All Things in Moderation

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Markets are lower on the back of a decline in European stocks and a profit warning from Fed Ex. The current account deficit came in lower than expected and foreign purchases of US assets jumped to 67B in July from 9B in June.  Bonds and MBS are stronger.

The National Association of Homebuilders Market Index rose to the highest level since early 2007, the latest sign that things are getting better for the homeboys. The Homebuilder ETF (XHB) has been on a tear since the beginning of summer, rallying 21%, but is still 45% off of its bubble highs. 

Chart:  SPDR S&P Homebuilder’s Index ETF (XHB)

Funny tweet from Bill Gross:  Central banks are where bad bonds go to die. The article goes on to discuss whether to be long Treasuries.  IMO – obama win, bond bullish, Romney win, bond bearish.

Bloomberg discusses the foreclosure backlog in New Jersey. The upshot – shadow inventory is decreasing everywhere except for the Northeast where judicial foreclosures are slowing the pace of foreclosures and creating a backlog. This is primarily affecting NY, NJ, CT, and PA. Which is why prices are rebounding in Phoenix and still falling in Fairfield County.  Wasn’t the plan in Washington to hold foreclosures off the market in the hope that less selling pressure means prices hold up?  So much for that theory….

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Expect a quiet market today and tomorrow for the Jewish holidays. S&P futures are down a couple of points and bonds / MBS are up a few ticks. There is not much on the economic calendar this week.

The Empire State Manufacturing Survey showed manufacturing in the New York region contracted more than expected. Just more evidence that the economy is losing steam going into the election. The diffusion index is now at the lows of late 2010. FWIW, I am hearing initial forecasts for 3Q GDP growth coming in around 1%. Meanwhile, several business owners testified last week that regulatory uncertainty is driving a lot of the inaction.

Paul Krugman has yet another editorial ridiculing anyone who disagrees with ZIRP and QE.  Nobody attacks a strawman with more savagery than Dr. Cowbell, who imagines he is debating with someone who honestly fears Zimbabwean style inflation (yes, he actually did say that).  Right now, commodities are soaring along with the stock market.  Wages are flat to falling.  So, a combination of flat wages and increased food and energy prices equals lower disposable income. I suspect a lot of middle class people would prefer not to have this “help.”  Or seniors, for that matter, who receive meager interest income from Treasuries and high quality corporate bonds.

Rick Santelli (kind of the anti-Krugman) raises some good points about why QE might not end up influencing mortgage rates to the consumer.  Why?  Because we are raising the guarantee fee on conforming mortgages, and the banks will respond to the GSE’s round of put-backs by increasing borrowing costs. His view on ZIRP – the government needs to borrow a lot of money and needs interest rates as low as possible. He also notes that a lot of the floor traders have become mortgage bankers.

Investors in foreclosed properties now have a new source of funds – banks! Waypoint Real Estate Group got $65 million from Citi to buy foreclosed properties. Citi is also working on a way to issue securities backed by rental income streams. This is very good news for the housing market.

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Welcome to the world of QEU (QE Unlimited). Markets worldwide rocketed on the Fed’s decision and the rally continues this morning. Commodities have a bid, while bonds and down a point and MBS are flat, continuing the divergence that began on the announcement. 

In economic data, the Consumer Price Index (which became officially irrelevant yesterday) came in at +.6% and retail sales data came in a little better than expected, though higher gas prices may have been driving that number. The dollar continued to weaken against the euro.

The Fed’s announcement had opposite effects on Treasuries and MBS.  Treasuries sold off 2 points on the announcement, while MBS gained a point. While Treasuries did recoup some of their losses, MBS went out at the highs of the day. This puts the 30 year Fixed Best-Ex rate somewhere between 3 3/8% and 3 1/2%. The NY Fed has the particulars on the MBS purchases.

Former Fed Governor Kevin Warsh told CNBC that the Fed’s action reflects deep concerns that the economy is at stall speed or worse. He also noted that the iPhone 5 would have more of an effect on the economy than QE.  Someone else made the same point, and took it further by saying if you believe that incremental consumer spending is good for the economy then you must support the New Deal II. 

The FHFA is developing a new securitization platform as a way to let other lenders compete with Fan and Fred in the secondary market and to reduce the GSEs role in the mortgage markets overall.

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Markets are lower this morning after initial jobless claims ticked up to 382k and the Producer Price Index showed inflation in check. All eyes turn to the FOMC decision scheduled for 12:30 est. Here is the summary of what to look for. Bonds and MBS are both stronger.

Fannie Mae’s latest issue of Housing Insights does a deep dive into the latest employment statistics. While average weekly earnings have rebounded from the recession, aggregate weekly earnings have not. What did Keynes say about “sticky wages?”  What this means is that wages have recovered for the people that have jobs, but is you add up everyone’s salaries, that number has not. Which pretty much tells us what we already know – wages are flattish and unemployment is high. They blame the construction sector for the weakness.  As I have said before, we have under-built housing for the past 10 years. Tight credit and temporarily depressed housing formation has masked the effect on housing demand. That won’t last forever.

Census points out that median income fell 1.5% in the last two years. Interestingly 2010 was the peak of average or median wages and they have been falling ever since. The two reports do disagree somewhat – Fannie has average wages up about 2% since the recession began, while census shows them 8.1% lower. Both adjust for inflation, and I cannot imagine the difference between median and average would be that great, so I am not sure what is going on there.  Census also notes the income gap is widening, so expect the study to be political fodder.

Rob Chrisman dissects the recent G-fee increase and its effect on the mortgage market. RTWT.

Is the rental boom reaching the end of the line? Maybe in Manhattan.

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Markets are buoyant this morning after a German Court ruled against efforts to block a european rescue fund. Apple is unveiling the iPhone 5 today as well. Mortgage applications rose, while import prices fell. Bonds are down about 3/4 of a point and MBS are down 1/4 or so.

The FOMC starts their two day meeting today, and will release their decision tomorrow around noon. The market expectations are for an extension of ZIRP into 2015 and a new round of bond buying. Given the run we have had in the stock market, we are possibly setting ourselves up for disappointment or a “buy the rumor, sell the fact” reaction.  

If you live in a state with judicial foreclosures (e.g. New York, New Jersey, Florida), you may find that it will cost you more to get a mortgage. Acting FHFA Chairman Ed DeMarco has suggested that Fan and Fred increase their guarantee fees in these states to compensate the fund for the elongated timelines. (It can take 5 years to complete the entire process in NY, while in non-judicial states like AZ the process can be done in 2).  JP Morgan estimates that the proper compensation would be 10 – 20 basis points up front. FHFA intends to put the policy out for comment in the near future, where it will undoubtedly get panned by housing advocates.

WaPo has a long background piece on the CFPB and what it is up to (spraying lenders with subpoenas).

Foreclosure auctions are attracting big institutional money.  Colony, Blackstone, Och-Ziff and Oaktree have raised $8 billion for the activity. The plan is to rent them out of drip them out slowly into a rising housing market. In an era of ZIRP, high single digit rental yields are appealing to yield starved investors.

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Markets are stronger this morning after the government sold a stake in AIG and the National Federation of Independent Businesses noted an increase in optimism.  Deutsche Bank is looking to cut $6 billion in expenses by 2015. The trade deficit shrunk from 44B to 42B.  Bonds are up 7 ticks, while MBS are down a couple.

The National Federation of Independent Business released their Small Business Optimism Report for September, which showed improvement, but is still solidly in recession territory. On the positive side, hiring plans are the best they have been in years; but on the negative side, they aren’t hiring now. It also weighs in on QE, asking the obvious question:  “Is anyone not hiring because interest rates are too high?” They also note that “political uncertainty” is at a new high – 22% of respondents cited that as a reason they are sitting on their hands. That said some pizza parlor owners must be doing okay.

Chart:  NFIB Small Business Optimism Index: 

Fannie’s first sale of REO-to-Rentals traded at 96% of BPO.  That is an eye-popping number, given that distressed pools have been trading in the mid / high 60s, but this is an oddball transaction – the buyer (Pacifica) will participate in a JV with Fannie, will put up under 16% of the purchase price, manage the properties, split the cash flows with Fannie and will receive a management fee. It seems odd that Fannie is basically buying properties from itself – Pacifica puts up 12.3MM, while Fannie puts up the rest.  Let me guess, there is a mark-to-market angle here…

FHFA and F&F have launched a new Reps and Warranties framework for conventional loans sold after Jan 1.  Put-Back risk – the risk that the government could come after you and force you to re-purchase a loan if the borrower starts missing payments – has been weighing on mortgage bankers and explains why banks have put such stringent overlays on F&F loans. The government will release banks from this requirement if the loan pays consistently for 36 months. For HAMP loans, it will be 12 months.  Co-incidentally, Congress has a re-introduced a bill to expand HARP refis which may contain language regarding the Qualified Mortgage safe harbor provision. The QM has been a big source of uncertainty for lenders. Finally specifying what constitutes are qualified mortgage could go a long way towards getting mortgage credit flowing again.

Redwood is doing another deal – $312 million of jumbos – the 9th deal since the market froze in 2008. Only 9 jumbo securitizations in 4 years. Probably $2 billion in total. To put that number in perspective, non-agency deals topped 1.2 trillion in 2004 and 2005. 

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Markets are down slightly on no some disappointing economic data out of China. Treasury plans to sell $18 billion worth of shares in AIG. Bonds are down 1/2 a point, while MBS are flat.

In spite of the disappointing Chinese data, the Street is heavily long commodities. Chart:  GSCI Index:

Italian Prime Minister Mario Monti told CNBC over the weekend that he does not expect Italy to participate in the ECB’s bond buying program, at least initially.  Remember, the individual states have to request the ECB to purchase their debt. 

JP Morgan is out this morning with a note saying they expect the FOMC to extend the low rate guidance through 2015, and initiate a small asset purchase program (maybe $300b) primarily focused on MBS. The FOMC decision is scheduled to be released Thursday at 12:30 est.

The NAR is reporting that housing affordability continues to increase in spite of the fact that prices are up 9.4% YOY.  Decreasing mortgage rates are able to offset the price increases. 

SIFMA and others have provided a formal response to FHFA regarding the Eminent Domain issue in San Bernardino.  They provide a helpful table lining out the trade and who makes / loses money. Basically the winners are the hedge fund behind this and the borrower.  The table doesn’t break out what the state gets, but presumably they will get something out of this as well.  The lender gets slammed.

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Markets are giving back earlier gains after a disappointing jobs report. Bonds and MBS are rallying on the number. The markets should be selling off on the lousy jobs report, but perhaps they are reacting to the possibility of more QE. Don’t fight the Fed, as they say.

Nonfarm payrolls increased by only 96k, a surprisingly weak number given yesterday’s ADP number which showed an increase of 200k. The Street was expecting 130k. June and July payrolls were revised down by 20k each. The unemployment rate fell to 8.1% from 8.3% due to a drop in the labor force participation rate, which now stands at 63.5%, the lowest level since the 81-82 recession.

Lawrence Yun has an interesting post showing how low mortgage rates are over the past 40 years. Unfortunately, it is mainly the professionals who are able to take advantage of these rates – the first time homebuyer is largely shut out.

Chart:  30 year fixed rate mortgage:

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Markets are higher this morning after the ECB maintained rates and the ADP Employment Change came in better than expected.  The ADP number came in at 201k, which suggests the street estimates for nonfarm payrolls is too low. Initial Jobless claims were 365k, better than expected.  Bonds are down a point, and MBS are down about 10 ticks.

Mario Draghi is discussing the ECB bond purchase program right now. It seems consistent with what had been leaked earlier – unlimited, fully sterilized purchases. It appears the plan requires that the governments need need to formally ask the ECB to conduct purchases of their debt. So, if there are strings attached that Spain or Italy do not like, nothing may happen at all.

Bob Woodward’s new book, The Price of Politics, gives insight into how the Obama Administration’s White House worked (or didn’t). It does not paint a rosy picture of the Obama White House.

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Stock index futures are lower after the ECB released its blueprint for unlimited bond purchases and FedEx warned. A positive surprise in productivity was offset by higher unit labor costs. Bonds and MBS are flat.

The ECB has declined to put a cap on yields and will sterilize bond purchases to prevent inflation. The plan will also focus on short term government debt with maturities up to 3 years. Bill Gross must have gotten the advance word, as he tweeted yesterday “Draghi appears willing to write 2-3 year “checks” to peripherals. Very relationary.  Buy gold, TIPS, real assets.”  The Bundesbank is anticipated to be the only objection. 

The CoreLogic Home Price Index grew at 3.8% and the early indication for August is + 4.6%.  Excluding distressed sales, August is expected to come in + 6%. While they anticipate a seasonal slowdown in the growth rate, they are forecasting a gain for the full year 2012. 

Toll Brothers just priced a convertible bond issue.  $250MM, 20 year senior debt, 50 basis point coupon, 50% premium. Japanese coupon, American premium.  Old school convertible arbs are shaking their heads at that one. Credit Crunch?  What Credit Crunch? Arbs better hope the company never institutes a dividend because that bond will get smoked.

Ally is auctioning off 4 billion of subprime loans.  There has been a lot of money raised for distressed mortgage purchases in the last year, and Nationstar, Fortress, and Berkshire Hathaway are some of the high profile bidders. GMAC expects to emerge from Chapter 11 sometime in Q113.

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