Morning Report: Fiscal stimulus on the way

Vital Statistics:


Last Change
S&P futures 2422 -19.4
Oil (WTI) 23.61 -0.49
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.44%


Stocks are lower this morning despite a deal on the fiscal stimulus bill. Bonds and MBS are up. The Fed will be continuing its normal $50 billion in MBS purchses this morning.


Congress came to a deal on a stimulus bill which aims to ease as much of the economic shock from Coronavirus as it can. Most Americans will get a $1,200 check, small businesses will get $367 billion in relief and state / local governments will get $500 billion in loans. Unemployed workers will get an additional $600 a week up to 4 months.


Trump says that he wants the “country opened” by Easter in order to salvage the US economy. The idea would be to re-open restaurants and in-person employment in the non-hotspots. Needless to say, health experts are aghast at the idea, and yes, health concerns are a concern. They aren’t the only concern. Of course state governments are going to have the last word on that as well.


A consortium of originators, credit agencies and lobbyists sent a letter to the government discussing relief for homeowners affected by Coronavirus. The idea would be to allow people affected by the crisis to defer mortgage payments for 90 days without interest or penalties. The missed payments would essentially be added to the final payments of the mortgage without interest. Of course servicers are on the hook for the advances, and non-bank servicers don’t have the liquidity to make these advances. The group urges the government to provide some sort of borrowing facility for non-bank servicers to draw upon to make the these additional payments.


The Coronavirus has impacted commercial mortgage backed securities as well. As businesses shut down, they can’t make their mortgage payments. This means that the mortgages securing the complex are having issues. Lots of small business owners are combing over the force majure clauses in their contracts right now. For mortgage bankers, this is an issue because the same folks that buy CMBS often buy RMBS. To make matters worse, some of the biggest buyers of mortgage backed are sovereign wealth funds, and with less goods coming from overseas, the less demand for MBS from foreign funds. The Fed will purchase agency CMBS with the help of Blackrock.


Mortgage Applications fell 29% last week as rate spiked and bottlenecks in the mortgage market increased. “The 30-year fixed mortgage rate reached its highest level since mid-January last week, even as Treasury yields remained at relatively low levels. Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With these higher rates, refinance activity fell 34 percent, and both the conventional and government indices dropped to their lowest level in a month. Looking ahead, this week’s additional actions taken by the Federal Reserve to restore liquidity and stabilize the mortgage-backed securities market could put downward pressure on mortgage rates, allowing more homeowners the opportunity to refinance.”


Have been hearing that Fannie cash window pricing was 50 – 200 basis points wider yesterday. FHA rates have been getting smashed on the basically worthless servicing value. Every co-issue partner is on hiatus. Tough to manage a pipeline when the bids for your loans are lower and the NY Fed is pushing your hedge inexorably higher which is driving margin calls. I keep saying the mortgage banking business will feast once this is over, but we gotta get to the table first.



Morning Report: The Fed announces further stimulus measures

Vital Statistics:


Last Change
S&P futures 2323 34.4
Oil (WTI) 22.71 0.09
10 year government bond yield 0.76%
30 year fixed rate mortgage 3.84%


Stocks are higher after the Fed announced additional support measures for the markets. Bonds and MBS are up as well.


The NY Fed announced further measures to support the markets this morning.  Essentially, the Fed will do whatever it takes to keep the financial market working properly.

Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.  The FOMC also directed the Desk to purchase agency commercial mortgage-backed securities (CMBS).

The Fed expects to buy $75 billion of Treasuries and $50 billion of MBS every day this week. As of right now (pre-open), TBAs are up, but bid ask spreads are wide.


The chart below (courtesy of Reuters) shows MBS spreads, which is the difference between the yield on the current coupon mortgage backed security and the comparable duration Treasury.  This represents the market’s reluctance to bid MBS and that flows through to rate sheets. Yes, the Treasury market yields are lower than February. Yes, the Fed Funds rate is lower than February. No, mortgage rates are not. Once those green bars get back to where they were in February we will be seeing lousy pricing in the primary market. The Fed’s $250 billion purchasing activity in the MBS market should help though.

MBS spreads

The Fed is also extending credit to other parts of the economy, specifically the muni market and the corporate credit market. The Fed will start purchasing investment grade corporate loans, it will re-launch the Term Asset-Backed Lending Facility which lent money to investors who buy credit card receivables and other consumer debt. The Fed also plans to roll out a Main Street Business Lending Program which will lend to small businesses.


Late last week, pretty much everyone stopped buying non-QM loans, and it looks like jumbos will end soon as well. The securitization markets are halted. I have heard that some non-QM lenders are even refusing to honor locks they have already extended. Aggregators were also declining to buy MBS with rates below 3% as well.


Lenders are still waiting for guidance out of Fannie Mae regarding verbal verifications of employment and drive-by appraisals. So far, people have been closing loans in parking lots, but loans are getting done. The last thing Fannie needs is for the mortgage finance pipeline to stop, so I assume they’ll find a way to make things work. The FHFA website apparently contains an announcement that it directs the GSEs to grant flexibility for appraisal and employment verification, so something should be forthcoming.


Washington is set to vote on a relief bill today at noon. The Democrats are complaining about executive compensation and stock buybacks, though the bill does contain some limitations on those. Treasury Secretary Steve Mnuchin said the bill could help the Fed direct $4 trillion to the business sector. Companies that take the money will be required to maintain payroll “to the extent practicable.” Supposedly the portion of the loan that goes to maintaining payroll could be forgiven.


Interesting data point: Lennar reported good first quarter earnings, which pretty much was expected. Pre-Coronavirus, homebuilding was set to have the best year in over a decade. Their quarter ends in February, and the company said that orders were up 16% in the first two weeks of this quarter – i.e. the first two weeks in March. In most of their markets construction continues, and with interest rates as low as they are PITI payments are lower than market rents.


The deadline for filing taxes has been extended to July 15.


Existing Home Sales increased 6.5% in February, according to NAR. “February’s sales of over 5 million homes were the strongest since February 2007,” said Lawrence Yun, NAR’s chief economist. “I would attribute that to the incredibly low mortgage rates and the steady release of a sizable pent-up housing demand that was built over recent years.” Social distancing and economic uncertainty is expected to weigh on sales going forward, but the fundamentals of the housing market remain strong, with tremendous pent-up demand.




Morning Report: Spring Selling Season slows down dramatically

Vital Statistics:


Last Change
S&P futures 2359 -52.4
Oil (WTI) 21.91 2.39
10 year government bond yield 1.14%
30 year fixed rate mortgage 3.58%


Stocks are lower this morning as volatility continues. Bonds and MBS are down.


Late yesterday, the Fed announced measures to support short-term money market mutual funds. Global central banks have been cutting rates and conducting currency interventions.


Initial Jobless Claims came in at 288k last week, a big increase but hardly recessionary. The big tell will what happens next week, which will include people who were laid off this week.


The government has imposed a 60 day moratorium on foreclosures and evictions.


Redfin has suspended its iBuying program. This was the program where Redfin would buy homes directly from sellers and handle the sale. I have to imagine Zillow won’t be far behind. While the Fed is pulling out all the stops to keep the financial markets functioning, if lines of credit are at risk of getting pulled, this strategy absolutely does not work.


The NYSE has shut down floor operations and is going all electronic in response to the virus. To be honest, I am surprised at how well the stock market has functioned during this whole sell-off. I thought the algorithmic traders would disappear with this volatility. So far, so good.


The Spring Selling Season it taking a hiatus due to Coronavirus. After a 27% increase in traffic, it was flat over the past week. Redfin has canceled open houses, and at some point appraisals will become an issue if appraisers don’t want to go into homes.


Dismayed by the lack of inventory at your local supermarket? Don’t be.





Morning Report: A view of things from the perspective of an investor

Vital Statistics:


Last Change
S&P futures 2427 22.4
Oil (WTI) 28.81 0.09
10 year government bond yield 0.8%
30 year fixed rate mortgage 3.48%


Stocks are up slightly after yesterday’s bloodbath. Bonds and MBS are down.


The actions taken by the Fed over the weekend seemed to help things in the mortgage market. According to Optimal Blue, the average 30 year fixed rate mortgage fell 23 basis points yesterday. Some of this was due to interest rate movements, but the biggest reason was a narrowing of MBS spreads.


Let me throw a little inside baseball stuff to explain what is going on. Mortgage backed securities are the basic input into rate sheets. They have an imputed yield and as of Friday, the difference between the imputed yield on the mortgage backed security and the corresponding Treasury was pushing 150 basis points. A month ago, it was around 100 basis points. The widening of MBS spreads (which translate into higher mortgage rates) was driven by a number of things, including prepayment fears, high refinance volumes, mortgage backed investors (think mortgage REITs) deleveraging, and a fear that repo rates will rise. The Fed’s actions over the weekend did two big things. The Fed’s commitment to provide liquidity to the markets soothed a lot of fears over repo lines getting pulled. The restarting of quantitative easing meant that one of the biggest players in the MBS market was back and went from being a net seller to a net buyer. That was just what the MBS market needed.


Annaly Capital (one of the biggest investors in mortgages) held a conference call yesterday to explain what is going on in the MBS market. Mortgage bankers should understand how the people on the “other side of the trade” – i.e. MBS buyers think. Here are my notes from the call yesterday

  • Fed much more accomodating with liquidity than it was in 2008.
  • MBS are the most attractive since before the financial crisis
  • Not seeing banks pull repo lines
  • Private label securitization markets will take a hiatus for a while
  • Repo haircuts remain unchanged.

The punch line is that the Fed is 110% committed to preventing a replay of 2008, where liquidity dried up and affected business. They do not want to see warehouse lines being pulled, repo lines being pulled, etc. Note the Fed committed to adding $500 billion in overnight repo financing as well.


Annaly investors were concerned that the upcoming year will be the biggest refinancing wave since 2003. For those that weren’t in the business then, 2003 origination volume was around $3.7 trillion. That is 75% higher than last year. The industry is about to be inundated with files, once the Coronavirus issue passes.


If the private label securitization markets go on hiatus, don’t be surprised to see the non-QM business slow down, and maybe mediocre pricing in the jumbo market. Simply put, the banks are being encouraged to keep businesses afloat and not just fill their balance sheet with portfolio products. Stock buybacks are also going to be suspended until this is over.


No, you can’t get that 0% mortgage rate you heard about on TV.





Morning Report: Fed intervention

Vital Statistics:


Last Change
S&P futures 2581 129.25
Oil (WTI) 33.12 1.89
10 year government bond yield 0.95%
30 year fixed rate mortgage 3.6%


Stocks are up big this morning, while bonds are down. Why? Just because. No reason.


The Fed intervened in the markets and injected liquidity into the short term money markets. Stocks initially jumped on the news but sold off as it had nothing to do with stocks. Remember, the Fed was having end-of-quarter issues in the money market in September, long before Coronavirus was even a thing. The Fed may bring back QE if things don’t settle down, but don’t bet on it making too big of a difference in mortgage rates. It didn’t do all that much the last time around, and we weren’t at the zero bound in long term rates like we are now.


Coronavirus fears are looming over the Spring Selling Season, according to NAR. The NAR said it expects to see a 10% drop in sales this month. The timing couldn’t have been worse, as 40% of sales take place between March and June. That said, if people have to move, they have to move. I could see lower activity affecting investment purchases as professionals wait to see if there is a major economic impact. is coming up with its own estimate of home values to compete with Zillow’s zestimate. The estimate will supposedly utilize different logic.

Morning Report: Markets down on travel restrictions

Vital Statistics:


Last Change
S&P futures 2601 -139.25
Oil (WTI) 31.12 -1.89
10 year government bond yield 0.70%
30 year fixed rate mortgage 3.5%


Stocks are lower after Trump announced a 30 day travel ban from Europe. Bonds and MBS are up.


Initial Jobless Claims came in at 211,000 last week, below expectations. If Coronavirus is going to cause a recession, this will be the first place you see it. So far, it looks like companies are hanging on to their workers. This is key to preventing a recession.


Credit spreads are beginning to widen, however. The banks have been crushed YTD, with Wells down something like 40%, JPM down 30%. We are nowhere near 2008 levels (and probably aren’t heading there), but widening credit spreads are the canary in the coal mine.


Speaking of widening spreads, mortgage backed security spreads are widening. The difference between the implied yield of mortgage backed securities and treasuries is about 150 basis points right now. It was about 110 at the end of February. In a nutshell, this means that mortgage rates right now are about the same as they were when the 10 year was yielding 1%.  If all you watch is the 10 year bond yield indicator on CNBC. It isn’t telling the whole story.


We are entering “oh crap” season, where companies that are going to miss their first quarter earnings expectations disclose it to the market. This could be an opportunity for companies to “kitchen sink” a lot of things as Coronavirus provides an opportunity for them to build in cushion for future earnings releases. In other words, if the Street expects you to make $1.16 in your first quarter earnings, and you are going to come in around $1.12 – $1.13, you might disclose that you will make only $1.10 and take the opportunity to write down a whole bunch of assets and doubtful accounts to create some cushion to make sure they make their numbers going forward. Companies aren’t supposed to do this, but they do. Certainly look for airlines, hotels, banks, consumer discretionaries, and energy to warn on Q1.


Inflation at the wholesale level fell 0.6% MOM in February, and is up 1.3% on a YOY basis. Ex-food and energy it is down 0.3% MOM and up 1.4% YOY. Again, inflation no longer matters to the Fed.


The Fed Funds futures are now predicting a 60% chance cut of 75 bps next week and a 40% chance of a 100 bp cut. Note that the CME indicates that the inter-meeting cut has screwed up the probability graphs, but they don’t quantify it. Oh, by the way, the CME is suspending all open-outcry trading until further notice starting Friday.


Fed funds futures Mar 20



Morning Report: Refinances up 80% last week.

Vital Statistics:


Last Change
S&P futures 2778 -81.25
Oil (WTI) 33.00 -1.49
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.37%


Stocks are after the Bank of England cut interest rates by 50 basis points. Bonds and MBS are up.


Coronavirus update: 120,000 worldwide, cases in the US breaches 1,000. A big pocked in the US centers around Westchester County in New Rochelle.


Washington is working on some sort of fiscal stimulus to support the economy while we deal with the Coronavirus. Republicans are pushing for a payroll tax holiday while Democrats want paid sick leave. They will probably come to some sort of deal. What politician doesn’t like to spend money in an election year, especially with an excuse as bulletproof as this?


Speaking of politics, Joe Biden is looking more and more like he will be the D nominee.


The MBA has raised its 2020 origination forecast to $2.6 trillion from $2.1 trillion. 2019 volume was $2.2 trillion. Refis are forecast to increase to $1.2 trillion, while purchases are expected to come in at 1.4 trillion.  “This month, our forecast is for mortgage rates to average around 3.4 percent for 2020, and we have revised our refinance forecast to a total of $1.2T for 2020 roughly double our previous forecast of $665B,” they said. “The revised refinance estimate is a 37 percent increase in refinance volume in 2020 relative to 2019. Additionally, we expect purchase originations to be stronger in 2020, showing an 8 percent increase for the year given the strength in new residential construction and in purchase applications to date. ”


Separately, mortgage originations increased 55.4% last week as purchases rose 6% and refis rose 79%. “Market uncertainty around the coronavirus led to a considerable drop in U.S. Treasury rates last week, causing the 30-year fixed rate to fall and match its December 2012 survey low of 3.47 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Homeowners rushed in, with refinance applications jumping 79 percent–the largest weekly increase since November 2008. With last week’s increase, the refinance index hit its highest level since April 2009.”


The consumer price index rose 0.1% MOM in February and is up 2.3% on a YOY basis. Ex-food and energy it rose 0.2% MOM and 2.4% YOY. Of course with the Fed knocking on ZIRP’s door, the inflation numbers are completely irrelevant to the bond market.


Mortgage credit availability dipped in February. “Mortgage credit supply decreased in February, as both conforming and jumbo segments of the market saw a decline,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “There were also reductions in ARM program offerings, as well as in low credit score programs offered by investors. Last month’s activity was the calm before the storm. Mortgage rates dropped steeply in the last week of February and a large surge of refinance activity followed. Investors may adjust their future mortgage credit offerings based on the sudden upswing in demand.” With pipelines full, many mortgage bankers are simply saying no to new loans.