All Things in Moderation

Vital Statistics:

Stocks are lower this morning after yesterday’s furious rally. Bonds and MBS are down.

Yesterday was a “hip to be square” day in the market, for those of us old enough to remember the early 1980s. Basically, every stock that has been hated for months had its day in the sun. Investors snapped up mall stocks, apartment REITs, retailers, lodging companies, cruise lines and sold off the big COVID momentum names. Mortgage originators got thrown overboard on fears that rates are going to rise and squash the refi boom.

Mortgage Backed securities are lagging the move in Treasuries, which means mortgage rates aren’t moving up as fast as the 10-year. This is typical, however remember the Fed is the 800 pound gorilla in the MBS market, so it can support rates wherever it wants.

JP Morgan is “going on the offensive” in the home lending business, reducing credit constraints.

Small business optimism was steady in October, at a historically high reading. “Leading up to the presidential election, small businesses continued to focus on stabilizing their businesses but were uncertain about the future economic conditions due to COVID-19 government regulations on all levels,” said NFIB Chief Economist Bill Dunkelberg. “We see solid momentum going into the 4th quarter, and another good quarter could get the GDP back to its 2019 closing levels.”

Loans in forbearance decreased 16 basis points to 5.67% last week, according to the MBA. “With declines in the share of loans in forbearance across the board, the data this week align well with the positive news from October’s jobs report, which showed a gain of more than 900,000 private sector jobs and a 1 percentage point decrease in the unemployment rate,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “A recovering job market, coupled with a strong housing market, is providing the support needed for many homeowners to get back on their feet.”

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Vital Statistics:

Stocks are higher this morning after Pfizer and BioNTech announced that its COVID-19 vaccine was successful in its Phase 3 trial. Bonds and MBS are down on the “risk-on” trade

Here is the press release from Pfizer about 2 hours ago. The vaccine supposedly has an efficacy rate of 90%. The vaccine has received fast track approval from the FDA.

While the election results may not have pleased partisans on either side, they are an absolute win for the markets and the mortgage banking business. Markets generally prefer gridlock since it means certainty. For interest rates, notwithstanding the market reaction to vaccine news, they should remain lower for longer with the Fed holding down rates and little chance for a big stimulus package. The best part of Biden (market friendliness, etc) will stay in place while the bad parts: tax hikes, green new deal, etc will not. Note we won’t have a final word on the Senate until January when the Georgia run-offs will determine the final make-up.

Note that divided government means that the big broke blue states like New York might go into default. The state and NYC bonds were downgraded already last month.

For stock investors, the promise of a vaccine means we should see some signs of life in lodging, airlines, and retailers. Interesting that the retailers rose 8% last week. Cruise line stocks are up 20% pre-market.

What the CFPB will look like under a Biden administration. Biden is almost assured to replace current director Kathy Kraninger as one of the first orders of business. Democrat Katie Porter is one name that has been mentioned. The CFPB will probably focus more on COVID related servicing issues at least initially.

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Vital Statistics:

Stocks are flattish this morning as it looks more and more like Biden will win. Bonds and MBS are down.

The Fed maintained rates yesterday and made little changes to the FOMC statement. Rates will remain low, and the Fed will continue to purchase Treasuries and MBS at a minimum of current levels to maintain stability and to support the economy. With divided government looking more and more certain, the chance of fiscal stimulus is probably off the table. This will push more of the burden of stimulus onto the Fed’s plate, which means lower rates for longer. Good news for the mortgage banking industry.

The economy added 638,000 jobs in October, according to BLS. The unemployment rate fell to 6.9% and the labor force participation rate increased to 61.7%. 21.2% of the US workforce is telecommuting due to COVID. Average hourly earnings rose 0.8% MOM and 4.5% YOY. The overall numbers were well above Street expectations.

The increase in wages is a good sign for the economy, and compensation is certainly rising in the mortgage banking space. The bond market has yet to start fearing inflation data, so the recovery should continue to gain momentum. Remember the Fed will let the labor economy run hot, so increasing wage growth shouldn’t trigger any response from the Fed.

PennyMac reported blowout earnings last night of $7.03 per share. Volumes were up 44% QOQ to a total of $54 billion. This is an increase of 55% from a year ago. The company has earned over $15 a share through the first 9 months of the year, and the full-year estimates are way too low. It is not out of the question for PFSI to earn $20 this year, which is wild with a stock trading at $58 per share. For those keeping score at home, it works out to be a P/E of 2.9. The next question will be what will they do with all that cash? The quarterly dividend is 15 cents and the company earned 7 bucks a share. A special dividend and massive buyback should be on the table.

I will be on a panel today at the MCT Exchange 2020. Rob Chrisman will be running the panel, where we will discuss the election and what it means for the mortgage banking sector. The panel starts at 11:00 am PST / 2:00 PM EST.

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Vital Statistics:

Stocks are higher this morning as we continue to digest the election news. Bonds and MBS are up.

The FOMC is set to release its decision today at 2:00 pm. There will probably be no change in policy, and bonds are going to be driven by election news.

Initial Jobless Claims came in at 750k this morning, while productivity rose 4.9% and unit labor costs fell 8.9%.

I wanted to give my thoughts on the election and things going forward. I assume Biden goes on to win. Republicans keep the Senate and Democrats control the House.

Big picture: Biden wins after a long, drawn-out litigation. Bond yields will drift lower as the fear of a blue wave is off the table. Stock rally because, well, just because. 

Divided government means no big stimulus package. Republicans will re-discover religion re government spending, which means any stimulus will be small and targeted. Maybe we will see another check made out to people. Any bailout of the big broke blue states is DOA. Nancy Pelosi will have her hands full managing the backbenchers in the House who want to see Trump in an orange jumpsuit. Washington will settle into gridlock. 

Regulatory-wise, the CFPB will become more aggressive. HUD will resume suing local governments to reduce single-family zoning. Regulatory fears will tighten FHA lending even more, which will give the affordable housing types like Urban Institute conniptions. The government will continue to have a moratorium on evictions. Luckily, rising house prices will keep a lid on strategic defaults. Multi-fam construction will probably slow as financing gets tighter, exacerbating the home supply problem. 

A lack of any sort of fiscal stimulus means the Fed keeps the pedal to the metal for a while. Neel Kashkari will urge the Fed begin to repo baseball cards and Elvis plates. Black Knight estimates the 3/4 of the US mortgage market can save 75 bps on rate, which means the refi boom continues to have legs. The mortgage industry is at capacity, and bringing on new bodies from another industry takes time (just look at how long it has taken in construction, where there are no regulatory issues). Mortgage industry should have another $3 – 4 trillion year in 2021, and the MBA will grudgingly move their forecast up from 2.5 trillion sometime in September 2021.  Margins remain wide, and salaries will continue to rise for industry professionals. 

Longer term, a more aggressive regulatory state will keep a lid on economic growth. The recovery will be shallower and longer. Interest rates will stay around here, and the economy will look more like the Obama years than the pre-COVID Trump years. For the mortgage banking industry, we should see a few more great years, but once the music stops and mortgage banks are left with bloated cost structures, a wave of consolidation will take place.

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Vital Statistics:

Stocks are higher as the election votes come in. Bonds are up after a wild night.

As I type this, the count in Michigan has narrowly gone to Biden, after leaning Trump all night. The remaining undecided states are MI, WI, PA, GA, NV, and NC. MI, WI, and NV are leaning Biden, and PA, GA and NC are leaning Trump. If those final results hold up, Biden wins.

The Senate so far is looking unchanged, although it hasn’t been declared either way. Same with the house. The only takeaway is there was no blue wave that the media had been trying to create for months. If the Senate stays Republican, we will have divided government no matter who wins, and that is good for both stocks and bonds. A huge stimulus bill with a bailout for the big broke blue states probably isn’t in the cards.

One thing to keep in mind, is that with all the expected recounts, we probably won’t have a definitive answer on the election for possibly weeks.

If Biden wins, the most likely change will a more aggressive regulatory state. My suspicion is that nothing changes with Fan and Fred, and the common stock for the GSEs will remain a litigation lottery ticket. I don’t think anything changes with the Fed.

Mortgage Applications increased 3.8% last week as purchases decreased 1% and refis increased 6%. The average rate ticked up a basis point to 3.01%.

The economy added 365,000 jobs in October, according to the ADP Jobs report. The Street was looking for around 750,000, so this is a miss. Economists are forecasting an increase of 530,000 jobs in Friday’s jobs report. “The labor market continues to add jobs, yet at a slower pace,” Ahu Yildirmaz, vice president and co-head of the ADP Research Institute, said in a statement. “Although the pace is slower, we’ve seen employment gains across all industries and sizes.”

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Vital Statistics:

Stocks are higher as we head into election day. Bonds and MBS are down small.

The share of loans in forbearance fell by 7 basis points last week to 5.83%, according to the MBA. “With more borrowers exiting forbearance in the prior week, the share of loans in forbearance declined across all loan types,” said MBA Senior Vice President and Chief Economist Mike Fratantoni. “Almost half of forbearance exits to date have been from borrowers who remained current while in forbearance, or who were reinstated by paying back past-due amounts.”

Apparently Morgan Stanley was out with a call yesterday calling for markedly higher bond yields, with the 10 year yield rising 100 basis points. Apparently the analyst is using 2016 as a template, where an unexpected Trump victory translated to a big “risk on” trade where investors sold Treasuries and bought stocks. Regardless, traders are betting on volatility stemming from the election. As MBS investors know, volatility is kryptonite for the asset class. And sort of dislocation in the bond market will translate into lower MBS pricing, which in turn means higher mortgage rates at the margin. FWIW, with global sovereign debt at or close to record lows, COVID, a Federal Reserve who wants low rates, and a lot of uncertainty regarding the disease and the recovery, I am not seeing the case for higher rates, but I guess anything is possible these days.

Construction spending rose 0.3% MOM and 1.5% YOY in September, according to the Census Bureau. Residential construction was up 2.7% MOM and over 10% YOY. That said, office and lodging spending was down.

Home prices rose 1.1% MOM and 6.7% YOY, according to CoreLogic. They are predicting flat prices going forward however.

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Vital Statistics:

Stocks are higher this morning as we head into an important week for the markets. Bonds and MBS are down.

Aside from the election this week, we also have a FOMC meeting. Plus, we have a slew of important economic data including the jobs report on Friday. Lots going on.

An election surprise could prove to cause some increase in market volatility. I remember in 2016 after Trump won, the S&P futures were down 100 points in the overnight Asian markets. Paul Krugman was penning his New York Times essay predicting Great Depression II, while famed investor Carl Icahn was buying every contract he could get his hands on in the overnight session. The stock market closed up about 1% on the day after the election. People forget the bond market also had a pretty substantial move. The 10 year yield increased 39 basis points in the immediate aftermath of the election.

The polls all show a Biden victory, but pollsters are increasingly in the opinion moving business, not the opinion measuring business. So a lot of the margin is nothing more than wishful thinking. I am wondering if the move up in yields lately is the bond market hedging its bets.

The manufacturing sector is still expanding, despite COVID-19. The ISM Survey for October came in at 53.4, which was higher than expected.

Redfin is getting sued by a bunch of housing organizations over its minimum listing price. The lawsuit claims that this amounts to discrimination since many urban neighborhoods especially in the cities they cited (Detroit, St. Louis) are low-priced. Redfin says it is a business decision, but the activists believe it has no legitimate business purpose. The problem is that many properties in these areas are extremely low priced (around $10,000 – $20,000) due to property tax arrears that have piled up for years. A real estate broker simply isn’t going to get excited about putting in the work for a $300 check. Redfin will pay a minimum commission for brokers, but someone has to eat the difference.

Ever notice the MBA’s origination forecasts seem to be low and raised only grudgingly? The latest MBA forecast for 2020 origination (which was only recently raised) came in at around $3.2 trillion. According to Black Knight Financial’s rate lock data, 2020 originations could come in over $4 trillion.

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Vital Statistics:

Stocks are lower this morning as big tech earnings report fail to excite investors. Bonds and MBS are down.

Pending home sales declined 2.2% according to NAR. Despite the decline, it is still the second highest reading on record.

“The demand for home buying remains super strong, even with a slight monthly pullback in September, and we’re still likely to end the year with more homes sold overall in 2020 than in 2019,” said Lawrence Yun, NAR’s chief economist. “With persistent low mortgage rates and some degree of a continuing jobs recovery, more contract signings are expected in the near future.”

“Additionally, a second-order demand will steadily arise as homeowners who had not considered moving before the pandemic begin to enter the market,” Yun said. “A number of these owners are contemplating moving into larger homes in less densely populated areas in light of new-found work-from-home flexibility.”

Personal incomes rose 0.9% in September, much higher than the consensus estimate of 0.3%. Personal spending rose 1.4%, higher than the 1% estimate, which is good news for the economy. Inflation (at least as the Fed measures it) remains well under control with the personal consumption expenditures index only up 1.4% on an annual basis.

It sounds like the flight out of urban areas is beginning to be felt for landlords. Apartment REIT Equity Residential reported a big decline in earnings, driven by concessions and turnover in its NYC, SF and Boston markets. Suburban apartments are holding up reasonably well however.

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Vital Statistics:

Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are flat as well.

COVID cases are surging in Europe, prompting many governments to institute strict social distancing measures.

Third quarter GDP rose 33%, while personal consumption rose 41%. These numbers were higher than expectations. Personal incomes fell by $540 billion after increasing $1.45 trillion in the second quarter, which was supported by government stimulus payments. Overall, the economy is improving, but it is still way below pre-COVID levels.

Initial Jobless Claims fell to 751k last week.

Corelogic reported that mortgage fraud risk fell by 26.3% YOY in the second quarter. This decrease was largely driven by a shift in the purchase / refi mix. Note that these are second quarter numbers, so they are a bit old.

Freddie Mac reported that the seriously delinquent rate fell by 13 basis points to 3.04% in September.

I will be a panelist at the IMN Mortgage Servicing Rights forum this morning at 10:45 this morning. It should be a good conference.

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Vital Statistics:

Stocks are lower this morning as COVID-19 cases continue to rise. Bonds and MBS are up.

Mortgage applications rose 1.7% last week as purchases rose 0.2% and refis rose 3%. “Mortgage applications to buy a home were flat compared to the prior week, but overall activity remains strong this fall,” said Joel Kan, MBA Associative Vice President of Economic and Industry Forecasting. “Applications jumped 24 percent compared to last year, and the average loan size reached another record high at $372,600. These results highlight just how strong the upper end of the market is right now, with outsized growth rates in the higher loan size categories.”

Rental issues (nonpayment, evictions) could usher in the next housing crisis. Eviction moratoriums will end on January 1 for the Federal Government and many states. These tenants could then face eviction processes and will be on the hook for missed rent payments. Second, many landlords rely on that rental income to make the mortgage payment or to live on. That said, it probably won’t be worse than the 2009 financial crisis.

CoreLogic has received multiple bids for the stock, valuing it at over $80 per share. CoreLogic has been pursued by Cannae, which is trying to replace the board of directors.

The homeownership rate ticked down in the third quarter, from 67.9% to 67.4% according to Census. The homeownership rate topped out at 69.2% during the real estate bubble.

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