Mark Calabria – The Daily Tearsheet

Morning Report: The Lehman moment?

Vital Statistics:

	Last	Change
S&P futures	2669	20.4
Oil (WTI)	23.86	0.49
10 year government bond yield		0.75%
30 year fixed rate mortgage		3.47%

Stocks are higher this morning the Trump Administration works to get the economy going again. Bonds and MBS are flat.

With the Fannie 2.5 over 104, the margin calls are back. The NY Fed needs to take a break.

The government is starting to work on getting the economy re-opened in the next four to eight weeks. The idea would be to start opening up areas which never really had too many cases to begin with, and slowly work everyone back in. Larry Kudlow said: “It’s the health people that are going to drive the medical-related decisions,” National Economic Council Director Larry Kudlow said in an interview with Politico webcast on Tuesday. “But I still believe, hopefully and maybe prayerfully, that in the next four to eight weeks we will be able to reopen the economy, and that the power of the virus will be substantially reduced and we will be able to flatten the curve.”

We will get the FOMC minutes out at 2:00 pm today. Usually the FOMC minutes are a non-event but today could be different. Of course MBS are marching to their own (NY Fed) drummer these days and are gently rising regardless of how the bond market is trading. At a minimum, it will make interesting reading.

Mortgage applications decreased 18% last week as purchases fell 19% and refis fell 12%. FWIW, pricing in the secondary market has been terrible for the past two weeks and that is flowing through to primary markets. Aggregators are pricing like they don’t want the business.

Mark Calabria said that no Fannie / Freddie servicing facility is going to be made available.

“Yes and no is the answer,” Calabria told HousingWire when asked whether FHFA has a plan similar to that of Ginnie Mae, which recently announced a program to aid servicers dealing with forbearance on loans backed by the Federal Housing Administration, Department of Agriculture, and the Department of Veterans Affairs.

“The yes is we continue to monitor Fannie and Freddie servicers,” Calabria said. “We are, at this point, comfortable with our ability to deal with any servicers that may be distressed so that we can either turn them into subservicers or transfer their servicing to other parties. And we believe at this point, given the number on uptake of forbearance, we’ve seen that we can transfer servicing in a way that’s not too disruptive.

“So, the yes is we have contingency plans and procedures put in place were this distress to happen,” Calabria continued. “So that’s the yes part. The no part is, do we have a liquidity facility that we will be providing via Fannie and Freddie? The answer’s no. We don’t have the resources at Fannie and Freddie to do that.”

Calabria is making a bet that forbearance requests will come in around 2% of servicing portfolios, noting the MBA said that 1.7% requested forbearance in a sample. Of course that was the first week, so it probably is premature to say that is the number. But he isn’t buying the 25% estimates some are throwing around, at least for non-Ginnie servicers. For Ginnie servicers, he can buy that number. FWIW, this kind of feels like a Lehman Brothers moment for the servicers.

Well, this news isn’t doing anything for servicing in the bulk market. I heard that Fannie Mae servicing trading at 1x- 2x. Freddie is 1x and GNMA is 1x to negative. In normal markets, Ginnie is a little south of 3x and Fannie is around 4x. I don’t know if theoretical marks are going to take such a dramatic hit, but if they do, bank earnings are going to take a hit next week.

The MBA sent out a statement urging FHFA to reconsider.

“The FHFA Director’s recent statements send a troubling message to borrowers, lenders, and the mortgage market. Servicers are required to offer borrowers widespread forbearance under a plan devised and approved first by FHFA and then codified by the CARES Act. Fannie Mae and Freddie Mac are contractually obligated for the payments to investors. Since Fannie Mae and Freddie Mac will eventually reimburse mortgage servicers for the payments they must advance during forbearance, Director Calabria should advocate for the creation of a liquidity facility at the Fed to ensure the stability of the housing finance market.

Finally, Anthony Hsieh had this to say on Linked In last night:

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.

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.

Morning Report: No revelations in Humphrey Hawkins testimony

Vital Statistics:

	Last	Change
S&P futures	2785.75	-5
Eurostoxx index	372.14	-1.55
Oil (WTI)	56.64	1.06
10 year government bond yield		2.63%
30 year fixed rate mortgage		4.34%

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

Jerome Powell’s Humphrey-Hawkins testimony didn’t really reveal much in the way of new information. Here are his prepared remarks. The Fed will be patient as it evaluates incoming data: “With our policy rate in the range of neutral, with muted inflation pressures and with some of the downside risks we’ve talked about, this is a good time to be patient and watch and wait and see how the situation evolves.” He didn’t volunteer too much information regarding balance sheet runoff other than to say the Fed is evaluating the timing. For the most part, the bond market didn’t really react much to the testimony other than to rally somewhat on his view that he doesn’t see much in the way of wage-push inflation. The message to the bond market: don’t freak out if you start seeing wage growth with a 3 handle.

Home prices rose 1.1% in the fourth quarter, according to the FHFA House Price Index. December was up 0.3% from November. The hot markets of 2017, especially the West Coast markets, have cooled substantially and are now experiencing appreciation more in line with the rest of the country. This chart probably understates the deceleration in the hotter markets, as the index only looks at loans with a conforming mortgage, which means it is only measuring the lower price points, which is where the strength lies. The jumbo market has been struggling.

Mortgage Applications increased 5.3% last week as purchases rose 6% and refis rose 5%. Mortgage rates were little changed last week, but as we anticipated, homebuyers are responding favorably to this more stable rate environment,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Purchase applications for both conventional and government loans rose last week, with the government gain led by a 14 percent increase in applications for VA purchase loans.”

A Senate Panel voted to advance Mark Calabria to a full vote on the Senate floor. The vote was 13-12, straight along party lines. The industry applauded the appointment.

Both Zillow and Redfin have models to value homes – which one is more accurate? It turns out that if you look at listed homes, Redfin is the winner, with an error rate of 1.8%. However, for homes off the market, it rises to 6%. Zillow, who doesn’t break out on the market / off the market for its error estimates comes in around 4%. FWIW, appraisers consider an error range of 4% about accurate. Note though that these are median error rates. In newer subdivisions, where square footage and lot sizes are similar, the estimates will be pretty predictive of final sales prices. As the properties become more diverse the error ranges increase. Note that in MSAs like Chicago, the median error is 4%, but over 40% of all home sales are not within 5% of the final sales price.

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: Small business optimism remains high

Vital Statistics:

	Last	Change
S&P futures	2667.5	28
Eurostoxx index	345.14	5
Oil (WTI)	51.55	0.25
10 year government bond yield		2.89%
30 year fixed rate mortgage		4.72%

Stocks are higher this morning on hopes of a trade deal. Bonds and MBS are down.

There were 7.1 million job openings as of the end of October, according to the BLS. This was largely unchanged from September. IT and real estate had the biggest increases in open positions. The quits rate fell by 0.1% to 2.3%. The Fed pays close attention to the quits rate as it historically has presaged wage inflation. The JOLTs report does echo what we saw out of last Friday’s employment situation report – the job market is still strong, however it is beginning to cool down a touch.

Small Business optimism slipped ever so slightly in November, however it remains at multi-decade highs. A tight labor market remains one of the biggest issues, with a scarcity of “qualified” – i.e. not just “skilled” labor as a major issue. A net 34% of all small businesses are increasing wages, a historically robust number. While labor markets are generally tight, there still is a large number of people who are on the older side, who probably do want to work, but are unable to find jobs. Getting them back into the economy is needed in order to raise potential GDP, which acts as a speed limit on the economy.

Mel Watt’s term running the FHFA is up in January, and it looks like Mike Pence’s Chief Economist Mark Calabria is the front-runner to replace him. Calabria is a Libertarian, which will be sure to upset affordable housing advocates. Mel Watt was considered to be an ideological kindred spirit of the affordable housing lobby, and he allowed Fannie Mae and Freddie Mac to increase their footprint in the mortgage market. Calabria will probably side with Republicans who want to see the GSEs reduce their influence, and will probably look to tighten requirements, increase guaranty fees, and lower eligible loan sizes. This of course assumes Congress does nothing about GSE reform, which is probably a safe assumption.

Funding for the government expires on Dec 21. Trump and the Democrats are negotiating over funding the wall. Government shutdowns generally do not affect the financial markets – as much as they bother the Washington Post, Wall Street does not care. That said, the last time we had a shutdown, originators were unable to get tax transcripts out of the IRS, so plan ahead.