Morning Report: Mark Calabria will run FHFA

Vital Statistics:

 

Last Change
S&P futures 2648.75 -3.5
Eurostoxx index 348.48 -1.12
Oil (WTI) 50.5 -0.64
10 year government bond yield 2.90%
30 year fixed rate mortgage 4.72%

 

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

 

The consumer price index was flat month-over-month in November, and was up 2.2% on a YOY basis. Ex-food and energy, it was up 0.2% MOM and 2.2% YOY. Inflation remains under control, which gives the Fed an excuse to stand pat next week. The Fed Funds futures are handicapping an 80% chance of another 25 basis point hike.

 

Mortgage applications increased 1.6% last week as both purchases and refis rose. “Mortgage rates fell across the board last week, driven by a similar slide in Treasuries. Trade fears dominated investors’ concerns, and this was amplified by data released by the U.S. Commerce Department showing a widening trade deficit,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The 30-year fixed mortgage rate decreased 12 basis points over the week back below 5 percent, representing the largest single week drop since 2017.” Refis are still flat on their back.

 

MBA refi index

 

While the real estate market is cooling overall, the hottest markets like Seattle and Denver are seeing big drops in activity. Denver sales are down 24% and inventory is up 50%. In Seattle, sales are down 20% while inventory is up 135%. I wonder how much of this is Chinese money getting cold feet about the US (and their own) real estate markets.

 

Donald Trump has officially nominated Mark Calabria to run FHFA when Mel Watt’s term expires in January. The NAHB and the MBA support the nomination, while affordable housing advocates are unhappy. In the past, he has been critical of low downpayment loans, which raises the question of what will happen with Fannie and Freddie’s low downpayment / low FICO programs. He has also been skeptical of the GSE’s affordable housing mandates. He is also on record being critical of securitization itself, regarding it as too pro-cyclical, which means there is too much credit in good times, and when the housing market turns down, it disappears. Finally, he has called for ending the 30 year fixed rate mortgage, which is almost an American birthright and would be impossible to get without the government subsidies.

Morning Report: More inflation data

Vital Statistics:

 

Last Change
S&P futures 2660.75 19
Eurostoxx index 347.9 2.9
Oil (WTI) 52.57 0.91
10 year government bond yield 2.89%
30 year fixed rate mortgage 4.72%

 

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

 

Donald Trump got into it with Democrats on live TV yesterday over funding for the wall. He said he would be “proud” to do a partial government shutdown in order to obtain funds for border security. “Partial government shutdown” all but screams that this shutdown will be symbolic only – usually the only thing they shut down are the monuments around DC – but that doesn’t always happen. As a general rule, the mortgage market should not be affected, but things like tax transcripts etc could be delayed. This sounds like it is all for show as both parties play to their respective bases.

 

Inflation at the wholesale level came in a hair above expectations, with the headline producer price index rising 0.1% MOM /  2.5% YOY. Ex-food and energy, the number was 0.3% / 2.7%. The Fed doesn’t necessarily put a lot of stock in the PPI, but it does show that inflation is beginning to creep above the Fed’s target of 2%. Building labor costs (which not only show up in direct wages, but also inputs like transportation) are being offset somewhat by declining commodity prices and strength in the US dollar.

 

Home prices rose 5.4% YOY in October, according to CoreLogic. “Rising prices and interest rates have reduced home buyer activity and led to a gradual slowing in appreciation. October’s mortgage rates were the highest in seven and a half years, eroding buyer affordability. Despite higher interest rates, many renters view a home purchase as a way to build wealth through home-equity growth, especially in areas where rents are rising quickly. These include the Phoenix, Las Vegas and Orlando metro areas, where the CoreLogic Single-Family Rent Index rose 6 percent or more during the last 12 months.”

 

CoreLogic estimates that 35% of all MSAs are overvalued, including the NY-NJ-LI area. This is interesting given that this area has barely rebounded off the 2012 lows, and has massively underperformed the rest of the US. This is evidence of the lack of wage growth in this area, primarily driven by secular changes in the financial services industry. Some of this was undoubtedly being driven by 0% interest rates, but a lot of it is technology replacing people.

 

NYC MSAs

Morning Report: Small business optimism remains elevated

Vital Statistics:

 

Last Change
S&P futures 2667.5 28
Eurostoxx index 345.14 5
Oil (WTI) 51.55 0.25
10 year government bond yield 2.89%
30 year fixed rate mortgage 4.72%

 

Stocks are higher this morning on hopes of a trade deal. Bonds and MBS are down.

 

There were 7.1 million job openings as of the end of October, according to the BLS. This was largely unchanged from September. IT and real estate had the biggest increases in open positions. The quits rate fell by 0.1% to 2.3%. The Fed pays close attention to the quits rate as it historically has presaged wage inflation. The JOLTs report does echo what we saw out of last Friday’s employment situation report – the job market is still strong, however it is beginning to cool down a touch.

 

Small Business optimism slipped ever so slightly in November, however it remains at multi-decade highs. A tight labor market remains one of the biggest issues, with a scarcity of “qualified” – i.e. not just “skilled” labor as a major issue. A net 34% of all small businesses are increasing wages, a historically robust number.  While labor markets are generally tight, there still is a large number of people who are on the older side, who probably do want to work, but are unable to find jobs. Getting them back into the economy is needed in order to raise potential GDP, which acts as a speed limit on the economy.

 

NFIB

 

Mel Watt’s term running the FHFA is up in January, and it looks like Mike Pence’s Chief Economist Mark Calabria is the front-runner to replace him. Calabria is a Libertarian, which will be sure to upset affordable housing advocates. Mel Watt was considered to be an ideological kindred spirit of the affordable housing lobby, and he allowed Fannie Mae and Freddie Mac to increase their footprint in the mortgage market. Calabria will probably side with Republicans who want to see the GSEs reduce their influence, and will probably look to tighten requirements, increase guaranty fees, and lower eligible loan sizes. This of course assumes Congress does nothing about GSE reform, which is probably a safe assumption.

 

Funding for the government expires on Dec 21. Trump and the Democrats are negotiating over funding the wall. Government shutdowns generally do not affect the financial markets – as much as they bother the Washington Post, Wall Street does not care. That said, the last time we had a shutdown, originators were unable to get tax transcripts out of the IRS, so plan ahead.

Morning Report: James Bullard floats idea of skipping Dec. hike

Vital Statistics:

 

Last Change
S&P futures 2628 -8
Eurostoxx index 343.16 -2.31
Oil (WTI) 51.87 -0.74
10 year government bond yield 2.85%
30 year fixed rate mortgage 4.72%

 

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

 

St. Louis Fed President James Bullard surprised markets on Friday by suggesting that the Fed could take a break at the December FOMC meeting. He argued that interest rates were already somewhat restrictive (at least that is what the yield curve is telling us), and the neutral Fed Funds rate is around 2%. (the current target rate is between 2% and 2.25%). He also noted that while unemployment is around 3.7%, the relationship between inflation and unemployment (aka the Phillips Curve) has been breaking down for decades, to where the statistical relationship is close to zero. The Fed Funds futures are handicapping an 80% chance of a hike, but the reaction from the market if they don’t hike may end up being worse than the reaction if they do.

 

The Fed Funds futures have been forecasting a hike in December, and then one more in 2019. So regardless of the timing, this tightening cycle is pretty much over.

 

The Fannie Mae Home Purchase Sentiment Index rose slightly in November, driven by increasing incomes. There has been a push-pull effect happening in the index, as increasing personal financials are being offset by deteriorating housing affordability. “The HPSI has moved within a tight range over the past five months, as positive sentiment regarding the overall economy continued to offset cooling housing sentiment,” said Doug Duncan, senior vice president and chief economist at Fannie Mae. “Consumers’ perceptions of growth in their household income reached a survey high this month, helping to absorb some of the impact of increasing mortgage rates on housing market activity. Meanwhile, the net share of consumers expecting home prices to increase over the next 12 months continues to moderate, dropping by 13 percentage points since this time last year.”

 

Roughly 46,000 homes were flipped in the third quarter, which is the lowest number in 3 1/2 years. The number of sub-3 year mortgages (used for the fix and flip crowd) dropped 11% last quarter. A combination of rich home prices and higher financing costs have made it tougher to earn a decent return in the business. At some point, the investors who did well in the REO-to-rental trade will probably look to ring the register and move on to better opportunities.

Morning Report: Jobs and the Fed Funds futures

Vital Statistics:

 

Last Change
S&P futures 2675 -16
Eurostoxx index 374 3.73
Oil (WTI) 51.4 -0.09
10 year government bond yield 2.89%
30 year fixed rate mortgage 4.66%

 

Stocks are lower this morning after yesterday’s wild ride in the stock and bond markets. Bonds and MBS are flat.

 

Jobs report data dump:

  • Nonfarm payrolls + 155,000
  • Unemployment rate 3.7%
  • Labor force participation rate 62.9%
  • Average hourly earnings up 0.2% / 3.1%

This was generally a weaker-than-expected jobs report, with payrolls coming in below the 190,000k estimate and average hourly earnings about 1/10% below estimates. It probably won’t make that much of a difference to the Fed, but it does show the economy is moderating a bit from the torrid pace of mid-year.

 

The Fed Funds futures are beginning to cheat to the side of less movement from the Fed. While the December futures are still predicting a hike, the June futures are now predicting that the Fed might hike only one more time.

 

fed funds futures

 

Nonfarm productivity rose 2.3% last quarter, while employment costs rose 0.9%. Real compensation grew at 1.1%, which is disappointing, but overall the report is decent. This report does demonstrate the issue that has been bedeviling the Fed: if we are at full employment, wages should be heading higher and the central bank should get ahead of that. However, wages are behaving as if we are not at full employment. So which numbers are telling the truth? IMO, we are not at full employment yet. While there are worker shortages in some areas, there is a glut in other areas. Also the financial crisis kicked out a lot of workers who were in their prime earnings years, and that is depressing the numbers.

 

Kathy Kraninger has been confirmed by the Senate to be the next head of the CFPB. She will serve a 5 year term. The vote fell along party lines, with Republicans looking for her to reform the agency’s anti-business tilt, while Democrats ululated that she won’t be tough enough on the industry. While nobody knows exactly what she has in mind, the CFPB has been going in the direction of more transparency about what the rules of the road are.

 

Loan Depot CEO Anthony Hsieh sent an email to his loan officers to stop whining. “I am honored to be your CEO and happy to work very hard for you. But the 42% that are unhappy being here, I do not want to work this hard for those that don’t want to be here. Adjust your attitude, be ALL-IN,” the alleged email states.  “Stop acting entitled and understand this industry has ups and downs, but all will average out great. Be confident and stop whining” Definitely a different approach to motivating people.

Morning Report: The government targets VA lending

Vital Statistics:

 

Last Change
S&P futures 2657 -42
Eurostoxx index 346.51 -7.2
Oil (WTI) 51.46 -1.45
10 year government bond yield 2.90%
30 year fixed rate mortgage 4.83%

 

Stocks are lower this morning as the global sell-off continues. Bonds and MBS are up.

 

While stocks are moving lower, the big news these days is the bond market rally. What appeared to be window-dressing last Friday (a sub 3% yield on the 10-year) has just kept going. A lot of market commentators have been scrambling to come up for a reason. Trade tensions make a convenient, if unsatisfying explanation. China and the US have reached an agreement to cool things off for 90 days, which should be good news. Economic data has been strong, and while we have had some slightly dovish comments out of the Fed, it is nothing dramatic. It feels like a major asset allocation trade out of equities into fixed income, but who or why is anyone’s guess. In other words, this could be just random noise, and therefore temporary. Note that 2s/10s (the difference in yield between the 10 year and the 2 year) got to single digits. Historically such behavior would signal a slowdown, but the Fed’s footprint in the Treasury market wasn’t so large before.

 

The business press is pushing out all sorts of “recession imminent?” articles, but if you read the ISM report on manufacturing, you will see nothing of the sort. New orders, production, and employment are all at historically very strong levels. The business press mirrors the mainstream media, and they are talking their ideological book a little.

 

In terms of MBS trading, they lagged the move big-time. On Tuesday, where yields touched 2.88% we saw only a couple of investors re-price for the better. So, all of those LOs who were running scenarios hoping to see an improvement were disappointed. TBAs did increase by 6 or 7 ticks, but the aggregators largely ignored it.

 

Construction spending fell 0.1% MOM in September, but was up almost 5% YOY. Residential construction fell 0.5% MOM and rose about 1.7% YOY. Lodging and office construction were up high / mid teens YOY, but resi (42% of total construction spending) continues to lag.

 

Speaking of resi construction, Toll Brothers reported a big drop in orders (down 13% in units / 15% in dollars). The cancellation rate jumped from 7.9% to 9.3%. Toll was one of the first builders to recover from the slowdown, making big bets on luxury urban apartments along with their traditional McMansion fare. California is the problem area, which  is being hit by higher prices, higher rates, diminished foreign demand and new tax treatment. The whole sector was smacked, with the homebuilder ETF down about 5%. The XHB is down about 25% from its mid January levels.

 

XHB chart

 

Mortgage applications rose 2% last week as purchase activity rose 1% and refis rose 6%. Mortgage rates dropped about 4 basis points.

 

The VA is taking a closer look at predatory behavior in VA lending. From the Federal Register on November 30:

“VA is concerned that certain lenders are exploiting cash-out refinancing as a loophole to the responsible refinancing Congress envisioned when enacting section 309 of the Act. VA recognizes there are certain advantages to a veteran who wants to obtain a cash-out refinance, and VA has no intention of unduly curtailing veterans’ access to the equity they have earned in their homes. Nevertheless, some lenders are pressuring veterans to increase artificially their home loan amounts when refinancing, without regard to the long-term costs to the veteran and without adequately advising the veteran of the veteran’s loss of home equity. In doing so, veterans are placed at a higher financial risk, and the lender avoids compliance with the more stringent requirements Congress mandated for less risky refinance loans. Essentially, the lender revives the period of subprime lending under a new name.”

The government has already dealt with the serial refinancings by adding new seasoning requirements for loans to be eligible for standard Ginnie MBS, but that was about protecting MBS investors. This is different. For many veterans, it may sound like a great deal to be able to lop 50 bucks off your monthly payment and maybe get to skip a month or two, but that 3.3% funding fee is expensive, even though you get to finance it. If you are doing a VA cash-out to refinance credit card debt, it amounts to an expensive debt consolidation loan, though the drop in your rate and the tax treatment does offset that a bit.

 

Morning Report: Markets closed on Wednesday

Vital Statistics:

 

Last Change
S&P futures 2798 40
Eurostoxx index 362.59 5.1
Oil (WTI) 52.94 2.02
10 year government bond yield 3.03%
30 year fixed rate mortgage 4.83%

 

Stocks are higher this morning after the US and China agreed to a 90 day trade truce. Bonds and MBS are down.

 

China and the US agreed to halt further tariffs against each other, and agreed to fresh talks to try and end the trade war. This has sent stocks up sharply in Europe and Asia, and emerging markets are especially strong. Whether this actually turns out to be the end is anyone’s guess, but at least dire trade warnings will be off the headlines for a while.

 

The stock markets will be closed in observance of a day of mourning for George H.W. Bush, who passed away over the weekend. SIFMA has recommended that the bond markets close on Wednesday as well.

 

We have a lot of data this week, which will probably be dominated by the Employment Situation Report on Friday. Jerome Powell will be speaking on Wednesday and we will get productivity as well as the ISM reports.

 

The typical mortgage originator made $480 on each loan (all-in) in the third quarter, a drop from $580 in the second quarter. Declining volumes are driving the drop, which is being offset somewhat from servicing income gains. “These are very challenging times for independent mortgage bankers, with the average pre-tax net production income per loan reaching its lowest level for any third quarter since inception of our report in 2008,” said Marina Walsh, MBA’s Vice President of Industry Analysis. “Profitability continues to be hindered by high costs and low productivity. We expect fixed costs to remain elevated, and competitive pressures will continue to hamper production revenues in the winter months. Therefore, mortgage banker profitability will likely remain challenged.” It won’t get any better as we enter the seasonally slow period.

 

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