Morning Report: Robust Housing Starts 2/16/18

Vital Statistics:

Last Change
S&P Futures 2736.0 2.0
Eurostoxx Index 379.5 3.0
Oil (WTI) 61.4 0.1
US dollar index 82.9 0.2
10 Year Govt Bond Yield 2.88%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.44

Stocks are higher on no real news. Bonds and MBS are up.

Housing starts came in at 1.326MM annualized, better than expectations. Building permits hit 1.4 million – a 10 year high. Both numbers beat estimates by about 100k, a sizeable amount. The jump was largely in the volatile multi-family segment however. Single family starts were up about 4% YOY. That said, we are still well under the historical averages for starts, which was about 1.5 million units a year during from the 60s through the 90s and early 00s.

NAR welcomed the housing starts number: “Terrific news on housing starts in January with a solid 10% gain. This rise in single-family housing construction will help tame home price growth, and the increase in multifamily units should continue to help slow rent growth. The large gain in housing starts in the West (10.7%) is especially welcomed, as that region has been facing acute housing shortages. Ultimately, there is still large room for improvement given the fact overall housing inventory is currently near historic lows.” This is from Lawrence Yun, Chief Economist.

Import prices rose 1% MOM and are up 3.6% YOY. Energy prices were a big driver of the increase, however if you pull out energy, import prices were up just under 2% YOY. The dollar has been selling off for about a year now, and that is adding pressure to import prices which will flow through to inflation.

Consumer sentiment improved in early February despite the stock market sell-off. Sentiment came in at about December levels and is at post-recession highs.

Changes may be coming to TRID disclosure. The House passed a measure requiring more detail in how insurance fees are disclosed. The bill would amend language in the Real Estate Settlement Procedures Act (RESPA) to require the itemization of “all actual charges” and not just the itemization of “all charges.” The bill also would amend RESPA to require that ‘‘Charges for any title insurance premium disclosed on [the TRID rule] forms shall be equal to the amount charged for each individual title insurance policy, subject to any discounts as required by State regulation or the title company rate filings.’’. Thus, the bill would not permit the current approach to the disclosure of title insurance premiums under the TRID rule, and would require that the amounts disclosed for title insurance reflect the actual premium charges, including any discounts.

Thinking of relocating? Here is how much you need to make to be able to qualify for a mortgage on the median house in that MSA. The highest? San Jose, where the median home price is 1.3 million and you need to make just under a quarter of a million.

Morning Report: Inflation rises 2/15/18

Vital Statistics:

Last Change
S&P Futures 2707.0 10.3
Eurostoxx Index 377.0 2.5
Oil (WTI) 60.4 -0.2
US dollar index 82.9 -0.2
10 Year Govt Bond Yield 2.90%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.44

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

Inflation at the wholesale level came in higher than expected as the Producer Price Index rose 0.4% MOM and 2.7% YOY. Ex-food and energy, the index was up 0.4% / 2.2% and the core rate was up 0.4% / 2.5%. The US dollar is weaker on the data, which adds to inflationary pressures. I suspect at some point dollar weakness will feed higher rates, but we aren’t there yet. Treasuries look like they want to test the 3% level we reached after the taper tantrum. The 10 year yield hit 2.94% overnight, so we aren’t all that far away. Goldman is forecasting 3.5% on the 10 year within the next 6 months on monetary tightening. Other strategists are raising their forecast for Fed tightenings as well, based on the additional stimulus of the budget deal and tax cuts.

FWIW, after the inflation data, the Fed Funds futures are now predicting a 83% chance of a hike at the March meeting, and sentiment is coalescing for a total of 3 hikes this year, to take the Fed Funds rate to 2.0% – 2.25%.

In other economic data, Initial Jobless Claims rose to 230k last week, while the Philly Fed rebounded to 25.8. The Empire State Manufacturing survey slipped. Industrial Production fell a tenth of a percent while Manufacturing Production was flat. Capacity Utilization fell 20 basis points to 77.5%. So, between the higher than expected inflation data and weaker manufacturing data, bonds are pretty much flattish.

Donald Trumps proposed 2019 budget contemplated an 18% cut in HUD’s budget, with the cuts largely coming from the end of the Community Development Block Grant program. At the end of the day, this budget is a messaging document and has 0% chance of becoming law as-is.

Builder Sentiment was flat in February according to the NAHB.

Morning Report: Bonds sell off on a higher-than-expected CPI 2/14/18

Vital Statistics:

Last Change
S&P Futures 2672.8 11.0
Eurostoxx Index 373.4 2.9
Oil (WTI) 58.6 -0.6
US dollar index 83.6 -0.1
10 Year Govt Bond Yield 2.87%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.39

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

Consumer prices rose 0.5% MOM and are up 2.1% YOY, according to the Consumer Price Index. Apparel drove the increase. Ex-food and energy the index was up 0.3% and 1.8%. These numbers are a little higher than what the Street was looking for, and bonds sold off about 5 basis points on the report. Between the CPI and the higher-than-expected wage inflation in the jobs report, Treasury investors are getting nervous about inflation.

The Fed Funds futures are predicting a 78% chance of a 25 basis point hike next month. For the year, there is about a 1/3 chance of two hikes and a 1/3 chance of 3 hikes. with the final 1/3 split between 1 and 4.

Goldman’s inflation forecast is for a 1.8% increase in the core PCE. Despite upward creeping inflation, this is still below the Fed’s target rate.

Mortgage Applications fell 4% last week as purchases declined 6% and refis declined 2%. On the back of the jobs report, Treasury yields rose and mortgage rates hit the highest level in 4 years. The typical 30 year mortgage rate rose to 4.57% from 4.5%.

Retail Sales were down 0.3% in January and were flat YOY. Weak auto sales were behind the change. The control group was flat.

Fannie Mae reported earnings of $2.5 billion for 2017, after taking a $9.9 billion hit on deferred taxes based on the tax law. Adding back the $9.9 billion noncash charge gives the company net income of about $12.4 billion, about the same as 2016. The stock has a market cap of $10.7 billion, meaning it is trading at a P/E below 1. Arguably, the stock shouldn’t exist in the first place, and it only trades due to the vagaries of government accounting.

About 130 mortgage bankers sent an open letter to Congress stressing the need for GSE reform. The letter laid out their preference for a guarantor-based system over an issuer-based system. Essentially the difference would be that the guarantor-based system would be most similar to the current one, where someone like Fannie and Freddie do not originate mortgages, but guarantee than and issue securities. The issuer-based system would rely on a few large aggregators to secure the government guarantee and issue securities. The smaller bankers would probably be at some sort of competitive disadvantage under an issuer-based system and would be better off under a guarantor-based system.

Federal Reserve Chairman Jerome Powell’s prepared remarks at his swearing-in ceremony. “While the challenges we face are always evolving, the Fed’s approach will remain the same. Today, the global economy is recovering strongly for the first time in a decade. We are in the process of gradually normalizing both interest rate policy and our balance sheet with a view to extending the recovery and sustaining the pursuit of our objectives. We will also preserve the essential gains in financial regulation while seeking to ensure that our policies are as efficient as possible. We will remain alert to any developing risks to financial stability.”

Morning Report: CFPB will no longer “push the envelope” 2/13/18

Vital Statistics:

Last Change
S&P Futures 2643.5 -11.8
Eurostoxx Index 372.7 -0.2
Oil (WTI) 58.8 -0.5
US dollar index 83.8 -0.3
10 Year Govt Bond Yield 2.54%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.37

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

Small Business Optimism rebounded in January as expansion plans hit a record high. The net percentage of businesses saying “now is a good time to expand” was the highest since 1973, when the survey began. A more benign regulatory and tax environment is helping drive sentiment. In fact, “finding quality workers” is a bigger concern now than “taxes and regulations.” Small businesses added .23 workers last month on average.

The CFPB released its strategic plan for the next 5 years, and it marks a departure from the Cordray CFPB. CFPB Acting Director lays out his strategic vision in the opening statement: “This Strategic Plan presents an opportunity to explain to the public how the Bureau intends to fulfill its statutory duties consistent with the strategic vision of its new leadership. In reviewing the draft Strategic Plan released by the Bureau in October 2017, it became clear to me that the Bureau needed a more coherent strategic direction. If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes. I have resolved that this will not happen at the Bureau. The rest of the document reiterates the role of the CFPB and Mulvaney’s commitment to those duties.

Donald Trump laid out his priorities in a budget document yesterday. These sorts of things are never intended to become law (Obama had one that garnered exactly zero votes), but are more to lay out philosophies and priorities. The document did contemplate an increase in the guaranty fee that Fannie Mae charges borrowers by 10 basis points. At the margin, this would make Fannie loans somewhat less attractive relative to FHA / VA however it probably won’t matter all that much. The amount of money involved ($26 billion over 10 years) is not major. Separately, shareholders of Fannie Mae and Freddie Mac stock had hoped the document would discuss the GSEs retaining their profits. That didn’t happen.

Hurricane-related delinquencies rose in November, but fell everywhere else, according to CoreLogic. 30 year DQs fell overall from 5.2% a year ago to 5.1%. The foreclosure rate fell from 0.8% to 0.6%.

Morning Report: Bond Vigilantes returning? 2/12/18

Vital Statistics:

Last Change
S&P Futures 2648.5 29.8
Eurostoxx Index 373.8 5.1
Oil (WTI) 60.3 1.1
US dollar index 84.2 0.0
10 Year Govt Bond Yield 2.87%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.37

Stocks are soaring this morning on overseas strength. Bonds and MBS are down.

No economic news today. The only market moving data this week should be the Consumer Price Index on Wednesday and the Producer Price Index on Thursday. We will get some housing data, with starts and the FHFA House Price Index, although those should not matter to the markets. Bonds are probably going to be an inverse stock ETF for a while – meaning that when stocks are down, they will be up and vice versa.

Old timers may remember the term “bond vigilantes” from the early days of the Clinton Administration. Early on in Bill’s term he wanted to do a fiscal stimulus package which would have increased government spending. As he talked about increasing spending to goose the economy, the bond market would sell off in response, raising interest rates. In other words, the government’s plan to increase economic growth via government spending was being offset by the market (increasing rates are generally bad for the economy). At one point, Bill Clinton was so exasperated, he exclaimed: “You mean to tell me that the success of the economic program and my re-election hinges on the Federal Reserve and a bunch of f****** bond traders?” James Carville, Bill’s strategist once said ““I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Fast forward to today. With the spending deal in place, along with a possible infrastructure plan, the economy will be getting plenty of stimulus and government spending. The bond market has been artificially supported by the Fed and global central banks, and that is unwinding. The bond vigilantes may be coming back, which is ironic since probably 3/4 of the bond traders on the street are experiencing their first tightening cycle. But, the trader in me sees the path of least resistance in the bond market as down, which means that rates are generally heading up. In practical terms, this means floating is a lot riskier than it used to be. During the last 30 years, rates generally moved down over time, so if you floated you often did well on that trade – you weren’t paying for a lock, and your rate at closing was probably better than it was when you opened the file. Given the change in market direction, the risk of floating is that the rate will increase over time, and in that circumstance it might make better sense to lock. Note that this isn’t a forecast of the bond market over the next 45 or 60 days, but an observation that the market “feels” like it wants to go down. It is something to keep in the back of your mind when discussing a lock with a borrower.

The House tweaked some of the “points and fees” language in Reg Z last week. Democrats have been universally opposed to the Financial CHOICE act, which makes some changes to Dodd-Frank. This may have a chance in the Senate, or at least a better chance than CHOICE would.

Best headline from last week: Low volatility ETN dies of irony. This was in reference to the XIV inverse VIX ETN which blew up early last week.

Morning Report: Fannie Mae will now allow AirB&B income on refi applications 2/9/18

Vital Statistics:

Last Change
S&P Futures 2593.0 0.0
Eurostoxx Index 368.2 -5.9
Oil (WTI) 60.4 -0.8
US dollar index 84.2 0.0
10 Year Govt Bond Yield 2.83%
Current Coupon Fannie Mae TBA 102.688
Current Coupon Ginnie Mae TBA 102.938
30 Year Fixed Rate Mortgage 4.33

Stock index futures are flat this morning after yesterday’s closing sell-off. Bonds and MBS are up.

There wasn’t any real catalyst for yesterday’s sell-off, aside from the natural phenomenon of volatility begets volatility. At the margin, stock market volatility is good for interest rates, but it does have negative consequences on your blood pressure.

So far the sell-off has yet to be reflected much in credit spreads. The biggest high yield ETF has dropped a few points over the past week, but nothing major. It did hit a low of 66 during the financial crisis and also a low in the 70s during early 2016. When high yield debt begins to seriously drop, you tend to see big drops in interest rates overall. Treat this ETF like the proverbial canary in the coal mine. High yield spreads overall are still below the 5 year average, which means investors are not even close to panicking.

You might not have been aware, but the government shut down for a few hours last night. Democrats in the House (and a few Republicans) balked at the Senate bipartisan plan that adds about $300 billion in spending over the next two years and kicks the debt ceiling can down the road until 2019. This takes continuing resolutions / debt ceiling grandstanding off the table for the 2018 midterms.

Homeowners will soon be allowed to include Air B&B income on their applications for refinancings. This is a new Fannie Mae program that will initially only be offered by a few lenders.

Fannie Mae’s Home Purchase Sentiment Index hit an all-time high last month on the back of a strong economy and rising house prices. The index increase was driven by expectations of increased home price appreciation. Personal economic expectations (things like concern over losing a job / household incomes) have been in a tight range over the past year.

Morning Report: Govt cracking down VA loan churning 2/8/18

Vital Statistics:

Last Change
S&P Futures 2681.3 13.3
Eurostoxx Index 380.1 7.3
Oil (WTI) 61.3 -0.6
US dollar index 84.2 0.0
10 Year Govt Bond Yield 2.86%
Current Coupon Fannie Mae TBA 102.688
Current Coupon Ginnie Mae TBA 102.938
30 Year Fixed Rate Mortgage 4.33

Stocks are higher as Monday’s sell-off gets smaller in the rear view mirror. Bonds and MBS are down.

The Senate reached a 2 year budget deal to fund the government which bumps up spending by $300 billion. It suspends the debt ceiling for a year, bumps up defense and social spending and provides additional relief to Puerto Rico. We’ll see if this can get through the House: the left is mad there is no immigration deal, while the right objects to the increase in spending.

Initial Jobless Claims hit a 45 year low last week, falling to 221,000.

The government is cracking down on VA IRRRL abuses and has told 9 lenders that they will remove them from the VA program if they don’t find a way to curtail refinance abuses. “We are targeting our actions at outliers, not at lenders who are genuinely helping to support responsible lending,” Ginnie Mae Chief Operating Officer Michael Bright wrote in a statement through a spokesman. These abuses are bad for the affected veterans who borrow the funding fee, but they also affect others, particularly other borrowers in FHA / VA loans. Part of the reason why it has been so difficult to get any fee pickup as you move up in rate has been due to serial refinancings. Investors are reticent to purchase high coupon TBAs.

I’ll try and explain what is going on, but first a little background on how government loans are priced. Suppose a borrower wants to get a lender credit and is willing to pay a higher rate to do it. The TBA rate stock is used to determine the rate / fee that goes to the borrower. If a borrower wants a note rate between 4.25% and 4.625%, their loan will be sold into a 4% TBA, which is trading at 102.8125. The difference between par and 102.8125 +/- any lender credits is what pays LO comp, covers the cost of doing the loan, overhead, etc. The higher up you go in the rate stack, the more profit margin you have to play with, and therefore the bigger credit you can offer. If the borrower is willing to take a note rate of 4.75% to 5.125%, the baseline TBA price is 104.125 and that differential between the TBAs represents the increased lender credit the borrower can receive. Here is the problem: What happens if a borrower wants to go even higher and get a bigger credit? If there is no demand for the next TBA coupon (say 5%), then the increase might not be a point – it might only be half a point.  Note today that all the TBAs are down for the day except for the 5% note rates. That means those prices are stale and probably not real.

Ginnie rate stack

Why would investors not be interested in buying the 5% Ginnie note rates? It has to do with prepayment speeds. If you are an investor, you are paying well over par (in this case, maybe 4 or 5 points over par) in order to get something that will give you par back at some point. In other words, you are paying 104 and once the loan pays off you are getting 100, which is a loss of 4 points. You are betting that you will get back that 4 points over time because the note rate is higher than what you could typically get for an instrument with similar credit risk. So, if you buy a bond over par it might take a few years to recoup that premium you paid. If the borrower refis in 6 months, you lose. Ginnie Mae investors have been burned over the past several years paying 105 – 106 for a security that pays them par in a few months when the borrower gets a VA IRRRL. Investors have become gun-shy at buying the higher coupon TBAs, and that affects everybody, not just the veteran who rolled a 1.5% funding fee into a new mortgage for a smaller monthly payment of a couple bucks and the right to skip a payment or two.

The Elizabeth Warrens of the world will focus on the veteran who is paying a big fee for a refi that will take several years to break even, but Ginnie will be focused on some of the unintended consequences of this, and it really becomes evident when you look at how it affects the more marginal borrower. Ginnie Mae was created to finance the tougher credits – the first time homebuyer, the cash-strapped buyer, manufactured homes, lower income / credit buyers. These homebuyers usually have risk factors that will translate into bigger loan level pricing adjustments, and will often require a higher note rate to make the math work. If those higher note rates are not available, then it becomes tough to finance those people, and Ginnie Mae’s mission is to help get these people loans. Which is why Ginnie is very sensitive to the actual investors of Ginnie Mae MBS as well as the veteran. The behavior of a few rogue lenders really does impact the whole market and pretty much everyone who takes out a government loans.

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