All Things in Moderation

Markets are higher this morning after WalMart reported earnings that beat analyst expectations. Bonds and MBS are up small.

Initial Jobless Claims came in at 290k, an increase from the prior week, but still below 300k which is kind of the demarcation line denoting strength in the labor market. The JOLTs job openings fell to 4.7 million from 4.9 million the month before. Both initial jobless claims and the JOLT numbers are at levels that typically are seen during economic boom times (think the late 90s and the mid 00s).

This illustrates the conundrum the Fed is in with the labor market – the leading indicators (initial jobless claims and job openings) are signaling strength, while the lagging indicators (wage inflation, unemployment, labor force participation rate) have yet to reflect that strength. The open question is whether there is a skills gap (meaning companies are searching for workers that are just not there) or are we simply at an inflection point and should see big improvements over the next couple of months. How that plays out will undoubtedly be the difference between rate hikes in mid-2015 vs maybe a symbolic hike and nothing more. For the mortgage industry, if it is an issue of a skills gap, that means even a symbolic hike in the Fed Funds rate might not affect long term interest rates (in other words, the yield curve would flatten). This means mortgage rates would probably stay about where they are now. If the labor market is indeed turning around and the Fed starts hiking rates due to economic strength, long term rates (and therefore mortgage rates) are probably going up.

Regulators are drafting rules to address non-bank servicers like Ocwen and Nationstar. The biggest issues involve liquidity and solvency if we have another serious downdraft in real estate prices and loans stop performing. The nonbank servicers will probably be required to hold more cash, although it is an open question whether that would affect smaller originators who retain servicing for their own origination.

Foreclosure activity had its biggest monthly increase since 2010, according to RealtyTrac. Filings increased to 123k in October, up 15% from the prior month. This works out to 1 in every 1,069 housing units with a foreclosure filing. Note that they are talking about the biggest increase – actual foreclosure filings are down since 2010, obviously. Also, this is a seasonal blip (yes foreclosures are seasonal), as states typically impose foreclosure moratoriums around the holidays. Overall, we are seeing the judicial states work through their inventory. The expiration of the Mortgage Debt Forgiveness Act at the end of last year (which made any sort of principal forgiveness on a mortgage tax free) accounts for some of the increases we are seeing now.

The PIMCO Total Return Fund, which was previously run by Bill Gross, sold Treasuries to buy MBS in October.

Bank of America CEO Brian Moynihan said that the bank will not ease mortgage standards in spite of the exhortations out of Mel Watt and the affordable housing advocates to do so. Note that Jamie Dimon of JP Morgan also said they might get out of the FHA business. Given the fines they have had to pay, I can see how they are having difficulties making the numbers work. Too much risk for too little return.