Morning Report: Tax reform passes

Vital Statistics:

	Last	Change
S&P Futures	2657.5	13.5
Eurostoxx Index	388.0	4.0
Oil (WTI)	57.8	-0.6
US dollar index	86.7	0.3
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	3.88

Stocks are higher this morning after tax reform passes in the Senate. Bonds and MBS are flat. 

This week should be pretty quiet with the exception of the jobs report on Friday. We are in the quiet period ahead of the FOMC meeting next week, so we won't be getting any Fed-speak. 

Tax reform passed over the weekend in the Senate. Now comes the reconciliation between the House and Senate versions. The winners in this bill? Banks, as they generally have fewer deductions and end up paying the high statutory rate. The corporate AMT remains at 20%. The losers? Health insurance companies that will see the healthier and younger eschew health insurance because the mandate is gone. Note however that the penalty for not carrying insurance under Obamacare was pretty small to begin with - so it probably won't make that big of a difference when all is said and done. 

One potential wrinkle in the tax reform bill seems to have been fixed, and that is the treatment of mortgage servicing rights. The tax bill would have made mortgage servicing rights taxable upon creation, which would have been negative for smaller independent mortgage originators. It looks like there was an amendment to eliminate this. Like many things in the tax bill, it will take some time to digest what the provisions were.  

Note that while the stock market has cheered tax reform, bonds and currencies are largely ignoring it. Good news for originators who don't need higher rates. It is early days, however. 

Stocks on Friday had a swoon mid-day on an ABC report that Mike Flynn was directed to make contact with the Russians. This was supposedly the smoking gun in the Trump - Russia collusion story. It turns out that Flynn was told to make contact after the election, which is what you would expect to see from an incoming administration in transition. The reporter from ABC was suspended for the story, although it certainly gave stock investors heartburn for a day. 

One columnist is a bear on the builders after tax reform. FWIW, I think that the absolute dearth of inventory will dominate any secondary effects from the tax bill. He notes that household formation did lag for the Millennial generation, and that student loan debt is an issue. That said, the financial difference between renting and buying is still very favorable towards buying given that interest rates are low and rental inflation is high. Second, the economy is accelerating (the Atlanta Fed just took up its estimate for Q4 GDP to 3.5%) and wage inflation seems to be coming back. The article does make a good point: that the homebuilding business is highly cyclical - and during booms P/E ratios will compress. That said, we haven't had a homebuilding boom in 12 years, which is a long, long time.