Morning Report: Rocket disappoints

Vital Statistics:

 LastChange
S&P futures4,159-0.8
Oil (WTI)65.33-0.37
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.15%

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

Initial Jobless Claims fell slightly to 493k last week. Meanwhile outplacement firm Challenger, Gray and Christmas reported that there were 22,913 announced job cuts last week.

Productivity increased 5.4% in the first quarter as output increased 8.4% and hours worked rose 2.9%. Unit Labor Costs fell 0.3% as compensation rose 5.1% and productivity rose 5.4%.

Rocket is getting pummeled this morning after reporting first quarter earnings and a slew of investment banks downgraded the name. Volume was up 100% compared to the first quarter of 2020 to $103.5 billion. Earnings per share came in at $1.07. Gain on sale margins increased 49 basis points compared to a year ago to 3.74%. Not sure why the stock is down 14% pre-open, but I haven’t checked out the conference call yet. FWIW, the Street is in a “shoot first and ask questions later” mode when it comes to the mortgage bankers.

New Rez reported first quarter earnings of $0.65 per share. Origination rose 14% sequentially to $27.2 billion. Gain on sale margin slipped QOQ to 143 basis points compared to 157 in the fourth quarter. The company is guiding for Q2 origination to fall to $22 to $24 billion. The company sees its servicing portfolio driving results going forward. The stock is unchanged this morning.

Despite the lousy sentiment for the mortgage banking sector, Genworth is IPO-ing its mortgage insurance arm, setting a price range of $22-$24 per share.

A Federal Judge ruled that the Center for Disease Control overstepped its bounds when it imposed a foreclosure moratorium last year. “It is the role of the political branches, and not the courts, to assess the merits of policy measures designed to combat the spread of disease, even during a global pandemic,” the order states. “The question for the Court is a narrow one: Does the Public Health Service Act grant the CDC the legal authority to impose a nationwide eviction moratorium? It does not.” This ruling won’t affect any state-level moratoriums.

Fed Vice Chairman Richard Clarida said that the Central Bank is comfortable with current policy. “We’re still a long way from our goals, and in our new framework, we want to see actual progress and not just forecast progress,” Clarida said. “As we go into next year and beyond, if there are unforeseen, persistent upward pressures on prices that would move inflation to a level inconsistent with our mandate, we would use our tools to bring it down,” he said. “We don’t see overheating as our baseline. Of course, in any outlook there’s risks.”

Morning Report: The economy added 742k jobs in March

Vital Statistics:

 LastChange
S&P futures4,17720.8
Oil (WTI)66.440.77
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.13%

Stocks are higher as commodity prices continue to rise. Bonds and MBS are flat.

Janet Yellen caused a stir in the markets yesterday when she said that interest rates may have to rise somewhat to prevent overheating in the US economy. She later walked back that comment (the Treasury Secretary is not supposed to be suggesting policy to the Fed), and clarified her statement. Regardless, the Fed Funds futures are handicapping at least a chance of a rate hike this year despite the language out of the Fed that the labor market is nowhere near ready for rate hikes.

The private sector added 742,000 jobs in April, according to the ADP Employment Survey. Roughly a third of these jobs were in leisure / hospitality however employment grew is pretty much every category. Note that the Street is looking for about 940,000 jobs in Friday’s Employment Situation Report, so that estimate could be a touch high.

Mortgage applications decreased modestly last week as purchases fell 3% and refis were basically flat. “There was a mixed bag of action in the mortgage market last week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates were slightly higher, refinance applications were essentially unchanged and purchase applications fell for the second straight week. Both conventional and government purchase applications declined, but average loan sizes increased for each loan type. This is a sign that the competitive purchase market, driven by low housing inventory and high demand, is pushing prices higher and weighing down on activity. The higher prices are also affecting the mix of activity, with stronger growth in purchase loans with larger-than-average balances.”

The MBA refinance index is below. You can see we are still quite elevated compared to historical numbers

Factory orders rose 1.1% in March. Part of the uptick we are seeing in inflation is due to inventory restocking. In many ways, this is reminiscent of the economy back before things like just-in-time inventory management and globalization. The economy would expand, companies would aggressively build inventory to compete, inflation would rise, which would trigger a response from the Fed, which would cause a recession and then the cycle would repeat.

For companies, inventory is a big use of cash, so they try to minimize it. Technology and data allowed them to use just as much as was necessary to meet demand, which improved cash flows. The COVID-19 pandemic revealed some of the issues with that model, and perhaps we will see some sort of reversal. These issues won’t necessarily show up in corporate financials as increased costs as much as they will manifest as lost opportunities.

I suspect the re-adjustment to this will take years and this will improve economic performance over the next few years. The big question revolves around commodity prices and whether they trigger inflation. My guess is they will not, as producers will invariably ramp up production and energy demand can be met quickly. People forget that 10 years ago, oil was trading around $125 a barrel. Lots of wells were drilled then that can be turned on pretty quickly.

Commodities rallied hard 10-15 years ago, driven by insatiable demand for everything out of China. We didn’t see a wave of consumer inflation then, though we did see a wave of asset inflation, especially real estate. Regardless, the Fed generally views commodity-push inflation as transitory and will probably not react to it. The economy should be relatively strong over the next few years, driven by inventory build, and housing.

Morning Report: Home prices rise double digits

Vital Statistics:

 LastChange
S&P futures4,164-24.8
Oil (WTI)65.240.87
10 year government bond yield 1.60%
30 year fixed rate mortgage 3.14%

Stocks are lower this morning on overseas weakness. The big trade seems to be to dump tech in favor of early-stage cyclicals. Bonds and MBS are up small.

The share of mortgages in forbearance fell again last week, decreasing by 2 basis points to 4.47% of servicers’ portfolios. Ginnie Mae and private label fell the most. “The rate of exits has slowed the past two weeks, with this week’s exit rate reaching the lowest since February,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The increase in the forbearance share for portfolio and PLS loans highlights both the ongoing buyouts of delinquent loans from Ginnie Mae pools as well as an increased forbearance share for other loans that are not federally backed.”

The CFPB sent a letter to the biggest apartment owners warning them about trying to evict anyone. “Landlords should ensure that FDCPA-covered debt collectors working on their behalf, which may include attorneys, notify tenants of their rights under federal law. Nearly nine million households are at risk of eviction due to the economic effects of COVID-19, but no one should lose their home without understanding their rights,” said CFPB Acting Director Dave Uejio. “We will hold accountable debt collectors who move forward with illegal evictions.”

Home prices rose 11.3% YOY in March, according to CoreLogic. Month over month, home prices rose 2%. CoreLogic sees the 2021 spring homebuying season surpassing 2018 and 2019. Demand is strongest at the lower end. CoreLogic said that prices for homes at 25% below the median home price saw increases of 15% plus. This is due to a rush of first-time homebuyers moving out to the suburbs. CoreLogic sees pricing flatting out from here, with gains over the next year rising only 3%. Home prices are flying everywhere except New York State.

Banks eased credit standards in April, according to the Fed’s Senior Loan Officer Survey.

Over the first quarter, banks eased lending standards for most mortgage loan categories and for revolving home equity lines of credit (HELOCs), with notable differences across bank sizes.6

A moderate net share of large banks eased standards on government-sponsored enterprise (GSE)-eligible mortgages, which make up the majority of bank mortgage originations. Furthermore, significant net shares of large banks eased standards on HELOCs and all other mortgage categories except government and subprime mortgages. Moderate net shares of large banks eased standards on government residential mortgages. At the same time, modest net shares of small banks eased standards on qualified mortgage (QM) jumbo mortgages, on QM non-jumbo, non-GSE-eligible mortgages, and on HELOCs. Small banks left standards on all other residential mortgage types except subprime mortgages basically unchanged.

Large banks reported unchanged demand across most mortgage categories and weaker demand for HELOCs. In contrast, small banks reported stronger demand across all mortgage categories except subprime mortgages and unchanged demand for HELOCs on net. Significant net shares of small banks reported stronger demand for GSE-eligible and QM jumbo residential mortgages, and moderate net shares reported stronger demand for all other categories except government and subprime mortgages. A modest net share of small banks reported stronger demand for government mortgages.

Morning Report: Residential Construction jumps

Vital Statistics:

 LastChange
S&P futures4,19419.8
Oil (WTI)63.730.17
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.17%

Stocks are up this morning on no real news. Bonds and MBS are up small.

The big even this week is the jobs report on Friday. The Street is looking for 938,000 jobs to have been created in April. The unemployment rate is expected to fall to 5.8% from 6% and average hourly earnings are expected to rise 4.2% on a year-over-year basis.

We are starting to see early estimates for second quarter GDP growth, with Goldman and the Atlanta Fed predicting 10%+ growth. While the Fed has repeatedly said it will go slow in backing off stimulus, the June Fed Funds futures see an 11% chance of a rate hike.

The ISM Manufacturing Index came in well below expectations at 60.7. New Orders and Production drove the decrease. “The manufacturing economy continued expansion in April. Survey Committee Members reported that their companies and suppliers continue to struggle to meet increasing rates of demand due to coronavirus (COVID-19) impacts limiting availability of parts and materials. Recent record-long lead times, wide-scale shortages of critical basic materials, rising commodities prices and difficulties in transporting products are continuing to affect all segments of the manufacturing economy. Worker absenteeism, short-term shutdowns due to part shortages, and difficulties in filling open positions continue to be issues that limit manufacturing-growth potential.”

Construction spending rose 0.2% MOM and 5.3% YOY, according to the Census Bureau. Residential construction rose 1.7% MOM and 23% YOY. Again, we will see unusually high year-over-year rates for the next several months as we compare against the lockdown days.

There was a rumor going around on Friday that Freddie is going to announce a 5% cap on non-owner occupied loans sometime this week. Freddie is thinking it might not be able to get under the 7% cap by the end of the year.

Mortgage REIT Annaly Capital announced first quarter earnings last week and mentioned on the earnings call that it is moving into the agency NOO space: “We continue to see opportunities in the non-QM market and have started to capitalize on opportunities in the agency investor market given recent changes to the GSE’s preferred stock purchase agreements.” As more and more players enter this market, we should see pricing improve on these loans. Annaly also made a prescient sale of its commercial real estate business, just as the Biden tax plan takes aim at 1031 sales.

New York State is legendary for its long foreclosure timelines. That said, we have found the champion for working the system: A guy on Long Island bought his house in 1998, made one payment, and has managed to still live there.

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