Morning Report: Jamie Dimon throws cold water on mortgage banking

Vital Statistics:

 

Last Change
S&P futures 2898.75 -1.5
Eurostoxx index 390.41 0.82
Oil (WTI) 63.91 0.15
10 year government bond yield 2.56%
30 year fixed rate mortgage 4.32%

 

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

 

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

 

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

 

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

 

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

 

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

 

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

 

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

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Morning Report: Bank earnings come in

Vital Statistics:

 

Last Change
S&P futures 2915 6.25
Eurostoxx index 388.92 0.82
Oil (WTI) 63.31 -0.09
10 year government bond yield 2.57%
30 year fixed rate mortgage 4.23%

 

Stocks are higher as bank earnings come in. Bonds and MBS are down.

 

Earnings season has begun, and the banks are all reporting.

 

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

 

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

 

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

 

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

 

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

 

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

 

fed funds futures

 

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: Gap between appraisals and homeowner perception widens slightly

Vital Statistics:

 

Last Change
S&P futures 2802 5
Eurostoxx index 374.06 0.81
Oil (WTI) 57.27 0.47
10 year government bond yield 2.62%
30 year fixed rate mortgage 4.28%

 

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

 

Inflation at the wholesale level came in below expectations, mirroring the consumer price index. The headline PPI rose 0.1% MOM / 1.9% YOY. Ex-food and energy the index rose 0.1% / 2.5% YOY.

 

Mortgage Applications rose 2.3% last week as purchases rose 4% and refis fell 0.2%. The MBA noted an uptick in FHA activity. “Purchase applications have now increased year-over-year for four weeks, which signals healthy demand entering the busy spring buying season. However, the pick-up in the average loan size continues, with the average balance reaching another record high. With more inventory in their price range compared to first-time buyers, move-up and higher-end buyers continue to have strong success finding a home.” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting.

 

The gap between a homeowner’s perception of their home’s value and the number that the appraiser comes up with is starting to widen a touch. The Quicken Home Price Perception Index fell slightly in February, although the difference between perception and appraisal is pretty tight historically. For most MSAs, appraisals are coming in higher than homeowners expect, which is good news for the cash-out refi business. Given the direction in interest rates, home price appreciation is going to drive refi activity going forward.

 

Quicken HPPI

 

Wells Fargo CEO Tim Sloane appeared before the House yesterday to get called on the carpet for aggressive sales practices. “We have gone above and beyond what is required in disclosing these issues in our public filings, we have worked to remedy these issues, and, most importantly, we have worked to address root causes that allowed them to occur in the first place,” Sloan said in his written testimony to the House Financial Services Committee. “As a result, Wells Fargo is a better bank than it was three years ago, and we are working every day to become even better.” he said in a written statement.

Morning Report: Bank earnings coming in

Vital Statistics:

 

Last Change
S&P futures 2609 2
Eurostoxx index 347.72 0.2
Oil (WTI) 51.15 0.64
10 year government bond yield 2.74%
30 year fixed rate mortgage 4.44%

 

Stocks are flattish as bank earnings continue to come in. Bonds and MBS are down.

 

Inflation at the wholesale level declined 0.2% MOM and rose 2.5% YOY. Ex-food and energy, it rose 0.1% MOM and 2.3% YOY. Rising food prices more than offset declines in energy. More and more strategists are thinking the Fed will stand pat: “We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy and uncertainty surrounding geopolitical events,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

 

Mortgage applications jumped 13.5% last week as rates fell to the lowest levels in 9 months. Purchases rose 9% while refis rose 19%.

 

Last week United Wholesale announced that they were removing most LLPAs from their loans in order to guarantee the best rate. Yesterday cross state rival Quicken announced they would cut pricing as well to compete. We have a wholesale price war in Amityville.

 

Wells Fargo announced earnings that disappointed the street as revenues declined. Mortgage banking volumes were down 28% on a YOY basis. Despite a flattening yield curve, net interest margins were flat with Q3 at 2.94%.

 

JP Morgan reported a sequential drop in revenues as well, however earnings were up smartly. There is some tax cut noise in the numbers however. The mortgage business had a rough go of it as originations fell 30% to $17.4 billion.

 

Fitch sees a stable mortgage market in 2019, after a 9% decline in 2018. Good news: delinquencies and arrears continue to fall. Bad news: lack of affordability will depress origination.

 

Kansas City Fed Head Esther George thinks now would be a good time to pause in the normalization process. FWIW, she doesn’t think we are quite at “neutral” yet but we are close. Note that she is on the hawkish end of the spectrum.

Morning Report: Moody’s downgrades Chase’s jumbo status

Vital Statistics:

Last Change
S&P futures 2888 11
Eurostoxx index 385 0
Oil (WTI) 68.79 0.02
10 Year Government Bond Yield 2.82%
30 Year fixed rate mortgage 4.58%

Stocks are higher this morning on news that the US and Mexico might strike a deal on NAFTA. Bonds and MBS are flat.

We should have a quiet week heading into the Labor Day weekend. We will get GDP on Wednesday and Personal Incomes / Personal spending on Thursday and those are probably the only potential market-moving reports.

Mohammed El-Arian believes there is a 60% chance that Trump’s hard line on trade will result in a better deal for the US. There is a 15% chance that Trump’s stance could result in a beakthrough with China (similar to Reagan’s approach with the USSR during the Cold War), and another 25% chance that we go into a full blown trade war. He stressed that the US’s role as the world’s biggest consumer matters: “I’ve said from day one, it’s just a matter of time until other countries realize that their best approach is to collaborate with the U.S. and fix things that are broken,” El-Erian said.

Moody’s downgraded Chase’s jumbo underwriting rating to “above average” from “strong” based on concerns over the percentage of loans that come from its delegated correspondent channel. Moody’s also dinged them over their proprietary LOS (licensed from Quicken), disliking the look and feel of it. Chase obviously disputes the downgrade, and defended their underwriting. “We respectfully disagree with the rating and feel it’s based on insufficient information. While we provide select correspondent lenders with delegated underwriting authority, we also then conduct individual underwriting reviews on roughly half of those loans. These are high-quality loans that perform well,” Amy Bonitatibus, chief marketing and communications officer of Chase Home Mortgage, said in an email.

Elon Musk ended his proposed buyout of Tesla late last week. The Street never took it seriously to begin with, and was highly skeptical of his claim that funding for the deal was secured. The SEC is investigating the “funding secured” comment, which sounds like it was based largely on the existence of a pitch book, not any sort of letter from an investment bank (not even a “highly confident” letter).

Layoffs continue in the mortgage biz. Wells let go 600 people, mainly in servicing and retail fulfillment. Lower volumes and margins contributed to a 33% drop in mortgage banking income for Wells in the second quarter.

Economic activity decelerated in July, according to the Chicago Fed National Activity Index, which is a meta-index of 85 economic indicators. Production-related indicators decelerated, while employment-related indicators improved. The 3 month moving average fell as well.

Morning Report: Bank earnings pour in

Vital Statistics:

Last Change
S&P futures 2797 -1
Eurostoxx index 385.18 0.81
Oil (WTI) 70.6 0.27
10 Year Government Bond Yield 2.84%
30 Year fixed rate mortgage 4.53%

Markets are flat as bank earnings come in. Bonds and MBS are up small. Slow news day.

The US government held a reasonably strong auction yesterday, where primary dealers took down their smallest positions ever. Meanwhile, speculative shorts in Treasuries (one of the biggest trades on the Street) are struggling as rates stay stubbornly low. Some continue to warn that the flattening yield curve is really telling us that a recession is around the corner.

The prepared remarks for Jerome Powell’s semiannual report to Congress should be out today. Probably won’t be market-moving, but you never know.

Import prices fell 0.4% in June as petroleum and food prices fell. For the year, they are up 4.3% however.

Consumer sentiment fell according to the University of Michigan / Reuters survey. The current conditions index drove the fall, which is usually a function of gas prices. Trade fears also weighed on sentiment.

Wells Fargo reported earnings this morning. Earnings were down due to a tax charge. Stripping out the tax charge, they were flat. They had a tough quarter for mortgages like everyone else. Origination for the quarter was $50 billion, which is up seasonally from Q1, but down 11% YOY. The current pipeline of $24 billion is down 26% YOY. Margins were 77 basis points, which is down 17 from the prior quarter and down 47 bps from a year ago. The stock is down 3% pre-open.

JP Morgan had a similar story to Wells. They originated $23.7 billion in mortgages during Q2, which was higher seasonally and down about 10% from a year ago. Mortgage banking revenue (which includes servicing) was down 6% YOY. Margin compression again was the story, especially in correspondent lending. They marked up the MSR book. JPM is flat pre-open.

A bunch of other banks reported this morning and the whole sector is getting hit, with the XLF down about a percent and a half.

Federal Reserve Chairman Jerome Powell made positive comments about the economy, although he is concerned about trade and the effects of a long trade war with China. He is concerned about rising trade tensions, although he notes that Trump’s goal is to get others to lower their tariffs. If he succeeds in that, then the trade tension would be a good thing, not a bad thing. It is important to remember that China’s biggest weapon against the US is not imposing tariffs on US goods – it is ignoring US intellectual property laws. Those sorts of things will not really show up in the balance of trade numbers, but will have huge effects on IP firms, particularly media and software.

Morning Report: Wells Fargo gets a $1 billion fine

Vital Statistics:

Last Change
S&P futures 2691.25 -1.75
Eurostoxx index 381.41 -0.54
Oil (WTI) 67.9 -0.39
10 Year Government Bond Yield 2.92%
30 Year fixed rate mortgage 4.45%

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

The Index of Leading Economic Indicators took a step back in March, following unusually strong readings in January and February. Employment-related indicators drove the decline, however weather could have played a part. “The LEI points to robust economic growth throughout 2018,” said Ataman Ozyildirim, director of business cycles and growth research at the Conference Board. “While the Federal Reserve is on track to continue raising its benchmark rate for the rest of the year, the recent weakness in residential construction and stock prices—important leading indicators—should be monitored closely.”

Regulators are close to fining Wells Fargo $1 billion. This stems from force-placed auto insurance and improperly charged lock extensions. An internal review found that up to 20,000 customers had their cars repossessed due to these improper insurance charges.

Donald Trump tweeted about how OPEC’s manipulation of oil prices will not be tolerated. “Looks like OPEC is at it again,” Trump said on Twitter. “Oil prices are artificially Very High! No good and will not be accepted!” OPEC fired back, claiming that oil prices reflect geopolitics and not manipulation.

Maxine Waters introduced legislation to increase scrutiny of FHA servicers. The bill aims to improve compliance with loss mitigation actions to prevent foreclosures. It will also establish a process for borrowers to register complaints and make appeals if they believe they are being treated unfairly. I am not sure what chance this has of actually becoming law, but government MSRs already trade far back of Fannie MSRs, and I can’t imagine this helps things.

Here is a new metric for measuring affordability: payment power. It basically is a metric that looks at MSAs on a granular level. it measures incomes versus available inventory and calculates how many people can afford the PITI payments for the typical home for sale. It takes into account changes in incomes (say due to an employer entering or leaving), interest rates and property taxes. Unsurprisingly, the Midwest has the best payment power levels, while the West Coast has the least.

Nice fixer-upper just went for $1.23 million in the Bay Area.