Morning Report - First Time Homebuyer sighting.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1603.2	-3.4	-0.21%
Eurostoxx Index	2596.7	-23.2	-0.88%
Oil (WTI)	97.22	0.2	0.18%
LIBOR	0.273	-0.001	-0.33%
US Dollar Index (DXY)	82.83	-0.075	-0.09%
10 Year Govt Bond Yield	2.52%	0.05%
Current Coupon Ginnie Mae TBA	102.1	-0.5
Current Coupon Fannie Mae TBA	101.1	-0.4
RPX Composite Real Estate Index	205.5	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.38

Markets are down slightly on no real news. The NAPM-Milwaukee report came in better than expected. Bonds and MBS are down.

Big drop in mortgage rates yesterday. Bonds were up a bit, but this was a big move. Sounds like the pandemonium in the TBA market since last week is taking a breather. You had a period where mortgage REITs and originators were getting in each other's way trying to sell TBAs. Perhaps the Great Mortgage REIT Convexity Hedge / Deleveraging Trade is finished, at least for the moment. Ginnie I / II spreads and Fannie / Gold spreads will tell the tale.

KB Home reported earnings yesterday, and gave some background on where they see the housing sector. There were two big takeaways from the conference call.  First, the increase in interest rates is not negatively affecting demand; in fact it is creating a "sense of urgency" among buyers. This comports exactly with what Lennar said on their call earlier this week. Second (and this is big), the first time homebuyer is back. KB Home is one of the lower price points for the homebuilders and focuses on the first time and move up buyer. 60% of their business is the first time homebuyer. If this is in fact the case (and Lennar also observed the same thing) this is the last step needed for a full, robust housing recovery. 

Pending Home Sales increased 6.7% to a 6 year high, according to NAR. These are contract signings, not sales, so they reflect the increase in rates over the month of May. We are finally seeing robust growth in the West. The Northeast was flat, but grew 14% year-over-year. The West grew 16%, but was flat year-over-year. Next month's number will be very interesting because it will include the "Bernanke Scare", which is becoming the euphemism for last week's FOMC statement that scared the beejeezus out of the bond market. 

Morning Report - Bill Gross's outlook and why the CRA analysis is all wet.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1604.5	9.0	0.56%
Eurostoxx Index	2604.7	1.9	0.07%
Oil (WTI)	95.87	0.4	0.39%
LIBOR	0.274	-0.002	-0.58%
US Dollar Index (DXY)	82.85	-0.128	-0.15%
10 Year Govt Bond Yield	2.49%	-0.05%
Current Coupon Ginnie Mae TBA	101.7	0.3
Current Coupon Fannie Mae TBA	101.1	0.4
RPX Composite Real Estate Index	205.6	0.2
BankRate 30 Year Fixed Rate Mortgage	4.57

Markets are up this morning as personal income comes in a little better than expected, and personal spending comes in at expectations. Initial Jobless Claims came in at 346k, more or less in line with expectations. Bonds and MBS are up.

The Corker - Warner Bill to wind down the GSEs is out. The full text of the bill (all 154 pages of it) are here. Punch line: GSEs are wound down, their liabilities are transferred to the taxpayer, some private entity will bear the first 10% loss on new securitizations, and the Federal Mortgage Insurance Corporation (FMIC) will re-insure losses over 10%. 

Bill Gross's latest investment outlook takes the view that the recent spike in rates was overdone.Yes, there was too much risk in the system (read leverage) and the Fed needed to act to squeeze some of that out. But, he believes that the 10 year yield is probably 30 basis points too high and belongs at 2.2%. Reasons: (a) the Fed's economic forecasts are too optimistic (remember, we just revised Q1 GDP downward yesterday from 2.6% to 1.8% after coming in at .4% in Q4). (b), the Fed wants higher inflation - 1% is too low, and finally, he makes the point that the Fed Funds rate is going nowhere until 2015 at the earliest. This anchor of Fed funds should hold down Treasuries, in his view. Color me unconvinced with that final argument - the 10 year has yielded over 4% in the context of a 25 basis point Fed Funds rate. In fact, since we have been at ZIRP, the average 10 year yield has been 2.65%. From 2009 to 2011, it average 3.25%. So, I don't see any reason why it can't go back to those levels. 

Insurance companies are suing HUD over the "disparate impact" rule - which says if statistically your lending to "underserved" groups doesn't comport with the national statistics, you are guilty of discrimination, no questions asked. Here is the complaint. Of course, these sorts or analyses use FICO as the only relevant variable, which is incorrect - the volatility of prices in the neighborhood matters too. As a lender, you are short a put (if the house drops in price, the borrower can toss you the keys and walk away, yet if the house increases in price, you get the cash flow stream). That put must be priced, and you can see that the volatility of the real estate indices in places like San Bernardino is much higher than places like Milwaukee WI. Which means loans in San Bernardino should have higher rates than loans in Milwaukee WI to take into account the price of that put. It isn't discrimination, it is the proper pricing of risk. 

Morning Report - Purchase Apps up in spite of rate rise

Morning Report

	Last	Change	Percent
S&P Futures	1587.9	6.5	0.41%
Eurostoxx Index	2599.1	55.8	2.19%
Oil (WTI)	94.88	-0.4	-0.46%
LIBOR	0.276	-0.001	-0.18%
US Dollar Index (DXY)	82.73	0.144	0.17%
10 Year Govt Bond Yield	2.53%	-0.08%
Current Coupon Ginnie Mae TBA	101.2	0.7
Current Coupon Fannie Mae TBA	100.7	0.7
RPX Composite Real Estate Index	205.5	0.2
BankRate 30 Year Fixed Rate Mortgage	4.58

Green on the screen in spite of a nasty downward revision in Q1 GDP. Stock futures are holding in while bonds are taking off, with the 10 year yield down 7 basis points from an hour ago. MBS are on the move as well.

The first estimate of Q1 GDP released in late April had growth at +2.5%. That number was revised downward to 2.4% the following month. The third and final revision came in this morning: +1.8%. Hardly robust. It makes you wonder what Bernanke was looking at when he announced QE was coming to a close. 

In spite of the bloodbath in bonds last week, mortgage applications fell only 3%. The MBA purchase index was up 2%. Refis dropped 5.2%. There has been two theories out there about the increase in rates - either (a) the higher rates are going to put people off and they will withdraw from the market or (b) the higher rates are going to get people off the fence, because rates and prices are going up. So far, it looks like its the latter.

One other rate rise datapoint: yesterday: The Conference Board Consumer Confidence Index came in at 81.4, the highest since winter of 2008. Dig into the internals, and you will see the expectations index jumped considerably - this index takes into account a respondent's view of their own personal financial situation, and shows that so far, the increase in rates has yet to be felt. Of course credit card rates are fixed to prime, which hasn't moved quite yet, but the early data shows the economy is taking the hike in rates in stride.

Lennar, the big homebuilder who reported better than expected quarterly numbers yesterday, sounded extremely bullish on its conference call. First, they see no evidence that rates are affecting home purchases yet, which comports with what we saw out of the MBA purchase numbers above. Second, they are spotting.... wait for it.... the first time home buyer. Lennar's average price point is $255k, which puts them squarely in the "first time homebuyer" category. They are noticing "household decoupling" which is a fancy way of saying recent grads are moving out of their parents' basements. One other interesting tidbit - their price increases were pretty much eaten by increased costs. While lumber did rally hard late last year and into early this year, it has fallen precipitously. So what was the other increased cost? Labor. There is a shortage of skilled labor in many geographical areas. Does that make them bearish? Absolutely not - rising middle class wages is exactly what the economy needs. 

Finally, Census put out new home sales data yesterday. Sales of new single family homes came in at a seasonally adjusted rate of 476,000 in May, up 2.1% from last month and 29% from a year ago. The median sales price was $263,900, while the average sales price was $307,800. These are increases of 10% and 18% respectively, but it is not based on any sort of repeat-sales methodology so you can't extrapolate existing home price appreciation from it. The difference between mean and median is the widest it has been, which implies most of the action is in the luxury end of the market. There are 161,000 houses for sale at the end of May, which represents 4.1 months' supply at current sales volumes. As you can see from the chart below, we are still at very, very depressed levels. 

Morning Blog Post - Comforting thoughts about the recent rate increase.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1576.3	10.1	0.64%
Eurostoxx Index	2546.0	34.2	1.36%
Oil (WTI)	95.53	0.3	0.37%
LIBOR	0.276	-0.001	-0.23%
US Dollar Index (DXY)	82.29	-0.137	-0.17%
10 Year Govt Bond Yield	2.51%	-0.02%
Current Coupon Ginnie Mae TBA	100.2	-0.5
Current Coupon Fannie Mae TBA	100.7	0.4
RPX Composite Real Estate Index	205.3	0.3
BankRate 30 Year Fixed Rate Mortgage	4.51

Green on the screen after the 10 year bond recouped all of its early losses and ended up positive on the day. The Chinese central bank agreed to keep money-market rates at a "reasonable" level. Durable Goods orders came in at 3.6%, above the 3% estimate. Ex transportation, they were up .7%, above the consensus estimate. April numbers were revised up. Bonds and MBS are up.

Homebuilder Lennar reported 2Q earnings per share of $.61, ahead of the $.33 estimate. The numbers included a tax benefit, but even without the one-time item, earnings still beat estimates by ten cents. Deliveries were up 39%, new orders were up 27% and backlog was up 55%. Stuart Miller, the CEO addressed the recent increase in rates directly: "Against the backdrop of recent investor concerns over recent mortgage rate increases, we believe our second quarter results together with real-time feedback from our field associates continue to point towards a solid housing recovery....Demand in all of our markets continues to outpace supply...affordability remains high and despite recent interest rate increases, we have seen very little impact on sales or pricing." The stock is up 4.5% pre-open.

Senators Corker and Warner plan to introduce their bill today to euthanize Fan and Fred. They will be replaced by the Federal Mortgage Insurance Corporation which will act as a re-insurer and not a primary insurer. How this will actually play out is anyone's guess - right now there are no mortgage insurance entities big enough to replace F&F. Perhaps the answer will be to over-collateralize MBS backed by QM mortgages by 10% and then apply the FMIC insurance. Obviously Dodd-Frank will have to weigh in on that one, and they are still figuring that part out. 

Lender Processing Services reported that April home prices were up 1.5% from March and 8.1% year-over-year. We are starting to see the Midwestern states start to show up in the top 10. California and Nevada are still #1 and #2 as usual. The LPS HPI is a little different than the other indices like Case-Shiller in that it applies a normalization process to REO and short sales in order to come up with a non-distressed index.

Case-Shiller reported home prices increased 1.72% month-over-month and 12.05% year-over year. This was the highest gain in the history of the Case-Shiller indices. David Blitzer of Case-Shiller addressed the recent increase in rates: "Last week's comments from the Fed and the resulting sharp increase in Treasury yields sparked fears that rising mortgage rates will damage the housing rebound. Home buyers have survived rising mortgage rates in the past, often by shifting from fixed rate to adjustable rate loans. In the housing boom, bust, and recovery, banks' credit quality standards were more important than the level of mortgage rates. The most recent Fed Senior Loan Officer Opinion Survey shows that some banks are easing credit restrictions. Given this, the recovery should continue."

The FHFA Home price Index reported an increase of .7% month-over-month and 7.4% year-over year. Remember, each of these indices (LPS, Case-Shiller, and FHFA) have different methodologies and samples. FHFA looks only at properties with a conforming mortgage, which eliminates jumbos, distressed, cash-only, etc. This index is more of a "central tendency" index than Case-Shiller or LPS.

Morning Report: What to watch for in economics this week

Vital Statistics:

	Last	Change	Percent
S&P Futures	1568.5	-15.6	-0.98%
Eurostoxx Index	2502.6	-46.9	-1.84%
Oil (WTI)	93.38	-0.3	-0.33%
LIBOR	0.277	0.004	1.47%
US Dollar Index (DXY)	82.8	0.483	0.59%
10 Year Govt Bond Yield	2.64%	0.11%
Current Coupon Ginnie Mae TBA	99.5	-1.6
Current Coupon Fannie Mae TBA	99.38	-1.1
RPX Composite Real Estate Index	205	0.2
BankRate 30 Year Fixed Rate Mortgage	4.36

A sea of red to greet investors this morning. The SPUs are down 15, and the the 10 year is down close to a point. MBS are down as well, with the FNCL 3.5s below par. We should be best-exing into a 4% security at this point, and are well on our way to hitting 4.5s.

The back up in yields is not only a US phenomenon. The UK gilt and the Canadian 10 year have been moving almost in lockstep with the US 10 year. Japanese and German yields are up small, but not as much as us. For those keeping score at home, the 10 year yield increased 40 basis points last week. 

Economically, we have a lot of stuff coming up this week, although not much is market moving. The big question is whether the back up in interest rates is affecting the economy.Watch the consumer confidence numbers (Conference Board on Wed, Michigan on Friday) to see if the jump in interest rates is affecting people's perception of their own financial situation. Pending Home Sales on Thursday is another one - that should affect contract signings over the past month and will give a clue as to whether the hike in rates is affecting the purchase market. On Thursday, we also get personal income and personal spending. 

Bond mutual funds and ETFs had record withdrawals in June, according to Trim Tabs. So far, over $47 billion has exited bond funds. This withdrawal exceeds the record set in October 2008 at the height of the financial crisis. Where that money goes is the $100,000 question. 

The Chicago Fed National Activity Index improved somewhat in May, although it is still negative and the the 3 month moving average is getting dangerously close to recession territory.

Morning Report - Dissecting the Bernank

Vital Statistics:

	Last	Change	Percent
S&P Futures	1590.7	6.8	0.43%
Eurostoxx Index	2595.4	9.0	0.35%
Oil (WTI)	95.37	0.2	0.24%
LIBOR	0.273	0.000	0.07%
US Dollar Index (DXY)	82.08	0.168	0.21%
10 Year Govt Bond Yield	2.39%	-0.03%
Current Coupon Ginnie Mae TBA	102.3	-0.7
Current Coupon Fannie Mae TBA	101.8	0.3
RPX Composite Real Estate Index	204.8	0.3
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are higher this morning after yesterday's bloodbath. There is no economic data this morning. Bonds and MBS are up small.

Mortgage rates are up 30 basis points this week so far. We should be best-exing into 4% coupons soon if not already. Will the higher rates crush the purchase market? Well, the National Association of Realtors reported May Existing home sales rose 4.2% to a seasonally-adjusted 5.18% annual rate. The median home price rocketed 15.4% year-over-year. Days on market fell to 41 days from 46 days in April. During the month of May, the 10 year went from 1.67% to 2.13% and the 30 year mortgage went from 3.43% to 4.10%. So, at least on the purchase front, so far, so good. 

The sell-off in bonds has been dramatic. Is it overdone? IMO, not really. Two things in Bernake's press conference jumped out at me. First, was that the Fed expects the labor market to improve slowly and for inflation to remain moderated. And if the economy acts as expected, they will start tapering QE by the end of the year and fully exit by mid 2014. In other words, the default path is to exit QE, and it will take exceptionally weak economic news to change that. I think going into the FOMC meeting, the market was discounting the possibility that the default path was to continue QE and it would take strong economic data to change that. That possibility has now been taken off the table.

Second, when asked about his concern over the recent increase in interest rates, Bernake said that their economic forecasts were done in the past few days, so they take into account the recent spike in rates. He went on to characterize the increase in rates as "increasing for the right reasons" - i.e. economic strength and the markets getting ahead of the Fed. 

The next question is "how high can rates go?" Well, if you look at historical numbers, a lot higher. Below is a chart of the 10 year yield less the Fed Funds Target Rate since we went to ZIRP. The yield curve had been a lot steeper in the past few years. 

Finally, I recently did an interview on Capital Markets Today, where I talked about the Fed, shadow inventory, mortgage rates, and the real estate market. It is a deeper dive into what the Fed had to say (it was done right after the FOMC release). Check it out.

Morning Report - Why household formation is lagging

Vital Statistics:

	Last	Change	Percent
S&P Futures	1649.5	-2.1	-0.21%
Eurostoxx Index	2654.8	-11.8	-0.44%
Oil (WTI)	97.95	+0.2	+0.23%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	80.92	-0.031	-0.04%
10 Year Govt Bond Yield	2.198%	+0.02%
Current Coupon Ginnie Mae TBA	104.5	-0.1
Current Coupon Fannie Mae TBA	103.1	-0.1
RPX Composite Real Estate Index	203.4	0.5
BankRate 30 Year Fixed Rate Mortgage	4.01

Markets are flattish as we await the FOMC decision, which should be out around 2:00 pm EST. Bonds and MBS are flat

Mortgage applications fell 3.3% last week, which is surprising since rates fell 9 bps. The purchase index fell 3% while the refi index fell 3.4%.

The CoreLogic Market Pulse has lots of good things in it this month. One article notes that prices are adjusting more quickly in this cycle as opposed to historical cycles. They also expect gains to moderate in the red-hot West Coast markets as previously underwater homeowners put their properties on the market. They also are hearing that professional investors believe some of these market to be overheated and are looking to exit. This could be good for originators as the cash buyers become a smaller percentage of buyers.

Wells Fargo recently held a conference call on the housing market. They see the Fed starting to move towards tapering QE towards the end of the year, but believe it will be gradual. They make an interesting point regarding the low household formation numbers - that they remain depressed because the jobs that are being created are not quality jobs. They are low paying / temporary jobs that will not really give a boost to housing demand. 

Another interesting tidbit - although it seems like the refi boom is over, it turns out that half of the outstanding mortgages in the U.S. have interest rates of 5% or more.

And finally, Treasury Secretary Jack Lew has re-done his signature from OOoooooooOO to something a bit more legible. His new John Hancock will be gracing your dollar bills shortly.

Morning Report - The Bernank is leaving the building.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1641.8	8.1	0.51%
Eurostoxx Index	2654.8	-11.8	-0.44%
Oil (WTI)	97.95	+0.2	+0.23%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	80.92	-0.031	-0.04%
10 Year Govt Bond Yield	2.198%	+0.02%
Current Coupon Ginnie Mae TBA	104.5	-0.3
Current Coupon Fannie Mae TBA	103.1	-0.2
RPX Composite Real Estate Index	203.4	0.5
BankRate 30 Year Fixed Rate Mortgage	3.98.05

Markets are generally higher as we begin the two day FOMC meeting. Bonds and MBS are down small.

Housing starts came in at 914k, lower than the 950k expectation. May starts were revised down to 856k. Multi-fam drove the decrease, and really accounts for the volatility of the index lately. SFR construction has been steadily growing from 520k to 620k over the past year. Wet weather in the Midwest may have dampened the number a bit. Building permits came in at 975k, as expected. Overall, it shows the housing market is continuing to recover, but we are still at very depressed levels. These sort of numbers are often seen at the absolute bottom of recessions. It may be too early to jump to conclusions, but perhaps the hike in interest rates over the past six weeks is starting to bite. 

The housing starts number stands in contrast to the National Association of Homebuilders sentiment survey which jumped 8 points to a reading of 52, the first "net positive" number since 2006. 

The consumer price index came in at +.1% on the headline number, and + .2% ex food and energy. This number is still too low to please the Fed as they would like to see annual inflation in the 2% to 2.5% range. 

On Charlie Rose, Obama said that "Ben Bernake has stayed on as Federal Reserve Chairman longer than he wanted," giving the clearest signal that the Bernank is going to leave when his term expires early next year. The two names mentioned have been ex Treasury Secretary Larry Summers and Vice Chair Janet Yellen. Yellen is the overwhelming favorite, and she is a bigger dove than Bernake. Something to keep in mind when you start thinking about QE tapering. That said, the current voting members on the Fed are very dovish on balance. Oh, and one other thing - she doesn't believe the Fed's interest rate policy has a role in bubble prevention. She would rather rely on supervision and regulation as the main line of defense against bubbles. Of course, with the stock market bubble and the real estate bubble so fresh in our minds, she will likely preside over the bursting of the Treasury bond bubble.

Morning Report: MBS spreads

Vital Statistics:

	Last	Change	Percent
S&P Futures	1632.7	1.8	0.11%
Eurostoxx Index	2654.8	-11.8	-0.44%
Oil (WTI)	95.66	-0.2	-0.23%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	80.92	-0.031	-0.04%
10 Year Govt Bond Yield	2.21%	-0.02%
Current Coupon Ginnie Mae TBA	101.5	0.3
Current Coupon Fannie Mae TBA	99.8	0.7
RPX Composite Real Estate Index	203.4	0.5
BankRate 30 Year Fixed Rate Mortgage	4.05

Markets are higher this morning after a slew of economic data that was generally negative. Bonds and MBS are up.

In economic data this morning, the producer price index showed inflation remains in check at the wholesale level. Industrial Production and Capacity Utilization were lower than expected. Finally, the University of Michigan Consumer Confidence number fell. Yesterday, the Bloomberg Consumer Comfort Index fell, and the driver was people's perception of their own financial situation. Perhaps the increase in interest rates is beginning to be felt.

Next week will be the FOMC meeting. Market participants will undoubtedly be focusing on the debate over tapering QE. Are they comfortable with the recent spike in long-term rates? 

Mortgage investors are starting to rotate to non-agency paper as rates rise. It is basically a bet that the housing market continues to improve. At the margin, it should put pressure on agency paper, which will increase borrowing rates.

We have already seen some of the effects of mortgage REIT deleveraging in the MBS space. The spread between Ginnie I and Ginnie II securities has narrowed, as well as the spread between Fannie Mae and Freddie Mac TBAs. Fannie Mae and Ginnie I TBAs generally trade at a premium to Freddie Mac TBAs and Ginnie II TBAs respectively. Why is this happening? Mortgage REIT deleveraging. The Ginnie Is and Fannie Mae TBAs are more liquid than the IIs and Freddie Macs. And when you are deleveraging, you sell what you can, not necessarily what you want to. Punch line?  Ginnie loans and Fannie loans are getting more expensive relative to Freddie loans. 

The MR will be spotty next week as I will be on the Left Coast.

Morning Report - Negative Equity falls

Vital Statistics:

	Last	Change	Percent
S&P Futures	1612.3	2.4	0.15%
Eurostoxx Index	2654.8	-11.8	-0.44%
Oil (WTI)	95.66	-0.2	-0.23%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	80.92	-0.031	-0.04%
10 Year Govt Bond Yield	2.21%	-0.02%
Current Coupon Ginnie Mae TBA	101.5	-0.2
Current Coupon Fannie Mae TBA	99.8	0.0
RPX Composite Real Estate Index	203.4	0.5
BankRate 30 Year Fixed Rate Mortgage	4.05

Markets are up on the back of a good retail sales number, in spite of an absolute shellacking (down 6.4%) in the Nikkei 225 index overnight. Initial Jobless Claims came in at 334k, a little better than expectations. The Import Price Index fell, which is bond bullish. Bonds and MBS are up small.

Advance Retail Sales were up .6% in the month of May, which was better than expected. Less autos and gasoline, they were up .3%, in line with expectations. April was revised downward from .5% to .2%.  Building materials are increasing at a 10% clip, which bodes well for new construction. 

It is probably too early for the back up in rates that started in May to start showing up in economic data, but is presence (or absence) will almost influence the Fed's decision making on ending QE. Don't forget The Bernank is done at the end of the year. The odds-on favorite is Janet Yellen to replace him and she is to the dovish side of Bernake. While I think it is a long shot, beware of a snap-back rally in bonds. That is when the margin clerk finishes his business.

CoreLogic reported that home equity increased 9% in the first quarter to reach $4.2 trillion. Negative equity fell 8% to $580 billion and the number of negative equity properties fell to 9.7 million from 10.5 million. CoreLogic estimates that if home prices increase another 5%, 1.6 million homes would regain positive equity.   This should really help drive purchase business as homeowners who have been stuck finally are able to move. Combined with a recovering job market to lure in the first time homebuyer and still generally good affordability, maybe the purchase business will make up for some of the lost refi business. Caveat: If the increase in home price appreciation continues to be driven by all-cash bidding wars in Las Vegas, then the effect will be more muted. We need to see home price appreciation in places like the Northeast and Midwest for this to really start turning things around. 

JP Morgan Chase is cutting 1,800 jobs in its mortgage unit, with the hits primarily coming from servicing (as delinquencies fall) and its Albion NY call center (as the refi market dries up).

Morning Report - The margin clerk approacheth...

Vital Statistics:

	Last	Change	Percent
S&P Futures	1637.7	10.6	0.65%
Eurostoxx Index	2697.5	14.3	0.53%
Oil (WTI)	96.07	0.7	0.72%
LIBOR	0.273	0.001	0.37%
US Dollar Index (DXY)	81.15	0.037	0.05%
10 Year Govt Bond Yield	2.23%	0.04%
Current Coupon Ginnie Mae TBA	101.6	-0.3
Current Coupon Fannie Mae TBA	99.92	-0.2
RPX Composite Real Estate Index	202.8	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.04

Markets are higher this morning after yesterday's decline. This week is relatively data-light until Friday. Bonds ad MBS are down small.

Mortgage Applications rose 5% last week as the Bankrate 30 year fixed rate average fell from 4.1% to 4.03%. Refis were up 5%.

The sell-off in bonds and MBS has not only hit mortgage REITs like Annaly and American Capital, who are down 25% + in the last month, it has also hit some hedge funds as well. $1.5 billion Metacapital is down 6.5% this year. The REITs are levered something like 6:1 and the hedge funds are undoubtedly levered as well. Margin calls could start soon, and when they happen, look out below. MBS are one of those investments that pretty much everyone is long, and there are few buyers when they get hit. The point of this: watch your locks. It is a dangerous environment to float in.

Corelogic has put out its latest equity report. Just under 20% of all homes are underwater and negative equity fell by 8.7% in the first quarter.

Morning Report - Small Business "Optimism" Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.6	-16.5	-1.00%
Eurostoxx Index	2661.6	-57.8	-2.13%
Oil (WTI)	94.47	-1.3	-1.36%
LIBOR	0.272	-0.002	-0.69%
US Dollar Index (DXY)	81.46	-0.186	-0.23%
10 Year Govt Bond Yield	2.26%	0.05%
Current Coupon Ginnie Mae TBA	101.2	-0.2
Current Coupon Fannie Mae TBA	99.55	-0.5
RPX Composite Real Estate Index	203	0.6
BankRate 30 Year Fixed Rate Mortgage	4.06

Markets are lower after the Bank of Japan left policy unchanged. Bonds and MBS are heavy again, with the 10 year yielding 2.26%

Part of the issue with the weakness in the bond and MBS market is convexity-related hedging. Convexity hedging is coming out of the mortgage REITs primarily, but also anyone who holds mortgages as an investment and hedges the interest rate risk. The "inside baseball" explanation of what is going on: Mortgage REITs are finding that as rates increase, the duration of their mortgage backed securities increases. This means they have to either sell MBS or Treasuries to rebalance their hedge." The punch line: selling begets more selling. And that is partly why the 10 year and MBS cannot get out of their own way.

The NFIB Small Business Optimism report ticked up to 94.4 in June, the highest level in a year, and the second highest reading since the recession started in 2007. That is the good news. The bad news? The number is still very weak, and only slightly higher than the post-recession average.  The biggest headaches for small business?  Taxes, Government regulations / red tape, and poor sales. In that order. The elephant in the room is obamacare. The report highlights one of the big disconnects happening right now, with the S&P 500 near record levels. The big multinationals are doing fine, but small business is barely growing with population. Since small business is half of the economy, it explains why we can have record levels in the S&P 500 and "meh" economic growth.If multinational profits correspond to 4% GDP growth, and the small business sector profits correspond to 0% GDP growth, you get 2% growth as an average number. 

Traders are well aware of the "fat finger" phenomenon. This happens when you are entering an order and accidentally hit two keys at once, turning an order to buy 100,000 shares into an order to buy 1,200,000 shares. Well, we have a fat head error. And no, I am not talking about the one where a guy ordered a Tom Brady Fathead poster for his office and got Tebow instead. 

Remember eminent domain? It's baaaack. Or at least advocates have some new ammunition - a paper by Cornell law professor Robert Hockett. He argues that municipalities should, in partnership with investors, "condemn" underwater mortgage notes, pay mortgagees "fair value" and systematically write down principal. Of course any municipality that pursues this will effectively be cutting their citizens off from Fannie Mae / Freddie Mac / Ginnie Mae loans.

Morning Report - a consensus forming on QE?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1644.8	6.2	0.38%
Eurostoxx Index	2716.5	-7.6	-0.28%
Oil (WTI)	95.33	-0.7	-0.73%
LIBOR	0.274	-0.001	-0.36%
US Dollar Index (DXY)	81.82	0.146	0.18%
10 Year Govt Bond Yield	2.18%	0.01%
Current Coupon Ginnie Mae TBA	101.5	0.1
Current Coupon Fannie Mae TBA	100.1	-0.2
RPX Composite Real Estate Index	202.4	0.2
BankRate 30 Year Fixed Rate Mortgage	4.03

Markets are higher this morning on no real news.  There is no economic data this morning. Bonds are weaker, with the 10 year yield at a 16 month high of 2.18%. MBS are down small.

Pretty light week, data wise. We will get NFIB Small business Optimism on Tuesday, retail sales on Thursday, and industrial production / capacity utilization on Friday. None of these should be market moving. 

Compass Research is out saying the death of NJ Senator Frank Lautenberg pretty much makes Mel Watt an unlikely confirmation. It drops his "yes" votes from 56 to 55. Separately, KBW is out saying that Fannie Mae common stock is worthless. Of course is still sports a $11.4 billion market cap

Home equity increased by $816 billion in Q1, according to the housing scorecard, put out by HUD. Delinquencies are down 7% in the month of May. In spite of the back up in mortgage rates, housing still remains highly affordable.

US bond fund redemptions are the highest since 1992. Bill Gross, who's fund lost 1.9% in May predicted that April of 2013 will go down as the end of the three decade bull market in bonds that began in the early 1980s. A poll by Bloomberg predicts that the Fed will cut its quantitative easing program from $85 billion a month to $65 billion a month at the October 29-30 FOMC meeting.

Morning Report - Jobs report in line with expectations

Vital Statistics:

	Last	Change	Percent
S&P Futures	1631.1	8.4	0.52%
Eurostoxx Index	2695.6	19.4	0.72%
Oil (WTI)	94.28	-0.5	-0.51%
LIBOR	0.275	0.001	0.33%
US Dollar Index (DXY)	81.47	-0.067	-0.08%
10 Year Govt Bond Yield	2.11%	0.03%
Current Coupon Ginnie Mae TBA	102.2	0.1
Current Coupon Fannie Mae TBA	100.6	-0.1
RPX Composite Real Estate Index	202.2	0.3
BankRate 30 Year Fixed Rate Mortgage	3.98

Markets are higher after the jobs report came in pretty much in line. Bonds and MBS are flat / down small.

The jobs report showed that nonfarm payrolls increased by 175,000 in the month of May, slightly higher than Street estimates (which were lowered after the ADP report). April was revised downward from 165k to 149k. The unemployment rate ticked up from 7.5% to 7.6% as the labor force participation rate ticked up from 63.3% to 63.4%. Earnings and workweek were flat. Since the report was pretty much in line with expectations,we aren't seeing any big reaction in the markets.

Remember my question about mortgage rates on Wednesday? Basically how did the Bankrate average 30 year mortgage rate jump from 3.9% to 4.1% when the bond market was flat and we had a weak day in Fannie TBAs? Well, whatever it was, it has been reversed, as the Bankrate average 30 year mortgage rate fell 18 bps back to 3.98%. Strange.

Morning Report - Moderate, Modest, and Measured.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1611.6	3.6	0.22%
Eurostoxx Index	2725.5	16.2	0.60%
Oil (WTI)	94.24	0.5	0.53%
LIBOR	0.274	0.000	-0.07%
US Dollar Index (DXY)	82.35	-0.248	-0.30%
10 Year Govt Bond Yield	2.11%	0.03%
Current Coupon Ginnie Mae TBA	101.8	-0.2
Current Coupon Fannie Mae TBA	100.2	-0.2
RPX Composite Real Estate Index	201.9	0.1
BankRate 30 Year Fixed Rate Mortgage	4.16

Markets are flattish after initial jobless claims came in as expected. Challenger and Gray reported that announced layoffs are 41% below last year's pace.  Bonds and MBS are flat.

Moderate. Modest. Measured. That is the summary of the Fed's Beige Book Survey of economic growth. The bright spot of the report was residential real estate construction. The Dallas District noted the strongest growth, while growth elsewhere was modest to moderate. Since this report is basically as amalgam of the various Federal Reserve District reports which have been previously released, it isn't a market-mover. 

The Senate plan to wind down the GSE's (Corker / Warner) would liquidate Fannie and Fred, transfer all of their liabilities to Treasury. The liquidation preference would be to the US Government first, then the junior prefs, and then the common shares. Note that Fannie Mae and Freddie Mac's recent record profits have not gone to paying down their debt to the government - those funds have been simply revenues to the government. A new entity - The Federal Mortgage Insurance Commission would have a re-insurance role and backstop private insurance. Ginnie Mae would not be affected.

Morning Report - What is going on with mortgage rates?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.1	-6.1	-0.37%
Eurostoxx Index	2723.4	-32.3	-1.17%
Oil (WTI)	93.76	0.5	0.48%
LIBOR	0.274	0.001	0.18%
US Dollar Index (DXY)	82.58	-0.192	-0.23%
10 Year Govt Bond Yield	2.12%	-0.02%
Current Coupon Ginnie Mae TBA	101.8	0.0
Current Coupon Fannie Mae TBA	100.3	-0.8
RPX Composite Real Estate Index	201.8	0.4
BankRate 30 Year Fixed Rate Mortgage	4.16

Markets are weaker after a disappointing ADP report. Nonfarm productivity was revised downward to .5% while unit labor costs fell. The Fed will release its Beige Book later on this afternoon. Mortgage applications fell 11.5% last week. Bonds and MBS are up small on the data.

The ADP report is supposed to foreshadow Friday's all-important jobs report, albeit only the private sector portion. Basically take the jobs report, subtract out public sector workers, and you have ADP. The ADP employment change report came in at 135,000 vs expectations of 165,000. Friday's payroll report is expected to be 178,000, with an unchanged unemployment rate of 7.5%. Bonds spiked on the ADP number and have pretty much given it all back. I am struggling to come up with a scenario where bonds rally big on Friday. My guess is that it will take an increase in the unemployment rate (like 7.7%) and a lousy payroll number, like 50k. The bond market increases so grudgingly, it feels like it won't take much of an upside surprise to send it lower.

I first thought it was a data error, or a misprint. On Friday, the Bankrate US Home Mortgage 30 year Fixed National Average spiked from 3.9% to 4.1%. But it increased again on Monday and Tuesday and now is sitting at 4.16%. Over that period, the 10 year is unchanged, but the FNCL 3.5 TBA is down a point, which corresponds to a 22 bp increase in yield. The GNSF 3.5 is down 14 ticks, which corresponds to a 10 basis point increase in yield. So how do we get a 26 basis point increase in mortgage rates when Fannies are up 22bps and Ginnies are up 10?  And no, its not jumbos, which only increased 4 basis points. Strange things are afoot at the Circle K. 

Morning Report - Progress on the GSEs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1638.5	2.3	0.14%
Eurostoxx Index	2765.3	17.5	0.64%
Oil (WTI)	93.19	-0.3	-0.28%
LIBOR	0.274	0.001	0.26%
US Dollar Index (DXY)	82.81	0.149	0.18%
10 Year Govt Bond Yield	2.13%	0.01%
Current Coupon Ginnie Mae TBA	101.9	-0.2
Current Coupon Fannie Mae TBA	100.4	-0.1
RPX Composite Real Estate Index	201.5	0.6
BankRate 30 Year Fixed Rate Mortgage	4.11

Markets are up small after a 2% rally in Japan's Nikkei 225 index last night. Bonds and MBS are down small.

Yesterday's ISM report showed the manufacturing sector contracted slightly in May. New Orders and Production fell, while inventories rose. Employment was flat. The index level of 49 corresponds to a GDP growth rate of just about 2%.

The Senate is close to establishing a plan to abolish Fannie Mae and Freddie Mac and replace them with a government re-insurer that would backstop private mortgage insurance. F&F would be wound down and the US Treasury would assume responsibility for existing conforming loans. A new entity - the Federal Mortgage Insurance Corporation (FMIC) would provide re-insurance, which means they would only step in if the private mortgage insurer was unable to cover the losses. For holders of the junior preferreds, which includes a lot of big hedge funds, this doesn't look like anything good for them.

And for those keeping track at home, here is Fannie Mae's recent chart: