Morning Report: Mortgage credit expands

Vital Statistics:

 

Last Change
S&P futures 2858 -14
Oil (WTI) 61.94 0.24
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.15%

 

Stocks are lower after the US imposed further tariffs on Chinese goods. Bonds and MBS are flat.

 

As promised, the US increased tariffs on about $200 billion of Chinese goods as trade talks continue. The Chinese vowed to retaliate, and that sent the Chinese stock market up sharply overnight. Both parties say they want to strike some sort of deal and it is possible this could get walked back.

 

Inflation at the consumer level rose 0.3% MOM and 2.0% YOY, right in line with the Fed’s target. Ex-food and energy, they were up 0.2% / 2.1%. Although the Fed doesn’t really pay too much attention to CPI (they prefer PCE), it keeps the Fed at bay, probably through the 2020 election.

 

Uber priced its IPO at $45 a share last night, towards the bottom of the range. The bankers claim that was due to market conditions, but the IPO market has been lousy in general, partly because all of the value is extracted in the funding rounds prior to the IPO, which means they are coming to the market priced for perfection. The lousy performance of Lyft’s IPO didn’t help matters either. A labor standoff with its drivers isn’t helping either.

 

Neel Kashkari discusses why we aren’t seeing inflation even at 3.6% unemployment. His main point is that the unemployment rate uses a measure of the labor force that is probably understated. You have to be actively looking for a job to be considered part of the labor force, and people who have been unemployed for over 6 months no longer count. The tell, therefore is wage growth. Given productivity has been running at around 1.5% and inflation is running around 2%, then non-inflationary wage growth should be around 3.5%. Since we are closer to 3%, there is still slack in the labor market. He also cited two interesting stats: First, of the people that got jobs in April, 70% said they weren’t looking for work in March. That suggests that many of these workers were on disability, which is basically long-term unemployment. The fact that they are coming back is a good sign. Second, the fall in the labor force participation rate offsets the unemployment effect. To get an apples-to-apples comparison of today’s job market versus the late 90s, 2.3 million more prime age workers (age 25-54) would need to have jobs. This also explains why wage growth has been running below what it should.

 

Usury laws are back. Bernie Sanders and Alexandria Ocasio-Cortez want to cap credit card interest rates at 15%. I guess the hope is that credit card companies will say “yes, we were overcharging you and we’ll still make money at 15%, so here you go.” In reality, all they will do is stop issuing cards to people with FICOs below a certain level. Credit card debt is unsecured, which means that the lender generally gets little to nothing if the borrower defaults.  So, they assign a probability of default and multiply the interest by 1 minus the default rate and decide whether that return is acceptable compared to other debt instruments. By the way, these ideas aren’t new. Much of this had been tried and rejected over the past 100 years, but i guess in politics and finance, knowledge is cyclical, versus cumulative as it is in the sciences.

 

Mortgage credit standards loosened last month as more lenders embraced non-QM lending. The MBA’s Mortgage Credit Availability Index increased for everything except government loans, which fell. The drop in government is probably due to VA loans, which are under scrutiny right now. By the way, although the chart below is close to highs, it doesn’t go back to the bubble years. Compared to then, credit is still much, much tighter. The current index of 190 or so is still a fraction of the 900 level which characterized the days of “pick a pay” loans.

 

MCAI

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Morning Report: Small mortgage origination has fallen

Vital Statistics:

 

Last Change
S&P futures 2867 -17
Oil (WTI) 61.91 -0.21
10 year government bond yield 2.45%
30 year fixed rate mortgage 4.17%

 

Stocks are lower as the trade-driven sell off continues. Bonds and MBS are up. Note Jerome Powell will be speaking around lunch time. Also, the long-awaited Uber IPO will price after the bell.

 

Inflation at the wholesale level increased 0.2% MOM and 2.2% YOY in April according to the Producer Price Index. Ex-food and energy, they rose 0.1% / 2.4%. We will get the consumer price index tomorrow.

 

Initial Jobless Claims came in at 228k last week.

 

FHFA Chairman Mark Calabria said that Fannie and Freddie may be released from conservatorship even if Congress doesn’t accomplish housing reform. He also signalled that Congress would have an “entire Congress” – i.e. at least 2 years to hash out a solution. Calabria has not said that he would end the “net worth sweep” which sends all of the GSE profits to Treasury, which has created capital shortages for the GSEs.

 

Fewer and fewer mortgages are being made in the lower price tiers, which is having an impact on entry-level borrowers.  The article blames lender focus on the jumbo space, but that probably isn’t really the driver. They look at the number of low balance mortgages (10k – 90k) being originated today versus 10 years ago. It turns out that the number of small loans is definitely lower. I think there are a few factors going on here: First, 2009 was the beginning of the big wash-out in real estate prices and the number of homes in that price range was a lot higher in 2009 than it is today. In other words, home price appreciation is the biggest driver. Second, compliance costs are simply much higher, and as the MBA has demonstrated, costs to originate have been rising relentlessly. FWIW, there is demand for low balance mortgages – the prepay speeds are much lower so investors are willing to pay up for them – but that probably doesn’t offset higher costs. Finally, it is hard to get loan officers excited about an 80k mortgage when they are only making 75 basis points on it to begin with. Given that an 80k mortgage requires as much effort as a 800k mortgage, it makes sense for loan officers to focus on larger loan balances.

 

small loans

Morning Report: Gap between appraisals and homeowner perception widens slightly

Vital Statistics:

 

Last Change
S&P futures 2802 5
Eurostoxx index 374.06 0.81
Oil (WTI) 57.27 0.47
10 year government bond yield 2.62%
30 year fixed rate mortgage 4.28%

 

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

 

Inflation at the wholesale level came in below expectations, mirroring the consumer price index. The headline PPI rose 0.1% MOM / 1.9% YOY. Ex-food and energy the index rose 0.1% / 2.5% YOY.

 

Mortgage Applications rose 2.3% last week as purchases rose 4% and refis fell 0.2%. The MBA noted an uptick in FHA activity. “Purchase applications have now increased year-over-year for four weeks, which signals healthy demand entering the busy spring buying season. However, the pick-up in the average loan size continues, with the average balance reaching another record high. With more inventory in their price range compared to first-time buyers, move-up and higher-end buyers continue to have strong success finding a home.” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.

 

The gap between a homeowner’s perception of their home’s value and the number that the appraiser comes up with is starting to widen a touch. The Quicken Home Price Perception Index fell slightly in February, although the difference between perception and appraisal is pretty tight historically. For most MSAs, appraisals are coming in higher than homeowners expect, which is good news for the cash-out refi business. Given the direction in interest rates, home price appreciation is going to drive refi activity going forward.

 

Quicken HPPI

 

Wells Fargo CEO Tim Sloane appeared before the House yesterday to get called on the carpet for aggressive sales practices. “We have gone above and beyond what is required in disclosing these issues in our public filings, we have worked to remedy these issues, and, most importantly, we have worked to address root causes that allowed them to occur in the first place,” Sloan said in his written testimony to the House Financial Services Committee. “As a result, Wells Fargo is a better bank than it was three years ago, and we are working every day to become even better.” he said in a written statement.

Morning Report: Consumer inflation remains muted

Vital Statistics:

 

Last Change
S&P futures 2787 2
Eurostoxx index 372.85 -1
Oil (WTI) 57.27 0.47
10 year government bond yield 2.65%
30 year fixed rate mortgage 4.32%

 

Stocks are higher with a general “risk-on” feel to the tape. Bonds and MBS are down.

 

Lael Brainard speaks this morning and then the Fed enters its quiet period ahead of next week’s FOMC meeting.

 

Consumer inflation rose 0.4% MOM in February. Ex-food and energy, the index rose 0.4% and is up 2.1% YOY. Inflation remains under control, which should give the Fed the leeway to hold the line on rates next week. Falling energy prices at the end of 2018 helped keep the index under control, and we are seeing evidence that medical costs are finally stabilizing. Medical goods fell 1% MOM and services were flat. Stabilizing medical costs should translate into stable health insurance costs, which leaves more room for wage increases.

 

medical cpi

 

Retail Sales in January rose 0.2%, a touch higher than expectations. Those looking for a big rebound after December’s anemic numbers were disappointed. Given the strong consumption numbers in Q4 GDP, the holiday shopping season remains a bit of a mystery. The government shutdown is a possible explanation, and while it certainly hit the shops at Tyson’s Corner, the rest of the nation was unaffected. Note that the Fed’s consumer credit report showed that revolving credit increased only 1.1% in December and 2.9% in January, both well below run rates we have seen in the months leading up to it

 

Nancy Pelosi doesn’t support impeaching Trump. This is probably a tacit admission that the Mueller report isn’t going to contain anything we don’t already know.

 

Small business optimism rebounded in February. Earnings trends fell as many contractors were temporarily sidelined due to the government shutdown. Employment trends also slipped, probably for the same reason. Plans for expansion rose, however they are still below levels we saw in 2017-2018, which were extremely strong. Actual hires were the highest in years, and small business still finds a shortage of qualified workers. I am curious as to whether the “shortage of qualified workers” means (a) nobody around knows how to do the job, (b) nobody around knows how to do the job and can pass a drug test, or (c) nobody around that knows how to do the job will accept what I am willing to pay.

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: Congressional Democrats take aim at BB&T / Suntrust merger

Vital statistics:

 

Last Change
S&P futures 2714 -8
Eurostoxx index 360.39 2.36
Oil (WTI) 52.28 -0.41
10 year government bond yield 2.64%
30 year fixed rate mortgage 4.43%

 

Stocks are down this morning on overseas weakness. Bonds and MBS are up small.

 

There is a possibility we could see another government shutdown at the end of the week. Talks over the weekend concerning border security funding went nowhere. For the financial industry, it will make funding loans for government employees more difficult, but everything else should be transparent.

 

Consumer staples companies are raising prices as commodity prices, transportation and labor costs increase. “The good news is that competitors are raising [prices] in those categories as we speak,” Church & Dwight Chief Executive Matthew Farrell said on a conference call last week when the company reported higher quarterly sales and lower profits. The Fed has been anxious to create more inflation, and it looks like they have finally succeeded. Does this mean we are headed for a repeat of 1970s inflation? Probably not – at least not in the near future. But it does mean the Fed Funds futures might be a touch too sanguine about monetary policy in 2019.

 

Speaking of inflation, we will get the consumer price index and the producer price index this week, which should be the only market-moving data.

 

Maxine Waters thinks the STI / BBT merger requires “serious scrutiny” “This proposed merger between SunTrust and BB&T is a direct consequence of the deregulatory agenda that Trump and Congressional Republicans have advanced,” Waters said in a statement to American Banker. “The proposed merger raises many questions and deserves serious scrutiny from banking regulators, Congress and the public to determine its impact and whether it would create a public benefit for consumers.” IIRC, all the “deregulaton” did was raise the ceiling for stress tests to $250 billion in assets. And that was due to the fact that many small banks were spending a lot on compliance and risk management for a portfolio of traditional bank loans. While it is entirely possible that someone at East Podunk Savings and Loan may blow himself up selling protection on a basket of CDO squareds, it is highly unlikely as well. And imposing all sorts of regulatory burdens on these banks under the guise of tackling systemic risk was on the wrong side of the cost / benefit ledger.

 

 

Morning Report: Inflation is tame, gas is not

Vital Statistics:

 

Last Change
S&P futures 2708 9.25
Eurostoxx index 360.56 -1.71
Oil (WTI) 56.32 0.07
10 year government bond yield 3.11%
30 year fixed rate mortgage 4.94%

 

Stocks are higher as oil stabilizes. Bonds and MBS are up. The 10 year is trading at 3.11%, quite the drop from the 3.27% levels of last week.

 

Inflation remains largely under control according to the Consumer Price index. The CPI in October rose 0.3% MOM and 2.5% YOY, right in line with street forecasts. Ex food and energy, it was up 0.2% MOM and 2.1% YOY.

 

A couple of trade groups wrote letters of support for Kathy Kraninger as head of the CFPB. The agency has been led by Mick Mulvaney, who also head OMB, as Acting Director. Kraninger is the supposed replacement. If she isn’t confirmed by the Senate in the lame duck session, the nomination returns to the President and Mick Mulvaney stays in charge for another 210 days. Kraninger promises to reform the CFPB in the same way Mick Mulvaney is, by ending “regulation by enforcement” and being more transparent about what the rules actually are.

 

It usually pays to keep tabs on markets unrelated to your own. While people have been focusing on the oil market, and the bear market in oil, we are seeing the opposite effect in natural gas. Oil has lost about 24% over the past month. Natural gas gained more than that this week. Seriously. Natural gas closed last Friday at around $3.70 a contract and closed yesterday at around $4.70 a contract. Many commodities, especially natgas, is extremely sensitive to weather forecasts – if you go to the New York Stock Exchange, you’ll see CNBC on the trading floor. If you go to the a commodity exchange like the Chicago Mercantile Exchange, they have on the Weather Channel. So, if you get a forecast for an extra-cold winter, the price can skyrocket. As the link above explains, while we are the Saudi Arabia of natural gas, supply is not the driver here, storage is. And if we have an unusually cold winter, the amount of gas in storage can fall to dangerously low levels, which means higher prices. There are rumors going around of a hedge fund that is short Natgas and in trouble, but who knows? Regardless, it is something to watch.

 

natural gas

 

Speaking of keeping tabs on other markets, watch the corporate bond markets. General Electric has issues. While everyone is aware of what is going on the stock price, the bonds are down about 15 points since early October. In bond market terms, for a household name like GE, that is a lot. Bonds trading in the low 80s aren’t necessarily distressed, but this is GE we’re talking about. If this snowballs, we should see a tightening of credit overall. It probably won’t affect the MBS market and mortgage pricing, but it will almost inevitably act as a drag on interest rates overall, and it could keep the Fed at bay.

 

Chart: Financial Stress Index:

 

financial stress index