All Things in Moderation

Vital Statistics:

Stocks are flat this morning while bonds and MBS are up.

Mortgage applications rose 2.3% last week as purchases rose 2% and refis rose 2%. Refi activity slipped to 48% of total applications, the lowest since June 2009.

Jeb Hensarling, the Chairman of the US Financial Services Committee says that reforming Dodd-Frank is a “this year priority.” Congressional Republicans are planning to introduce legislation that will give banks relief from certain Dodd-Frank provisions if they increase their capital. He also called the CFPB a “rogue agency” and called for the President to fire CFPB Director Richard Cordray.

Given the structure of the CFPB, firing Cordray is going to be difficult, however there supposedly is a way. The DC Circuit ruled that the structure of the CFPB was unconstitutional, and that the Director could be fired at will by the President. However, Cordray can stay until the appeals process plays out. Here is the way out: President Trump orders Cordray to drop the appeal, which he has the right to do, since the CFPB must coordinate with the DOJ, and they need the Attorney General’s approval to go to the Supreme Court. So, Trump orders Cordray to drop the appeal, and the court ruling stands. If Cordray refuses then Trump can fire him for insubordination.

In expectation of an easier regulatory environment, we are seeing startup banks after a long dormant period post-crisis. Eight banks filed applications with the FDIC in 2016. This is a far cry from the salad days when you would see 250-300 applications, but it is a step in the right direction towards increasing credit.

Speaking of credit, the MBA Mortgage Credit Availability Index rose in January. The conventional, conforming, government and jumbo indices all rose, although jumbo was really what drove the increase. Since the index was benchmarked at 100 in early 2012 (probably the bottom of the housing market) the increase since then looks pretty dramatic. However, when you compare it to the longer term chart (that includes the bubble years) you can see how much things have changed.

Long-term MCAI chart: Credit probably overshot in the immediate aftermath of the bubble (and credit is probably still too tight), however we are nowhere near returning to the days when ads for “pick a pay” mortgages dominated the Super Bowl.

Will rising rates kill home price appreciation? Probably not, since inventory is so tight. At a minimum, borrowers are looking to get ahead of any increase in mortgage rates, so this could be a lagged effect. Ultimately, mortgage rates will be determined by the 10 year bond, which is influenced by the Fed Funds rate, but doesn’t move in lockstep. In fact, the correlation between the two is quite low: around .12 since 1990. Until we start seeing wage inflation, the yield curve will probably flatten as the fed hikes.

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