All Things in Moderation

Vital Statistics:

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

United Wholesale is accepting cryptocurrency for mortgage loans. “We’ve evaluated the feasibility, and we’re looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments,” CEO Mat Ishbia said in the company’s second quarter earnings call on Monday. “That’s something that we’ve been working on, and we’re excited that hopefully, in Q3, we can actually execute on that before anyone in the country because we are a leader in technology and innovation.” I am not sure what this buys UWM or a borrower for that matter, but there it is.

Rent prices have soared past pre-pandemic levels, according to Zillow. Rents grew 9.2% YOY in July, the fastest recorded pace since Zillow started tracking these numbers in 2015. When the eviction moratorium ends, many renters are going to face sticker shock when they try and find a new place. Zillow also predicted that home price appreciation will begin to cool off, however keep in mind that almost every index has been predicting that for the past year, and prices keep rising.

The increase in home price appreciation is a concern at the Fed as well, and that is one big reason for scaling back MBS purchases. The Fed probably isn’t worried about a bubble (they just don’t happen that often), but they are worried about affordability, and the impact that its MBS purchases are having on it. The real bubble is in global sovereign debt, not real estate. As they say, generals always fight the last war.

What will MBS tapering do to mortgage rates? Well, during the taper tantrum of 2013, MBS spreads widened to 150 basis points or so. MBS spreads are (very roughly) the difference in yield between a mortgage backed security and its corresponding maturity Treasury. If spreads widen, it could mean that mortgage rates increase even if Treasuries go nowhere.

Note that in 2013, most of the widening took place before the Fed actually started tapering. The spread actually peaked in late summer of 2013, well before the Fed started reducing purchases at the December 2013 FOMC meeting. As they often say in markets, buy the rumor, sell the fact.

My personal view is that the economy is not going to strengthen the way the media and the government is hoping, and Treasury rates will probably work lower. The inflation data will also begin to moderate as commodity shortages abate. This will probably keep a floor on mortgage rates, as I suspect they will probably stay around here even if rates work lower.

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Vital Statistics:

Stocks are lower this morning after the FOMC minutes showed the central bank could begin curtailing bond purchases this year. Bonds and MBS are up small.

The minutes of the July FOMC meeting had a long discussion on tapering. Overall, it looks like the consensus is that the Fed will start reducing asset purchases late this year or early next year.

Looking ahead, most participants noted that, provided that the economy were to evolve broadly as they anticipated, they judged that it could be appropriate to start reducing the pace of asset purchases this year because they saw the Committee’s “substantial further progress” criterion as satisfied with respect to the price-stability goal and as close to being satisfied with respect to the maximum employment goal. Various participants commented that economic and financial conditions would likely warrant a reduction in coming months. Several others indicated, however, that a reduction in the pace of asset purchases was more likely to become appropriate early next year because they saw prevailing conditions in the labor market as not being close to meeting the Committee’s “substantial further progress” standard or because of uncertainty about the degree of progress toward the price-stability goal. Participants agreed that the Committee would provide advance notice before making changes to its balance sheet policy.

Initial Jobless Claims fell to 348,000 last week. Give the labor shortage we are experiencing it is surprising to see numbers this high. We have record job openings, and are seeing wages increase. On the other hand, the labor force participation rate isn’t really recovering. The Fed seems to believe that this is a COVID-19 driven phenomenon which will go away with time.

The Conference Board’s Index of Leading Economic Indicators rose a strong 0.9% in July. “The U.S. LEI registered another large gain in July, with all components contributing positively,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The Leading Index’s overall upward trend, which started with the end of the pandemic-induced recession in April 2020, is consistent with strong economic growth in the second half of the year. While the Delta variant and/or rising inflation fears could create headwinds for the US economy in the near term, we expect real GDP growth for 2021 to reach 6.0 percent year-over-year, before easing to a still robust 4.0 percent growth rate for 2022.”

Delinquencies fell to 5.47% in the second quarter, according to the MBA. “Much of the second-quarter improvement can be traced to later-stage delinquent loans – those 90 days or past due, but not in foreclosure,” Walsh said. “The 90-day delinquency rate dropped by 72 basis points, which is another record decline in the survey. It appears that borrowers in later stages of delinquency are recovering due to several factors, including improved employment and other economic conditions, the availability of home retention workout options after forbearance, and a strong housing market that is bringing additional alternatives to distressed homeowners.”

The median home price rose 20% in July, according to Redfin. Time on market was 15 days, which is a touch higher than June, but is still well below historical averages. “Home prices are still soaring at an astonishing rate,” said Redfin Chief Economist Daryl Fairweather. “Now that we’re a year out from the post-lockdown rebound, we can no longer explain away the enormous price growth by pointing to the pandemic’s earliest impacts on the housing market. While this ongoing trend continues to fuel an already severe affordability crisis, the market is becoming somewhat less competitive for homebuyers. Demand has softened enough that homes aren’t flying off the market quite as fast or for as much above list price as they were in the spring. Mortgage rates are remaining about as low as they’ve ever been, so buyers who lose out in a bidding war don’t have to fear that they’ve missed their window to buy. As more homes are being listed, it may be worth waiting for the right home at the right price.”

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Vital Statistics:

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

The FOMC minutes will be released at 2:00 pm today. While it probably won’t have much impact on where the 10 year goes, mortgage backed securities will be watching the language regarding tapering closely. Be careful locking around that time.

Housing starts disappointed again, coming in at 1.55 million. Shortages of labor and materials have been a problem, although the lumber market seems to be getting back to normal. On a MOM basis, they fell 7%, and on a YOY basis rose only 2.5%. Don’t forget that July of 2020 was heavily depressed by COVID. Building Permits were a bit better, but that has been the pattern for at least a year – permits look good, but the starts don’t materialize.

Separately, the NAHB / Wells Fargo Housing Market Index (a measure of builder sentiment) decreased to the lowest level in a year.

More evidence that the economy is not accelerating into the end of the year. Retail sales fell 1.1% last month, which was well below Street estimates. Ex-autos and gas, it fell 0.7%. About the only bright spot in the report was restaurants and bars, which increased. We are getting into the critical period of the year with respect to consumer spending, and back-to-school sales are beginning to ramp up.

Industrial Production increased 0.9% in July, while manufacturing production rose 1.4%. Capacity utilization rose to 76.1%

Mortgage Applications fell 4% last week as purchases fell 1% and refis dropped 5%. “Mortgage rates followed an overall increase in Treasury yields last week, which started higher from the strong July jobs report before slowing because of weaker consumer sentiment and concerns about rising COVID-19 cases,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The increase in mortgage rates caused a 5 percent decrease in refinancing, driven by a 7 percent drop in conventional refinance applications. Even though rates are 7 basis points lower than the same week a year ago, the refinance index is around 8 percent lower. The eligible pool of homeowners who stand to benefit from a refinance is smaller now.”

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Vital Statistics:

Stocks are lower after weaker-than-expected economic data out of China and continuing fears about COVID. Bonds and MBS are up.

In terms of economic data this week, we will get retail sales, industrial production, and housing starts. Jerome Powell will speak on Tuesday, and we will get the FOMC minutes on Wednesday.

As part of the infrastructure package, the government is looking at what is basically an Alternative Minimum Tax for corporations. It supposedly would look at increases in book value and tax that at 15% as a floor. One area that would impact mortgage originators is mortgage servicing rights. As of now, mortgage servicing rights are capitalized when created, and there is no income realized until the they are sold or fees are collected.

Under the new proposal, they would be taxed immediately, since book value increases once they are capitalized. Given the issues with potential Basel-like capital requirements for non-bank GNMA originators, MSR pricing in the secondary market will remain under pressure.

United Wholesale reported second quarter earnings this morning. Volumes increased 20% to $59 billion, however gain on sale margins were down big, more or less as expected. In the first quarter, gain on sale margins were 2.19% and they fell to 0.81% in the second quarter. FWIW, the company guided on its Q1 earnings call that margins would be down big in Q2, although Matt Ishbia also expected that to be the bottom. For the third quarter, UWM is guiding for volumes to to come in at $57-62 billion and for gain on sale margins to be in the 0.75% – 1.00% range. Note that Rocket on Friday also guided that the margin compression is probably over as well.

The big question for the mortgage market is when to begin the tapering process (or reducing the current $80 billion a month pace of MBS and Treasury purchases). The Fed wants to avoid a repeat of the 2013 “taper tantrum” where Treasury yields got away from them quickly. It sounds like it could start anywhere from September to mid-2022.

The big difference between 2013 and today is the state of the economy. In December 2013 the Fed started reducing its purchases and unemployment was 6.7%. Today, unemployment is at 5.4%. Inflation is higher as well, although much of that is due to supply chain constraints which can’t be influenced by monetary policy. Labor constraints are also an issue, and that is increasing the cost of homebuilding and the Fed is wary of the fast pace of home price appreciation. While the Fed can’t control the supply and demand imbalance in the housing market, they can influence mortgage rates. This issue will probably push up the tapering process, especially for MBS purchases. We will have to see how home prices look as we head into the seasonally slow period.

One important thing to keep in mind is that MBS spreads (that is the difference between the yield on Treasuries and MBS) were much wider during 2013, with the spread reaching something like 150 basis points. Today, spreads are closer to 70 basis points. If history repeats itself, we should see higher mortgage rates going forward if the economy continues to improve. If it does not, and Treasury yields work lower, mortgage rates will struggle to get much lower.

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Vital Statistics:

Stocks are flattish as we end up the week on this Friday the 13th. Bonds and MBS are up small.

Rocket reported earnings after the close yesterday. Volume in the second quarter fell from $105B in Q1 to $84B in Q2. Gain on sale margins were slammed hard sequentially, falling from 3.74% to 2.78%. The company is guiding for Q3 volume to resemble Q2, and gain on sale margins are expected to be in the 2.7% – 3% range. It looks like perhaps the margin compression is over, or at least taking a breather. FWIW, Matt Ishbia said on United Wholesale’s Q1 call that he expected Q2 to be the bottom for margins and for them to rebound into the end of the year. So perhaps some of the pressure will ease up. Rocket is up a buck and change in early trading.

Import prices are up 0.3% MOM and 12% YOY. Export prices are up 1.3% MOM and 17% YOY. China just partially shut down the world’s third largest port after an employee had a positive Delta COVID test. Shipping prices are already up 220% this year, so the inflation story will get another temporary boost.

It looks like the red-hot housing market is beginning to cool off, according to Redfin. “For the first time in over a year, homebuyers don’t need to feel rushed,” said Redfin Chief Economist Daryl Fairweather. “Although the market still feels tight and competitive, the number of homes for sale keeps creeping up as more homes are listed. Those home sellers are adjusting their price expectations or seeing their homes sit on the market. There could be even more listings coming on the market as mortgage forbearance ends and homeowners with missed payments decide to sell. And mortgage rates remain near all-time lows with no signs of an increase on the horizon.”

Consumer sentiment got whacked this month, according to the University of Michigan’s Consumer Sentiment Survey. The index fell from 81.2 in July to 70.2. This is the sixth largest drop in the index’s history, and is actually below the April 2020 low of 71.8.

As a general rule, consumer sentiment surveys often turn out to be nothing more than a reflection of gasoline prices, however this reading is probably due more to renewed COVID fears.

The drop was broad across all demographics and included both drops in consumers’ current situation and their expectations.

The 10 year yield fell about 4 basis points on the news. I suspect the expected rip-roaring 2H recovery that the Street and the media has been cheerleading for is not going to be in the cards.

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Vital Statistics:

Stocks are flat after the Producer Price Index came in higher than expected. Bonds and MBS are flat as well.

Prices at the wholesale level increased 1% MOM and 7.8% YOY. Ex-food and energy, prices rose 1% MOM and 6.2% YOY. Autos accounted for about 20% of the increase, while travel-related services also added a bit. I sound like a broken record here, but keep in mind that the year-over-year comparisons have a lot of noise in them due to the lockdowns of a year ago. We are still a ways away from putting Whip Inflation Now bumper stickers on the backs of our cars.

The COVID-related supply bottlenecks are reversing and returning to normal. Freight shipping volume is back to pre-pandemic levels, however costs are way higher than before. Shipping costs are 44% higher than a year ago, and 23% higher than two years ago. That said, they are falling on a MOM basis.

Despite an extremely tight labor market, initial jobless claims remain elevated, coming in at 375k last week. Initial Jobless Claims remain a puzzle, as they are much higher than the Great Recession. Take a look at the chart below, which compares the Great Recession with COVID. It is astounding that COVID claims remain so persistently high when it seems every store has a “help wanted” sign in front.

Mortgage Credit increased slightly in July, according to the MBA. “Even as the economic recovery is underway, overall credit supply has remained close to its lowest levels since 2014,” Kan said. “Some borrowers are still in pandemic-related forbearance status, and servicers continue to work through possible resolutions for these borrowers.”

Fannie Mae introduced a new initiative to help first time homebuyers get access to a loan. It will now allow a borrower’s rental payment history to be included in cases where a limited credit history is insufficient to get an approval out of DU.

“Many renters believe they will never be able to buy their own home because of insufficient credit. We can responsibly expand mortgage eligibility by including positive rent payment history in underwriting risk assessments,” said Hugh R. Frater, Chief Executive Officer, Fannie Mae. “We believe this will be the first time any large-scale automated mortgage underwriting system will leverage electronic bank statement data to consider positive rent payment history. It is but one important step in correcting the housing inequities of the past, creating a more inclusive mortgage credit evaluation process going forward, and encouraging the housing system to develop new ways of safely assessing and determining mortgage eligibility in order to fairly serve all potential homeowners. We look forward to working with our industry partners to do what we can together to address this and other barriers to homeownership.”

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Vital Statistics:

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

Inflation at the consumer level rose 0.5% MOM and 5.4% on a YOY basis. Ex-food and energy, it increased 0.4% MOM and 4.3% YOY. While the Fed doesn’t really use the CPI to guide its policy decisions, it does still indicate that inflation is back, at least temporarily. I would take the YOY numbers with a grain of salt since last year’s prices were distorted by COVID lockdowns.

Productivity rose 2.3% in the second quarter, according to BLS. Prior estimates were revised downward. Productivity is critical to creating non-inflationary growth. Part of the reason for the 1970s inflation was due to a collapse in productivity. Unit labor costs rose 1%. Productivity will be a key factor in the Fed’s assessment of the economy going forward. If productivity is high, then the Fed has a little more breathing room in how it reacts. If productivity is low, then inflation can be more persistent. The big takeaway is that inflation has increased, COVID is distorting the numbers somewhat, and we will have a better idea of how persistent it is by the end of the year.

Small Business Optimism declined in June, according to the NFIB. “Small business owners are losing confidence in the strength of the economy and expect a slowdown in job creation,” said NFIB Chief Economist Bill Dunkelberg. “As owners look for qualified workers, they are also reporting that supply chain disruptions are having an impact on their businesses. Ultimately, owners could sell more if they could acquire more supplies and inventories from their supply chains.”

Supply chain bottlenecks are also partially behind the increase in inflation. Presumably, these will reverse as we put COVID behind us. That said, the decline in small business optimism, especially about the future, calls into question the whole massive rebound in the second half of 2021 scenario.

Mortgage Applications rose 3% last week as purchases rose 2% and refis rose 3%. Refi applications returned to levels last seen in February. “Mortgage applications rebounded last week, including an increase in purchase applications for the first time in nearly a month,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Rates slightly rose but remained below 3 percent, driven by an end-of-week increase in the 10-year Treasury yield following the positive July jobs report.”

Despite the drop in the 10 year, mortgage rates have been slow to follow. This is a function of MBS spreads widening in anticipation of the end of the Fed’s MBS purchases. Current coupon spreads right now are about 70 basis points (this is the difference in yield between the 10 year bond and the typical MBS). During the taper tantrum of 2013, that spread increased to 150 basis points. Mortgage REIT earnings were dented in the second quarter due to spread widening, and that shows up in stagnant mortgage rates in a context of declining 10 year yields. This adjustment will play out over the next year, and LOs should get used to being disappointed when they see the 10 year yield down on CNBC and see no difference when they run a scenario.

The share of loans in forbearance fell to 3.4% last week, according to the MBA. “Forbearance exits increased as August began and new forbearance requests declined, resulting in the largest decrease in the share of loans in forbearance in three weeks,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “1.7 million homeowners remain in forbearance, 13% of whom were current on their payments as of August 1. Of those who exited forbearance last week, more than 10.5% were current. Forbearance has surely provided both insurance and assurance for many of these homeowners who worried about ongoing hardships, and it is positive to see so many continue to be able to make their payments while in forbearance.”

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Vital Statistics:

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

The upcoming week is relatively data-light however we will get some inflation data with the Consumer Price Index and the Producer Price Index. We will also get productivity data as well as plenty of Fed-speak.

Some good commentary from various home builders. It looks like the torrid price growth has eased. While shortages are still an issue, lumber prices have come back to earth.

The MBA is urging New York Governor Andrew Cuomo to veto a bill that would require independent mortgage bankers to follow Community Reinvestment Act guidelines. The MBA called the bill “unnecessary,” and said it “fails to consider the existing legal infrastructure and significant industry efforts that have greatly expanded mortgage lending to low- and moderate-income (LMI) borrowers in New York.” There definitely seems to be a push to institute banking-like regulations on independent mortgage bankers – witness GNMA’s proposals for capital requirements on non-bank servicers.

Rising house prices have an outsized effect on the inflation numbers. The concept is owners equivalent rent, which attempts to come up with a number if a homeowner rented his house out. So far, we haven’t seen much in the way of increased rents during the pandemic, as foreclosure moratoriums have made raising rent difficult. Owner’s equivalent rent has been running at around 3.5% annually, despite double-digit increases in house prices.

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Vital Statistics:

Stocks are higher this morning after a better-than-expected jobs report. Bonds and MBS are down.

The economy added 943,000 jobs in July, according to the BLS. This was higher than expected, and much better than the ADP jobs reading on Wednesday. The unemployment rate fell from 5.9% to 5.4%. The number of employed increased by 1 million, while the number of people who were unemployed fell by 800k. The labor force participation rate ticked up to 61.7%.

The report notes that the payroll increase may have been distorted by seasonal adjustments for education. COVID issues meant there were fewer than normal June layoffs, which exaggerated the July payroll increase.

Average hourly earnings increased 0.4% MOM and 4% YOY. I suspect the wage increases will be more persistent than people are thinking, and the bargaining power may be in the hands of workers for the first time in decades. This will support inflation, although wage-driven inflation is exactly what the Fed wants to see.

The Delta variant of COVID has caused companies to push back the return to the office. Apple was the first to push it back, and now we have Amazon.com delaying the return until next year. Wells has also delayed the return by a month. That said, office REITs like SL Green say that most employers are targeting a post-Labor Day return.

Servicer satisfaction increased during the pandemic. I guess forbearance makes borrowers happy. Rocket, Huntington and Guild were the favorites.

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Vital Statistics:

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

Initial Jobless Claims came in at 385,000, which was a touch above expectations. Separately, the Challenger Gray and Christmas job cut report showed 18,942 announced job cuts.

Despite a Supreme Court ruling that the CDC’s eviction ban is unconstitutional, the Biden Admin ordered another one to last until October 3. I think they tweaked it a little, so if you make under 200k, you can’t get evicted. Despite this change it will still cover about 90% of renters. FWIW, the Biden Admin admitted earlier it couldn’t really pull this stunt, but I guess the pressure from the backbenchers got to be too much.

Fed Vice Chairman Richard Clarida could see the Central Bank start raising rates in 2023. He didn’t give a timeframe on the issue of MBS and Treasury purchases, only saying that the market would have plenty of notice before they start.

The Fed Funds futures envision a more hawkish scenario, with the market assigning a 60% chance of rate hikes by the end of 2022.

While the job market still has more work to do in order to get back to full employment, inflation is running above the Fed’s 2% target. COVID-19 related supply chain bottlenecks are probably behind it, but wage growth may be the next shoe to drop and that will be more persistent boost to inflation than a lack of logistics space on I-95.

Loan Depot reported lower-than-expected earnings, as competitive pressure and overcapacity pressured margins. Volumes decreased 17% to $34.5 billion and gain on sale margins fell to 2.28% from 2.98% in the first quarter. On a YOY basis, gain on sale margins are down 58%.

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