Morning Report - Preparing for life after Fan and Fred

Vital Statistics:

	Last	Change	Percent
S&P Futures	1860.0	-5.2	-0.28%
Eurostoxx Index	3052.9	-39.6	-1.28%
Oil (WTI)	98.3	-1.7	-1.73%
LIBOR	0.234	0.001	0.34%
US Dollar Index (DXY)	79.66	-0.073	-0.09%
10 Year Govt Bond Yield	2.74%	-0.03%
Current Coupon Ginnie Mae TBA	105.6	0.1
Current Coupon Fannie Mae TBA	104	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.35

Markets are weaker this morning on no real news, except for general concerns about overseas economic growth. Bonds and MBS are up

Mortgage Applications fell 2.1% last week as purchases fell .5% and refis fell 3.1%. Mortgage rates rose five bps last week, according to the MBA. Refi activity dropped to 56.7% of all mortgages.

The Senate Banking Committee released the broad outlines of a plan that revamp the nation's housing finance system and they plan on releasing more details in the coming days. The biggest change is that the government moves into a re-insurance role with private capital bearing the first 10% severity risk. It also eliminates the affordable housing mandates out of Fannie and Fred, but requires a fund paid for with industry fees that would go toward ensuring affordable housing. The government's continued presence would maintain the 30 year fixed rate mortgage, which Americans consider their birthright. 

The government's big problem is that Fannie and Fred had historically undercharged for their insurance product. In order to attract (or "crowd in") private capital, they have to price as if they have no government backing or subsidy. Ex FHFA Chairman Ed DeMarco raised g-fees, which Mel Watt has put on hold. If they charge too little for insurance, you won't see private capital enter the market, and if they charge too much, the industry and affordable housing advocates begin to complain. The government really has to walk a fine line with this. 

The stocks of Fannie and Fred got clobbered yesterday, and are down big pre-market. That said, Fannie Mae still sports a  $23 billion market cap, which IMO is a hefty price for what is simply a litigation lottery ticket at this point.

Bill Gross has been scaling out of MBS. The PIMCO Total Return Fund cut its holdings of MBS from 36% to 29%. Bill has also been shortening duration, taking the fund's effective duration from 5.1 years to 4.7 years. This means Bill is piling into shorter-dated, lower return bonds, which is a bet you would make if you think interest rates are going up faster / quicker than the market consensus. Bill has been making bullish statements in the press on bonds, so this is yet one more instance of Bill talking his book. Don't pay attention to what Bill says, watch what he does. 

The Fed is close to ditching its 6.5% unemployment threshold for considering a rate rise and will substitute less granular language in its FOMC statement next week. This is interesting because Yellen had come out very much in favor of more communication out of the Fed, not less. The problem of course is that the unemployment rate has been falling, but the jobs market is still weaker than the headline numbers suggest. They want to de-emphasize the 6.5% numerical target and embrace a more holistic view of the labor market that includes the labor force participation rate, underemployment rate, etc - factors that can't be captured if you simply focus on the unemployment rate.