Morning Report - NAR forecasting home prices to moderate in 2014.

	Last	Change	Percent
S&P Futures	1805.0	3.0	0.17%
Eurostoxx Index	3084.1	21.5	0.70%
Oil (WTI)	92.22	-1.5	-1.56%
LIBOR	0.2376	0.001	0.42%
US Dollar Index (DXY)	80.67	0.059	0.07%
10 Year Govt Bond Yield	2.73%	0.02%
Current Coupon Ginnie Mae TBA	105.234	-0.2
Current Coupon Fannie Mae TBA	104.344	-0.2
RPX Composite Real Estate Index	200.67	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are higher this morning after a mixed bag of economic reports. Due to the Thanksgiving Day holiday, this morning included reports scheduled for tomorrow. Bonds and MBS are down small.

Initial Jobless Claims came in at 316k, the lowest level in 2 months. Durable Goods orders fell 2%, which was more or less in line with Street expectations. Consumer Confidence came in higher than expected. Chicago Purchasing Managers dropped, but not as much as expected. Finally leading economic indicators rose .2%. Bottom line: so much for the theory that the government shutdown affected the economy outside of the luxury car dealerships around Tyson's Corner.

Mortgage Applications fell slightly as rates ticked up a couple of basis points. Surprisingly, refis rose while purchases fell. 

FHFA decided not to change the conforming loan limits, which really isn't much of a surprise. Incoming FHFA Chairman Mel Watt does not have an appetite for reducing the government's footprint in the mortgage market. Whether that means anything for FNMA shareholders (and pref holders) is an open question. Ralph Nader (yes) is agitating in defense of shareholders. 

Again, I think the under-appreciated story is that Mel Watt will in fact be the new FHFA Chairman. This means principal reductions on loans held by F&F, a probable extension (and loosening) of the HARP plan, and definitely more focus on low-income lending. Watt is a CRA guy to the bone. The reason why the MBA has supported his candidacy was because he would presumably usher in a wave of refis. 

Pending Home Sales dropped .6%, according to the National Association of Realtors. This is unsurprising given the government shutdown and the inability of mortgage bankers to get tax returns out of the IRS. The NAR is warning that the new QM rules may depress sales in early 2014. They also forecast home price growth to slow from 11% in 2013 to 5% in 2014. It is an interesting dynamic with tight inventory on one hand, and decreasing affordability on the other. If the job market improves, especially for the Millenials, there will be a wave of pent-up demand that is going to enter the market. Household formation has been severely depressed over the past 6 years, not due to demographics, but due to a lousy economy. Homebuilders have underbuilt for ten years, and foreclosures remain tied up in the courts in the judicial states. And while affordability may have decreased, anyone with gray hair remembers the days when a 4.5% mortgage was considered unheard-of, something that your dad might have been able to get in the 1960s, but a relic of a bygone era.

Morning Report - Harry went nuclear - Watt does that mean?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1802.7	0.3	0.02%
Eurostoxx Index	3068.0	-4.8	-0.16%
Oil (WTI)	94.1	0.0	0.01%
LIBOR	0.2366	0.001	0.32%
US Dollar Index (DXY)	80.865	-0.055	-0.07%
10 Year Govt Bond Yield	2.71%	-0.01%
Current Coupon Ginnie Mae TBA	105.365	0.0
Current Coupon Fannie Mae TBA	104.477	0.1
RPX Composite Real Estate Index	200.67	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Sorry I haven't put one of these out in the last couple of days - been traveling for the holidays.

Markets are flattish on no major news. This week should be relatively dull, with no major economic reports. Bonds and MBS are flat as well.

We have had some economic data over the past couple of days. Pending Home Sales came in at -.6%, which is evidence the housing recovery may be slowing down a bit. That said, prices are still rising at a rapid clip, with the Case-Shiller index up 13.3% on a year-over-year basis and the FHFA House Price Index up 2% for the third quarter.

Building Permits came in at 974k, higher than the Street estimate. We didn't get housing starts today due to the government shutdown. 

One piece of news from last week - Harry Reid "went nuclear" and changed the rules regarding Presidential nominations. Now, nominees cannot be filibustered. Watt does that mean? It means Mel Watt will be the next FHFA Chairman. Mel Watt is basically a CRA guy, so expect a lot of fair-lending scrutiny. Also, he will do everything he can to expand HARP and HAMP. Watt does that mean for originators? Maybe one more refi wave.

Mel Watt wouldn't take a position on the use of eminent domain to handle underwater mortgages, which is pretty much tacit approval of the strategy. Expect a lot of consumer friendly / investor unfriendly stuff to come down the pike. Principal mods are almost a given, although there will be push-back from investors. Not that the government is going to care about hurting hedge funds or mortgage REITs, but there are investors they do care about, namely pension funds. Pension funds have been begging the government not to do this, and this will certainly lead to interesting political dynamics. 

Morning Report - Parsing the FOMC minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1783.8	4.1	0.23%
Eurostoxx Index	3050.5	3.2	0.10%
Oil (WTI)	94.25	0.4	0.43%
LIBOR	0.238	-0.001	-0.21%
US Dollar Index (DXY)	81.08	-0.035	-0.04%
10 Year Govt Bond Yield	2.81%	0.01%
Current Coupon Ginnie Mae TBA	105.3	-0.4
Current Coupon Fannie Mae TBA	104.3	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.38

Markets are higher this morning on no real news. Bonds and MBS continue their post-FOMC minutes sell-off.

Initial Jobless Claims came in at 323k, lower than the 335k street forecast. Inflation at the wholesale level remains muted.

The bond market sold off on the FOMC minutes, as people who had been holding out hope that the September non-move meant QE4EVA were disabused of that notion. The Fed largely dismissed the effects of the government shutdown as "temporary and limited." Given the October jobs report and October retail sales, they are correct - we just didn't see any effect from the shutdown except for a temporary spike in the 1 month T-bill. They again repeated the view that the economy is strengthening, and if things play out as we expect, we should be tapering QE in the next few months. 

Sometimes you have to parse the Fed's characterization of things. On the Fed's scale:

Economic Growth - "moderate"

Inflation - "modest"

Corporate Credit - "robust"

CAPEX - "tepid"

In other words, growth is just ok, inflation is too low, business investment is way too low, and the Fed is beginning to worry about bond investors reaching for yield. This means that QE' days are numbered as the risks of an overheated credit market are becoming larger than the risk of a credit crunch. However, low interest rates are probably here to stay until business investment, inflation, and employment are closer to where the Fed wants to see things.  

One thing to keep in mind is that the Fed's footprint has been increasing in the MBS market as issuance drops. The end of the refi boom meant lower overall MBS issuance but the Fed has been maintaining a constant $40 billion a month. As a percentage of total volume, their footprint has been increasing. You can see it in MBS spreads, which have tightened to Treasuries. While the market has been of the view that the Fed would taper Treasury purchases first, lest it derail the nascent housing recovery, an adjustment in MBS is probably in order. This could mean a double-whammy for mortgage rates - The benchmark (Treasuries) increases in rate, and the spread to Treasuries increases as well. Float at your own peril..

I find it ironic that the Fed worries about people conflating a reduction in QE with a tightening of monetary policy, yet at the same time refers to "fiscal headwinds." Reality Check: fiscal policy is about as loose as it gets, unless you compare it to a completely artificial benchmark of the past 5 years. Post WWII, government spending averaged around 19% of GDP. We have averaged 24% over the past 5 years. We are still at 22%. 5 of the 7 largest postwar deficits as a percent of GDP have been in the past 5 years. Calling a slight reduction in government spending as a "fiscal headwind" makes as much sense as characterizing a reduction in asset purchases from 85 billion a month to 65 billion a month as "tightening monetary policy." It is the dieting equivalent of having a diet coke with your triple whopper value meal.

As home prices rise, negative equity has continued to fall, according to Zillow. The percentage of homes with negative equity dropped to 21% in the third quarter from 23.8% in the previous quarter. Negative equity has been a big reason why existing home sales have been so depressed. Yesterday we saw an annualized pace of 5.12 million, which is slightly below average. IMO, there is pent-up demand that is being held back by negative equity. As that condition rights itself, we should see existing home sales numbers well in excess of historical averages. The mortgage bankers who do purchase activity well will reap the benefit. 

Morning Report - median house price up 12.8% in October

Vital Statistics:

	Last	Change	Percent
S&P Futures	1788.5	3.3	0.18%
Eurostoxx Index	3043.7	-5.5	-0.18%
Oil (WTI)	93.71	0.4	0.40%
LIBOR	0.238	-0.001	-0.42%
US Dollar Index (DXY)	80.64	-0.066	-0.08%
10 Year Govt Bond Yield	2.73%	0.02%
Current Coupon Ginnie Mae TBA	105.6	-0.1
Current Coupon Fannie Mae TBA	104.8	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are higher after retail sales came in a bit better than expected. Bonds and MBS are down small. Later on today, we will get the minutes from the October FOMC meeting. It will be interesting to see if the credibility argument is still being made.

Existing Home Sales dropped to an annualized pace of 5.12 million in October according to the National Association of Realtors. The median house price rose 12.8% from a year ago to $199.500. Days on market increased to 54 and months of supply increased to 5. Inventory on the West Coast is still tight. 

Mortgage applications fell 2.3% during the holiday-shortened week. Purchases jumped 5.8%, while refis dropped 6.5%. Not sure what drove the jump in purchases. Refis as a percent of total number of loans fell to 64.3%. 

Chart: MBA Purchase Index

The Consumer Price Index came in as expected, with a .1% decrease month-over-month and a 1% increase year over year. Ex food and energy, prices rose .2% month-over-month and 1.7% year-over-year. Certainly not enough of an increase to get the Fed worked up about inflation. If anything, they probably think it is too low. 

Retail Sales came in at +.4% for October, which is yet another sign that the consumer (and the economy) basically yawned at the government shutdown. For all the sturm and drang out of guys like Mark Zandi saying the shutdown would lop 1.4% off of 4Q GDP growth, we have yet to see any tangible evidence it so far. Payroll was par for the post-recession course, retail sales were above average.

Housing-related expenditures make up about 17.6% of GDP, according to CoreLogic. This is up slightly from a year ago, but well below the peak of 20.6% in 2005. Part of the reason why this recovery has been so maddeningly tepid has been the absence of housing spending, particularly housing starts. Housing starts used to average around 1.5 million units a year from the sixties to the bubble years. Since then, we have been averaged under half of that. Since housing construction usually leads us out of a recovery, it absence has meant this slog of 1% - 2% GDP growth. Note that the homebuilders were noting mid teens increases in average selling prices amidst a drop in traffic. At some point, they are going to have to pump up the volume in order to meet achieve further growth. And that could be what we have been waiting for. 

I went on Louis Amaya's show yesterday and talked about the mortgage originators, servicers, and some of the REITs. I also discussed the origination business in general and trends going forward. The link is here. 

Morning Report - Fedspeak

Vital Statistics:

	Last	Change	Percent
S&P Futures	1787.7	-1.0	-0.06%
Eurostoxx Index	3059.2	-22.1	-0.72%
Oil (WTI)	92.83	-0.2	-0.21%
LIBOR	0.239	0.002	0.74%
US Dollar Index (DXY)	80.73	-0.098	-0.12%
10 Year Govt Bond Yield	2.69%	0.03%
Current Coupon Ginnie Mae TBA	106.1	0.0
Current Coupon Fannie Mae TBA	105	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are lower this morning on no real news. The employment cost index rose .4% in the third quarter, lower than expected. Bonds and MBS are down small.

Yesterday we had some Fed-speak with Philly Fed Head Charles Plosser urging the Fed to stop playing "this bond buying game by ear" and to tell the markets how much the Fed intends to buy and then to stop once it gets to that level. Plosser also claimed that the recent low inflation numbers were transitory due to lower government spending on things like Medicare. Separately, New York Federal Reserve Chairman William Dudley said he is becoming more optimistic that 2014 and 2015 will be much stronger than 2013. He said the "fiscal drag" of the sequester is abating. Pet peeve - the Fed goes out of its way to say that reducing tapering is not "tightening," yet refers to a tiny reduction in unprecedented postwar fiscal stimulus as "fiscal drag." Even with the sequester, fiscal policy is still highly, highly accommodative and looks miserly only if you compare it to 2009 or 2010.

Good story out of Bloomberg on the pickle the Fed is in with respect to QE.  How to reduce tapering without increasing interest rates. The Fed would really, really like to avoid a repeat of last summer where the 10 year bond increased by 100 basis points. Yellen said in her testimony that the answer was better communication, however as everyone has acknowledged, we are in uncharted territory here. Separately, the Senate Banking Committee is scheduled to vote on Yellen Thursday, which will set the stage for a full Senate vote later this year.

Tomorrow starts the big data dump for the week with a slew of economic reports. We will get the minutes from the October FOMC meeting, existing home sales, retail sales and the consumer price index.

Speaking of retail sales, the holiday shopping season is shaping up to be on the weak side. We have already seen two warnings out of Wal Mart this year, and now Best Buy is saying that promotional activity is going to hurt margins. I keep hearing anecdotal evidence that the retailers are getting promotional already, which is a bad sign ahead of Thanksgiving. On the other hand, the Despot reported better than expected 3rd quarter earnings as people are taking advantage of the increase in house prices to do some remodeling.

Remember the 2012 jobs report ahead of the election where Jack Welch tweeted ""Unbelievable jobs numbers…these Chicago guys will do anything…can't debate so change numbers," He was fired from Fortune over that. Well, it turns out that he may have been correct. Census may have been doing some monkey business with the report.

Small banks asked for some temporary relief from some of the new edicts coming out of CFPB and were given the Heisman. CFPB has said that they will take into account good faith efforts to comply with the rules, but as Rob Chrisman points out, the plaintiffs' attorneys definitely will not.

Morning Report - slowish week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1796.1	2.6	0.14%
Eurostoxx Index	3082.4	27.9	0.91%
Oil (WTI)	93.46	-0.4	-0.40%
LIBOR	0.237	-0.001	-0.31%
US Dollar Index (DXY)	80.67	-0.176	-0.22%
10 Year Govt Bond Yield	2.70%	-0.01%
Current Coupon Ginnie Mae TBA	105.9	0.0
Current Coupon Fannie Mae TBA	104.8	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are up small this morning on no major news. Bonds and MBS are up small.

We don't have a tremendous amount of economic data this week, although we will get the minutes from the October FOMC meeting. Analysts will be looking for clues regarding December. Remember the state of play from the Sep meeting - the Fed didn't think the economic data warranted reducing asset purchases, but some felt like they had to do it anyway, just to maintain credibility. I don't think the credibility argument really applies anymore, although the Fed may do a token move just to say they did it. Also the market seems pretty convinced that any changes will be on the Treasury side, not the MBS side. (That doesn't mean mortgage rates won't go up, they will)

Earnings season is largely over, except for the retailers. I think the consensus is that this year's holiday season will be nothing to get all excited about. We will hear from the Despot tomorrow and Lowe's on Wednesday. Wal Mart is watching closely to see if the obamacare insurance mandates hurt sales.

The future of Fannie and Fredie is still being worked out. The Senate has to balance the demand from liberals that the mortgage market serve all markets equitably and from conservatives that the taxpayer has to be protected. The goal is to wind down F&F and replace them with a re-insurer which will cover losses over 10%. Will Ackman and Fairholme play a role in this? That will be up to the courts.

Eminent Domain:  The bad idea that won't die. Now Irvington, N.J. is considering. How many of these loans were CRA-driven in the first place? I wonder...

Morning Report - Private entities trying to force something with Fan and Fred

Vital Statistics:

	Last	Change	Percent
S&P Futures	1791.2	3.5	0.20%
Eurostoxx Index	3057.4	3.7	0.12%
Oil (WTI)	93.88	0.1	0.13%
LIBOR	0.238	0.000	-0.15%
US Dollar Index (DXY)	80.88	-0.141	-0.17%
10 Year Govt Bond Yield	2.70%	0.01%
Current Coupon Ginnie Mae TBA	105.7	-0.2
Current Coupon Fannie Mae TBA	104.6	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are higher on no real news. Bonds and MBS are down small. 

The Empire Manufacturing Survey came in lower than expected and import prices fell. Industrial Production and Capacity Utilization fell.

Bill Ackman has taken a 10% stake in Fannie Mae and Freddie Mac and may seek talks. This comes on the back of Fairholme's bid to buy the insurance units of Fan and Fred. Fairholme's bid would probably be denied by the government. Many in the financial community view the government's changing the terms of the bailout just as Fannie and Fred became profitable as dirty pool. The government owns 80% of Fannie Mae and Freddie Mac's stock and doesn't have to do anything it doesn't want to, but it certainly cannot relish the thought of dueling in the press with guys like Ackman, Pauson, and Berkowitz. 

Housing affordability fell in the third quarter as prices rose and interest rates increased, according to the NAHB.

Janet Yellen's testimony was pretty much as predicted. She is a dove. Reading the tea leaves, however it appears she is in no rush to begin tapering. Punch line:  I don't know how you could have come out of that meeting thinking "I gotta short some bonds, right here." Here is my longer take on it from yesterday: http://thenadtearsheet.blogspot.com/2013/11/janet-yellen-data-dump_14.html 

Janet Yellen Data Dump

Janet Yellen testified in front of the Senate Banking Committee today and overall, there were few surprises. It is becoming clear that she intends to continue most of the Bernanke Fed's policies, and to be honest I couldn't find anything she would do differently. Her reception was generally good, and the Senators were respectful. Most of the questioning had to do with banking regulation, income inequality, the existence of asset bubbles and the size of the Fed's balance sheet.

Here are some of the discussion points:

On current monetary policy: The Fed is seeking a strong and robust recovery, and must not jeopardize it by removing accommodation too early. She does not want to remove support while recovery is fragile. It is costly to withdraw accommodation or fail to provide adequate accommodation, and the Fed has the tools and the will to withdraw accommodation at the right time.

On asset bubbles: The Fed should attempt to detect asset bubbles when they are forming, however the first line of defense should be regulatory. Monetary policy is a blunt instrument and should be used if other measures aren't working. She won't rule out using monetary policy to address bubbles, but prefers that we use regulatory measures (such as increased capital requirements, higher risk retention requirements, etc) to prevent bubbles from occurring. Separately, she sees little evidence that there are bubbles currently forming in the real estate market.

On banking regulation: Too Big To Fail imposes costs on the economy and should be avoided if possible. The government is making progress in handling too big to fail. They will raise capital standards further and the Fed is looking at requiring banks to issue additional unsecured debt at the holding company level to raise capital. She wants to ensure that the system isn't set up to advantage the larger banks at the expense of the smaller banks.

On communication: In a nod to the volatility of the bond market over the summer, she said that she wants the Fed to communicate as clearly as possible with the markets and will redouble efforts to reduce volatility. This follows Bernanke, and is a departure from the Fed of the past, where they wanted to be as opaque as possible, lest the market anticipate what they were going to do, which would limit the effectiveness.

On QE and the balance sheet: Yellen was asked repeatedly about the effects of QE. She stressed that QE is being done to help the economy, not to help the government finance its deficit. When pressed about the size of the Fed's balance sheet, she was forced to admit it is unprecedented for the US Central bank, but it was not unprecedented compared to other central banks. She acknowledged there are costs and risks to such a large balance sheet, and opposes any sort of Congressional audit of the Fed lest it reduce the Fed's independence.

On income inequality: The Democratic Senators pretty much focused on income inequality, and what could be done about it. Yellen acknowledged that asset prices are rising, and that primarily benefits the rich, however the point of QE is to help the economy recover, and the best thing we can do for the middle class is to have a robust economy. She also acknowledged that QE is doing a number on seniors who rely on interest from safe assets to supplement social security. She views income inequality as a serious problem.

On the dual mandate: She stressed that the Fed must prevent inflation that is too low, and that deflation is a terrible thing. She refused to say what she thought "full employment" was, other than to give a range that it is probably in the 5% to 6% range. She also said that fiscal policy was working at cross purposes with what the Fed is trying to do. She also acknowledged that the reported unemployment rate understates the severity of the problem.

Key Takeaways:

While not admitting it, she seems to indicate the Fed goofed when it talked about withdrawing accommodation last June and causing the subsequent bond market sell-off. Expect the Fed under Yellen to be more communicative and she will probably try and clear up the confusion over tapering QE. It certainly seems she intends to err on the side of caution, provided there is no evidence of asset bubbles and inflation is at or below its 2% target rate.

The comment about full employment being in the 5% to 6% range was interesting as well. We spent many years over the past couple of decades with unemployment under 5% (it actually got below 4% in 2000). Does that mean the Fed will begin to start tightening before it ever gets to that level? Perhaps.

On asset bubbles, she does not hold the view that the Fed had a role in inflating the real estate bubble or the stock market bubble. Those bubbles were due to regulatory failure. It is ironic that the Fed has a problem with "too much money chasing too few goods" - in other words "inflation", but is ok with "too much money chasing too few assets" - in other words a bubble. This is unsurprising; and suggests that the punch bowl might hang around a little longer than expected.

Morning Report - Here's Janet!

Vital Statistics:

	Last	Change	Percent
S&P Futures	1782.4	3.7	0.21%
Eurostoxx Index	3041.1	20.0	0.66%
Oil (WTI)	93.35	-0.5	-0.56%
LIBOR	0.238	-0.002	-0.89%
US Dollar Index (DXY)	81.08	0.156	0.19%
10 Year Govt Bond Yield	2.71%	0.01%
Current Coupon Ginnie Mae TBA	105.4	0.4
Current Coupon Fannie Mae TBA	104.5	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.38

Markets are higher this morning on no real news. Bonds and MBS are flattish. 

Wal-Mart cut its profit forecast due to the weaker economy at the lower end of the income spectrum and increased competition from dollar stores.

Finally, some economic data, although nothing market-moving. Initial Jobless Claims came in at 339k, a touch higher than the 330k forecast. Productivity was 1.9% vs Street expectaions of 2.2% and unit labor costs fell .6%. Later on today, we will get the Bloomberg Consumer Comfort index. Philly Fed President Charles Plosser will be speaking momentarily - he is a hawk so bonds could sell off on his comments.

Janet Yellen is scheduled to appear in front of the Senate Banking Committee today. Here are her prepared remarks. First thing off the bat, no mention of QE or tapering. For the most part nothing in the statement suggests any sort of change in direction from the Bernanke Fed. She intends to continue with the policy of keeping the markets informed of the Fed's thinking, and believes that the dual mandate requires her to boost inflation if it is too low. She is committed to making sure the too big to fail banks are regulated, while at the same time she wants to lower the regulatory burden on small community banks. These sort of hearings are more or less dog and pony shows for the benefit of politicians, not public consumption. They don't ask questions, they make statements. I don't expect anything market-moving to come out of this, but just be aware. While there are a few people who want to use her nomination as leverage to advance other items, she should be confirmed easily. 

Abby Joseph Cohen loves stocks right here..

Bidding wars on the West Coast are beginning to wane as inventory builds. Expect to see this reflected in the home price indices going forward. This could be a welcome development for the mortgage industry as professionals exit and real buyers (the ones who will need a mortgage) enter. 

Morning Report - Mortgage credit beginning to ease up

Vital Statistics:

	Last	Change	Percent
S&P Futures	1755.5	-9.6	-0.54%
Eurostoxx Index	3006.0	-28.7	-0.95%
Oil (WTI)	93.31	0.3	0.29%
LIBOR	0.241	0.001	0.56%
US Dollar Index (DXY)	81.15	-0.041	-0.05%
10 Year Govt Bond Yield	2.73%	-0.04%
Current Coupon Ginnie Mae TBA	105.2	0.2
Current Coupon Fannie Mae TBA	104.2	0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.51

Markets are lower after Atlanta Fed President Dennis Lockhart said a paring of U.S. bond purchases could very well take place next month. Bonds and MBS are up; however.

Mortgage Applications fell 1.8% last week, with purchases down .5% and refis down 2.3%. We had a huge move in rates last week, but it took place on Friday. This week's numbers will probably be horrendous.

Mortgage Credit Availability increased slightly in October, according to the Mortgage Bankers Association. On one hand, some lenders increased lowered their FICO floor, but others restricted cash-out refis. The net effect was a slight increase in credit availability. FWIW, given the end of the refi boom, it looks like bankers realize they have to go our further on the credit curve. Redwood Trust announced on its conference call that it is diversifying away from strictly high quality jumbos and will look at the non-QM space. 

Tri-Pointe Homes reported better than expected sales and earnings, and took up full year guidance. They are buying Weyerhaeuser's home building unit as well. We are starting to see more M&A in the homebuilding space.

Transunion reported that the national average for 60 day delinquencies is 4.09%. The worst states are the judicial states, while the best are the northern mountain / midwest states. They have a cool interactive map where you can see DQ rates by state.

Morning Report 5.4% 30 year fixed rate mortgage by the end of 2014?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1763.2	-4.4	-0.25%
Eurostoxx Index	3039.5	-13.3	-0.44%
Oil (WTI)	95.06	-0.1	-0.08%
LIBOR	0.239	0.000	0.00%
US Dollar Index (DXY)	81.12	0.028	0.03%
10 Year Govt Bond Yield	2.77%	0.02%
Current Coupon Ginnie Mae TBA	105.2	-0.8
Current Coupon Fannie Mae TBA	103.9	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are lower as bond traders come back from a long weekend. Bonds and MBS continue their post jobs report sell-off.

The Chicago Fed National Activity Index ticked up a bit in September, while the 4 month moving average remained negative. 

The NFIB Small Business Optimism Report fell from 93.9 to 91.6. He points out that small business is still struggling. That is an important point to remember - the S&P 500 is not a representative sample of U.S. business. Most of the big S&P names have exposure to fast-growing overseas markets and benefit from all the liquidity being pumped into the system by the world's central banks. Small business is more affected by weak demand domestically. The government shutdown weighed on sentiment as well. 

With not a lot of economic data, Fed-speak becomes more important. Dallas Fed President Richard Fisher told CNBC that the markets should bear in mind that QE cannot last forever. The balance sheet is $4 trillion and there are limits to what the Federal Reserve can do. Minneapolis Fed President Kocherlakota will talk about monetary strategy at 1:00 pm EST and Atlanta Fed President Dennis Lockhart will discuss the economy at 1:50 EST.

Homebuilder D.R. Horton reported earnings in line with estimates. Average selling prices climbed 15% as a combination of tight supply and low inventory allows the builders to hike prices at will. The stock is up in the pre-market. 

NAR's Chief Economist Lawrence Yun is making predictions about 2014. Exiting Home Sales will be flat at about 5.1 million units, prices will rise by 6% and the the 30 year fixed rate mortgage will end the year at 5.4%. New Home construction will increase to meet demand (at some point the builders will stop seeing price increases and will have to pump up volume to achieve growth). Lending standards will continue to ease and an improving job market will increase activity. If cash sales drop as a percentage of total sales, the purchase business should improve, but probably not enough to offset the end of the refi boom.

Morning Report - Jobs day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1741.8	-3.4	-0.19%
Eurostoxx Index	3009.5	-33.4	-1.10%
Oil (WTI)	94.24	0.0	0.04%
LIBOR	0.239	0.001	0.21%
US Dollar Index (DXY)	81.22	0.373	0.46%
10 Year Govt Bond Yield	2.72%	0.12%
Current Coupon Ginnie Mae TBA	105.3	-0.7
Current Coupon Fannie Mae TBA	104.5	-0.7
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Stocks are down in spite of a jobs report that showed a better-than-expected increase in payrolls. Bonds are getting slammed on the number, with the 10-year down 12 basis points.

The economy added 204,000 jobs in the month of October, well in excess of the 120k street expectation. September was revised upward. The government shutdown was expected to depress job growth and it looks like that didn't happen. The unemployment rate ticked up to 7.3% and the labor force participation rate nosedived to 62.8%, the lowest since January of 1978. Average hourly earnings ticked up a tenth of a percent and average weekly hours fell. Overall, the report was a mixed bag, but it does bring back the possibility of a December tapering. Separately, personal Income rose .5% and personal spending rose .2%. 

The chart below shows the labor force participation rate since the days of Ward and June Cleaver. The big increase was due to women entering the workforce, which shows how dramatic the decline has been. Roughly half the gains have been taken away.

Twitter's IPO went swimmingly. It priced at $26 and traded as high as $50. It now sports a 25 billion market cap which works out to 48 times trailing 12 month sales. 

Freddie Mac is doing another risk sharing deal as the GSEs try to lower their footprint in the mortgage market.

Morning Report - Nationstar misses

Vital Statistics:

	Last	Change	Percent
S&P Futures	1771.3	5.7	0.32%
Eurostoxx Index	3097.5	41.1	1.34%
Oil (WTI)	94.12	-0.7	-0.72%
LIBOR	0.239	0.000	0.10%
US Dollar Index (DXY)	81.39	0.903	1.12%
10 Year Govt Bond Yield	2.64%	-0.01%
Current Coupon Ginnie Mae TBA	106.1	-0.1
Current Coupon Fannie Mae TBA	105.1	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are higher after the European Central Bank cut rates and we got a surprisingly strong 3Q GDP report. Initial Jobless Claims fell and came in slightly below expectations. Bonds and MBS are down small.

#Twittergoespublicat26.  Symbol is TWTR for those who want to watch at home. This is a punchy valuation at 12.4 time sales. The offering price was increased from $17 to $26, lets see if they got too greedy on the IPO the way Facebook did.

The advance estimate of 3Q GDP came in at 2.8%, well above the Street expectations of 2.0%. Remember, this is the advance estimate and it will be revised twice. Lately, we have seen the advance estimates come in too high, only to be revised downward - for example the first estimate for Q113 GDP was 2.5% and by the third revision it ended up being 1.1%. Given the differential between the Street and the government, I suspect the number will be revised downward.

There had been chatter in the marketplace that Nationstar (NSM)'s pricing had gotten worse and they were backing out of the market. Well, today, we saw that there was indeed something wrong; as the company missed its earnings estimate in a big way. Pro-forma EPS were $1.08 vs the Street at $1.27. They took down guidance for full year 2013 and 2014. They also announced they are selling their wholesale channel to Stonegate (SGM). Some retail The stock is down 8 bucks (about 16%) pre-open. 

The mortgage REITs have been announcing earnings and for the most part, they were flat on the quarter with regard to book value per share. They have de-leveraged a lot over the past quarter, and I would almost go as far as to say that their MBS (and TBA) selling is probably close to finished. Many are lowering duration by switching to hybrid ARMs and increasing credit risk while lowering interest rate risk. REIT selling has been one of the reasons why secondary margins have been getting hit across the board. 

Fannie Mae reported good earnings per share and will pay Treasury $8.6 billion in the third quarter. The stock is up 6% or so pre-market

Merger mania in the homebuilder space. Earlier this week, Tri Pointe Homes (TPH) announced it is buying Weyerhaeuser's homebuilding unit for $2.7 billion.  Now Toll Brothers (TOL) is in a deal to buy Shapell for $1.6 billion to increase its California exposure. As we have seen, financing availability has been a case of the haves and the have nots. If you are big enough, you can get amazing financing terms.

Morning Report - Housing is overvalued again?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1764.5	8.0	0.46%
Eurostoxx Index	3056.8	20.9	0.69%
Oil (WTI)	93.94	0.6	0.61%
LIBOR	0.239	0.001	0.40%
US Dollar Index (DXY)	80.54	-0.169	-0.21%
10 Year Govt Bond Yield	2.65%	-0.02%
Current Coupon Ginnie Mae TBA	106	0.1
Current Coupon Fannie Mae TBA	105	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.23

Markets are higher this morning on strength in overseas markets. Market darling Tesla Motors (TSLA) fell in premarket trading after missing its quarter. Abercrumble (ANF) was down 9% after missing as well. Bonds and MBS are up small. At 10:00 we will get the Index of Leading Economic Indicators, which shouldn't be a market mover

Tomorrow starts the big data, with GDP and then the jobs report on Friday. The bond market has clearly been spooked by the strong ISM numbers and the language out of the FOMC statement. 

In politics last night, Chris Christie cruised to a win in New Jersey, while McAuliffe won in Virginia. Dinkins got another term in New York City.

Mortgage applications fell by 7% last week as mortgage rates rose 5 basis points. The purchase index fell by 5.2% while the refi index fell by 7.9%. 

Homeprices are 17% overvalued according to Fitch's models, with much of coastal California > 20% overvalued. Their model is based on unemployment, income, rental prices, population levels, housing units, and mortgage rates. Note that the median house price to median income ratio is back above its historical range again. This is based on NAR's median house price, which is probably over-emphasizing the red-hot California markets due to its repeat sale methodology. All real estate is local, and I doubt we are overvalued all that much outside of a few markets like Washington DC, Manhattan, and the hot West Coast markets. In the judicial states (primarily in the Northeast) we have yet to see any sort of meaningful rebound in prices.

The homeownership rate edged up last quarter to 65.3% from 65% in Q2 and is now back to levels we haven't seen since the mid-90s, when HUD began to aggressively push to increase homeownership in this country. 

Interesting article on the fiscal drag (aka "austerity") by the AEI. Without the Fed's stimulus, nominal GDP would have fallen by 2%. Note that most of the drag is coming from the tax increases, not the spending cuts, as the tax hikes have a much higher multiplier than spending cuts. They cite a San Francisco Fed study which found that 90% of the fiscal drag came from increased taxes. This is not surprising as taxes were increased much more than spending was cut, but I found the difference in multiplier interesting. The spending cuts have a .60 multiplier while tax hikes have a 1.8 multiplier. This means that a $1 reduction in government spending reduces GDP by 60 cents, while a $1 increase in taxes reduces GDP by $1.80.  

Morning Report - Bay Area House Prices eclipse bubble highs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1758.0	-5.0	-0.28%
Eurostoxx Index	3032.3	-28.9	-0.94%
Oil (WTI)	94.33	-0.3	-0.31%
LIBOR	0.238	0.000	-0.17%
US Dollar Index (DXY)	80.59	0.032	0.04%
10 Year Govt Bond Yield	2.62%	0.02%
Current Coupon Ginnie Mae TBA	106.3	0.3
Current Coupon Fannie Mae TBA	105.2	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.22

Markets are lower this morning on no real news. Bonds and MBS are down. Later this morning, we will get the ISM non-manufacturing survey and the IBD / TIPP economic optimism report.

SAC Capital and the government reached a deal yesterday - Cohen's SAC Capital and the government settled insider trading charges for $1.2 billion. Cohen personally was never criminally charged. While Steve Cohen avoids jail, the firm will no longer be able to manage money, and once the client funds are withdrawn, no one on the Street will deal with him anymore. So, he can take his billions and go to the beach, I guess. The ultimate arbitrage - Cohen won this game.

The FHFA banned fees on forced placed insurance yesterday. Ultimately this move will result in a little less revenue for servicers.

Did FHA hike premiums just a little too much? It appears so. Wells, Bank of America and TD Bank are now offering loans with as low as a 5% down payment, with a requirement to have PMI until the house has 20% equity (this was the big thing FHA changed - now PMI has to exist for the life of the loan, regardless of the equity). In other words, Wells, B of A, and TD are offering a product similar to old FHA loans. Rising house prices make these worth the gamble. The government has been saying it wants to crowd in private capital; perhaps this is an intended consequence.

The CFPB will hold a hearing in Boston on Wednesday, November 20th at 11:00 am. Richard Cordray will be speaking as well as representatives from consumer groups, industry and the public. These hearings are usually used to announce new initiatives, and we may get the TILA-RESPA integrated disclosures final rule.

What is driving the growth of home prices in the Bay Area? Chinese money. Bay Area house prices are at all time highs, yes, even higher than the bubble years. Roughly 7% higher.

Morning Report - a 2.25% 10 year by the end of the year?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1755.0	4.0	0.23%
Eurostoxx Index	3062.3	-5.7	-0.18%
Oil (WTI)	95.64	-0.7	-0.77%
LIBOR	0.238	-0.004	-1.76%
US Dollar Index (DXY)	80.53	0.338	0.42%
10 Year Govt Bond Yield	2.58%	0.02%
Current Coupon Ginnie Mae TBA	106.2	-0.3
Current Coupon Fannie Mae TBA	105.2	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.15

Markets are up as Twitter increases the price of its IPO from $17-$20 to $23-$25. Bonds and MBS are up as well.

This week promises to be a big one with Friday's jobs report. The bar is set pretty low - nonfarm payrolls are expected to increase 125k. Given that this report will include the government shutdown, you probably should put an asterisk next to it, but all jobs reports are huge these days. The unemployment rate is expected to tick up to 7.3% from 7.2%. The ADP report, which forecasts the same payroll number came in at 130k, weaker than the 150k estimate. Given the shutdown, I would expect a good jobs report to be bond bearish and a bad jobs report to not necessarily be bond bullish. Weakness would be taken as par for the course given the shutdown, and strength in spite of the shutdown would bring a December tapering back into the picture.

Deutsche Bank is out with a gutsy call in Treasuries - a 2.25% yield on the 10-year by the end of the year. The reason? The economy isn't growing as strongly as forecast. That said, Friday's ISM report was reasonably strong, but overall consumer confidence has been dropping, and we didn't see blockbuster numbers out of the retailers for back-to-school. It certainly makes you wonder what the Fed is looking at when they talk about a strengthening economy. Remember, however the Fed has been consistently high in its economic forecasts for GDP growth. The last time rates were at that level, the Bankrate average 30 year fixed rate mortgage was below 4%. 

Homebuilder Tri Pointe Homes is making a big bet on housing construction with its purchase of timber conglomerate Weyerhaeuser's home-building division. In many ways, this deal simply recognizes the reality that there is a huge advantage to size for the builders. On one hand, you have small builders who are having difficulty borrowing money, and on the other hand the big builders are having money thrown at them by the market. Exhibit (a) for that was KB Home's (KBH) convertible bond deal earlier this year. 10 year paper, 1.375% coupon, initial conversion premium at 50%. 

71% of single family homes were built before 1990, according to RealtyTrac's Aging Home Analysis. This speaks to the merger mentioned above (we have underbuilt for 6 years) and represents an opportunity for 203k loans. 

Morning Report - Mel Watt doesn't get the vote

Vital Statistics:

	Last	Change	Percent
S&P Futures	1755.0	4.0	0.23%
Eurostoxx Index	3062.3	-5.7	-0.18%
Oil (WTI)	95.64	-0.7	-0.77%
LIBOR	0.238	-0.004	-1.76%
US Dollar Index (DXY)	80.53	0.338	0.42%
10 Year Govt Bond Yield	2.58%	0.02%
Current Coupon Ginnie Mae TBA	106.2	-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	4.15

Markets are up this morning on no real news. The Markit PMI fell in October, but came in a little better than consensus. Bonds continue their post-FOMC sell-off with the 10 year yielding 2.58%. MBS are down a few ticks.

Mel Watt failed to garner the 60 votes needed to move to a final vote, so he will probably end up withdrawing his name for consideration to run FHFA. Watt was considered to be a little too political and there were grave doubts he would be working in the best interests of the taxpayers. Moody's Chief Economist Mark Zandi has been mentioned as a possible nomination, however he has been a vocal proponent of principal forgiveness and that will be an issue.

The thing to keep in mind about principal reduction is that there are two losers in this situation - the taxpayer who obviously backstops the insurance and the investors who own the paper. The investors who own these mortgage backed securities are mainly pension funds, and they have been quietly urging their representatives in Washington to not go the mass forgiveness route. Think about things from a pension fund's perspective - the expected rate of inflation for their liabilities has been growing a lot faster than the paltry rate of return they are getting on their assets in this QE-manipulated environment. The dirty little secret of many of these funds is that they are making, shall we say, optimistic assumptions about the expected rate of return on their asset in order to claim they are in fact solvent. Capital losses (even on insured MBS) will happen, which will push them even deeper in the hole. Many of these plans are government / union and many politicians have their own retirement in these plans. So that is a look at the behind-the-scenes issue with the whole FHFA head. 

Politically, Acting Chairman Ed DeMarco may in fact make a convenient target for the Left, who can rail against his refusal to entertain principal mods while that the same time offering assurances to their state pension funds that nothing will change. And the Republicans get to do the dirty work. A win all around. 

One note, CBO did conduct a study that showed that a mass principal forgiveness program would save the government money, primarily through increased economic growth, however that result depends on the government getting it right in terms of crafting a policy that would not cause a wave of strategic defaults. That is the $10,000 question.

John McCain and Lindsey Graham are going to hold up the nomination of Janet Yellen unless they get more details from the Administration over the Benghazi attacks. In spite of this, Yellen will get confirmed. I don't anticipate the political sausage-making will affect the bond market at all.