The Fed – The Daily Tearsheet

Morning Report: Forbearances are flat

Vital Statistics:

	Last	Change
S&P futures	3496	2.6
Oil (WTI)	42.94	0.17
10 year government bond yield		0.72%
30 year fixed rate mortgage		2.93%

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

The percentage of loans in forbearance was flat at 7.2% last week, according to the MBA. Fannie and Freddie loans decreased by 5 basis points while FHA and private label increased. The share of loans in forbearance was unchanged, as the decline in the share of GSE loans was offset by increases for Ginnie Mae, and portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The pace of new forbearance requests has been relatively flat across investor types, but for those with GSE loans, the rate of exits from forbearance regularly exceeds the rate of new requests. The exception in these trends are borrowers with Ginnie Mae loans. The loss of enhanced unemployment insurance benefits, coupled with a consistently high rate of layoffs and uncertainty about the job market, are having a disproportionate impact on FHA and VA borrowers.”

Rep Maxine Waters (D-CA) laid into the FHFA over the 50 basis point adverse market fee. “Just two weeks ago, Director Calabria approved an outrageous penalty – in the middle of a pandemic and an economic recession – that would apply to homeowners looking to use today’s historically low mortgage rates to refinance their mortgages and reduce their mortgage payments,” Waters said. “Now, after bipartisan backlash, Director Calabria is attempting to save face by delaying the penalty until December 1st and then only providing very narrow exemptions moving forward. While this delay will buy homeowners looking to refinance some time, at the end of the day, the vast majority of homeowners will still pay the penalty – and homeowners in higher-cost areas like Los Angeles will disproportionately be excluded from the narrow exemptions provided. I am calling on Director Calabria to terminate this penalty altogether, not just delay it.”

CoreLogic reported that home prices rose 5.5% in July. CoreLogic CEO Frank Martell said: “On an aggregated level, the housing economy remains rock solid despite the shock and awe of the pandemic. A long period of record-low mortgage rates has opened the flood gates for a refinancing boom that is likely to last for several years. In addition, after a momentary COVID-19-induced blip, purchase demand has picked up, driven by low rates and enthusiastic millennial and investor buyers. Spurred on by strong demand and record-low mortgage rates, we expect to see more home building in 2021 and beyond, which should help support a healthy housing market for years to come.” That said, CoreLogic forecasts a deceleration for home price appreciation going forward of sub-1% for the July 21 – July 20 period.

Many companies who were planning on re-opening offices after Labor Day are rethinking that idea.

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: New guidance from the Fed

Vital Statistics:

	Last	Change
S&P futures	3475	-3.6
Oil (WTI)	43.24	-0.17
10 year government bond yield		0.66%
30 year fixed rate mortgage		2.91%

Stocks are flattish this morning as we await Jerome Powell’s (virtual) Jackson Hole speech. Bonds and MBS are up.

Second quarter GDP was revised upward from -32.9% to -31.7%. Consumption was revised up as well from -34.6% to -34.1%. Separately, 1 million people filed for unemployment the first time last week.

Home prices rose 11% in the week ending August 16, according to Redfin. The Redfin Homebuyer Demand index increased by 29% from pre-pandemic levels earlier in the year. “Schools are beginning to start again, and it seems like that has slowed the amount of homebuyer activity a little bit, but that doesn’t make the market less crazy,” said Oakland, Calif.-area Redfin agent Veronica Clyatt. “Instead of 20 offers on a home, you may ‘just’ see 10. But prices have not gone down—home price increases haven’t slowed at all.”

Fan and Fred will continue to buy loans in forbearance through September 30, extending the previous deadline of August 31. “MBA and its members appreciate FHFA and the GSEs extending these important features,” said MBA President and CEO Bob Broeksmit. “Both the origination flexibilities and the program to purchase loans in forbearance are providing important stability to the mortgage market during the pandemic, and today’s announcement will enable lenders to continue to make low rate mortgage financing readily available to consumers and avoid the inevitable credit tightening that would have resulted from their expiration.”

Democratic presidential candidate Joe Biden has proposed a $15,000 first-time homebuyer tax credit. Supposedly they could use the credit when they make the purchase instead of having to wait to file taxes. The details haven’t been ironed out, which is typical for campaign promises.

The Fed has updated its statement on its longer-run goals for monetary policy, strengthening its commitment to a stronger job market. “The economy is always evolving, and the FOMC’s strategy for achieving its goals must adapt to meet the new challenges that arise,” said Federal Reserve Chair Jerome H. Powell. “Our revised statement reflects our appreciation for the benefits of a strong labor market, particularly for many in low- and moderate-income communities, and that a robust job market can be sustained without causing an unwelcome increase in inflation.”

One change is subtle but important: they replaced the term “deviations” from full employment to “shortfalls” from full employment. This basically codifies what Janet Yellen alluded to years ago, that the Fed will allow the labor market to run hot for a while. This essentially means that the Fed will remain supportive to the labor market when the economy is below full employment, and will be reluctant to take away the punch bowl when we are at full employment.

The bigger question is whether this is just wishful thinking. As we saw before, as the level of government debt rises, the velocity of money slows. And the US economy took a quantum leap upward in indebtedness in response to COVID. Which means talking about a super-hot economic growth in the US makes as much sense as talking about super-hot economic growth in France or Japan. Punch line: we are looking at lower rates for longer, at least at the short end of the curve. The big question is whether the Fed will continue to purchase the 10 year to drive down longer-term rates.

Morning Report: Homebuilding is back

Vital Statistics:

	Last	Change
S&P futures	3141	74.1
Oil (WTI)	38.34	1.39
10 year government bond yield		0.78%
30 year fixed rate mortgage		3.16%

Green on the screen this morning as Jerome Powell heads to Capitol Hill for Humprey-Hawkins testimony. Bonds and MBS are down.

Retail Sales came in way better than expected, rising 17.7% versus expectations of a 8% gain. Last month was revised from -16.4% to -14.7%. The control group, which excludes gas, autos, and building materials rose 11% versus expectations of a 4.7% increase.

Industrial production rose 1.4% in May, a little better than expected. Capacity Utilization rose to 64.8% and manufacturing output rose 3.8%.

Lennar reported second quarter earnings yesterday, with a 27% increase in earnings per share. Lennar is on a November fiscal year, so the quarter included both March and April, the worst months of the economic pandemic. That said, everything turned around in May, with CEO Stuart Miller saying this in the press release: “Business rebounded significantly in May, and by quarter’s end, our total new orders declined by only 10%, and deliveries ended flat year-over-year. In sync with the market rebound, we resumed starts and land spend to match the improving market conditions, and this rebound has continued into the first two weeks of June.” He also mentioned the effect COVID has had on demand: “While unemployment increased throughout the quarter due to impacts from the COVID-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry.” Finally, the company re-instituted its 2020 guidance.

The MBA reported that new home purchase applications increased 26% MOM in May and 11% on YOY basis. “The solid increase in new home purchase applications in May is another indication of a recovery in the housing market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “MBA estimates that new home sales rebounded 26 percent last month – a healthy turnaround after three months of declines. Homebuyer traffic is rising, and homebuilders are continuing to ramp up production following the COVID-19 pandemic-related restrictions. We expect to see additional near-term strength in the coming months from the resumption of delayed sales activity caused by the social distancing and stay-at-home orders during March and April.”

The MBA reported that the share of mortgages in forbearance has leveled out at 8.55%. “Results from the first week of June showed a slight uptick in the overall share of loans in forbearance, but this increase was primarily driven by a larger share of portfolio and PLS loans in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Half of the servicers in our sample saw the forbearance share decline for at least one investor category. Although there continues to be layoffs, the job market does appear to be improving, and this is likely leading to many borrowers in forbearance deciding to opt out of their plan.” Given the way the CARES Act was drafted, there was almost no penalty for taking forbearance, and it sounds like many took it pre-emptively. Ginnie loans was flat at 11.8%, while GSE loans came in at 6.4% and private label mortgages were 10.2%.

The housing market outside New York City is booming. Local builders are getting slammed with inquiries and are selling homes at a rapid pace. “People who are now in the Hudson Valley looking for homes, many of them have never been to the Hudson Valley before,” Mr. Petersheim said. “That’s new to the marketplace, that urgency.” I guess being cooped up for 3 months in an 800 square foot studio that costs 5 grand a month will wear on anyone.

Fed Head Robert Kaplan says the economy will experience a historic contraction before rebounding in the second half of the year. From the sound of it, the economy is already bouncing back.

I will be doing a podcast for the Information Management Network this morning. I will be discussing economics, housing, and the markets. I will leave a link once I get one.

Morning Report: Zero percent rates until 2022.

Vital Statistics:

	Last	Change
S&P futures	3104	-84.1
Oil (WTI)	36.84	-2.39
10 year government bond yield		0.68%
30 year fixed rate mortgage		3.19%

Stocks are lower this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

The Fed made no changes to interest rate policy yesterday. The part that got everyone’s attention:

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Fed will also maintain its purchases of Treasuries and MBS at the current pace. The economic projections include a 6.5% expected drop in GDP this year, an unemployment rate of 9.3%, and sub-1% inflation. The dot plot shows the Fed expects to keep rates at zero throughout 2020 and 2021.

The gloomy outlook and the continued asset purchases are what seems to be driving the drop in stocks this morning and the strength in the bond markets. I guess we should expect mortgage rates to continue to ratchet lower as financial conditions thaw and more aggregators begin to get aggressive in pricing.

It seems like yesterday that the mortgage REITs were being thrown overboard. Bellwether Annaly just cut its dividend, which was to be expected, but it wasn’t that bad. In addition, it bought back $100 million worth of stock. With everyone out there deleveraging, I found it interesting that they chose to buy back stock as opposed to buying assets.

Meanwhile, initial jobless claims fell to 1.5 million and the producer price index fell 0.8% on a YOY basis.

The Trump Administration is considering another stimulus bill that would include more direct payments and further aid for small businesses. “We will have a significant amount of unemployment and we’re going to need to look at doing something there,” Mnuchin said. “I think we’re going to seriously look at whether we want to do more direct money to stimulate the economy, but I think this is all going to be about getting people back to work.”

Home Equity rose 6.5% in the first quarter, according to CoreLogic. The number of homes with negative equity fell by 16% to 1.8 million homes.

Morning Report: 20 million jobs lost in April

Vital Statistics:

	Last	Change
S&P futures	2876	13.1
Oil (WTI)	23.27	-1.29
10 year government bond yield		0.71%
30 year fixed rate mortgage		3.36%

Stocks are higher this morning as investors look forward to re-opening the economy. Bonds and MBS are lower as Treasury announced its quarterly refunding for next week.

The economy lost over 20 million jobs in April according to the ADP Employment report. The Street is looking for a -21.2 million print in this Friday’s jobs report.

Mortgage applications were flattish last week as purchases rose 6% and refis fell 2%. “Mortgage application volume was unchanged last week, even as the 30-year fixed rate mortgage declined to 3.40 percent – a new record in MBA’s survey,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Despite lower rates, refinance applications dropped, as many lenders are offering higher rates for refinances than for purchase loans, and others are suspending the availability of cash-out refinance loans because of their inability to sell them to Fannie Mae and Freddie Mac.”

Fannie Mae is extending reps and warrants relief through June.

The Fed is set to start buying corporate bonds, targeting “fallen angels” – in other words bonds from corporations who were downgraded due to COVID-19 issues – names like Macy’s and Occidental Petroleum. We are seeing investors begin to snap up these bonds, although many are trading above their recovery value in a bankruptcy, which means it all reality, it is just a greater fool trade. It seems to me if the Fed can fund a facility to buy department store debt they could set up a facility to fund mortgage advances.

Fed Head Richard Clarida thinks the economy will return to positive growth in the third quarter, although further help from the Fed may be necessary.

“Our policies we think will be very important in making sure that the rebound will be as robust as possible. We’re in a period of some very, very, very hard and difficult data that we’ve just not seen for the economy in our lifetimes, that’s for sure. But a third-quarter rebound “is one possibility. That is personally my baseline forecast,” he added. Realistically, it’s going to take some time for the labor market to recover from this shock. I do think the recovery can commence in the second half of the year”

Meanwhile, here is a tracker of how the different states are re-opening.

Morning Report: The Fed maintains rates at zero

Vital Statistics:

	Last	Change
S&P futures	2908	-28.1
Oil (WTI)	16.81	3.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

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

The Fed maintained interest rates at 0% and pledged to continue to do what it can to support functioning markets, including buying agency mortgage backed securities and treasuries. They didn’t specify amounts, just that they wanted to keep orderly markets. As Dave Stevens noted, it is clear the Fed wants to see lower mortgage rates as a way to stimulate the economy. The problem with that of course is that the CARES Act is doing the exact opposite – it is restricting credit more than what happened in 2008. The MBA’s Mortgage Credit Availability index took a nosedive in March, and I think it will be much, much worse in April.

Flagstar just announced a 5 point LLPA for cash-out refis. It is clear that these are the next program to go bye-bye, joining jumbos, non-QM, and sub 700 FHA. The law of unintended consequences rears its ugly head once again. I wonder if the government could tweak the CARES Act to make cash-outs ineligible for forbearance. That way the program could still exist and provide relief to people hit by COVID. Presumably if you do a cash-out, you have money to live on, so….

Initial Jobless Claims came in at 3.8 million, pushing the COVID job losses over 30 million.

Personal incomes fell 2% in March and personal spending fell 7%. The personal consumption expenditure index remained under control. I suspect that increasing food prices are being offset by lower energy prices.

Mortgage REITs AGNC and Annaly reported yesterday, and needless to say both were hit hard by COVID. Both have completed their deleveraging, and AGNC noted that its book value per share increased by 8% in April, after declining about 22% in Q1. For the agency REITs, it looks like the crisis is over.

Another round of stimulus may be a bridge too far. Nancy Pelosi wants to force states to vote by mail, and that is a non-starter with Republicans. Mitch McConnell wants lawsuit protection for businesses that remain open during the COVID crisis, and that is a non-starter to Democrats. As Travelers noted on its conference call, trial lawyers smell an opportunity here and are ginning up lawsuits as we speak.

Morning Report: First quarter GDP falls 4.8%

Vital Statistics:

	Last	Change
S&P futures	2915	48.1
Oil (WTI)	15.71	3.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

Stocks are higher this morning despite a disappointing GDP print. Bonds and MBS are up.

First quarter GDP fell 4.8% as the COVID lockdown depressed consumer spending, which fell 7.6%. The price index rose 1.3%, and that will be a number to watch going forward. Inflation is too much money chasing too few goods. We have managed to sidestep inflation in the past because shortages weren’t a problem. Now they are. Do you remember paying a buck a roll for TP last year? How about chicken? It averaged $3.11 a pound last year. At the local Stop and Shop it is now $3.80, and with the Tyson closures it will go higher. The black swan out of this whole thing could be a resurgence of inflation, right when that is the last thing the economy needs.

The FOMC will make their announcement at 2:00 pm today. Not sure what they can say,(Information received since the Federal Open Market Committee met in March seems to indicate the economy has hit a brick wall and is sinking like an anvil….) and I can’t see it being market-moving. The mortgage industry would love to see something about a servicing advance repo line, but aside from accepting newer forms of collateral I don’t think there is much more they can do.

Mortgage applications fell 3.3% last week as purchases rose 12% and refis fell 7.5%. The refi market continues to tighten as investors add overlays to cash-outs. The strength in the purchase market is encouraging. Separately, the homeownership rate hit 63.5% in the first quarter, the highest since 2013. I think for many urban millennials with families, the COVID Crisis will trigger a flight to the suburbs, which should bump up the homeownership rate going forward.

According to a NPR poll, half of Americans have been financially affected by the Coronavirus. If that is the case, then forbearance numbers are going up.

Consumer confidence fell from 119 to 87, which was worse than expected.

Morning Report: Shelter in place orders are being relaxed

Vital Statistics:

	Last	Change
S&P futures	2856	28.1
Oil (WTI)	12.71	-4.29
10 year government bond yield		0.63%
30 year fixed rate mortgage		3.43%

Stocks are higher this morning on optimism that we have turned the corner on the COVID-19 crisis. Bonds and MBS are down.

In terms of economic data, the big number will be the first pass at Q1 GDP will be released on Wednesday. The consensus is that GDP contracted 3.8% as consumer spending falls 1.5%. Trump Administration Advisor Kevin Hassett thinks the economy could contract 30% in Q2.

The Fed will have the April FOMC meeting this week, and with rates already at zero, it probably won’t have the impact it normally has. Speaking of the Fed, they are ratcheting back MBS purchases again this week, with only $8 billion a day.

It looks like some states are beginning to relax the shelter-in-place orders, and even New York is looking to ease things in mid-May. If these states end up seeing no big uptick in cases, I expect the rest of the country to follow pretty quickly. Especially if the number of deaths settles in under 100k. FWIW, I think if most of the country is back to normal by Memorial Day, we can take the Great Depression II economic forecasts off the table.

Ex MBA President wrote a scathing editorial in Housing Wire regarding Mark Calabria and how he is the worst person for the job right now. In Mark’s defense, his job is to protect the GSEs and (and therefore the taxpayer), however Dave is correct that taking a cavalier attitude with non-bank servicers is not the best look right now when (a) the government imposed this forbearance period on everyone and (a) the GSEs are part of the government. If the government goes forward and imposes all of these costs on the industry, the least it can do is help mitigate those as much as it can. Perhaps the aid doesn’t need to come from Fannie and Freddie, but the government should provide it from somewhere.

Home price appreciation is slowing, but not dropping yet, according to Realtor.com. Inventory is tight, largely driven by sellers who are pulling their homes off the market. This could be due to fears of not getting the best price, or it could be due to people wanting to keep potentially sick strangers from entering their home.

Pulte noted on its Q1 conference call that pricing is holding up, and cancellations are unexpectedly small – about 2% and only due to job losses. Orders on the other hand are weak. In the first week of March, they got over 800 orders. By the last week of March it was 140.

Rent strikes are beginning to pop up in NYC. This one is not the usual tenant versus landlord situation where there is a dispute over fixing things. This is meant to be a political statement to goad lawmakers into doing something for renters. Bold strategy, Cotton…

Morning Report: 22 million jobs lost in the past month

Vital Statistics:

	Last	Change
S&P futures	2790	15.1
Oil (WTI)	20.13	0.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.37%

Stocks are higher this morning as the Trump Administration works on how to re-open the economy. Bonds and MBS are up.

The Trump Administration is looking to ease the lockdown as it looks like cases have peaked in the US. He is planning to hold a conference call with governors this afternoon and will announce something by the end of the day. Of course it will be up to the states and local governments to make the ultimate decisions for their respective jurisdictions. State and local governments are starting to get starved for cash as sales taxes have fallen off a cliff. In all honesty, if masks and gloves work (and they appear to), then it probably makes sense to have people return to work wearing them. Note that the food supply is at risk for shortages, so that is something the government must work to avoid.

Initial Jobless Claims fell to 5.25 million last week. Over the past month, 22 million people have lost their jobs. That is about 34 jobs lost per case of the virus, and 770 per death from the illness.

Housing starts fell to 1.216 million. This is down 22% from February, but is actually up 1.4% on a YOY basis. Building permits came in at 1.35 million, which was down 6.8% sequentially, but up 5% on an annual basis. Starts are going to be super-sensitive to local economies. The rumor is that KB Home simply walked away from all their land deposits in Las Vegas.

Neel Kashkari is recommending that the big banks raise $200 billion in capital to help buffer against the effects of the recession. Note that Shelia Bair was jawboning the Fed to force the banks to suspend dividends and bonuses, the way most European banks have. Of course the European banks are in much weaker capital positions than the US banks, and the US banks have already suspended share buybacks. Oh, and bonuses are paid at the end of the year, so that is just a throwaway talking point. But bonuses, buybacks, and dividends are kind of an evergreen topic for liberal policy types.

The NHMC found that 84% of renters made a full or partial April rent payment. As of a week ago, that number was only 69%. Good news for the apartment REITs.

“We are pleased to see that it appears that the vast majority of apartment residents who can pay their rent are doing so to help ensure that their properties can continue to operate safely and so apartment owners can help residents who legitimately need help,” said Doug Bibby, President of NMHC. “Unfortunately, unemployment levels are continuing to rise and delays have been reported in getting assistance to residents, which could affect May’s rent levels. It is our hope that, as residents begin receiving the direct payments and the enhanced unemployment benefits the federal government passed, we will continue to see improvements in rent payments.”

“Anecdotally, we are hearing that different parts of the industry are experiencing different levels of rent payments,” said David Schwartz, NMHC Chair and CEO Chairman of Chicago-based Waterton. “As you would expect, more expensive Class A properties, whose resident base may be more able to work from home, are reporting much higher percentage of rent payments than operators of more affordable workforce properties whose residents are more likely to have had their incomes disrupted because of the pandemic.”