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.

24 Responses

  1. PennyMac Financial trades at 3 times earnings.

    Why?

    Like

  2. Progressives go back to their Prohibition roots in terms of what they find inspiring:

    “Gretchen Whitmer Shuts Michigan Restaurants, Bars in Stirring Reminder That Democrats Can Actually Do Things

    By Ben Mathis-Lilley
    Nov 16, 202011:40 AM

    https://slate.com/news-and-politics/2020/11/gretchen-whitmer-michigan-shutdown-restaurants-bars-closed-seems-smart-probably.html

    This tone is what people find so off putting about progressives, the idea that this is something to celebrate.

    Liked by 1 person

    • I feel like there’s got to be a lot of people in Michigan who vote Democrat by rote, or who don’t vote, who are not going to respond well to Whitmer’s visibility here. I can’t imagine she wins re-election. But maybe she does.

      Like

    • Fortunately, a hero in the heartland has found the courage to stand athwart history shouting that it is insane to keep spaces for indoor socializing open during a viral pandemic that is spread mostly by people socializing indoors.

      That hero is Michigan Gov. Gretchen Whitmer, who, on Sunday, announced that she is ordering the closure, until Dec. 8, of her state’s restaurants and bars, movie theaters, casinos, and venues for group fitness classes. In-person classes for students in ninth grade and above will also be halted. (Outdoor dining and drinking will be allowed; hair salons, gyms where patrons work out individually, and retail stores can remain open. With Thanksgiving a week-plus away, the order also instructs residents not to gather indoors in groups that include more than 10 people or more than two households, though there do not appear to be plans to enforce that rule aggressively.)

      Reads like a Pravda article regarding the benevolent wisdom of dear leader’s latest edicts.

      Like

    • This tone is what people find so off putting about progressives, the idea that this is something to celebrate.

      racist

      Liked by 1 person

  3. So apparently a tax assessment is considered property that can be inherited now:

    https://www.sfgate.com/news/editorspicks/article/What-are-the-implications-of-Prop-19-15731809.php

    Like

  4. Bret Stephens calls out the left

    odds he is forced to resign?

    Like

    • I find the tone change interesting from articles he was writing just a week ago about how The Conservative Movement Needs a Reckoning and Goodbye, Principled Conservatism (both very concern-trolly in their thrust).

      Something he has been thinking on but not writing about? A shot across the bow? A recent review of the revenues enjoyed by Sullivan and Taibbi and other big names who have gone to Substack, and seem to be doing substantially better financially?

      Or just a real concern that the left has becoming stultifyingly illiberal?

      And he doesn’t just get to publish that in a vacuum, although I feel it’s likely the staff that rebelled over the Tom Cotton editorial didn’t know it was coming. But others on the editorial staff must have read it before it made it’s way to the website.

      Given the rebellion at NYT over Tom Cotton’s editorial, this seems to be an intentional attempt to lose his job, or start a fight.

      Like

      • it was cute when it was all Orange Man Bad.
        but now that demon has been slain, so back in your hole, lefites.

        Like

        • With Trump out of the picture (to whatever extent he will be), I’m worried about getting whiplash watching the NeverTrumpers.

          Like

  5. Anyone check out Parler? It has a lot of news of how the left is doxxing everyone involved in the electoral process. It sounds like a total Stasi / mob operation.

    Like

    • Brent:

      It sounds like a total Stasi / mob operation.

      Hooray for the Biden era!

      Liked by 1 person

    • There has been zero consequence for this, or for leftwing violence against Trump people. This will result in certain elements of Trumpers arming up and defending themselves (and seeking out conflict, as we’re seeing in Portland). How far away are we from Bloody Kansas?

      When you insist that every knee bends this is what you get.

      Liked by 1 person

    • Yup. I’m also on Parler. I’m expecting a very huge transfer from Twitter to Parler of everybody from center-to-far-right (all the far right are probably over there already) as the left embraces the theory that THIS is the time to make everyone they disagree with shut up. The YouTube purges are coming, I expect. They’ve already started. Every time I watch the People’s Pundit detail why the polls were wrong and voting irregularities, Google has helpfully put a “The AP has called the Presidential race for Joe Biden. See more on Google.” link under the video. Eventually that’s not going to be enough narrative shaping.

      Like

      • KW:

        Every time I watch the People’s Pundit detail why the polls were wrong and voting irregularities, Google has helpfully put a “The AP has called the Presidential race for Joe Biden. See more on Google.” link under the video.

        Yeah, I noticed that too on virtually any video relating to the election. Pure propaganda.

        Yay Leftisim! Yay Democrats! Yay Biden!

        Liked by 1 person

      • KW:

        I’m expecting a very huge transfer from Twitter to Parler of everybody from center-to-far-right (all the far right are probably over there already) as the left embraces the theory that THIS is the time to make everyone they disagree with shut up.

        O’Sullivan’s law: Any organization that is not explicitly right-wing will eventually become left-wing over time.

        Liked by 1 person

        • Because infilitration. Whether it’s just orientation or some explicit plan–like a conspiracy, they worm their way in and take the reigns of power. One way or another.

          Like

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