Morning Report: Jamie Dimon throws cold water on mortgage banking

Vital Statistics:

 

Last Change
S&P futures 2898.75 -1.5
Eurostoxx index 390.41 0.82
Oil (WTI) 63.91 0.15
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.32%

 

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

 

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

 

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

 

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

 

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

 

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

 

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

 

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

Morning Report: Bank earnings come in

Vital Statistics:

 

Last Change
S&P futures 2915 6.25
Eurostoxx index 388.92 0.82
Oil (WTI) 63.31 -0.09
10 year government bond yield 2.57%
30 year fixed rate mortgage 4.23%

 

Stocks are higher as bank earnings come in. Bonds and MBS are down.

 

Earnings season has begun, and the banks are all reporting.

 

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

 

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

 

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

 

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

 

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

 

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

 

fed funds futures

 

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: Job openings fall

Vital Statistics:

 

Last Change
S&P futures 2890.5 8
Eurostoxx index 386.66 0.98
Oil (WTI) 64.39 0.06
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.16%

 

Stocks are higher this morning on overseas strength after the ECB maintained interest rates. Bonds and MBS are up.

 

The Fed will release the minutes from its March meeting this afternoon at 2:00 pm. Given the magnitude of the shift in their Fed Funds forecasts, it should make interesting reading. There is a chance that it could be market-moving, especially since rates have moved back up.

 

Inflation at the consumer level rose 0.4% MOM in March, and increased 1.9% YOY. Ex-food and energy, it rose 0.1% MOM and increased 2.0% YOY. Energy prices are increasing again, so expect to see more upward pressure on prices. The 0.4% increase was the biggest in 14 months.

 

Job openings fell in February by about 500,000. Job openings had a big growth spurt in 2018 and now appear to be pulling back a little. Job openings fell in most sectors, with hotels and accomodation leading. Hiring fell in several sectors as well, including construction. The most important number – the quits rate – was stuck again at 2.3%. The quits rate is a leading indicator for wage growth, and is a number the Fed watches closely. Between the latest payroll numbers and this report, we can see evidence that the labor market is cooling a bit. That said, the number of job openings (7.1MM) are still larger than the number of unemployed (6.2MM).

 

JOLTs

 

The IMF cut its forecast for 2019 global growth from 3.5% to 3.3%, with the risks solidly to the downside. “The balance of risks remains skewed to the downside,” the IMF said. “Failure to resolve differences and a resulting increase in tariff barriers above and beyond what is incorporated into the forecast would lead to higher costs of imported intermediate and capital goods and higher final goods prices for consumers.”

 

Mortgage Applications decreased 5.6% last week as purchases rose 1% and refis fell 11%. “Mortgage rates inched back up last week, but remain substantially lower than they were in the second half of last year,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “As quickly as refinance activity increased in recent weeks, it backed down again in response to the rise in rates. However, this spring’s lower borrowing costs, coupled with the strong job market, continue to push purchase application volume much higher. Purchase applications are now up more than 13 percent compared to last year at this time.”  Government loans (FHA / VA) increased their share of the market, and the average contract interest rate rose 4 basis points to 4.4%.

 

The CEOs of major banks head to the House for what promised to be a tongue-lashing from Democrats. Bank of America attempted to head off criticism by raising the minimum wage for its employees. There will almost certainly be kvetching about CEO pay, and the financial system will almost certainly be Enemy #1 for the Democrats running in 2020.

Morning Report: The Trump Administration pushes for lower rates.

Vital Statistics:

 

Last Change
S&P futures 2893 -2.75
Eurostoxx index 388.4 0.22
Oil (WTI) 63.35 0.27
10 year government bond yield 2.50%
30 year fixed rate mortgage 4.17%

 

Stocks are flattish this morning as the Trump Administration and China get closer to a trade deal. Bonds and MBS are up.

 

This week will be relatively data-light, although we will get inflation data on Wednesday and Thursday. Fed Head Jerome Powell will speak to Democrats at their annual retreat. I doubt there will be anything market-moving in Powell’s speech, but you never know.

 

Lennar is making a big bet on entry-level homebuyers, launching new communities with prices in the mid $100,000s. The homes range from 1200 – 2200 square feet and are on 40 foot lots. Prices range from $162,000 – $200,000.

 

Former Kansas City Fed Chief and restaurateur Herman Cain is currently being vetted by the Trump Administration for a Fed post. He has some allegations of sexual misconduct, and so far most Republicans are in wait and see mode during the process. Over the weekend, Larry Kudlow and Mick Mulvaney stressed that the two nominations were “on track.”

 

Donald Trump said the economy would “take off like a rocket ship” if the Fed cut rates. He also criticized the “quantitative tightening” – i.e. reducing the Fed’s balance sheet. His feelings about monetary policy are natural – there isn’t a politician alive who doesn’t prefer lower rates to higher rates, but his constant criticism is something new. That said, there is a partisan bent to monetary policy. Republicans fret about monetary policy being too loose when Democrats are in charge, and Democrats are less dovish when Republicans are in charge. Both sides want the economy to be weak when their rivals are in charge.

 

Did the Fed overshoot? It is hard to say, since this was really one of the first times the Fed started tightening without a real inflation problem. The point of tightening was advertised as a preventative move to prevent inflationary pressures from building, but the real reason was to get off the zero bound. 0% interest rates are an emergency measure, and emergency measures aren’t meant to be permanent. Interest rates at the zero bound also cause all sorts of distortions in the markets, and build risks into the system. Given that the economy was strengthening, the Fed took advantage of the opportunity to get back closer to normalcy. Would the economy be faster if the Fed wasn’t tightening? Probably. However some of that is going to be determined by global growth, and Europe is not doing well.

 

Monetary policy acts with about a year’s lag, so the June, September, and December hikes from last year still have yet to be felt. Nobody is predicting a recession, but the 2018 hikes are going to sap growth a little this year. I would be surprised if it slowed down the economy enough to prod the Fed to cut rates. Note that the NY Fed raised its Q2 growth estimate to 2% from 1.6%.

 

Finally, even if the Fed raises rates, overall long-term interest rates can stay low for a long, long time. Interest rates went below 4% during the Hoover Administration and didn’t get back above that level until the Kennedy Administration. So, it could be a long time before we ever see a 4% 10 year yield.

 

100 years of interest rates

 

 

Morning Report: Final estimate for fourth quarter GDP

Vital Statistics:

 

Last Change
S&P futures 2811.75 1.25
Eurostoxx index 375.78 -1.45
Oil (WTI) 59.49 -0.45
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.08%

 

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

 

Fourth quarter GDP was revised downward to 2.2% in the third and final estimate. Inflation came in at 1.5%. This is more ammo for the Fed to possibly cut rates this year.

 

GDP

 

Initial Jobless Claims came in at 211k last week. Despite the slowdown in economic activity, employers are hanging on to their workers. Speaking of labor, McDonalds will no longer lobby against minimum wage hikes. It probably is safe for McDonalds – their franchisees bear the brunt of labor costs not corporate. At any rate, I’m not sure that Republicans really need a lobbyist to tell them to oppose minimum wage hikes, but companies seem more interested in placating the social justice mob these days than delivering shareholder returns.

 

Facebook has been charged with housing discrimination based on algorithms that target housing-related ads. “Facebook is discriminating against people based upon who they are and where they live,” HUD Secretary Ben Carson said in a statement announcing the charges of violating the Fair Housing Act. “Using a computer to limit a person’s housing choices can be just as discriminatory as slamming a door in someone’s face.”

 

The White House has released a memorandum on housing reform. There were no discernible policy changes in it – the government would like to decrease the GSE’s footprint in the mortgage market while maintain the 30 year fixed rate mortgage and affordable housing goals. They did mention the goal of getting more banks doing FHA loans, although the capital treatment of servicing rights probably makes that tough. Fannie Mae stock liked the release, rallying 9%.

 

The Washington Post has run something like 4 anti Steven Moore editorials in the past few days. The economics establishment really doesn’t like the nomination. Don’t forget one thing, though. While it is generally not a good thing when politicians criticize monetary policy (and Trump / Moore were pretty outspoken about it), the action in the Fed Funds futures and the change in the dot plot shows they were right.

Morning Report: Sea change in market expectations

Vital Statistics:

 

Last Change
S&P futures 2815.75 -7.25
Eurostoxx index 375.78 -1.45
Oil (WTI) 59.49 -0.45
10 year government bond yield 2.38%
30 year fixed rate mortgage 4.08%

 

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

 

Independent mortgage banks reported a loss of $200 per loan on average in the fourth quarter of 2018, according to the MBA. This is a drop from the $480 per loan they earned in the third quarter. This works out to be about an 11 basis point production loss per loan. In the fourth quarter of 2017, independent mortgage banks earned 20 basis points. This 11 basis point loss is the lowest since the MBA began keeping tabs on this about 10 years ago. Declining secondary marketing income was met with increasing production costs. The first quarter this year probably looks just as bad, and servicing portfolios are going to be taking a mark-to-market hit as interest rates have unexpectedly fallen. Many banks use their MSR portfolio as a natural hedge for their core business, but there will be a lag so Q1 looks to be similar to Q4.

 

That said, we did see a spike in applications last week, as they rose 8.9%. Purchases rose 6% and refis rose 12% as rates fell.

 

Donald Trump’s nominee to the Federal Reserve Board Steve Moore has called for the Fed to cut rates 50 basis points immediately. He came under criticism (and apologized) for calling for Jerome Powell’s resignation after the Fed hiked rates again in December. FWIW, left econ is pretty bent out of shape over his nomination (the Washington Post penned 2 editorials against him yesterday), mainly for his support of tax cuts, deregulation, and free markets. In an interview with the New York Times, he said “I was really angry” about the December increase, Mr. Moore said. “I was furious — and Trump was furious, too. I just thought that the December rate increase was inexplicable. Commodity prices were already falling dramatically.” Remember Trump criticized the cuts (and was beaten about the head and shoulders in the business press over it). That said, back in December, the markets thought the Fed would raise rates twice this year. They are now predicting at least 1 cut this year. Take a look at what the Fed Funds futures are saying below. Just one month ago, the market was assigning a 81% chance that the Fed would do nothing this year. Now, there is roughly a 75% chance of at least one rate cut. The swing in sentiment is pretty dramatic.

 

fed funds futures dec 19

 

Note that the yield curve has inverted, although that is mainly due to the high 3 month rate. 2s – 10s is still positive.

 

While we have seen a marked deceleration in home price appreciation according to Case-Shiller, the FHFA House Price index still shows decent growth. It increased 5.6% annually in January.  Since the FHFA index only looks at homes with conforming mortgage, it ignores the jumbo space, and that is where we are really seeing the weakness in home prices. Regionally, the West and Mountain states have really slowed down, and the lagging markets in the Mid Atlantic area (especially the NYC area) are finally showing signs of life. You can see the dispersion between 2017 (blue) and 2018 (red) has really decreased as the correlation tightens.

 

FHFA regional

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