Morning Report: Deep subprime auto is big

Vital Statistics:

Last Change
S&P Futures 2352.5 1.0
Eurostoxx Index 377.2 -0.1
Oil (WTI) 48.6 0.2
US dollar index 90.1  
10 Year Govt Bond Yield 2.40%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.36
30 Year Fixed Rate Mortgage 4.11

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

Mortgage Applications fell 0.8% last week as purchases rose 1% and refis fell 3%. Rates collapsed at the end of the week due to the failure of health care reform, so it is probably premature to see if that has affected things. Note that mortgage rates invariably lag moves in the 10-year as lenders wait to see if the changes are for real.

Pending Home Sales increased 5.5% in February, which is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Deep Subprime auto loans (loans to borrowers with sub 550 credit scores) have increased to 1/3 of all auto loan ABS. In 2010, they were just 5%. As you can expect, delinquencies are increasing on these. It is surprising that institutional investors are happy to buy bonds securitized by assets that depreciate like sushi, while securitizing an overcollateralized pool of high quality non-QM loans is like pulling teeth.

If there is anything in Washington that should have bipartisan support, it is finding a solution for Fannie Mae and Freddie Mac. The current situation is untenable, as the government is sweeping all of their profits, which is making them more and more undercapitalized. The Trump Administration has indicated that dealing with the GSEs is a high priority, but they have yet to give any sort of indication of how they think the future housing market should look. The model the MBA supports is to turn them into regulated utilities, with a capped rate of return. The Obama Administration supported nationalizing them, while another plan would get them out of the securitization business and into the mortgage insurance business. There are many stakeholders in this discussion, including the affordable housing types who want to ensure underserved areas can get credit, hedge funds who own the common and preferred shares, as well as lenders and borrowers.

Here is a good backgrounder on how hard tax reform is going to be. Every “loophole” will have a constituency which will defend it to the death. The failure to end Obamacare (at least for now) will have taken the biggest “pay for” off the table. That leaves Republicans with a couple choices: Either pass a 10 year tax cut the way George W Bush did, or do revenue-neutral tax reform like Reagan did.

Institutional Investors are implementing artificial intelligence into the stock picking business. How much do you want to bet that everyone’s algorithms will look pretty much the same and will pick the same stocks?

7 Responses

  1. Heh.


  2. Algorithms spit out by computers already dominate, don’t they? I understand this is one step further along to unmanned financial space flight.

    Canada is betwixt and between on Brexit.

    Two reports from CBC reflect the uncertainties. First, Canada has just negotiated a free trade deal with the EU; second, its biggest EU source and customer is the UK, and third, London is suddenly interested in a Commonwealth trade agreement for the first time. Ha.

    And deep in that second report we read that CA is also preparing for the renegotiation of NAFTA, that Aussie and NZ have been negotiating with EU, and that it is thought EU would pressure Aussie and NZ not to enter into any new agreement with London until Brexit is complete, or they won’t be welcome at EU.


    • Stock picking is like a beauty contest where the goal isn’t to pick who you think is the prettiest girl, it is to pick you think everyone else will pick as the prettiest girl.


  3. The left thinks Trump isn’t getting sufficiently agitated over “hate crimes”


  4. So the admin could destroy obamacare without lifting a finger?


    • I have no faith that Republicans will do anything to hurt insurance companies, in that they are like the Democrats, forever shoveling Federal money into United, Aetna, Anthem et al coffers


    • From the Slate article:

      The CBO believes that most of Obamacare’s exchanges are essentially explosion-proof, because the law’s subsidies cap what lower-income Americans have to pay toward their premiums as a percentage of their income. That means no matter how high the cost of coverage rises, buying it will still be a good deal for enough of a critical mass of customers to keep the market afloat.

      The incapacity of the left to grasp simple economic reality is mind boggling. They truly view the government as essentially Santa Claus, able to pass out goodies at whim with no cost to anyone. “The cost of insurance can never get too high to reduce demand, because if it does, government will just pay for it.” God these people are stupid.


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