Morning Report: The CFPB eyes the GSE patch

Vital Statistics:

 

Last Change
S&P futures 3025 1.5
Oil (WTI) 53.61 0.14
10 year government bond yield 2.05%
30 year fixed rate mortgage 4.07%

 

Stocks are flattish as we head into FOMC week. Bonds and MBS are up.

 

The FOMC begins its two day meeting on Tuesday, and is expected to cut rates by 25 basis points. We will also get the jobs report on Friday, so this should be a busy week.

 

While the Fed is ostensibly cutting rates to ward off a potential recession, the economic data has been surprisingly robust. Despite trade fears, GDP growth in the second quarter topped 2%, and earnings season has been robust. The “Powell Put” as it has been dubbed, is the expectation that rates are going down and that will support the stock market. That said, the global economy is slowing and that is pushing down interest rates. Note the German 10-year is again pushing negative 40 basis points, and the Chinese are having issues in their banking system. Meanwhile, the US consumer is alive and well as the biggest canary in the coal mine for the US consumer – UPS – reported a 14% increase in quarterly profit.

 

Last Thursday, the CFPB announced that it was willing to let the “GSE patch” expire in 2021. The GSE patch allows loans with DTI ratios above 43 to fit in the QM bucket if they are approved for sale to Fannie Mae or Freddie Mac. “The top line is the patch is going to expire,” [CFPB Director Kathy] Kraninger said in a meeting with reporters. “We are amenable to what a transition would look like.” The CFPB has put out a public request for comment on the new rules, and is working to ensure that there are no disruptions in the mortgage market. This is important given that 1/3 of the Fan and Fred loans have DTIs over 43%. It is possible that FHA will pick up the slack, however FHA has been tightening credit standards as well, requiring FICOs above 620 to go over 43%. Note that a quarter of FHA lending has DTI ratios over 50% (FHA permits up to 57%), but it is more likely that these loans will end up as securitized non-QM loans. There are still many issues to be resolved before the private label market returns to its former glory, but this may force those issues to finally get ironed out. This may be why the government considers this to be a key part of GSE reform – it will shrink the GSE’s footprint in the market, and also increase the credit quality of their loans.

 

The Trump Administration had indicated they wanted to get GSE reform done before the 2020 election, however that is looking like it won’t happen. Mark Calabria, head of the FHFA, think this is more likely to happen within the next 5 years. By far the biggest issue is whether the government will continue to guarantee MBS issued by the GSEs. The government guarantee was never explicit prior to the financial crisis, and the government floated a trial balloon during the crisis about not guaranteeing these securities. Bill Gross of PIMCO threatened to stop buying Fan and Fred MBS if the government did that and that was the end of that discussion. Note Bill had just loaded up the boat in his Total Return Fund with agency MBS and made a killing when the government formally guaranteed them, so he was talking his book so to speak.

 

Housing security is a big issue for seniors. With the end of defined benefit pension plans, most people are living on Social Security and savings. One proposal would allow seniors to use pretax earnings in their IRA or 401k plans to pay off mortgage debt without triggering taxes and penalties.

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Morning Report: Small business optimism slips

Vital Statistics:

 

Last Change
S&P futures 2968 -10
Oil (WTI) 57.95 0.25
10 year government bond yield 2.06%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as we await a speech from Jerome Powell. Bonds and MBS are down.

 

Jerome Powell speaks at 8:45 this morning at the Boston Fed regarding stress-testing for the banks. Here are his prepared remarks. He doesn’t address monetary policy.

 

There were 7.3 million job openings in May, down slightly from April. The quits rate, which tends to lead increases in wages, was steady at 2.3%, where it has been all year. Private sector openings were flat, while government fell by about 40,000.

 

Small Business Optimism slipped in June, according to the NFIB. This reversed May’s jump, however sentiment is still at historically high levels. Expectations eased for sales and profitability, and the outlook for capital expenditures weakened. The capital expenditure level was the lowest since May 2015. Employment also decreased, however most firms are still in hiring mode, with the availability of qualified labor the biggest issue.

 

NFIB

 

The Congressional Budget Office analyzed the probable effects of raising the Federal Minimum Wage to $15 an hour. Unsurprisingly, they concluded that it would cost jobs, with the median estimate coming in at 1.3 million. The graph below looks at how the constant dollar minimum wage has behaved relative to the bottom 10th and 25th percentile of workers over time.

 

minimum wage

 

Mortgage delinquencies are the lowest in 20 years, according to CoreLogic. 30 day DQs fell 0.7% to 3.6%, while the foreclosure rate slipped 0.1% to 0.4%. Delinquencies fell pretty much across the board, with the exception of areas that were affected by natural disasters.

Morning Report: The Fed catches up with the markets

Vital Statistics:

 

Last Change
S&P futures 2817 -10
Eurostoxx index 380.22 -0.62
Oil (WTI) 60.12 1.09
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.22%

 

Stocks are lower after the Fed cut interest rates. Bonds and MBS are up.

 

As expected, the Fed maintained the Fed Funds rate at current levels and took down their forecast for the end of year. The December dot plot showed a central tendency in the 2.72% (using the lower bound of the range) and the March plot showed a central tendency of 2.37%. The forecast for 2019 GDP was lowered from 2.3% to 2.1%, while the unemployment rate was increased from 3.5% to 3.7%. PCE inflation was more or less unchanged at 2%.  The Fed Funds futures increased their probability of a 2019 rate cut from about 25% to about 40%.

 

dot plot

 

The Fed also tweaked their balance sheet runoff plan, increasing the amount they reinvest each month by $15 billion. This only affects Treasuries – MBS will continue to run off.

 

Stocks initially rallied on the Fed announcement, but then sold off on fears the Fed sees something the markets don’t. Bonds rallied on the Fed announcement, with the 10 year yield falling to 2.53%. MBS were slow to follow, but we did see some reprices towards the end of the day. With rates even lower this morning, expect to see a big move down in mortgage rates. FWIW, Fannie Mae has taken down their prediction for the 30 year fixed rate mortgage from 4.8% to 4.4%.

 

What does some of this mean for mortgage bankers? 2019 won’t necessarily be as bad as people feared for origination, and if you have been aggressively marking your servicing portfolio in order to paper over a price war, you might have a problem.

 

Banks that refocused their mortgage lending towards high-end buyers in the aftermath of the financial crisis are seeing the winds shift. Jumbo origination has been falling as prices at the high end have been peaking out and tax reform has limited the value of the mortgage interest deduction. Many non-banks focused on the first time and moderate income buyer. Many banks were offering amazing jumbo terms, presumably in an attempt to cross sell the more lucrative asset management business.

 

 

Morning Report: New home sales still anemic historically

Vital Statistics:

 

Last Change
S&P futures 2821  9
Eurostoxx index 380.4 1.8
Oil (WTI) 58.12 -0.14
10 year government bond yield 2.60%
30 year fixed rate mortgage 4.28%

 

Stocks are higher this morning on overseas strength, particularly in China and Japan. Bonds and MBS are up.

 

New Home Sales fell to 607,000 in January, according to the Census Bureau. This is down 7% MOM and 4% YOY. New Homes Sales is a notoriously volatile number, and the margin for error is generally in the mid-teens %. Still 607,000 is roughly in line with historical averages over the past 50 years. That said, population has grown since then, so it isn’t really comparable. Take a look at the chart below, which is new home sales divided by population – we are still only at levels associated with the depths of prior recessions. In other words, we are still in very early innings with the housing recovery, and you can make an argument that the recovery hasn’t even begun yet.

 

new home sales divided by population

 

Industrial Production rose 0.1% in February, and January’s initial 0.6% drop was revised upward to -0.4%. Manufacturing production fell 0.4%, while January’s 0.9% drop was revised upward to -0.5%. Capacity Utilization fell to 78.2%, while Jan was revised up again. So, Feb wasn’t great, but January wasn’t as bad as it initially appeared to be.

 

We have entered the quiet period for the Fed ahead of their meeting next week. No rate hikes are expected, although we will get new economic forecasts and a new dot plot. Sentiment regarding the Fed has changed massively over the past few months. As of now, the the Fed funds futures are estimating that there is a 75% chance the Fed does nothing this year, and a 25% chance they cut rates by 25 basis points. The fed funds futures are pricing a 0% chance of a hike. While Trump’s jawboning of the Fed was bad form, and you generally don’t want to see presidents doing that, you also can’t escape the fact that the Fed Funds futures and the markets think he was right!