All Things in Moderation

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.

Stocks are lower this morning on no real news. August is usually a slow month, so you often see big moves on no real volume, or without any important reason. Bonds and MBS are up.

 

Mortgage Applications rose last week for the first time in two months. The purchase index was up small while the refi index fell slightly.

 

Obama laid out his housing plan in a speech yesterday. There was nothing major in it, with the exception that he wants to tax mortgage backed securities to fund low-income housing. Supposedly this would replace explicit goals for lending to low income borrowers. So basically, it is euthanize Fan and Fred, beef up FHA, make the government a mortgage reinsuer, and impose an additional tax on mortgage backed securities.

 

Freddie Mac may do something about eminent domain. 

 

No MR tomorrow of Friday

Markets are flattish on no real news. This week is relatively data-light. Bonds and MBS are flat.

 

Mortgage delinquencies rose 10% month over month in June, according to Lender Processing Services, breaking a downtrend that has lasted since late last year. 700,000 people who made their May payment missed their June payment. Is this a blip or the start of a new trend? Interesting fact regarding geography – Non-current inventory is still close to peak levels in New York State (only down 5%). By contrast, California is down 59%, Arizona is down 66% and Nevada is down 47%. This explains why Northeast real estate prices are still bumping along the bottom of the bathtub while the Southwest is not. 

 

Home prices increased 11.9% year-over-year, according to CoreLogic. According to chief economist Dr. Mark Fleming: “In the first six months of 2013, the U.S. housing market appreciated a remarkable 10%. This trend in home price gains is at the best pace since 1977.” They are forecasting prices to increase 12.5% in July. You can see what markets are hot and what markets are not below:

 

 

There were some interesting observations out of mortgage REIT Invesco Mortgage Captial (IVR). They noted that spreads have widened on agency paper and believe there is good value here. They are taking the view that the spread widening is temporary and was due to a perfect storm of REIT de-leveraging, mutual fund outflows and dealers clearing inventory for quarter’s end. What does this mean to us? That mortgage rates have room to fall, even if the 10 year bond doesn’t move.

Markets are flattish after a wild week with an unexpectedly strong GDP report, a dovish FOMC statement, and a disappointing jobs report. This week is very data-light, so I don’t expect a whole lot of movement. We do have some Treasury auctions this week, but I don’t see that as market moving. Bonds and MBS are down small.

 

The 10 year traded in a range of 2.57% to 2.74%. So far, it is looking like 2.74% is acting as resistance.

 

Another data point showing the first time homebuyer is being put off by higher rates – Beazer Homes announced a drop in orders as traffic has slowed due to higher interest rates. So far we have seen drops in orders from Pulte and Beazer – both geographically diverse builders with an emphasis on lower price points.