Morning Report: New home sales up big

Vital Statistics:


  Last Change
S&P futures 3629 -7.6
Oil (WTI) 45.47 0.31
10 year government bond yield   0.85%
30 year fixed rate mortgage   2.78%

Stocks are flattish this morning despite positive COVID-19 vaccine news. Bonds and MBS are flat.


Today is Cyber Monday and investors are hoping that it will offset the weakness we saw on Black Friday, where traffic was down 50% due to the pandemic. That said, retailers are expecting a robust holiday, with spending expected to rise 3.6% according to the National Retail Foundation.


We will have a lot of data and Fed-speak this week as we enter the final month of 2020. Data-wise, we have construction spending, the jobs report, and PMI data. Jerome Powell will be speaking Tuesday and Wednesday.


New home sales rose 23% YOY to 999,000 in October, which was more or less flat with September’s million unit print. As a general rule, new home sales can be a volatile number and I kind of thought September’s big print would be revised away. Turns out, it wasn’t. This will be an under-appreciated economic boost to the country going forward. Housing is back.


Janet Yellen is Biden’s nominee for Treasury Secretary. She will be confirmed easily, as she is liked by the banks and is a known quantity. She is considered a bipartisan pick, and will advocate for additional federal spending to combat the economic weakness caused by COVID.


Pending Home Sales fell 1.1% in October, according to NAR. “Pending home transactions saw a small drop off from the prior month but still easily outperformed last year’s numbers for October,” said Lawrence Yun, NAR’s chief economist. “The housing market is still hot, but we may be starting to see rising home prices hurting affordability.”

Morning Report: Conforming loan limits increased

Vital Statistics:


  Last Change
S&P futures 3631 2.6
Oil (WTI) 45.53 0.31
10 year government bond yield   0.88%
30 year fixed rate mortgage   2.80%

Stocks are flattish this morning after a slew of economic data. Bonds and MBS are flat.


Third quarter GDP rose 33.1% and personal consumption expenditures rose 40.6%. This was the second revision and the numbers came in more or less in line with street expectations.


Initial Jobless Claims rose to 778k last week, which was a touch worse than expectations. Meanwhile durable goods orders rose 1.3%, which was better than expected.


Mortgage Applications rose by 4% as purchases rose 4% and refis increased 5%. “Thirty-year fixed mortgage rates dropped seven basis points to 2.92 percent, another record low in MBA’s survey,” said Joel Kan, MBA Associate Vice President of Industry and Economic Forecasting. “Weekly mortgage rate volatility has emerged again, as markets respond to fiscal policy uncertainty and a resurgence in COVID-19 cases around the country. The decline in rates ignited borrower interest, with applications for both home purchases and refinancing increasing on a weekly and annual basis.”


The FHFA increased the one-unit conforming loan limit to $548,250, an increase of 7.42%. All other limits were adjusted upward accordingly.


Morning Report: Yellen to Treasury

Vital Statistics:

  Last Change
S&P futures 3603 28.6
Oil (WTI) 43.83 0.31
10 year government bond yield   0.87%
30 year fixed rate mortgage   2.80%

Stocks are higher this morning on overseas strength. Bonds and MBS are down.

Joe Biden has nominated Janet Yellen to Treasury. Apparently Elizabeth Warren lobbied hard for the job, but lost out in the end. Yellen gets along with the banks, which is important. Needless to say, Biden wants to see a big stimulus package, and Yellen will be part of agitating for that. The fate of a stimulus package will remain in the hands of Georgia voters.

Home prices are skyrocketing as lower interest rates meet a housing shortage and increased demand. The FHFA House Price Index rose 1.7% MOM and 9.1% on a YOY basis. The Cash-Shiller index rose 1.3% MOM and 6.6% YOY, the highest rate of growth in 6 years.

The FHFA House Price Index only looks at homes with confirming loans, which means it excludes jumbo. Note that with the FHFA index rising so much, we could be looking at a conforming loan limit of around $550k next year.

The number of loans in forbearance ticked up last week, according to the MBA. 5.48% of all mortgages were in forbearance, an uptick of 1 basis point compared to a week prior. “A marked slowdown in forbearance exits, as well as a slight rise in the share of Ginnie Mae, portfolio and PLS loans in forbearance, led to an overall increase for the first time since early June,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The decline in exits in the prior week follows a flurry of them last month, when many borrowers reached the six-month point in their forbearance terms. The share of GSE loans in forbearance continued its downward trend and have now declined every week for six straight months.”

With mortgage rates continuing to fall, Black Knight has updated its count of high quality refinances. According to their latest report, 19.4 million borrowers can save 75 basis points on their rate by refinancing. These are only the high quality refi candidates, which have more than 20% equity and 720 FICOs. Here is an interesting stat: 7.2% of these borrowers are in the New York City area. 1.4 million borrowers * 400k a pop = $700 billion in potential refis right in our backyard.

If you remove the FICO and equity constraints, that number increases to 32 million. As long as the Fed keeps rates low, this refi boom is going to have legs. 32 million potential refis out there at 400k a pop means $12.8 trillion in potential refi activity. The MBA’s estimate of under $1 trillion in refi activity next year seems too low.

As long as mortgage rates keep falling, the number of refis is only going to increase. We are at all-time lows.

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The Pennsylvania Senator offered an appropriate response to the Trump campaign’s failed election litigation

Jonathan H. Adler | 11.23.2020 10:34 AM

Over the weekend, a federal district court judge through (sic) out the Trump campaign’s effort to challenge the Pennsylvania election results in Donald J. Trump for President v. Boockvar. The strongly worded opinion by Judge Matthew Brann excoriates the Trump campaign’s legal team, their arguments, and their tactics.

In response to the ruling, Senator Pat Toomey (R-PA) issued a statement that is worth quoting in full, as it provides a model for how other elected Republicans should be handling the Trump campaign’s legal maneuvers.

With today’s decision by Judge Matthew Brann, a longtime conservative Republican whom I know to be a fair and unbiased jurist, to dismiss the Trump campaign’s lawsuit, President Trump has exhausted all plausible legal options to challenge the result of the presidential race in Pennsylvania.

This ruling follows a series of procedural losses for President Trump’s campaign. On Friday, the state of Georgia certified the victory of Joe Biden after a hand recount of paper ballots confirmed the conclusion of the initial electronic count. Michigan lawmakers rejected the apparent attempt by President Trump to thwart the will of Michigan voters and select an illegitimate slate of electoral college electors. These developments, together with the outcomes in the rest of the nation, confirm that Joe Biden won the 2020 election and will become the 46th President of the United States.

I congratulate President-elect Biden and Vice President-elect Kamala Harris on their victory. They are both dedicated public servants and I will be praying for them and for our country. Unsurprisingly, I have significant policy disagreements with the President-elect. However, as I have done throughout my career, I will seek to work across the aisle with him and his administration, especially on those areas where we may agree, such as continuing our efforts to combat COVID-19, breaking down barriers to expanding trade, supporting the men and women of our armed forces, and keeping guns out of the hands of violent criminals and the dangerously mentally ill.

Make no mistake about it, I am deeply disappointed that President Trump and Vice President Pence were not re-elected. I endorsed the president and voted for him. During his four years in office, his administration achieved much for the American people. The tax relief and regulatory overhauls that President Trump enacted with Republicans in Congress produced the strongest economy of my adult life. He also should be applauded for forging historic peace agreements in the Middle East, facilitating the rapid development of a COVID-19 vaccine through Operation Warp Speed, appointing three outstanding Supreme Court justices, and keeping America safe by neutralizing ISIS and killing terrorists like Qasem Soleimani and Abu Bakr al-Baghdadi.

To ensure that he is remembered for these outstanding accomplishments, and to help unify our country, President Trump should accept the outcome of the election and facilitate the presidential transition process.

Indulging the President’s continued efforts to delegitimize the election through frivolous litigation and conspiracy mongering is not patriotic. It is quite the opposite. Elections have consequences, and in this election the Republican presidential candidate lost. Republicans and others who supported Trump need to acknowledge this fact and move on, as Senator Toomey has.

Alas, there is reason to believe the shenanigans will continue. The Trump campaign filed a notice of appeal in the Pennsylvania litigation with the U.S. Court of Appeals yesterday, but did not ask the court to delay certification of the Pennsylvania results. Other suits remain pending in Wisconsin and elsewhere, and some Republican office holders are still seeking to prevent the certification of results in other states. None of this will overturn President-elect Biden’s victory. It will, however, continue to exacerbate tribal partisan divisions and undermine confidence in our institutions.

It is long past time for more Republicans to put country over party Trump.


Jonathan H. Adler (@jadler1969) is the Johan Verheij Memorial Professor of Law at the Case Western Reserve University School of Law.

Morning Report: Stimulus talks resume

Vital Statistics:


  Last Change
S&P futures 3577 -2.6
Oil (WTI) 41.53 -0.31
10 year government bond yield   0.85%
30 year fixed rate mortgage   2.84%

Stocks are flattish this morning on no real news. Bonds and MBS are flat.


The CFPB will get more aggressive under a Biden Administration. Payday lenders will be the focus again, as will servicers. I expect the bureau will also pursue a lot of fair lending cases. Given that there is a time lag to develop cases, the fair lending ones may take a while.


The Index of Leading Economic Indicators rose 0.7% last month, an indication that the economy continues to improve.


Steve Mnuchin has decided to let many emergency Fed lending programs expire at the end of the year. The Fed would like to keep them. I am sure the first order of business in Biden Administration will be to re-institute them.


Chuck Schumer says that he and Mitch McConnell have agreed to resume negotiations over a COVID stimulus bill. “Last night, they’ve agreed to sit down and the staffs are going to sit down today or tomorrow to try to begin to see if we can get a real good Covid relief bill,” the minority leader said during a news conference in New York. “So there’s been a little bit of a breakthrough in that McConnell’s folks are finally sitting down and talking to us.”

Morning Report: Home prices rise 16%

Vital Statistics:

  Last Change
S&P futures 3559 -6.6
Oil (WTI) 41.73 0.31
10 year government bond yield   0.86%
30 year fixed rate mortgage   2.82%

Stocks are lower this morning as COVID cases continue to rise. Bonds and MBS are up.

Initial Jobless Claims ticked up to 740,000 last week.

Existing home sales rose 4.3% MOM to a seasonally-adjusted annual rate of 6.85 million in October. This number is up 27% from a year ago. The median home price came in at 313,000 an increase of 16% from a year ago. This huge jump in prices means that the luxury end of the market is recovering. Housing inventory remains tight at 1 42 million units, which represents a 2.5 month supply at current rates. “Considering that we remain in a period of stubbornly high unemployment relative to pre-pandemic levels, the housing sector has performed remarkably well this year,” said Lawrence Yun, NAR’s chief economist.

The FHFA issued its final capital rule for the GSEs. Fan and Fred will have to hold Tier 1 capital in excess of 4% to avoid restrictions on capital distributions and discretionary bonuses. The government would like to end conservatorship, however I think there is a meaningful risk that a Biden Administration will re-instate the profit sweep to pay for the advance relief that servicers are getting as a part of the CARES Act. The left really has little appetite to privatize the GSEs in the first place, and divided Congress makes anything legislative difficult.

New Home Purchase applications rose 5% MOM and 33% YOY according to the MBA. “New home sales activity was robust in October,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “October is usually when home buying activity slows as the weather turns colder. However, this fall has been a different story, with delayed activity from the spring, and more households seeking larger homes with more indoor and outdoor space, driving demand.”

Global debt is set to hit $277 trillion by the end of the year. That is a quarter of a quadrillion in debt. Despite all of that debt, interest rates are negative in much of the world. Meanwhile, the Fed is committed to lower rates, and has absolutely no intention to reduce the size of its balance sheet. In fact, it may extend its liquidity facilities for corporate and municipal debt into 2021.

Morning Report: The MBA revises its origination forecasts

Vital Statistics:

  Last Change
S&P futures 3610 2.6
Oil (WTI) 41.73 0.31
10 year government bond yield   0.87%
30 year fixed rate mortgage   2.84%

Stocks are flattish despite positive vaccine news. Bonds and MBS are up.

Housing starts rose 14% YOY to 1.53MM in October. Building Permits were up 2.8% compared to a year ago. Starts fell in the Northeast, but were up pretty much everywhere else, especially the South. Meanwhile, the NAHB Homebuilder Sentiment Index hit another record high.

The MBA revised upward its 2020 and 2021 origination forecasts. As a general rule, the MBA is conservative on origination forecasts. 2020 is now expected to be $3.4 trillion and 2021 is now expected to come in at $2.6 trillion. Interestingly, the MBA still thinks refi activity in 2021 will be below $1 trillion. They expect the 30 year fixed rate mortgage to end 2020 at 2.9% and then rise to 3.4% by the end of 2021. As I discussed in yesterday’s note, the Fed has a real incentive to maintain mortgage rates as low as possible to support the economy. The last thing it needs is for home prices to fall as rates rise.

One thing market participants need to understand is that the bond market, at least as it relates to mortgage rates, is not a market. The Fed is engineering rates by purchasing mortgage backed securities. Forget about inflation expectations, trade flows, etc. They don’t matter. Here is what you need to know. The economy is weak. The Fed’s playbook is to support the economy by supporting asset prices. Residential Real estate is the biggest asset most people own. The Fed doesn’t want to risk weakening the economy during a pandemic by letting mortgage rates rise. For mortgage bankers, this couldn’t be a better set of circumstances, although those that retain servicing will probably have a bumpy road ahead.

Mortgage applications were flattish last week as purchases rose 4% and refis fell 2%. There wasn’t an adjustment for the Veterans Day holiday. “Mortgage market activity was mixed last week, despite the 30-year fixed rate mortgage staying below 3 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market recovered from its recent weekly slump, with activity increasing 3 percent and climbing above year-ago levels for the 26th straight week. Housing demand remains supported by the ongoing recovery in the job market, and an increased appetite from households seeking more space because of the pandemic.”

Morning Report: Why mortgage rates are going nowhere for a while

Vital Statistics:


  Last Change
S&P futures 3599 -22.6
Oil (WTI) 40.73 0.41
10 year government bond yield   0.88%
30 year fixed rate mortgage   2.84%

Stocks are lower this morning as COVID cases build. Bonds and MBS are up.


Retail Sales rose 0.3% in October, which was lower than expectations. The control group, which strips out autos, gas, and building products rose 0.2%. The retail sales print gave the bond market a boost, sending yields lower.


Industrial production in October reversed September’s big declines, rising 1.1%. Manufacturing production rose 1%, and capacity utilization rose from 71.5% to 72.8%. All numbers were better than Street expectations.


The share of loans in forbearance fell to 5.47% last week, a decline of 20 basis points. “Declines in the share of loans in forbearance continued this week, with a significant increase in the rate of forbearance exits – particularly for portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “More than 76 percent of borrowers in forbearance are now in an extension, as we are well past the six-month point for most borrowers’ forbearance plans.”


Interesting article in Bloomberg about the implications of the Fed’s support for the mortgage market. The article gets a little technical, however the main point is that the Fed is using its purchases of mortgage backed securities in order to support the economy. House prices are rising as rates fall, which has created a “house of cards” scenario. Essentially the argument is that the Fed has painted itself into a corner and has no choice but to keep mortgage rates down lest housing prices fall and knock out one of the remaining supports for the US economy. The piece is really from the perspective of an MBS investor, and it frets about what is happening to higher-coupon mortgage backed securities, because prepay speeds are rising so fast. The article suggests that since the Fed wants to create inflation, it might shift its Treasury purchases from shorter-dated bonds to longer dated ones, in order to keep long term rates low.

Here is what this means. When mortgage backed securities investors start talking about “prepay speeds,” mortgage bankers should smile, since a synonym for “high prepay speeds” is “refinance boom.” While I don’t share the author’s fear of a housing bubble, I do think he is correct that the last thing the Fed wants to see is a decline in house prices, at least as long as the economy is in a weakened state. This means that the Fed will continue to support MBS prices, and by purchasing lower coupon notes, aka the 1.5% bonds, it is taking affirmative steps to push mortgage rates even lower.

This is truly a nirvana situation for the mortgage banking industry. This means that as the Fed pushes mortgage rates even lower, more profitable refi opportunities open up. Remember that Black Knight believes that 75% of the $10 trillion mortgage market can save 75 basis points in rate by refinancing. The MBA thinks there will be under $1 trillion in refis next year and that mortgage rates will rise in the second half of 2021. If this article is correct, we won’t see an increase in mortgage rates for years.

Stock investors, take note. PennyMac Financial trades at 3 times earnings. Rocket trades at under 6 times 2020 expected earnings per share.

Morning Report: Judy Shelton heads to the Fed

Vital Statistics:

  Last Change
S&P futures 3614 32.6
Oil (WTI) 41.73 0.41
10 year government bond yield   0.91%
30 year fixed rate mortgage   2.9%

Stocks are higher this morning on positive economic news out of China. Bonds and MBS are down.

The upcoming week doesn’t have much in the way of market-moving news, however we will get a lot of housing news, with housing starts, NAHB housing market index, and existing home sales.

The Biden transition team will focus heavily on what they see as systemic racism in the financial sector. Expect to see a flurry of fair lending suits once the new CFPB leadership is in place. The government will also focus like a laser on forbearance servicing.

Better Mortgage, a digital platform which connect homebuyers with lenders just raised capital which values the company at $4 billion. This is about the market cap of Lending Tree.

The CEO of Freddie Mac just stepped down. I am not sure what that means with housing reform, but my guess is that nothing will change for the time being. While we won’t know which party will control the Senate until the Georgia runoff election, chances are that Republicans will hold the chamber and we will be looking at divided government. True housing reform will have to be accomplished legislatively, and with COVID front and center it probably won’t have the urgency to get considered, at least in the near future. Given the new administration’s focus on perceived systemic racism in lending, the government will want to keep F&F on a short leash in order to push affordable housing goals.

Judy Shelton looks like she will be joining the Fed, assuming a vote on her this week. The left absolutely despises her for the apparent thoughtcrime of having positive things to say about the gold standard. Ron Wyden of Oregon said: “Her ideas are so wacky and outdated, giving her authority over the dollar would be like putting a medieval barber in charge of the CDC.”

Note to Senator Wyden: The Fed doesn’t have any authority over the dollar, that would be Treasury. Regardless, with global central banks in the midst of the most ambitious experiment in financial engineering, groupthink is a risk.

Morning Report: Mortgage Credit Eases

Vital Statistics:


  Last Change
S&P futures 3555 22.6
Oil (WTI) 40.83 0.41
10 year government bond yield   0.88%
30 year fixed rate mortgage   2.9%

Stocks are higher this morning despite a rise in COVID cases. Bonds and MBS are up.


Inflation remains muted at the wholesale level, with the producer price index up 0.3% MOM and 0.5% YOY. Even if you strip out the commodity and trade-related components it only rose 0.2% MOM and 0.8% YOY.


The bond market is starting to claw back some of its vaccine-related losses. The trader in me doesn’t sense that the path of least resistance has changed from lower rates to higher rates, at least not yet. The last time the Fed had rates at 0%, the 10 year was trading at 1.5% – 2%, so it won’t necessarily take a rate hike to get them back up to those levels. If the 10-year bond yield has indeed bottomed out, that would mark the end of the Great 40-year bond bull market in the US, which began in the early 80s as Paul Volcker broke the back of 1970s inflation. The last bond bear market lasted from sometime in the 1930s until 1980. Interest rate cycles are long. The first rule of bubbles is that they go on further and longer than you would ever expect.


Mortgage Credit eased in October, according to the MBA’s Mortgage Credit Availability Index. “Credit availability increased in October for the first time since July,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The ongoing economic recovery and improving labor market led to a rise in credit supply for various loan types. There was an overall increase in credit availability for low credit score and higher LTV loans, with conventional credit supply increasing 5.1 percent and government credit staying essentially flat.” That said, we still have a long way to go to get back to pre-COVID-19 levels.

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