Morning Report: Mortgage delinquencies fall to a 40 year low

Vital Statistics:

 

Last Change
S&P futures 3371 13.25
Oil (WTI) 51.06 1.12
10 year government bond yield 1.62%
30 year fixed rate mortgage 3.67%

 

Stocks are higher this morning after China expressed optimism on economic growth. Bonds and MBS are down small.

 

Jerome Powell continues his Humphrey-Hawkins testimony today. Here were his prepared remarks from yesterday. There was really nothing new in them – the economy is growing moderately, but due to concerns about global growth the Fed cut rates.

 

Mortgage Applications rose 1.1% last week as purchases decreased 6% and refis increased 5%. “The mortgage market continues to be active in early 2020, as applications increased for the third straight week,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates also rose, but still remained close to their lowest levels since October 2016. The refinance index climbed to its highest level since June 2013, and refinance loan sizes also increased as a result of an active jumbo lending market.”

 

Mortgage delinquency rates in the fourth quarter fell to the lowest in 40 years, according to the MBA. The delinquency rate for one-to-four unit properties fell to a seasonally adjusted rate of 3.77% of all loans outstanding, which was down 20 bps from Q3 and 29 bps from a year ago. “The mortgage delinquency rate in the final three months of 2019 fell to its lowest level since the current survey series began in 1979,” said Marina Walsh, MBA Vice President of Industry Analysis. “Mortgage delinquencies track closely to the U.S. unemployment rate, and with unemployment at historic lows, it’s no surprise to see so many households paying their mortgage on time.”

 

Job openings fell in December, according to the JOLTS report. The quits rate (which tends to lead wage growth) was unchanged.

Morning Report: Goldman sees the unemployment rate falling to 3.25% this year

Vital Statistics:

 

Last Change
S&P futures 3362 9.25
Oil (WTI) 50.51 0.72
10 year government bond yield 1.58%
30 year fixed rate mortgage 3.66%

 

Stocks are higher this morning as China begins to restart industrial production. Bonds and MBS are down.

 

Jerome Powell goes to the Hill today for his semi-annual Humphrey Hawkins testimony. The Fed is closely monitoring the Coronavirus issue with respect to global growth. With this being an election year, the questioning will probably be more focused on political posturing (what would you do about income inequality? what would you do about affordable housing?) than anything else. I doubt there will be anything market-moving in the testimony, but you never know.

 

Small Business started the year off strong, according to the NFIB Small Business Optimism Index. “2020 is off to an explosive start for the small business economy, with owners expecting increased sales, earnings, and higher wages for employees,” said NFIB Chief Economist William Dunkelberg. “Small businesses continue to build on the solid foundation of supportive federal tax policies and a deregulatory environment that allows owners to put an increased focus on operating and growing their businesses.” Labor continues to be an issue: “Finding qualified labor continues to eclipse taxes or regulations as a top business problem. Small business owners will likely continue offering improved compensation to attract and retain qualified workers in this highly competitive labor market,” Dunkelberg concluded. “Compensation levels will hold firm unless the economy weakens substantially as owners do not want to lose the workers that they already have.”

 

Speaking of the labor market, Goldman Sachs Chief Economist Jan Hatzius sees the unemployment rate falling to 3.25% this year. That would be the lowest since 1953. But first, the Boeing and Coronavirus issues need to recede into the rear-view mirror.

 

The Trump Administration released its 2021 budget, which cut social programs and increased defense spending. Some housing related programs were hit, such as the Housing Trust Fund and the Capital Magnet Fund, which are funded by a 4 basis point charge on Fannie and Freddie origination. The Community Development Block Grants would be eliminated. As a general rule, these proposed budgets are not meant to become law (one of Obama’s budgets received exactly zero votes) – but are more statements of priorities. It also cuts Medicare and Medicaid, which means it would get no support from Democrats.

 

Morning Report: The Fed is sanguine on the economy

Vital Statistics:

 

Last Change
S&P futures 3322 -3.25
Oil (WTI) 50.11 -0.32
10 year government bond yield 1.56%
30 year fixed rate mortgage 3.66%

 

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

 

The upcoming week will be date-light, however we will have a lot of Fed-speak. Jerome Powell will be delivering his semi-annual Humphrey-Hawkins testimony on Capitol Hill on Tuesday and Wednesday. In terms of economic data, we will get CPI, retail sales and industrial production this week. None of these should be market-movers. The 10 year will be driven mainly by the global risk on / risk off trade which will be led by China.

 

The Fed said that downside risks to the US economy have diminished over the past few months, although Coronavirus remains a threat. Remember, recoveries don’t die of old age – they are either murdered by the Fed or are ended by some external event. “Downside risks to the U.S. outlook seem to have receded in the latter part of the year, as the conflicts over trade policy diminished somewhat, economic growth abroad showed signs of stabilizing, and financial conditions eased. The likelihood of a recession occurring over the next year has fallen noticeably in recent months.”

 

The Atlanta Fed has Q1 growth coming in at 2.7%.

 

Mortgage credit availability dipped in January, according to the MBA. “Mortgage credit availability was mostly unchanged to start 2020, decreasing 0.2 percent in January,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Similar to December of 2019, the decline came from the reduction of low credit score, high-LTV programs. Furthermore, there continues to be movement with both adds and drops in the government program space, with the net result last month showing small growth in the government index. Although credit supply has flattened these last two years, the meaningful increase seen overall since the Great Recession has been helpful to the growing share of first-time homebuyers, as well as refinance borrowers looking to act on lower mortgage rates. Ongoing housing supply constraints in the lower-price range continues to hold prospective buyers back the most.”

 

Interesting article in American Banker: Big banks lost money on mortgages in 2018. “Large banks withstood an average loss of $4,803 for every retail mortgage originated in 2018 (compared with a net profit of $376 per loan for independent mortgage bankers). Appetite for these kinds of losses is increasing.” Why were they doing this business? It is all about the MSR. And unfortunately for holders of servicing, rates have been going down, not up which is a negative for servicing assets. As rates have fallen, banks have had to reach for yield, which generally means taking more risk. I know that 2018 data is far in the rear view mirror,  but that is an incredible number.

 

 

Morning Report: Strong jobs report

Vital Statistics:

 

Last Change
S&P futures 3340 -3.25
Oil (WTI) 50.38 -0.32
10 year government bond yield 1.61%
30 year fixed rate mortgage 3.68%

 

Stocks are lower this morning as investors sell winners. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls up 225,000
  • Unemployment rate 3.6%
  • Average hourly earnings up 3.1% annually
  • Labor force participation rate 63.4%
  • Employment-population ratio 61.2%

Overall, a strong report. Certainly payrolls were way above the 158,000 expectation. Construction gained workers, which comports with what we have been hearing from the builders – that they are ramping up for 2020. Wage growth and payroll growth remain strong, and more people are entering the workforce, with the participation rate up and a rise in the employment-population ratio.

 

The NAHB notes that 63 million households are unable to afford a $250,000 home. Interesting stat from the piece: “A previous post discussed the often-cited estimate that a $1,000 increase in the price of a median-priced new home will price 158,857 U.S. households out of the market for the home.  A second post discussed the related estimate that a quarter point increase in the mortgage rate will price out 1.3 million.”

 

On the other side of the spectrum, Redfin notes that luxury home prices are rising again as interest rates fall. “Demand for luxury is improving. That’s showing up primarily in an increase in sales right now, but it’s also putting some slight upward pressure on prices,” said Redfin chief economist Daryl Fairweather. “We’re ending the year in a much better position than we started, which is a good sign for 2020. I expect price growth to return to at least 3% to 5% by spring.”

 

 

Morning Report: 70% chance of a recession in the next 6 months?

Vital Statistics:

 

Last Change
S&P futures 3347 13.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Stocks are up after China announced they will cut tariffs on about $75 billion in goods by mid-month. Bonds and MBS are flat.

 

Announced job cuts doubled in January, according to outplacement firm Challenger, Gray and Christmas. Note that this is generally a weak employment indicator, as it focuses only on announced job cuts in press releases, which may or may not happen. Separately, initial jobless claims fell to 202k.

 

Productivity rose 1.4% in the fourth quarter, while unit labor costs rose by the same amount. The Street was looking for a 1.5% increase in both. Manufacturing productivity fell by 1.2%, which probably was Boeing-related.

 

JP Morgan Chase is entertaining getting back into the FHA business. JP Morgan had scaled back their FHA lending because of “aggressive use” of the False Claims Act, which resulted in large fines, and basically made the business too risky. Talks are still at the initial stage, but appeared to have been driven by a Trump Administration policy that will not penalize lenders for immaterial errors. JPM CEO Jamie Dimon said that the Obama Administration’s use of the False Claims Act to extract massive penalties for underwriting mistakes wiped out a decade’s worth of profit for the business.

 

Punchy bet: There is a 70% chance of a recession in the next 6 months, according to a study by State Street and MIT. They fit a model based on industrial production, nonfarm payroll growth, the slope of the yield curve, and stock market returns. They looked at over 100 years of data and concluded that the current set of circumstances would see a recession within 6 months about 76% of the time. FWIW, this sounds more like a “gee-whiz, look at what our model predicts!” sort of scenario than a real forecast. For starters, the economy is much less sensitive to industrial production than it was a century ago. Second, the yield curve’s behavior is being manipulated by unprecedented action out of central banks. Financial repression (the name for the central bank’s mission to push rates lower) also is pushing money into the stock market. This sort of activity was unthinkable even 15 years ago, so historical comparisons should be treated with caution. In other words, take this survey with a boulder of salt.

Morning Report: Big jump in jobs

Vital Statistics:

 

Last Change
S&P futures 3327 23.25
Oil (WTI) 50.88 1.02
10 year government bond yield 1.65%
30 year fixed rate mortgage 3.68%

 

Another “risk-on” day as stock markets rally overnight and bonds get sold. MBS are performing a touch better than the 10 year.

 

Mortgage applications hit a six year high last week, which included an adjustment for the MLK holiday. The index rose 5% while refis increased 15%. The refi index is up 183% from the same week a year ago. Purchases fell 10%. “The 10-year Treasury yield fell around 20 basis points over the course of last week, driven mainly by growing concerns over a likely slowdown in Chinese economic growth from the spread of the coronavirus. This drove mortgage rates lower,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity jumped as a result, with an increase in the number of applications and a spike in the average loan amount, as homeowners with jumbo loans reacted more resoundingly to lower rates.”

 

ADP reported that payrolls increased by 291,000 last month, a huge jump from December, which was revised upward from 139,000 to 202,000. The Street is looking for an increase of 158,000 nonfarm payrolls in Friday’s jobs report, so that number appears to be too low. There was a pretty big increase in construction workers as it looks like homebuilders are eager to finally fulfill the pent-up demand for housing out there. It looks like the ADP number was the strongest in at least a year

 

ADP report

 

Home prices rose 0.3% MOM in December, and are up 4% on an annual basis according to CoreLogic.

Morning Report: The government prepares to IPO Fannie and Freddie

Vital Statistics:

 

Last Change
S&P futures 3289 43.25
Oil (WTI) 51.38 1.02
10 year government bond yield 1.59%
30 year fixed rate mortgage 3.63%

 

Stocks are higher after Chinese markets held up overnight. Bonds and MBS are down.

 

Construction spending fell 0.2% in November, but was up 5% on a YOY basis. Residential construction was up 1.4% MOM and up 5.8% YOY. Public residential construction was up almost 30% YOY.

 

Manufacturing performed better than expected in January, with the ISM Manufacturing Index rising to 50.9. This is a sharp rebound from December, which indicates that trade issues are in the rear view mirror.

 

The government is considering an expansion of the Federal Home Loan Bank’s customer base to include non-bank lenders and mortgage REITs. Federal Home Loan Bank borrowers generally get a sweetheart deal on financing, usually much better than even overnight repo lines. The reason? government subsidies. Note that some mortgage REITs currently do have FHLB lines, but I guess they want more mortgage REITs in the business. The Feds have been frustrated by the large banks, who have shied away from all but the most credit-worthy borrowers.

 

FHFA has hired an advisor to help recapitalize Fannie Mae and Freddie Mac. Houlihan Lokey won the deal. This will allow Fan and Fred to hire their own advisors for the equity sale. This is part of the government’s plan to decrease its footprint in the mortgage market. The share sale could top $125 billion, which would dwarf the largest IPO ever (Saudi Aramco in December) by a factor of 5. Lots of details remain, but progress is being made.

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