Morning Report: Jerome Powell appears on 60 Minutes

Vital Statistics:

 LastChange
S&P futures4,115-5.4
Oil (WTI)60.471.15
10 year government bond yield 1.67%
30 year fixed rate mortgage 3.27%

Stocks are flattish this morning on no major news. Bonds and MBS are flat.

We kick off earnings season this week, with the big banks starting the show. We will get some important economic data with the Consumer Price Index on Tuesday, Industrial Production on Thursday and Housing starts on Friday.

Fannie Mae and Freddie Mac will stop purchasing loans under the GSE patch starting on July 1. This means they will no longer accept loans with debt-to-income ratios above 43%. This is interesting given that the CFPB has proposed extending the patch to October 2022.

Fed Chairman Jerome Powell went on 60 Minutes yesterday and talked about the state of the economy. Here is the transcript. Nothing was said that could be considered market-moving, although he did discuss the Fed’s thinking regarding inflation as the economy improves:

SCOTT PELLEY: What the Fed has done traditionally is use economic models to predict inflation and then raise interest rates, tap the brake if you will, before inflation happens. Is that what you’re planning on doing?

JEROME POWELL: No, it’s not. And really, what we’ve done is we’ve updated our understanding of the economy and therefore, our policy framework to the way the economy has evolved. The economy has changed. And what we saw in the last couple of cycles is that inflation never really moved up as unemployment went down.

We had 3.5% unemployment, which is a 50-year low for much of the last two years before the pandemic. And inflation didn’t really react much. That’s not the economy we had 30 years ago. That’s the economy we have now. That means that we can afford to wait to see actual inflation appear before we raise interest rates. Now, we don’t want inflation to go up materially above 2% and go back to, you know, the bad, old inflation days that we had when you and I were in college back a long time ago. But at the same time, we do have the ability to wait to see real inflation. And that’s what we plan on doing.

Overall, the Fed is sticking with its base case scenario that the second half of 2021 will be exceptionally strong, perhaps the strongest in 30 years. That said, there are still about 9 million fewer people working than there were pre-pandemic and a lot of small businesses have closed. It will take time for those people to find jobs and new businesses to emerge to replace the closed ones.

Powell has changed his thinking even over the course of his term regarding tapering and getting off the zero bound. The labor market index is roughly at the same place today as it was in 2013 when Powell began urging the Fed to reduce purchases of Treasuries and MBS. As the article notes, we are going to see a spike in inflation simply because prices during the lockdown days of 2020 were artificially low. Of course that doesn’t tell the whole story; supply chain bottlenecks are driving prices higher as well, although those should be temporary. Ultimately people’s perception of inflation is largely driven by prices at the gas pump, and the summer driving season begins soon.

Morning Report: The CFPB warns servicers about foreclosures

Vital Statistics:

 LastChange
S&P futures4,03227.4
Oil (WTI)59.84-1.62
10 year government bond yield 1.74%
30 year fixed rate mortgage 3.33%

Stocks are higher this morning after Friday’s strong jobs report. Bonds and MBS are down small.

The upcoming week is pretty data-light, as is typical after the jobs report. The main thing will be the FOMC minutes on Wednesday and then inflation data on Friday. The FOMC minutes will be interesting to see just how much faith the Fed is putting into the stimulus spending.

Speaking of stimulus, the Biden Admin is trying to sell its $2.5 trillion infrastructure plan both to Republicans and the country at large. The sticking point will be the increase in corporate taxes to pay for the plan, and so far it looks like he isn’t even getting buy-in from his own party on that.

Pension funds are getting into the single-family rental business. “You now have permanent capital competing with a young couple trying to buy a house,” said John Burns, whose eponymous real estate consulting firm estimates that in many of the nation’s top markets, roughly one in every five houses sold is bought by someone who never moves in. “That’s going to make U.S. housing permanently more expensive,” he said. Again, when you look at mid single-digit cap rates, and then tack on double-digit price appreciation for the underlying assets, you have an asset class that has better characteristics than most other investment options out there.

The CFPB wants servicers to be ready for the wave of foreclosures once the moratoriums expire. “There is a tidal wave of distressed homeowners who will need help from their mortgage servicers in the coming months. Responsible servicers should be preparing now. There is no time to waste, and no excuse for inaction. No one should be surprised by what is coming,” said CFPB Acting Director Dave Uejio. “Our first priority is ensuring struggling families get the assistance they need. Servicers who put struggling families first have nothing to fear from our oversight, but we will hold accountable those who cause harm to homeowners and families.”

Morning Report: The MBA urges FHFA to go slow with GSE limits

Vital Statistics:

 LastChange
S&P futures391616.4
Oil (WTI)59.331.57
10 year government bond yield 1.63%
30 year fixed rate mortgage 3.30%

Stocks are higher despite a lousy durable goods number. Bonds and MBS are up small.

Durable Goods orders fell 1.1% in February, which was well below the consensus estimate of 0.8% growth. Ex-transportation, they fell 0.9% and core capital goods orders (sort of a proxy for business capital investment) fell 0.8%.

Mortgage applications fell 2.5% last week as rates spiked. Purchases increased 3%, while refinances fell 5%. “The 30-year fixed mortgage rate increased to 3.36 percent last week and has now risen 50 basis points since the beginning of the year, in turn shutting off refinance incentives for many borrowers,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Refinance activity dropped to its slowest pace since September 2020, with declines in both conventional and government applications. Mortgage rates have moved higher in tandem with Treasury yields, as the outlook for the U.S. economy continues to improve amidst the faster vaccine rollout and states easing pandemic-related restrictions.”

While refis are falling, we are still well above where we were pre-COVID. Below is a chart of the MBA refinance index.

The MBA sent a letter to Treasury Secretary Janet Yellen and FHFA Director Mark Calibria urging them to reconsider the GSE purchase caps. The MBA expressed concern about the limit on high risk (low FICO / high LTV) caps of 6% on purchases and 3% on refis. It also discussed the problem with investor property caps.

MBA said when the amendments to the PSPAs were announced, Treasury noted that these limits were “aligned with [the Enterprises’] current levels” of investment property and second home acquisitions. Market volumes in these segments in 2020, however, were lower than in prior years, and data from recent months suggest that heightened sales and refinance activity in these segments is driving an increase in GSE acquisitions of these loans. As the GSEs have begun to implement the investor/2nd home caps in the past week, the market for these loans has deteriorated significantly as investors impose loan level price adjustments to avoid getting an excessive volume of loans that the GSEs cannot purchase.  It is not clear that private market participants currently have the capacity or resources to absorb the entirety of the gap between the GSE limits and the volume needed to satisfy underlying demand.   

At least for the low FICO / high LTV paper, there is an alternative outlet: FHA. For investment properties we are starting to see some investor interest in AUS compliant / non-guaranteed investor property loans. That said, this is a completely new product and there have yet to be any securitizations of this. One potential issue is the capital treatment that banks will have on these. If these loans require higher reserves than traditional Fan and Fred MBS, then banks will be reluctant to hold them and that will affect pricing.

The MBA’s point is a good one, that these loans were artificially depressed as a percentage of all loans in 2020 due to the plethora of easy primary refinances. At a minimum, the MBA is urging FHFA to slow down: “Under a more flexible approach and timeline, the Enterprises could make necessary adjustments to their automated underwriting systems, which would alleviate concerns about existing loan pipelines and better protect against market disruptions. Gradual changes also would provide time for private capital alternatives to develop the operational capacity to serve these market segments.

The typical mortgage originator did $1.5 billion in the fourth quarter and made 137 basis points.Posted on

Morning Report: Home prices rise 16%

Vital Statistics:

  Last Change
S&P futures 3559 -6.6
Oil (WTI) 41.73 0.31
10 year government bond yield   0.86%
30 year fixed rate mortgage   2.82%

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

Initial Jobless Claims ticked up to 740,000 last week.

Existing home sales rose 4.3% MOM to a seasonally-adjusted annual rate of 6.85 million in October. This number is up 27% from a year ago. The median home price came in at 313,000 an increase of 16% from a year ago. This huge jump in prices means that the luxury end of the market is recovering. Housing inventory remains tight at 1 42 million units, which represents a 2.5 month supply at current rates. “Considering that we remain in a period of stubbornly high unemployment relative to pre-pandemic levels, the housing sector has performed remarkably well this year,” said Lawrence Yun, NAR’s chief economist.

The FHFA issued its final capital rule for the GSEs. Fan and Fred will have to hold Tier 1 capital in excess of 4% to avoid restrictions on capital distributions and discretionary bonuses. The government would like to end conservatorship, however I think there is a meaningful risk that a Biden Administration will re-instate the profit sweep to pay for the advance relief that servicers are getting as a part of the CARES Act. The left really has little appetite to privatize the GSEs in the first place, and divided Congress makes anything legislative difficult.

New Home Purchase applications rose 5% MOM and 33% YOY according to the MBA. “New home sales activity was robust in October,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “October is usually when home buying activity slows as the weather turns colder. However, this fall has been a different story, with delayed activity from the spring, and more households seeking larger homes with more indoor and outdoor space, driving demand.”

Global debt is set to hit $277 trillion by the end of the year. That is a quarter of a quadrillion in debt. Despite all of that debt, interest rates are negative in much of the world. Meanwhile, the Fed is committed to lower rates, and has absolutely no intention to reduce the size of its balance sheet. In fact, it may extend its liquidity facilities for corporate and municipal debt into 2021.

Morning Report: Rates down as coronavirus infects the market

Vital Statistics:

Last Change
S&P futures 2910 -40.25
Oil (WTI) 44.97 -1.79
10 year government bond yield 1.05%
30 year fixed rate mortgage 3.44%

 

Stocks are lower as the Coronavirus knocks down global equities. Bonds and MBS are up.

 

Washington State has reported the second US death due to Coronavirus, and one case has been reported in New York City. Globally there have been 87,000 cases and 3,000 deaths. The total number of confirmed cases in the US is 75. Most of the cases center around a nursing home in Kirkland, WA.

 

The 10 year is trading close to 1% as the market is anticipating a move out of the Fed, the ECB, and maybe the Bank of Japan to lower rates.  Fed Chairman Jerome Powell made a statement on Friday saying:

The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

This statement caused a big shift in the Fed Funds futures. The March Fed Funds futures are now calling for a 50 basis point cut. My guess is that we would have an intra-meeting cut if the sell-off continues this week, and then another 25 basis points in March. Oh, and guess what the central tendency is for December. 50 – 75 bps in the FF rate. In other words, 100 basis points in cuts this year.

fed funds futures march 2020

 

Those sorts of moves seem to anticipate a recession in the US this year. Unless this turns into a major pandemic in the US, that seems unlikely. You generally don’t see recessions with 3.6% unemployment. However, supply shocks out of Asia will definitely slow things down. FWIW, the Fed Funds futures are predicting a recession, and that seems to be a stretch unless you start seeing tens of thousands of cases in the US.

 

The OECD is predicting that the coronavirus will lop about .5% off global growth this year, from 2.9% to 2.4%, which is a best case scenario. This scenario assumes that Coronavirus remains largely contained in Asia. If major outbreaks happen in Europe and the US, we would be looking at 1.5% global growth this year.

Morning Report: Blowout jobs report

Vital Statistics:

 

Last Change
S&P futures 3148 22.25
Oil (WTI) 57.99 -0.44
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.94%

 

Stocks are higher after a blowout jobs report. Bonds and MBS are down.

 

Jobs report data dump:

  • Nonfarm payrolls up 266,000
  • Unemployment rate 3.5%
  • average hourly earnings up 0.2% MOM / 3.1% YOY
  • Employment-population ratio 61%
  • Labor force participation rate 63.2%

Huge surprise in payrolls given the ADP report only had 67,000. The unemployment rate of 3.5% is the lowest in 50 years. About the only blemish was the small downtick in the labor force participation rate. Note that manufacturing payrolls increased smartly.

 

What does this mean for the bond markets? Nothing since the Fed is on hold, probably through the 2020 election. It also might mean that the rate cuts of earlier this year are beginning to take effect and the drag from the 2018 tightening cycle is behind us.

 

Note that the makeup of the 2020 FOMC voting members will be more dovish than 2019. Eric Rosengren and Esther George – two hawks that dissented against rate cuts – rotate off the board next year. In their place, we will be getting Neel Kahskari and Robert Kaplan. Neel Kashkari is considered one of the most dovish members of the FOMC. Will it make much of a difference? Probably not, although the bar for increasing interest rates will be adjusted upward accordingly.

 

Interesting chart: the median age of US homebuyers since 1980. It has increased from 32 to 47 over that period. Half of that increase came from the Great Recession. Much of this is explained by the muted presence of the first time homebuyer, who has been about 30% of sales as opposed to their historical 40%.

 

median age of us homebuyer

Morning Report: Refinances at 18 year low 8/8/18

Vital Statistics:

Last Change
S&P futures 2857 -2.75
Eurostoxx index 389.8 -0.69
Oil (WTI) 68.41 -0.76
10 Year Government Bond Yield 2.99%
30 Year fixed rate mortgage 4.58%

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

Mortgage applications fell 3% last week as purchases fell 2% and refis fell 5%. Activity overall has fallen to a 19 month low. The refi index has is at an 18 year low.

Mortgage credit availability increased in July, although it tightened for government loans. The MBA’s MCAI increased 1.7%, which is a post-crisis high, but nowhere near what it was during the bubble years.  “Credit availability continued to expand, driven by an increase in conventional credit supply. More than half of the programs added were for jumbo loans, pushing the jumbo index to its fourth straight increase, and to its highest level since we started collecting these data. There was also continued growth in the conforming non-jumbo space, which reached its highest level since October 2013,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. Note that some observers think the MCAI understates how loose credit is, when you look at things like LTV and credit scores.

Separately, US banks eased lending standards for business loans. The report noted increased demand for business loans, and decreased demand for commercial real estate loans. As mortgage lending dries up, banks are competing more for small business loans, although increased liquidity in the secondary market for these loans also helped.

Elon Musk proposed the largest LolBO ever on Twitter yesterday, saying he was thinking of taking Tesla private at $420 a share. He claims he has funding secured, which is quite the statement. Even in this market, raising $71 billion isn’t the easiest thing in the world, especially for a negative cashflow company trading with an EV / EBITDA in the 150s.  Perhaps the price should have tipped people off that this was a joke, but apparently it isn’t.

The NAHB conducted a survey of potential homebuyers, and only 14% are planning to buy a home in the next year. That number was 24% in the fourth quarter of 2017. Of those planning to buy a home, 61% are first time buyers, of which 71% are Millennials. Most are noting that the number of homes for sale with the desired features and price point are smaller than they were 3 months ago.

Morning Report: Jamie Dimon discusses the state of affairs 4/5/18

Vital Statistics:

Last Change
S&P futures 2660 13.5
Eurostoxx index 373.93 6.6
Oil (WTI) 63.22 -0.16
10 Year Government Bond Yield 2.81%
30 Year fixed rate mortgage 4.41%

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

Initial Jobless Claims increased to 242k last week. Job cuts also jumped to 60k from 30k according to outplacement firm Challenger, Gray and Christmas. Retailers (probably Toys R Us) drove the increase. This is the biggest jump in 2 years.

JP Morgan CEO Jamie Dimon discusses the state of the economy in his annual letter to shareholders. He argues with normal growth and inflation around 2% (the current state of affairs) historically, we would expect to see short-term rates around 2.5% and the 10 year trading around 4%. He argues that QE (both here and abroad) is what is suppressing the 10 year yield. That will reverse for the Fed this year, and in the near future overseas. There will be some countervailing forces at work, but we are in such uncharted territory that no one knows how it will turn out. Dimon then starts discussing the surprise 1979 rate hike (100 basis points on a Saturday!) and talks about how the Fed Funds rate then opened 200 bps higher that Monday. Just for the record, I want to put this chart out there – interest rate cycles are long. We are probably a generation (or two) from that sort of situation again, at least if historical observations are any guide.

100 years of interest rates

Dimon makes another point in his letter about the state of the financial system. On one hand, it is much more stable and well-capitalized. Money market funds have higher restrictions, and there is much less leverage in the system overall. That said, post-crisis policy has removed the counter-cyclical levers in the financial system. First of all, the Volcker rule has meant less market-making. Investors have noted that it is much harder to trade securities, especially the less liquid ones. In a downturn, expect to see many securities go no-bid. In other words, investors will be stuck riding something down. Second, the newer bright lines means that banks will not be able to use their reserves to step in and lend. In Reminiscences of a Stock Operator, there was a credit crunch and banks were fully lent out to the reserve point. J.P. Morgan exhorts the banks to use their reserves. That is what they are for! And finally, in a swipe at the Obama Administration, the big banks are not going to agree to buy out the failing ones. JP Morgan bought Bear at the height of the crisis, as a favor to the Bush Administration. The Obama Admin then slammed them with fines for all of Bear’s sins.

We aren’t going to see much in the way of inflation without wage growth, and at least one economist (Noah Smith) is arguing that we aren’t seeing any because employers have too much market power. He also argues that minimum wage laws are not job killers, at least in the aggregate, despite what Econ 101 would say. His argument is that if employers do have market power, then they are earning a higher return than they would otherwise accept on their workforce. In other words, you could force them to hike wages, and they still will make enough that it won’t make sense to fire people. He then cites the usual Rx for increasing wages: higher minimum wage laws and more unions. The question is then where employers have market power. Perhaps in one-company towns that could be the case. But en masse? Possible, but not probable.

The trade deficit increased again in February, giving ammo to those who agitate for a trade war. A trade war could have an effect on interest rates. Right now, China sends us ships of stuff (phones, plastic goods, all sorts of things). In return (they aren’t giving it away), they have to take something. Right now, they largely take things like agricultural products. We would prefer it if they bought even more stuff. Since they aren’t, the get US dollars instead, which they then invest in Treasuries and other US assets. If trade decreases with China, they will theoretically buy less Treasuries, and that would mean higher interest rates, at least at the margin. To put this in perspective, the trade deficit with China in February was $29 billion. During QE, the Fed was buying $45 billion in Treasuries and MBS a month. So that isn’t chump change.

It is important to understand that we are in a negotiation phase with China, that many of these things are just proposals. Historically, these things get solved by a meaningless pledge that allows the US to claim victory, but doesn’t really make that much of a difference. As China gets richer, it will undoubtedly purchase more US goods and services. However, the savings rate is sky-high there – which means that consumption is low. They are in building mode.

Ginnie Mae has noted the abuses in VA IRRRLs and is taking action against some lenders. New Day and Nations Lending are no longer eligible to issue securities into multi-issuer pools. They will only be able to issue spec pools, which will trade at a discount.

Morning Report: Sell-off is “technical fear,” not “real fear” 2/6/18

Vital Statistics:

Last Change
S&P Futures 2593.8 -14.0
Eurostoxx Index 373.2 -8.8
Oil (WTI) 63.4 -0.8
US dollar index 84.0 0.0
10 Year Govt Bond Yield 2.74%
Current Coupon Fannie Mae TBA 103.591
Current Coupon Ginnie Mae TBA 103.688
30 Year Fixed Rate Mortgage 4.33

Stocks are lower after yesterday’s bloodbath. Bonds and MBS are down.

There was no real catalyst for yesterday’s sell-off. The economic data has been great, earnings have been good, and nothing has really changed fundamentally. The canary in the coal mine economically is credit spread behavior, and we have not seen any major movement there. To put things in perspective: We are 8.5% off the record highs set last week. That doesn’t even meet the threshold for a correction, which is defined as a 10% drop. Don’t forget that a lot of money has been hiding in the stock market because bonds have paid nothing for so long. As the Fed hikes rates, short-term money instruments begin to come back on the radar screen for many investors. Investors have been spoiled over the past few years. Low volatility made people a lot of money in some trades, and it also made investors complacent.

In fact, THE trade of 2017 was short volatility, and it blew up yesterday. Retail investors can trade volatility via VIX futures, and there are exchange traded funds that mimic movements in the volatility indices. VIX is a “fear index” and it is generally associated with major downward moves in stocks. The “short vol” trade made something like 100% last year, and the mechanics of exiting it can cause all sorts of technical trading issues that can affect stocks. If all the speculators are short volatility, then their exit from the market can add to the destabilization. It is tough to explain, but think of a marble in a bowl. That is “normalcy.” If the marble is off-center, it is attracted to the center. That is what typical buy low / sell-high stock market behavior is like. Too many sellers come in, and the buyers emerge which stabilizes things. But, when the crowd is generally short volatility, it is like the bowl is flipped over and the marble is on top. So when the marble is off-center, it is more likely to move away from equilibrium, and the further away it gets, the more the momentum builds. That is what a short squeeze in volatility feels like, and that is what happened yesterday. I am hearing that the mechanical covering in the exchange traded notes is largely done. However, the real money resides in the over-the-counter market and there is simply no visibility there.

You can see the correlation between high VIX and market-moving events below. There is an old market saw: “VIX is high, time to buy. VIX is low, time to go.” You can see the volatility spikes which generally correspond with major events, like the end of the dot-com bubble or the financial crisis. There is no catalyst to speak of here, so I have to imagine this will be short. Yesterday was technically-driven “fear” not “real fear.”

VIX

By the way, whenever you hear the term “convexity-related buying or selling” that describes sort of the same phenomenon in bonds, although the magnitude is much less than it is with stocks and VIX. Convexity buying and selling generally refers to the behavior of mortgage backed securities and interest rate hedging. We did not see much activity in credit spreads yesterday, and that is a good sign. If credit spreads are increasing, that means investors are becoming worried about the economy going forward. While spreads moved a little, it wasn’t much.

Bonds rallied hard on the flight-to-quality trade, which gives LOs a chance to retrieve some loans that may have gotten away from them last week. Take advantage of the drop in rates to review your pipelines and see if any borrowers might want to lock and / or consider a refi. Given the massive home price appreciation we have seen lately, the switch out of a FHA into a conforming loan with no MI still makes a lot of sense. You might only have a short window here.

As an aside, Jerome Powell took over as Fed Chairman yesterday as Janet Yellen heads to Brookings. Welcome to the party, Jerome!

Interestingly, the move in markets yesterday caused the Fed Funds futures to take down their estimate of a March hike from 78% to 69%. While it is a low-probability event, the Fed could ease up on rate hikes if the sell-off continues, provided that inflation remains below target. If inflation passes the target and hits the upper 2% range, then they will probably stick to script regardless of what happens in the markets, barring a crash of some sort.

Home prices rose 0.5% MOM and 6.6% YOY in December, according to CoreLogic.

As an aside, I will be on a panel at IMN’s MSR conference in NYC March 26 and 27. Should be a good event.

Morning Report: Congress cracks down on serial VA refinancing 1/12/17

Vital Statistics:

Last Change
S&P Futures 2769.0 -0.5
Eurostoxx Index 397.5 0.2
Oil (WTI) 63.2 -0.6
US dollar index 85.3 -0.2
10 Year Govt Bond Yield 2.58%
Current Coupon Fannie Mae TBA 101.75
Current Coupon Ginnie Mae TBA 102.875
30 Year Fixed Rate Mortgage 4.01

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

Inflation on the consumer level continues to be under control, according to the Consumer Price Index. The headline number was up 0.1% MOM and 2.1% YOY. The core rate, which excludes food and energy) was up 0.3% MOM and 1.8% YOY. Housing and medical costs drove the increase in the rate.

Retail Sales were up 0.4% in December, which was a touch below expectations. The control group was up 0.3%, which was in line with expectations. The MOM numbers may seem low, however November was exceptionally strong.

Robert Kaplan said the Fed has upped their 2018 economic forecast to 2.5% – 2.75%. The current estimate is at 2.5%. After having been too high in their GDP estimates for 9 years, the Fed finds itself in the position of consistently being too low.

The two year bond yield topped 2% for the first time since the financial crisis. The 2 year is much more sensitive to the Fed Funds rate than the 10 year is, and is part of the reason why we are talking about a yield curve flattening and what it means. A common narrative these days is that the yield curve is flattening (that is, the difference between long-term rates and short-term rates is falling) and that signals a recession. That could be the case if the Fed tightens more aggressively than they are now, however they are going at such a slow pace that it probably won’t knock the economy into a recession. Plus there is so much pent-up demand from the last 10 years that a lot of the necessary pieces for a recession simply aren’t in place.

Where do we stand with the market’s prediction of rates? The Fed Funds futures are now pricing in a 73% chance of a 25 basis point hike in March. This is up from 59% a month ago.

Wells Fargo reported higher earnings, however part of that was due to a one-time benefit due to the tax bill. On the mortgage side, originations came in at $53 billion for the fourth quarter, down 10% QOQ (largely explained by seasonality) and down 26% from a year ago. Margins were up a basis point from the third quarter and were down 43 basis points from a year ago.

The Administration and the Senate continue to work on hammering out a deal on funding the government. The current continuing resolution expires in a week, and Democrats are holding out for an immigration deal in order to sign off on a new CR. It is still too early to predict a shutdown, but remember that a shutdown will affect the IRS and getting tax transcripts. Plan accordingly.

Washington is looking to do something about serial VA refinances.  Many veterans were refinancing their mortgages (and adding to their principal by folding in the funding fee) for a de minimus drop in monthly payment. The Protecting Veterans from Predatory Lending Act of 2018 will make the following changes to VA lending.

  • A lender may only submit a refinance loan for VA insurance if it certifies that all fees associated with the refinance would be recouped through lower monthly payments within three years;
  • A lender may only receive VA insurance for a refinance loan if the refinance loan has a fixed rate 50 basis points lower than the earlier fixed-rate loan (or 200 basis points lower if the new refinanced loan is an adjustable rate mortgage).
  • A lender may only receive VA insurance or get a Ginnie Mae guarantee for a refinance loan if the refinance comes more than six months after the initial loan.

At the margin, this legislation is bullish for Ginnie Mae TBAs and Ginnie Mae servicing, which should translate into better FHA and VA rates going forward.

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