Delinquencies – The Daily Tearsheet

Morning Report: The Fed is concerned about coronavirus

Vital Statistics:

	Last	Change
S&P futures	3379	-6.25
Oil (WTI)	53.76	0.45
10 year government bond yield		1.54%
30 year fixed rate mortgage		3.69%

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

The FOMC minutes didn’t reveal anything too surprising. The central bank is concerned about coronavirus, and the situation “warranted close watching.” In his Humphrey Hawkins testimony, Jerome Powell said he wanted to see evidence that Chinese disruptions are having a material effect on the US economy that will last. China is idling factories and restricting travel, and companies are now seeing the downside of stretched supply chains. In addition they fretted about persistently low inflation and searched for reasons why it has consistently missed their 2% target to the downside. Basically the message is that if rates are going anywhere, it is down not up.

In other economic news, initial jobless claims came in at 210,000 and the Philadelphia Fed manufacturing survey surged to a robust level of 37.

Mortgage delinquencies are the lowest on record (going back to 2000). The total 30 day + DQ rate came in at 3.22%, which was down 14% YOY and down 5% on a MOM basis. This is unusual given that DQs often spike early in the year as holiday spending gets the better of people.

Morning Report: Bonds adjust to the prospect of no more rate cuts

Vital Statistics:

	Last	Change
S&P futures	3083	7.25
Oil (WTI)	56.97	0.64
10 year government bond yield		1.84%
30 year fixed rate mortgage		3.92%

Stocks are higher this morning after Chinese President Xi Jinping committed to lowering tariffs and institutional transaction costs. Bonds and MBS are down.

The markets expect to see some sort of phase 1 trade deal with China in the coming weeks. The Wall Street Journal is reporting that China and the US are considering rolling back some tariffs. Separately, the Chinese central bank lowered rates to deal with a liquidity crunch.

There isn’t much data this week (as is typical after the jobs report) however we do have a lot of Fed-Speak so, we could see some movement in the bond markets as we adjust to the pause. For those keeping score at home, the December Fed Funds futures are signalling only a 5% chance of another rate cut this year. A month ago, they were handicapping a 44% chance of another cut.

Home prices rose 3.5% YOY according to CoreLogic. By their models, 36% of the top 100 MSAs are overvalued (including the NYC area), while 23% were undervalued and 41% were fairly valued. Their model compares housing values to disposable incomes to come up with a valuation score. They are forecasting home price appreciation to accelerate to 5.6% over next year. Note that Realtor.com said that listing prices rose 4.3% in October to a high of 312,000.

About 0.6% of all originations went DQ within 6 months, according to Black Knight Financial Services. While this is much lower than the pre-bubble years, it has been steadily increasing since the housing market bottomed. The concentration is primarily in first time homebuyers. Foreclosures remain under control, at levels last seen in 2005.

Morning Report: Durable goods disappoint

Vital Statistics:

	Last	Change
S&P futures	3010	7.25
Oil (WTI)	56.09	0.04
10 year government bond yield		1.77%
30 year fixed rate mortgage		4.03%

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down small.

Durable goods orders disappointed as trade fears and global economic weakness weighs on the manufacturing sector. The headline number was down 1.1%, versus expectation of a 70 basis point drop. Much of the weakness was driven by a drop in aircraft, probably related to the issues with the Boeing 737 Max. Ex-transportation, orders were down .3%. Most worrisome was the drop in core capital goods, which is a proxy for business capital expenditures and signals that business is concerned about future growth. You can see the deceleration in growth in the chart below:

Initial Jobless claims fell to 212,000, which is a historically strong number. So despite the weakness in the manufacturing sector, the labor market remains relatively robust.

Delinquencies ticked up marginally in September to 3.53%, but are down 11.2% from a year ago. Foreclosure starts came in at 39,400 which is up about 9%, but still down a YOY basis. Prepay speeds are still elevated, up 121% from a year ago. With high prepay speeds, you can expect to see weakness in the higher coupon MBS, which is why increasing the loan rate doesn’t buy the borrower much in terms of adding lender credits. It also makes loans with lots of Fannie Mae adjustments (investment, cash out etc) almost impossible to get a par rate.

The Fed is increasing the amount of liquidity in the system, possibly as a result of the cash crunch last month in the repo markets. “It’s just more evidence the Fed will not back off as year-end gets closer,” said Mike Schumacher, global head of rate strategy at Wells Fargo Securities. “The Fed wants to take out more insurance. You had repo pick up last week. That might not have gone over too well.” Separately, the Fed funds futures are pricing in a 94% chance of a rate cut next week.

Morning Report: Retail Sales strong

Vital Statistics:

	Last	Change
S&P futures	3019	5.35
Oil (WTI)	59.54	-0.07
10 year government bond yield		2.13%
30 year fixed rate mortgage		4.10%

Stocks are flattish as earnings season kicks off. Bonds and MBS are down.

June Retail Sales came in much higher than expectations. The headline number was up 0.4% MOM and 3.4% YOY. The control group, which excludes volatile products like autos, gas, and food was up 0.7%, well above the 0.3% Street estimate. May’s numbers were revised upwards as well. The upside surprise in retail sales pushed up the 10 year from 2.09% before the number to 2.13% after. Since consumption is such a big component of the economy, expect to see Q2 GDP estimates to be revised upwards.

Despite the strong retail sales numbers, the street is still handicapping a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut at the July FOMC meeting. I can’t believe we are talking about rate cuts when the economy is this strong, but here we are…

In bank earnings, JP Morgan reported an increase in net income, but mortgage banking revenue was down 17% QOQ and YOY, driven by an unfavorable mark on the MSR portfolio. Volume increased 14% YOY to 24.5 billion. Wells also reported stronger earnings, with origination volume increasing to $33 billion. Margins fell from 105 basis points to 98, and it looks like they took a hit to their servicing portfolio as well.

Industrial Production was flat in June, driven by a drop in utility output. Manufacturing production was up 0.4%. Capacity Utilization increased as well, from 75.6% to 75.9%. So, despite all the concern about tariffs, we aren’t seeing it flow through to the numbers yet.

The FHA has been trying to figure out a way to bring more lenders back into the program after many exited in the aftermath of the housing crisis. The Obama administration aggressively fined lenders for minor errors which pushed banks largely out of FHA lending. The Trump Administration is changing enforcement policies and is working to bring more clarity to to the program. A number of trade groups however have argued that the reforms don’t go far enough, and don’t provide enough certainty to encourage banks to re-enter the business.

30 day delinquencies fell 0.7% YOY to 3.6%, according to CoreLogic. The only places that saw increases were due to hurricane-related issues. Flooding in the Midwest could boost these numbers in the future however. The foreclosure rate fell from 0.5% to 0.4% as well.

Morning Report: Housing starts fall

Vital Statistics:

	Last	Change
S&P futures	2910	13.25
Oil (WTI)	51.78	-0.15
10 year government bond yield		2.03%
30 year fixed rate mortgage		4.15%

Stocks are higher as we begin the 2 day FOMC meeting. Bonds and MBS are up smartly on statements out of the ECB.

US rates are pushing towards 2% this morning after ECB President Mario Draghi signaled that the central bank could roll out further stimulus if inflation fails to materialize. The German Bund yields -32 basis points this morning (a record low), and US interest rates will have a hard time rising in this sort of environment. Simply put, bond investors will rotate out of bonds paying nothing into bonds paying something, even if they have to bear currency risk. It is preferable to locking in a sure loss by holding Bunds.

Housing starts fell to 1.24 million units in May, which was below expectations, but the prior two months were revised upward. Starts were down on a month-over-month and a year-over-year basis. Building Permits cam in at 1.29 million, which was more or less flat MOM and YOY.

Homebuilder sentiment slipped in June, primarily due to weakness in the Northeast and the West. That said, the index is solidly in the mid-60s, which is an overall strong level. Home prices have become stretched relative to incomes, but falling interest rates are offsetting that slightly. Rising costs for land and labor are making starter homes unaffordable for many first time homebuyers.

30 day delinquencies fell by 0.3% in March to a rate of 4.0%. Delinquencies are still being driven by hurricane-related issues. The foreclosure rate fell from 0.6% in March 2018 to 0.4% in March of 2019. Separately, ATTOM reported that there were 56,152 foreclosure filings in May, up 1% YOY, but down 22% from a year ago. Completed foreclosures were down 50%. The states with the highest foreclosure inventory are New Jersey, Florida, Delaware, Illinois.

Morning Report: The Fed’s balance sheet will probably never return to pre-crisis levels.

Vital Statistics:

	Last	Change
S&P futures	2896	-2.5
Eurostoxx index	388.12	0.58
Oil (WTI)	64.46	0.06
10 year government bond yield		2.52%
30 year fixed rate mortgage		4.16%

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

Factory Orders fell 0.5% in February, while January was revised downward to no change. Core Capital Goods Orders (which is a proxy for business capital expenditures) fell 0.1% after unusually strong readings in January and December.

Small Business Optimism increased in March, according to the NFIB Small Business Optimism Survey. Hiring indicators improved (companies added .5 workers on average), the earnings outlook brightened, and capital expenditures were steady. The only negative was an inventory build.

House flipping is back to pre-crisis levels. Profit margins are much higher however, which should provide a bit of a cushion if home price appreciation tails off. The type of property is generally older – a fix and flip – which is dominated by professionals, not neophytes. Those were the type who would purchase rights to buy a new construction condo and then hope to sell the right at a profit.

Margin compression and lower volumes has meant job losses in the nonbank mortgage sector. Nonbank lenders employed 320,000 people in February, which is a drop of about 20,000 jobs from August.

30+ day delinquencies fell to 4% in January, which is a drop from 4.9% in January of 2018. The foreclosures rate fell to 0.4% from 0.6%. Delinquency rates fell across the entire spectrum of buckets, and are at the lowest levels in 20 years. Interestingly, DQ rates for student loans and auto loans are up.

Good explainer on quantitative easing and why the Fed doesn’t want to return to pre-crisis levels for its balance sheet. Changes in the way banks manage their reserves, along with rising global demand for dollars has made a larger Fed balance sheet a necessity. The mechanics of rate setting involve setting the interest they pay on bank reserves, and in order to do that, they need a large level of reserves in the banking system. These reserves are the Fed’s liabilitites, and if the liabilities need to increase, the assets will have to move up in lockstep. Hence the need to maintain a bigger balance sheet.

Note that the equity value of the Fed’s balance sheet is largely unchanged, which means the Fed is vulnerable to a fast uptick in interest rates. This is because rising interest rates will negatively affect the value of its bond portfolio (bond values fall as rates rise). The Fed has about $3.9 billion in assets, supported by $39 billion in equity. In other words, a 1% drop in their asset portfolio would wipe out their equity. While that is a distinct possibility for their long-term bond holdings, it is highly unlikely for their short term bond holdings. That said, the Fed does operate with a 100:1 leverage ratio and historically that level has been deadly for institutions that don’t own a printing press.

Morning Report: Mark Calabria to testify in front of the Senate today

Vital Statistics:

	Last	Change
S&P futures	2757	7
Eurostoxx index	366.36	1.6
Oil (WTI)	54.46	0.56
10 year government bond yield		2.65%
30 year fixed rate mortgage		4.43%

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are up.

We have some inflation data, with the consumer price index flat MOM and up only 1.6% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.2% YOY. At the wholesale level, the producer price index fell 0.1% and 2% YOY. Ex-food and energy, the index rose 0.2% MOM and 2.5% YOY. Inflation remains under control, despite rising wage pressures which is a bit of a Goldilocks scenario, especially with respect to the Fed.

December retail sales were disappointing, falling 1.2%. The control group, which excludes volatile sectors like autos and building materials, fell 1.7%. This data was delayed by the government shutdown – we should be getting Jan numbers tomorrow.

Initial Jobless Claims rose to 239,000 last week.

It looks like Trump is going to sign the spending deal hashed out in Congress that provides some of the money he requested for the southern wall. He will continue to look for other options to get funding as well. Whether that includes declaring a national emergency to siphon fund from DOD is anyone’s guess.

Mark Calabria is set to testify before the Senate today as it considers his nomination to run FHFA, the housing regulator that oversees Fannie and Freddie. Calabria is a libertarian, and has questioned the government’s role in the mortgage market – particularly the support it gives the 30 year fixed rate mortgage, which is a distinctly American product which wouldn’t exist without government subsidies. Calabria has also been critical of the whole mortgage securitization market in general, believing that banks should hold (and service) more of their loans. The vote is expected to fall along party lines, with Republicans voting in favor and Democrats voting against.

The 30 year fixed rate mortgage is an anomaly that doesn’t exist anywhere else in the world that I am aware of. In most other countries, mortgages are adjustable rate, and banks hold them without government backstopping the credit. In other words, the borrower bears the interest rate risk, and the bank bears the credit risk. In the US, the lender bears the interest rate risk and the taxpayer bears the credit risk. Calabria has been critical of this product, arguing that it artificially inflates housing values which is a valid criticism. Of course the 30 year fixed rate mortgage isn’t the only subsidy out there – the tax treatment of mortgage interest is another, and flood insurance is another. These programs makes housing more affordable relative to incomes, which means it will be vulnerable to shocks. Does that mean these programs cause bubbles? Not necessarily, since we have seen housing bubbles in several countries that don’t have these supports.

Mortgage delinquencies continue to fall, as the 30 day DQ rate hits the lowest level in 10 years. 30 day DQs fell from 5.2% to 4.1% over the past year, while foreclosures fell from 0.6% to 0.4%. CoreLogic CEO Frank Martell said, “On a national basis, we continue to see strong loan performance. Areas that were impacted by hurricanes or wildfires in 2018 are now seeing relatively large annual gains in the share of mortgages moving into 30-day delinquency. As with previous disasters, this is to be expected and we will see the impacts dissipate over time.”

Morning Report: Delinquencies rebound

Vital Statistics:

	Last	Change
S&P futures	2683	19
Eurostoxx index	354.73	1.46
Oil (WTI)	66.9	0.07
10 year government bond yield		3.12%
30 year fixed rate mortgage		4.93%

Stocks are higher this morning despite a huge sell-off in Asian shares last night. Bonds and MBS are flat.

Stocks got walloped yesterday yet again, making this month the worst since the bad days of the financial crisis. There really isn’t much of a catalyst to hang your hat on – just general overseas selling and the risk-off trade. I think part of this is a rotation back into the short term interest rate market. CDs are now paying over 2%, after having paid nothing for years. A moribund asset class is coming back, and stocks are going to feel the brunt of it.

With the NASDAQ officially down 10% from the high, and the S&P 500 pushing close to it, where do you think the VIX is? Just over 25, which isn’t even the high for the year. If you are hoping we have hit capitulation, we haven’t.

Home price appreciation decelerated in August, according to the FHFA House Price index. Prices rose 0.3% MOM and 6.1% YOY. The red-hot Pacific and Mountain MSAs have decelerated, while many of the laggards (Mid-Atlantic) are seeing improved performance.

New Home Sales fell dramatically in September on both a month-over-month and annual basis. They fell to a seasonally-adjusted annual rate of 553,000, which is down 5.5% MOM and over 13% YOY. With current inventory at 327,000 units, we have over 7 month’s worth of inventory, which would be characterized as a buyer’s market (6 – 6.5 months is considered “balanced.”). Note that new home sales can be extremely volatile but it confirms what we have been seeing in the homebuilder ETF – affordability is beginning to deter buyers.

“Modest to moderate.” was how the Fed’s Beige Book characterized economic growth. “Modest to moderate” was pretty much how the Fed characterized everything from 2010 to 2016. This is a downgrade from “brisk,” “solid” or “strong” – words the Fed has been using recently to characterize the economy. The Beige Book is a more qualitative assessment of the economy, so parsing the language is about the only thing you have to work with. The Fed has been expecting the economy to slow due to trade wars. If the economy is beginning to slow, the Fed might want to take a breather and let the recent rate hikes take effect before making any further moves. The Fed also noted that housing continues to underperform.

The sell off has affected the Fed Funds futures market. A week ago, the markets were handicapping a 80% chance for a hike. It is now down to 74%. A March 2019 hike is now a coin toss.

Delinquencies spiked in September, rising 13% for the biggest jump since November 2008. Hurricane Florence hit areas saw DQs rise by 38%, although there is a seasonal aspect to DQs – they typically rise during September and January.