All Things in Moderation

Vital Statistics:

Stocks are lower after weaker-than-expected economic data out of China and continuing fears about COVID. Bonds and MBS are up.

In terms of economic data this week, we will get retail sales, industrial production, and housing starts. Jerome Powell will speak on Tuesday, and we will get the FOMC minutes on Wednesday.

As part of the infrastructure package, the government is looking at what is basically an Alternative Minimum Tax for corporations. It supposedly would look at increases in book value and tax that at 15% as a floor. One area that would impact mortgage originators is mortgage servicing rights. As of now, mortgage servicing rights are capitalized when created, and there is no income realized until the they are sold or fees are collected.

Under the new proposal, they would be taxed immediately, since book value increases once they are capitalized. Given the issues with potential Basel-like capital requirements for non-bank GNMA originators, MSR pricing in the secondary market will remain under pressure.

United Wholesale reported second quarter earnings this morning. Volumes increased 20% to $59 billion, however gain on sale margins were down big, more or less as expected. In the first quarter, gain on sale margins were 2.19% and they fell to 0.81% in the second quarter. FWIW, the company guided on its Q1 earnings call that margins would be down big in Q2, although Matt Ishbia also expected that to be the bottom. For the third quarter, UWM is guiding for volumes to to come in at $57-62 billion and for gain on sale margins to be in the 0.75% – 1.00% range. Note that Rocket on Friday also guided that the margin compression is probably over as well.

The big question for the mortgage market is when to begin the tapering process (or reducing the current $80 billion a month pace of MBS and Treasury purchases). The Fed wants to avoid a repeat of the 2013 “taper tantrum” where Treasury yields got away from them quickly. It sounds like it could start anywhere from September to mid-2022.

The big difference between 2013 and today is the state of the economy. In December 2013 the Fed started reducing its purchases and unemployment was 6.7%. Today, unemployment is at 5.4%. Inflation is higher as well, although much of that is due to supply chain constraints which can’t be influenced by monetary policy. Labor constraints are also an issue, and that is increasing the cost of homebuilding and the Fed is wary of the fast pace of home price appreciation. While the Fed can’t control the supply and demand imbalance in the housing market, they can influence mortgage rates. This issue will probably push up the tapering process, especially for MBS purchases. We will have to see how home prices look as we head into the seasonally slow period.

One important thing to keep in mind is that MBS spreads (that is the difference between the yield on Treasuries and MBS) were much wider during 2013, with the spread reaching something like 150 basis points. Today, spreads are closer to 70 basis points. If history repeats itself, we should see higher mortgage rates going forward if the economy continues to improve. If it does not, and Treasury yields work lower, mortgage rates will struggle to get much lower.

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Vital Statistics:

Stocks are flattish as we end up the week on this Friday the 13th. Bonds and MBS are up small.

Rocket reported earnings after the close yesterday. Volume in the second quarter fell from $105B in Q1 to $84B in Q2. Gain on sale margins were slammed hard sequentially, falling from 3.74% to 2.78%. The company is guiding for Q3 volume to resemble Q2, and gain on sale margins are expected to be in the 2.7% – 3% range. It looks like perhaps the margin compression is over, or at least taking a breather. FWIW, Matt Ishbia said on United Wholesale’s Q1 call that he expected Q2 to be the bottom for margins and for them to rebound into the end of the year. So perhaps some of the pressure will ease up. Rocket is up a buck and change in early trading.

Import prices are up 0.3% MOM and 12% YOY. Export prices are up 1.3% MOM and 17% YOY. China just partially shut down the world’s third largest port after an employee had a positive Delta COVID test. Shipping prices are already up 220% this year, so the inflation story will get another temporary boost.

It looks like the red-hot housing market is beginning to cool off, according to Redfin. “For the first time in over a year, homebuyers don’t need to feel rushed,” said Redfin Chief Economist Daryl Fairweather. “Although the market still feels tight and competitive, the number of homes for sale keeps creeping up as more homes are listed. Those home sellers are adjusting their price expectations or seeing their homes sit on the market. There could be even more listings coming on the market as mortgage forbearance ends and homeowners with missed payments decide to sell. And mortgage rates remain near all-time lows with no signs of an increase on the horizon.”

Consumer sentiment got whacked this month, according to the University of Michigan’s Consumer Sentiment Survey. The index fell from 81.2 in July to 70.2. This is the sixth largest drop in the index’s history, and is actually below the April 2020 low of 71.8.

As a general rule, consumer sentiment surveys often turn out to be nothing more than a reflection of gasoline prices, however this reading is probably due more to renewed COVID fears.

The drop was broad across all demographics and included both drops in consumers’ current situation and their expectations.

The 10 year yield fell about 4 basis points on the news. I suspect the expected rip-roaring 2H recovery that the Street and the media has been cheerleading for is not going to be in the cards.

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Vital Statistics:

Stocks are flat after the Producer Price Index came in higher than expected. Bonds and MBS are flat as well.

Prices at the wholesale level increased 1% MOM and 7.8% YOY. Ex-food and energy, prices rose 1% MOM and 6.2% YOY. Autos accounted for about 20% of the increase, while travel-related services also added a bit. I sound like a broken record here, but keep in mind that the year-over-year comparisons have a lot of noise in them due to the lockdowns of a year ago. We are still a ways away from putting Whip Inflation Now bumper stickers on the backs of our cars.

The COVID-related supply bottlenecks are reversing and returning to normal. Freight shipping volume is back to pre-pandemic levels, however costs are way higher than before. Shipping costs are 44% higher than a year ago, and 23% higher than two years ago. That said, they are falling on a MOM basis.

Despite an extremely tight labor market, initial jobless claims remain elevated, coming in at 375k last week. Initial Jobless Claims remain a puzzle, as they are much higher than the Great Recession. Take a look at the chart below, which compares the Great Recession with COVID. It is astounding that COVID claims remain so persistently high when it seems every store has a “help wanted” sign in front.

Mortgage Credit increased slightly in July, according to the MBA. “Even as the economic recovery is underway, overall credit supply has remained close to its lowest levels since 2014,” Kan said. “Some borrowers are still in pandemic-related forbearance status, and servicers continue to work through possible resolutions for these borrowers.”

Fannie Mae introduced a new initiative to help first time homebuyers get access to a loan. It will now allow a borrower’s rental payment history to be included in cases where a limited credit history is insufficient to get an approval out of DU.

“Many renters believe they will never be able to buy their own home because of insufficient credit. We can responsibly expand mortgage eligibility by including positive rent payment history in underwriting risk assessments,” said Hugh R. Frater, Chief Executive Officer, Fannie Mae. “We believe this will be the first time any large-scale automated mortgage underwriting system will leverage electronic bank statement data to consider positive rent payment history. It is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners. We look forward to working with our industry partners to do what we can together to address this and other barriers to homeownership.”

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Vital Statistics:

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

Inflation at the consumer level rose 0.5% MOM and 5.4% on a YOY basis. Ex-food and energy, it increased 0.4% MOM and 4.3% YOY. While the Fed doesn’t really use the CPI to guide its policy decisions, it does still indicate that inflation is back, at least temporarily. I would take the YOY numbers with a grain of salt since last year’s prices were distorted by COVID lockdowns.

Productivity rose 2.3% in the second quarter, according to BLS. Prior estimates were revised downward. Productivity is critical to creating non-inflationary growth. Part of the reason for the 1970s inflation was due to a collapse in productivity. Unit labor costs rose 1%. Productivity will be a key factor in the Fed’s assessment of the economy going forward. If productivity is high, then the Fed has a little more breathing room in how it reacts. If productivity is low, then inflation can be more persistent. The big takeaway is that inflation has increased, COVID is distorting the numbers somewhat, and we will have a better idea of how persistent it is by the end of the year.

Small Business Optimism declined in June, according to the NFIB. “Small business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” said NFIB Chief Economist Bill Dunkelberg. “As owners look for qualified workers, they are also reporting that supply chain disruptions are having an impact on their businesses. Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains.”

Supply chain bottlenecks are also partially behind the increase in inflation. Presumably, these will reverse as we put COVID behind us. That said, the decline in small business optimism, especially about the future, calls into question the whole massive rebound in the second half of 2021 scenario.

Mortgage Applications rose 3% last week as purchases rose 2% and refis rose 3%. Refi applications returned to levels last seen in February. “Mortgage applications rebounded last week, including an increase in purchase applications for the first time in nearly a month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates slightly rose but remained below 3 percent, driven by an end-of-week increase in the 10-year Treasury yield following the positive July jobs report.”

Despite the drop in the 10 year, mortgage rates have been slow to follow. This is a function of MBS spreads widening in anticipation of the end of the Fed’s MBS purchases. Current coupon spreads right now are about 70 basis points (this is the difference in yield between the 10 year bond and the typical MBS). During the taper tantrum of 2013, that spread increased to 150 basis points. Mortgage REIT earnings were dented in the second quarter due to spread widening, and that shows up in stagnant mortgage rates in a context of declining 10 year yields. This adjustment will play out over the next year, and LOs should get used to being disappointed when they see the 10 year yield down on CNBC and see no difference when they run a scenario.

The share of loans in forbearance fell to 3.4% last week, according to the MBA. “Forbearance exits increased as August began and new forbearance requests declined, resulting in the largest decrease in the share of loans in forbearance in three weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “1.7 million homeowners remain in forbearance, 13% of whom were current on their payments as of August 1. Of those who exited forbearance last week, more than 10.5% were current. Forbearance has surely provided both insurance and assurance for many of these homeowners who worried about ongoing hardships, and it is positive to see so many continue to be able to make their payments while in forbearance.”

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Vital Statistics:

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

The upcoming week is relatively data-light however we will get some inflation data with the Consumer Price Index and the Producer Price Index. We will also get productivity data as well as plenty of Fed-speak.

Some good commentary from various home builders. It looks like the torrid price growth has eased. While shortages are still an issue, lumber prices have come back to earth.

The MBA is urging New York Governor Andrew Cuomo to veto a bill that would require independent mortgage bankers to follow Community Reinvestment Act guidelines. The MBA called the bill “unnecessary,” and said it “fails to consider the existing legal infrastructure and significant industry efforts that have greatly expanded mortgage lending to low- and moderate-income (LMI) borrowers in New York.” There definitely seems to be a push to institute banking-like regulations on independent mortgage bankers – witness GNMA’s proposals for capital requirements on non-bank servicers.

Rising house prices have an outsized effect on the inflation numbers. The concept is owners equivalent rent, which attempts to come up with a number if a homeowner rented his house out. So far, we haven’t seen much in the way of increased rents during the pandemic, as foreclosure moratoriums have made raising rent difficult. Owner’s equivalent rent has been running at around 3.5% annually, despite double-digit increases in house prices.

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Vital Statistics:

Stocks are higher this morning after a better-than-expected jobs report. Bonds and MBS are down.

The economy added 943,000 jobs in July, according to the BLS. This was higher than expected, and much better than the ADP jobs reading on Wednesday. The unemployment rate fell from 5.9% to 5.4%. The number of employed increased by 1 million, while the number of people who were unemployed fell by 800k. The labor force participation rate ticked up to 61.7%.

The report notes that the payroll increase may have been distorted by seasonal adjustments for education. COVID issues meant there were fewer than normal June layoffs, which exaggerated the July payroll increase.

Average hourly earnings increased 0.4% MOM and 4% YOY. I suspect the wage increases will be more persistent than people are thinking, and the bargaining power may be in the hands of workers for the first time in decades. This will support inflation, although wage-driven inflation is exactly what the Fed wants to see.

The Delta variant of COVID has caused companies to push back the return to the office. Apple was the first to push it back, and now we have Amazon.com delaying the return until next year. Wells has also delayed the return by a month. That said, office REITs like SL Green say that most employers are targeting a post-Labor Day return.

Servicer satisfaction increased during the pandemic. I guess forbearance makes borrowers happy. Rocket, Huntington and Guild were the favorites.

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Vital Statistics:

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

Initial Jobless Claims came in at 385,000, which was a touch above expectations. Separately, the Challenger Gray and Christmas job cut report showed 18,942 announced job cuts.

Despite a Supreme Court ruling that the CDC’s eviction ban is unconstitutional, the Biden Admin ordered another one to last until October 3. I think they tweaked it a little, so if you make under 200k, you can’t get evicted. Despite this change it will still cover about 90% of renters. FWIW, the Biden Admin admitted earlier it couldn’t really pull this stunt, but I guess the pressure from the backbenchers got to be too much.

Fed Vice Chairman Richard Clarida could see the Central Bank start raising rates in 2023. He didn’t give a timeframe on the issue of MBS and Treasury purchases, only saying that the market would have plenty of notice before they start.

The Fed Funds futures envision a more hawkish scenario, with the market assigning a 60% chance of rate hikes by the end of 2022.

While the job market still has more work to do in order to get back to full employment, inflation is running above the Fed’s 2% target. COVID-19 related supply chain bottlenecks are probably behind it, but wage growth may be the next shoe to drop and that will be more persistent boost to inflation than a lack of logistics space on I-95.

Loan Depot reported lower-than-expected earnings, as competitive pressure and overcapacity pressured margins. Volumes decreased 17% to $34.5 billion and gain on sale margins fell to 2.28% from 2.98% in the first quarter. On a YOY basis, gain on sale margins are down 58%.

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Vital Statistics:

Stocks are lower this morning on COVID fears. Bonds and MBS are up small.

The 10-year continues to drop in yield, however this is a global phenomenon. The German Bund is back below negative 50 basis points, and the Japanese Government Bond is back at 0%.

I know that with the current central bank intervention in the bond markets that interest rates don’t have the signal to noise ratio they usually have, but it certainly doesn’t appear that the US economy is set for a huge upswing in the second half of the year.

The economy added 330,000 jobs in July, according to the ADP Employment Report. The Street was looking for 700k jobs, so this is a sizeable miss. The gains were primarily in leisure / hospitality and education / health. The June number was revised downward as well.

“The labor market recovery continues to exhibit uneven progress, but progress nonetheless. July payroll data reports a marked slowdown from the second quarter pace in jobs growth,” said Nela Richardson, chief economist, ADP. “For the fifth straight month the leisure and hospitality sector is the fastest growing industry, though gains have softened. The slowdown in the recovery has also impacted companies of all sizes. Bottlenecks in hiring continue to hold back stronger gains, particularly in light of new COVID-19 concerns tied to viral variants. These barriers should ebb in coming months, with stronger monthly gains ahead as a result.”

The Street is looking for 900,000 payrolls in Friday’s jobs report so there seems to be a sizeable disconnect between expectations and reality here.

Mortgage applications fell 1.7% last week as purchases and refis fell by basically the same amount. This is despite a 4 basis point drop in the mortgage rate. “Interest rates drifted lower globally last week, as markets assessed the latest concerns regarding the delta variant. 30-year mortgage rates dropped below 3 percent in our survey for the first time since this February, presenting an opportunity for many homeowners who have not yet refinanced to lower their rate and their payments. Refinance application volume slightly decreased, following an 11 percent jump last week,” said MBA Senior Vice President and Chief Economist Mike Fratantoni.

So far, it doesn’t appear that the adverse market fee is having much of an impact on refi volume, does it?

Figure, a blockchain fintech is merging with Homebridge. Figure is led by Mike Cagney, who founded SoFi. “Probably the most significant issue was we had this grand thesis that we could save 90 basis points of expense to originate securitized loans on a blockchain” Cagney told HousingWire in an interview in May.

Fannie Mae just reported earnings. Here are the prepared remarks. Fannie sees purchase volume reaching $1.8 trillion this year, and they expect refi volume to decrease as interest rates rise. They also see a 14.8% rise in house prices this year.

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Vital Statistics:

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

Home prices rose 17.2% in June, according to CoreLogic. This is the highest annual growth rate since 1979. While the lockdowns of a year ago are almost certainly exaggerating the increase, some of the Western states are experiencing eye-popping gains. Idaho, 34%. Arizona 26%. Montana 24%. CoreLogic expects home prices to level out from here, but with the current supply / demand situation that seems unlikely.

The number of loans in forbearance fell from 3.48% to 3.47% last week, according to the MBA. “Forbearance exits remained low, and there was another increase in new forbearance requests, particularly for Ginnie Mae and portfolio and PLS loans. The net result was another slight decline in the share of loans in forbearance,” said MBA Senior Vice President and Chief Economist Mike Fratantoni.

About 65% of forbearance plans are slated to expire this year, according to Black Knight. “As a result, 65% of active plans – representing approximately 1.2 million homeowners – are now set to expire over the rest of 2021, including nearly 80% of all FHA and VA loans in forbearance. Nearly three quarters of a million plans would expire in September and October alone. Over the course of just two months this fall, the nation’s mortgage servicers would have to process up to approximately 18,000 expiring plans per business day, guiding borrowers through complex loss mitigation waterfalls directed by changing regulatory requirements. The operational challenge this represents is staggering, even before noting the oversized share of FHA and VA loans. Given the heightened challenges those borrowers may face in returning to making mortgage payments as compared to those in GSE loans, effective loss mitigation efforts and automated processes become even more critically important.”

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Vital Statistics:

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

The big event this week will be the jobs report on Friday. The Street is looking for 900k payrolls to be added, which seems pretty high compared to recent history.

Construction spending rose 0.1% in June, according to Census. It is up 8.2% YOY. Residential construction rose 1.1% and is up 29% YOY. I would bet most of that increase is due to higher lumber prices.

Manufacturing decelerated in July, according to the ISM Manufacturing Report. “Business Survey Committee panelists reported that their companies and suppliers continue to struggle to meet increasing demand levels. As we enter the third quarter, all segments of the manufacturing economy are impacted by near record-long raw-material lead times, continued shortages of critical basic materials, rising commodities prices and difficulties in transporting products. Worker absenteeism, short-term shutdowns due to parts shortages and difficulties in filling open positions continue to be issues limiting manufacturing-growth potential.”

The eviction moratorium that was imposed by the CDC expired over the weekend, but FHFA and FHA extended their own eviction moratoriums until September 30. This affects single family rentals backed by FHA and Fannie / Freddie loans. “The pandemic continues to have an outsized impact on the ability of Americans to meet their monthly rent or mortgage payments. Today’s extension of the eviction moratorium protects particularly vulnerable Americans who otherwise would be at risk of losing a place to live,” said Acting Director Sandra L. Thompson. 

Just to put this eviction moratorium into perspective. We are pushing two years now, unemployment is under 6% and there are record job openings. It sure would be nice to get some sort of indication from DC what set of circumstances would warrant a restoration of property rights.

St. Louis Fed President James Bullard thinks the Fed should begin tapering MBS and Treasury purchases in September and wrap up the process by March. “We should go ahead and get the taper going, get it behind us, so we would have some optionality to handle the possibility — maybe not even the likelihood — the possibility that inflation is more persistent and higher than we’d like,” Bullard said.

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