All Things in Moderation

Vital Statistics:

	Last	Change
S&P futures	3279	3.6
Oil (WTI)	39.63	-0.46
10 year government bond yield		0.67%
30 year fixed rate mortgage		2.94%

Stocks are higher this morning as Jerome Powell heads to Capitol Hill. Bonds and MBS are flat.

Jerome Powell heads to the Hill for his semi-annual Humprey-Hawkins testimony. Here are his prepared remarks.

Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement. Household spending looks to have recovered about three-fourths of its earlier decline, likely owing in part to federal stimulus payments and expanded unemployment benefits. The housing sector has rebounded, and business fixed investment shows signs of improvement. In the labor market, roughly half of the 22 million payroll jobs that were lost in March and April have been regained as people return to work. Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.

 

Loans in forbearance fell to 6.93% last week, according to the MBA. Fan and Fred loans decreased to 4.55%, while Ginnies increased to 9.15%. “The share of loans in forbearance has dropped to its lowest level in five months, driven by a consistent decline in the GSE share in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “However, not only the did the share of Ginnie Mae loans in forbearance increase, new requests for forbearance for these loans have increased for two consecutive weeks. While housing market data continue to show a quite strong recovery, the job market recovery appears to have slowed, and we are seeing the impact of this slowdown on FHA and VA borrowers in the Ginnie Mae portfolio.”

The MBA and NAR are pushing back against proposed VA funding fee increases for IRRRL loans. “MBA and NAR have consistently registered our opposition to legislation that increases VA home loan funding fees to offset the costs associated with non-housing-related expenditures,” the letter said. “Although this proposed legislation would use the fee increase to fund job training and education programs that both organizations support, we believe the use of the VA home loan program for this purpose is inappropriate, particularly in the midst of a pandemic and a widespread economic downturn. This is exactly the time at which veterans should be encouraged to use streamlined refinancing options, such as IRRRLs, to lower their monthly mortgage payments. These savings are particularly important for those veterans who have suffered temporary job losses or reductions in income.”

The refi wave has the MBA forecasting $1.75 trillion in refis this year. The MBA believes this wave could be cresting. The MBA is forecasting that refinance volume will fall to $722 billion in 2021. That seems hard to square with the numbers out of Black Knight, who estimated that 19.3 million “high quality” refis were out there. 19.3 million loans (with an average loan size of say $350k) works out to be about $7 trillion. Taking away the “high quality” constraints (>20% equity, FICO > 720), there are 32.4 million refis (or over $11 trillion) out there. Currently 75% of homeowners have rates 75 basis points over the Freddie average rate. That 2021 forecast just seems off. The only way it can happen is if mortgage rates drift upward, which will probably require a resurgence of inflation and the Fed to take the foot off the gas with its MBS purchases.

That said, FHA loan spreads have widened compared to conforming loans, which is probably being driven by forbearance fears and the decline in servicing values, especially for FHA.

The jumbo-conforming spread, after spending the last several years at negative levels (in other words, jumbos had lower rates than Fannie / Freddie loans) spreads reverted back to positive numbers and is now around 35 basis points.

Affordable suburbs outside big cities are seeing the hottest real estate markets. Places like Camden County (outside Philly), Fairfield County CT, and El Dorado CA (outside Sacramento) are booming as people can get so much more for their dollar.

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