Morning Report: Fannie and Freddie are told to level the playing field.

Vital Statistics:

 

Last Change
S&P futures 3005 7.25
Oil (WTI) 57.95 -0.64
10 year government bond yield 1.69%
30 year fixed rate mortgage 3.96%

 

Stocks are higher this morning after China made some agricultural trade concessions to the US. Bonds and MBS are flat.

 

House prices rose 0.4% MOM and 5% YOY in July, according to the FHFA House Price Index. Home price appreciation has slowed across the board compared to 2018’s numbers. This is despite a meaningful drop in rates. Separately, the Case-Shiller index was more or less flat on a MOM basis and up a couple of percent annually.

 

FHFA regional

 

One of the best predictors of rising wages is the quits rate, which has been inching up slowly since the economy bottomed out in 2009. The latest reading had it at 2.6%. We are seeing an uptick in the quits rate for the bottom income brackets, with 12% of all lower income households switching jobs during the spring and early summer. For all the concern about income inequality, this is a welcome sign.  Separately, another 1.3 million workers will qualify for overtime pay due to a new Labor Department directive.

 

The FHFA has issued a directive to Fannie Mae and Freddie Mac to end guarantee fee discounts for high volume lenders. “We trying to make sure Fannie and Freddie aren’t driving consolidation in the market, but instead they’re providing a level playing field, and that’s really something we’re focused on,” Calabria said Monday at a National Association of Federally Insured Credit Unions conference. “One of the things that really concerned me before the crisis was that it wasn’t unusual where the big guys like Countrywide would come in and they pay G-fees down here and you come in and pay G-fees up here.” The ruling would level the playing field for smaller lenders, and apply the principle of “same rate of return for the same risks, regardless of size.”

 

What will be the implications of this change? Until we have a better grasp of how Fannie will make changes, it is hard to tell. It will probably push the redevelopment of the private label securities market. If other insurers can compete for the big aggregators, then we might see a more competitive marketplace, and will reduce the taxpayer’s footprint in the mortgage market.

Morning Report: Where is the private label MBS market?

Vital Statistics:

Last Change
S&P futures 2645 -1.75
Eurostoxx index 385.49 0.17
Oil (WTI) 67.92 -0.65
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are lower as we begin the FOMC meeting. Bonds and MBS are flat.

Construction spending fell 1.7% MOM but is still up 3.6% YOY. Bad weather in the Northeast and Midwest probably drove the decrease. Residential construction was down 3.5% MOM and up 5.3% YOY.

Manufacturing downshifted in April, but is still reasonably strong according to the ISM Manufacturing Report. Steel tariffs were mentioned several times as an issue. A few comments from the piece:

  • “[The] 232 and 301 tariffs are very concerning. Business planning is at a standstill until they are resolved. Significant amount of manpower [on planning and the like] being expended on these issues.” (Miscellaneous Manufacturing)
  • “Business is off the charts. This is causing many collateral issues: a tightening supply chain market and longer lead times. Subcontractors are trading capacity up, leading to a bidding war for the marginal capacity. Labor remains tight and getting tighter.” (Transportation Equipment)

The US economic expansion is now the second-longest on record. Low inflation and low interest rates have made that possible. Despite the increase in interest rates, Fed policy is still highly expansionary, so as long as inflation behaves this could go on for a while longer.

expansions

House prices rose 1.4% MOM and 7% YOY, according to CoreLogic. About half of the MSAs are now overvalued according to their model.

Corelogic overvalued

Acting CFPB Director Mick Mulvaney is looking for ways to save money. Sharing desks and moving to the basement are possibilities. As an aside, this article belongs on the opinion page.

The private label MBS market used to be a $1 trillion market – last year it was only about $70 billion. What is going on? Regulation may appear to be the culprit, but it really isn’t. There are still all sorts of unresolved issues between MBS investors and securitizers. The biggest surround servicing – how do investors get comfort that the loan will be serviced conflict-free, especially if the issuer has a second lien on the property. How do investors get comfort that the issuer won’t solicit their borrower for a refinance? A lack of prepay history is also a problem – it makes these bonds hard to model and price. Many investors also remember the crisis years, when liquidity vanished and investors were unable to sell, sometimes at any price.

Issuers were content for a lot of years to simply feast on easy refi business – rate and term streamlines which were uncomplicated and simple to crank out. Warehouse banks were reticent to fund anything that didn’t fit in the agency / government box, so why not concentrate on the low-hanging fruit? Investors were able to pick and choose from all sorts of distressed seasoned non-agency paper trading in the 60s and 70s. Most of that paper ended up being money good. But in that environment, why would anyone be interested in buying new issues over par? If you are a mortgage REIT, why not buy and lever new agency debt with interest rates at nothing and a central bank that is actively supporting the market?

Now that the easy refi business is gone, will we see a return of this market? Perhaps, but there probably still is a big gulf between what borrowers and investors are willing to accept and the governance issues remain unsolved.