All Things in Moderation

Vital Statistics:

Stocks are lower as COVID cases increase. Bonds and MBS are up

Initial Jobless Claims came in at 709,000 last week. While the trend is still going in the right direction, they are still at the highest levels ever recorded. Take a look at the chart below. The yellow highlighted area was the Great Recession

Inflation remains under control, at least according to the government statistics. The Consumer Price index was flat month-over-month in October and was up 1.2% on a year-over year basis. Ex-food and energy, prices were flat, and rose 1.6% YOY.

Jerome Powell will be speaking this afternoon. Probably won’t be market-moving, but nothing can be ruled out these days. The bond market has been volatile lately as positive vaccine news and negative COVID news battle it out.

Manhattan real estate prices and asking rent are falling, which could signal that it is turning the corner. Median effective rent fell 19% YOY to $2868, and leases are up 33%. FWIW, $2,868 sounds low to me. The young are supposedly moving back to Manhattan, but with the bars and restaurants shut, what is there to do?

2020 has been the year of the mortgage IPO. Loan Depot is the next to go public.

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Vital Statistics:

Stocks are higher this morning as the risk-on trade continues. The bond market is closed for Veteran’s Day.

Mortgage Applications fell 0.5% last week as purchases fell by 3% and refis rose by 1%. “Mortgage application activity was mixed last week, despite the 30-year fixed rate decreasing to 2.98 percent – an all-time MBA survey low,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index climbed to its highest level since August, led by a 1.5 percent increase in conventional refinances. The purchase market continued its recent slump, with the index decreasing for the sixth time in seven weeks to its lowest level since May.”

Despite the news of a potential vaccine, the Fed is thinking about supporting the economy even more, and is having “robust discussions” about increasing them.

“We have asset purchases well in place and we are discussing what more we could do if more is needed and what should we do in terms of communicating a plan for asset purchases going forward,” [San Francisco Fed President Mary] Daly told CNBC’s Steve Liesman on “Squawk on the Street.”

“Those discussions are always ongoing, but we really had a robust debate” at least week’s Federal Open Market Committee meeting. “I would say discussion more than debate even,” she added. “We’re all dedicated to the same thing — continue the mission to serve the American people with our top policy tools. I would say our tools are powerful.”

Given that it is looking like we will have divided government in DC, any sort of major stimulus package should be off the table. The potential vaccine is giving investors more of an appetite for risk, which is why the 10 year is selling off. That said, mortgage rates are determined by the mortgage backed securities market, and that is much easier for the Fed to manipulate.

Rocket Mortgage reported third quarter numbers last night, with volumes increasing to122% YOY to $89 billion. The company reported net income of about $3 billion per share which works out to be a 3.4% profit margin. That is pretty fat as far as mortgage banking margins go. Gain on sale margins were wide at 4.5%

80.4% of renters paid their rent payment by November 6, according to the National Multifamily Housing Council. This is up from the 79.4% of renters who paid by October 6, but down from the 81.5% who paid by November 6 2019.

NAR weighs in on what a Biden Administration means for Fan and Fred. Punch line: probably nothing, as a full release will require legislation and that won’t happen under divided government. There is a lawsuit pending in the Supreme Court regarding the structure of the FHFA. However, the Biden Administration will probably be happy to keep the GSEs as wards of the state in order to prod them to increase affordable housing mandates etc.

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Vital Statistics:

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are down.

Yesterday was a “hip to be square” day in the market, for those of us old enough to remember the early 1980s. Basically, every stock that has been hated for months had its day in the sun. Investors snapped up mall stocks, apartment REITs, retailers, lodging companies, cruise lines and sold off the big COVID momentum names. Mortgage originators got thrown overboard on fears that rates are going to rise and squash the refi boom.

Mortgage Backed securities are lagging the move in Treasuries, which means mortgage rates aren’t moving up as fast as the 10-year. This is typical, however remember the Fed is the 800 pound gorilla in the MBS market, so it can support rates wherever it wants.

JP Morgan is “going on the offensive” in the home lending business, reducing credit constraints.

Small business optimism was steady in October, at a historically high reading. “Leading up to the presidential election, small businesses continued to focus on stabilizing their businesses but were uncertain about the future economic conditions due to COVID-19 government regulations on all levels,” said NFIB Chief Economist Bill Dunkelberg. “We see solid momentum going into the 4th quarter, and another good quarter could get the GDP back to its 2019 closing levels.”

Loans in forbearance decreased 16 basis points to 5.67% last week, according to the MBA. “With declines in the share of loans in forbearance across the board, the data this week align well with the positive news from October’s jobs report, which showed a gain of more than 900,000 private sector jobs and a 1 percentage point decrease in the unemployment rate,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “A recovering job market, coupled with a strong housing market, is providing the support needed for many homeowners to get back on their feet.”

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Vital Statistics:

Stocks are higher this morning after Pfizer and BioNTech announced that its COVID-19 vaccine was successful in its Phase 3 trial. Bonds and MBS are down on the “risk-on” trade

Here is the press release from Pfizer about 2 hours ago. The vaccine supposedly has an efficacy rate of 90%. The vaccine has received fast track approval from the FDA.

While the election results may not have pleased partisans on either side, they are an absolute win for the markets and the mortgage banking business. Markets generally prefer gridlock since it means certainty. For interest rates, notwithstanding the market reaction to vaccine news, they should remain lower for longer with the Fed holding down rates and little chance for a big stimulus package. The best part of Biden (market friendliness, etc) will stay in place while the bad parts: tax hikes, green new deal, etc will not. Note we won’t have a final word on the Senate until January when the Georgia run-offs will determine the final make-up.

Note that divided government means that the big broke blue states like New York might go into default. The state and NYC bonds were downgraded already last month.

For stock investors, the promise of a vaccine means we should see some signs of life in lodging, airlines, and retailers. Interesting that the retailers rose 8% last week. Cruise line stocks are up 20% pre-market.

What the CFPB will look like under a Biden administration. Biden is almost assured to replace current director Kathy Kraninger as one of the first orders of business. Democrat Katie Porter is one name that has been mentioned. The CFPB will probably focus more on COVID related servicing issues at least initially.

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Vital Statistics:

Stocks are flattish this morning as it looks more and more like Biden will win. Bonds and MBS are down.

The Fed maintained rates yesterday and made little changes to the FOMC statement. Rates will remain low, and the Fed will continue to purchase Treasuries and MBS at a minimum of current levels to maintain stability and to support the economy. With divided government looking more and more certain, the chance of fiscal stimulus is probably off the table. This will push more of the burden of stimulus onto the Fed’s plate, which means lower rates for longer. Good news for the mortgage banking industry.

The economy added 638,000 jobs in October, according to BLS. The unemployment rate fell to 6.9% and the labor force participation rate increased to 61.7%. 21.2% of the US workforce is telecommuting due to COVID. Average hourly earnings rose 0.8% MOM and 4.5% YOY. The overall numbers were well above Street expectations.

The increase in wages is a good sign for the economy, and compensation is certainly rising in the mortgage banking space. The bond market has yet to start fearing inflation data, so the recovery should continue to gain momentum. Remember the Fed will let the labor economy run hot, so increasing wage growth shouldn’t trigger any response from the Fed.

PennyMac reported blowout earnings last night of $7.03 per share. Volumes were up 44% QOQ to a total of $54 billion. This is an increase of 55% from a year ago. The company has earned over $15 a share through the first 9 months of the year, and the full-year estimates are way too low. It is not out of the question for PFSI to earn $20 this year, which is wild with a stock trading at $58 per share. For those keeping score at home, it works out to be a P/E of 2.9. The next question will be what will they do with all that cash? The quarterly dividend is 15 cents and the company earned 7 bucks a share. A special dividend and massive buyback should be on the table.

I will be on a panel today at the MCT Exchange 2020. Rob Chrisman will be running the panel, where we will discuss the election and what it means for the mortgage banking sector. The panel starts at 11:00 am PST / 2:00 PM EST.

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Vital Statistics:

Stocks are higher this morning as we continue to digest the election news. Bonds and MBS are up.

The FOMC is set to release its decision today at 2:00 pm. There will probably be no change in policy, and bonds are going to be driven by election news.

Initial Jobless Claims came in at 750k this morning, while productivity rose 4.9% and unit labor costs fell 8.9%.

I wanted to give my thoughts on the election and things going forward. I assume Biden goes on to win. Republicans keep the Senate and Democrats control the House.

Big picture: Biden wins after a long, drawn-out litigation. Bond yields will drift lower as the fear of a blue wave is off the table. Stock rally because, well, just because. 

Divided government means no big stimulus package. Republicans will re-discover religion re government spending, which means any stimulus will be small and targeted. Maybe we will see another check made out to people. Any bailout of the big broke blue states is DOA. Nancy Pelosi will have her hands full managing the backbenchers in the House who want to see Trump in an orange jumpsuit. Washington will settle into gridlock. 

Regulatory-wise, the CFPB will become more aggressive. HUD will resume suing local governments to reduce single-family zoning. Regulatory fears will tighten FHA lending even more, which will give the affordable housing types like Urban Institute conniptions. The government will continue to have a moratorium on evictions. Luckily, rising house prices will keep a lid on strategic defaults. Multi-fam construction will probably slow as financing gets tighter, exacerbating the home supply problem. 

A lack of any sort of fiscal stimulus means the Fed keeps the pedal to the metal for a while. Neel Kashkari will urge the Fed begin to repo baseball cards and Elvis plates. Black Knight estimates the 3/4 of the US mortgage market can save 75 bps on rate, which means the refi boom continues to have legs. The mortgage industry is at capacity, and bringing on new bodies from another industry takes time (just look at how long it has taken in construction, where there are no regulatory issues). Mortgage industry should have another $3 – 4 trillion year in 2021, and the MBA will grudgingly move their forecast up from 2.5 trillion sometime in September 2021.  Margins remain wide, and salaries will continue to rise for industry professionals. 

Longer term, a more aggressive regulatory state will keep a lid on economic growth. The recovery will be shallower and longer. Interest rates will stay around here, and the economy will look more like the Obama years than the pre-COVID Trump years. For the mortgage banking industry, we should see a few more great years, but once the music stops and mortgage banks are left with bloated cost structures, a wave of consolidation will take place.

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Vital Statistics:

Stocks are higher as the election votes come in. Bonds are up after a wild night.

As I type this, the count in Michigan has narrowly gone to Biden, after leaning Trump all night. The remaining undecided states are MI, WI, PA, GA, NV, and NC. MI, WI, and NV are leaning Biden, and PA, GA and NC are leaning Trump. If those final results hold up, Biden wins.

The Senate so far is looking unchanged, although it hasn’t been declared either way. Same with the house. The only takeaway is there was no blue wave that the media had been trying to create for months. If the Senate stays Republican, we will have divided government no matter who wins, and that is good for both stocks and bonds. A huge stimulus bill with a bailout for the big broke blue states probably isn’t in the cards.

One thing to keep in mind, is that with all the expected recounts, we probably won’t have a definitive answer on the election for possibly weeks.

If Biden wins, the most likely change will a more aggressive regulatory state. My suspicion is that nothing changes with Fan and Fred, and the common stock for the GSEs will remain a litigation lottery ticket. I don’t think anything changes with the Fed.

Mortgage Applications increased 3.8% last week as purchases decreased 1% and refis increased 6%. The average rate ticked up a basis point to 3.01%.

The economy added 365,000 jobs in October, according to the ADP Jobs report. The Street was looking for around 750,000, so this is a miss. Economists are forecasting an increase of 530,000 jobs in Friday’s jobs report. “The labor market continues to add jobs, yet at a slower pace,” Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said in a statement. “Although the pace is slower, we’ve seen employment gains across all industries and sizes.”

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Vital Statistics:

Stocks are higher as we head into election day. Bonds and MBS are down small.

The share of loans in forbearance fell by 7 basis points last week to 5.83%, according to the MBA. “With more borrowers exiting forbearance in the prior week, the share of loans in forbearance declined across all loan types,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “Almost half of forbearance exits to date have been from borrowers who remained current while in forbearance, or who were reinstated by paying back past-due amounts.”

Apparently Morgan Stanley was out with a call yesterday calling for markedly higher bond yields, with the 10 year yield rising 100 basis points. Apparently the analyst is using 2016 as a template, where an unexpected Trump victory translated to a big “risk on” trade where investors sold Treasuries and bought stocks. Regardless, traders are betting on volatility stemming from the election. As MBS investors know, volatility is kryptonite for the asset class. And sort of dislocation in the bond market will translate into lower MBS pricing, which in turn means higher mortgage rates at the margin. FWIW, with global sovereign debt at or close to record lows, COVID, a Federal Reserve who wants low rates, and a lot of uncertainty regarding the disease and the recovery, I am not seeing the case for higher rates, but I guess anything is possible these days.

Construction spending rose 0.3% MOM and 1.5% YOY in September, according to the Census Bureau. Residential construction was up 2.7% MOM and over 10% YOY. That said, office and lodging spending was down.

Home prices rose 1.1% MOM and 6.7% YOY, according to CoreLogic. They are predicting flat prices going forward however.

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Vital Statistics:

Stocks are higher this morning as we head into an important week for the markets. Bonds and MBS are down.

Aside from the election this week, we also have a FOMC meeting. Plus, we have a slew of important economic data including the jobs report on Friday. Lots going on.

An election surprise could prove to cause some increase in market volatility. I remember in 2016 after Trump won, the S&P futures were down 100 points in the overnight Asian markets. Paul Krugman was penning his New York Times essay predicting Great Depression II, while famed investor Carl Icahn was buying every contract he could get his hands on in the overnight session. The stock market closed up about 1% on the day after the election. People forget the bond market also had a pretty substantial move. The 10 year yield increased 39 basis points in the immediate aftermath of the election.

The polls all show a Biden victory, but pollsters are increasingly in the opinion moving business, not the opinion measuring business. So a lot of the margin is nothing more than wishful thinking. I am wondering if the move up in yields lately is the bond market hedging its bets.

The manufacturing sector is still expanding, despite COVID-19. The ISM Survey for October came in at 53.4, which was higher than expected.

Redfin is getting sued by a bunch of housing organizations over its minimum listing price. The lawsuit claims that this amounts to discrimination since many urban neighborhoods especially in the cities they cited (Detroit, St. Louis) are low-priced. Redfin says it is a business decision, but the activists believe it has no legitimate business purpose. The problem is that many properties in these areas are extremely low priced (around $10,000 – $20,000) due to property tax arrears that have piled up for years. A real estate broker simply isn’t going to get excited about putting in the work for a $300 check. Redfin will pay a minimum commission for brokers, but someone has to eat the difference.

Ever notice the MBA’s origination forecasts seem to be low and raised only grudgingly? The latest MBA forecast for 2020 origination (which was only recently raised) came in at around $3.2 trillion. According to Black Knight Financial’s rate lock data, 2020 originations could come in over $4 trillion.

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