Morning Report: New 30 year mortgage proposal

Vital Statistics:

	Last	Change
S&P Futures	2445.8	3.3
Eurostoxx Index	373.4	-0.7
Oil (WTI)	47.5	-0.4
US dollar index	85.6	-0.1
10 Year Govt Bond Yield	2.17%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are up this morning after Harvey pounded Houston. Bonds and MBS are up.

About 10% of US gasoline refining capacity is offline due to Harvey. We could see higher gasoline and heating oil prices as a result. 

We have a big week of economic data with GDP, personal spending and incomes, PCE inflation, and the jobs report. The December Fed Funds Futures are pricing in a 61% chance of no change in the Fed Funds rate at the December meeting. 

Janet Yellen and Mario Draghi defended the post-crisis regulatory framework and suggested only "modest" changes to it. Janet Yellen's term expires early next year, and many are wondering who Trump will nominate to replace her (or whether she will be re-nominated). Gary Cohn is the name most mentioned as a replacement. With regards to Dodd-Frank, most of the regulatory changes will probably concern the regulatory burden for smaller community banks and finding a way to give them some relief. A change in the structure of the CFPB would also be a possibility. 

Speaking of the CFPB, there is talk that Director Cordray will be resigning soon in order to run for Governor of Ohio. 

The Fed lays out a proposal for a new type of 30 year fixed rate mortgage - the COFI (cost of funds index) mortgage. It is a 30 year fixed rate mortgage, however it has restrictions on refinancing and equity extraction. Essentially, it is an ARM from the banks' standpoint, and a 30 year fixed from the borrower's standpoint. The payment never changes, however the amount of the payment that goes to principal and interest varies with interest rates. When rates fall, the interest component of the fixed mortgage payment falls as well, and that extra payment is applied to the principal, which creates a reservoir of home equity. When rates rise, the interest component increases, and the home equity component falls. If the reservoir is empty (i.e. no home equity to draw upon), the bank covers it. Essentially the idea would be to replace something that is difficult to hedge (prepayment risk) with something easy to hedge (basically option-like interest rate risk). The added equity build will also limit risk to the government, which still guarantees the credit risk.  Interesting idea, however the industry will probably not like it, as it reduces refinancing opportunities. I suspect these bonds will also be difficult to securitize as well.