Morning Report: Steve Mnuchin testifies and sinks the GSEs 1/20/17

Vital Statistics:

Last Change
S&P Futures 2267.0 5.0
Eurostoxx Index 362.7 -0.7
Oil (WTI) 52.2 0.8
US dollar index 91.9 0.1
10 Year Govt Bond Yield 2.48%
Current Coupon Fannie Mae TBA 101.2
Current Coupon Ginnie Mae TBA 103.1
30 Year Fixed Rate Mortgage 4.19

Stocks are up as we prepare for the inauguration. Bonds and MBS are down.

Should be a quiet day for bonds as there are no economic data.

Janet Yellen spoke yesterday at Stamford and stressed the Fed was not behind the curve, and we still have some slack in the labor market. However, she said it was prudent to undo some of the accomodation so that we don’t have to move too quickly later. She also said the economic outlook was clouded due to uncertainty out of Washington. While Trump can sand down the edges of the regulatory state, he has a problem legislatively with Democrats in complete opposition, and a tenuous relationship with Republicans.

A partial explanation for the weakness in the high end of the real estate market can be explained by new Chinese capital controls. The Chinese government has instituted capital control to prevent an outflow of yuan. Foreign real estate was a big beneficiary of that capital, so expect to see more weakness in the high-priced markets like San Francisco, NYC, Seattle, and Denver.

Trump Treasury Secretary nominee Steve Mnuchin testified in front of Congress yesterday, and largely escaped unscathed. He called for a reform of Fannie Mae and Freddie Mac, however he said he did not support “recap and release.” He also said that any sort of “border tax” would be targeted at companies that offshore manufacturing and then sell back into the US. The hearing got testy at times, with Sen Pat Roberts (R-KS) suggesting that Sen Ron Wyden (D-OR) take a valium. Democrats zeroed in on his role with IndyMac and purported foreclosure abuses.

Fannie Mae and Freddie Mac tumbled during the testimony, however they also lost a lawsuit that could have have explained the fall as well. Both were down 5% after being up for the day. Both stocks have more than doubled since the election on optimism that Donald Trump would support some sort of change in how the government treats these stocks. Currently, the government owns 79.9% and all profits from the company go directly to Treasury.

In terms of other takeaways from Mnuchin’s testimony, he supports bringing the CFPB into the appropriations process, would like to tweak the Volcker rule (which prohibits proprietary trading) to eliminate the negative effects it is having on market liquidity, to ease the regulatory burden on small banks, and to bring back a “21st century” Glass-Steagall law, whatever that means.

Glass Steagall was implemented during the Great Depression because investment banks were putting busted underwritings (i.e. underwritten bonds they couldn’t sell to the public) on the balance sheets of their captive commercial banks and insurance companies at par in order to hide the losses. Glass Steagall ended this practice by requiring all of these transactions to be arm’s length. Fast forward to 2007, the crisis wasn’t caused by JP Morgan the investment bank stuffing bad paper on Chase the commercial bank’s balance sheet. For what its worth, the US is the only country on the planet that separates investment banking and commercial banking, or even draws a distinction between the two. Everywhere else, it is just called “banking.” Indeed, the reason Glass-Steagall was repealed in the first place was that reason: Wall Street investment banks like Morgan Stanley and Goldman couldn’t compete with foreign banks because they had to fund their balance sheets at LIBOR while the foreign banks could borrow at much lower deposit rates. As the derivatives business expanded in the 1990s, “Wall Street” was becoming Credit Suisse, Deutsche Bank, Nomura, and Barclay’s.

The Mortgage Bankers Association was out with a statement yesterday, speculating that the change in FHA MIP could be reversed by Ben Carson’s HUD. “”Based on recent testimony and political pushback, we believe there is a strong chance the most recent MIP reduction… may be one of the rollback actions taken soon after President Trump takes office.” Carson has said he would study how the change would affect the insurance fund, but hasn’t indicated whether he supports the change or not.

Note that we did see a rally in the Ginnie II higher coupon MBS yesterday despite a rough day for bonds otherwise. You can see in the chart below how Ginnie 4.5s (black line) outperformed Fannie 4.5s (blue line). Expect to see higher volatility in the higher note rates for FHA and VA loans as this plays out.

Negative equity is becoming less of a problem as home prices continue to rise. During 2016, 1 million homes regained positive equity, leaving only 2.2 million homes with negative equity. While we are still well above the bubble years in terms of negative equity, we have fallen markedly from the peak of 15.1 million homes in 2010. As houses regain positive equity, it will create refinance opportunities which will help offset the effect of higher rates. It will also increase mobility, which is one of the reasons why we have a low unemployment rate, but have so many workers still on the sidelines. They can’t move to where the jobs are because they are trapped in a home with negative equity they can’t sell.

65 Responses

  1. Election Day documentary that’s worth a watch:

    When it was in real time, it wasn’t about Russian hacking, the DNC leaks, Comey, or anything else. It was about the mood of the country and how badly it was misread.

    Liked by 1 person

    • Ace made that point in a series of posts last night relieving election night

      John Ekdahl had a point I think I’m allowed to repeat. He and I were watching these videos a couple of weeks ago, and he observed to me tonight that on election night itself, liberals were so shocked by the result that they could mostly only respond with the easiest sort of reaction: Honesty.


      • Yep.

        The interviews with the African American voters on their views about Clinton are illuminating.

        Edit: It also reminded me of how the narrative from the 2000 recount evolved from how it was portrayed at the time.

        Liked by 1 person

  2. This is great:

    ““There’s a good portion of us who think Trump is a liberal who basically pulled an Alinsky on the GOP and beat them with their own rules,” Hedtke said. “It’s kind of funny, from an anarchist standpoint.””


  3. This is amusing:

    “As Trump becomes president, the global elite at Davos wonder why people don’t like them
    Updated by Zack Beauchamp
    Jan 20, 2017, 11:15am EST

    Through an incredibly fortuitous historical coincidence, the World Economic Forum — the premier confab of the global political and economic elite — is happening on the same day that Donald Trump is taking office in the United States. The dispatches from Davos, Switzerland (where the forum takes place), make it sound like a place of barely concealed panic.

    So to recap:

    Davos had a panel on the woes of the middle class starring a billionaire hedge fund manager.
    The billionaire’s only policy ideas were slashing government and lowering tax rates.
    He then condemned populism for being “an anti-Davos way of operating.””

    They really do make it too easy for him.

    Liked by 1 person

  4. Those morons on the PL actually want a civil war, don’t they.

    Liked by 1 person

  5. He knows what he’s doing:

    “‘This is the greatest guy’: Trump meets FedEx courier, offers him $10,000
    By Justin Jouvenal January 19 at 11:04 PM”

    Original story that prompted it:

    “In donated shoes and suit, a Trump supporter comes to Washington
    By Justin Jouvenal
    January 18”


  6. “One by one the factories shuttered and left our shores, without even a thought for the millions of workers who were left behind. The wealth of the middle class has been ripped from their homes and redistributed across the world. But that is the past, and now we are looking only to the future.””

    attribute this to Sanders and watch the left eat it up.

    Liked by 1 person

    • these people are like a religious cult, and blasphemy is a sin.

      Liked by 1 person

    • nova:

      wth is wrong with people

      Political ideology consumes their lives, probably. It’s why they disown relatives who have the wrong political views, its why they go out of their way to destroy small businesses that don’t toe the politically correct line, and it’s why they taunt children who are protesting for the wrong cause.

      Liked by 1 person

  7. Liked by 1 person

  8. Good take:

    “Trump’s New-Right Politics of Solidarity

    By Ross Douthat
    2017-01-20T14:08:39-05:00 2:08 PM ET

    “The time for empty talk is over,” our new president said near the end of his relatively brief Inaugural Address. And if he actually makes good on that promise, if the speech wasn’t just talk but a blueprint for effective presidential action, then we just watched an epochal moment: the last rites of Reaganite conservatism, and the birth of a populist and nationalist new right.”


    • “… the birth of a populist and nationalist new right”.

      For the next few years, anyway, if Trump eventually gets coopted as DC seems to have a way of doing. Or 8 years, max, if not. I don’t see the GOP being any more self-reflective than the left on why Trump won, why Sanders did so well and the DNC had to practically sabotage him for him to lose against Clinton.


    • Read “18.9” as “189” and was sure it had been said by DJT. Big disappointment, there, George.

      My first take on Inaugural Address: 21st C. billionaire huckster channels Andrew Jackson [rage against the insiders, push nationalism, git the bad guys, and build Fortress America].

      Cherokee Nation better watch out.


  9. Don’t think she’s #Woke


  10. This is awesome:

    Troll level: Master Class

    Someone must have wished on a shooting star for a president that would literally drive all liberals insane. Because we have him.


  11. Liked by 1 person

  12. Yeah Dan, it was obvious that the NYT hated Clinton and Obama.

    Nailed it.


  13. Liked by 1 person

    • We have access to free razors?

      I find it fascinating what human beings are willing to inflict on themselves. Cher and Madonna are famous, rich, can pretty much do anything they want with their time, have social networks to draw on and business networks that we can only dream of . . . but they are victims and making themselves miserable because of mostly imaginary stuff for no discernible reason.

      We’re just designed to find reasons to be unhappy.


  14. Like

  15. That’s why there’s an asterisk after Obama’s name when it comes to the 2012 election. Selected, not Elected.


  16. What’s the difference between us TeaBagger’s “obstructing” Obama and Dumb Lefties “Resisting” Trump?

    Asking for a friend.

    Liked by 1 person

  17. This is a complete non sequitur, but….

    I’m currently reading (listening to, actually) the Erik Larsen book In The Garden Of Beasts, which is about the tenure of William Dodd as ambassador to Germany from 1933 thru 1937. It compelled me to do a little internet reasearch into Dodd, and I found this line from a speech he gave in Berlin in 1933 to be particularly interesting. Speaking of what was going on in Roosevelt’s America, he said:

    It was not revolution as men are prone to say. It was a popular expansion of governmental powers beyond all constitutional grants, and nearly all men everywhere hope the President may succeed.

    In our current age in which virtually every expansion of federal power is routinely claimed to be justified by the ever-changing nature of an allegedly “living constitution”, and we have become accustomed to the disingenuous sophistry of those who seek to articulate such justifications, it is somewhat refreshing to see such honesty about the obviously unconstitutional nature of what the original architects of unlimited federal power wanted, nevertheless, to do.

    Liked by 1 person

  18. Like

    • This is the common response to this meme, but my response is: uh, inanimate objects don’t have rights. If you accept the absurd premise, why guns? Hammers have more “rights” than guns and more freedom of movement. So do handbags. Polo shirts. Lunch boxes. Fishing rods. iPhones. Comic books. But guns are not conscious, not thinking entities, do not have lives and do not have rights. Gun owners and gun manufacturers have rights and limitations on those rights.

      It speaks to the quality of thought for some of those folks.


  19. Football. Bah, humbug.


  20. Matthew Yglesias has a decent piece today:

    “Massive Women’s March turnout shows Trump’s opponents are done underestimating him
    The opposition is united and passionate in a way it never was in the campaign.
    Updated by Matthew Yglesias
    Jan 23, 2017, 8:30am EST

    Donald Trump won 46 percent of the popular vote on the way to victory — a victory driven by capturing the electoral votes of seven states in which he failed to capture a majority of the vote: Wisconsin, Michigan, Pennsylvania, North Carolina, Florida, Arizona, and Utah.

    He was elected anyway because many people who didn’t want him to be president couldn’t bring themselves to vote for his opponent. Some of that was her own fault. But some of it was because Trump, in an odd way, was the beneficiary of the perception that he couldn’t possibly win.

    People who felt he’d be a bad president felt secure in dissenting from the Democratic Party to either the right (Gary Johnson) or the left (Jill Stein) because everyone knew Clinton would win anyway. Almost everyone who had any kind of serious policy doubts about Clinton invested vast time and energy in exploring them, regardless of whether or not they had much more profound doubts about Trump, because everyone knew Clinton would win anyway. Mainstream journalists spent more time poring over potential access-seeking at Clinton’s undoubtedly life-saving charitable foundation than they did detailing the fact that Trump’s foundation was a potentially criminal fraud that appears to have had no legitimate public benefit.

    Everyone knew Clinton would win anyway.”


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