Tag: OCC

Morning Report: Lot sizes and the CRA

Vital Statistics:

Last Change
S&P futures 2897 -4.25
Eurostoxx index 379.06 -3.45
Oil (WTI) 71.13 1.33
10 year government bond yield 2.88%
30 year fixed rate mortgage 4.55%

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

The highlight of the upcoming week will be the jobs report on Friday, although we will get a lot of Fed-speak on Wednesday. Productivity and costs on Thursday will be an important report as well.

Construction spending rose 0.1% which was lower than the Street 0.4% expectation. Residential construction rose 0.6% MOM and 6.6% YOY.

Manufacturing expanded in August, according to the ISM PMI Index. The August PMI increased 3.1% to 61.3, driven by increases in production and new orders. Employment rose as well. Many of the participants noted that trade is injecting some uncertainty into their business, especially with respect to price negotiations with suppliers. The reading of 61.3 is unusually strong, and is typically associated with 5.6% GDP growth.

The OCC is asking for input regarding the CRA and modernization. “As a long-time banker, I have seen firsthand the benefit of CRA investment and how it makes communities vibrant. I applaud the effort of community development practitioners and bankers who work together to make an important difference in our nation’s neighborhoods,” said Comptroller of the Currency Joseph M. Otting. “I have also seen how limitations in the current CRA regulation can fail to provide consideration to a bank that wants to lend and invest in a community with a need for capital, including many low- and moderate-income areas. Unfortunately, the operation of the current CRA regulation can result in restricted resources. It is time for a national discussion on how we can make the CRA work better.”

The ANPR solicits comment on a number of questions regarding improvements to the CRA regulations related to

  • increasing lending and services to people and in areas that need it most, including in LMI areas;
  • clarifying and expanding the types of activities eligible for CRA consideration;
  • revisiting how assessment areas are defined and used;
  • establishing metric-based thresholds for CRA ratings;
  • making bank CRA performance more transparent;
  • improving the timeliness of regulatory decisions related to CRA; and
  • reducing the cost and burden related to evaluating performance under the CRA.

Donald Trump was jawboning Canada over trade and threatening China with $200 million in higher tariffs. I think markets are pretty much shrugging off trade threats any more. Note that Trump will need legislation to carry out some of the changes he wants to make with Canada, which isn’t going to happen.

Home prices increased 0.3% MOM and 6.2% YOY in July, according to CoreLogic. They are forecast to rise about 5% over the upcoming year. We are seeing sellers in the hot markets decide to pull properties off the market to see if they can ride the home price appreciation for a bit longer. This is adding to the supply crunch. CoreLogic’s model always seems to predict a slowdown in home price appreciation that never seems to materialize.

An interesting tidbit – the median lot size fell to 8.560 square feet in 2017 (about 1/5 of an acre). Lot sizes had been trending downward, but climbed during the bubble years as more and more building was done in the exurbs. New England has the largest lot sizes at about 0.4 acres, while the left coast has the smallest (.15 acres). Note this study is only looking at single family spec homes. It looks like this is basically a secular trend, and the the bubble years (building in the exurbs) was largely a blip. It also could be a function of building activity being dominated in regions (like the West Coast), where lots are smaller.

The ultra-high end luxury market has been getting whacked as foreign investors step away. Changes in tax laws might be having an impact, but it could have also been driven by overbuilding at the top end. I suspect it is the latter, since we are seeing softness in states like Florida which benefit from the tax law.

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Morning Report: December Fed Funds futures still leaning towards 3 hikes this year

Vital Statistics:

Last Change
S&P futures 2767 -8.25
Eurostoxx index 385.56 -0.38
Oil (WTI) 65.78 -0.17
10 Year Government Bond Yield 2.93%
30 Year fixed rate mortgage 4.59%

Markets are lower this morning on negative news out of Apple. Bonds and MBS are down small.

Something to watch: We are seeing bigger bets against emerging markets currencies and some European bonds. These trades will bump up against Treasury shorts, which were increased last week in the wake of the Italian election results. One of the biggest trades in the hedge fund community is short Treasuries – which means hedge funds are betting on rising rates. A sell-off in Euro bonds and emerging markets will add buying pressure to Treasuries on the flight to quality trade. So, expect some volatility in Treasuries as fast money enters and exits the market.

Rising interest rates are creating another phenomenon – increased flows into money market funds. Money market funds had been a moribund asset class after the crisis, with interest rates at 0% and the memories of breaking the buck still fresh in many investors minds. Money market funds are seeing the biggest inflows since 2013. Expect to see more of this as bond investors also look for ways to shorten duration. This is yet another reason why hedge funds are short Treasuries.

After the Italian led drop in rates, the market adjusted its prediction for the Fed Funds rate. Still sitting at a 60-40 bet for 3 or less hikes this year / 4 or more.

fed funds probability 2

Warren Buffett and Jamie Dimon are exceedingly bullish on the US economy. “Right now, there’s no question: It’s feeling strong. I mean, if we’re in the sixth inning, we have our sluggers coming to bat right now” is how Warren Buffet characterized it. Jamie Dimon’s view: “The way I look at it, there is nothing that is a real pothole,” he said. “Business sentiment is almost at the highest level it’s ever been, consumer sentiment is at its highest levels, markets are wide open, housing’s in short supply and my guess is mortgage credit will expand a little bit.”

Buffett and Dimon are also arguing for companies to stop providing earnings guidance. They claim that focusing on short term quarterly earnings causes companies to de-emphasize long-term growth. Berkshire Hathaway does not provide any sort of guidance to the Street. It is an interesting idea, however companies provide guidance to the Street because investors as a general rule prefer predictable companies to unpredictable ones.

How not to “teach your servicer a lesson.” Yikes. If you think your lender is making a mistake, or you are unhappy with the service, don’t stop paying as a means of retaliation.

The OCC is taking a more constructive approach with the banks. At the top of the agenda: re-writing community reinvestment rules to be less onerous for the industry. Obama’s head of the OCC was a career regulator who made a point of challenging the perception that the OCC was too close to the banks it regulated. The Obama administration pushed hard for banks to take less credit risk, and I wonder how much of the issue with a lack of housing construction is due to that. While this wouldn’t affect the Lennars of the world, most construction is with smaller builders who would have to go to their local community bank for financing.