Morning Report - Existing Home Sales hit peak of year

Vital Statistics:

	Last	Change	Percent
S&P Futures	1910.9	11.0	0.58%
Eurostoxx Index	2975.1	47.8	1.63%
Oil (WTI)	83.74	1.0	1.25%
LIBOR	0.231	0.001	0.26%
US Dollar Index (DXY)	85.13	0.176	0.21%
10 Year Govt Bond Yield	2.22%	0.03%
Current Coupon Ginnie Mae TBA	104.8	-0.1
Current Coupon Fannie Mae TBA	103.7	-0.1
BankRate 30 Year Fixed Rate Mortgage	3.93

Stocks are up this morning, following Euro markets as they speculate on added stimulus measures out of the ECB. Bonds and MBS are down.

Mel Watt addressed reps and warranties concerns at the MBA conference. He acknowledged uncertainty over putback risk is encouraging lenders to put overlays on Fan and Fred loans, which is excluding many borrowers who should be eligible for a conforming loan. In order to encourage lenders to lend through the entire spectrum of Fannie's tolerances, rules regarding putback risk will be tightened up. Life of loan exclusions (in other words putback risk for the life of the loan) will be clarified. Watt didn't go as far as to announce a new 97 LTV Fannie loan, but he did say FHFA was working withe GSEs to develop them. 

AbbVie and Shire have abandoned their corporate inversion deal based on possible tax law changes.

Existing Home Sales bounced back in September to 5.17 million, the highest pace this year. Sales increased everywhere but the Midwest. The median house price was $209,700, up 5.6% for the year. Total housing inventory fell 1.3% to 2.3 million homes, which represents a 5.3 month supply. 6 months supply is considered a balanced market. All cash sales fell to 24% in September, down from 33% a year ago. 20% cash buyers is more or less the historical norm. 

The median home price to median income ratio is now 209,700 / 53,589 = 3.9x. Historically, that number has been in a range of 3.2 - 3.6. So house prices could be vulnerable or stagnate until we start seeing wage inflation. 

Mortgage REIT CYS Investments reported earnings last night. In spite of a small bond market rally, they still experienced mark-to-market hits on their portfolio of MBS as these securities cheapened on fears of a Fed rate hike. Since TBAs correlate with existing RMBS, this means TBAs underperformed as well. This is further evidence that mortgage rates simply did not correlate with Treasuries very strongly on the bond market rally this summer. So, if a borrower says "I saw on CNBC that interest rates were going down in a big way, how come your rates aren't falling as well?" you can explain that mortgage rates have been lagging the bond market rally all summer, and the securities that set mortgage rates simply haven't been performing as well as Treasuries. CYS did not attribute this to the end of QE however - in spite of the drop in Fed buying, the lack of volume as refis dried up has been the dominant effect, and there is strong demand for whatever RMBS issuance remains.