Morning Report: Jumbo loans remain much cheaper than conforming loans.

Vital Statistics:

 

Last Change
S&P futures 3120 8.25
Oil (WTI) 58.69 0.24
10 year government bond yield 1.81%
30 year fixed rate mortgage 3.94%

 

Stocks are higher this morning on optimism for a trade deal. Bonds and MBS are down.

 

China maintained that tariffs must be cut if there is to be a phase 1 deal before new tariffs go into effect December 15. Chinese officials said the two sides remain in close communication.

 

Despite the weak ADP print yesterday, other labor market indicators look healthy. Outplacement Firm Challenger Gray and Christmas reported that announced job cuts fell 11% MOM and 13% YOY to 44,569. Tech was the biggest sector this month however retail is the leader for the year. Year-to-date, companies have announced 556,000 job cuts versus 1.2 million planned hires. Note that Challenger and Gray only looks at press releases, not actual cuts. Separately, initial jobless claims fell to 203,000 for the holiday-shortened week.

 

The service sector continued to expand, albeit at a slower rate in November, according to the ISM survey. Employment plans accelerated, while production decelerated. “Tariffs are impacting prices for a broad array of products used in the delivery of services and completion of projects for our clients. Upward pressure is impacting suppliers and their pricing to customers. We are seeing no relief from our customers, so we’re being negatively impacted by tariff-driven price increases. Numerous suppliers report looking for alternative manufacturing/supply locations outside of China, but with limited or no success so far.” (Management of Companies & Support Services)

 

The government has ended the limits on VA mortgages, which means veterans can borrow as much as their incomes and credit allow. So theoretically veterans can buy million dollar homes with no money down.

 

Mortgage credit increased in November, according to the MBA, especially in the jumbo space. “Most notably, the jumbo index climbed to yet another record high, as investors increased their willingness to purchase loans with lower credit scores and higher LTV ratios,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Additionally, the government index saw its first increase in nine months, driven by streamline refinance programs.”

 

Speaking of jumbos, the spread between 30 year conforming loans and jumbos remained negative this year, which means jumbo rates are less expensive than conforming rates. This is odd given that conforming loans are government guaranteed and jumbos are not. The spread did rise a bit this year, largely driven by staffing issues. Still, what is going on? According to CoreLogic, an “increase in GSE guarantee fee, a reduction in the GSE funding advantage, and portfolio lenders’ desire to hold jumbo loans explain much of the variation in the jumbo-conforming spread.” The issue of portfolio lenders could be translated to: banks are subsidizing jumbo loans because they are interested in the cross-selling opportunities, especially wealth management services. 

 

jumbo conforming spread.PNG

Morning Report: New Home inventory is declining.

Vital Statistics:

 

Last Change
S&P futures 3005 0.25
Oil (WTI) 56.21 0.04
10 year government bond yield 1.77%
30 year fixed rate mortgage 4.03%

 

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

 

New Home Sales came in at 701,000, a hair above consensus and in line with the previous few months. The number was up 15.5% on an annual basis. There was 321,000 homes for sale at the end of September, which represents a 5.5 month supply. The inventory of homes for sale has been consistently declining, however the median sales price was down 8% MOM and 9% YOY. This appears to have been driven by a fall in the number of homes sold at the higher price points, but could be a sign of builders discounting as well. Note that the homebuilders have been on a tear this year, with the homebuilder ETF right at all time highs.

 

XHB

 

The new mortgage backed securities containing high LTV VA cashouts made their trading debut yesterday, and as expected they traded well back of normal Ginnies. Remember that GNMA made 90 LTV cashout VAs ineligible for regular delivery into Ginnie I and Ginnie II mortgage backed securities in response to investor complaints about fast prepayment speeds. These loans had to go into custom pools and the bid for these securities in the market reflected the higher risk. They traded anywhere from 2 to 4 points below commensurate Ginnie MBS. For example, the 4% coupon traded 120 ticks (or 3.75 points) behind. In other words, the 4% custom pools traded at 100, versus the 4% December Ginnies which traded at 103.75, which means that giving a borrower par pricing is going to be almost impossible.

 

Amazon.com disappointed the street with its holiday forecast. They anticipate $80 – $86 billion in revenue, which lagged the street estimate of $87 billion plus. This may just be Amazon-specific, but the economy has been held up by consumer spending and wage growth. If the spending aspect is declining, it means a weak Q4. The stock is down 7% pre-open.

 

 

Morning Report: VA sends subpoenas to several lenders

Vital Statistics:

 

Last Change
S&P futures 2875 -15
Oil (WTI) 61.27 -0.13
10 year government bond yield 2.43%
30 year fixed rate mortgage 4.17%

 

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

 

Trade fears have been the driver of negative sentiment in the markets this week after Trump tweeted that he is considering increasing tariffs on Chinese goods this week. It turns out that Beijing sent a marked-up agreement that basically reneged on most of their former commitments, which is what drove the response from the US.

 

There were 7.5 million job openings at the end of March, according to BLS. The quits rate was unchanged at 2.3%. Quits rose in real estate and fell in construction. Job openings are pretty much close to record levels and exceed the numbers we saw in 2000. This is the 13th straight month where the number of openings has exceeded the number of unemployed.

 

Mortgage applications rose 2.7% last week as purchases rose 4% and refis rose 1%. We saw a good week for the spring home buying season, as a 5 percent increase in purchase applications–both weekly and year-over-year–drove the results,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Average loan amounts also stayed elevated, with government purchase applications rising to the highest in the survey. Even with slower price appreciation in higher-priced markets, home prices are still rising enough to push average loan sizes higher.” The increase in government applications was driven by VA purchase activity. The typical 30 year fixed rate mortgage fell 4 basis points to 4.27%.

 

Speaking of VA loans, the government has sent subpoenas to at least 8 lenders seeking information regarding delinquencies and prepayments. VA prepay speeds have been an issue for both the government and investors. VA has recently put out a request for input from various stakeholders regarding VA loans and prepay speeds and is considering making some high LTV VA loan ineligible for GNMA multi-issuer pools, which would almost certainly negatively affect pricing.

 

Newco spelled backwards reported a first quarter loss, due to a negative mark on their MSR book. The mark was probably due more to interest rates than anything else, as both prepayments and delinquencies fell. Yet another instance where investors have loaded up the boat buying MSRs ahead of an expected increase in interest rates, only to see them head back down. This has pretty much been the story for the past several years.

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 2928 9
Eurostoxx index 390.26 -0.72
Oil (WTI) 61.85 0.04
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.20%

 

Stocks are higher after the strong payroll number. Bonds and MBS are up small.

 

Jobs report data dump:

  • Nonfarm payrolls up 263,000
  • Unemployment rate 3.6%
  • Labor Force participation rate 62.8%
  • Average hourly earnings up 0.2% MOM / 3.2% YOY
  • Employment – Population ratio 60.8%

Overall it was a Goldilocks report for the markets. Stocks are happy about the payroll number while bonds like the wage data. Note the unemployment rate is at the lowest level since Jimi Hendrix did the Star Spangled Banner at Woodstock. We saw an uptick in construction workers as well as health care.

 

unemployment rate

 

The Washington Post noted how difficult finding truck drivers has become: McClane Company is a large trucking and warehouse firm that specializes in moving food and grocery items around the country. They are advertising truck driving jobs for $70,000 a year and a $6,000 sign on bonus in Jessup, Pennsylvania, but even at that level of pay it’s been tough to get enough people in the door.

 

Steve Moore withdrew his name from consideration to join the Fed after it appeared the he wouldn’t have the votes to get confirmed. Establishment Republicans are not ready for non-traditional types to join the Fed, though it might be a good thing, if only to break the group-think that goes on there.

 

Ginnie Mae is taking a look at 90%+ LTV cash out refinancings. They put out a request for input. Initially, they were looking at the prepay speeds for VA IRRRL loans, and how it was affecting GNMA MBS investors, but it looks like they are now broadening their focus as VA loans still have higher prepay speeds than comparable FHA or Fannie / Freddie loans. Specifically, VA refis occur earlier than FHA refis, and high LTV VA cashouts have higher prepay speeds than comparable FHA cash-outs. FHA cash outs are limited to 85% LTV, while VAs can go up to 97.5%, and the funding fee can be financed. It looks like GNMA is not looking at tightening the restrictions for VA refis, but it is more interested in perhaps creating new GII pools for shorter duration loans (i.e. fast prepays).

 

VA versus FHA speeds