Morning Report: FOMC minutes confirm no move in December

Vital Statistics:

 

Last Change
S&P futures 3110 1.25
Oil (WTI) 57.39 0.74
10 year government bond yield 1.76%
30 year fixed rate mortgage 3.93%

 

Stocks are flat this morning after China invited the US for trade talks in Beijing despite the resolution backing Hong Kong. Bonds and MBS are down small.

 

In economic data, initial jobless claims were flat at 227,000 last week and the Philadelphia Fed manufacturing survey improved.

 

The CFPB is conducting an assessment of the TRID rule. There doesn’t appear to be any specific issues the CFPB is looking to address, but it is part of the Trump Administration’s push to eliminate unnecessary burdens on business.

 

Independent mortgage banks had their best quarter in 7 years as pretax production profit rose to 74 basis points from 64 in the prior quarter. “A surge in refinance activity and a healthy purchase market led to robust mortgage volume in the third quarter, pushing up production profits to a high not seen since the fourth quarter of 2012 ($2,256 per loan),” said Marina Walsh, MBA Vice President of Industry Analysis. “The increase in profits was primarily driven by declining production expenses and higher loan balances, which mitigated the effects of lower basis-point revenue.” Interestingly, production revenue and secondary marketing income fell. The purchase share of the market fell from 74% to 60%.

 

Bold prediction: Within the next two years, we will see the majority of loans go through the entire process without any human involvement. It will be a much more mechanized process.

 

The minutes from the Fed confirmed the market’s view that the central bank will be out of the picture for a while. They removed the “act as appropriate” language in order to signal that stance. From the minutes:

 

In describing the monetary policy outlook, they also agreed to remove the “act as appropriate” language and emphasize that the Committee would continue to monitor the implications of incoming information for the economic outlook as it assessed the appropriate path of the target range for the federal funds rate. This change was seen as consistent with the view that the current stance of monetary policy was likely to remain appropriate as long as the economy performed broadly in line with the Committee’s expectations and that policy was not on a preset course and could change if developments emerged that led to a material reassessment of the economic outlook.

 

Translation: We aren’t moving in December. Note the Fed Funds futures agree with that assessment, although they are predicting more cuts in 2020. FWIW, the Fed generally tires to avoid modifying policy in the months leading up to an election for fear of appearing political. That said, the March futures are pricing in about a 25% chance of a cut.

 

fed funds futures

 

Is the REO-to-Rental trade finally done? Blackstone has finally exited its entire position in Invitation Homes, which it created in the aftermath of the financial crisis. Invitation was one of the first to buy up distressed properties and rehab them to rent. Turns out Blackstone tripled its money on the trade.

Morning Report: A look ahead to the regulatory environment for the financial industry

Vital Statistics:

 

Last Change
S&P futures 2996 7.25
Oil (WTI) 53.47 -0.44
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning on expectations of an orderly Brexit and optimism on trade. Bonds and MBS are down.

 

Not a lot of market-moving data this week, although we will get a lot of housing indicators, with existing home sales, new home sales, and house prices. Note the FOMC meets next week, and it is looking like a lock that they will cut rates. The Fed funds futures are now handicapping a 91% chance of a cut.

 

The Index of Leading Economic Indicators declined in September, as trade concerns and manufacturing offset strength in other areas. “The US LEI declined in September because of weaknesses in the manufacturing sector and the interest rate spread which were only partially offset by rising stock prices and a positive contribution from the Leading Credit Index,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The LEI reflects uncertainty in the outlook and falling business expectations, brought on by the downturn in the industrial sector and trade disputes. Looking ahead, the LEI is consistent with an economy that is still growing, albeit more slowly, through the end of the year and into 2020.”

 

It looks like the structure of the CFPB is going to be decided by the Supreme Court. The issue with the CFPB goes back to its structure, which makes it nearly impossible to remove a director. The idea was to make the CFPB less influenced by politics, however it also makes it completely immune to oversight and accountability. The case will move forward without the support of the government, as CFPB Director Kathy Kraninger doesn’t support the structure of the agency either. If the CFPB’s structure is declared unconstitutional, it wouldn’t mean the end of the agency, it would mean that the single, unfireable director would be replaced by a bipartisan board, which was actually the initial proposal when the CFPB was created during the drafting of Dodd-Frank.

 

Elizabeth Warren threatened to ban fracking if she wins the presidency. “On my first day as president, I will sign an executive order that puts a total moratorium on all new fossil fuel leases for drilling offshore and on public lands. And I will ban fracking—everywhere.” Needless to say, this would be incredibly disruptive to the US economy as natural gas prices would increase to $9.00 to $15 per mBTU, compared to current prices of around $2.00 – $2.50. Since natural gas is the main way we generate electricity, consumers and industry would feel it immediately, and this would cause uncertainty on steroids, and make Trump’s trade concerns look like a minor annoyance. She would be able to implement many changes via executive order, and she intends to use it. Given that Joe Biden is having trouble fundraising, it is looking more like a lock that she gets the nomination. Even some left-leaning pundits are worried.

 

What would that mean for the mortgage banking business? Regulations will undoubtedly be tightened, but they probably will affect the bigger banks more than the independent operators. She says she wants to re-implement Glass-Steagall, which is really a solution in search of a problem. However, if she succeeds in raising taxes and energy prices as much as she intends, it would almost certainly be the final nail in the longest running expansion ever, and that means the Fed Funds rate is probably heading back to zero. A return to ZIRP almost certainly means the 10 year will breach the 1.47% low set in 2012, which will would create another refi wave similar to the years immediately after the financial crisis. So, perversely a Warren presidency could be great for the mortgage banking business, as the industry feasts on easy refinances.

Morning Report: Housing is coming back

Vital Statistics:

 

Last Change
S&P futures 3003.75 4.25
Oil (WTI) 58.37 -0.94
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%

 

Stocks are flattish as we await the FOMC decision at 2:00 pm EST today. Bonds and MBS are up.

 

Housing starts increased 12.3% MOM and 6.6% YOY to a seasonally adjusted annual rate of 1.36 million. This is the highest in 12 years. July was revised upward as well. Building Permits rose 7.7% MOM and 12% YOY to 1.4 million, which is close to historical levels (non-population adjusted). This data seems to comport with the MBA’s 30% rise in purchase activity. Permit activity increased the most in the Northeast, while falling in the Midwest.

 

housing starts

 

Mortgage applications were flat last week despite a huge back up in rates. There was also an adjustment for Labor Day, so that will affect the numbers. Purchases rose 6%, while refis fell 4%. The average rate on a 30 year fixed rose 19 basis points to 4.01%, and government loans increased share.

 

CFPB Chair Kathy Kraninger believes her job security is unconstitutional and supports a Supreme Court review of a case pending before the 9th Circuit. Essentially, Dodd-Frank made the head of the CFPB basically untouchable – the President can only fire “for cause” and not at the discretion of the White House. “From the Bureau’s earliest days, many have used the uncertainty regarding this provision’s constitutionality to challenge legal actions taken by the Bureau in pursuit of our mission,” Kraninger wrote to staff. “Litigation over this question has caused significant delays to some of our enforcement and regulatory actions. I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.” Given that the case is currently in front of the liberal 9th Circuit (aka the Nutty Ninth) the current structure will almost certainly be upheld and it will go to SCOTUS.

 

Some inside-baseball stuff: Despite the bet that the Fed will cut rates to a range of 175-200 basis points today, the Fed had to intervene yesterday to prevent the Fed Funds rate from breaching the top of the current 200-225 basis point range. The cause was a shortage of dollars in the money markets ahead of Q3 interim tax payments and a big Treasury bond issue. This caused overnight repo rates to surge to 500 basis points on Monday, and the punch line is that this problem might push the Fed to increase the size of its balance sheet, which means more QE. This stems from a change in how the Fed mechanically manages the Fed Funds rate in the immediate aftermath of the financial crisis. How will it affect mortgage markets? Not directly, however issues with financing / hedging and rate volatility will negatively impact mortgage rates, at least at the margin.

 

repo rates

Morning Report: Fed Funds forecasts and mortgage rates.

Vital Statistics:

 

Last Change
S&P futures 2895.75 0.75
Oil (WTI) 51.89 -0.62
10 year government bond yield 2.11%
30 year fixed rate mortgage 4.12%

 

Stocks are flat this morning as we enter Fed week. Bonds and MBS are flat as well.

 

The big event this week will be the FOMC meeting which starts Tuesday. Given the disconnect between the market’s perception of the road ahead and the Fed’s prior forecast, something has to give. FWIW, the market is now assigning a 20% chance they will ease by 25 basis points at this meeting. By the December meeting, the market is forecasting the FOMC will cut rates either 2 or 3 times!

 

fed funds futures dec 19

 

Compare that to the March 2019 dot plot, which showed most members of the FOMC thought rates would be unchanged for the year and about 1/4 of the members wanted to see a rate hike:

 

dot plot Mar 2019

If the Fed Funds futures are correct and we are looking at a 1.5% Fed Funds rate, where will mortgage rates go? If history is any guide, probably nowhere. The last time the Fed Funds rate was around 1.5% (late Dec 2017), the 30 year fixed rate mortgage (according to the MBA) was in the low 4% range, in other words, right about here.  Long term rates have already priced in the move. MBA 30 year FRM chart:

 

MBA mortgage rate

 

Quicken Loans settled with the DOJ over false claims allegations regarding FHA origination going back to 2015. The case was dismissed and Quicken settled for $32.5 million with no admission of guilt. Quicken fought the case the entire way, and eventually narrowed it down to a tiny fraction of what the Obama Administration wanted. Quicken Vice Chairman Bill Emerson said: “I think the current HUD administration realized how faulty the previous administration’s tactics were, and frankly, as we’ve said before, we viewed them as extortionist tactics and we just could not go along with that,” Emerson said. “We know we didn’t do anything wrong and so we continued to fight, and if that somehow caused the new administration to evaluate it differently, then great.”

 

Ed Demarco discusses the ways that private capital can be drawn back into the mortgage market. First, the CFPB’s ATR and QM rules need to change to bring down the allowable DTI ratios on Fannie and Freddie loans to that of the rest of the market. This is known as the QM patch, which basically says that any loans that meet F&F criteria meet the ability to repay test. The problem is that the QM laws specify a max DTI ratio of 43% and the GSEs allow up to 50%. This gives Fan and Fred a huge advantage over other lenders. The second issue revolves around the SEC and refining the data definitions in the registration rules. Third, Fan and Fred have all sorts of mortgage performance data that is unavailable to the broader market, and leveling the playing field would mean allowing other participants to see that data. Note however that DeMarco is only looking at the issue from the standpoint of originators. Buyers of private label securities have other issues that are still unresolved, especially when the issuer of the bonds also retains servicing. There is a conflict of interest issue that must be resolved as well. I discussed this about a year ago in Housing Wire.

 

Profitability improved for independent mortgage bankers in the fist quarter of 2019. Average revenue per loan came in at $9584, while average cost per loan was $9,299, or a net gain of $285 per loan, compared to a loss of $200 a loan in the fourth quarter. It looks like mortgage bankers reported a loss in the first quarter of 2018 as well.

Morning Report: Housing cycles and bond markets.

Vital Statistics:

 

Last Change
S&P futures 2815 -4
Eurostoxx index 377.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.63%
30 year fixed rate mortgage 4.28%

 

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

 

Initial Jobless Claims fell slightly to 224k last week.

 

Durable Goods orders increased 0.4% in February, driven by an increase in commercial jet orders. Ex-transportation, they were down 0.1%. Core capital goods increased 0.8% as companies continue to plow capital back into expansion opportunities. Much of the increase in capital expenditures was in machinery, which is a positive sign for manufacturing. Still, economists are cautious on Q1 GDP, with many forecasting sub 1% growth for the quarter.

 

Construction spending rose 1.3% MOM and is up 0.3% YOY. Residential construction was down on a MOM and YOY basis. Housing continues to punch below its weight. Since construction is seasonally affected, January numbers tend to be a bit more volatile and have less meaning than summer numbers.

 

The MBA released its paper on CFPB 2.0, where they list out their recommendations for the CFPB. Much of what they say is similar to what Mick Mulvaney and Kathy Kraninger have been doing – increasing transparency regarding rulemaking and giving more guidance on what is legal and illegal. The Obama / Cordray CFPB was purposefully vague in promulgating rules, which makes life easier for regulators but makes it harder for industry participants. Regulation by enforcement was the MO of the Cordray CFPB, which ended with the new Administration, and the MBA agrees.

 

Specific to the mortgage business, the MBA recommends that the CFPB allow loan officers to cut their compensation in response to competitive dynamics, to extend the “GSE patch” which means loans that are GSE / government eligible are automatically considered to be QM compliant, to allow mortgage companies to pass on error costs to loan officers, and to raise the cap on points and fees.

 

CoreLogic looks at home price appreciation and the economic cycle. The punch line: While the current expansion is just short of a record length, and home price appreciation is declining, it doesn’t necessarily mean that house prices are in for a decline. In fact, housing typically weathers recessions quite well. I could caveat that the chart below only looks at a bond bull market. The 1978 – 1982 timespan of the misery index and inflation marked the bottom of the Great Bond Bear Market that lasted from the mid 1950s to the early 80s. The Great Bond Bull Market that began in the early 80s ended a few years ago, and while a bear market probably hasn’t begun yet the tailwind of interest rates falling from 17% to 0% isn’t going to be around this time. Finally, there are a few massive supports for the real estate market: rising wages, low inventory, and demographics. It is hard to imagine another 2008 happening if the economy peters out.

 

corelogic home prices

Morning Report: Friday’s jobs report in perspective

Vital Statistics:

 

Last Change
S&P futures 2756 0.4
Eurostoxx index 371.87 1.24
Oil (WTI) 56.47 0.4
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.32%

 

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

 

The upcoming week has a lot of economic data, however most of it is not housing related, and probably won’t be market-moving either. The biggest housing-related number will be new home sales and construction spending. We will also get inflation data and industrial production.

 

Friday’s payroll number was a definite downward surprise, and the question is whether this indicates a slowing labor market? Extremely low job prints happen occasionally we had sub-20k months in Sep 2017 and May 2016. Both prints ended up being a blip, and there is a good chance this gets revised upward in next month’s number. The number to take away from the jobs report is the increase in average hourly earnings. Average hourly earnings are a notoriously non-volatile series, and this one keeps inexorably increasing by larger and larger amounts.

 

average hourly earnings

 

Just because the US economy is doing relatively well, that doesn’t mean things are rosy overseas. China has had some bad days in the stock market, and the cracks are starting to appear in the economy. In Europe, the German Bund yield (The European benchmark) is about to go negative. Growth estimates have been slashed from 1.7% to 1.1%. So there is a bit of a global slowdown, and it means that we will probably take some shrapnel in the form of lower rates.

 

CFPB Chair Kathy Kraninger appeared before the House Financial Services Committee last week, and the commentary broke down along partisan lines. Democrats, pining for the Cordray days, had a laundry list of complaints, ranging from a de-emphasis on payday lenders to kvetching about changes in internal reporting lines. Republicans generally supported her and the agency’s end of regulation by enforcement. Kraninger reaffirmed the Agency’s commitment to chasing bad financial actors.

Morning Report: Strong wage growth in December

Vital Statistics:

 

Last Change
S&P futures 2480 32.75
Eurostoxx index 338.85 4.35
Oil (WTI) 48.05 0.95
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.43%

 

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

 

Jobs report data dump:

  • Nonfarm payrolls up 312k, street expectation 177k
  • Average hourly earnings up 0.4% MOM / 3.2% YOY, street expectation 0.3% / 3.1%
  • Labor force participation rate 63.1%, November 62.9%
  • Unemployment rate 3.9%, street expectation 3.7%

Overall a strong report. The uptick in the unemployment rate was a surprise, but is still below 4% and the labor force increased by quite a bit. Wages are increasing smartly, rising 3.2%. Those in the press (and DC) hoping for recessionary data will be disappointed with this report.

 

Yesterday, we touched 2.57% on the 10 year bond yield. If you were hoping to see that reflected in mortgage rates, you were probably disappointed. MBS are lagging the move in Treasuries (as usual).

 

The action in the Fed funds futures is truly astounding. There has been a complete sea-change in market perception over the past month. Look at the January 2020 futures (a year from now). Implied probability of another hike in 2019? Zero. Chance of a rate cut? Better than 50/50. Note the implied probabilities a month ago versus today. The market is saying the Fed overshot.

 

fed fund futures dec 2019

 

Compare that to the dot plot from the December meeting which suggests another 50 basis points of hikes:

 

dot plot

 

This is an astounding change in sentiment in just a month. It is certainly possible that the Fed Funds futures have it wrong, but it is clear the market and the Fed aren’t seeing the future even remotely the same.

 

Chinese demand is collapsing, as evidenced by falling consumption tax receipts. People have known that China has a real estate bubble and a shaky banking system for a while, but bubbles generally go on for longer than anyone ever expects. With the Chinese pulling out of the hot US markets, we are seeing a decline in places like Manhattan, where the median apartment price fell below $1 million for the first time in 3 years. There is a 16 month supply of luxury apartments in Manhattan, compared to an overall 4.5 month supply of existing homes for sale in the US. 6.5 month’s worth is generally considered a balanced market. The same thing is happening in the hot West Coast markets.

 

Kathy Kraninger, the new head of the CFPB sent an email to staffers saying that the agency will “continue to vigorously enforce the law,” but keep in mind “costs and benefits” and “maintain an open mind, without presumption of guilt.” So, she sounds like a continuation of the Mick Mulvaney approach and not a return to the Cordray “regulation by enforcement” model.

 

Mr Cooper bought IBM’s $48 billion servicing portfolio.