All Things in Moderation

Vital Statistics:

Stocks are flattish this morning as we head into Fed week and the meat of earnings season. Bonds and MBS are down small.

Flagstar Bank reached a deal to be acquired by New York Community Bank in an all-stock merger. Based on Friday’s closing prices, the deal is a 6% premium, which isn’t massive. It sounds like the rationale for this merger is not the typical cost-cutting one since there is no overlap of branches. It look like more of a strategic deal where NYCB wants to transition away from its roots as a thrift bank and add commercial banking heft. Lee M Smith of Flagstar will continue to run the mortgage operations, so it sounds like NYCB envisions keeping everything there. NYCB stock is up pre-open so it looks like the Street likes the deal.

The week ahead will have quite a bit of economic data with GDP on Thursday and Personal Incomes / Personal Spending on Friday. We will also have the FOMC meeting on Tuesday and Wednesday. No changes in policy are expected, however if the statement is unusually positive on the economy, bond prices could be vulnerable.

The next test for the Fed will be introducing the idea of returning to a more normal policy. The Fed wants to avoid a repeat of the “taper tantrum” when it made its first attempt to get off the zero bound. In the statement from the March meeting, it said that it wanted to see “substantial progress” towards full employment, and if you look at the employment-population ratio, it gives you kind of an idea what they need to see.

Pre-COVID, the employment-population ratio was 61.1% and it is now 57.8%. To get back to that level, we need to see about 11 million more jobs created. Given that inflation was still below the Fed’s target rate at that level, I think we have to assume that they are probably targeting that level again before they even think about increasing rates (or perhaps even tapering). I think the Fed feels like they were too aggressive last time around and will be less fearful of an inflationary surge. FWIW, CPI inflation was routinely in the 3% – 4% range during the mid- 1980s and 1990s, and most of us remember that period as pretty comfortable economically.

Durable Goods orders rose 0.5% in March, following a 0.9% decline in February. This was below the Street consensus of a 1.5% gain. Core Capital Goods orders (which are a good proxy for business capital expenditures) actually fell by 4.7% (excluding national defense). Inventory build was also minimal, which was another surprise.

The Biden Admin signed a mortgage relief bill that helps delinquent borrowers with their taxes and insurance bills. It will be distributed to states based on their unemployment rates.

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Vital Statistics:

Stocks are higher as we round out the week. Bonds and MBS are up small.

New Home sales rose 21% MOM and 69% YOY to a seasonally-adjusted average of just over 1 million homes. The increases are exaggerated by bad weather in February and COVID lockdowns last year.

The MBA updated its forecasts for 2021, with total originations expected to fall 14% from a record $3.8 trillion in 2020 to a still-robust $3.28 trillion. This would be the third highest on record. Purchase originations are expected to increase to $1.78 trillion. Refis are expected to fall by a third.

Exiting home sales fell 3.7% from February to a seasonally-adjusted annual rate of 6.01 million units. The median home price rose a record 17.2% to $329,100. Inventory rose slightly to 1.07 million units, but is still down 28% on a YOY basis. Lack of inventory was the constraint on sales, and it represents about a 3 month supply. We are at record lows for inventory since NAR started tracking this data in 1982.

The typical 30 year mortgage rate rose 27 basis points in March to 3.08%, according to Freddie Mac’s survey. Higher prices and higher mortgage rates are definitely affecting affordability.

Joe Biden proposed raising the capital gains tax to 39.6% for Americans earnings $1 million or more. The money would go to fund childcare and community college and would be separate from the $1.5 trillion infrastructure plan. Meanwhile, Senate Republicans are working on a scaled down $600 billion infrastructure plan.

The Conference Board Index of Leading Economic Indicators rose 1.3% in March. “The U.S. LEI rose sharply in March, which more than offset February’s slightly negative revised figure,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The improvement in the U.S. LEI, with all ten components contributing positively, suggests economic momentum is increasing in the near term. The widespread gains among the leading indicators are supported by an accelerating vaccination campaign, gradual lifting of mobility restrictions, as well as current and expected fiscal stimulus. The recent trend in the U.S. LEI is consistent with the economy picking up in the coming months, and The Conference Board now projects year-over-year growth could reach 6.0 percent in 2021.”

Homebuilder D.R. Horton reported that earnings per share increased 93% to $2.53 per share in the quarter ending March 31. Revenues rose 43%, and homes closed rose 36%. Backlog increased 85%. D.R. Horton’s focus in on homes in the $200k – $500k range, so it is really a barometer of the entry-level and move-up markets. Gross margins rose to 24.6%, so it is clear that the company is able to pass on increased input costs like lumber and labor.

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Vital Statistics:

Stocks are flattish this morning after the European Central Bank decision to maintain current policy. Bonds and MBS are flat as well.

Finally, some economic news this week. Initial Jobless Claims fell to 547k, while the Chicago Fed National Activity Index jumped to 1.71.

Ocwen is buying Texas Capital Bank’s correspondent division and a portfolio of MSRs. Terms were not disclosed, but TCB originated about $2.4 billion in the fourth quarter, and the MSR portfolio is $14 billion in UPB. TCB’s correspondent division and personnel will be absorbed by Ocwen’s PHH unit.

Meanwhile, Redwood Trust is partnering with Churchill Homes to increase its exposure to business purpose mortgages.

Sales of luxury homes jumped 42% in the first quarter of 2021, according to Redfin. This is a change from the typical post-2008 bubble phenomenon where luxury properties (especially on the East Coast) languished for years on the market with no interest. Lower mortgage rates (and rising asset prices) are driving the move. Note that many of these homes are located in California, where a 1,500 square foot ranch can command a couple million bucks and gets lumped in the “luxury” category.

Homebuilder NVR reported first quarter 2021 earnings of $63.21 per share which was up 41%. Revenues rose 29%, and gross margins expanded to 19.7%. For the next few quarters, year-over-year comparisons for Corporate America are going to look great given the easy comparison to COVID-19 numbers.

Average sales prices increased 10% to 410k, which is a surprise to me given the rally in lumber and the increase in gross margins. Perhaps the company is shifting production to smaller homes, or is building in the exurbs where land is cheaper.

Corporate bond spreads are narrowing, as investors worry less and less about the economic backdrop. The average spread to Treasuries for junk bonds is a mere 3.02%, which is testament to the fact that a lot of money is looking for a home. The last time it was this low was 2007. Corporations have raised a lot of capital over the past year, and are pretty cash-rich at the moment. In this environment, expect to see a lot more M&A activity.

That said, corporations (especially retailers) have learned their lesson about running “lean and mean” inventory levels and many will spend some of that cash re-stocking. In fact, the CEO of Prologis said on the company’s earnings call that the current environment for logistics is the best he has seen in his career.

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Vital Statistics:

Stocks are lower this morning as overseas cases of COVID-19 increase. Bonds and MBS are up small.

Mortgage applications finally snapped out of their slump and increased for the first time in 6 weeks. Overall applications increased 6.8%, while purchases increased 6% and refis rose 10%.

FHFA Chairman Mark Calabria spoke at the MBA Spring Conference and said that the Preferred Stock Purchase Agreement (the basic governing doc between the GSEs and the government) will need to be amended again.

“I said in January when the PSPA were signed — there needs to be another set of amendments. January really is a bridge,” he told Wells Fargo‘s Kristy Fercho, chair-elect of the Mortgage Bankers Association, at the trade group’s spring conference. “We knew when the January memo was being signed that Fannie would hit the retained earning caps and the sweep would go into place. And so it was absolutely critical that we ended this sweep so we can continue to build capital. Because again, just as it is at Wells or any other financial institution, with Fannie and Freddie, capital really is the binding constraint on the risk and footprint and activities they can take.”

Calabria was asked about the 7% investment cap as well. Here is what he said:

“I obviously wish that we were in a better capital position and had a stronger Fannie and Freddie that could support more of the market, and that’s our objective” Calabria replied. “The reality is there will be some short-run pinch, if you will, on the market, while we try to build a stronger Fannie and Freddie that can support the market. I do want to clarify because I think there’s often some misperceptions out there, and to say, the PSPA are lines of credit, Fannie and Freddie cannot legally knowingly take risk against PSPAs. That would be like if Wells said, ‘Well, we’ve got deposit insurance so who cares.’”

I found this statement surprising since the NOO loans are highly profitable for Fannie Mae and Freddie Mac, so limiting them does nothing to improve their capital position. As Calabria mentioned, the PSPA is a line of credit, and this would be the first time I have seen a creditor unilaterally change a debt covenant in a way that is adverse to the creditor. It is possible he is referring strictly to the high risk stuff (i.e. high LTV / low FICO / >43 DTI) and not the investment properties, but the question was specifically about the 7% cap. But certainly, if the overarching goal here is to get Fannie Mae and Freddie Mac better capitalized, limiting investment property loans goes against that goal.

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Vital Statistics:

Stocks are down this morning on overnight weakness in equity markets. Bonds and MBS are down small.

The number of loans in forbearance fell another 16 basis points last week to 4.5% of servicers’ portfolios. Fannie Mae and Freddie Mac loans fell to 2.44% while FHA fell to 6.16%.

Given the investment limits on non-owner occupied loans, non-QM lenders are stepping in to fill the void. It is important to understand that the GSE’s issue with these loans is philosophical, not risk-related. In other words, these investor loans are profitable – that isn’t the issue. This restriction was put in place by Mark Calabria, the current director of FHFA. This is driven by a belief that the government should be supporting first time homebuyers, and helping people get on the first rung of homeownership. It shouldn’t be in the business of helping professional real estate investors.

That said, the limits on high-risk loans (high LTV / low FICO) are being driven by risk concerns. FWIW, if these limits stay in place, I think the high risk stuff is going to go to FHA, while the investor stuff will go to non-QM.

Western Alliance reported strong first quarter numbers, with EPS up 130% YOY to $1.90 per share. The acquisition of Amerihome closed and the bank intends to portfolio a bunch of Amerihome (and presumably Galton) non-QM loans on its balance sheet. The stock has been on a tear, more than tripling over the past year.

Interesting study results out of Fannie Mae regarding remote work. Respondents reported that remote work improved productivity and reduced operating costs. That said, collaboration did seem to suffer. 79% of lenders prefer a hybrid model, where some employees work remotely and some work on-site.

I think the big takeaway from COVID and remote work is that a big source of friction in the economy – the need for workers to be located near their place of work – is disappearing. This should help drive productivity increases in the economy, which is what drives improving standards of living. If you look at the latest NFIB Small Business Sentiment Survey, finding qualified workers remains the biggest concern for small business. The ability to source workers from all over the country will help alleviate that issue.

Note that productivity has always been notoriously hard to measure, and in these days of “free” internet applications it is 10x worse. How do you put a price on your personal data? It isn’t monetary, but it isn’t worthless either. Since productivity and inflation are intertwined, this will become a more important issue going forward.

Speaking of inflation, consumer products giant Proctor and Gamble announced that it will increase prices in September. It appears that prices of paper products is driving the increases. Kimberly-Clark also announced it will increase prices in June.

Speaking of inflation, lumber continues to spike. It is trading now at $1,347. Users of lumber had delayed orders in hopes that prices would fall, and that didn’t happen. Now everyone is competing for supply.

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Vital Statistics:

Stocks are flattish this morning as earnings season begins. Bonds and MBS are flat.

We should have a quiet week data-wise, with existing home sales and new home sales the only really important data. We won’t have any Fed speakers since we have a meeting next week.

According to the CDC, at least half of all adults have received at least one COVID-19 shot. Despite this good news, it looks like overseas countries are battling with a resurgence of cases.

The CFPB is taking aim at servicers. “We are very concerned and we’re watching closely…Our supervision team is robustly asking for more data than ever from servicers….We remain very concerned about a potential wave of borrowers seeking assistance after the emergency protections expire later this year, and we will use our regulatory, enforcement, and supervisory authorities to prevent avoidable foreclosures” said the CFPB spokeswoman.

Apartment market conditions appear to be tightening for the first time in a year and a half, according to the National Multifamily Housing Council. Interestingly, the debt financing conditions continued to weaken. I think this refers more to CMBS transactions, not 1-4 unit residential financing which is facing new caps from Fannie Mae. The CMBS market took some lumps last year as COVID-19 negatively affected many commercial real estate tenants. That might explain why Annaly jettisoned its CMBS portfolio recently.

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Vital Statistics:

Stocks are higher this morning on strong economic numbers out of China. Bonds and MBS are up.

Housing starts jumped 19% MOM and 34% YOY to a seasonally-adjusted annual rate of 1.74 million units. This is certainly a good number, however remember the base case issue – in March of 2020, the economy was shut down, and in February we had a lot of bad weather. Still, it is an encouraging number. In the grand scheme of things, 1.7 million is not that huge of a number; in fact it is just about average.

Note that chart goes back to the 1950s, and the US population has increased substantially since then. If you take the series and divide it by the US population, you get a sense of how much the US has underbuilt over the past decade.

Building Permits rose 30% YOY to 1.72 million. On a month-over-month basis, they rose 2.7%.

As the starts divided by population chart shows, the US needs a lot of housing immediately. Existing home sales data shows a dearth of inventory, and home price appreciation is soaring. In the fourth quarter, just about every homebuilder was reporting fat gross margins, so the builders have every incentive to build, especially since work-from-home has made the exurbs more attractive. The exurbs, with cheaper land will attack some of the affordability issue. Housing will finally do some of the heavy lifting for US economic growth.

Congress is also introducing a bill to encourage more building near transit stops. My guess is this is primarily a messaging bill since local communities really call the shots with zoning and environmental statements, etc. With all of the headaches of building in the cities, with workers heading outwards, along with eviction moratoriums, I can’t see developers getting too excited about this, but you never know.

The Biden Admin is planning a first-time homebuyer bill. It would provide $25,000 cash, usable at closing, for certain first-time homebuyers. It would be available only to first-generation and economically disadvantaged homebuyers. It will be means-tested and will be available only to people who make less than 120% of area median income, and their parents could not have owned a home in the past 3 years (although if the parents lost their home in a foreclosure or short sale, it won’t apply). The base-case grant is $20k, but if you are part of a group that has been “subjected to racial or ethnic prejudice” you get an extra $5k. It sounds like there will be a lot of moving parts here, so it will be interesting to see how much of an impact it really makes.

Consumer Sentiment improved in April, according to the University of Michigan Consumer Sentiment Survey. The improvement was driven more by current economic conditions than it was by future expectations, which is also encouraging.

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Vital Statistics:

Stocks are higher this morning after a strong retail sales number. Bonds and MBS are up.

Freddie Mac released its quarterly forecast yesterday. Freddie sees the 30 year fixed rate will average 3.2% in 2021, while rising throughout the year. It sees a 3.4% fixed rate in the fourth quarter of 2021, and it hitting 3.8% in the fourth quarter of 2022. This will drive refi volumes to $1.8 trillion in 2021 and $800 billion in 2022.

Freddie sees home price appreciation to decrease in 2021, falling to 6.6% from 11% in 2020.

March was the hottest month in housing history, according to Redfin. The median house price rose 17% YOY to $353,000. Housing inventory fell 29% and homes sold in 25 days, with 42% trading above list. I suspect all of the housing data for the next few months should have an asterisk next to it since we are comparing to lockdown months. Still, the rise in prices is undeniable.

Retail Sales rose 9.8% in March, driven by stimulus payments and an easy comparison to February which had a lot of bad weather.

Initial Jobless Claims fell to 576k last week. Nice to see a drop, but we need to get back below 300k to have some semblance of normalcy.

Wells reported first quarter earnings yesterday. Mortgage originations were $51.8 billion, which was up 8% YOY and down about 4% compared to the fourth quarter. Retail originations were 65% of total volumes as Wells seemed to be pulling back from correspondent. That said, revenues did increase on a MOM and YOY basis, driven by higher gain on sale margins and a heavier retail mix.

New Home purchase applications rose 7% MOM and 12% YOY, according to the MBA. That said, new home sales are estimated to fall in March, driven by exceptionally low inventory and higher price / borrowing costs.

Industrial Production rose 1.4% in March, while manufacturing production rose 2.7%. Capacity Utilization increased to 74.4%. These numbers were all below expectations.

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Vital Statistics:

Stocks are flat this morning as we kick off earnings season. Bonds and MBS are up.

JP Morgan reported strong earnings this morning which included $5.2 billion in credit reserve releases. These are reserves the bank took for potential losses related to COVID which now look unlikely to materialize. Consumer lending has returned to pre-pandemic levels, and mortgage origination was up 40% YOY. Return on equity was an eye-popping 24%. JPM CEO Jamie Dimon is pretty bullish on the economy.

New Residential is buying Caliber for $1.675 billion in cash. That must explain why Caliber recently increased its investment property LLPAs to 7-9 points. Caliber earned $891 million in pre-tax income in 2020, so New Rez is paying 1.9 times pretax earnings for the company, which originated $80 billion last year. It also gets a $153 billion MSR portfolio.

Caliber is owned by Lone Star Funds, and this sale (along with Amerihome) shows that private equity is ringing the register on mortgage originators. I suspect these funds are going to re-deploy that cash into single-family rental strategies.

The MBA estimates that the industry did $3.8 trillion in mortgage originations last year, which would be the best year ever recorded.

“2020 was a banner year for the mortgage industry, despite the COVID-19 global health crisis essentially shutting down the U.S. economy in March and forcing personnel into remote work environments,” said Marina Walsh, CMB, MBA Vice President of Industry Analysis. “A surge in housing and mortgage demand, record-low mortgage rates and widening credit spreads translated into soaring net production profits that reached their highest levels since the inception of MBA’s annual report in 2008.”

Average production volume was $4.5 billion per originator, up from $2.7 billion in 2019. Average production profit rose to 157 basis points from 58 in 2019. Total production revenues rose to 434 basis points, up from 356 in 2019. Surprisingly, loan production expenses, were more or less flat at $7,578. Productivity might have been the driver, which rose from 2.3 loans per employee to 3.3 loans per employee.

Mortgage applications fell 3.7% last week as purchases fell 1% and refis fell 5%. The 10 year reached 1.7% last week, and now seems to be heading lower, at least for the time being.

The MBA is urging Washington to allow some additional flexibility on the GSE caps for investment properties and high risk loans. MBA Senior Vice President of Legislative and Political Affairs Bill Killmer said a more flexible approach and timeline would allow the GSEs to come into compliance by making necessary adjustments to their automated underwriting systems on a prospective basis. “This solution would alleviate concerns about existing loan pipelines and make lender-specific caps unnecessary,” he said. “Gradual changes also would provide time for private capital alternatives to develop the operational capacity to better serve these market segments.”

Import prices rose 1.2% MOM and 6.9% YOY, while export prices rose 2.1% MOM and 9.1% YOY. The import number was driven by energy, while the export number was driven by agricultural. Take these numbers with a grain of salt; COVID-19 related shutdowns (especially during the heavy lockdown days) are going to produce some strange year-over-year comparisons.

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