Morning Report: Rates fall again

Vital Statistics:

S&P futures4,2606.2
Oil (WTI)66.14-0.25
10 year government bond yield 1.14%
30 year fixed rate mortgage 3.00%

Stocks are rebounding this morning after yesterday’s bloodbath. Bonds and MBS are up again.

The drop in rates is a global phenomenon, based on fears of a COVID resurgence and a drop in growth. The German Bund is down to -43 basis points and the Japanese Government Bond is flirting with negative rates again. While global rates don’t correlate exactly, they do move together. Expect mortgage rates to lag the move, as MBS invariably wait for confirmation that the move in the 10-year is real.

The previous forecast of a rip-roaring second half of 2021 is getting off to a rough start. Note the Atlanta Fed’s GDP Now forecast for the second quarter has fallen again to 7.5%. As the Fed has constantly preached, the economy is going to be highly dependent on the course of COVID-19, and many of its forecasts were based on the assumption that we don’t see a resurgence in cases.

One thing that is sure to happen is that mortgage servicing right valuations are about to get softer as rates fall. Since many big lenders tend to use MSR income as a way to augment lower gain on sale income we should see a detente in the margin wars going on right now.

Speaking of servicing valuations, Ginnie Mae servicing is probably going to get whacked again. Why? Ginnie Mae is looking to limit the amount of servicing issuers can hold by introducing a risk-based capital weighting. It gets complicated, but they want to limit the GNMA servicing that an issue can hold relative to its net worth. This appears to be a direct shot at non-bank servicers, and the expected impact will be that many will have to sell off big parts of their GNMA book or raise equity capital.

This (along with falling rates) will probably depress GNMA servicing valuations (and probably servicing valuations across the board). GNMA burned its bridges with the big banks after the financial crisis and now they are contemplating this. If the government wants to increase FHA lending to help lower-income borrowers, this is an odd way of going about it.

Housing starts came in at 1.64 million in June, which was a touch above expectations. Building Permits were 1.6 million, which was somewhat below what the Street was looking for. While lumber prices have eased, labor shortages remain an issue for the industry.

Loans in forbearance fell to 3.5% of servicers’ portfolios last week, according to the MBA. “Forbearance exits edged up again last week and new forbearance requests dropped to their lowest level since last March, leading to the largest weekly drop in the forbearance share since last October and the 20th consecutive week of declines,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The forbearance share decreased for every investor and servicer category.”

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