All Things in Moderation

Markets are higher this morning after some initial jobless claims came in at 331k and the second estimate for 2Q GDP came in higher than expected. The initial pass at 2Q GDP was 2.2%, while this estimate was 2.5%. We will have a final revision next month.

Between the Syria situation and the emerging markets meltdown you would expect the 10 year to strengthen and it isn’t happening. This speaks to the bearish sentiment surrounding the US bond market. Of course this could change if a big player gets in trouble with Indian exposure or we get into a shooting war in the Middle East and oil soars. But so far, the 10 year isn’t rallying under circumstances where it should. Punch line: if you are floating, you are drawing an inside straight.

Something that I haven’t dwelled on, but could become an issue – the debt ceiling fight. I don’t see a government shutdown in the cards, but the WH wants a clean, no-strings-attached hike in the debt ceiling (which is a rare event and a pretty big demand) and the Republicans want to de-fund obamacare. So, expect a lot of posturing going into October, which is when the government needs to borrow more money.

CoreLogic is reporting that there were 49,000 completed foreclosures in July, down 25% year-over-year. This is still elevated compared to pre-crisis levels, where a 21,000 pace was the norm. We are seeing the remaining shadow inventory concentrated in the judicial states, which explains why prices are rallying in the West and going nowhere in the Northeast.

FHFA is reporting that mortgage interest rates rose 45 basis points in July. These are based on lock data, which is somewhat stale, so the end of July data reflects locks made in mid-to-late June. During this time, the 10 year yield increased about 52 basis points, so it looks like spreads are compressing a bit.

Is it going to be Summers or Yellen? That is the question many market participants are asking. Summers is rumored to be the favorite and is seen as more hawkish than Yellen. As we approach the end of the year, bond investors will probably do well to read the Washington Post as well as the Wall Street Journal. Expect the bond market to become a bit twitchy and begin to react to the latest headlines in this horse race.

Markets are higher this morning after a few economic numbers suggested strength in the economy. Bonds and MBS are down

Initial Jobless Claims came in at 336k, while the FHFA home price index rose .7% last month. A preliminary ISM number showed manufacturing gaining strength.

The minutes from the FOMC meeting didn’t give any new insights into the Fed’s thinking about tapering. Most of the research pieces seem to think that the Fed is going to start tapering at the September meeting. They are sticking to their story that the economy will start picking up steam in the second half.

As the refi boom ends, banks are cutting workers in the mortgage department. Wells just announced it is laying off 20% of its mortgage production staff, or about 2300 workers. Wells’ business was 70% refis in 1H and it has dropped to 50%.

The Ellie Mae Origination Report shows that purchases are now a bigger percentage of originations than refis. It also looks like credit is beginning to thaw, as the average FICO score for closed loan dropped from 742 to 737 in July. 75% of closed loans had average FICOs above 700 vs 83% a year ago.

MR will be taking a hiatus for the next week as I will be on vacation.

Fed Minutes Day. The Minutes of the last FOMC meeting will be released at 2:00 pm EST, and that has the potential to move the bond markets. At the moment, bonds and MBS are down. 

 

Given the volatility of the bond market lately, getting it wrong means getting it VERY wrong. Probably not a good environment to roll the dice and float.

 

Mortgage applications fell 4.6% last week, which is not s surprise given the back-up in rates. The purchase index was actually up a percent, while the refi index (predictably) hit new lows. Refis as a percent fell to 61.5% of total number of loans.

 

Existing Home sales spiked to 5.39 million in July, a 6.5% increase month-over-month, and 17.2% higher than a year ago. NAR Chief Economist Lawrence Yun says that changes in affordability are beginning to affect the market. As rates rise, the pool of eligible buyers decreases. This is apparent at the low end of the market and especially with the first time homebuyer struggling with student loan debt and unable to meet the DTI requirements.

 

Homebuilder Toll Brothers reported third quarter earnings that missed analyst estimates, but their outlook was good. Toll is in the McMansion business, so it isn’t necessarily representative of the homebuilding market as a whole. In fact, some of the builders at the lower price points – particularly Pulte and Beazer – reported a decrease in orders. They noted an increase in sales volume and pricing power, which is unsurprising since we have underbuilt for the past 10 years. 

 

Punch line: the haves vs the have nots.  If you are a twenty-something looking for a starter home, you are fighting professional cash-only investors for inventory, struggling to meet DTI requirements and are getting sticker shock from high interest rates. However, the luxury end of the market is doing quite well, as Toll’s numbers can attest.

Markets are higher this morning after some good retail earnings and the Chicago Fed National Activity Index rose slightly to -.15. Bonds and MBS are rallying.

 

President Obama met with various regulators regarding Dodd-Frank yesterday, and stressed the need to prevent another crisis from happening, and also to make sure the housing finance system “that better serves middle class families” (whatever that means). Sounds like more of the same “Slug the lenders harder – maybe they’ll finally take some risk.” thought process going on.

 

Another good data point on the housing recovery – good earnings from the Despot. Comps up 11.4%, which is pretty impressive.

 

Cool real estate price “heat map” courtesy of the NY Fed.  The West is the Best. 

 

Unemployment is rising in more than half the states and fewer states are adding jobs. The labor market may be losing some steam

Markets are stronger after yesterday’s bloodbath, although bonds are still having a tough go of it. There is no economic data this morning

 

This week looks to be pretty dull with respect to market-moving economic data, with the exception of the FOMC report this Wednesday. Market participants will be parsing the minutes closely to answer the “September or December” question. (Will the Fed start reducing QE purchases at the September FOMC meeting or the December FOMC meeting?) 

 

Interesting factoid: according to a Goldman Sachs survey, more than half of the homes sold in the United States last year, and so far this year, are all-cash transactions. When you consider the fact that existing home sales are running at around a 5 million / year rate and over half these sales are all cash, it shows that the mortgage business still has a lot of room to rebound. Pre-bubble, existing home sales were about 5 – 6 million units / year and peaked over 7 million at the height of the bubble. This says that the mortgage business is still in highly depressed territory. 

 

The Inspector General of FHFA is saying that the super-profitable Fannie Mae and Freddie Mac are ignoring billions in potential losses on overdue loans and they adopt a new accounting system. Of course, the GSEs are effectively nationalized and we all know government accounting does not comport with GAAP accounting. They are supposed to start writing down loans when they go 180 days delinquent. They aren’t.

 

President Obama is scheduled to meet with Ben Bernanke and other financial regulators to discuss the progress in implementing Dodd-Frank. So far, pretty much the CFPB is up and running and that is about it. Major issues remain unresolved as Dodd-Frank was drafted without any input from the financial industry. 

Markets are stronger after yesterday’s bloodbath, although bonds / MBS are still heavy.

 

Housing starts came in at 896k, slightly below the 900k estimate. Building permits increased to 943k. Multi-fam construction drove the increase. Single Family starts actually fell. I am having a tough time reconciling the housing starts numbers with the order growth being reported by the homebuilders. We should be seeing faster housing start growth than we are. Maybe it is just that lead times are longer.

 

Productivity and Unit Labor costs both rose more than expected. Employee hours increased, as did compensation. 

 

CFPB Monitor has its take on the new QRM rule, along with speculation that the CFPB may raise the required downpayment to 30%. 

 

The MR will be spotty the next two weeks as I will be on the West Coast.

Somebody beat the tape with the ugly stick this morning, with stock index futures and bonds both down sharply. For stocks, an earnings miss from Wal Mart and yet another restructuring out of Cisco Systems are feeding the negativity. On the bond side, stronger data has driven the 10 year yield out of its recent 2.57% – 2.74% trading range.

 

Let’s run through the economic data:

• Initial Jobless Claims 320k vs 335k expected
• Empire Manufacturing 8.24 vs 10 expected
• Consumer Price Index + .2% in line with expectations
• Industrial Production flat vs expectations of a .3% increase
• Capacity Utilization 77.6% vs 77.9% expected
• Bloomberg Consumer Comfort Index -26.6, first decline in a while
• NAHB Homebuilder Sentiment Index rose to 59 from 57
• Philly Fed 9.3 vs expectations of 19.8

 

The latest CoreLogic Market Pulse is out. While everyone knows that rising rates have more or less killed the refi market, they estimate that 29% of borrowers are in the money to refinance – meaning that the savings will cover the up-front fees to refi. So, that is still a good chunk of people. If Obama does HARP 3.0 and extends the dates , then another refi wave is on the way. 

 

Mortgage debt has fallen $91 billion over the past quarter, and HELOCs fell by $12 billion. Non-housing debt rose. Overall household debt fell by .7% to $11.15 trillion. The Great American Deleveraging Continues…

 

FBR analyst Edward Mills is predicting that regulators will release new draft rules concerning mortgage secuiritzations, including the removal of down payment requirements for QRMs and premium capture cash reserve accounts. The original proposal was to require 20% down in order to release the securitizer from “skin in the game” holdings. (non-QRM MBS would require the issuer to hold 5% risk retention). Consumer Groups opposed the rule because it will restrict credit. Also they are ditching the Premium Capture Cash Reserve Accounts, which mandated that any securitization gain on sale could not be touched until the security no longer exists. The government right now is backing 90% of all newly issued mortgages and they finally figured out that regulatory overreach was preventing that number from dropping. 

 

The long-awaited foreclosure wave that dates back to the beginning of the crisis is finally starting to happen. Foreclosures increased 3x in Baltimore. This is due to all of the foreclosure prevention actions taken by state and local governments are finally winding down. New York State is legendary for how long you can go without making a mortgage payment. Of course this is why prices are rocketing on the West Coast and they are modestly increasing on the East Coast. Maybe politicians and regulators finally figured out that all of the foreclosure restrictions they put on banks were having the effect of depressing prices, instead of supporting them, as they had hoped. 

Markets are down small after wholesale inflation came in lower than expected. Mortgage Applications fell 5% last week. Bonds and MBS are up small.

 

Mortgage Apps fell 4.7% last week, with the purchase index decreasing 5% and the refi index dropping 4%. Refis were 63% of all applications, with 35% of the refis being HARP. Surprising result given that mortgage rates fell last week, albeit by only a few basis points.

 

The Producer Price Index showed low inflation at the wholesale level. Now that QE4EVA is officially done, inflation numbers matter again. If they are too low, then the Fed may re-think the timing of their exit strategy. The Fed fears deflation more than anything, because if prices are falling in the context of zero percent interest rates, that means real (inflation-adjusted) rates are rising. And that problem has bedeviled the Japanese for almost 20 years. In related news, 65% of all economists expect the Fed to begin tapering QE at the September meeting. The expected change? Purchases go from $85 billion to $75 billion.

 

Remember all of that widespread mortgage fraud?  Turns out the Obama administration made it up, or at the very least wildly exaggerated it. The Administration was forced to reduce the number of people criminally charged from 530 to 107. Victim losses were reduced to $95 million from $1 billion, and the number of victims were cut to 17,185 from 73,000. 

 

Why does Obama want Larry Summers for the Fed, when he can make a groundbreaking choice with eminently qualified Janet Yellen? According to a note from Mizuho Chief Economist Steven Ricchiuto, it is because Summers is more of a political guy who will support activist fiscal policy. In other words, Obama wants an ally at the Fed to increase pressure on Congress for more public-works spending (in order to dole out projects to help boost vulnerable candidates in 2014). Interesting take, and makes more sense than anything else I have heard. 

Markets are slightly better this morning after the NFIB Small Business Survey came in below expectations and a mixed report for retail sales. Bonds and MBS are down.

 

The National Federation of Independent Business Optimism Index rose to 94.1 from 93.5, just missing the Street estimate of 94.5. Generally speaking it was a glum report, although it was the 4th highest reading since 2008. (The index has averaged 100 in the 35 years prior to to 2008 so that gives you a bit of perspective). 9% of firms added workers while 12% shed workers. 20% reported job openings they could not fill, which is a good sign for the labor markets, I suppose. 19% reported increasing worker comp while 4% reduced it. Capital Expenditures fell. Credit appears not to be a problem. The report notes the bifurcation of the business environment, where the big S&P 500 names are doing great (energy, large manufacturers, agribusiness) due to strong exports and the rest, who are seeing prospects of earnings growth fade. 

 

The advance estimate for retail sales increased .2% month-over-month and increased .4% ex-autos and gasoline. Sales increased 5.4% year over year. Discretionary goods (sporting goods, apparel) seemed to lead the charge while autos were a drag. Given that consumption is 70% of the U.S. economy, we need to see more robust growth here if we want to see a recovery.

 

Have a borrower who is ineligible for FHA (or doesn’t want to go down that route) but is coming up shy on the down payment? A new equity sharing product from First Rex provides downpayment assistance. They will put down up to half the borrower’s down payment in return for 40% of the house price appreciation. Since it is an equity investment, there are no payments that the borrower must make. FHFA has recommended that the GSEs allow this product as a form of down payment, and SIFMA is considering a proposal to allow loans with subordinate financing product (which is what this is called) to be eligible for good delivery into TBAs. If you have the view that house prices are going nowhere for a while, this may be an interesting product. 

 

Ever wonder why GDP gets revised so much? Remember Q1, which was revised downward from 1.7% to 1.1%. The advance estimate for Q1 GDP was 2.5% in April. By the July, it was 1.1%. What accounts for the revisions? Zach Pandl at Columbia Management discusses all of the economic “sausage making” that goes into GDP estimates and how noisy they are. Which means that when you look at GDP numbers, they might not be giving you a good picture of how the economy is actually doing. 

 

Harry Reid is not onboard with ending Fannie and Fred. From the government’s perspective, F&F are FWB – they are spewing cash, which goes 100% to the government’s coffers, they control them absolutely, but there is still a 20% sliver of outside equity which allows them not to consolidate F&F’s debt on the government balance sheet. When you consider that the taxpayer bears 50% of the credit risk in the U.S. mortgage market, that is significant.

Markets are weaker this morning after Japanese GDP came in lower than expected. There is no economic data this morning, but we will have a lot of it later this week. Bonds and MBS are up small on the risk-off trade.

 

This week will be relatively data-heavy, with inflation numbers (which matter again) and industrial data. We also get housing starts this week.

 

The Office of the Inspector General has releases a mid-point assessment of the HARP program. So far, 2.4 million borrowers have refinanced under HARP, while it has been estimated that 4 to 5 million were eligible. Overly-tight restrictions in the beginning account for the slow start. Also, the report cites a lack of awareness. FHFA intends to launch a nationwide public education campaign. 

 

Separately, FHFA weighed in on eminent domain. They threaten to direct the agencies to restrict or cease business activities within the jurisdictions of any state or local authority that uses eminent domain to restructure mortgage loan contracts. SIFMA has already said that loans coming from such jurisdictions would be ineligible for TBA trading. Now FHFA is saying they are uninsurable. That should end the discussion on the use of eminent domain. Of course FHFA nominee Mel Watt has refused to take a stand on the use of eminent domain, which is another reason why he is a long shot to take over FHFA.

 

MBA reported that applications for new home purchases increased 14% compared to the previous month. This is not a seasonally adjusted number. MBA estimates that sales of new single family homes were running at a seasonally adjusted annual rate of 481,000 in July.