Morning Report - Elizabeth Warren and QM

Vital Statistics:

	Last	Change	Percent
S&P Futures	1757.4	-3.2	-0.18%
Eurostoxx Index	3056.4	15.7	0.52%
Oil (WTI)	96.25	-0.5	-0.54%
LIBOR	0.242	0.000	0.04%
US Dollar Index (DXY)	79.99	0.212	0.27%
10 Year Govt Bond Yield	2.50%	-0.04%
Current Coupon Ginnie Mae TBA	106.2	-0.1
Current Coupon Fannie Mae TBA	105.5	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.13

Markets are slightly weaker after yesterday's insufficiently dovish FOMC statement. Initial Jobless Claims came in at 340k, more or less in line with expectations. Bonds and MBS are up. The Street was clearly leaning long going into the statement and it may have simply been a case of "sell the rumor, buy the fact."

I just got back from the MBA conference in DC, and it was great to meet so many people in this business. Needless to say, conversations between different bankers centered around the new rules taking effect on Jan 1. 

Elizabeth Warren spoke at the conference and more or less gave the boilerplate liberal take on the crisis: "It was the bankers, affordable housing targets had nothing to do with it, etc..." However, she did address QM, and said that it needs to be strengthened, because the potential liability associated with writing non-QM loans is relatively small, and in good times, lenders can compensate for these possible losses with higher rates or fees." Clearly she is trying to discourage non-QM loans.

Cue Richard Cordray, the head of the Consumer Financial Protection Bureau, who has been trying to disabuse the Street of the idea that non-QM loans are illegal. "Qualified mortgages cover the vast majority of loans made in today's market, but they are by no means all of the mortgage market. This point is important and it should not be misunderstood. There are plenty of good loans made every years - for example loans made to a borrower with considerable other assets or whose individual circumstances are carefully assessed - that are non-QM because they do not meet the 43% debt-to-income ratio or are not eligible for purchase by the GSEs, but nonetheless, are based on sound underwriting standards and routinely perform well over time." 

So, contradictory guidance is coming out of the government. Maybe it is a good cop / bad cop sort of thing. But whatever it is, it is unhelpful. For the people in Washington scratching their collective heads wondering why credit is so tight? Well, there ya go...

Oh, and one other thing.. She is pushing for some sort of fair lending review as a condition to continued GNMA and FNMA MBS issuers. Something "clear and enforceable." Which is really just wealth redistribution in drag. There is this fantasy among some people in Washington that there is this huge reservoir of great opportunities in CRA neighborhoods that are smart loans, but a bunch of stooges in the most competitive industry on the planet are studiously avoiding them because of some sort of latent racism. As if there is some big pile of money that people don't want because it comes from the wrong zip code. Wall Street often gets it wrong, but it usually falls along the lines of seeing an opportunity where none really exists and not the other way around. Someone should tell these people that FICO and severities matter when pricing credit. 

The FOMC decided to keep interest rates unchanged and not to change the pace of asset purchases. After the government shutdown, virtually no one expected a taper at the October meeting. The market focused on the statement that the "Committee decided to await more evidence that progress will be sustained before adjusting the pace of its purchases." In other words, QE4EVA is off the table. Bill Gross of PIMCO tweeted yesterday: "Think abt this Fed: Capitalism depends on carry. When carry (yld, risk spreads, etc) gets too low, capitalism stalls."  Think someone is underweight duration right now?

Mortgage Servicing Rights (MSRs) are hot, hot hot. Agency REIT giant American Capital (AGNC) is buying Residential Credit Solutions, a mortgage servicer. By the way, AGNC's third quarter earnings were pretty disappointing. They de-leveraged in a big way (ratio fell from 8.5x to 7.2x), and are now net short TBAs by 7.3 billion. 

Morning Report - Housing remains affordable

Vital Statistics:

	Last	Change	Percent
S&P Futures	1747.3	-1.2	-0.07%
Eurostoxx Index	3037.2	-1.8	-0.06%
Oil (WTI)	97.48	0.4	0.38%
LIBOR	0.237	-0.001	-0.52%
US Dollar Index (DXY)	79.25	0.066	0.08%
10 Year Govt Bond Yield	2.51%	-0.01%
Current Coupon Ginnie Mae TBA	103.6	0.0
Current Coupon Fannie Mae TBA	102.6	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are flattish on no real news. UPS, which tends to be a broad economic indicator, beat numbers. Durable Goods came in better than expected. Bonds and MBS are flat

The latest CoreLogic Market Pulse is out. They discuss mortgage fraud, negative equity, foreclosures, and home prices. The key metric of affordability - the price to income ratio - has been creeping up, but is still around historical averages, meaning housing in no longer dirt cheap, but is still reasonably priced compared to historical standards, not just the bubble years. 

It is looking like some sort of grand bargain isn't going to happen as we approach the budget negotiations. Democrats want to get rid of the sequester. Republicans are willing to replace the sequestration cuts with other cuts, particularly in Medicare and and other long-term expenses like Federal retirement. Tax hikes are a non-starter. Republicans are probably not anxious to re-live the shutdown either, so we probably get some sort of extension of the CR and the debt ceiling without much in the way of attacking spending. 

The Morning Report will be on hiatus early next week as I will be in DC for the Mortgage Bankers Conference. Hope to see some of you there.

Finally, what if Facebook was around from WWI to WWII?

Morning Report - Pulte reports 17% drop in new orders

Vital Statistics:

	Last	Change	Percent
S&P Futures	1745.3	3.5	0.20%
Eurostoxx Index	3029.4	12.2	0.40%
Oil (WTI)	96.67	-0.2	-0.20%
LIBOR	0.238	0.000	-0.10%
US Dollar Index (DXY)	79.26	-0.005	-0.01%
10 Year Govt Bond Yield	2.49%	-0.01%
Current Coupon Ginnie Mae TBA	103.7	-0.1
Current Coupon Fannie Mae TBA	102.7	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markes are higher this morning after a slew of generally positive earnings reports, most notably PulteGroup, Ford, and Coca Cola. Initial Jobless Claims came in higher than expected. California is still working through its claims backlog, so that number is probably understated. Bonds and MBS are up small.

Homebuilder PulteGroup announced third quarter earnings that topped analyst estimates. New orders were down 17%. On the conference call, they noted that "housing market conditions have changed", as demand is slowing on higher prices and mortgage rates. Their Washington DC markets, particularly the higher priced markets, were affected by uncertainty over the government shutdown. California is also "softer." However, they view this as short-lived within a sustained, multiyear housing recovery. Tellingly though, they bought back stock and debt instead of re-investing idle cash back in the business.

Bank of America was found guilty for Countrywide's sins and the government wants $850 billion, stemming from a plan to pay LO's bonuses on volume. The person who led the plan (dubbed the hustle) may be personally liable for fraud. Damages have yet to be determined. I wonder how much the government "encouraged" BOA to buy Countrywide. In every financial crisis, the first thing any government does is it to force shotgun weddings between the strong and the weak. 

Lender Processing Services "First Look" Mortgage Report has delinquencies up slightly (4.2%) month over month, but still down 12.6% year over year. 

Cash sales accounted for 49% of all residential sales in September, up from a revised 40% in August according to RealtyTrac. Last year, cash sales were 30% of all residential sales. Short sales accounted for 15% of all sales. REO sales were 10%. RealtyTrac estimates the median price was 174,000, which is vastly different than NAR's estimate of the median home price which is 199,000.

Morning Report - The powers that be throw originators a bone on fair lending

Vital Statistics:

	Last	Change	Percent
S&P Futures	1742.2	-7.2	-0.41%
Eurostoxx Index	3021.7	-24.1	-0.79%
Oil (WTI)	96.59	-1.7	-1.74%
LIBOR	0.238	0.000	0.00%
US Dollar Index (DXY)	79.31	0.083	0.10%
10 Year Govt Bond Yield	2.50%	-0.01%
Current Coupon Ginnie Mae TBA	103.9	0.1
Current Coupon Fannie Mae TBA	102.7	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are lower on an earnings miss from Caterpillar. Import prices rose .2% month-over-month. Bonds and MBS are up small.

Mortgage Applications fell .6% last week, which is surprising given that rates fell so much later in the week. The refi index actually fell while the Bankrate 30 year fixed rate mortgage fell 5 basis points to 4.23%. The purchase index was up small.

The FHFA Home Price index rose .3% month-over-month in August, which was lower than expected. Prices are up 8.5% year-over-year. The FHFA index only looks at houses with conforming mortgages, so it is a bit of a central tendency index in that it ignores the jumbos and the cash sales (which are usually distressed sales). The FHFA index shows the strongest recovery in home prices of all the indices out there.

Regulators gave originators a bit of breathing room by saying that originators that focus only on QM loans will not have EEOC issues if they choose to go this route. Of course that can easily change if they find that loans are not getting made in certain areas, so I would take that assurance with a grain of salt. Now that the points / fee caps pretty much make sub-$100k loans uneconomic, lets see how the Administration reacts when credit dries up at the lower price points. You think Eric Holder is going to care that CFPB made these loans money-losers? Me neither.

Flagstar Bank reported better than expected earnings this morning, although mortgage origination suffered. Total originations declined 28.9% to $7.7 billion from $10.9 billion in Q2 and $14.5 billion in Q312. Purchase activity was up 17% though. Gain on sale margin fell to 1.14% from 1.47% based on "lower hedge performance." This is surprising given that the 30 year fixed rate mortgage started the quarter at 4.39% and ended it at 4.33%. Volatility is what kills mortgage pipeline hedging and Q3 was a bit more volatile than Q2, but not by much. Surprising result. They also made no bulk MSR sales in Q3, after having made them in Q2. Given that MSR valuations have been going up, it is surprising they haven't been ringing the register. Perhaps they are done with their Basel III MSR selling.

One of the unintended consequences of taper-talk has been the slowing of the private label market. Lewis Ranieri's (of Liar's Poker fame) Shellpoint Partners pulled a jumbo bond deal after finding it could get better pricing by selling the loans outright. Investors are shunning the bonds because they are afraid that they will be holding long-duration / low yielding assets for a long time. 

Morning Report - Jobs day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1742.5	4.3	0.25%
Eurostoxx Index	3046.0	17.4	0.57%
Oil (WTI)	99	-0.2	-0.22%
LIBOR	0.238	0.000	-0.10%
US Dollar Index (DXY)	79.48	-0.213	-0.27%
10 Year Govt Bond Yield	2.54%	-0.06%
Current Coupon Ginnie Mae TBA	103.6	0.6
Current Coupon Fannie Mae TBA	102.4	0.6
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are higher on the back of a weaker-than-expected jobs report. Bonds are flying on the report, which has the 10 year down 6 basis points to 2.54%. MBS are up as well, and we are no best-exing into a 3.5% coupon. Later on today we will get international capital flows, construction spending, and Richmond Fed.

The economy created 148k jobs in September, lower than expected. August was revised upward. The unemployment rate fell to 7.2% while the labor force participation rate remained the same at 63.2%, a level we haven't seen since the late 70s. The last time the labor force participation rate was this low, "Three Times a Lady" by the Commodores was topping the charts. The workweek stayed the same at 34.5 hours and earnings increased .1%.

Overall the jobs report is weak enough to take any sort of December tapering off the table. Don't forget these numbers predate the shutdown, so October's numbers will invariably be worse. 

Existing Home Sales dropped to a seasonally adjusted annual rate 5.29 million units in September, according to the National Association of Realtors. Distressed sales accounted for 14% of sales,and cash sales were 33%. Inventory was steady at 5 months of supply. The median house price rose 11.7% year-over-year to $199,200. 

Morning Report - The market is letting you back in

Vital Statistics:

	Last	Change	Percent
S&P Futures	1738.0	1.5	0.09%
Eurostoxx Index	3026.5	-6.8	-0.22%
Oil (WTI)	99.68	-1.1	-1.12%
LIBOR	0.239	-0.002	-0.81%
US Dollar Index (DXY)	79.76	0.104	0.13%
10 Year Govt Bond Yield	2.59%	0.01%
Current Coupon Ginnie Mae TBA	105.9	0.2
Current Coupon Fannie Mae TBA	105.1	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.23

Markets are flat this morning on no real news Bonds and MBS are down small. We will get existing home sales later this morning.

The government is still figuring out how it will release the economic reports that piled up during the shutdown. I don't see anything official from BLS regarding the jobs report, although Bloomberg has it scheduled for tomorrow. I think it will take a massive jump in payrolls (like 300k +) to bring a December tapering back into the picture. Given that we just kicked the can down the road for a few months, we are probably looking at March. FWIW, Chicago Fed President Charles Evans said pretty much the same thing on CNBC.

Homebuilder NVR rerpoted a 37% increase in revenues for the third quarter. Closed loan production was just under $700 million for the quarter. Origination volume actually increased about $50 million from Q2. New orders fell 7% and the cancellation rate edged up to 17%. Earnings came in well above expectations. NVR is more East Coast based and DC-centric (think McMansions in McClean VA) so it will be sensitive to government spending. We will hear from Pulte later this week. 

The Bankrate average 30 year fixed rate mortgage fell to 4.23% last week, the lowest since June. We had fantastic lock days on Thursday and Friday. LO's wake up any borrowers that are on the fence or were thinking about refinancing. The market just let them back in. 

JP Morgan is close to a settlement with the government over the sins of Bear Stearns. (Didn't Jamie Dimon buy Bear as a "favor" to the government?) Anyway, it is looking like it will be $13 billion. Whenever the government needs money, it shakes down Wall Street, I guess. At what point are these things no longer "fines," but "surtaxes?"

Morning Report - Still no data

Vital Statistics:

	Last	Change	Percent
S&P Futures	1732.7	4.9	0.28%
Eurostoxx Index	3022.5	12.1	0.40%
Oil (WTI)	101.4	0.7	0.71%
LIBOR	0.241	-0.002	-0.62%
US Dollar Index (DXY)	79.62	-0.027	-0.03%
10 Year Govt Bond Yield	2.57%	-0.02%
Current Coupon Ginnie Mae TBA	105.9	0.2
Current Coupon Fannie Mae TBA	105.2	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are higher this morning on a couple of good earnings reports out of Morgan Stanley and GE. The 10-year continues its post-crisis rally.

The government has been back at the job, but still no economic data this morning. Apparently the September jobs report will be released Tuesday. And some of the data we will get will be less than reliable.

As bonds move lower, so do mortgage rates. Since early September, the average 30 year fixed rate mortgage has fallen to 4.24%, which is the lowest level since June. Mortgage Bankers may in fact get one last bite at the refi apple before rates start heading higher for good.

The increase in rates has brought some anecdotal evidence that the red-hot California market is beginning to cool a bit. The flippers are focusing on the higher end homes, as the lower price points have been picked over. According to the California Association of Realtors, home sales were down 5% in September, and the median price fell.

The National Association of Homebuilders sentiment index fell in October as builders worried about the cost and availability of labor as well as the events in Washington. We have been hearing about skilled labor quite a bit - in spite of high unemployment, employers are finding it hard to fill certain positions. The biggest one is skilled labor. The housing bust sent many skilled laborers to the energy patch, which means there are less electricians, plumbers, etc. The NAHB is forecasting housing starts to be around 900,000 units for the month of September. This is still well below our historical average of 1.5 million. As the echo boomers find jobs, we should be in store for a massive, massive building boom given that we have tremendous pent-up household formation and we have underbuilt for the past decade.

The beatdown goes on... Wells is laying off 925 in mortgage ops. Suntrust is laying off 800. 

Morning Report - We have a deal

Vital Statistics:

	Last	Change	Percent
S&P Futures	1709.5	-3.7	-0.22%
Eurostoxx Index	2998.6	-16.8	-0.56%
Oil (WTI)	101.7	-0.6	-0.59%
LIBOR	0.242	-0.004	-1.63%
US Dollar Index (DXY)	79.83	-0.637	-0.79%
10 Year Govt Bond Yield	2.75%	-0.05%
Current Coupon Ginnie Mae TBA	105.7	0.2
Current Coupon Fannie Mae TBA	104.9	0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.31

Buy the rumor, sell the fact. Markets are down small after the government came up with a deal to keep the lights on. Lousy earnings from Goldman aren't helping things. Bonds are rallying as the Fed is probably on hold for a while.

So the shutdown is over. Democrats won a few month reprieve before we go through this whole process once again. Republicans won a minor concession that the government will try and prevent fraud with obamacare subsidies. We'll see if this is where the Tea Party finally jumped the shark. I suspect it is.

If you want a deeper dive into this, I discussed this along with a whole host of other issues on Louis Amaya's Mortgage Markets Today show yesterday. You can hear it here:

http://www.blogtalkradio.com/capitalmarketstoday/2013/10/16/debt-ceiling-explanation-and-implications

Initial Jobless Claims came in at 358k, a drop of 16k, but higher than expectations. It appears California is still working through its computer issues.

It is looking like tomorrow will be the day when we will get all the of the economic reports that have piled up since the shutdown. The biggest of course will be the employment report we were supposed to get two weeks ago. We will also get industrial production, consumer and producer prices, retail sales, inventories, housing starts, amongst other reports. So tomorrow could be market moving in a big way.

Fannie Mae priced a $675 million risk-sharing deal yesterday, the first of its kind. Investors will share in the guarantee fee and will bear some of the credit risk of the underlying mortgages. Given the underlying bonds were all very recent vintages, with very tight underwriting, investors were aggressive in bidding the paper. The senior tranches went for L+200. The mezz tranches went at L+525. This is part of a deal to wean Fannie Mae off the government and to "crowd in" private capital into the mortgage markets.

The Fed released its Beige Book report yesterday. Pithy punch line: Moderately modest.

Morning Report - continuing negotiations in the Senate

Vital Statistics:

	Last	Change	Percent
S&P Futures	1701.3	9.3	0.55%
Eurostoxx Index	2999.1	-5.5	-0.18%
Oil (WTI)	101	-0.2	-0.24%
LIBOR	0.246	0.003	1.03%
US Dollar Index (DXY)	80.32	-0.164	-0.20%
10 Year Govt Bond Yield	2.74%	0.01%
Current Coupon Ginnie Mae TBA	105	-0.2
Current Coupon Fannie Mae TBA	104.1	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are higher this morning on optimism that a deal is unfolding in the Senate. Bonds and MBS are down. The Mortgage Bankers Association reported that applications increased .3% last week.

Last night, Fitch put US sovereign debt on rating watch negative. "Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default"

Harry Reid and Mitch McConnel are finalizing plans to raise the debt ceiling through Feb 7 and fund the government through Jan 15. Technically the government runs out of money tomorrow, however independent analysts say that the real D-day is November 1. Note that T-bills maturing Oct 31 are trading with a yield of 36 basis points, which means the market is discounting the possibility that they get paid late. Both sides have been making small concessions to get a deal done. Of course the wild card is the House, and whatever solution that comes out of the Senate will leave obamacare largely intact. Note, as I write this, Bloomberg is saying that the T-bills maturing 10/31 now yield 52 basis points.

The dog that didn't bark - shadow inventory. People have been warning of mass dumping of REO properties, but it never occurred, and now shadow inventory is working its way down. Regulators never forced the banks to write down / dispose of bad assets like they did after the S&L crisis in the late 80s. Billions of dollars were raised to capitalize on this, and the flow has been a slow trickle. Second, judges have been slow to approve foreclosures, particularly in the Northeast. This explains the wide disparity between home price appreciation in the West, where the shadow inventory has largely been worked off and the Northeast.

Bank of America announced 3Q earnings this morning, and came in better than expected. The pipeline ended the quarter down 59% quarter on quarter. Production was $465m vs $860 in Q2 based on lower gain on sale margins and a reduction in rate lock volume. 78% were refis. 

Morning Report - an emerging deal?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1702.7	-1.6	-0.09%
Eurostoxx Index	2994.3	16.6	0.56%
Oil (WTI)	101.5	-0.9	-0.86%
LIBOR	0.244	-0.002	-0.92%
US Dollar Index (DXY)	80.64	0.374	0.47%
10 Year Govt Bond Yield	2.71%	0.03%
Current Coupon Ginnie Mae TBA	105	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are flattish after Citi missed and Coca Cola and Johnson and Johnson beat earnings expectations. The Empire Manufacturing Survey came in at 1.52. Bonds and MBS are down

The Senate appears close to a deal on the government shut down and the debt ceiling. The plan would fund the government through mid-January, and extend the debt ceiling until early February. Obamacare would remain largely intact, although Republicans were able to extract a concession that would force the government to verify that people are eligible for subsidies. Democrats also want to delay a tax on existing policies which is on Big Labor's wish list. This whole thing is designed to take the pressure off and allow the government to enter into budget negotiations. Another round of spending cuts is scheduled to take effect at the beginning of the year, with defense bearing the brunt of it. Of course the problem is not in the Senate, but the House. Will the requirement that the government try and prevent fraud in obamacare enough to get the Tea party onboard? We'll see. 

What date actually matters for the debt ceiling? The government says Oct 17, when the government exhausts its borrowing authority. The Bipartisan Policy Center estimates that sometime between Oct 22 and Nov 1 the government will be unable to pay all the government's bills on time. And Bank of America is saying that by Nov 15, default is more or less inevitable.

Surprisingly, T-bills make up only 13% of the $11.6 trillion in marketable debt outstanding, the smallest share since Eisenhower was president. This is due to the Fed's Operation Twist as well as government extending duration to take advantage of low interest rates. Such short supply has had the shorter dated T-bills trading with negative yields for brief periods of time. 

Speaking of T-bills, the 1 month T-bill has been getting hammered as we approach the debt ceiling, with the yield increasing from basically zero a month ago to 33 basis points a few days ago. It is heading back down, but it is worth keeping an eye on it. Investors are dumping the short end of the curve as major banks have been discussing which T-bills they may restrict as collateral for repo transactions. 

Morning Report - no news on the debt ceiling front

Vital Statistics:

	Last	Change	Percent
S&P Futures	1685.9	-13.1	-0.77%
Eurostoxx Index	2963.5	-10.8	-0.36%
Oil (WTI)	101.5	-0.5	-0.49%
LIBOR	0.246	0.002	0.90%
US Dollar Index (DXY)	80.15	-0.213	-0.27%
10 Year Govt Bond Yield	2.69%	0.00%
Current Coupon Ginnie Mae TBA	105.2	-0.2
Current Coupon Fannie Mae TBA	104.3	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Stock markets are weaker this morning as a deal fails to emerge over the weekend. The bond market is closed.

No deal emerged over the weekend, and it appears Democrats are moving to the left as they want to address the sequestration cuts. Not sure if this is just a negotiating posture or something they intend to hold on to. Supposedly we will hit the debt ceiling this week. Republicans offered a 6 week clean extension of the debt ceiling over the weekend, with the government remaining shut. This was rejected by Democrats.

Earnings season kicks off in earnest this week, with heavyweights like Coca Cola, Citi, Johnny John, Goldman, Google, and GE.

Morning Report - Wells and JP Morgan report big drops in origination volume

Vital Statistics:

	Last	Change	Percent
S&P Futures	1684.0	-1.0	-0.06%
Eurostoxx Index	2966.3	-3.2	-0.11%
Oil (WTI)	101.7	-1.3	-1.24%
LIBOR	0.244	0.001	0.21%
US Dollar Index (DXY)	80.29	-0.124	-0.15%
10 Year Govt Bond Yield	2.66%	-0.02%
Current Coupon Ginnie Mae TBA	105.5	0.1
Current Coupon Fannie Mae TBA	104.6	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are flattish after yesterday's rally on the possibility of a deal on the debt ceiling. Bonds and MBS are rallying.

John Boehner and Obama met to discuss a 6 week clean extension for the debt ceiling. The government "shutdown" would remain in place.Neither side agreed to anything.

Earnings season is upon us, and we heard from Wells Fargo and JP Morgan this morning. Wells reported residential mortgage originations were $80 billion for the third quarter, down 29% from the $112 billion in the second quarter. JP Morgan reported a loss due to legal expenses. Their origination volume decreased 18% from the prior quarter.

The government is re-thinking how it releases market-sensitive economic data. Under the current system, the government releases data to the media under an embargoed basis - the reporters have an hour to write their reports and then the data is released to the market. At issue is the fact that high frequency traders have paid for high speed transmission lines to media outlets and they get the raw data a few milliseconds before everyone else does. The idea would be for the government to release the data directly to the media so no one gets a jump on market moving reports.

Monday is a bank holiday and the bond market will be closed, although the equity market will be open. Should be a slow news day.

Morning Report - parsing the FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1661.9	13.1	0.79%
Eurostoxx Index	2952.0	47.3	1.63%
Oil (WTI)	101.6	0.0	-0.02%
LIBOR	0.243	-0.003	-1.02%
US Dollar Index (DXY)	80.39	0.014	0.02%
10 Year Govt Bond Yield	2.70%	0.04%
Current Coupon Ginnie Mae TBA	105.2	-0.2
Current Coupon Fannie Mae TBA	104.3	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are higher on talk of a short term bump in the debt ceiling. Bonds and MBS are selling off.

Initial Jobless Claims increased to 374k. The jump was attributed to the unwinding of a computer problem in California and furloughed government employees.

The debt ceiling machinations are beginning to have more effects - in Hong Kong, the exchange increased the haircut on T-bills citing default concerns. Jack Lew is in front of the Senate Banking Committee this morning warning about the risks of not raising the debt ceiling. FWIW, Bill Gross is a buyer.

There was nothing earth-shattering in the FOMC minutes, which were released yesterday. On housing, they mentioned that the sector continued to strengthen, but they were worried about the increase in rates and what effect it would have. They noted the recent weakness in housing starts. The debt ceiling / government shutdown was mentioned as a further risk to the economy. Their estimates for GDP growth were taken down by 30 basis points.

On Page 8, they discuss the thought process behind the decision not to taper at the September meeting. For the most part, they were disappointed at the economic data and the ones who supported no changes to QE felt that reducing asset purchases would harm the housing recovery and the economy in general. The ones who were supported a reduction in QE were in favor of reducing it because they worried about sending mixed messages to the market, not because they were satisfied with the economy or were worried about inflation or asset bubbles. Because they sent the signal in June that they planned to reduce purchases and the market internalized it, they felt like they had to follow through, or else risk credibility at the Fed. They were worried about creating uncertainty. So here is the takeway, at least for me. They don't want to end QE, they don't even want to reduce it, but you may see a small tweak at the December meeting, just to prove that the Fed's communications about its intentions can be relied upon. And if the economy continues to stagnate, that may be it for a while. 

Morning Report - It's Janet

Vital Statistics:

	Last	Change	Percent
S&P Futures	1654.3	3.9	0.24%
Eurostoxx Index	2917.5	14.1	0.49%
Oil (WTI)	103.3	-0.2	-0.19%
LIBOR	0.246	0.002	0.82%
US Dollar Index (DXY)	80.39	0.329	0.41%
10 Year Govt Bond Yield	2.65%	0.01%
Current Coupon Ginnie Mae TBA	105.4	0.0
Current Coupon Fannie Mae TBA	104.5	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are up small after Alcoa kicked off earning season with good numbers. Bonds and MBS are down small.

Mortgage Applications increased last week by about a percent, according to the Mortgage Bankers Association. The refi index was up about 2.5%, while the purchase index fell small.

The FOMC minutes will be released at 2:00 pm EST. In the absence of economic data this will undoubtedly take on more importance.

In a move that surprised exactly no one, Obama is expected to name Janet Yellen to replace Ben Bernanke when his term expires in January. Basically it means Alan Greenspan's third term. Yellen is a dove, a bigger dove than Bernanke, who was a bigger dove than Greenspan. Expect fawning support from the media due to the groundbreaking nature of the nomination. (If only Janet Yellen had been running the Fed, we wouldn't be in this mess - never mind that while Ben Bernanke just spiked the punch bowl, Janet will be adding oxycontin to it.) The extra juice will have the Street singing Dammit Janet.

The shenanigans regarding the debt ceiling are not being felt in the 10-year, but they are being felt in the 1 month T-bill. The yield has increased from almost zero in mid September to 29 basis points currently. Any sort of default will wreak havoc in the repo market as defaulted securities are ineligible to be used for collateral. That has the makings of a credit crunch and bears watching. If there is one thing that is sure to get the market's attention it would be liquidity problems somewhere because someone can't roll over their repo lines.

Completed Foreclosures increased to 48,000 in August (up 1.3% month over month, but down 34% on an annualized basis), according to CoreLogic. Shadow inventory was 1.9 million units. Note: The MBA and Corelogic have different methodologies for calculating shadow inventory - The MBA's estimate is about 50% higher.

Morning Report - NFIB Small Business Pessimism Report

Vital Statistics:

	Last	Change	Percent
S&P Futures	1669.2	1.5	0.09%
Eurostoxx Index	2919.6	-3.5	-0.12%
Oil (WTI)	103.5	0.4	0.43%
LIBOR	0.244	0.000	0.10%
US Dollar Index (DXY)	79.98	0.034	0.04%
10 Year Govt Bond Yield	2.65%	0.02%
Current Coupon Ginnie Mae TBA	105.5	0.0
Current Coupon Fannie Mae TBA	104.9	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are flattish this morning on no real news. Bonds and MBS are down. Earnings season kicks off after the close with Alcoa. 

China and Japan are warning the US not to default on its debt. China holds just under 1.3 trillion of US Treasuries. Beijing warned that "the clock is ticking" and urged Washington to get its act together to "ensure the safety of the Chinese investments." The White House says it is open to a short-term increase in the debt ceiling, which may allow us to kick the debt ceiling can to the end of the year while we figure out the government shutdown. However, both sides are dug in, with the White House insisting on a clean debt ceiling increase, and John Boehner insisting that some spending cuts have to be a part of any deal.

Corelogic is reporting there were 48,000 completed foreclosures in August, down 34% year-over-year and up 1.3% from July.The shadow inventory is estimated to be 1.9 million homes. 2.1 million mortgages, or 5.3% of all mortgages are seriously delinquent, the lowest level since November 2008. The Northeast, Florida, and Nevada have the highest foreclosed inventory.

Corelogic also released its 2013 mortgage fraud report. They estimated that $10.5 billion of mortgage applications had fraudulent information in the first half of 2013. The mortgage fraud index decreased 5.6% nationally on a year-over-year basis. They identify six types of fraud - employment, identity, income, occupancy, property, and undisclosed debt. Income fraud is the highest risk, while property fraud is the lowest. 

The National Federation of Independent Businesses say that optimism fell in September as pessimism about future business conditions increased. Small business optimism is still well below pre-crisis levels. Keep this in mind when you start hearing blowout earnings numbers from the S&P 500 companies. Many of them are overseas earning stories and you shouldn't draw too many conclusions from their strength. 

Chart: NFIB Small Business Optimism Index

Morning Report - more shutdown stuff

Vital Statistics:

	Last	Change	Percent
S&P Futures	1671.7	-13.1	-0.78%
Eurostoxx Index	2904.9	-23.4	-0.80%
Oil (WTI)	102.9	-0.9	-0.89%
LIBOR	0.243	0.001	0.21%
US Dollar Index (DXY)	79.99	-0.128	-0.16%
10 Year Govt Bond Yield	2.61%	-0.04%
Current Coupon Ginnie Mae TBA	105.6	0.1
Current Coupon Fannie Mae TBA	105.2	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.26

Markets are lower as the government shutdown stretches into Week 2. Bonds and MBS are rallying. Earnings season kicks off with Alcoa tomorrow. We will hear from JP Morgan and Wells on Friday.

On Wednesday, we will get the minutes from the September FOMC meeting. Should make very interesting reading, although the shutdown pretty much means tapering is off the table for a while.

Back of the envelope calculations:  The drop in government spending is about 13% from the shutdown because most government functions, specifically entitlements, are still being done. So, on a 3.8 trillion budget, 13% amounts to just a hair under 500 billion for the year, or about 9.5 billion a week. On a 16 trillion GDP, that amounts to 6 basis points of GDP. Tack on a government spending multiplier of 1.3 and you get about 8 basis points of fiscal drag for each week the government is shut down.

Ginnie Mae has denied rumors that the Ginnie Mae I MBS is about to be sunsetted. Ginnie Mae I securities have usually traded at a premium to Ginnie II MBS but have been trading at a discount since May when rates started backing up. The other security which is rumored to be going away is the Freddie Mac (or Gold) MBS. This would simplify the MBS market into conforming and Ginnie.

The debt ceiling debate is going to get ugly. The Administration has said it will not negotiate on the debt ceiling. John Boehner has said he doesn't have the votes to pass a clean debt ceiling increase. While it seems easy to just decide which checks to write and which ones not to, it is actually a knotty piece of re-programming at Treasury to do that. And with the government shut down, it is even more difficult. Still nobody thinks the US will fail to make interest and principal payments. The Bipartisan Policy Center has a really good breakdown on the shutdown and debt ceiling issue

Morning Report - warning signs flashing in the short term Treasury markets

Vital Statistics:

	Last	Change	Percent
S&P Futures	1673.5	3.8	0.23%
Eurostoxx Index	2915.7	13.6	0.47%
Oil (WTI)	103.6	0.3	0.32%
LIBOR	0.243	0.000	0.00%
US Dollar Index (DXY)	79.98	0.233	0.29%
10 Year Govt Bond Yield	2.63%	0.02%
Current Coupon Ginnie Mae TBA	105.6	0.1
Current Coupon Fannie Mae TBA	105.1	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.25

Markets are higher this morning on no major news. Since we have the government shutdown, the all-important jobs report that was scheduled for this morning will be delayed. Bonds and MBS are down small.

Even though we don't have any economic data today, we have a lot of Fed-speak. Fisher will talk at 8:30, Dudley at 9:15, Stein at 9:30, Lacker at 12:30, and Kocherlakota at 1:45 (all times EST). With no data to chew on, the market will probably react more strongly to any new revelations than it otherwise would. 

With no economic data to analyze, the Fed will almost certainly maintain its present course of asset purchases at the October FOMC meeting. While the Fed does have their own econometric models and independent sources of data, they do rely on inputs from the Federal government agencies. The bigger question is about December. Does Ben Bernanke want to start the tapering process on his watch or throw the whole thing to Janet Yellen? And does Janet Yellen want to taper at all? She may not. This whole shutdown has thrown a wrench in the conventional wisdom over tapering, which means QE may stick around a little while longer than we thought. Doing nothing at the December meeting is still a long-odds scenario, but it is getting less and less so.

The dynamic I would watch in the bond market is that anything that points to a deal would be bond bearish, and continued gridlock is bullish. Here is one area of concern though - the short term Treasury markets. I already discussed the issues with the repo market and here is another: the 1 month T-bill has increased in yield as the debt shutdown has gone on. It is now a higher yield than the 1 year. Heard on the Street has a piece on how a debt ceiling breach will impact the money markets. While no one anticipates another 2008, things could get dicey. If anything is going to push the S&P 500 over the edge and get everyone's attention in Washington, this will. 

Chart: 1 month T-bill yield

We are starting to see the Federal government move towards bringing back items piecemeal. Currently there is are bills that would commit to pay furloughed federal workers their back pay once government gets back up and running. Naturally Democrats don't like these sort of bills because they want to use the leverage of mad constituents to force Republicans to drop their opposition to a clean continuing resolution. Republicans are taking a page out of the sequester strategy, where they fixed the air traffic controller problems with a simple bill. Behind the scenes, the Tea Party is wearing thin on most everybody and at some point the more senior Republicans are going to say enough is enough. Separately, John Boehner is telling people he will avoid a default on the federal debt. It is looking more and more likely that any sort of deal with be a two-fer, handling the budget and debt ceiling.

HUD has released its own rule on QM - any mortgage (aside from HECMs) that do not meet the points and fees requirements will not be eligible for insurance. This is a proposed rule, which will be open for comment. HUD will handle the points and fees a little differently: Under CFPB, the APR has to be below 150 bps over the average prime rate offer (APOR). Under the HUD proposal, it has to be less than 115 basis points over APOR plus the mortgage insurance premium. This intends to alleviate concerns that higher MIPs are causing loans to breach the threshold. HUD believes MIP will add about 135 bps to APR, so, the punch line is that a loan that is withing 250 bps of APOR would fall within safe harbor.

Banks are abandoning mortgage pre-approvals, according to CNBC and moving towards conditional approvals that usually last about 90 days.