Morning Report: Congress cracks down on serial VA refinancings

Vital Statistics:

	Last	Change
S&P Futures	2769.0	-0.5
Eurostoxx Index	397.5	0.2
Oil (WTI)	63.2	-0.6
US dollar index	85.3	-0.2
10 Year Govt Bond Yield	2.58%
Current Coupon Fannie Mae TBA	101.75
Current Coupon Ginnie Mae TBA	102.875
30 Year Fixed Rate Mortgage	4.01

Stocks are flat this morning on no real news. Bonds and MBS are down small.

Inflation on the consumer level continues to be under control, according to the Consumer Price Index. The headline number was up 0.1% MOM and 2.1% YOY. The core rate, which excludes food and energy) was up 0.3% MOM and 1.8% YOY. Housing and medical costs drove the increase in the rate. 

Retail Sales were up 0.4% in December, which was a touch below expectations. The control group was up 0.3%, which was in line with expectations. The MOM numbers may seem low, however November was exceptionally strong. 

Robert Kaplan said the Fed has upped their 2018 economic forecast to 2.5% - 2.75%. The current estimate is at 2.5%. After having been too high in their GDP estimates for 9 years, the Fed finds itself in the position of consistently being too low. 

The two year bond yield topped 2% for the first time since the financial crisis. The 2 year is much more sensitive to the Fed Funds rate than the 10 year is, and is part of the reason why we are talking about a yield curve flattening and what it means. A common narrative these days is that the yield curve is flattening (that is, the difference between long-term rates and short-term rates is falling) and that signals a recession. That could be the case if the Fed tightens more aggressively than they are now, however they are going at such a slow pace that it probably won't knock the economy into a recession. Plus there is so much pent-up demand from the last 10 years that a lot of the necessary pieces for a recession simply aren't in place. 

Where do we stand with the market's prediction of rates? The Fed Funds futures are now pricing in a 73% chance of a 25 basis point hike in March. This is up from 59% a month ago. 

Wells Fargo reported higher earnings, however part of that was due to a one-time benefit due to the tax bill. On the mortgage side, originations came in at $53 billion for the fourth quarter, down 10% QOQ (largely explained by seasonality) and down 26% from a year ago. Margins were up a basis point from the third quarter and were down 43 basis points from a year ago. 

The Administration and the Senate continue to work on hammering out a deal on funding the government. The current continuing resolution expires in a week, and Democrats are holding out for an immigration deal in order to sign off on a new CR. It is still too early to predict a shutdown, but remember that a shutdown will affect the IRS and getting tax transcripts. Plan accordingly. 

Washington is looking to do something about serial VA refinances.  Many veterans were refinancing their mortgages (and adding to their principal by folding in the funding fee) for a de minimus drop in monthly payment. The Protecting Veterans from Predatory Lending Act of 2018 will make the following changes to VA lending. 

• A lender may only submit a refinance loan for VA insurance if it certifies that all fees associated with the refinance would be recouped through lower monthly payments within three years;
• A lender may only receive VA insurance for a refinance loan if the refinance loan has a fixed rate 50 basis points lower than the earlier fixed-rate loan (or 200 basis points lower if the new refinanced loan is an adjustable rate mortgage).
• A lender may only receive VA insurance or get a Ginnie Mae guarantee for a refinance loan if the refinance comes more than six months after the initial loan.   

At the margin, this legislation is bullish for Ginnie Mae TBAs and Ginnie Mae servicing, which should translate into better FHA and VA rates going forward.