All Things in Moderation

Vital Statistics:

Welcome to the world of QEU (QE Unlimited). Markets worldwide rocketed on the Fed’s decision and the rally continues this morning. Commodities have a bid, while bonds and down a point and MBS are flat, continuing the divergence that began on the announcement. 

In economic data, the Consumer Price Index (which became officially irrelevant yesterday) came in at +.6% and retail sales data came in a little better than expected, though higher gas prices may have been driving that number. The dollar continued to weaken against the euro.

The Fed’s announcement had opposite effects on Treasuries and MBS.  Treasuries sold off 2 points on the announcement, while MBS gained a point. While Treasuries did recoup some of their losses, MBS went out at the highs of the day. This puts the 30 year Fixed Best-Ex rate somewhere between 3 3/8% and 3 1/2%. The NY Fed has the particulars on the MBS purchases.

Former Fed Governor Kevin Warsh told CNBC that the Fed’s action reflects deep concerns that the economy is at stall speed or worse. He also noted that the iPhone 5 would have more of an effect on the economy than QE.  Someone else made the same point, and took it further by saying if you believe that incremental consumer spending is good for the economy then you must support the New Deal II. 

The FHFA is developing a new securitization platform as a way to let other lenders compete with Fan and Fred in the secondary market and to reduce the GSEs role in the mortgage markets overall.

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Markets are lower this morning after initial jobless claims ticked up to 382k and the Producer Price Index showed inflation in check. All eyes turn to the FOMC decision scheduled for 12:30 est. Here is the summary of what to look for. Bonds and MBS are both stronger.

Fannie Mae’s latest issue of Housing Insights does a deep dive into the latest employment statistics. While average weekly earnings have rebounded from the recession, aggregate weekly earnings have not. What did Keynes say about “sticky wages?”  What this means is that wages have recovered for the people that have jobs, but is you add up everyone’s salaries, that number has not. Which pretty much tells us what we already know – wages are flattish and unemployment is high. They blame the construction sector for the weakness.  As I have said before, we have under-built housing for the past 10 years. Tight credit and temporarily depressed housing formation has masked the effect on housing demand. That won’t last forever.

Census points out that median income fell 1.5% in the last two years. Interestingly 2010 was the peak of average or median wages and they have been falling ever since. The two reports do disagree somewhat – Fannie has average wages up about 2% since the recession began, while census shows them 8.1% lower. Both adjust for inflation, and I cannot imagine the difference between median and average would be that great, so I am not sure what is going on there.  Census also notes the income gap is widening, so expect the study to be political fodder.

Rob Chrisman dissects the recent G-fee increase and its effect on the mortgage market. RTWT.

Is the rental boom reaching the end of the line? Maybe in Manhattan.

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Markets are buoyant this morning after a German Court ruled against efforts to block a european rescue fund. Apple is unveiling the iPhone 5 today as well. Mortgage applications rose, while import prices fell. Bonds are down about 3/4 of a point and MBS are down 1/4 or so.

The FOMC starts their two day meeting today, and will release their decision tomorrow around noon. The market expectations are for an extension of ZIRP into 2015 and a new round of bond buying. Given the run we have had in the stock market, we are possibly setting ourselves up for disappointment or a “buy the rumor, sell the fact” reaction.  

If you live in a state with judicial foreclosures (e.g. New York, New Jersey, Florida), you may find that it will cost you more to get a mortgage. Acting FHFA Chairman Ed DeMarco has suggested that Fan and Fred increase their guarantee fees in these states to compensate the fund for the elongated timelines. (It can take 5 years to complete the entire process in NY, while in non-judicial states like AZ the process can be done in 2).  JP Morgan estimates that the proper compensation would be 10 – 20 basis points up front. FHFA intends to put the policy out for comment in the near future, where it will undoubtedly get panned by housing advocates.

WaPo has a long background piece on the CFPB and what it is up to (spraying lenders with subpoenas).

Foreclosure auctions are attracting big institutional money.  Colony, Blackstone, Och-Ziff and Oaktree have raised $8 billion for the activity. The plan is to rent them out of drip them out slowly into a rising housing market. In an era of ZIRP, high single digit rental yields are appealing to yield starved investors.

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Markets are stronger this morning after the government sold a stake in AIG and the National Federation of Independent Businesses noted an increase in optimism.  Deutsche Bank is looking to cut $6 billion in expenses by 2015. The trade deficit shrunk from 44B to 42B.  Bonds are up 7 ticks, while MBS are down a couple.

The National Federation of Independent Business released their Small Business Optimism Report for September, which showed improvement, but is still solidly in recession territory. On the positive side, hiring plans are the best they have been in years; but on the negative side, they aren’t hiring now. It also weighs in on QE, asking the obvious question:  “Is anyone not hiring because interest rates are too high?” They also note that “political uncertainty” is at a new high – 22% of respondents cited that as a reason they are sitting on their hands. That said some pizza parlor owners must be doing okay.

Chart:  NFIB Small Business Optimism Index: 

Fannie’s first sale of REO-to-Rentals traded at 96% of BPO.  That is an eye-popping number, given that distressed pools have been trading in the mid / high 60s, but this is an oddball transaction – the buyer (Pacifica) will participate in a JV with Fannie, will put up under 16% of the purchase price, manage the properties, split the cash flows with Fannie and will receive a management fee. It seems odd that Fannie is basically buying properties from itself – Pacifica puts up 12.3MM, while Fannie puts up the rest.  Let me guess, there is a mark-to-market angle here…

FHFA and F&F have launched a new Reps and Warranties framework for conventional loans sold after Jan 1.  Put-Back risk – the risk that the government could come after you and force you to re-purchase a loan if the borrower starts missing payments – has been weighing on mortgage bankers and explains why banks have put such stringent overlays on F&F loans. The government will release banks from this requirement if the loan pays consistently for 36 months. For HAMP loans, it will be 12 months.  Co-incidentally, Congress has a re-introduced a bill to expand HARP refis which may contain language regarding the Qualified Mortgage safe harbor provision. The QM has been a big source of uncertainty for lenders. Finally specifying what constitutes are qualified mortgage could go a long way towards getting mortgage credit flowing again.

Redwood is doing another deal – $312 million of jumbos – the 9th deal since the market froze in 2008. Only 9 jumbo securitizations in 4 years. Probably $2 billion in total. To put that number in perspective, non-agency deals topped 1.2 trillion in 2004 and 2005. 

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Markets are down slightly on no some disappointing economic data out of China. Treasury plans to sell $18 billion worth of shares in AIG. Bonds are down 1/2 a point, while MBS are flat.

In spite of the disappointing Chinese data, the Street is heavily long commodities. Chart:  GSCI Index:

Italian Prime Minister Mario Monti told CNBC over the weekend that he does not expect Italy to participate in the ECB’s bond buying program, at least initially.  Remember, the individual states have to request the ECB to purchase their debt. 

JP Morgan is out this morning with a note saying they expect the FOMC to extend the low rate guidance through 2015, and initiate a small asset purchase program (maybe $300b) primarily focused on MBS. The FOMC decision is scheduled to be released Thursday at 12:30 est.

The NAR is reporting that housing affordability continues to increase in spite of the fact that prices are up 9.4% YOY.  Decreasing mortgage rates are able to offset the price increases. 

SIFMA and others have provided a formal response to FHFA regarding the Eminent Domain issue in San Bernardino.  They provide a helpful table lining out the trade and who makes / loses money. Basically the winners are the hedge fund behind this and the borrower.  The table doesn’t break out what the state gets, but presumably they will get something out of this as well.  The lender gets slammed.

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