Morning Report: Where is the private label MBS market?

Vital Statistics:

Last Change
S&P futures 2645 -1.75
Eurostoxx index 385.49 0.17
Oil (WTI) 67.92 -0.65
10 Year Government Bond Yield 2.96%
30 Year fixed rate mortgage 4.56%

Stocks are lower as we begin the FOMC meeting. Bonds and MBS are flat.

Construction spending fell 1.7% MOM but is still up 3.6% YOY. Bad weather in the Northeast and Midwest probably drove the decrease. Residential construction was down 3.5% MOM and up 5.3% YOY.

Manufacturing downshifted in April, but is still reasonably strong according to the ISM Manufacturing Report. Steel tariffs were mentioned several times as an issue. A few comments from the piece:

  • “[The] 232 and 301 tariffs are very concerning. Business planning is at a standstill until they are resolved. Significant amount of manpower [on planning and the like] being expended on these issues.” (Miscellaneous Manufacturing)
  • “Business is off the charts. This is causing many collateral issues: a tightening supply chain market and longer lead times. Subcontractors are trading capacity up, leading to a bidding war for the marginal capacity. Labor remains tight and getting tighter.” (Transportation Equipment)

The US economic expansion is now the second-longest on record. Low inflation and low interest rates have made that possible. Despite the increase in interest rates, Fed policy is still highly expansionary, so as long as inflation behaves this could go on for a while longer.

House prices rose 1.4% MOM and 7% YOY, according to CoreLogic. About half of the MSAs are now overvalued according to their model.

Acting CFPB Director Mick Mulvaney is looking for ways to save money. Sharing desks and moving to the basement are possibilities. As an aside, this article belongs on the opinion page.

The private label MBS market used to be a $1 trillion market – last year it was only about $70 billion. What is going on? Regulation may appear to be the culprit, but it really isn’t. There are still all sorts of unresolved issues between MBS investors and securitizers. The biggest surround servicing – how do investors get comfort that the loan will be serviced conflict-free, especially if the issuer has a second lien on the property. How do investors get comfort that the issuer won’t solicit their borrower for a refinance? A lack of prepay history is also a problem – it makes these bonds hard to model and price. Many investors also remember the crisis years, when liquidity vanished and investors were unable to sell, sometimes at any price.

Issuers were content for a lot of years to simply feast on easy refi business – rate and term streamlines which were uncomplicated and simple to crank out. Warehouse banks were reticent to fund anything that didn’t fit in the agency / government box, so why not concentrate on the low-hanging fruit? Investors were able to pick and choose from all sorts of distressed seasoned non-agency paper trading in the 60s and 70s. Most of that paper ended up being money good. But in that environment, why would anyone be interested in buying new issues over par? If you are a mortgage REIT, why not buy and lever new agency debt with interest rates at nothing and a central bank that is actively supporting the market?

Now that the easy refi business is gone, will we see a return of this market? Perhaps, but there probably still is a big gulf between what borrowers and investors are willing to accept and the governance issues remain unsolved.

34 Responses


    The Mueller investigation will probably pay for itself in collections from Manafort, who is truly brazen.


  2. As an aside, this article belongs on the opinion page.

    Which could be said about 90% of the news.

    Although this is my favorite type of modern news story: some guy said they were thinking about doing some of this stuff, but nothing has been decided or really discussed, and there is no indication that any of it is actually going to happen any time soon.

    The headline also misses the mark by a mile. The most astounding, amazing thing about the story should be the headline: Government Agency Possibly Considering Becoming More Efficient and Spending Less Money!!!


    • It’s impressive the amount of dishonest commentary there’s been about Mulvaney. This is a prime example:

      “Also consider this: Budget director Mick Mulvaney last week made a brash admission about his time in Congress. “If you were a lobbyist who never gave us money,” he said to an audience of banking executives, “I didn’t talk to you.”

      In a more innocent age, this confession would have provoked sustained indignation over how our political money system fundamentally corrupts our politics. (And imagine if Hillary Clinton had said such a thing.) But Mulvaney’s words just seemed to slide by.”

      Selectively excerpting the quote actually undermines the point Dionne trying to make. Since when is not talking to lobbyists evidence of how money has corrupted the political system?

      And of course had he included the full quote, it wouldn’t have helped either because Mulvaney was making a point that’s the opposite of what Dionne claims by using lobbyists as foils:

      “Thank you for doing this. Thank you for coming to Washington, D.C. I never get tired of telling people it does count. I’ll close with this. This has nothing to do—I’m going to put my old Congressional hat on for a second. Many of you who have heard me speak before have heard me say this. What you do here matters. We had a hierarchy in my office, in Congress. If you were a lobbyist who never gave us money, I didn’t talk to you. If you were a lobbyist who gave us money, I might talk to you. If you came from back home and sat in my lobby, I talk to you without exception, regardless of the financial contributions.

      People coming from back home, to tell people in Congress what issues are important to them, is one of the fundamental underpinnings of our representative democracy, and you have to continue to do it.”

      Liked by 1 person

      • Dionne is a propagandist. Trying to “craft a narrative” so people are educated on how to “think right” about Mulvaney. So far, Gorsuch, Mulvaney, and Pruitt are my 3 favorite things about the Trump presidency.


  3. “Democrats Lose Ground With Millennials”

    The online survey of more than 16,000 registered voters ages 18 to 34 shows their support for Democrats over Republicans for Congress slipped by about 9 percentage points over the past two years, to 46 percent overall. And they increasingly say the Republican Party is a better steward of the economy.

    Although nearly two of three young voters polled said they do not like Republican President Donald Trump, their distaste for him does not necessarily extend to all Republicans or translate directly into votes for Democratic congressional candidates.

    The present GOP and Donald Trump are gifts to the Democrats. Easy targets standing still patiently waiting for the Democrats to take aim and shoot them dead.

    Yet the Democrats as a part and liberals as a cultural-political force cannot help but aim squarely at their own feet.

    “It sounds strange to me to say this about the Republicans, but they’re helping with even the small things,” Hood said in a phone interview. “They’re taking less taxes out of my paycheck. I notice that.”

    While the Democrats *attack* the GOP for the tax cuts, and call the bonuses and raises “crumbs”.

    Presumably Trump and the Republicans are better than an HRC presidency with a Democratic congress. Honestly not 100% sure on that, but it seems likely. Point being, I don’t think most voters know if who they vote for is going to help them or hurt them, or what benefits that they enjoy and utilize come from Republicans or Democrats or liberals or conservatives. Voting is primarily emotional, and swing-voters and last-minute voters vote on pure emotion, maybe even on whim.

    Both parties are reasonably good at feeding their bases red meat, but those bases are *easy*. They’re politically slutty. Just say “America!” or “Social Justice!” and the respective bases may swoon.

    Swing-voters, people in the middle, party-flippers, etc, people without a tribal identification to party . . . these people have what little slips into their daily experience to make decisions and build loyalties on. If you’re the party who put more money in my paycheck, and the other party is the party that dismissed that as meaningless, and I’ve got no real investment in your wars of ideology . . .

    I’m going with the more-money-in-my-paycheck people. Or at least I’m not indebted or feel attached to the people who dismiss that, or want to take money out of my paycheck.


  4. The cultural appropriation victim obsession is a bottomless pit:

    And not to be cliched or anything, but it was nice back when Asian people had better things to do than play victim. But modern America and social media definitely put and end to that.

    Just so we’re clear, the radical progressive position is (1) America’s borders should be flung wide open to people from every culture in the world; (2) when American white people encounter people from those hundreds of different cultures, they need to stay in their lane; and (3) white people staying as white as possible will help our nation totally unify and diversity will be our strength.


    • Bullying a teenage girl under the guise of virtue. These people are medevial..

      Liked by 1 person

      • No, they are post modern.

        Still the amount of triggering on both sides is impressive. This guy should have been ignored like the asshole that he is. The attention is exactly the result he wanted here.

        Liked by 1 person

        • Post-post modern. Completing the circle into utter tribal, emotional, superstitious primitivism.

          Unfortunately, the attention he’s gotten from the right came from how viral he went on the left. While there’s not much chance of talking offended right-wingers from giving guys like him attention, there is zero chance of convincing his fellow post-modern neo-primitives from making him go viral.

          They are complete id. There’s no filter, there’s no pause for thought, there’s no self-reflection, there’s no searching for context, there’s no cogitation whatsoever. There is an emotional reaction by infantile raw nerves disguised as human beings, primed to be offended and victimized by everything. If being offended or victimized might elevate their status in the tribe, they do it. No thinking.

          It was a pretty dress. I don’t foresee a situation in where increasingly tiny groups of self-identified tribes are going to ultimately be allowed to forbid everybody else from doing anything they emotionally feel “belongs” to them. You can get people to change their vocabulary, but when you start saying they can’t use a computer or smartphone unless they are German because it was Gottfried Wilhelm Leibniz that developed binary code, and so the use of binary code by any other race or nationality is cultural appropriation . . .


        • Actually, reading his Twitter thread I almost feel sorry for him. It’s a lot of commentary about how he’s in bad relationships and always on Tinder, etc, along with how white people are to blame for everything that’s wrong in his life, especially since he lives in Salt Lake City, Utah.

          What probably set him off was seeing someone happy for their prom and who is in apparently in a better relationship than he is. The only way he can strike back is to argue that she’s a racist for wearing a dress from “his” culture without his permission.

          I think he’s one step away from being Elliot Rodger.


    • My culture is NOT your goddamn prom dress.

      Hmmmm…Asian guy named “Jeremy” wearing a baseball cap and complaining in English about so-called cultural appropriation? What’s wrong with this picture?

      Liked by 1 person

  5. In honor of May Day

    Liked by 1 person

  6. I found someone on Twitter who definitely puts the “I” in insufferable


    • I assume she’s intentionally being cryptic to the point of incoherence/incomprehensibility in order to seem clever.


    • Christ, why did you post that? 🙂

      I went and read a lot of it. She’s awful. Insufferable doesn’t begin to describe it. Toxic femininity, maybe. I dunno. I need to go to do something to cleanse my soul now.


    • you have to click through to read her article:

      “Instead of asking your buddy if he scored, why not ask him if he connected with her?”


      • So how does this relate to wearing a prom dress from another culture?

        “Let’s just let people like the things they like and let’s support them as long as they’re not hurting others, and especially if they’re going against the status quo.”

        When SJW’s collide, next on Discovery Channel. Cultural Appropriation vs Toxic Masculinity.


      • “you have to click through to read her article:”

        Why? What have I done to deserve that?

        “Instead of asking your buddy if he scored, why not ask him if he connected with her?”

        Why would I ever do that? Why would I ever ask that? Lord.

        I was going to click through to the article to punish myself for my toxic masculinity, but it’s blocked by the net nanny at work. Thank goodness!


      • Never mind, I did get there:

        The cancer we’re talking about isn’t MEN. It’s toxic masculinity, and there’s a difference.

        Love that term. Wonder what the response would be to: “The pollution we’re talking about isn’t WOMEN, it’s feminazism. And there’s a difference!”

        Probably that saying something like that was #ToxicMasculinity.


    • The best one: Science is toxic masculinity.

      Liked by 1 person

      • Believing that all science is objective fact and ignoring the very real biases that have existed across disciplines for centuries.

        Well, that’s for sure! But even saying “science is objective fact” is wrong, because it’s not like there is a list of assertions that constitute “science” and they can be just to be true or false. It is a discipline. That’s like saying “Believe all car repair is objective fact” .

        Science has been and remains to this day full of biased being adhering imperfectly to scientific method and being unduly influenced by their biases. Why having the mistaken notion that science is unbiased is somehow uniquely masculine doesn’t make sense.

        I definitely would not want to be social engaged with her in any way. It would have to be awful.


      • This is just an updated version of Galileo vs. the Church…


    • Hah! She blocked me on Twitter.

      For a reply I made to a person who commented on one of her posts.



    From the story:

    Viking Global has acquired a majority stake in the beauty startup after agreeing to invest around $15 million of new cash into the business, multiple sources told Recode. Viking Global is also taking over a startup that currently has tens of millions of dollars in debt, sources say, as Birchbox tries to kick-start profitable growth to emerge from that shadow.

    With the deal, Birchbox’s other investors — which include top venture capital firms including Accel Partners and First Round Capital — are getting wiped out, and are expected to walk away with nothing.

    I take it that Birchbox was not publicly traded and Accel and First Round lost the current market value of their stock because the market value of a minority interest in a privately held entity is nil.

    If that is the case, there is still residual value if Birchbox is ever sold in an M&A.

    Here is what makes no sense – how could a major investor think of buying into a privately held company without preemptive rights and cumulative voting written into the company’s charter? Are big time angel investors that dumb?

    Scott? Brent?

    Liked by 1 person

    • my guess is that the new owner’s agreement to absorb the entity with $15 in debt counts as payment for the original investors.

      but who knows?


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