Morning Report: Deep subprime auto is big

Vital Statistics:

Last Change
S&P Futures 2352.5 1.0
Eurostoxx Index 377.2 -0.1
Oil (WTI) 48.6 0.2
US dollar index 90.1  
10 Year Govt Bond Yield 2.40%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.36
30 Year Fixed Rate Mortgage 4.11

Markets are flat this morning on no real news. Bonds and MBS are down small.

Mortgage Applications fell 0.8% last week as purchases rose 1% and refis fell 3%. Rates collapsed at the end of the week due to the failure of health care reform, so it is probably premature to see if that has affected things. Note that mortgage rates invariably lag moves in the 10-year as lenders wait to see if the changes are for real.

Pending Home Sales increased 5.5% in February, which is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Deep Subprime auto loans (loans to borrowers with sub 550 credit scores) have increased to 1/3 of all auto loan ABS. In 2010, they were just 5%. As you can expect, delinquencies are increasing on these. It is surprising that institutional investors are happy to buy bonds securitized by assets that depreciate like sushi, while securitizing an overcollateralized pool of high quality non-QM loans is like pulling teeth.

If there is anything in Washington that should have bipartisan support, it is finding a solution for Fannie Mae and Freddie Mac. The current situation is untenable, as the government is sweeping all of their profits, which is making them more and more undercapitalized. The Trump Administration has indicated that dealing with the GSEs is a high priority, but they have yet to give any sort of indication of how they think the future housing market should look. The model the MBA supports is to turn them into regulated utilities, with a capped rate of return. The Obama Administration supported nationalizing them, while another plan would get them out of the securitization business and into the mortgage insurance business. There are many stakeholders in this discussion, including the affordable housing types who want to ensure underserved areas can get credit, hedge funds who own the common and preferred shares, as well as lenders and borrowers.

Here is a good backgrounder on how hard tax reform is going to be. Every “loophole” will have a constituency which will defend it to the death. The failure to end Obamacare (at least for now) will have taken the biggest “pay for” off the table. That leaves Republicans with a couple choices: Either pass a 10 year tax cut the way George W Bush did, or do revenue-neutral tax reform like Reagan did.

Institutional Investors are implementing artificial intelligence into the stock picking business. How much do you want to bet that everyone’s algorithms will look pretty much the same and will pick the same stocks?

Morning Report: Consumer confidence highest since Dec 2000 3/28/17

Vital Statistics:

Last Change
S&P Futures 2334.5 -1.5
Eurostoxx Index 374.0 -1.3
Oil (WTI) 48.32 0.5
US dollar index 89.4
10 Year Govt Bond Yield 2.36%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.32
30 Year Fixed Rate Mortgage 4.15

Markets are slightly lower after recouping most of yesterday’s losses. Bonds and MBS are up small.

The trade deficit improved to $64.8 billion from $68.8 billion in February. The weakening dollar is helping things, along with lower oil prices. Meanwhile retail inventories increased 0.4%.

Janet Yellen is scheduled to speak at 12:50 pm on workforce development. I doubt there will be any monetary policy (i.e. market-moving) statements, but you never know.

Donald Trump is hoping he can attract some moderate Democrats to vote in favor of his infrastructure spending plan. Democrats are in favor of infrastructure investment, however they want the government to spend directly, while Trump and the Republicans want to do it via the tax code. The partisan rift will almost undoubtedly fall down that line, although the failure of Obamacare repeal leaves less money for direct spending.

Remember the debt ceiling negotiations and threats of government shutdowns in the Obama admin? The government runs out of money in a month.

Charles Evans said that two hikes might be the right number for 2017, which is more dovish than the consensus. The collapse of the Obamacare repeal is still sinking in. Watch for more dovish statements and a lowering of growth and inflation forecasts.

Economic confidence fell last week according to Gallup and is at the lowest since the election. It is still higher than pre-election however. It will be interesting to see the numbers post the health care vote.

That drop in confidence was not apparent in the Consumer Confidence numbers, which came in way higher than expected in March. The reading of 125.6 was the highest reading since December 2000. Note the cutoff for this survey was mid-March.

The Richmond Fed Manufacturing Index is showing further strength, echoing the strength we have been seeing in the other regional Fed indices.

Home prices rose smartly in January, increasing 5.9% and hitting a 31 month high, according to the Case-Shiller home price index. Seattle, Portland, and Denver led the charge all reporting over 9% growth. Seattle increased by over 11%.

Home inventories are at the lowest level in 2 decades, according to NAR at just under 4 months’ worth. The first time homebuyer is being squeezed by tight inventory, rising prices, and increasing mortgage rates. Unless incomes begin to catch up with prices, something has to give: either home prices or building. According to NAR, the median home price February was $228,400, while the median income (from Sentier Research) was $58,056, putting the median house price to median income ratio at 3.9x, which is higher than the historical range of about 3.2- 3.6 times. Given the continued acceleration in home prices, professional investors who bought properties during the bust years and rented them out are happy holders. And to be honest, as an investor, you would sell real estate to buy what, exactly? Stocks? Bonds? Bitcoins?

Meanwhile, the homebuilder stocks are almost back to 2 year highs heading into the Spring Selling Season. Note that KB Home recently reported strong earnings, while Lennar disappointed on the the gross margin side. Increasing land costs are the biggest problem, while rising material and labor costs are an issue. The question for the bigger builders is what is going to drive revenue growth going forward once home prices plateau. At that point, they may begin to start building again. We aren’t there yet however, as Stuart Miller of Lennar commented on an earnings call: “In this environment of accelerating sales pace, together with limited land and labor, and tight inventory particularly at the lower price points, we believe we are positioned for increased pricing power and solid earnings going forward.” Translated, that says that Lennar plans to keep inventory tight and let price increases drive the top line going forward.

Despite the increase in rates, lenders are still optimistic about the economy, according to the latest Fannie Mae Investor Sentiment Survey, however a challenging purchase environment and the death of refis remain huge issues. Lenders are beginning to increase the size of the credit box in response, although the changes are modest. Increasing the credit box meaningfully will require some sort of return of the private label securitization market, which remains largely dormant. Addressing the issues here will be a huge part of Dodd-Frank reform. The US taxpayer currently stands behind something like 90% of all new origination, which almost nobody in government wants.

The regulators are using AI and machine learning to deal with the markets.

Morning Report: The Trump reflation bubble deflates 3/27/17

Vital Statistics:

Last Change
S&P Futures 2324.5 -19.5
Eurostoxx Index 374.0 -1.3
Oil (WTI) 47.62 -0.35
US dollar index 89.4
10 Year Govt Bond Yield 2.35%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.32
30 Year Fixed Rate Mortgage 4.17

Stocks are lower after the Trump reflation trade is being unwound. Bonds and MBS are up.

Not much in the way of data this week – probably the biggest number is the final revision to Q4 GDP on Thursday. We will have a lot of Fed-speak however.

The Republican House couldn’t agree on a replacement for Obamacare and pulled the vote. This puts Trump’s planned infrastructure spend and tax cuts in jeopardy as reduced spending on healthcare was the pay-for. That said, tax reform will probably be easier as there is bipartisan agreement that the current corporate tax structure isn’t really working for anyone. Tougher will be individual tax reform, where Republicans want to lower rates in exchange for reduced deductions. The mortgage interest deduction will stay, but the deduction for state and local taxes may not.

Even though the markets are re-adjusting their forecasts for fiscal stimulus, central bankers still seem committed to getting off the zero bound. Amidst all the furor in the US over the last month, Europeans have completely re-assessed what they think the ECB is going to do, taking the implied probability of a rate hike by the end of the year from a long shot to a coin toss.

In the aftermath of the Obamacare vote, the next thing to watch for is whether the regional Fed banks and strategists start taking down their estimates for 2017 GDP. Remember, the Fed’s forecast of 2-3 hikes this year was predicated on fiscal stimulus, which now looks less likely.

Treasuries remain under some selling pressure as Japanese fund managers sell. Note that speculative short positions in Treasuries were pretty high going into this defeat on healthcare, so interest rates may be pushed lower as hedge funds unwind the trade. Not sure how long that lasts, but this is good news for homebuyers entering the Spring selling season.

Home prices are just shy of their 2006 peak, according to the Black Knight Financial Services Home Price Index. In December, they rose 0.1% MOM and 5.7% YOY. The report has a good state-by-state analysis too.

Morning Report: Investor optimism at a 16 year high 3/24/17

Vital Statistics:

Last Change
S&P Futures 2344.5 4.5
Eurostoxx Index 376.0 -1.3
Oil (WTI) 47.5 -0.7
US dollar index 90.0  
10 Year Govt Bond Yield 2.41%
Current Coupon Fannie Mae TBA 102.06
Current Coupon Ginnie Mae TBA 103.32
30 Year Fixed Rate Mortgage 4.17

Stocks are higher this morning after durable goods orders came in strong. Bonds and MBS are flat

We have a lot of Fed-speak today with 5 speakers, mainly in the morning.

Durable Goods orders rose 1.7% last month versus a 1.5% expectation. Aircraft orders drove the increase. Ex-transportation they rose 0.4%. The only disappointing part was capital goods orders, which fell 0.1% versus expectations of a 0.1% gain. Capital Goods orders is a proxy for business capital investment, and this number shows that while business may be more optimistic for the future, they aren’t putting their money where their mouth is quite yet.

Donald Trump challenged the GOP to either pass health care reform today or to forget it. Health care reform is being fought by both Democrats (who oppose any cuts whatsoever) and the GOP Freedom caucus (who oppose the program on general principles). Here are some of the proposed amendments and negotiation points. Health care reform is a critical piece of his planned infrastructure spending plan, so if that goes, then it will be much smaller than advertised and tax reform will probably have to be revenue-neutral. Note that revenue-neutral tax reform could still do a lot for the economy just by getting rid of the distortions caused by the tax code. At the margin, the failure to pass health care reform should make the Fed slightly less hawkish.

Regardless of the state of health care reform, Treasury Secretary Steve Mnuchin says tax reform will get done by the August recess.

Investor optimism is at a 16 year high, according to Wells Fargo. Interestingly, this is not based on taxes, as more people expect their taxes to increase (39%) than decrease (29%). Investors are also sanguine about the Fed’s proposed interest rate hikes, with equal percentages thinking they will be good, bad, or have no effect. 60% say now is a good time to invest, which is the highest number since 2011, when Wells started tracking that number. Note that extremely high investor sentiment can be a contrary indicator, however betting on that is usually a losing trade.

Suburbs and exurbs are again out-growing cities and their near suburbs, according to new Census data. This trend was upended during the post-bubble years as young Millennials stayed in the city.

Morning Report: New home sales rise 3/23/17

Vital Statistics:

Last Change
S&P Futures 2346.3 3.8
Eurostoxx Index 375.2 1.1
Oil (WTI) 47.5 -0.7
US dollar index 90.0  
10 Year Govt Bond Yield 2.40%
Current Coupon Fannie Mae TBA 102.22
Current Coupon Ginnie Mae TBA 103.45
30 Year Fixed Rate Mortgage 4.17

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

Initial Jobless Claims came in at 258k, a small uptick from the week before. This is a 7 week high, but still very low historically.

New Home Sales rose to 592k, higher than expectations. New home sales are approaching historical normalcy, however they are well lower than what is needed to meet pent-up demand and population growth. There are currently 266,000 homes for sale This represents a 5.4 month supply.

Congress and Donald Trump are making last minute changes to the replacement for Obamacare in an attempt to swing conservatives who feel the bill doesn’t go far enough. Democrats are united in opposition. Dealing with healthcare (and the future spending cuts it entails) lays the groundwork for infrastructure spending and tax reform. This in turn will affect the bond market, so progress on healthcare = higher interest rates, at least at the margin.

As the bond market re-adjusts its expectations for fiscal stimulus, longer – term rates have been falling, which means the yield curve is flattening. This is generally bad news for stocks. Know who it is good for? Borrowers who have adjustable rate mortgages and want the certainty of a 30 year fixed rate payment. ARMs reset based on short term rates, which the Fed is moving upward. As the curve flattens, the relative attractiveness of 30 year fixed rates versus ARMs increases. The other big opportunity is refinancing older FHA loans which have built up sufficient equity to go into a conventional loan. There are still refi opportunities even in a rising rate environment.

Prepayment speeds (i.e. refinance activity) are down 40% YTD according to Black Knight Financial Services. Delinquencies are down to 4.21%, a drop of .98% MOM and 5.51% YOY. Foreclosure starts fell 18% MOM and are down 37% YOY to just over 57,000. The Deep South remains the area hardest hit by foreclosures, while the Northeast saw the biggest improvement, with New Jersey and New York leading the way.

House Financial Services Chairman Jeb Hensarling says that reforming Dodd-Frank remains a 2016 priority. Meanwhile, the bankers are adjusting their expectations for any changes. Getting any reform through the Senate is going to be a difficult job to say the least and will require bipartisan support.

Ray Dalio of Bridgewater has a long paper on populism and how it may affect the economy more than monetary or fiscal policy. Populism has been largely dormant since the 1930s, but seems to be expressing itself in developed countries as well as emerging ones.

Morning Report: Existing home sales fall 3/22/17

Vital Statistics:

Last Change
S&P Futures 2340.3 -2.0
Eurostoxx Index 373.1 -2.6
Oil (WTI) 47.5 -0.7
US dollar index 90.2  
10 Year Govt Bond Yield 2.42%
Current Coupon Fannie Mae TBA 102.09
Current Coupon Ginnie Mae TBA 103.39
30 Year Fixed Rate Mortgage 4.21

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

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 3%. Mortgage rates were more or less unchanged on the week.

Existing home sales fell 3.7% YOY to 5.48 million in February, according to NAR. Low inventory and lower affordability offset the increased foot traffic. The median price rose 7.7% YOY to $228,400. Inventory represented a 3.8 month supply, which was an uptick from January, but is still lower YOY. Days on market dropped to 45 days from 50 in January and 59 a year ago. 42% of the homes sold in February were on the market less than a month.

Home prices were flat on a month-over-month basis and are up 5.7% YOY, according to the FHFA House Price Index. The mountain states had the highest home price appreciation, while the northeast lagged.

The story in the markets is that stocks and bonds are beginning to give back the Trump reflation trade, where bonds sold off and stocks rallied on the prospect of fiscal stimulus out of Washington. Donald Trump is getting a lesson in the limitations of the bully pulpit as health care reform appears to be stalling. Repealing and replacing Obamacare is the “pay for” for fiscal stimulus and tax reform, so if it doesn’t happen then part of the basis for the post-Trump stock market rally is in jeopardy. Meanwhile, Neil Gorsuch seems to be sailing through his Senate Confirmation hearings, albeit with a little kvetching from the usual suspects.

Punch line on Washington: health care reform is supposed to go to the House this week. If it passes, that is good for stocks and bad for bonds. If it fails, it is bad for stocks and good for bonds (in other words, if it fails, interest rates are probably heading lower). FWIW, a couple big market technicians (Ralph Acampora and Dennis Gartman) went bearish yesterday as the S&P 500 broke below the post-election uptrend.

As anyone shopping for a home can tell you, it’s slim pickings out there. We are seeing the biggest squeeze in the starter home category. It appears that part of the problem is a lack of confidence to move up to the next category. People in starter homes are staying put, which is keeping homes off the market.

One potential issue for tax reform is affordable housing construction, which relies on tax credits to entice investors to put up money. If the corporate tax rate falls from 35% to 20% – 25%, then the value of those tax credits decreases. Affordable housing has always been a money-loser for developers and landlords, so tax incentives are used to paper them over. They used to be called tax shelters back in the day. Apparently the value of the credits (which actually trade) has dropped by 10% – 20% since Election Day. This is going to make life more difficult for Ben Carson and HUD.

Dealing with Fannie and Freddie is not an immediate priority, at least not for this year. Staffers are now starting from scratch to come up with a plan. One possibility is to end the profit sweep for the GSEs and let them retain that profit in order to build up their capital, which would take a decade or more. This would not require a legislative fix: Under the 2008 law, HUD Secretary Mel Watt has the authority to make that change. Note that Fannie is expected to pay $10 billion to the government for its fourth quarter gains.

The Cleveland Fed takes a look at wage growth and posits that the huge capital for labor swap that has been in place since the end of the 20th century could be taking a breather.

Interesting story in the FT about commodity trading advisors and how they are using momentum-trading strategies to put the old “portfolio insurance” wine in a new bottle. Portfolio insurance was a technique developed in the 1970s, which was largely credited with causing the Crash of 1987. These new strategies are similar, and use algorithms to follow the momentum of the markets, which would potentially add selling pressure to crashes. In the brave new world we live in, there are no longer market makers and specialists that take the other side of the trade, and we could see selling in a vacuum. The next market crash, investors may find out the downside of sub penny bid-ask spreads and commissions.

Morning Report: Credit risk is at post-crisis lows 3/21/17

Vital Statistics:

Last Change
S&P Futures 2373.8 3.5
Eurostoxx Index 378.3 0.6
Oil (WTI) 48.4 0.2
US dollar index 90.2  
10 Year Govt Bond Yield 2.49%
Current Coupon Fannie Mae TBA 101.703
Current Coupon Ginnie Mae TBA 102.98
30 Year Fixed Rate Mortgage 4.22

Stocks are up small this morning while bonds and MBS are flat.

We have no economic data this morning, but will have a lot of Fed-speak during the day.

CoreLogic took a look at credit risk of mortgages going back to 2001 and came up with an index to describe the credit risk of a typical mortgage, using things like credit scores, LTVs, and DTI ratios. Credit risk is now re-approaching the lows of 2011-2012. This is somewhat interesting as you would expect lenders to loosen standards as rates rise – basically using a larger credit box to offset some of the volume lost from refis. So far (this data is through December) we don’t have evidence of lenders doing that. Even the Ellie Mae data had a de minimus change in FICOs.

Speaking of increasing the credit box, we are seeing signs of life from the private label securitization market, which has largely been dormant since 2006. Angel Oak did a $148MM deal securitized by non-QM mortgages that got a AAA rating from Fitch. The new deals are much different than the past deals in that they documented, have large downpayments, and are much more overcollateralized than they were in the past. Part of the problem in bringing them back has simply been interest rates. Banks have been unable to structure anything that provides a high enough rate of return to interest the traditional MBS investor. As rates rise, that problem should go away. We are a long way from the no-no loans of 2005 – the typical loan is either a high quality jumbos or non-QM loans for the self-employed.


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