Morning Report: Brookings frets about non-bank origination market share

Vital Statistics:

 

Last Change
S&P futures 3074 4.25
Oil (WTI) 56.97 -0.24
10 year government bond yield 1.83%
30 year fixed rate mortgage 3.97%

 

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

 

Mortgage Applications fell 0.1% last week as purchases decreased 3% and refis increased 2%. “U.S. Treasury yields once again exhibited some intraweek volatility before declining sharply toward the end of the week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “As a result, mortgage rates decreased, with the 30-year fixed rate falling below 4 percent again. In response to the lower rates, refinance applications climbed 2 percent, as homeowners with larger loan balances helped to keep the average refinance loan size elevated. Purchase applications fell slightly last week but remained almost 7 percent higher than a year ago.”

 

Job openings ticked down in September, according to the JOLTS survey. The quits rate fell to 2.3%, although it was lowest (1.7%) in the Northeast. The rest of the country was in the mid-2s. The Fed keeps a close eye on the quits rate as often presages an increase in wage growth. Construction job openings remain elevated, as does the quits rate for the sector.

 

construction labor market

 

The ISM non-manufacturing survey came in much better than expectations. Business is “brisk” and a shortgage of workers remains one of the biggest headaches. Whatever late-summer fears about an impending recession or business slowdown appear to have abated.

 

Productivity fell in the third quarter, according to BLS, as output increased 2.1% and hours worked increased 2.4%. Unit labor costs rose 3.3%, reflecting a 3.6% increase in compensation and the 0.3% drop in productivity. Manufacturing has been a weak spot, as decreasing demand has lowered output.

 

PennyMac has filed an antitrust lawsuit against Black Knight alleging that “Black Knight uses its market-dominating LoanSphere® MSP mortgage loan servicing system to engage in unfair business tactics that both entrap its licensees and create barriers to entry that stifle competition.” Basically Pennymac developed their own servicing infrastructure and Black Knight is suing them. Separately, Black Knight reported better than expected earnings this morning.

 

The government is getting worried about shadow banks (read independent mortgage bankers) and their market share in the mortgage origination business. Independent mortgage banks were the subject of a Brookings paper which points out they are vulnerable to financial shocks given that they rely on short-term funding in the money markets to fund their business. Note this isn’t only an origination issue – it is a servicing issue and the revolves around advances. For FHA and VA servicing these advances can spin out of control. This is probably what is behind the government’s recent moves to curb the use of the False Claims Act, which basically drove the big banks out of the FHA /  VA business. Nonbanks currently originate 90% of all GNMA loans.

 

nonbank share

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Morning Report: Surprise refi boom

Vital Statistics:

 

Last Change
S&P futures 2850 -24.5
Oil (WTI) 52.746 -.94
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.86%

 

Stocks are lower this morning on continued trade fears. Bonds and MBS are up.

 

New Zealand cut its short term interest rate more than expected, which sent sovereign yields lower overnight. The German Bund is approaching negative 60 basis points, and UK Gilts just dropped below a 50 basis point yield. All of this pushed US Treasury yields down to 1.62% overnight and we are now sitting at 1.63%. 2s-10s are at 10 basis points, and the September Fed Funds futures are now pricing in a 100% chance of a cut, with a 1/3 chance of 50 bps and a 2/3 chance of 25 bps.

 

fed funds futures

 

Mortgage rates have been falling along with the drop in yields, but they have been lagging the move. We are seeing compression high up in the rate stack, which means that the higher note rates are not improving by much. Why is that? Prepayment fears. Given the drop in rates, it is a risky bet to pay 105 for for a Fannie 4.5% coupon bond when the 2.5% are trading at par.  Those 4.5% MBS might prepay so quickly you won’t make up for that extra premium you paid. Hedging issues are also coming into play here, as MBS investors generally abhor rate volatility and we have been getting a lot of it. Bottom line, this is good news for mortgage bankers, but prepare to be disappointed when you run new scenarios. Rates are better, but not by as much as you would expect.

 

Mortgage applications increased 5.3% last week as purchases decreased 2% and refis increased 12%. On a YOY basis, refis are up 116%. Take a look at the chart of the MBA refi index below. Houston, we have a refi boom. Now if we could only do something about housing starts….

 

refi index

 

Lost in the noise about interest rates was another strong job openings report. The JOLTs job openings came in better than expected at 7.35 million and the prior month was revised upward to 7.38 million. The quits rate was flat at 2.3%.

Morning Report: Job openings exceed unemployed by over 1 million

Vital Statistics:

 

Last Change
S&P futures 2751.25 6.5
Eurostoxx index 364.16 1.38
Oil (WTI) 53.66 0.58
10 year government bond yield 2.69%
30 year fixed rate mortgage 4.43%

 

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

 

It looks like a shutdown may be avoided, as Congress has come up with a plan to allocate some funds to a smaller, cheaper border wall than Trump was looking for. The President hasn’t committed to signing anything yet, but it looks like he will go along.

 

The labor market continues to be on fire, as the number of job openings hit 7.3 million, a series record. The number of job openings exceeds the number of unemployed by over 1 million. Construction led the increase with a jump of 88,000, some of which is probably seasonal. The quits rate was unchanged at 2.3%, although it increased for the private sector while decreasing for government. The quits rate is a leading indicator for wage growth.

 

quits rate

 

Mortgage Applications fell 3.7% last week as purchases fell 6% and refis fell .01%.

 

Ellie Mae is being taken private in a $3.7 billion transaction. Private Equity firm Thomas Bravo will pay $99 a share for the stock, and has allowed a 35 day “go-shop” provision, which permits Ellie Mae to seek higher bids.

 

Small business optimism is returning to normal levels after spiking to all time highs in 2017 and 2018 according to the National Federation of Independent Businesses. Uncertainty in Washington, exacerbated by the lengthy government shutdown is making small business worried about the future. That said, they continue to hire, though they are more cautious about expansion plans.

 

 

 

 

Morning Report: The CFPB wants to define the term “abusive.”

Vital Statistics:

 

Last Change
S&P futures 2810 2.75
Eurostoxx index 364.61 -0.6
Oil (WTI) 71.52 -0.5
10 year government bond yield 3.18%
30 year fixed rate mortgage 4.95%

 

Stocks are flattish this morning after yesterday’s huge rally. Bonds and MBS are down.

 

We will get the minutes of the September FOMC meeting today at 2:00 pm. Be careful locking around that period. They usually aren’t market-moving, but you never know.

 

Lots of people are returning from the MBA conference in Washington, DC, so let’s catch up on the economic data from the past couple of days.

 

Job openings hit a record (going back to 2000) last month as 7.1 million positions went unfilled. The quits rate was unchanged at 2.4%. The quits rate has been steadily inching upward and we are back to early 2001 levels. The quits rate is generally considered to be a predictor of wage inflation.

 

quits rate

 

Retail sales for September disappointed at the headline level, rising only 0.1%. The control group, which strips out autos, gas stations, and building materials rose 0.5%, which was towards the higher end of expectations. Department Stores were especially weak, which isn’t surprising given that Sears just filed for bankruptcy. Overall, consumption for the third quarter looks to have been strong, which will support a good GDP number.

 

Industrial production rose 0.3% last month, and manufacturing production rose 0.2%. Capacity Utilization was steady at 78.1%. Manufacturing was up about 3.5% YOY, which is an inflation-adjusted number. If you add back 2.5% inflation, we are looking at 6% nominal growth, which is a very respectable number. Suffice it to say that whatever trade wars seem to be occurring have yet to show up in the numbers. Also, with capacity utilization stuck below 80%, we don’t have inflationary pressure from more marginal (and costly) production being used.

 

Mortgage applications fell 7% last week as purchases fell 6% and refis fell 9%. Seasonal adjustments are primarily responsible; unadjusted applications were more or less flat, which is kind of impressive given that rates rose about 16 basis points in the previous two weeks.

 

CFPB Chairman Mick Mulvaney told the MBA conference that regulation by enforcement is dead. Regulation by enforcement was a prime tactic of the Cordray regime, which was characterized by intentionally vague rules. Dodd-Frank inserted the term “abusive” into the vernacular, and while words like “fair” and “unfair” have been litigated over the past century such that we all have a pretty good legal idea of what they mean, “abusive” is still pretty much a blank canvas. The CFPB is working on a definition of what the term actually means.

 

“We know what ‘unfair’ is,” Mulvaney said. “We know what ‘deceptive is; I’m not sure we know how to define ‘abusive.’ This is an example of how we are looking at issues….”We are still Elizabeth Warren’s child, for better or worse. We’re not the FDIC; we’re not the SEC…I want the Bureau to get there, to where we are associated with other regulators and not controversial because of its partisan circumstances, which colors what half of Americans think of it.”

 

“Partisan” is a good description of how the agency was initially staffed. Here is one lawyer’s description of how things went. The agency ensured that only Democrats who were inherently hostile to the financial industry were hired to staff out the agency. Mulvaney may have different goals than Richard Cordray, but the rank-and-file of the agency do not.

 

Trulia noted that price reductions at the high end of the market accelerated in July and August. Over 17% of US listings had a price cut during August. Between tax reform, higher rates, and higher prices it was only a matter of time before we started seeing an impact at the higher price points. Don’t forget that in the aftermath of the crisis, luxury real estate was about the only sector that was working for homebuilders. While the West Coast has been able to absorb that inventory, the East Coast definitely has not. Indeed, tony NYC suburbs are swollen with $1 million + properties for sale, and some have gone as far as to ban “for sale” signs.

 

Trump continued to jawbone the Fed, calling it his “biggest threat.” FWIW, there isn’t a politician on the planet that actually likes tightening cycles, but most have the common sense not to say anything about.