Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

 

Last Change
S&P futures 3088 -6.25
Oil (WTI) 57.59 0.44
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

 

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

 

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

 

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

 

FNMA chart

Advertisements

Morning Report: Risk-on feel as China and US strike a trade deal

Vital Statistics:

 

Last Change
S&P futures 3088 12.25
Oil (WTI) 57.27 0.94
10 year government bond yield 1.88%
30 year fixed rate mortgage 3.97%

 

Stocks are higher this morning after the US and China agree to remove tariffs. China also made some high profile arrests to stem the tide of fentanyl coming into the US. The fentanyl issue was a key part of the US’s issues with China. Bonds and MBS are down on the “risk-on” trade.

 

After a dismal start to the year, the luxury end of the market (homes over $1.5 million) rebounded in the third quarter as rates fell. Prices rose 0.3% on average, but they had been falling since 2018. Manhattan was hit particularly hard on the new mansion tax. Florida was the beneficiary as prices rose over 100% in West Palm and some of the other nearby areas. Previously hot markets like San Diego also remained in the losing category. “Because recession fears peaked over the summer, I expected luxury home prices and sales to dip. But it appears that nerves alone weren’t enough to scare off wealthy homebuyers,” said Redfin chief economist Daryl Fairweather. “The U.S. economy grew faster than expected in the third quarter, partly as a result of healthy consumer spending. Those results, along with flat luxury home prices and rising sales, go to show that Americans are basing their spending habits on their own personal financial situation rather than concerns about global economic tensions. For many, that means strong incomes and good employment prospects.”

 

Fannie Mae is out with their housing forecasts for 2020. They anticipate the 30 year fixed rate mortgage will continue to fall, hitting 3.5% by the end of 2020, and home prices will rise about 4%. Interestingly, they do not anticipate any sort of pickup in housing starts – in fact they anticipate they will be flat with 2019. Despite the drop in rates, they anticipate origination volumes will fall to 1.86 trillion from 2.04 trillion as the refinance share of the market falls from 37% to 31%.

 

New York Fed President John Williams said that the FOMC sees no reason to cut interest rates further: “The three rate cuts we did were very effective at managing the risks” slowing global growth and trade uncertainty present to the U.S. economy, New York Fed President John Williams said at a Wall Street Journal event in New York. Chicago Fed President Charles Evans echoed the same sentiment.

 

Finally, we know that gathering strength in the US economy is helping push rates higher. It is important to note that rising rates is not simply a US phenomenon. US Treasuries don’t trade in a vacuum – they are always going to be subject to moves in overseas rates. For now, the key overseas interest rate to watch is the yield on the German Bund, which has increased by 45 basis points since early September. The Bund still has a negative yield, but it is now -27 basis points after bottoming at -72 basis points 2 months ago.

 

bund

Morning Report: Existing home sales fall as prices increase

Vital Statistics:

 

Last Change
S&P futures 2992 -2.25
Oil (WTI) 53.87 -0.64
10 year government bond yield 1.74%
30 year fixed rate mortgage 4.03%

 

Stocks are flattish as earnings come in. We should be hearing from heavyweights such as Tesla, Boeing, Caterpillar, Ford and Microsoft. Bonds and MBS are flat.

 

Mortgage Applications fell 12% last week as purchases fell 4% and refis fell 17%. Mortgage rates increased 10 basis points and increased to 4.02%. “Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day,” said MBA Chief Economist Mike Fratantoni. “Last week, mortgage rates jumped 10 basis points and were above 4 percent for the first time since September. The increase in mortgage rates caused refinance applications to drop 17 percent, and by more than 20 percent for conventional loans. Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.”

 

Existing home sales fell 2.2% in September, according to NAR. Lawrence Yun, NAR’s chief economist, said that despite historically low mortgage rates, sales have not commensurately increased, in part due to a low level of new housing options. “We must continue to beat the drum for more inventory,” said Yun, who has called for additional home construction for over a year. “Home prices are rising too rapidly because of the housing shortage, and this lack of inventory is preventing home sales growth potential.” The median home price increased 5.9% to 272,100 and the supply of available homes came in at 1.83 million units, or about 4 month’s worth of inventory.

 

Home prices rose 0.2% MOM and 4.6% YOY in August, according to the FHFA House Price Index. Home price appreciation is definitely decelerating this year, compared to 2018, although lower rates will probably re-accelerate growth in the markets with tighter inventory.

 

FHFA regional

 

FHFA Director Mark Calabria said that he is willing to wipe out the shareholders of Fannie and Freddie if needed to protect taxpayers. “If the circumstances present themselves where we have to wipe out the shareholders, we will.,” he said at testimony in front of the House Financial Services Committee. He added that he believes that shareholders should have lost their stakes in the GSEs when the government rescued them in 2008. Fannie and Fred were put into conservatorship, with the government owning 79.9% of the companies. This was done largely to prevent disruption to the mortgage market if the companies were to enter formal bankruptcy, and also to prevent the government from having to consolidate all of Fannie’s debt on its own balance sheet. His comments at least leaves the door open for some recovery value for common stockholders if the GSEs are reformed. FWIW, the Obama administration was absolutely steadfast in their belief that the stock was worthless, and a change in administrations will probably return to that stance.

 

 

Morning Report: Service sector decelerates

Vital Statistics:

 

Last Change
S&P futures 2885 4.25
Oil (WTI) 52.48 0.24
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.87%

 

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

 

Announced job cuts fell to 41,557 according to the Challenger and Gray report. This looks at press releases, so they don’t represent actual cuts, just announcements. Retail (which has been a perennial weak spot) dominated, along with trade-related industrial cuts. Separately, initial jobless claims rose to 219,000.

 

The service sector decelerated in September, according to the ISM non-manufacturing survey. Separately durable goods orders fell slightly. We are definitely seeing a deceleration in business spending, and will see if this is only a temporary bump, or something more permanent.

 

Fannie and Freddie now guarantee about $7 trillion of mortgage debt, 33% higher than before the crisis. The amount of higher DTI loans is rapidly increasing, due to the GSE patch, which permitted them to do riskier loans. About 30% of GSE loans are high DTI, compared to 16% 3 years ago. FHA is even worse, with 57% high DTI, compared to 38% 2 years ago. “There is a point here where, in an effort to create access to homeownership, you may actually be doing it in a manner that isn’t sustainable and it’s putting more people at risk,” said David Stevens, a former commissioner of the Federal Housing Administration who led the Mortgage Bankers Association until last year. “Competition, particularly in certain market conditions, can lead to a false narrative, like ‘housing will never go down’ or ‘you will never lose on mortgages.’ ” The Trump and the Obama Administrations hoped to attract private capital back into the mortgage market, but so far it has been extremely limited.

 

New Rez has bought Ditech for $1.2 billion, as it works its way through bankruptcy. New Rez is part of Fortress which has been on an acquisition binge, buying Shellpoint last year. Fortress is owned by Japan’s Softbank.

 

Interesting stat: Remember the HAMP program, which was treated as a way to prevent foreclosures by modifying mortgages? Turns out that 57% of the modified loans from 2008 to 2013 re-defaulted.

Morning Report: Fannie and Freddie are told to level the playing field.

Vital Statistics:

 

Last Change
S&P futures 3005 7.25
Oil (WTI) 57.95 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.96%

 

Stocks are higher this morning after China made some agricultural trade concessions to the US. Bonds and MBS are flat.

 

House prices rose 0.4% MOM and 5% YOY in July, according to the FHFA House Price Index. Home price appreciation has slowed across the board compared to 2018’s numbers. This is despite a meaningful drop in rates. Separately, the Case-Shiller index was more or less flat on a MOM basis and up a couple of percent annually.

 

FHFA regional

 

One of the best predictors of rising wages is the quits rate, which has been inching up slowly since the economy bottomed out in 2009. The latest reading had it at 2.6%. We are seeing an uptick in the quits rate for the bottom income brackets, with 12% of all lower income households switching jobs during the spring and early summer. For all the concern about income inequality, this is a welcome sign.  Separately, another 1.3 million workers will qualify for overtime pay due to a new Labor Department directive.

 

The FHFA has issued a directive to Fannie Mae and Freddie Mac to end guarantee fee discounts for high volume lenders. “We trying to make sure Fannie and Freddie aren’t driving consolidation in the market, but instead they’re providing a level playing field, and that’s really something we’re focused on,” Calabria said Monday at a National Association of Federally Insured Credit Unions conference. “One of the things that really concerned me before the crisis was that it wasn’t unusual where the big guys like Countrywide would come in and they pay G-fees down here and you come in and pay G-fees up here.” The ruling would level the playing field for smaller lenders, and apply the principle of “same rate of return for the same risks, regardless of size.”

 

What will be the implications of this change? Until we have a better grasp of how Fannie will make changes, it is hard to tell. It will probably push the redevelopment of the private label securities market. If other insurers can compete for the big aggregators, then we might see a more competitive marketplace, and will reduce the taxpayer’s footprint in the mortgage market.

Morning Report: August recession trade gets smashed and Fannie adjusts pricing

Vital Statistics:

 

Last Change
S&P futures 2987 -2.25
Oil (WTI) 58.05 -0.04
10 year government bond yield 1.70%
30 year fixed rate mortgage 3.96%

 

Stocks are flattish as trade progress was offset by weakness in overseas economies. Bonds and MBS are up.

 

Global bond yields are falling this morning after a dismal ISM manufacturing reading for Germany. The Bund is down 5.5 basis points to negative 57 bps, which is pulling down US Treasury yields. We have a big week of data, with home prices tomorrow, new home sales on Wednesday, GDP on Thursday, and Personal Incomes / Spending on Friday. We will also have Fed-speak every day except Tuesday.

 

The NY Fed addd $50 billion in cash to the markets this morning to ease pressure in the overnight repo markets. A shortage of cash last week pushed overnight repo rates to 10% last week. Mortgage Backed security repo rates spiked last week along with Treasuries, but MBS are now back to normal levels. A rise in MBS repo rates can make leveraged bets in MBS more expensive (this really affects mortgage REITs) and will therefore make them require a higher return, which means higher mortgage rates, at least at the margin.

 

Note that Fannie Mae has also reportedly backed off its pricing last week, especially at the higher note rates in response to pressure from regulators. These changes went into effect on Thursday. Reportedly, the increase was in the 25 basis point range on average, but it was lower at the 3% note rates and up to 50 basis points higher up in the stack. From the chatter I am hearing Freddie adjusted as well, but not as dramatically. What does this mean? Pricing for investment properties will be hit hard, and borrowers are not getting paid much to buy up the rate.

 

The MBA made its recommendations to the CFPB over how to best deal with the GSE patch. The MBA recommends that the CFPB scrap the 43% debt to income ratio standard and pursue a more holistic method of determining a borrower’s ability to pay. The MBA lays out a number of recommendations for how to de-emphasize the importance of DTI. The GSE patch is set to expire in January 2021.

 

The Chicago Fed National Activity Index showed an uptick in activity during August. Production-related indices drove the increase, while employment-related indicators were flat. Many traders who were making recessionary bets (short stocks / long bonds) earlier in the summer (based on trade fears) found themselves on the wrong side of the boat this month. The S&P 500 is flirting with all-time highs, and the 10 year bond yield backed up nearly 30 basis points since the start of the month. The CBOE volatility index (VIX) has fallen from 25 in early August to around 15, which is historically a benign level.

 

VIX

Morning Report: New Home purchase activity up 33%

Vital Statistics:

 

Last Change
S&P futures 2995.5 -6.25
Oil (WTI) 62.07 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as the markets continue to digest the Saudi oil situation. Bonds and MBS are up.

 

The FOMC begins its two day meeting today. The Fed funds futures further discounted the chance of a rate cut announcement tomorrow to 63% from 73% a day earlier.

 

Industrial Production rose 0.6% in August, and manufacturing production rose 0.5%. Both estimates were well in excess of street expectations. Capacity utilization rose to 77.9%. Pretty healthy numbers, and certainly don’t demonstrate that trade wars are killing the manufacturing economy.

 

New home purchase activity was up 33% on a YOY basis in August. “New home purchase activity was robust in August, as both mortgage applications and estimated home sales increased from a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent increases in new residential housing permits and housing starts, lower mortgage rates, and a still-strong job market all bode well for the new home sales outlook.” This is a bullish sign for the economy, as we have underbuilt for years. New Home Sales has been in the 600k – 700k range recently, which is at levels last seen in the mid 90s.

 

new home sales

 

That said, the population has grown, so mid-90s levels doesn’t really support the demand out there. Adjusting for population, the historical average would equate to about 900k new homes sold, or about 30% higher than here.

 

FHFA Director Mark Calabria was interviewed on Bloomberg TV on the GSEs. It looks like they will hit the market to raise capital by the end of 2020. The first order of business is to end the net worth sweep, which will allow them to build capital. FHFA and Treasury haven’t settled on a number for the capital increase yet. Fannie Mae stock was up a touch on the interview.