Morning Report: Janet Yellen testifies in front of the Senate

Vital Statistics:


  Last Change
S&P futures 3813 24.3
Oil (WTI) 53.64 0.64
10 year government bond yield   1.10%
30 year fixed rate mortgage   2.86%

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


The MBA reported that mortgage loans in forbearance fell 5.37% compared to 5.46% a week ago. Fannie and Fred loans in forbearance fell to 3.13%, an improvement of 6 basis points. “The week of January 10 saw the largest – and only the second – decrease in the share of loans in forbearance in nine weeks, with declines across almost every tracked loan category,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The rate of exits from forbearance has picked up a bit over the past two weeks but remains much lower than what was seen in October and early November.”


The FHFA has extended its foreclosure moratorium until Feb 28. The FHFA projects the COVID-19 foreclosure moratorium and its extension will create an additional $1.4 to $2 billion in expenses for the government-sponsored enterprises.


Mortgage Applications decreased 1.9% last week according to the MBA. Purchases increased 3%, while refinances fell 5%. “Market expectations of a larger than anticipated fiscal relief package, which is expected to further boost economic growth and lower unemployment, have driven Treasury yields higher the last two weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “After a post-holiday surge of refinances, higher rates chipped away at demand. There was a 5 percent drop in refinance activity, driven by a 13.5 percent pullback in government refinances.”


Janet Yellen testified yesterday in front of the Senate Finance Committee. Here were the big takeaways:

  • Higher taxes are coming, but not now.
  • The government needs to get spending under control, but not now.
  • The dollar should be strong
  • Fiscal stimulus needs to be big.

Morning Report: Freddie Mac sees mortgage originations hitting $3.2 trillion in 2021

Vital Statistics:


  Last Change
S&P futures 3798 27.3
Oil (WTI) 52.84 0.54
10 year government bond yield   1.12%
30 year fixed rate mortgage   2.88%

Stocks are higher this morning as more financial stocks report earnings. Bonds and MBS are down.


The upcoming week is pretty data-light, although we will get some housing data with housing starts, the NAHB Housing Market Index and Existing Home Sales. The Spring Selling Season will be starting in about a month or so, and we should see plenty of pent-up demand from last year. Existing home inventory is at record lows, and prices are rising.


Bank of America reported better than expected earnings, however revenues fell 10%. The Fed has loosened the reins on stock buybacks, and the company announced it intended to repurchase $2.9 billion shares. Separately, Goldman Sachs reported strong earnings.


Janet Yellen is scheduled to return to the Hill today for testimony about her new role as Treasury Secretary. Unsurprisingly, she is going to advocate for a lot of additional fiscal stimulus. Note that with the change of the administration, many Democratic lawmakers are suddenly interested in re-opening the economy.


Joe Biden nominated Rohit Chopra to lead the CFPB. It sounds like the Administration is going to focus on student loan servicing practices. I am sure that the Agency will also focus on mortgage servicing as well. Chopra is a well-known name in DC and was most recently at the FTC where he focused on market domination in the tech space.


Merrill Lynch is out with a bullish take on the 2021 economy, predicting that the most vulnerable parts of our population will be vaccinated by April and May, and earlier and larger stimulus package will help things as well. They are taking up their GDP forecast from 4.6% to 5%. Note the Fed is predicting 4.2% for next year. If historical patterns hold, we can expect the Fed to overshoot growth estimates for the next four years.


Freddie Mac is forecasting that originations will decline 20% from their all-time high of $4 trillion in 2021. $3.2 trillion is still a hefty number, and should allow for great times for the industry. They see mortgage rates averaging about 2.9% this year before rising to 3.2% in 2022. Freddie also sees home price appreciation leveling out to about 0.7% in 2021. With the current supply-demand imbalance, that seems unlikely.

Morning Report: Jerome Powell says rates are going nowhere for a while.

Vital Statistics:


  Last Change
S&P futures 3770 -21.3
Oil (WTI) 52.74 -0.74
10 year government bond yield   1.10%
30 year fixed rate mortgage   2.88%

Stocks are lower this morning as we kick off earnings season. Bonds and MBS are up.


Retail Sales dropped 0.7% in December. This was well below expectations. Ex-gasoline and autos, sales fell 2.1%. This shows the economy is moving in the wrong direction, and I suspect we will see economists take down their estimates for fourth quarter US GDP growth. Separately, the University of Michigan Consumer Sentiment Index fell in January.


Industrial Production rose 1.6% while manufacturing production rose 0.9%. Capacity Utilization rose to 74.5%. We still have a lot of wood to chop to get back to pre-COVID levels here as well.


Fed Chairman Jerome Powell said that “now is not the time” to discuss tapering bond purchases. “Now is not the time to be talking about exit,” from the $120 billion in government securities the Fed is buying each month, Powell said in a web symposium with Princeton University. “A lesson of the Global Financial Crisis is be careful not to exit too early, and by the way try not to talk about exit all the time…because the markets are listening.” ”The economy is far from our goals…and we are strongly committed…to using our monetary policy tools until the job is well and truly done.” He went on further to say that the goal is to get the labor economy back to where it was pre-pandemic. The focus for that will be on lower-wage employment and wage growth.

Bottom line: mortgage rates are probably not going to get away from us for a while. A easy non-legislative way to put money in people’s pockets is to allow them to refinance their mortgage at a lower rate. With 32 million borrowers out there able to save 75 basis points on their rate, it will take years to do all of those loans, given industry capacity constraints. Powell knows this, and unless inflation magically appears from out of the blue, rates are staying low.


The FHFA will not leave conservatorship in the near term. There was talk of the Trump Administration letting them go, but that was always a long shot. FWIW, I do not see the Biden Administration releasing them either – if anything I could see them reinstituting the profit sweep and getting a whole slew of new affordable housing mandates.



Morning Report: Small Business Optimism headed back down.

Vital Statistics:


  Last Change
S&P futures 3811 7.3
Oil (WTI) 51.67 0.94
10 year government bond yield   1.01%
30 year fixed rate mortgage   2.88%

Stocks are higher this morning on hopes of a stimulus package. Bonds and MBS are flattish.


Joe Biden revealed a $2 trillion stimulus package. It will include $2,000 payments, aid for state and local governments and extended unemployment benefits. Separately, Mitch McConnell moved the impeachment trial for Trump until after Joe Biden takes office.


New York City renters owe $1 billion in back rent, according to one survey. It probably is closer to $2 billion. According to one housing advocate, the government could wipe that amount out with aid to the New York City. “It’s not an insurmountable amount,” Mr. Martin said. “The numbers tell us that, probably, if we could get an additional billion or two dollars in the city, we could probably pay off every single renter’s arrears in the entire city of New York over the last year of the crisis.” This may be where the government is headed, with the government making rent payments until the crisis is over. This is a risky course of action, as it will encourage a stampede of rent defaults with the government writing checks and asking questions later. Also, it has to be bearish for apartment pricing in the City as well. I don’t know how you account for potentially unenforceable rent contracts in your cap rate assumptions.


The National Federation of Independent Businesses reported that sentiment fell dramatically in December. “This month’s drop in small business optimism is historically very large and most of the decline was due to the outlook of sales and business conditions in 2021,” said NFIB Chief Economist Bill Dunkelberg. “Small businesses are concerned about potential new economic policy in the new administration and the increased spread of COVID-19 that is causing renewed government-mandated business closures across the nation.”

The plus side for the economy going forward is more government aid, and a robust housing market. The downside is more government regulation and general anti-business sentiment.


Mortgage Applications rose 16.7% in the first week of January as purchases rose 8% and refis rose 20%.


Initial Jobless Claims are headed in the wrong direction, with the number of newly unemployed increasing to almost 1 million.


In which it is detailed how much violence occurred during mainly peaceful BLM demonstrations and how relatively sporadic police overreaction was.

In which a previously ignored ground for impeachment is argued.

Morning Report: Uncertainty

Vital Statistics:


  Last Change
S&P futures 3809 17.3
Oil (WTI) 51.67 0.94
10 year government bond yield   1.09%
30 year fixed rate mortgage   2.82%

Stocks are higher this morning despite a pretty lousy jobs report. Bonds and MBS are down.


The jobs report showed a loss of 140,000 jobs in December, which was well below the expected 50,000 gain. The unemployment rate slipped to 6.7% and hourly earnings rose by 5.1% YOY. The labor force participation rate was flat at 61.5%.


Given the riot that happened yesterday in DC, I am surprised to see bonds continuing to sell off. My gut tells me that part of the reason is that the bond market is still adjusting to the surprise result in the GA Senate runoff. Yes, we will get more stimulus which is theoretically inflationary. That said, all of the chaos in DC should be considered bond bullish, and I do think the stock market is in a state of denial. This is setting up for an unfriendly business environment.

As things settle down, I suspect the watchword for the business community will become uncertainty. Uncertainty is the reason for not hiring, not spending, etc. Ultimately, Biden is a bit of a blank screen, and until the business community knows whether we are getting Bill Clinton or Barack Obama’s regulatory state it will choose to sit on its hands. Someone remarked that the DC riot is the left’s 9/11, and they want revenge. An angry left is not conducive to commerce. All you can do is hunker down, play it safe and wait for the storm to pass.

I will be willing to bet that the NFIB Small Business Optimism Index will take a dive the next time it is released. Ultimately, this state of affairs should be considered bond bullish, and I suspect rates will be headed back down. The stock market is still being elevated by the Fed and speculative activity (I read somewhere that 6% of the volume in the market has been in one name: Tesla).

Ultimately, if the economy slows (which seems to be the case), the Fed’s bond purchases will have to stay in place. This means that mortgage rates should have a lid on them for the foreseeable future. While I don’t see a return to the economy of 2009-2010, I do think the pre-COVID economy is probably not in the cards for a long time. This is why I think rates are headed back lower.



Morning Report: Looking ahead

Vital Statistics:


  Last Change
S&P futures 3757 17.3
Oil (WTI) 50.57 -0.04
10 year government bond yield   1.07%
30 year fixed rate mortgage   2.81%

Stocks are higher this morning after Trump agreed to an orderly transfer of power. Bonds and MBS are down.


Now that the Democrats control 100% of government, the first order of business will be $2,000 stimulus checks. The other big item on the menu will be a bailout for the Big Broke Blue States of NY, CA and NJ. The left has been itching to raise taxes, however I see that as a long shot while the economy is still in a COVID weakened state. I don’t see a tax hike as something we need to worry about right off the bat. GSE reform will also go to the back burner. I wouldn’t be surprised to see the government re-instate the net profit sweep.


The bigger fear is that the bond market continues to sell off, which counteracts what the Fed is trying to do. The fact that TBA prices are lagging the move in Treasuries indicates that the Fed is still firmly in control of this market and that mortgage rates will stay low. The Fed realizes that the easiest way to get money into people’s pockets is to let them cut their mortgage payment or to get a cash-out refinance. I suspect the Fed will keep the refi boom going for the near term by supporting the TBA market.


The supply / demand imbalance in the housing market should guarantee that home prices keep appreciating. The one thing that worries me is an extended foreclosure and eviction moratorium. The left has zero sympathy for landlords, and they haven’t thought through the consequences of letting people live rent-free for an extended period of time. I wouldn’t touch a non-QM NOO mortgage with a barge pole right now.


The FOMC minutes were uneventful. Unsurprisingly, the Fed is worried about the economy, and low inflation. They didn’t say anything we didn’t already know.


Initial Jobless Claims came in at 787k last week, while the Challenger and Gray job cut report showed 77,000 announced job cuts in December.

Morning Report: The bond vigilantes return

Vital Statistics:


  Last Change
S&P futures 3699 -19.3
Oil (WTI) 50.02 0.24
10 year government bond yield   1.03%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning as the Georgia runoff results are coming in. Bonds and MBS are getting clobbered.


Democrats have won one of the GA Senate seats and the other remains too close to call. Unified control of the country by Democrats is bearish for stocks and bonds, and the 10 year is trading above 1%.


The reaction in the bond market indicates that the bond vigilante is awakening from its 30 year slumber. The Bond Vigilantes bedeviled Bill Clinton’s first term as anything he did to stimulate the economy was greeted with higher interest rates.


The FOMC minutes will be released around 2:00 pm this afternoon. It probably won’t be market-moving, but just be aware.


Mortgage Applications fell 4.2% over the two week holiday period as purchases fell 0.8% and refis fell 8%. “Mortgage rates started 2021 close to record lows, most notably with the 30-year fixed rate at 2.86 percent, and the 15-year fixed rate at a survey low of 2.40 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The record-low rates for fixed-rate mortgages is good news for borrowers looking to refinance or buy a home, as around 98 percent of all applications are for fixed-rate loans. Despite these low rates, overall application activity fell sharply during the holiday period – which is typical every year. Refinance applications were 6 percent lower than two weeks ago, and purchase activity less than 1 percent from its pre-holiday level.”


The economy lost 123,000 jobs in December, according to the ADP report. The Street is looking for 65,000 jobs in this Friday’s jobs report.


Manufacturing improved in December, according to the ISM Report. Overall, the report says that despite the COVID-19 headwinds, things are getting better. One thing did jump out at me: Every commodity was up in price. Nothing was down, and there were all sorts of shortages. Whether this is just a COVID-related bottleneck remains to be seen, but commodity booms are usually associated with higher inflation.

Morning Report: Another mortgage banking IPO

Vital Statistics:


  Last Change
S&P futures 3683 -9.3
Oil (WTI) 48.82 0.24
10 year government bond yield   0.93%
30 year fixed rate mortgage   2.78%

Stocks are lower this morning after yesterday’s sell-off. Bonds and MBS are flat.


Construction spending rose 0.9% MOM and 3.8% YOY. Residential construction rose 2.6% MOM and 16.2% YOY. 2021 should be a breakout year for housing construction.


Home prices increased 1.1% MOM and 8.2% YOY, according to CoreLogic. “The housing market performed remarkably well in 2020 despite the volatile economic state,” said Frank Martell, president and CEO of CoreLogic. “While we can expect to see lingering effects of COVID-19 resurgences and subsequent shutdowns in the early months of 2021, vaccine distributions and stimulus actions should revitalize economic activity and keep home purchase demand and home price growth strong.” FWIW, I believe that economists are not factoring into their forecasts that housing starts are going to rocket this year. Housing as has a huge multiplier effect and that will offset some of the COVID-driven weakness.


Many economists are forecasting mortgage rates to stay in the 2% range next year. The MBA forecasts rates will rise in the second half of next year. Personally, I don’t see that happening. The Federal government is writing checks to people in order to put money in people’s pockets. One of the most bang-for-the-buck ways to do that is to lower someone’s housing payment. The Fed wants the refi boom to last – that is partly why it is buying MBS.

What about inflation? The Fed has said it wants to target an average inflation rate, and since inflation has been below the Fed’s 2% target for years, they will have to accept inflation above the 2% target for a long time in order to get the average up. While the Fed has been pulling out all the stops trying to create inflation, that doesn’t guarantee it will be successful. Witness Japan, which has run the same playbook for a generation only to achieve deflation.


Striking while the iron is hot: Amerihome is the latest mortgage banker to file for an IPO. The company plans to raise about $250 million and the price talk values the company around $1.3 billion.

Morning Report: Housing affordability declines

Vital Statistics:


  Last Change
S&P futures 3763 14.3
Oil (WTI) 48.72 0.24
10 year government bond yield   0.94%
30 year fixed rate mortgage   2.78%

Stocks are higher this morning on strong overseas economic data. Bonds and MBS are down small.


This week contains a lot of Fed-speak as well as the FOMC minutes on Wednesday. On Friday, we will get the jobs report. On Tuesday, the GA Senate runoff elections will happen, and that could be market-moving as well. Gridlock will be more positive for the markets than an aggressively leftist one will be.


Joe Biden is setting up for an aggressive regulatory state, at least on the environmental side. I have to imagine he will do the same thing on the financial side.


The decrease in interest rates has pushed up housing prices and is making homes less affordable, according to data from ATTOM. “Owning a home in the United States slipped into the unaffordable zone for average workers across the nation in the fourth quarter as the numbers continued a year-long slide in the wrong direction,” said Todd Teta, chief product officer with ATTOM Data Solutions. “The latest housing market data shows the average worker unable to meet the 28 percent affordability guideline used by lenders. That’s happened as home prices have continued rising throughout 2020 and the housing market has remained remarkably resilient in the face of the brutal economic fallout from the coronavirus pandemic. The future remains wholly uncertain and affordability could swing back into positive territory. But for now, things are going in the wrong direction for buyers.”


New York State bans evictions. It also prevents lenders from foreclosing on landlords who own 10 or fewer units.

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