Morning Report: Tough quarter for originators, servicers, and mortgage REITs 11/5/15

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

Initial Jobless Claims ticked up to 276k from 260k last week. Still strong numbers – the lowest since the Nixon Administration, which is even more impressive given the growth in the population over that time period.

Challenger, Gray and Christmas announced job cuts fell 1.3% in October after rising 93.2% the month before. We are continuing to see layoffs in the energy patch.

Nonfarm productivity rose 1.6% in the third quarter and unit labor costs rose 1.4%. Productivity tends to be somewhat volatile. Productivity growth is necessary if we are going to see real wage growth.

The Bloomberg Consumer Comfort Index fell to 41.1 last week.

Mortgage originator Stonegate reported lower-than expected earnings yesterday. Originations in Q3 were up 1% on a quarter-over-quarter basis and down 2% on a year-over-year basis. The stocks of the originators / servicers have gotten absolutely hammered this year, with Nationstar down 2/3 over the past year, Stonegate down 60%, and Ocwen down 72%.

Not only has it been rough for the mortgage originators and servicers, mortgage investors have had a rough go of it as well. Pretty much all of the agency mortgage REITs got roughed up last quarter and reported decreases in book value. The volatility in the financial markets over the third quarter pushed out MBS spreads. All of the REITs are switching out of interest-rate sensitive MBS (things like 30 year fixed rate securities, or what originators are typically selling) into more commercial and credit sensitive instruments. It is a bet that the economy is recovering. At the margin, the fact that these entities are pulling back in the MBS market means that mortgage rates are a little higher than they otherwise would be.

Citi’s Head of North American Economics thinks Janet Yellen and the Fed are making a big mistake, letting the markets influence their decision-making. Economists are starting to discuss the possibility that the Fed is really subject to a triple mandate these days – not only are they supposed to keep inflation expectations in check and to minimize unemployment, they also have an unspoken mandate to keep the financial markets stable. The genesis of this really started with the Crash of 1987 when Alan Greenspan said the Fed stood buy to provide liquidity in the aftermath. The Fed rode to the rescue again after the Asian Tiger Crisis, the Long-Term Capital Management crisis, and even took prophylactic measures to prevent Y2K from becoming a crisis. Eventually this all became known as the “Greenspan put” and we have seen the endgame, which is the serial inflating of asset bubbles.

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