Morning Report: Highly profitable Q2 for independent mortgage bankers

Vital Statistics:

 

Last Change
S&P futures 3546 20.6
Oil (WTI) 42.84 0.17
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.93%

 

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

 

Mortgage Applications fell by 2% last week as purchases were flat and refis fell by 3%. “Both conventional and government refinancing activity decreased last week, despite 30-year fixed and 15-year fixed mortgage rates declining to near historical lows,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates have remained below 3.5 percent for five months now, and it’s possible that refinance demand may be slowing and will not significantly increase again without another notable drop in rates.” Are we seeing prepayment burnout? Or was the 50 basis point adverse market fee adding some noise? I suspect it was the latter.

 

Independent mortgage banks made a profit of $4,548 on each loan in the second quarter, up from $1,600 in the first quarter. Average volume for the quarter was $1 billion. 96% of firms were profitable. Total production revenue increased to 429 basis points from 362 bp in the first quarter.

 

ADP reported 428,000 new jobs in August. The Street was looking for 900k. The consensus for Friday’s jobs report is 1.4 million.

 

Rental prices are collapsing in New York City and San Francisco. “Since [COVID-19] really started to affect the U.S. market in March, it has dramatically decreased the amount of people commuting to work every day—either because of social distancing measures or layoffs resulting from COVID-19’s effect on the economy. Given this, there is less of a reason for Americans to cluster in urban centers,” says Zumper analyst Neil Gerstein. “We believe this has caused a migration shift, and a subsequent demand shift, to historically cheaper cities.”

 

 

Morning Report: Forbearances are flat

Vital Statistics:

 

Last Change
S&P futures 3496 2.6
Oil (WTI) 42.94 0.17
10 year government bond yield 0.72%
30 year fixed rate mortgage 2.93%

 

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

 

The percentage of loans in forbearance was flat at 7.2% last week, according to the MBA. Fannie and Freddie loans decreased by 5 basis points while FHA and private label increased. The share of loans in forbearance was unchanged, as the decline in the share of GSE loans was offset by increases for Ginnie Mae, and portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The pace of new forbearance requests has been relatively flat across investor types, but for those with GSE loans, the rate of exits from forbearance regularly exceeds the rate of new requests. The exception in these trends are borrowers with Ginnie Mae loans. The loss of enhanced unemployment insurance benefits, coupled with a consistently high rate of layoffs and uncertainty about the job market, are having a disproportionate impact on FHA and VA borrowers.”

 

Rep Maxine Waters (D-CA) laid into the FHFA over the 50 basis point adverse market fee. “Just two weeks ago, Director Calabria approved an outrageous penalty – in the middle of a pandemic and an economic recession – that would apply to homeowners looking to use today’s historically low mortgage rates to refinance their mortgages and reduce their mortgage payments,” Waters said. “Now, after bipartisan backlash, Director Calabria is attempting to save face by delaying the penalty until December 1st and then only providing very narrow exemptions moving forward. While this delay will buy homeowners looking to refinance some time, at the end of the day, the vast majority of homeowners will still pay the penalty – and homeowners in higher-cost areas like Los Angeles will disproportionately be excluded from the narrow exemptions provided. I am calling on Director Calabria to terminate this penalty altogether, not just delay it.”

 

CoreLogic reported that home prices rose 5.5% in July. CoreLogic CEO Frank Martell said: “On an aggregated level, the housing economy remains rock solid despite the shock and awe of the pandemic. A long period of record-low mortgage rates has opened the flood gates for a refinancing boom that is likely to last for several years. In addition, after a momentary COVID-19-induced blip, purchase demand has picked up, driven by low rates and enthusiastic millennial and investor buyers. Spurred on by strong demand and record-low mortgage rates, we expect to see more home building in 2021 and beyond, which should help support a healthy housing market for years to come.” That said, CoreLogic forecasts a deceleration for home price appreciation going forward of sub-1% for the July 21 – July 20 period.

 

Many companies who were planning on re-opening offices after Labor Day are rethinking that idea.

Morning Report: The death of the Phillips Curve

Vital Statistics:

 

Last Change
S&P futures 3506 2.6
Oil (WTI) 43.24 0.17
10 year government bond yield 0.74%
30 year fixed rate mortgage 2.93%

 

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

 

The stock market has been rocking this month. It turns out this is the best August in 30 years.

 

We will have a decent amount of data this week, with the jobs report, construction spending, ISM and productivity. The markets will be closing early on Friday ahead of the Labor Day weekend.

 

Fed Vice Chairman Richard Clarida said the Fed isn’t looking to raise rates even if unemployment starts falling. “My colleagues and I believe that this new framework represents a critical and robust evolution of our monetary policy strategy that will best equip the Federal Reserve to achieve our dual-mandate objectives on a sustained basis in the world in which we conduct policy today and for the foreseeable future,” Clarida said in prepared remarks for a speech to the Peterson Institute for International Economics. The “new framework” he is referring to is the asymmetric risks around inflation, which means that the Fed will let the labor market run hot before raising rates. Essentially this is the death of the Phillips Curve.

The Phillips Curve was a theory that came from the 1960s which said that as unemployment falls, inflation will rise. The Fed had used that sort of model in the past to help guide monetary policy, and the new monetary framework basically says that the Fed will no longer slow the economy pre-emptively as unemployment falls. The Fed will now wait until inflation is running above its 2% target before raising rates. We saw unemployment in the mid 3% range, and inflation remained under control. The punch line is that rates will stay at the zero bound for years unless we get some sort of unexpected increase in inflation.

Morning Report: The Fed’s challenge

Vital Statistics:

Last Change
S&P futures 3495 8.6
Oil (WTI) 43.04 -0.17
10 year government bond yield 0.72%
30 year fixed rate mortgage 2.91%

 

Stocks are higher this morning as personal incomes and spending came in better than expected. Bonds and MBS are down.

 

Personal incomes rose 0.4% in July, which was well ahead of the expectations of a 0.2% drop. Personal spending was up 1.9% versus expectations of a 1.5% increase. June’s numbers were all revised upward as well. Inflation remains well below the Fed’s target, rising 1% on a YOY basis.

 

Pending Home sales rose 5.9% in July. “We are witnessing a true V-shaped sales recovery as homebuyers continue their strong return to the housing market,” said Lawrence Yun, NAR’s chief economist. “Home sellers are seeing their homes go under contract in record time, with nine new contracts for every 10 new listings.”

 

Luxury home builder Toll Brothers reported record contract signings in June and July this year.

 

Jerome Powell discussed the Fed’s new policy yesterday, and there is some skepticism in the markets that the Fed can get inflation up above its 2% target. For what its worth, there is ample evidence that this can take longer than people think. Japan has been trying to create inflation for 30 years, and it has been unsuccessful. In fact, the younger generation which grew up post 2000 has the deflationary mindset, which is to save, and to wait for products to get cheaper. Inflation and deflation are monetary phenomenons of course, but they are also psychological. The Fed will discuss inflationary and deflationary expectations, and that word is deliberate. The Fed doesn’t want to see Americans get into the trap of saving too much (I know that seems counter-intuitive), so it is jawboning the markets saying essentially “we are going to create inflation, so spend now, before prices go up!” But if people feel like the economy is going to get worse, they will save what they can, pay off debt, and hunker down. This becomes a self-fulfilling prophecy. And anecdotally, that is exactly what is happening now. I was listening to an earnings call from PRA Group (a debt collector) and they said that collections have been better than normal. In a pandemic. People are saving more (paying down debt is considered saving). The Fed sees this and wants to get people spending, which is what gets the economy going.

 

Morning Report: New guidance from the Fed

Vital Statistics:

Last Change
S&P futures 3475 -3.6
Oil (WTI) 43.24 -0.17
10 year government bond yield 0.66%
30 year fixed rate mortgage 2.91%

 

Stocks are flattish this morning as we await Jerome Powell’s (virtual) Jackson Hole speech. Bonds and MBS are up.

 

Second quarter GDP was revised upward from -32.9% to -31.7%. Consumption was revised up as well from -34.6% to -34.1%. Separately, 1 million people filed for unemployment the first time last week.

 

Home prices rose 11% in the week ending August 16, according to Redfin. The Redfin Homebuyer Demand index increased by 29% from pre-pandemic levels earlier in the year. “Schools are beginning to start again, and it seems like that has slowed the amount of homebuyer activity a little bit, but that doesn’t make the market less crazy,” said Oakland, Calif.-area Redfin agent Veronica Clyatt. “Instead of 20 offers on a home, you may ‘just’ see 10. But prices have not gone down—home price increases haven’t slowed at all.”

redfin home prices

 

Fan and Fred will continue to buy loans in forbearance through September 30, extending the previous deadline of August 31. “MBA and its members appreciate FHFA and the GSEs extending these important features,” said MBA President and CEO Bob Broeksmit. “Both the origination flexibilities and the program to purchase loans in forbearance are providing important stability to the mortgage market during the pandemic, and today’s announcement will enable lenders to continue to make low rate mortgage financing readily available to consumers and avoid the inevitable credit tightening that would have resulted from their expiration.”

 

Democratic presidential candidate Joe Biden has proposed a $15,000 first-time homebuyer tax credit. Supposedly they could use the credit when they make the purchase instead of having to wait to file taxes. The details haven’t been ironed out, which is typical for campaign promises.

 

The Fed has updated its statement on its longer-run goals for monetary policy, strengthening its commitment to a stronger job market. “The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

One change is subtle but important: they replaced the term “deviations” from full employment to “shortfalls” from full employment. This basically codifies what Janet Yellen alluded to years ago, that the Fed will allow the labor market to run hot for a while. This essentially means that the Fed will remain supportive to the labor market when the economy is below full employment, and will be reluctant to take away the punch bowl when we are at full employment.

The bigger question is whether this is just wishful thinking. As we saw before, as the level of government debt rises, the velocity of money slows. And the US economy took a quantum leap upward in indebtedness in response to COVID. Which means talking about a super-hot economic growth in the US makes as much sense as talking about super-hot economic growth in France or Japan. Punch line: we are looking at lower rates for longer, at least at the short end of the curve. The big question is whether the Fed will continue to purchase the 10 year to drive down longer-term rates.

velocity of money

Morning Report: Adverse Market fee delayed until December

Vital Statistics:

 

Last Change
S&P futures 3446 2.6
Oil (WTI) 43.54 0.87
10 year government bond yield 0.71%
30 year fixed rate mortgage 2.94%

 

Stocks are flat this morning as Hurricane Laura is expected to make landfall sometime tonight. Bonds and MBS are flat.

 

The FHFA delayed the 50 basis point adverse market fee until December 1. It also carved out refinances below $125,000. From the press release: “The fee is necessary to cover projected COVID-19 losses of at least $6 billion at the Enterprises. Specifically, the actions taken by the Enterprises during the pandemic to protect renters and borrowers are conservatively projected to cost the Enterprises at least $6 billion and could be higher depending on the path of the economic recovery.” Now the big question will be whether the aggregators remove the fee or keep it in their rate sheets. Quicken and PennyMac have already. Here is the MBA’s take on it.

 

Mortgage applications fell by 6.5% last week as purchases increased by 0.4% and refis decreased by 10%. “Mortgage rates were mixed last week, but the rates for 30-year fixed mortgages and 15-year fixed mortgages declined,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Despite the lower rates, conventional refinance applications fell 11 percent and government refinance applications fell 6 percent, which pushed the total refinance index to its lowest weekly level since July.” Rates had been ticking up for a while, with the 10 year bond stuck around 70 basis points.

 

Luxury homebuilder Toll Brothers reported earnings yesterday. Sales revenue fell due to the pandemic, but orders were up 23% in units and 18% in dollar value. The $2.21 billion in new contracts was a record third quarter (they have an October fiscal) for the company.

 

Consumer confidence declined in August as expectations of a quick economic recovery were quashed. “Consumer Confidence declined in August for the second consecutive month,” said Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “The Present Situation Index decreased sharply, with consumers stating that both business and employment conditions had deteriorated over the past month. Consumers’ optimism about the short-term outlook, and their financial prospects, also declined and continues on a downward path. Consumer spending has rebounded in recent months but increasing concerns amongst consumers about the economic outlook and their financial well-being will likely cause spending to cool in the months ahead.”

 

Durable Goods orders rose 11.2% in July, which was much higher than expectations. Ex-transportation orders rose 2.4% and core capital goods orders (a proxy for capital expenditures) rose 1.9%.

Morning Report: New home sales surge

Vital Statistics:

 

Last Change
S&P futures 3439 12.6
Oil (WTI) 43.54 0.87
10 year government bond yield 0.69%
30 year fixed rate mortgage 2.92%

 

Stocks are higher this morning after the US and China reaffirmed their commitment to a trade deal. Bonds and MBS are down.

 

New Home Sales came in at 900k, much higher than the 754k expected. This is the highest print since 2006.

 

new home sales

 

Energy prices are rising as Hurricane Laura has shut down natural gas and oil terminals. Servicers already lugging portfolios of loans in forbearance will now have to deal with additional disaster-related delinquencies.

 

Home prices were flat MOM in June, according to the Case-Shiller index. On an annual basis they were up 4.3%. The FHFA Index, which uses a different methodology, reported home prices rose 0.9% MOM and are up 5.7% on a YOY basis.

 

The Mortgage Bankers Association reported that the share of loans in forbearance was flat last week as 3.6 million homeowners (or about 7.2% of loans) are in plans. Ginnie Mae loans were flat at 9.54% and private label (jumbo and non-QM) are 10.37%. “The share of loans in forbearance declined for the 10th week in a row, but the rate of improvement has slowed markedly,” said MBA Chief Economist Mike Fratantoni. “The extremely high rate of initial claims for unemployment insurance and high level of unemployment remain a concern, and are indications of the challenges many households are facing. While new forbearance requests remain low, particularly for Fannie Mae and Freddie Mac loans, the pace of exits from forbearance has declined for two straight weeks.”

 

Economic activity decelerated in July however it is still growing above trend, according to the Chicago Fed National Activity Index.

 

Mortgage lenders are asking borrowers to confirm they don’t plan to seek forbearance right away. While the language varies, it generally says that borrowers certify they won’t seek forbearance until the loan is guaranteed by the government. Given that Fannie and Freddie charge either 5% or 7% to buy loans in forbearance, this is important. For mortgage lenders, the forbearance penalty is an added concern. “The hit more than wipes out your margin—over something you have no control over,” said Esther Phillips, senior vice president of sales at Key Mortgage Services Inc. “You can’t control what customers do after you close.” Key’s form asks borrowers to certify they haven’t applied for forbearance from any mortgage payments and have no plans to ask for it.

Morning Report: Existing home sales jump

Vital Statistics:

 

Last Change
S&P futures 3377 -3.6
Oil (WTI) 41.94 -0.82
10 year government bond yield 0.64%
30 year fixed rate mortgage 2.89%

 

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

 

Exiting home sales increased 24.7% in July, according to NAR. “Homebuyers’ eagerness to secure housing has helped rejuvenate our nation’s economy despite incredibly difficult circumstances,” said NAR President Vince Malta, broker at Malta & Co., Inc., in San Francisco, Calif. “Admittedly, we have a way to go toward full recovery, but I have faith in our communities, the real estate industry and in NAR’s 1.4 million members, and I know collectively we will continue to mount an impressive recovery.”  The annualized pace of sales puts it at 5.86 million units. The median home price increased 8% to $280k. First time homebuyers were up 35%.

 

The 50 basis point LLPA will wipe out millions in mortgage banking profit, according to an article in American Banker. “The way they did this is very, very damaging to banks and other mortgage bankers and brokers who have loans in the pipeline,” said Scott Buchta, head of fixed-income strategy at Brean Capital. “In the first month, the bulk of the fee will come out of the pockets of bankers and brokers that locked in a lot of loans.”

 

More than three dozen ex-Fed officials have signed a letter urging the Senate to reject Fed nominee Judy Shelton. Her crime is having the audacity to say something positive about the gold standard. Perhaps that is out of step with today’s army of progressive economists who are trying to fine-tune the economy by intervening directly in markets. If so, that is a good thing. The US Federal Reserve is thick in the biggest economic experiment the world has ever seen, and is highly susceptible to groupthink. The last think we need is a bunch Janet Yellens all saying the same thing.

 

The Fed has increased its balance sheet almost tenfold in the last twelve years. The US debt-to-GDP ratio (a measure of how leveraged the economy is) has increased from 67% to 107%. This should be massively stimulative to the US economy, yet the best we have been able to muster is “meh” for most of the past 10 years. Why is that? The velocity of money (basically how many times a dollar gets used) has fallen off a cliff. This has kept inflation in check, but the downside is that the US is slouching towards Japan, where disinflation (or outright deflation) has taken hold.

 

velocity of money

 

 

Morning Report: Stocks fall on pessimistic FOMC minutes

Vital Statistics:

 

Last Change
S&P futures 3357 -16.6
Oil (WTI) 42.54 -0.32
10 year government bond yield 0.65%
30 year fixed rate mortgage 2.89%

 

Stocks are down this morning after the Fed minutes revealed pessimism about the economy. Bonds an MBS are up.

 

Initial Jobless Claims rose back above the 1 million market last week.

 

The Fed released its minutes from the July FOMC meeting yesterday. The big revelation was a moderating of economic expectations into the end of the year. The money quote: (note this is from the staff economists)

The projected rate of recovery in real GDP, and the pace of declines in the unemployment rate, over the second half of this year were expected to be somewhat less robust than in the previous forecast.

There was also discussion about the concept of yield caps, in other words the Fed targeting specific maturities in the Treasury market to keep the 10-year or 5-year bond yield below a certain target level.

A majority of participants commented on yield caps and targets—approaches that cap or target interest rates along the yield curve—as a monetary policy tool. Of those participants who discussed this option, most judged that yield caps and targets would likely provide only modest benefits in the current environment, as the Committee’s forward guidance regarding the path of the federal funds rate already appeared highly credible and longer-term interest rates were already low.

This is generally good news, at least for those that still cling to the idea that interest rates should be determined by a market. Still, the Fed and the US continues its “slouching towards Japan” strategy. Given the theory that increases in government debt as a percentage of GDP creates sluggish growth and low rates, not inflation (certainly borne out in Japan and Europe), low rates may be around for quite some time.

 

Mortgage Applications decreased 3.3% last week as rates rose. The purchase index rose by 1%, while refis fell by 5%. “Positive economic data reported last week on retail sales, as well as a large U.S. Treasury auction, drove mortgage rates to their highest level in two weeks,”  said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The rise in rates dampened refinance activity, but purchase applications continued their strong run and were 27 percent higher than a year ago – the third straight month of year-over-year increases.”

 

There were a lot of rumors going around that the GSEs are looking to delay the 50 basis point LLPA for mortgage refinances. The industry has been dead set against it, and we have seen bipartisan opposition to it. The industry’s main gripe is the short fuse: loans that were locked before the announcement but expected to close after would require the lender to eat the additional cost. A longer runway (say Jan 1) would prevent this. Another option is to apply the LLPA on locks after Sep 1. The word on the street is that the next shoe to drop will be investment properties, so we could see higher LLPAs there in the future.

 

Fannie CEO Hugh Frater and Freddie CEO David Brickman threw cold water on that idea in a blog post.

Contrary to much of the criticism we have received since making this announcement, this will generally not cause mortgage payments to “go up.” The fee applies only to refinancing borrowers, who almost always use a refinancing to lower their monthly rate…

Some have asserted that this price adjustment could impact borrowers by as much as $1,500—but this life of the loan estimate is a misrepresentation of how this cost would be applied. For an average refinanced mortgage, we estimate a reduction in savings of about $15 per month, meaning refinancing homeowners who were previously saving $133 on their monthly payments will now save $118 per month, on average.

This estimate also assumes lenders pass on the entire fee to borrowers. That is up to them. If they do not, the $15-per-month figure would go down, potentially to zero.

Does this sound like someone reconsidering the idea? It sounds more like “I am altering the deal. Pray I don’t alter it any further.”

 

Despite the economic gloom, renting households are making their rent payments, according to the National Multifamily Housing Council. Almost 87% of renters have paid August rent, which is down about 2% from a year ago. Note that NYC is bringing up the rear at a sub-80% rate. Writer James Altucher wrote an interesting essay about why this time is indeed different for NYC.

Morning Report: Housing starts jump

Vital Statistics:

 

Last Change
S&P futures 3384 6.6
Oil (WTI) 42.24 0.52
10 year government bond yield 0.68%
30 year fixed rate mortgage 2.93%

 

Stocks are higher this morning on strong numbers out of WalMart and the Home Despot. Bonds and MBS are up small.

 

It looks like we are getting bipartisan push-back against the 50 basis point adverse market fee. Trump criticized the fee, and we have a chorus of Democrats opposed to it as well. It seems like no one is actually supporting this move. This is as just about every industry group lines up against it as well.

 

Housing starts increased to a seasonally-adjusted annual rate of 1.5 million in July, which is a 23% increase from a year ago. Building permits came in at 1.5 million as well, which is a 9% increase from last year. Certainly the COVID-related pause is over, and we are approaching the highs of earlier this year.

housing starts

 

Mortgage delinquencies increased to 8.2% in the second quarter, compared to 4.4% in the first quarter and 4.5% a year ago.

The COVID-19 pandemic’s effects on some homeowners’ ability to make their mortgage payments could not be more apparent,” said Marina Walsh, MBA Vice President of Industry Analysis. “The nearly 4 percentage point jump in the delinquency rate was the biggest quarterly rise in the history of MBA’s survey. The second quarter results also mark the highest overall delinquency rate in nine years, and a survey-high delinquency rate for FHA loans.

The conventional delinquency rate rose to 6.7% while the FHA delinquency rate rose to 15.7%, the highest rate since the survey began in the late 70s. DQs spiked in NY, NJ, FL, NV, and HI.

 

The number of loans in forbearance decreased to 7.2% last week, according to the MBA. Interesting data point on non-QM: big NQM investor MFA Financial said that roughly a third of its non-QM portfolio was in forbearance (though many were still paying). Ginnie remains a rough spot, with 9.5% in forbearance, and that doesn’t include the Ginnie loans which have been bought out of pools.