mortgage – The Daily Tearsheet

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: 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.

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: The FHFA is listening to industry on the 50 basis point refi fee

Vital Statistics:

	Last	Change
S&P futures	3421	28.6
Oil (WTI)	42.54	0.17
10 year government bond yield		0.64%
30 year fixed rate mortgage		2.91%

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

The upcoming week will be pretty data-light, although we will get real estate prices and new home sales on Tuesday and personal incomes / spending on Friday. Jerome Powell speaks on Thursday.

The Wall Street Journal is reporting that the FHFA is negotiating with the mortgage industry to delay the 50 basis point hike for refinances:

As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions. Industry groups, including the American Bankers Association and the Mortgage Bankers Association, have generally sought to eliminate the surcharge altogether, the people said.

That said, the 50 basis point fee probably equates to something like 1/8% in rate, so it probably won’t end the refi wave. The industry was most concerned about the short fuse on the announcement, and the prospect of losing 50 basis points on loans that are already locked and in the pipeline.

Housing Wire got a quote from ex-MBA president Dave Stevens:

Dave Stevens, former president and CEO of the Mortgage Bankers Association and former commissioner of the Federal Housing Administration, told HousingWire on Saturday that, “If true, it seems clear that Director Calabria listened to industry concerns about the impact of this short time frame to implement. And while the logic of the fee remains in question, this is a good sign and hopefully will lead to a change in behavior going forward where impact assessment conversations can take place prior to major policy announcements.”

Even if they delayed the implementation by a month, it would give people a chance to clear out their pipelines.

Loan aggregator Amerihome is no longer doing self-employed borrowers for non-delegated. I guess with so many W2 refinancings out there, why mess around with harder files? Expect to see other aggregators make similar announcements.

Lower rates and tight supply has home prices rising at a double-digit clip. The issue is that these increases are happening in a period of economic weakness, which has some pros worried. That said, the COVID crisis has caused many builders to temporarily slow building, and many sellers to pull their listings since they don’t want to have people walking through their homes.

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.

Morning Report: New Home Sales rise

Vital Statistics:

	Last	Change
S&P futures	3212	-15.1
Oil (WTI)	41.34	-0.22
10 year government bond yield		0.59%
30 year fixed rate mortgage		3.02%

Stocks are lower this morning on weakness in overseas markets. Bonds and MBS are flat.

New Home Sales rose to a seasonally-adjusted annual rate of 776k, an increase of 14% from March and 7% from a year ago. Despite the big increase, we are still way below historical levels, which are insufficient to keep up with population growth and incremental demand.

The index of leading economic indicators improved in June, but still exhibited weakness for the economy overall.

“The June increase in the LEI reflects improvements brought about by the incremental reopening of the economy, with labor market conditions and stock prices in particular contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “However, broader financial conditions and the consumers’ outlook on business conditions still point to a weak economic outlook. Together with a resurgence of new COVID-19 cases across much of the nation, the LEI suggests that the US economy will remain in recession territory in the near term.”

Wells Fargo supposedly put people into forbearance who were merely interested in getting information about it. This prevents borrowers from refinancing their mortgages. Apparently, it is hard for borrowers to get out of forbearance, even if they want to. Note that Elizabeth Warren is on the shortlist for Joe Biden VP candidates, which means the financial sector will get plenty of vitriol out of DC heading into the election. Wells has already cut its dividend 80%, and may have to suspend it in order to keep the politicians and activists happy.

Home asking prices are up 13% from last year, according to Redfin. The ratio of sales price to asking price hit a record of 99% in early July, while the number with a price drop hit an all-time low at 34.4%. Not only that, the late summer slowdown doesn’t look like it is going to happen either: “The housing market usually slows down in July and August when people take time off for vacations,” said Washington, D.C. area Redfin agent Kris Paolini. “This year though, a lot of vacations have been cancelled, and buyers who had previously given up their search are being lured back by low mortgage rates. The market has stayed hot through the summer and it doesn’t look like we’ll see the typical slowdown in August, either.” If schools are closed this fall, the whole seasonal dynamic of moving kind of disappears.

Morning Report: Home Prices Rise

Vital Statistics:

	Last	Change
S&P futures	3235	-5.1
Oil (WTI)	42.34	1.22
10 year government bond yield		0.59%
30 year fixed rate mortgage		3.02%

Stocks are flattish as earnings continue to come in. Bonds and MBS are up after the Trump Administration took steps to close the Chinese Consulate in Houston.

Mortgage Applications rose 4% last week as purchases rose 2% and refis rose 5%. “Mortgage applications increased last week despite mixed results from the various rates tracked in MBA’s survey. The average 30-year fixed rate mortgage rose slightly to 3.20 percent, but some creditworthy borrowers are being offered rates even below 3 percent. As a result, these low rates drove a 5 percent weekly gain in refinances and a robust 122 percent increase from a year ago,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “There continues to be strong homebuyer demand this summer, as home shoppers have returned to the market in many states. Purchase activity increased again last week and was up 19 percent compared to last year – the ninth straight week of year-over-year increases.”

Home prices fell 0.3% MOM, but are still up 4.9% YOY, according to the FHFA House Price Index. “U.S. house prices posted a small decrease in May compared to April but remained 4.9 percent higher than a year ago,” according to Dr. Lynn Fisher, Deputy Director of the Division of Research and Statistics at FHFA. “The May HPI results are based on contracts for sale signed in late March and throughout April, which was a period when many states announced stay-at-home orders. The number of transactions powering the FHFA HPI in May was down by just over 30 percent compared to a year ago, reflecting the early effects of COVID-19 shutdowns. Based on the rebound in mortgage applications for home purchases and pending home sales in May, we expect the number of transactions increased somewhat in June.”

The number of Americans considering a new home purchase has been relatively unaffected by COVID, at least according to numbers by the NAHB. I guess there is a push-pull effect going on. On one hand, COVID and the riots are pushing renters out of the cities, but on the other hand, economic uncertainty is making potential buyers more cautious.

Chris Waller and Judy Shelton were approved by the Senate Banking Committee to join the Federal Reserve Board. Judy Shelton has expressed support for the gold standard, and has questioned whether bank deposits should be insured. These thoughtcrimes make her toxic for Democrats. The two now go to the Senate for a full vote.

Note we will have the FOMC meeting next week, where further stimulus measures will be discussed. The credit tightening in the mortgage market will almost certainly be an issue, although I don’t know what the Fed can do about that since it is being driven by the CARES Act, not necessarily financial markets.

Morning Report: Median home prices rise

Vital Statistics:

	Last	Change
S&P futures	3216	2.1
Oil (WTI)	40.34	-0.22
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.02%

Stocks are flattish as we head into the heart of earnings season. Bonds and MBS are flat as well.

Aside from earnings, we should have a quiet week on the data front, with only new home sales on Friday. There will be no Fed-speak ahead of the FOMC meeting next week.

Quicken disclosed that it earned between $3.35 and $3.55 billion in the second quarter, according to its updated prospectus.

The US median home price rose 3% in June, according to Redfin. “The market has remained very competitive even as we’re getting towards the late summer months when things usually begin to cool off,“ said Redfin Detroit agent Tony Orlando. “We saw a spike in homebuying immediately after real estate reopened in May, and ever since then we’ve been busy. At this point, homebuyers are assuming that they’ll have to pay a lot more for a home than they initially expected due to all the competition. Today’s record-low mortgage rates help with that some, but the upfront costs are still a tough pill to swallow.”

Morning Report: Delinquencies spike in April

Vital Statistics:

	Last	Change
S&P futures	3200	-19.1
Oil (WTI)	40.74	-0.41
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.02%

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

Initial Jobless claims came in at 1.3 million. It is surprising to see so many claims given the state of re-opening, however it seems like many small businesses are still closing down as a result of the COVID shutdown. There is talk of additional stimulus out of Washington, along with the end of the additional $600 a week for the unemployed.

Retail Sales increased 7.5% in June, well above the 5.2% forecast. The control group, which excludes gas, autos, and building products rose 5.7%. This is overall good news for the economy as consumption is the biggest driver.

Overall delinquencies rose to 6.1% in April, according to CoreLogic. The hardest hit states were the NYC area: NY, NJ, CT, as well as the deep south states of LA and MS. You can see how fast the DQ rate spiked in the chart below:

Single family authorizations fell 10% in June, according to BuildFax, although activity might be stabilizing as builders learn to work within the restrictions of COVID. Certainly the demand is there, as first time homebuyers try and escape the cities. Note we will get housing starts and building permits tomorrow.

Morning Report: More bank earnings

Vital Statistics:

	Last	Change
S&P futures	3229	45.1
Oil (WTI)	40.84	0.61
10 year government bond yield		0.65%
30 year fixed rate mortgage		3.02%

Stocks are higher this morning on promising results from a COVID vaccine study. Bonds and MBS are down.

US Industrial Production rose 5.4% in June, while manufacturing production rose 7.2%. Capacity Utilization increased to 68.6%.

Mortgage Applications rose 5.1% last week as purchases decreased 6% and refis rose 12%. “Mortgage rates continued their downward trend, with the 30-year fixed rate falling 7 basis points to 3.19 percent – another record low in MBA’s survey and 63 basis points lower than the recent high in late March,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The drop in rates led to a jump in refinance activity to the highest level in a month, with refinance loan balances also climbing to a high last seen in March. Despite the decrease in purchase apps, they are still up 15% YOY.

Despite the great performance for the mortgage business in Q2, Chase’s origination volume was down on a sequential basis, from $28.1 billion in the first quarter to $24.2 billion in the second. Given the seasonality of the business this is a surprising result. Originations were more or less flat YOY. The servicing portfolio also fell, from $738 billion to $684 billion. JP Morgan also added another $8.9 billion to loan loss reserves, increasing them to $34.3 billion.

US Bank reported earnings this morning. Earnings were down substantially on increased provisions for credit losses. The residential loan portfolio remains high quality with an average FICO of 768 and LTV of 68%. 90 day DQs were at .17% of the portfolio, which was a slight increase. Mortgage banking revenue increased 64% QOQ to $648 million due to higher volume and gain on sale revenues, which were offset by a falling servicing values.

Citi reported a 5% increase in revenues, but a 74% decrease in EPS due to increased provisions for credit losses. Mortgage origination increased 64% YOY to $6.4 billion. The servicing portfolio declined about 2%.

The rebound in housing caused Fannie Mae economists to revise upward their 2020 GDP estimate from down 5.4% to down 4.2%.