Morning Report: Housing is coming back

Vital Statistics:


Last Change
S&P futures 3003.75 4.25
Oil (WTI) 58.37 -0.94
10 year government bond yield 1.78%
30 year fixed rate mortgage 4.00%


Stocks are flattish as we await the FOMC decision at 2:00 pm EST today. Bonds and MBS are up.


Housing starts increased 12.3% MOM and 6.6% YOY to a seasonally adjusted annual rate of 1.36 million. This is the highest in 12 years. July was revised upward as well. Building Permits rose 7.7% MOM and 12% YOY to 1.4 million, which is close to historical levels (non-population adjusted). This data seems to comport with the MBA’s 30% rise in purchase activity. Permit activity increased the most in the Northeast, while falling in the Midwest.


housing starts


Mortgage applications were flat last week despite a huge back up in rates. There was also an adjustment for Labor Day, so that will affect the numbers. Purchases rose 6%, while refis fell 4%. The average rate on a 30 year fixed rose 19 basis points to 4.01%, and government loans increased share.


CFPB Chair Kathy Kraninger believes her job security is unconstitutional and supports a Supreme Court review of a case pending before the 9th Circuit. Essentially, Dodd-Frank made the head of the CFPB basically untouchable – the President can only fire “for cause” and not at the discretion of the White House. “From the Bureau’s earliest days, many have used the uncertainty regarding this provision’s constitutionality to challenge legal actions taken by the Bureau in pursuit of our mission,” Kraninger wrote to staff. “Litigation over this question has caused significant delays to some of our enforcement and regulatory actions. I believe this dynamic will not change until the constitutional question is resolved either by Congress or the Supreme Court.” Given that the case is currently in front of the liberal 9th Circuit (aka the Nutty Ninth) the current structure will almost certainly be upheld and it will go to SCOTUS.


Some inside-baseball stuff: Despite the bet that the Fed will cut rates to a range of 175-200 basis points today, the Fed had to intervene yesterday to prevent the Fed Funds rate from breaching the top of the current 200-225 basis point range. The cause was a shortage of dollars in the money markets ahead of Q3 interim tax payments and a big Treasury bond issue. This caused overnight repo rates to surge to 500 basis points on Monday, and the punch line is that this problem might push the Fed to increase the size of its balance sheet, which means more QE. This stems from a change in how the Fed mechanically manages the Fed Funds rate in the immediate aftermath of the financial crisis. How will it affect mortgage markets? Not directly, however issues with financing / hedging and rate volatility will negatively impact mortgage rates, at least at the margin.


repo rates

14 Responses

  1. BTW, that chart on the overnight rate? Supposedly going to replace LIBOR…


    • Brent:

      BTW, that chart on the overnight rate? Supposedly going to replace LIBOR…

      Ha, yeah, we were talking about exactly that yesterday.


    • can you layman terms that for me?
      i have a ARM that’s based on the LIBOR


      • The regulators are trying to force LIBOR to disappear as a commonly used rate index, and a new index called SOFR has been created and tagged as the replacement for libor. This of course causes problems for legacy contracts that refer to libor, like your ARM. Industry organisations (like ISDA for the swaps market) are trying to come up with a protocol to be used as a “fall back” for contracts that reference libor, if/when it ceases to be published. Most of the fall back proposals involve a market-calculated relationship between libor and SOFR on the day that libor’s demise is announced, and then using that relationship to calculate the libor-equivalent rate going forward, once libor disappears.

        Somewhere in your mortgage there is probably some language about what happens if libor becomes unavailable when your rate resets. I would guess that, once the protocol is established, your lender will advise you that you can either agree to the new protocol for your mortgage when libor disappears or you can stay with whatever provision currently exists in your mortgage docs in the event that libor is unavailable.


      • BTW, I don’t know what kind of language exists in your loan docs for the contingency that libor is not available, and we don’t yet know exactly what the new protocol is going to be, so I can’t say which will be better for you. But 90% of the contracts in my business reference libor, and the existing language for the absence of libor isn’t really workable on a mass scale, so we will almost certainly be signing on to whatever protocol is eventually established, and we will be encouraging our clients to do so as well. Unless the protocol turns out to be crazyily uneconomic. But that seems unlikely.

        I read the most up-to-date proposals just today, and it seems likely that the fall back is going to involve establishing the average spreads between the individual libor tenors (1week, 1m, 3m, etc) and the average SOFR rate (which is an overnight rate) over that tenor going back to the inception of SOFR. These spreads will be calculated on whatever day it is announced that libor will be discontinued, and then whenever libor stops being published, all contracts that refer to libor will “fall back” to being the average of SOFR for the relevant tenor plus the already established spread for that tenor.


      • Taibbi’s take on it:

        “LIBOR is set to be phased out in 2021. If you read the financial press closely, you’ll note occasional semi-panicked comments to the effect that no one has a good plan for replacing the rate written into trillions of dollars of contracts.

        Here and there you’ll find the 2021 compared to Y2K, an unavoidable changeover whose consequences are unknown. “Now, like then, words like apocalypse and panic are being spoken and written,” wrote Forbes last October.

        There’s some sentiment for changing out LIBOR for the Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing cash collateralized by Treasury Securities. SOFR, however, measures secured borrowing, while LIBOR is supposed to measure unsecured borrowing, a significant difference. People who made investments expecting to receive LIBOR may not be happy with getting SOFR instead. It could be a mess, all over the world.

        As Forbes put it, sorting all of this out before 2021 is “a full employment act for Wall Street analysts and lawyers.””


        • jnc:

          Taibbi’s take on it:

          As is so often the case, Taibbi’s analysis suffers from his need to demonize banks. I’ll preface this by saying that I have been arguing for about 10 years now that we have no need for LIBOR, and that it makes no sense for banks to use LIBOR as an index, so my critique of Taibbi has nothing to do with any affinity for LIBOR. But he just doesn’t know what he is talking about.

          From Taibbi:

          The rate is supposed to measure the rate at which banks borrow from each other, but Bailey said it wasn’t based on real borrowing

          This is true. It is based largely on self-assessment, rather than actual transactions.

          LIBOR, the London Interbank Offered Rate, helps set rates for hundreds of trillions of dollars worth of financial instruments, including swaps, annuities, credit cards, mortgages and other products. If Bailey was right, it meant a sizable portion of global economic activity rested on magical thinking.

          That is nonsense. Any interest rate, at root, is just a made up number. The Fed Funds rate, the basic building block of the entire rates market, isn’t based on any market transactions. It is literally just made up by the fed. If economic activity that uses LIBOR rests on “magical thinking” simply because LIBOR is not based on any market transactions, then the entire economy rests on magical thinking. (Which may indeed be what Taibbi thinks, but if so he should at least be honest about it and not restrict it simply to his LIBOR analysis.)

          And the mere fact that so many contracts do use LIBOR creates market based transactions for LIBOR. If LIBOR settings were regularly out of whack relative to other rates (fed funds, repo rates, prime, commercial paper, t-bills, etc), then market participants would either switch to using those other rates, or they would arb the markets by swapping into or out of libor against those other available indices.

          A secondary concern involved manipulation. If banks were inventing numbers to submit to the LIBOR committee, could they not also be manipulating rates to line pockets?

          I wrote a whole series of posts on this issue several years ago.

          The action against JP Morgan Chase, Bank of America, Citigroup, Barclays, and numerous other banks uses both documentary evidence and data to argue that banks have been purposefully depressing interest rates. The idea would be to lower payouts to investors who are contractually due to receive LIBOR, while lessening costs for LIBOR borrowers, many of whom are banks.

          I don’t know anything about this suit against JPM et al, but while it is true that banks are borrowers, Taibbi elides the fact that they are also, and perhaps even primarily, lenders. In other words, when it comes to LIBOR settings, banks are not naturally pitted against “investors” the way Taibbi presents, wherein banks win if investors lose. Banks are also “investors”, and so have just as much reason to want LIBOR to set high as they have to want it to set low. Banks both lend and borrow on a LIBOR basis, and they make their money based on the spread between the two. They don’t make money by borrowing at LIBOR and then lending on some other basis.

          The authors added a lack of real data means, “submissions by panel banks are largely based upon judgment (as opposed to transactions).” A Fed official later wrote that some LIBOR submissions were based on “no transactions at all.”

          [snip 5 paragraphs]

          In other words, banks were guesstimating. Why? After the crash, regulators sniffed out two motives for manipulation.

          This is actually pretty funny. Taibbi spent literally 5 previous paragraphs explaining precisely “why” the banks are “guesstimating”. It is because they are obligated (a fact that Taibbi never points out) to submit a rate for something that they no longer do very much of, ie borrowing in the interbank market. So they have to make a judgement, because there are few if any actual transactions that they can base their (again, obligated) submission on. But after providing that very explanation, Taibbi completely ignores it, and tells us the real reason….manipulation!

          It is true that, because the submission is based on a judgement rather than actual transactions, it is more susceptible to manipulation. But that doesn’t mean that manipulation is the reason that a judgment is being made in the first place. Taibbi is simply blinded by his own prejudices and preconceptions, even as he provides the very answer to his question.

          The first cases involved suppressing LIBOR in 2008 and 2009, to create an artificial impression of market stability during the crisis. In one incident, the Bank of England was accused of asking Barclays chiefs to “just do it” and push LIBOR lower, so as to reassure the public.

          I touched on this in my previous posts (above). Because individual bank submissions were public, they were being viewed as indicators of individual bank liquidity, and were therefore contributing to the spiraling liquidity crisis. If, for example, Barclay’s submission was significantly higher than that of other banks, it would contribute to the impression that Barclays in particular was increasingly in trouble, meaning that it would be even more difficult for them to be able to borrow, driving up their rates further. It is true that the regulatory powers (the fed, the BOE, etc) either turned a blind eye to this or actively encouraged it.

          In a second, more grotesque form of corruption, individual traders at various banks goaded LIBOR submitters to move rates to protect certain investments.

          This is also true, although it is worth noting that most of this manipulation took place in non-USD libor submissions. The most notorious cases that I am aware of (and to which Taibbi links) took place in the JPY market. Also, since the manipulators were submitting both high and low submissions, it doesn’t exactly fit into Taibbi’s narrative that banks are routinely screwing “investors” (and aiding people like NoVa!) with artificially low submissions.

          Even though these two problems were ostensibly corrected, LIBOR was apparently still being contrived.

          Well, yes, because as Taibbi himself already went to great length to explain, the transactions on which the rate is supposed to be based simply don’t happen very much anymore. It isn’t some big, mysterious bankster conspiracy.

          In other words, in a typical post-crash absurdity, many of the banks asked to help reform LIBOR were the same companies that earned giant regulatory settlements for abuse of LIBOR.

          Incorrect. The panel that Taibbi is referring to has not be tasked with “reforming LIBOR”. It has been tasked with transitioning away from LIBOR to SOFR. Given the number of existing contracts that are based on LIBOR, and given that banks are a party to virtually all of those contracts, and given the practical and administrative problems that such a transition raises for those banks, the true “absurdity” would be planning such a transition without involving the banks. Again, Taibbi’s seemingly preternatural need to demonize banks makes him incapable of rationally analyzing, or even describing, the situation.

          The AARC quote suggests the banks themselves were cognizant, both in-house and in consultation with each other, that LIBOR for some time has been based on “judgment” instead of “transactions.”

          Of course they were. So what?

          The complaint includes charts comparing LIBOR rates to various other market indicators dating back to 2014, including credit default swaps, treasury repurchase general collateral (“GC”) rates, and the yields on the banks’ own bonds. They found the rates were not only consistently mismatched, but mismatched in the same direction – LIBOR was lower in each chart.

          I’d like to see these charts, because for various reasons (for example, tenor mismatches) it isn’t clear that a direct comparison is meaningful. In my mind the best comparison would be the GC vs libor rate, because such a difference can (in theory) be arbitraged via swaps. But the GC rate is derived from a repo transaction, and there are regulatory externalities that can impact the repo market and hence distort the GC rate. It is notable that the charts he refers to go back to 2014. Coincidentally, many new Dodd-Frank regulations impacting the repo market were implemented in….2013. I will bet anything that if you extend those graphs back before 2014, a different picture emerges, and that it is regulatory pressures, not bank “manipulation”, that has driven LIBOR to levels below GC.

          But apart from that, so what? If investors think that LIBOR isn’t a reasonable reflection of the returns they should be getting, there is nothing stopping them from using contracts that refer to some other rate index. The main reason LIBOR is so ubiquitous is because it was an easily viewable rate that was administered by a 3rd party and could be traded in a transparent two-way market. It wasn’t because everyone had faith that it actually represented some objectively determinable funding cost for a hypothetical average bank. (In fact, the people who have the most interest in it actually being that are the banks themselves.)

          How would banks make money by moving LIBOR down across the board? The suit argues the answer lay in the individual banks’ treasury departments, which are responsible for funding other operations within the bank. Plaintiffs argue that the banks’ funding desks have been using interest rate swaps to convert long-term fixed rate borrowings to holdings indexed to LIBOR.

          I don’t know whether this is actually what the suit argues, or whether Taibbi has just mangled it out of a lack of understanding, but it is hilarious. This is something that literally every major corporation in the world does. It is classic liability management. It is not some magic voodoo that banks are keeping to themselves. And when, say GE or Toyota or BMW issues a 10 year bond and swaps it back into LIBOR, guess who is doing the swap for them, and agreeing to receive LIBOR. One of the dreaded banksters who is supposedly benefiting from artificially low LIBOR!

          This is not easy to follow, but the gist is banks have been taking large sums borrowed on fixed rates and using swaps to make their interest payments more based on LIBOR. Because they have some control over LIBOR, which has been kept artificially low, they end up paying less.

          No. They end up paying less because LIBOR is a short term rate while they have borrowed on a long term basis, and in a normal yield curve environment, short term rates are lower than long term rates. If, in the future, rates spike up, they could easily end up paying more than they would have had they not swapped out of the original term rate. Swapping out of a 10yr term rate and into LIBOR is a “bet” on the future direction of interest rates, not a way of capturing value from artificially low LIBOR submissions. And again, this is something that literally every corporation in the world does as part of its liability management. Taibbi’s spin on it is utterly ridiculous.

          There’s some sentiment for changing out LIBOR for the Secured Overnight Financing Rate (SOFR), which measures the cost of borrowing cash collateralized by Treasury Securities. SOFR, however, measures secured borrowing, while LIBOR is supposed to measure unsecured borrowing, a significant difference. People who made investments expecting to receive LIBOR may not be happy with getting SOFR instead.

          But NoVa will be happy as hell! Except that, again, Taibbi doesn’t know what he is talking about. As I explained yesterday, any transition from LIBOR to SOFR will involve looking at the historical relationship between LIBOR and SOFR, and adding a spread to SOFR in order to bring SOFR up to a hypothetical LIBOR equivalent. In fact, there exists even today a SOFR/LIBOR basis market, where you can either pay or receive SOFR vs receiving/paying LIBOR for any term out to 30 years, and the spread between the two is fully transparent. The spread ranges between 22 basis point (ie pay SOFR + 22bps to receive LIBOR flat) out to 27 bps, depending on the tenor of the swap. Anyone who thinks that trading LIBOR for SOFR is a rip-off can put their money where their mouth is right now, and trade the reverse.

          Once again, Taibbi completely mangles the situation.


        • Uh oh, Scott’s pissed at Taibbi again.


        • lol….yeah, I haven’t done a good fisking in a long time.


        • Scott, I think your analysis of Taibbi’s article is superb.

          I have a collateral question based on my ignorance. Why are banks not borrowing and lending “inter-bank”? What has supplanted that?

          Just trying to keep up.


        • Mark:

          I think your analysis of Taibbi’s article is superb.


          Why are banks not borrowing and lending “inter-bank”?

          This is a decent article on that question. The basic conclusion is this:

          What accounts for the decline in reliance on these key forms of short-term funding? First, as we noted in our discussion of the decline in LIBOR, banks are much less willing to lend to one another on an unsecured basis. Having awakened to the true scale of counterparty risks during the crisis—especially from large, complex, opaque intermediaries—they simply view it as too risky.

          Second, changes in capital and liquidity requirements appear to be playing a key role. Not only are capital charges more comprehensive and higher under Basel III (see here), but the liquidity coverage ratio (LCR) makes short-term interbank lending very costly. Specifically, the LCR specifies that, when a bank issues an unsecured wholesale liability of 30 days or less, it must hold between 25 and 100 percent of the amount in the form of either central bank reserves or sovereigns. Furthermore, since retail deposits tend to be sticky, the design of the LCR encourages their use as a primary funding source.

          Together, these changes in internal risk management practice and regulatory structure almost surely account for the fact that interbank lending has disappeared while deposits now account for more than 70% of total funding.

          Liked by 1 person

        • Thanks.


        • @ScottC: But he just doesn’t know what he is talking about.

          This is the universal problem with journalists, who share a cognitive limitation with most human beings; in that we don’t know what we don’t know, and we have few tools to judge how much of a topic we know well and accurately, so often assume we understand much more than we do.

          For most people it can lead to contention between people of different understandings but . . . we muddle through.

          For journalists, it tends to involve doing their job poorly. Taibbi, who knows much more about Russia that most American journalists, was consistently on the correct and rational side of the Trump/Russia collusion hallucination. His opinion pieces on the matter where more accurate and news-like than what was coming out of most of the mainstream news.

          When it comes to LIBOR and SOFR (about which I know enough to know I know nothing), he has clearly learned enough to believe he knows much more than he does. Which happens all the time.

          Journalists often feel themselves uniquely qualified for their job, because they fancy themselves as excellent generalists–they know more about almost everything than any normie, so are much more suited to talk about almost any issue.

          It’s why I feel like the news should be 100% viewed as opinion, entertainment and propganda–or, colloquially, “fake news”.

          Even when the news isn’t biased by political or cultural prejudices, it’s biased by most journalists belief that they know more about an issue than they do and understand and issue better than they do.

          Many Trump critics in the press, for example, often report in a biased manner, leaving out exculpatory facts and otherwise producing “news” that is basically anti-Trump propaganda–but some journalists and pundits actually purport to read his mind, reporting on what Trump was thinking in a given moment, or what other people think about him–without a quote or direct citation to be had.

          The recent Kavanaugh story is a great example of this, where the “reporters” were confident that their omniscience allowed them to accurately report that Kavanaugh went to Yale parties where other people handled his penis and then put it in other people’s hands, when there were apparently no credible direct witnesses and where the supposed victim has no memory of any such event. Yet their omniscience allowed them to see past the lack of evidence and through the decades to the real truth of the matter.

          I could get in to all the “Russian hacking” reporting that is just . . . imaginary. Mostly because of a lack of understanding how the tech works and how it is commonly used, but believing that their simple, top-level understanding is actually deep expertise. Part of it was the bias of the reporters and the agitators, but another big part was that they thought they knew about things they just didn’t.

          And of course other biased actors take advantage of that ignorance. That’s another problem. Easy to manipulate people who think they are really smart.


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