Morning Report: Mortgage and rent payments are due

Vital Statistics:

 

Last Change
S&P futures 2650 -48.1
Oil (WTI) 19.81 1.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

Stocks are lower this morning after disappointing comments out of Exxon, Apple and Amazon. Bonds and MBS are flat.

 

It is May 1. Mortgage and rent payments are due. I suspect we will see a deluge of missed payments. Meanwhile, about half of US states are looking to loosen restrictions.

 

Construction spending rose 0.9% in March, despite the COVID-19 concerns. The ISM Manufacturing Index fell, but not as much as feared.

 

Fannie Mae reported net income of $461 million in the first quarter compared to $4.4 billion in the fourth quarter of 2019. Increased provisions for loan losses drove the decline. Fannie estimates that 7% of its book (or about a million loans) is in forbearance right now. Net worth fell by a billion to 13.6 billion. 1 million loans, $13.6 billion in equity.

 

According to Black Knight, 3.8 million mortgages are in forbearance. 1.7 million are Fannie / Freddie, 1.2 are GNMA and the rest are private label / other. UPB is $238 billion. Black Knight estimates that there will need to be $8 billion in P&I advances and another $1.7 billion in T&I advances.

 

Many large corporations are thinking of keeping work-from-home a permanent thing. It looks like productivity hasn’t suffered as much as employers have feared, and this could be a win-win for both employers and employees.

Morning Report: Market signalling March rate cut

Vital Statistics:

 

Last Change
S&P futures 3070 -39.25
Oil (WTI) 46.77 -1.79
10 year government bond yield 1.28%
30 year fixed rate mortgage 3.54%

 

Stocks are lower this morning on overseas weakness and Coronavirus fears. Bonds and MBS are up again.

 

The 10 year is trading at 1.28%, but MBS are lagging the move. Be patient with rates, as it will take MBS and rate sheets a few days to catch up. The Fed Funds futures are now handicapping a 58% chance of a March rate cut. A week ago it was 9%. What a difference 250 S&P handles makes…

 

New home sales rose 7.9% MOM in January, and is up 18.6% on a YOY basis. This is the highest level in 12 years. Mild weather and lower interest rates may have been a driver.  Speaking of new home sales, Toll Brothers reported lower than expected earnings, and blamed it on Coronavirus and CA sales.

 

new home sales

 

The second estimate for fourth quarter GDP came in at 2.1%, in line with the advance estimate a month ago. Consumption was a touch below expectations at 1.7%, as was inflation at 1.3%. In other economic data, durable goods orders fell 0.2% which was better than expectations. Ex-transportation, they rose 0.9% and capital goods orders (which are a proxy for capital expenditures) rose 1.1%. Finally, initial jobless claims rose to 219,000 last week.

 

Interesting on the flight to safety trade – gold is up. bitcoin is not.

 

 

Morning Report: The Fed is sanguine on the economy

Vital Statistics:

 

Last Change
S&P futures 3322 -3.25
Oil (WTI) 50.11 -0.32
10 year government bond yield 1.56%
30 year fixed rate mortgage 3.66%

 

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

 

The upcoming week will be date-light, however we will have a lot of Fed-speak. Jerome Powell will be delivering his semi-annual Humphrey-Hawkins testimony on Capitol Hill on Tuesday and Wednesday. In terms of economic data, we will get CPI, retail sales and industrial production this week. None of these should be market-movers. The 10 year will be driven mainly by the global risk on / risk off trade which will be led by China.

 

The Fed said that downside risks to the US economy have diminished over the past few months, although Coronavirus remains a threat. Remember, recoveries don’t die of old age – they are either murdered by the Fed or are ended by some external event. “Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased. The likelihood of a recession occurring over the next year has fallen noticeably in recent months.”

 

The Atlanta Fed has Q1 growth coming in at 2.7%.

 

Mortgage credit availability dipped in January, according to the MBA. “Mortgage credit availability was mostly unchanged to start 2020, decreasing 0.2 percent in January,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Similar to December of 2019, the decline came from the reduction of low credit score, high-LTV programs. Furthermore, there continues to be movement with both adds and drops in the government program space, with the net result last month showing small growth in the government index. Although credit supply has flattened these last two years, the meaningful increase seen overall since the Great Recession has been helpful to the growing share of first-time homebuyers, as well as refinance borrowers looking to act on lower mortgage rates. Ongoing housing supply constraints in the lower-price range continues to hold prospective buyers back the most.”

 

Interesting article in American Banker: Big banks lost money on mortgages in 2018. “Large banks withstood an average loss of $4,803 for every retail mortgage originated in 2018 (compared with a net profit of $376 per loan for independent mortgage bankers). Appetite for these kinds of losses is increasing.” Why were they doing this business? It is all about the MSR. And unfortunately for holders of servicing, rates have been going down, not up which is a negative for servicing assets. As rates have fallen, banks have had to reach for yield, which generally means taking more risk. I know that 2018 data is far in the rear view mirror,  but that is an incredible number.

 

 

Morning Report: Bank earnings looking strong

Vital Statistics:

 

Last Change
S&P futures 2991 -6.25
Oil (WTI) 52.97 0.14
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.97%

 

Stocks are lower this morning as bank earnings come in. Bonds and MBS are down.

 

Retail Sales disappointed, falling 0.3%, which was lower than expected. Ex autos and gas, they were flat, although August numbers were revised upward across the board. The control group was flat, and sales rose 4.1% YOY.

 

Mortgage Applications rose 0.5% last week as purchases fell 4% and refis rose 4%. “The ongoing interest rate volatility is impacting a borrowers’ ability to lock in the lowest rate possible. Despite a slight rise in mortgage rates last week, refinance applications increased 4 percent and were 199 percent higher than a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications slowed for the second week in a row. While near term economic uncertainty is still a factor, other fundamental issues, such as a lack of housing inventory in many markets, is preventing purchase activity from meaningfully rising. However, purchase applications were still much higher than a year ago. This is a reminder that the purchase environment in 2019 continues to be stronger than in 2018.”

 

Bank earnings are generally looking good, and mortgage backed securities trading desks are doing well as rates have fallen and volumes have picked up. The other side of the coin is that the drop in rates have negatively affected the values of mortgage servicing rights. Wells is a good example: despite a $127 million increase in origination revenue, total mortgage banking revenue fell by $292 million as their servicing book took a $419 million mark-to-market loss.

Morning Report: Global yields head lower

Vital Statistics:

 

Last Change
S&P futures 2862 -3.5
Oil (WTI) 56.05 1.14
10 year government bond yield 1.45%
30 year fixed rate mortgage 3.82%

 

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

 

Global bond yields continue to head lower, and a larger percentage of the world’s sovereign yields are negative. Note that Germany has passed negative 70 basis points on the Bund, and France is not too far behind at negative 44 basis points. Japan is at negative 27 basis points. Even some of the ne’er-do-wells of Europe – Italy and Spain – have lower yields than we do. It is important to keep this chart in mind when you hear the business press push the “inverting yield curve means a recession is imminent” narrative. They inevitably ignore the fact that US bonds don’t trade in a vacuum and investors will sell negative yielding bonds to buy something positive.

 

global bond yields

 

Mortgage applications fell 6.2% last week as purchases fell 4% and refis fell 8%. Rates increased about 4 basis points for a 30 year conforming loan. Mortgage rates continue to lag the moves in the overall bond market. “U.S. Treasury yields were volatile over the course of the week, as the ongoing trade dispute between the U.S. and China continued to generate uncertainty among investors,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates increased for the first time since the week of July 12, but were still 80 basis points lower than the beginning of the year. With rates edging higher, refinances and purchase applications fell, at 8 percent and 6 percent, respectively.”

 

Consumer confidence remains elevated and close to record highs, according to the Conference Board. We are at levels last seen during the stock market bubble days of the late 90s, and the late 60s when we landed on the moon. Given the retail sales data, this could be one of the best holiday shopping periods in a long time.

 

consumer confidence

 

 

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 2928 9
Eurostoxx index 390.26 -0.72
Oil (WTI) 61.85 0.04
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.20%

 

Stocks are higher after the strong payroll number. Bonds and MBS are up small.

 

Jobs report data dump:

  • Nonfarm payrolls up 263,000
  • Unemployment rate 3.6%
  • Labor Force participation rate 62.8%
  • Average hourly earnings up 0.2% MOM / 3.2% YOY
  • Employment – Population ratio 60.8%

Overall it was a Goldilocks report for the markets. Stocks are happy about the payroll number while bonds like the wage data. Note the unemployment rate is at the lowest level since Jimi Hendrix did the Star Spangled Banner at Woodstock. We saw an uptick in construction workers as well as health care.

 

unemployment rate

 

The Washington Post noted how difficult finding truck drivers has become: McClane Company is a large trucking and warehouse firm that specializes in moving food and grocery items around the country. They are advertising truck driving jobs for $70,000 a year and a $6,000 sign on bonus in Jessup, Pennsylvania, but even at that level of pay it’s been tough to get enough people in the door.

 

Steve Moore withdrew his name from consideration to join the Fed after it appeared the he wouldn’t have the votes to get confirmed. Establishment Republicans are not ready for non-traditional types to join the Fed, though it might be a good thing, if only to break the group-think that goes on there.

 

Ginnie Mae is taking a look at 90%+ LTV cash out refinancings. They put out a request for input. Initially, they were looking at the prepay speeds for VA IRRRL loans, and how it was affecting GNMA MBS investors, but it looks like they are now broadening their focus as VA loans still have higher prepay speeds than comparable FHA or Fannie / Freddie loans. Specifically, VA refis occur earlier than FHA refis, and high LTV VA cashouts have higher prepay speeds than comparable FHA cash-outs. FHA cash outs are limited to 85% LTV, while VAs can go up to 97.5%, and the funding fee can be financed. It looks like GNMA is not looking at tightening the restrictions for VA refis, but it is more interested in perhaps creating new GII pools for shorter duration loans (i.e. fast prepays).

 

VA versus FHA speeds

Morning Report: Weak housing starts number

Vital Statistics:

 

Last Change
S&P futures 2821.25 14.5
Eurostoxx index 376.34 2.01
Oil (WTI) 59.65 0.83
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.08%

 

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

 

Lots of housing data to chew through. Let’s start with existing home sales, which increased 11.8%, according to NAR. While this month-over-month print of 5.51 million sounds impressive, we are still down on a YOY basis. Lower rates are helping, and we are beginning this season with a little more inventory to work with. We had 1.63 existing homes for sale, which represents a 3.6 month supply. A balanced market needs something like 6 months. Prices are still rising – the median house price rose by 3.6% – but the rate of appreciation has slowed. The median home price came in at $249,500, and that puts the median house price to median income ratio just over 4. Historically that is a high number, but lower interest rates help the affordability issue. The first time homebuyer represented 32% of home sales, an increase from last year but still below the historical average of around 40%.

 

Housing starts fell 8.7% to 1.16 million, a disappointing number. We saw a huge decrease in single family construction – from an annualized pace of 970k to 805k. Last February, the number was 900k so this is a big drop. One note of caution – the margin for error on these numbers is huge (around 17%), so there is a good chance this gets revised upward in subsequent releases. Building permits were a little better – falling only 2% to 1.3 million. Housing construction has largely been absent from this recovery, and could provide a huge boost to the economy if it ever gets back to normalcy (around 1.5 million units a year).

 

housing starts

 

More evidence that home price appreciation is slowing: the Case-Shiller home price index rose 4.3% in January, the slowest pace since 2015. In general, 2018 was a year to forget for the mortgage industry as rates rose 100 basis points. They have now given back most of those gains, so perhaps 2019 will be a bit brighter, although if you have been counting on MSR unrealized gains to paper over weakness in lending, the Q1 mark is going to be harsh.

 

The economy seems to be slowing, according to the Chicago Fed National Activity Index. It edged downward to -.29 in February, and the 3 month moving average is negative as well. The CFNAI is a meta-index of 85 different economic indicators, of which many are leading as well as lagging. While it is too early to start declaring 2019 a slow-growth year, the first quarter is looking weak.

 

The FHA is backing away from a 2016 decision to loosen credit – it is now tightening standards and flagging more loans as “high risk.” The biggest effect will be for the first time homebuyer, and FHA estimates that 40,000 loans or so might be affected. At the heart of the issue is a 2016 decision to no longer require a manual underwrite for FHA loans with FICOs below 620 and DTIs above 43. FHA was largely a backwater pre-crisis, and most of these types of loans were subprime. As the subprime market disappeared, FHA stepped in to fill the void. Home Ready and Home Possible have emerged as low downpayment competitors, and FHA has suffered from negative selection bias. While FHA permits very low credit scores, most lenders don’t go as low as FHA permits in the first place.

 

Trump nominates free-marketer Steven Moore to the Federal Reserve Board and Paul Krugman isn’t taking it well. For a little economics inside-baseball, this resembles the Spacely Sprockets / Cogswell Cogs rivalry in the economics profession. Since most of the free-market caucus comes from the University of Chicago, they are called “fresh water economists” and Krugman comes from Ivy / Coastal academia (Princeton) so his school is called “salt water” economists. In terms of ideological bent, the fresh water economists are much more non-interventionist than the salt water economists, who support direct government intervention in the markets and economy. Steven Moore is a true believer in the free market approach, and to be honest, most of the Fed and academia are not. A little diversity of opinion is not a bad thing….

 

 

Morning Report: The Fed catches up with the markets

Vital Statistics:

 

Last Change
S&P futures 2817 -10
Eurostoxx index 380.22 -0.62
Oil (WTI) 60.12 1.09
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.22%

 

Stocks are lower after the Fed cut interest rates. Bonds and MBS are up.

 

As expected, the Fed maintained the Fed Funds rate at current levels and took down their forecast for the end of year. The December dot plot showed a central tendency in the 2.72% (using the lower bound of the range) and the March plot showed a central tendency of 2.37%. The forecast for 2019 GDP was lowered from 2.3% to 2.1%, while the unemployment rate was increased from 3.5% to 3.7%. PCE inflation was more or less unchanged at 2%.  The Fed Funds futures increased their probability of a 2019 rate cut from about 25% to about 40%.

 

dot plot

 

The Fed also tweaked their balance sheet runoff plan, increasing the amount they reinvest each month by $15 billion. This only affects Treasuries – MBS will continue to run off.

 

Stocks initially rallied on the Fed announcement, but then sold off on fears the Fed sees something the markets don’t. Bonds rallied on the Fed announcement, with the 10 year yield falling to 2.53%. MBS were slow to follow, but we did see some reprices towards the end of the day. With rates even lower this morning, expect to see a big move down in mortgage rates. FWIW, Fannie Mae has taken down their prediction for the 30 year fixed rate mortgage from 4.8% to 4.4%.

 

What does some of this mean for mortgage bankers? 2019 won’t necessarily be as bad as people feared for origination, and if you have been aggressively marking your servicing portfolio in order to paper over a price war, you might have a problem.

 

Banks that refocused their mortgage lending towards high-end buyers in the aftermath of the financial crisis are seeing the winds shift. Jumbo origination has been falling as prices at the high end have been peaking out and tax reform has limited the value of the mortgage interest deduction. Many non-banks focused on the first time and moderate income buyer. Many banks were offering amazing jumbo terms, presumably in an attempt to cross sell the more lucrative asset management business.

 

 

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.