All Things in Moderation

Vital Statistics:

Stocks are lower this morning after inflation came in hotter than expected. Bonds and MBS are down.

Inflation rose at a 7.5% annual pace in January, according to the Consumer Price Index. Ex-food and energy, it rose 6%. Rising energy costs were the big driver of the headline number, however used cars were another item. Shelter rose 4% YOY, however the price appreciation of the past year is only beginning to be reflected in the inflation numbers. If you take away seasonal adjustments, the headline CPI rose 8.2%.

Needless to say, the bond market took a beating on these numbers. Mortgage backed securities are down a half a point, and roll rates are increasing. This should translate into higher lock prices.

Foreclosure completions increased to 4,784 properties in January, which is up 57% MOM and 235% YOY. “The increased level of foreclosure activity in January wasn’t a surprise,” said Rick Sharga, executive vice president of RealtyTrac, an ATTOM company. “Foreclosures typically slow down during the holidays in November and December and pick back up after the first of the year. This year, the increases were probably a little more dramatic than usual since foreclosure restrictions placed on mortgage servicers by the Consumer Financial Protection Bureau expired at the end of December.”

Given that the foreclosure moratorium has expired, we should expect to see increases in foreclosure activity. Will we see a repeat of 2009 – 2010? I don’t see that as even a remote possibility. What is the difference? Home equity. Home price appreciation has been so strong that borrowers who cannot afford their current mortgage payment can sell their property and move to a cheaper place. Investors who are hoping to pick up a cheap properties as the moratoriums expire are probably going to be disappointed.

Rocket CEO Dan Gilbert is being sued for alleged insider trading. The complaint alleges that Gilbert sold $500 worth of stock two months before the company announced that gain on sale margins were falling. The plaintiff alleges that guidance out of Rocket pushed the stock to $41.60, after which Gilbert sold stock. Rocket’s spike was not due to guidance, it was due to rumors on Reddit that Rocket could be a short squeeze candidate. Redditors were envisioning another Gamestop situation. Pro tip: If the float of a stock is tiny, but the founders have a lot of stock they would like to sell, it isn’t a short squeeze candidate.

I wouldn’t be surprised to see more suits like this given how god-awful mortgage banking stock have performed in the market. Just about a year ago, Loan Depot was trading above $30 a share. It is now closer to $4. That is a 87% decline. You would think the stock would be in trouble, right? Well, not exactly. The company is expected to make $0.64 this year, which gives it a P/E of 6.5. It also has a dividend yield of 7.7%. I know mortgage banking stocks are as popular as mask mandates these days, but at some point, they have to be too cheap to ignore, right?

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Vital Statistics:

Stocks are higher as earnings continue to come in. Bonds and MBS are up small.

Mortgage applications decreased by 8.1% last week as rates rose. Refis decreased by 7% and purchases fell by 10%. “With rates 87 basis points higher than the same week a year ago, refinance applications continued to decrease,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity slowed after the previous week’s gain. Both conventional and FHA purchase applications saw proportional declines, resulting in purchase activity overall dropping 10 percent. The average loan size again hit another record high at $446,000. Activity continues to be dominated by larger loan balances, as inventory remains tight for entry-level buyers.”

New Rez reported numbers yesterday which sent the stock up 7.4%. In anticipation of higher rates, New Rez has been building the servicing book. They are in a position now, at least according to their analysis that increasing rates will benefit financially – in other words, they think the increase in MSR valuation will more than offset the decline in origination that a 100 basis point increase in mortgage rates will be accretive to EPS by $0.11. Separately, New Rez announced some layoffs from the Caliber acquisition.

Mortgage bankers have been beaten up this year, especially United Wholesale and Rocket. New Rez has held up better than the rest. New Rez has a pretty decent dividend yield, so that might be helping.

Total household debt increased 2.2% to $15.58 trillion, according to the Fed. Mortgage debt increased a trillion last year. “The total increase in nominal debt during 2021 was the largest we have seen since 2007,” said Wilbert Van Der Klaauw, senior vice president at the New York Fed. “The aggregate balances of newly opened mortgage and auto loans sharply increased in 2021, corresponding to increases in home and car prices.” The biggest percentage increases were in student loan debt and credit card debt, however.

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Vital Statistics:

Stocks are lower this morning as bonds continue to sell off. Bonds and MBS are down.

Part of the reason for the sell-off in stocks and bonds has been the consistently hawkish direction of the Fed Funds futures. The March Fed Funds futures are now predicting a 71% chance of a 25 basis point increase and a 29% chance of a 50 basis point hike. A month ago, it was a 6% probability and markets thought there was a 25% chance that the Fed would hold rates at zero.

The consensus for the December 2022 FOMC meeting is that the Fed Funds rate will be 150-175 basis points, which represents six 25 basis point increases. Bank of America is even more aggressive, forecasting that the Fed Funds rate will be between 1.75% and 2%.

Small business optimism slid in January, according to the NFIB. “More small business owners started the New Year raising prices in an attempt to pass on higher inventory, supplies, and labor costs,” said NFIB Chief Economist Bill Dunkelberg. “In addition to inflation issues, owners are also raising compensation at record high rates to attract qualified employees to their open positions.”

The number of businesses characterizing inflation as their biggest problem reached the highest level since 1981. In addition, the net number of firms raising prices hit 61% which was the highest reading since 1974. In addition, a net 50% of small businesses reported increasing raising compensation, a 48 year high.

The slowdown in the mortgage business has hit Spanish bank Santander. It will exit the US mortgage business. “We are simplifying our business to focus on those areas where we can be successful with clients and deliver solid returns,” Tim Wennes, president and CEO of Santander Bank and its U.S. holding company, said in an interview.

The mortgage industry was understaffed in general heading into the big 2020 refi wave, and is now overstaffed. Expect more layoffs going forward.

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Vital Statistics:

Stocks are flattish this morning as earnings continue to come in. Bonds and MBS are down small.

The week after the jobs report is usually pretty data-light, and this week is no exception. The big number will be the Consumer Price Index on Thursday.

Speaking of the jobs report, one of the explanations for the big jump in payrolls was a seasonal adjustment. Generally speaking a lot of people get hired for the holiday shopping season and then get laid off in January. BLS adjusts for that in its seasonal adjustments. This time around, the layoffs didn’t happen, as many employers decided to hang onto these temp workers since the labor market is so tight. So the 467k number more accurately represents people who ordinarily would have been let go that weren’t. I suspect that is the driver for the big difference between the ADP number (loss of 200k) and BLS (gain of 467k).

Mortgage rates continue to soar higher, reaching the highest level since late 2019. Most lenders are quoting rates in the 3.875% – 4% range. Big MBS investors like AGNC Investment noted that mortgage backed securities spreads are widening in January as investors are reluctant to catch a falling knife from the Fed.

United Wholesale is suing one of its broker partners for selling loans to Rocket and Fairway. This stems from a policy introduced last year, which made brokers agree to not sell loans to Rocket or Fairway.

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Vital Statistics:

Stocks are lower this morning as rates rise. Bonds and MBS are down.

There were 467,000 jobs created in January, according to BLS. The unemployment rate ticked up to 4%, and the labor force participation rate rose to 62.2%. Average hourly earnings increased 5.7% YOY. The employment-population ratio rose from 59.5% to 59.7%. The payroll number is surprising given what we saw from ADP (a drop of 200k) so I am not sure which one will prove to be correct. Given the Omicron surge, my gut says that ADP makes more sense and this report will be revised down.

The bond market was clearly leaning the wrong way going into this report, as the 10-year yield rose from 1.82% to 1.9%. Mortgage backed securities are lagging the move a touch, as is typical on big moves in the bond market.

The homeownership rate ticked up slightly to 65.5%, according to the Census Bureau. Median asking rent is on the march higher, which represents rising home prices and record low vacancy rates.

The ISM Services Index declined in January. The Business Activity sub-index dived 8 points, while costs are rising. Labor and materials shortages remain an issue. Some of the comments from respondents include:

• “Costs have escalated to what we believe are unsustainable levels. Available labor is nonexistent, so we have cut staffing and are taking on fewer projects temporarily in an attempt to reduce cost. Outsourcing where possible. We are not optimistic at this time.” [Construction]
• “Challenging operating conditions remain the same to start the new year. Our biggest service providers seem to be rebounding from labor shortages or are managing their way through them. We will be forced to upgrade some equipment that is less reliant on labor.” [Agriculture, Forestry, Fishing & Hunting]
• “Business activity is increasing, but professional labor continues to be in short supply. Virtual work is preferred by clients.” [Finance & Insurance]

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Vital Statistics:

Stocks are lower this morning after tech lead sled-dog Facebook stunk up the joint with earnings last night. Bonds and MBS are down.

Nonfarm productivity increased 6.6% in the fourth quarter as output rose 9.2% and hours worked increased 2.4%. Unit labor costs rose 0.3% as compensation rose 6.9% and productivity increased 6.6%. This is good news overall as the key to higher living standards (in other words non-inflationary growth) is productivity.

Initial Jobless Claims fell to 238k last week, while the Challenger job cut report showed just over 19,000 announced job cuts.

Equity-rich properties (in other words LTV < 50) accounted for 42% of all mortgaged homes in the fourth quarter, up from 39% in the third quarter of 2021.

“Another quarter, another boost to the balance sheets of homeowners in most of the United States – that was the story from the fourth quarter of last year. As home prices kept rising, so did the equity built up in residential properties, to the point where close to half of all mortgage payers around the country found themselves in equity-rich territory,” said Todd Teta, chief product officer with ATTOM. “No doubt, there are market metrics that pose warnings about how long the boom can last and equity can keep improving. We keep watching those closely. But for now, homeowners are sitting pretty as the wealth they have tucked away in their homes keeps growing.”

Of course the big question remains how long can the increase in home price appreciation last, with rising mortgage rates. Ultimately the productivity report provides some guidance: hourly compensation rose 6.9% in the fourth quarter. Wage inflation, along with a shortage of available properties means that home prices should be well-supported going forward.

I have to say this every once in a while: we are not in another housing bubble. Bubbles are rare and psychologically-driven phenomena, where everyone (buyers, lenders, regulators) believe an asset is “special” and cannot fall in price. Prior to the 2006 bust the previous residential real estate bubble was in the 1920s. Memories are fresh from 2006, and the pieces just aren’t in place for one.

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Vital Statistics:

Stocks are higher this morning after Alphabet (Google) reported strong numbers. Bonds and MBS are flat.

Private payrolls fell 300k in January, according to the ADP Employment Report. The Street is looking for positive 200k in Friday’s Employment Situation Report, so this is a sizeable miss. The Omicron Variant was the big driver of the decline.

“The labor market recovery took a step back at the start of 2022 due to the effect of the Omicron variant and its significant, though likely temporary, impact to job growth,” said Nela Richardson, chief economist, ADP. “The majority of industry sectors experienced job loss, marking the most recent decline since December 2020. Leisure and hospitality saw the largest setback after substantial gains in fourth quarter 2021, while small businesses were hit hardest by losses, erasing most of the job gains made in December 2021.”

Mortgage Applications increased 12% last week as borrowers rushed to complete refinances ahead of the expected increase in borrowing rates. Purchases rose 4% while refis rose 18%. “Despite the increase in rates, refinance applications were up 18 percent, driven mainly by a 22 percent jump in conventional applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “There has likely been some recent volatility in application counts due to holiday-impacted weeks, as well as from borrowers trying to secure a refinance before rates go even higher.”

Loan Depot reported disappointing earnings, as volumes fell 22% on YOY basis and gain on sale margins contracted 106 basis points. EBITDA fell 88%. The company did increase its market share and the servicing book increased by 57% on a YOY basis.

Home Prices rose 18.5% in December, according to CoreLogic. The company expects home price appreciation to take an abrupt halt, with prices expected to rise only 3.5% this year. Frank Nothaft, Chief Economist of CoreLogic had this to say: “Much of what we’ve seen in the run-up of home prices over the last year has been the result of a perfect storm of supply and demand pressures. As we move further into 2022, economic factors – such as new home building and a rise in mortgage rates – are in motion to help relieve some of this pressure and steadily temper the rapid home price acceleration seen in 2021.”

Regarding home prices, the rise in mortgage rates will definitely crimp affordability, however wages are also rising. IMO the supply-demand imbalance is so stark, it will take years of above-average housing starts (think 2.5 to 3 million units) to make a dent. Last year, we did something like 1.6 million starts, which is about what we did in 1959, when the population was a little more than half of what it is now. We have a long way to go.

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Vital Statistics:

Stocks are up this morning as the bond market stabilizes. Bonds and MBS are flat.

The manufacturing economy expanded in January at a slower rate than December, according to the ISM Manufacturing Report. The New Orders and Production indices fell, however prices rose substantially. The employment index also ticked up marginally.

“The U.S. manufacturing sector remains in a demand-driven, supply chain-constrained environment, but January was the third straight month with indications of improvements in labor resources and supplier delivery performance. Still, there were shortages of critical intermediate materials, difficulties in transporting products and lack of direct labor on factory floors due to the COVID-19 omicron variant. Quits rate and early retirements hinder reliable consumption. Panel sentiment remains strongly optimistic, with seven positive growth comments for every cautious comment, up from December’s ratio of 6-to-1.

Shortages of skilled labor and materials remain big issues. We did see some evidence that backlog is getting cleared, but overall the brake on the economy is from the supply side, not the demand side.

Speaking of labor shortages, the JOLTs job opening report showed 10.9 million unfilled jobs in the US. The quits rate edged down to 2.9%, and hiring slowed compared to November. I suspect this is pandemic-driven and not really economy-driven.

Construction spending rose 0.2% MOM and 9% YOY, according to Census. Residential construction rose 15% YOY, and this offset weakness in office building. Public construction was down 1.6% MOM and 2.9% YOY. I guess the infrastructure bill passed last year hasn’t had a chance yet to be reflected in the numbers.

Mortgage REIT AGNC Investment reported earnings yesterday, and book value per share fell 4% as mortgage backed security spreads widened. MBS spreads are the difference between the yields on Treasuries and mortgage backed securities. When spreads are “widening” it means that mortgage rates are increasing relative to Treasuries.

“Investor sentiment turned negative in the fourth quarter as the Federal Reserve signaled a very significant shift toward aggressive monetary policy normalization,” said Peter Federico, the Company’s President and Chief Executive Officer. “With inflation running well above its long run target and the labor market nearing full employment, the Fed reduced its asset purchases more quickly than its initial guidance, signaled a more aggressive series of short-term interest rate increases, and discussed a more rapid approach toward balance sheet normalization. This abrupt shift by the Fed led to an uptick in interest rate volatility amid greater monetary policy uncertainty. Against this backdrop, Agency mortgage-backed securities underperformed in the fourth quarter as spreads to benchmark rates widened moderately and valuations declined relative to interest rate hedges.

The increase in mortgage rates means that refinance possibilities are decreasing, however the flip side is that prepayment speeds are falling. This mirrors what we are seeing at mortgage originators right now: refi activity is falling, while servicing multiples are increasing. This is why servicing is thought of as a natural hedge for the origination business.

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