an increase in the price of used cars; without transportation, inflation would have been close to zero. Ex-food and energy, inflation rose 0.2% MOM / 1.7% YOY.

Small business optimism increased in September, however uncertainty remains a huge issue.

“We are experiencing the shortest recession in modern history, starting in March or April and ending no later than September (official dates will eventually be determined by the National Bureau of Economic Research once more precise data are available). Housing is probably the hottest sector, posting record home sales last month and double digit price increases. More construction firms have unfilled job openings than in any other industry. Durable goods orders were strong except for aircraft, autos were weak after several strong months. Non-defense capital goods orders (excluding aircraft) were also very strong.”

Home prices rose 1% MOM and 5.9% YOY, according to CoreLogic. Interestingly, CoreLogic expects prices to decline over the next year. Not sure I buy that given the supply / demand imbalance and rates at record lows.

Fannie Mae’s Chief Economist Doug Duncan offers his predictions for next year.

“Current homeowners are more pessimistic than potential new buyers – they’re pessimistic because they’re afraid of somebody coming to their house and walking through with the virus or the fact that other people won’t go out and shop because of fear of the virus, so they might take a discount on their house price,” Duncan said. “They’re simply not offering houses for sale, and you did see a big drop in listings at that time.”

If there is a resurgence of COVID-19 without an effective vaccine broadly distributed, Duncan said that the ‘W-shaped’ environment could become a reality.

“In that environment, I would not expect a normal housing cycle because what would happen is, then those businesses which have been able to keep going and keep their salary workers, who tend to be more in management in place, would start laying those people off and that’s when the risks rise on the housing side,” Duncan said. “But if we get a relatively broadly distributed vaccine that is demonstrated to be effective, then I think we do return to a to a normal housing cycle, especially, unless the Fed changes its posture, if rates stay low, it will be viewed as a great opportunity for people to get in.”

Vital Statistics:

	Last	Change
S&P futures	3497	26.6
Oil (WTI)	40.00	-0.99
10 year government bond yield		0.78%
30 year fixed rate mortgage		2.88%

Stocks are higher this morning on stimulus hopes. The bond market is closed for the Columbus Day holiday.

The upcoming week won’t have much in the way of market-moving data, although we will get retail sales, inflation data, and manufacturing output. Third quarter earnings season begins this week as the big banks all report numbers. The area of concern will be loan performance, especially for small businesses, along with exposure to airlines and hotels. The banks took huge provisions up front, so any increase in projected losses will be an area of concern.

It looks like the bid / ask spread for the stimulus bill is $2 trillion / $2.2 trillion. The big sticking point of the bill largely concerns aid to (deep blue) states and local governments. I am so old that I remember when a difference of $200 billion in a bill would have been insurmountable, but nowadays a 12-digit number feels like a rounding error.

Affordable Housing advocates are urging lawmakers to include substantial aid for renters facing eviction. The Center for Disease Control, which is not known for weighing in on real estate issues, put out a moratorium on evictions until the end of the year. The protections are not automatic however, and a tenant needs to “declare that their 2020 income will fall below the threshold set out in the order; that they’ve sought all potential sources of federal housing aid; and that they cannot afford to pay the rent due to a pandemic-related job loss or expense despite their best efforts to do so.” Since many tenants are unaware of the order in the first place, they aren’t taking that step.

The number of borrowers in forbearance fell by 649,000 last week as the initial six-month plans expire. The national forbearance rate now stands at 5.6%.

Boston Fed President Eric Rosengren said that the previous years of rock-bottom interest rates has made this crisis worse. He blames it on excessive risk-taking.

“Clearly a deadly pandemic was bound to badly impact the economy,” Rosengren said. “However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult.”

He blames regulators for failing to see the increase in risk-taking. FWIW, the Fed made its own bed here. While it does have to follow the statutory dual mandate, the Fed has chosen to interpret the mandate to minimize unemployment while controlling inflation to mean “keep the pedal to the metal as long as the economy is below full employment.” Now that the economy is used to 0% interest rates, it really doesn’t have a lot of tools left to improve the economy. Building the balance sheet doesn’t have the effect that lowering rates does.

Vital Statistics:

	Last	Change
S&P futures	3429	26.6
Oil (WTI)	40.75	-0.99
10 year government bond yield		0.77%
30 year fixed rate mortgage		2.88%

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

We will have a lot of Fed-speak today, mainly in the afteroon.

Initial Jobless Claims came in at 840,000 last week. It seems that we are stuck at a new level of around 800k a week.

The MBA’s Mortgage Credit Availability Index fell again last month to hit a 6 year low. The MBA believes it is probably due to a curtailment of ARM loans ahead of the transition from LIBOR to SOFR.

“Mortgage credit supply decreased in September to its lowest level since February 2014, driven in part by a 9.5 percent decline in the conforming loan segment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “This reduction was the result of lenders discontinuing conforming adjustable-rate mortgage loan offerings in advance of the September 30, 2020, application deadline for GSE-eligible LIBOR-indexed ARM loans.

About a quarter of all borrowers in forbearance are still making their mortgage payments. Of the 3.4 million borrowers in forbearance, 840k are current on their mortgages. Given that servicers were required by the CARES Act to record mortgages in forbearance as current, many borrowers chose to enter forbearance as a precaution.

The Northeast and Mid-Atlantic states are most at risk to the economic effects of the pandemic, according to a study by ATTOM Data.

“The U.S. housing market continues to show remarkable resilience during a time of widespread economic trouble and high unemployment stemming from the virus pandemic. But amid continued price gains, pockets around the country face greater risk of a fall, especially in and around the Northeast,” said Todd Teta, chief product officer with ATTOM Data Solutions. “There is much uncertainty ahead, especially if another virus wave hits. We will continue to closely monitor home prices and sale patterns to see if, how and where the pandemic starts rattling local markets.”

As the economic woes drag on, a crisis in rental housing is building as tenants cannot pay their rent and small landlords who depend on that rent cannot make mortgage or property tax payments. Affordable housing advocates are urging more action from the government to do something. “The longer the federal government waits to act, the steeper the financial cliff that renters will be pushed off when the eviction moratorium expires this winter,” Yentel said. If the 800k weekly initial jobless claims is the new normal, we will have a crisis of epic proportions.

Vital Statistics:

	Last	Change
S&P futures	3379	26.6
Oil (WTI)	39.75	-0.99
10 year government bond yield		0.78%
30 year fixed rate mortgage		2.88%

Stocks are higher this morning after Trump softened his stance on further stimulus measures. Bonds and MBS are flat.

We have a lot of Fed-speak today, along with the FOMC minutes at 2:00 pm. This might affect the governement bond market, but so far it looks like mortgages and govvies have decoupled a little.

Trump pulled the plug on stimulus talks yesterday, “I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill,” Mr. Trump wrote Tuesday on Twitter. He then said he was willing to accept something that gave relief to airlines and direct stimulus payments to individuals: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now,” Mr. Trump tweeted.

Meanwhile, Fed Chairman Jerome Powell urged the government to enact further stimulus, saying there is little risk to the economy of the government “overdoing it.” “By contrast, the risks of overdoing it seem, for now, to be smaller,” Powell added in remarks to the National Association for Business Economics. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”

Office, retail and residential vacancy rates increased in the third quarter. The average mall vacancy rate hit 10%, the highest in 20 years. Apartments are feeling the squeeze too as they are buying occupancy via reducing rents.

The third quarter statistics clearly show that property owners started to feel the impact of the pandemic. Ironically, occupancy growth in the apartment market was net positive, yet rents fell dramatically, especially in some high-priced markets as tenants had the upper hand and property owners recognized this and lowered rents to maintain occupancy.

Mortgage applications rose 4.6% last week as purchases fell 2% and refis rose 8%.

“Mortgage rates declined across the board last week – with most falling to record lows – and borrowers responded,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index jumped 8 percent and hit its highest level since mid-August. Continuing the trend seen in recent months, the purchase market is growing at a strong clip, with activity last week up 21 percent from a year ago. The average loan size increased again to a new record at $371,500, as activity in the higher loan size categories continues to lead growth.”