Morning Report - Beginning of the secular bear

Vital Statistics:

	Last	Change	Percent
S&P Futures	1645.7	-7.9	-0.48%
Eurostoxx Index	2781.4	-17.8	-0.64%
Oil (WTI)	92.79	-0.8	-0.88%
LIBOR	0.275	0.001	0.22%
US Dollar Index (DXY)	83.15	0.108	0.13%
10 Year Govt Bond Yield	2.10%	-0.01%
Current Coupon Ginnie Mae TBA	102.6	0.4
Current Coupon Fannie Mae TBA	101.1	0.1
RPX Composite Real Estate Index	200.6	0.4
BankRate 30 Year Fixed Rate Mortgage	3.9

Markets are weaker this morning after personal income and personal spending came in weaker than expected. Bonds and MBS are up small.

University of Michigan Consumer Confidence increased to 84.5 from 83.7 the week before.  

Goldman believes the bond market sell-off is for real. They are forecasting a 2.5% 10 year by the end of the year. The sell-off has been global, as Japanese Government Bonds, UK Gilts, German Bunds have also been hit. FWIW, Bill Gross of PIMCO called it 3 weeks ago when he tweeted "The secular 30-yr bull market in bonds likely ended 4/29/13" 

Morning Report. Fannie Mae comes back to Earth

Vital Statistics

	Last	Change	Percent
S&P Futures	1652.6	5.6	0.34%
Eurostoxx Index	2807.2	20.6	0.74%
Oil (WTI)	92.59	-0.5	-0.58%
LIBOR	0.275	-0.001	-0.40%
US Dollar Index (DXY)	83.7	0.037	0.04%
10 Year Govt Bond Yield	2.14%	0.02%
Current Coupon Ginnie Mae TBA	101.8	0.4
Current Coupon Fannie Mae TBA	100.8	-0.2
RPX Composite Real Estate Index	200.6	0.4
BankRate 30 Year Fixed Rate Mortgage	3.94

Markets are higher this morning in spite of a 5.2% sell-off in the Nikkei 225 last night. Q1 GDP was revised downward to 2.4% from 2.5%. Initial Jobless Claims rose to 354,000. Bonds and MBS are down small.

Yesterday was the first relatively stable day in the Treasury markets in quite some time, notwithstanding the major sell-off in early Asian trading yesterday morning. Today we are more or less in the same place. 

The CFPB has tweaked the Ability to Repay rule a tad, with new guidance for mortgage broker compensation and exempting small lenders that focus on low-income lending. These amendments will take effect Jan 1, 2014.

It is tempting to think the the U.S. Treasury yield is being driven by differing interpretations of Bernake's words. And maybe some of it is. But we are seeing a global sell-off in G7 sovereign debt that started at about the same time.  The US Treasury yield is up 54 basis points since May 1. UK Bonds are up 26 basis points. Japanese Government bond yields are up 31 basis points. That is in spite of a new quantitative easing program by the Bank of Japan - think about that! German Bund yields are up 30 basis points. Everyone started selling off more or less on May 1. My point is that there seems to be more going on in US Treasuries than a simple question over when the Fed is going to start tapering QE. Given the move in world stock markets, it feels like a very big investor (probably a sovereign wealth fund) is doing an asset allocation trade out of G7 debt and into stocks. 

Remember Fannie Mae, which was more or less given up for dead? Well, it has rallied about fourteenfold since mid March. It sold off had yesterday, but you can't deny the move. 30 cents to an intraday high of $5.44. This has been one big speculative toy for the past couple of months, while the big hedge funds are in the prefs. If Fannie Mae survives in some way, shape, or form those bets could pay off. However Fannie Mae is simply sending all of its profits to the government, which is not counting them against money it owes. (They changed the rule last Fall, right before Fannie Mae started turning a profit - what a coincidence). Oh, and before you dismiss it as just another "penny stock" - it sports a market cap of $16.7 billion. Anyway, play in this sandbox at your own risk.

Chart:  Fannie Mae (FNMA)

Morning Report - Foreclosures drop again.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1646.2	-8.4	-0.51%
Eurostoxx Index	2794.0	-41.9	-1.48%
Oil (WTI)	94.43	-0.6	-0.61%
LIBOR	0.276	0.003	1.10%
US Dollar Index (DXY)	83.58	-0.516	-0.61%
10 Year Govt Bond Yield	2.14%	-0.03%
Current Coupon Ginnie Mae TBA	101.7	0.3
Current Coupon Fannie Mae TBA	100.6	0.3
RPX Composite Real Estate Index	200.2	0.0
BankRate 30 Year Fixed Rate Mortgage	3.88

Bond market volatility is the theme of the day (yet again). The 10-year bond yield jumped to 2.23% this morning in late Asian hours. No real news drove the decline, just the general fear that the Fed will start paring back QE sometime this fall.

Lender Processing Services reported that home prices are up 1.4% month-over-month and 7.6% year over year. It does appear that the rally is becoming more broad, as states other than the usual suspects are showing the biggest gains. This time around, Georgia leads the way as Atlanta prices increased 2.6% MOM. Arizona was actually in the bottom 10, indicating that perhaps the big professional-driven rally off the bottom has been played out.

CoreLogic reported that foreclosures are down 16% YOY and 1% MOM. 52,000 foreclosures were completed in April 2013. In states like Arizona and California, the year-over-year decline is over 50%. The shadow inventory of homes in some state of foreclosure is 1.1 million, compared to 1.5 million a year ago. The judicial states of FL, IL, NJ, NY, and CT still have some work to do, but the rest of the states have largely completed their foreclosures.

The sell-off in bonds has created a massive jump in mortgage rates. Now, as the mortgage REITs hedge their books, we are approaching another wave of selling in TBAs as MBS investors hedge their convexity and REITs de-lever. This is going to push mortgage rates even higher. If rates stay here, we should be best-exing into a 3.5% coupon pretty soon.

Morning Report: Case-Schiller up 10.9% YOY

Vital Statistics:

	Last	Change	Percent
S&P Futures	1664.4	13.8	0.84%
Eurostoxx Index	2832.8	37.8	1.35%
Oil (WTI)	95.11	1.0	1.02%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	83.75	0.045	0.05%
10 Year Govt Bond Yield	2.05%	0.04%
Current Coupon Ginnie Mae TBA	102.8	-0.3
Current Coupon Fannie Mae TBA	101.4	-0.3
RPX Composite Real Estate Index	200.2	0.3
BankRate 30 Year Fixed Rate Mortgage	3.75

Markets are higher after equity markets rally worldwide. Bonds and MBS are down again.

The S&P Case-Schiller House Price Index rose 1.12% MOM and 10.87% YOY in March. This is the biggest gain since April 2006. Gains were widely distributed, with Phoenix rising 22.5% and New York rising 2.6%. 

Chart:  S&P / Case-Schiller Home Price Index:

Jon Hilsenrath of WSJ discusses the Fed's expectations management issue. The latest FOMC statement inserted language stating that the Fed was ready to increase or decrease purchases as conditions change. During Bernake's testimony, he refused to rule out tapering QE by Labor Day. It feels as if the market expectations and the Fed are not in sync at the moment, which leads to interest rate volatility.

Investors are rotating out of bonds and into balanced funds. Balanced funds will allocate between stocks and bonds and can trade tactically. This could explain some of the "risk on / risk off" behavior we have been seeing. The net result of this could be greater interest rate volatility going forward. After Ben Bernake's comments last week about ending QE this fall, we saw massive selling in the Treasury futures market (something like 250 contracts being sold in a couple minutes) as stocks rallied. If interest rate volatility is the theme of the market going forward, it makes sense to lock and not float. 

Title Insurer Fidelity National Financial (FNF) is buying outsourcing / data firm Lender Processing Services (LPS) in a $2.9 billion cash and stock deal. 

Morning Report - New Home Sales increase

Vital Statistics:

	Last	Change	Percent
S&P Futures	1641.0	-9.0	-0.55%
Eurostoxx Index	2765.2	-11.6	-0.42%
Oil (WTI)	93.17	-1.1	-1.15%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	83.71	-0.094	-0.11%
10 Year Govt Bond Yield	2.01%	-0.01%
Current Coupon Ginnie Mae TBA	103.1	0.1
Current Coupon Fannie Mae TBA	101.9	0.1
RPX Composite Real Estate Index	200.2	0.3
BankRate 30 Year Fixed Rate Mortgage	3.77

Markets are lower on no real news. Today will be basically a throw-away as the bond market closes at 1:00 pm and most of the Street will be on the LIE by noon. Bonds and MBS are up small

Durable Goods orders increased 3.3% in April. Ex transportation, they increased 1.3%. Good numbers.  That said, the manufacturing sentiment reports out of the various Fed banks have been subdued, to say the least. 

New Home Sales jumped to a seasonally adjusted annual rate of 454,000. This is 2.3% above the revised March rate and 29% above last year. The median sales price was $271,600 and the average sales price was $330,800, both big increases, indicating more activity is happening at the high end. Strangely, McMansion builder Toll Brothers' earnings report was on the weaker side compared to its competitors. 

So far, the narrative regarding Bernake's statements in front of Congress has been that the Fed is considering   tapering QE sometime this summer. My take is that is wrong, but we are seeing bear market behavior in bonds right now. Rallies are brief and quickly sold, while sell-offs seem to gather steam. 

Morning Report: The Bernank inadvertently whacks the bond market

Vital Statistics:

	Last	Change	Percent
S&P Futures	1639.5	-16.1	-0.97%
Eurostoxx Index	2766.1	-68.9	-2.43%
Oil (WTI)	92.66	-1.6	-1.72%
LIBOR	0.273	-0.001	-0.37%
US Dollar Index (DXY)	83.92	-0.433	-0.51%
10 Year Govt Bond Yield	2.00%	-0.04%
Current Coupon Ginnie Mae TBA	103.2	0.2
Current Coupon Fannie Mae TBA	101.8	0.1
RPX Composite Real Estate Index	199.5	0.5
BankRate 30 Year Fixed Rate Mortgage	3.73

Markets are lower again after yesterday's massive reversal. Initial Jobless Claims came in at 340,000 down 23k from the week before and 5k below street estimates. Bonds are up about six ticks, which is surprising given that the SPUs are down 16.

Yesterday's moves in the stock and bond markets have a lot of people scratching their heads. I'll give you my explanation:  Yesterday's reversal came during Bernake's testimony, which I was listening to in the background. Bernake started his prepared remarks basically saying that the Fed would be guided by data, and noted that they feel like in hindsight, that they stopped QEI and QEII a little too early. As long as inflation remained below their target rate they felt like they had no reason to stop asset purchases. Bonds rallied early and the yield dropped to 1.89%. Then, during the Q&A, one of the questioners tried to pin down Bernake on when they would slow or stop asset purchases. Bernake repeated that the Fed would be guided by the data. When they see a materially better employment market, they will think about tapering. The questioner then asked if that could be before Labor Day. Bernake replied that if the data improves materially, then sure. Bernake's body language was "well, it is a theoretical possibility that the labor market could improve dramatically over the summer and I am not going to rule anything out." The bond market however focused on the statement that the Fed could end QE by Labor Day and sold off. Apparently a big asset allocation trade went through right about the same time where someone sold Treasury futures to buy stocks and that exacerbated the move. The S&P 500 turned on a dime about the same time and did a 40 point intraday swing. 

The bond market is just heavy, as it has been since it turned on a dime in the first week of May. Any rally is sold. This is traditional bear market behavior, and I don't know how long it lasts, but until the market feels different, your borrowers are rolling the dice if they are floating. Note Bene: Bear market rallies are fast and furious, so you should expect increased volatility in rates. In both directions. 

The National Association of Realtors reported that existing home sales rose to an annualized pace of 4.97 million in April. Total Housing Inventory rose 11.9% at the end of April to 2.16 million units, a 5.2 month supply. Six months' inventory is considered "balanced."  The median existing home price increased to 192,800 in April, up 11% from a year ago. One thing to note is that the outsized activity on the West Coast and places like Phoenix is distorting the median price indices. Most of the activity is concentrated in a handful of hot market where prices are rising rapidly after bottoming last year. The rest of the country is not experiencing that at all. Home prices are up in the low / mid single digits elsewhere. 

In contrast to the NAR report, the FHFA released its monthly home price index report, which shows prices rose 1.9% in Q1 and are up 6.7% year over year. The FHFA report looks at the prices of houses with mortgages backed by Fannie Mae and Freddie Mac, which means that a lot of the activity on the West Coast is excluded, because it ignores cash transactions. The FHFA report is more of a "central tendency" report.

Morning Report - The Bernank speaks at 10:00 EST

Vital Statistics:

	Last	Change	Percent
S&P Futures	1669.5	3.9	0.23%
Eurostoxx Index	2817.3	-4.3	-0.15%
Oil (WTI)	95.92	-0.3	-0.27%
LIBOR	0.274	0.000	-0.13%
US Dollar Index (DXY)	83.91	0.044	0.05%
10 Year Govt Bond Yield	1.93%	0.01%
Current Coupon Ginnie Mae TBA	104.2	0.1
Current Coupon Fannie Mae TBA	102.8	0.0
RPX Composite Real Estate Index	199	0.2
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are up again on no real news. Bonds and MBS are more or less flat

Mortgage Applications fell 10% last week as the recent rise in interest rates has taken its toll. The refi index was down 12% while the purchase index was down 3%. It appears that the 10 year has found a level here, at least for the short term.

McMansion builder Toll Brothers (TOL) reported better than expected earnings this morning. Revenues increased 38%.  Contracts increased 57%. ASPs were up huge - 16%. Backlog was up 69%. Toll's results more or less mirror what the other homebuilders have reported, although the growth was larger in the builders that focus on starter homes and first move-up buyers. 

We had a lot of Fed-speak over the past couple of days. New York Fed President William Dudley said that it will take 3 to 4 months to make a determination over whether the economy is strong enough to stand an end to QE. St. Louis Fed Head James Bullard also said that purchases should continue. The Fed is concerned about the sequester's effect on the economy, which will mainly be felt over the summer. Finally, the Bernank is scheduled to testify before Congress at 10:00. The minutes of the April 30 meeting will also be released today. 

The New York Fed released its mortgage backed securities purchase advice recently. In spite of the hike in interest rates, the MBS purchases stayed the same:  3 million MBS a day, of which the lion's share is conforming (something like 80%). You would think the Fed would be more aggressive when rates increase and back off when they fall, but that isn't what they are doing. 

It looks like Mel Watt faces an uphill climb to confirmation. The choice is seen as 100% political, while most Republicans think we need a technocrat who understands finance. The fear is that the partisan wrangling and posturing over Watt will poison the well so much that any sort of bipartisan housing bill will be more or less impossible. Principal mods aside, that would probably mean the end of HARP 3.0 which would extend HARP eligibility to late 2009 and 2010 vintages.

Morning Report - Slow news day

Vital statistics:

	Last	Change	Percent
S&P Futures	1664.6	0.0	0.00%
Eurostoxx Index	2811.6	-12.9	-0.46%
Oil (WTI)	96.49	-0.2	-0.23%
LIBOR	0.274	0.001	0.37%
US Dollar Index (DXY)	84.03	0.294	0.35%
10 Year Govt Bond Yield	1.96%	0.00%
Current Coupon Ginnie Mae TBA	103.7	-0.1
Current Coupon Fannie Mae TBA	102.3	-0.1
RPX Composite Real Estate Index	198.8	0.6
BankRate 30 Year Fixed Rate Mortgage	3.67

Perfectly flat - the S&P 500 futures that is.  Perfect description of today, with no economic data. Bonds and MBS?  More or less flat as well.

Tangentially related to housing and the mortgage business - the Despot beat earnings.

The Chicago Fed National Activity Index showed manufacturing activity decelerated in April. The 3 month moving average is more or less flat, indicating we are growing exactly on trend. For once, employment was the bright spot of the report.

Is credit finally starting to loosen up? One clue is found in the Professional Risk Managers' International Association survey of risk managers. In home delinquencies, the vast majority expect delinquencies to stay the same or fall, but almost 40% expect them to fall. Less credit headaches gives banks the leeway to go out further on the risk curve. Another indication can be found in the latest Ellie Mae Origination Insight Report, where the average FICO score for a closed loan has fallen from 750 in November 2012 to 742 in April. The big question is whether originators are going to be willing to step out of the QM box, or will the landscape continue to be pristine jumbo loans and conforming / ginnie loans?

With the IRS scandal gaining steam, Obama got his "look, a squirrel" gift, at least momentarily. A new Senate report shows Apple's international arm paid no income taxes to anyone.

Morning Report - the week ahead

Vital Statistics:

	Last	Change	Percent
S&P Futures	1660.1	-2.9	-0.17%
Eurostoxx Index	2806.9	-11.1	-0.39%
Oil (WTI)	95.7	-0.3	-0.33%
LIBOR	0.273	-0.001	-0.18%
US Dollar Index (DXY)	84.01	-0.240	-0.28%
10 Year Govt Bond Yield	1.92%	-0.03%
Current Coupon Ginnie Mae TBA	104.2	0.2
Current Coupon Fannie Mae TBA	102.7	0.2
RPX Composite Real Estate Index	198.2	0.3
BankRate 30 Year Fixed Rate Mortgage	3.66

Markets are slightly weaker to start the week on no real news. The Chicago Fed National Activity Index came in at -.53, indicating that manufacturing activity is decelerating. We saw the same thing in the Philly Fed last week. Merger Monday is back with a few new deals. Bonds and MBS are up small

This week is very data-light. The main market-moving event will be the release of the FOMC minutes from the April 30 meeting. The focus will be on the tapering of quantitative easing. We will also get existing home sales  - it will be interesting to see if the lack of inventory is concentrated only in the hot markets like Phoenix and San Francisco, or is it more widespread. New Home sales come out on Thursday - given the good earnings we have seen from the homebuilders, this number should be good. Finally, on Friday we get durable goods. Expect activity to start to tail off after the FOMC minutes. By noon on Friday, most of the street will be on the LIE ahead of the long weekend, so spreads will widen and pricing will be lousy.

Wells has briefly suspended foreclosures after new questions from the OCC. Meanwhile, the payments from the settlements has been slow to arrive.

The bond market bloodbath bumped up borrowing rates quite quickly. After bottoming out at 3.4% in early May, the average 30 year fixed rate mortgage is 3.66%. That is a big move in a short period of time. In times of excessive volatility, it makes more sense to lock than float. LOs tell your customers they are basically speculating on interest rates if they choose to float.

Morning Report - No, we are not in a new housing bubble....

Vital Statistics:

	Last	Change	Percent
S&P Futures	1655.5	7.4	0.45%
Eurostoxx Index	2817.6	10.9	0.39%
Oil (WTI)	95.88	0.7	0.76%
LIBOR	0.274	-0.001	-0.18%
US Dollar Index (DXY)	84.29	0.700	0.84%
10 Year Govt Bond Yield	1.90%	0.02%
Current Coupon Ginnie Mae TBA	104.7	-0.3
Current Coupon Fannie Mae TBA	103	-0.1
RPX Composite Real Estate Index	198.2	0.3
BankRate 30 Year Fixed Rate Mortgage	3.6

Markets are stronger this morning on good economic data. The University of Michigan Consumer Confidence index rose to 83.7, a post-bubble high and better than expected. Leading Economic Indicators increased .6%, which was better than expected. These should normally not be market-moving indices, but lately stocks can do no wrong and bonds can do no right. The market seems to be convinced that the Fed can stick the landing and end QE without any major hiccups.

The CoreLogic / Case-Schiller Q412 report is out. House prices increased 7.3% nationwide in 2012. They are forecasting prices to rise 2.5% in 2013 as the market broadens out from the red-hot Western markets like San Francisco and Phoenix. They see a 5-year annualized trend growth of 3.9%. The areas with the largest price gains: Phoenix (+23,8%), San Jose (+17%), Detroit (+ 16.7%), Miami (+13.5%) and Lost Wages (+13.4%). The biggest declines were in Long Island (-4.3%), Virginia Beach (-2%), Richmond (-1.5%), Philthy (-1.3%) and Birmingham (-1.3%). They do note that the fast-rebounding markets could hit an air pocket as professional investor demand wanes.

They do not see evidence of a new housing bubble. I actually find it humorous that a small rally off the bottom could be considered a "bubble." Bubbles are rare things and are based on an idea that an asset price cannot go down. We saw that mentality during the late 90s - "Buy quality companies and hold them for the long term. Stocks always go up in the long term. The biggest risk is not being fully invested" People wrote books like Dow 40,000. Similarly, during the real estate bubble, people thought prices could never fall. People who had no experience in real estate were buying "Flipping Houses for Dummies." Nobody that experienced the stock market bubble or the real estate bubble is going to believe that these asset prices cannot fall. There may be another stock or real estate bubble, but we won't see it. Maybe our grandkids will.

It was noted at the MBA Secondary conference that private label spreads were widening. We finally see evidence of this with Redwood's latest private label deal. They just sold $424 million of bonds with the senior tranches priced to yield 2.82%, a spread of 190 basis points over swaps. In January, similar deals were priced at 97 bps over swaps. $5.5 billion of private label deals have been done so far this year, as compared to $3.5 billion for all of 2012. That said, during the bubble, $1.1 trillion of PL securities were issued in one year, so we are still a long way from re-living the salad days of big real estate finance.

The House is holding a hearing this morning on the IRS scandal. Whether this turns into another Watergate or not, the President's political capital is waning quickly. The net effect could be that not much more happens in Washington for the rest of his term. For us, that means replacing FHFA Chief Ed DeMarco with Mel Watt is going to be an even tougher sell, and principal mods for conforming loans / extension of HARP eligibility dates are become less of a sure thing.

Morning Report - Housing starts fall

Vital Statistics:

	Last	Change	Percent
S&P Futures	1652.2	-2.1	-0.13%
Eurostoxx Index	2811.5	1.9	0.07%
Oil (WTI)	94.08	-0.2	-0.23%
LIBOR	0.274	0.000	0.00%
US Dollar Index (DXY)	83.81	-0.021	-0.03%
10 Year Govt Bond Yield	1.90%	-0.03%
Current Coupon Ginnie Mae TBA	104.3	-0.1
Current Coupon Fannie Mae TBA	102.9	0.1
RPX Composite Real Estate Index	197.6	0.5
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are slightly lower after a barrage of negative data. The day began with Wal-Mart reporting earnings in line with estimates, but giving 2nd quarter guidance below estimates. Then, we had higher-than-expected initial jobless claims and a very disappointing housing starts number. Stock index futures are down a couple of points while bonds and MBS are up about a quarter of a point.

Initial Jobless claims increased from a revised 328,000 to 360,000 last week. This is the highest level since mid-February. The Department of Labor has noted that that there has been some seasonal gremlins in the data lately, so maybe that is what is going on.

Census reported that building permits increased by 14.3%, while housing starts fell 16.5%. Single family starts fell from 623,000 to 610,000, while multi-fam fell from 376,000 to 234,000. Multi-fam had been driving the housing starts numbers lately as investors try and get in on the rental boom. Single family has been more slow and steady. On the permits side, single family increased from 599,000 to 617,000 and mult-fam increased from 266,000 to 374,000. So maybe the April multi-fam drop was a blip.

Chart:  Housing starts 1959- Present

You can see from the chart above that even though housing starts have rebounded smartly from the recession lows, we are still at very depressed levels historically. Consider that we are more or less at the lows of the previous major recessions (73-75, 81-82, 91-92). Then factor in population growth. Conclusion:  there is a lot of pent-up demand out there..

The National Association of Home Builders released their Housing Survey yesterday, which showed builder confidence improved in May after a brief drop in April. "Builders are noting an increased sense of urgency among potential buyers as a result of thinning inventories of homes for sale, continuing affordable mortgage rates and strengthening local economies" noted a North Carolina based builder. In fact, he notes challenges regarding the cost and availability of labor, lots, and building materials. The homebuilders reported recently and did note some of these concerns as well, but there is a geographic slant to it:  the West has the most issues, while the Northeast does not.

Morning Report - Mortgage Applications dive

Vital Statistics:

	Last	Change	Percent
S&P Futures	1645.3	-2.7	-0.16%
Eurostoxx Index	2801.6	6.0	0.21%
Oil (WTI)	93.29	-0.9	-0.98%
LIBOR	0.274	0.000	0.00%
US Dollar Index (DXY)	83.94	0.343	0.41%
10 Year Govt Bond Yield	1.94%	-0.03%
Current Coupon Ginnie Mae TBA	105.2	0.3
Current Coupon Fannie Mae TBA	102.7	0.2
RPX Composite Real Estate Index	197.1	0.5
BankRate 30 Year Fixed Rate Mortgage	3.65

Markets are lower this morning after an earnings miss from John Deere (DE) and better than expected earnings out of Macy's. The Producer Price Index fell .7% as commodity prices continue to drop. Bonds and MBS are up a quarter or so.

Mortgage Applications fell 7.3% in the last week, unsurprising given that rates have backed up so much. People will be looking at drier pipelines into early June. The purchase index fell by 4%, while the refi index fell 8%.

The Empire State Manufacturing Survey showed manufacturing contracted in the May. The six month outlook weakened as well. Inflation remains muted. The employment-related indicators (number of employees and average workweek) declined slightly. The Fed and other economists had been predicting a second quarter slowdown, and this is evidence of it. The consensus is for a re-acceleration into the second half of the year. Certainly the stock market and the bond market are focusing more on the 2H acceleration than they are on the current slowdown.

Lots of good stuff in the latest CoreLogic Market Pulse. They discuss how residential construction has moved from a drag to a driver on the economy. While the red-hot Western markets like Las Vegas and San Francisco are seeing professional-driven buying, the markets of North Carolina and Texas are more balanced and are the healthiest new sale markets..On a price to income ratio, housing is still as affordable as it has been since the 90s. RTWT.

Morning Report - Housing Scorecard

Vital Statistics:	Last	Change	Percent
S&P Futures	1631.8	1.0	0.06%
Eurostoxx Index	2778.9	1.5	0.05%
Oil (WTI)	94.59	-0.6	-0.61%
LIBOR	0.274	-0.001	-0.36%
US Dollar Index (DXY)	83.34	0.065	0.08%
10 Year Govt Bond Yield	1.91%	-0.01%
Current Coupon Ginnie Mae TBA	104.9	-0.2
Current Coupon Fannie Mae TBA	103	0.1
RPX Composite Real Estate Index	196.6	0.4
BankRate 30 Year Fixed Rate Mortgage	3.62

Markets are flattish this morning on no real news. Appalloosa manager David Tepper said on CNBC that he is still bullish and the economy is getting better. Bonds finally catch a bid after a pretty brutal two week sell-off. MBS are up small.

The National Federation of Independent Business released their Small Business Optimism Survey this morning, which showed the index creeping up slightly to 92.1 from 90.7. Owners are still pessimistic about the economy, with a net negative 15% expecting business conditions to improve over the next six months. Hiring and raises are being done only grudgingly, and capital expenditures are only at maintenance levels. Yet the stock market is at record highs. So what gives? Part of it is that the big S&P 500 stocks have a lot of international exposure, which means they can offset US weakness elsewhere. Also, I think quantitative easing is playing a part.

The Obama Administration released their monthly Housing Scorecard which showed home equity increased again last month. HAMP trial modifications jumped, while HAMP permanent mods fell. HARP refis were flat for the month. It is still looking like Mel Watt as the new FHFA Chairman is no sure thing, either. Even if he doesn't get nominated, HARP 3.0 might still happen, which would extend the eligibility dates for HARP refis to include late 2009 and 2010 vintages. That would undoubtedly kick off another refi wave.

Morning Report - retail sales

Vital Statistics:

	Last	Change	Percent
S&P Futures	1627.3	-2.3	-0.14%
Eurostoxx Index	2776.9	-8.4	-0.30%
Oil (WTI)	95.43	-0.6	-0.64%
LIBOR	0.275	0.000	0.00%
US Dollar Index (DXY)	83.31	0.165	0.20%
10 Year Govt Bond Yield	1.94%	0.04%
Current Coupon Ginnie Mae TBA	104.8	-0.4
Current Coupon Fannie Mae TBA	102.8	-0.3
RPX Composite Real Estate Index	196.3	0.5
BankRate 30 Year Fixed Rate Mortgage	3.58

Markets are slightly lower after vaulting to new heights last week. Earnings season is largely over; the only ones left are the retailers who start reporting this week. We will hear from Wal Mart and Kohls later this week. Bonds and MBS continue to sell off - the 30 year fixed rate mortgage closed the week at 3.58% after bottoming at 3.4% a week and a half ago.

Does the back up in bond yields mean the refi boom is over? Perhaps. At any rate, since we have been in this range of interest rates for so long, the people who have the ability to refinance already have. This is called prepayment burnout. Now, it will take home price appreciation to drive refinances. That said, there is talk of a HARP 3.0, which would allow late 2009 and 2010 vintage underwater mortgages to refinance, and there is talk that the government may allow people who have already refinanced under HARP to do so again.  New government initiatives may help keep the refi boom alive for a little bit longer.

Retail sales increased .1% in April, higher than the -.3% estimate. The movement of the Easter holiday played some role in the increase. Ex autos and gasoline, the increase was .6%. Gasoline is usually stripped out, because simple price changes can move the index. Joseph H Banks (JOSB) missed earnings estimates this morning. It is an old saw that in weak economic times, the only apparel that is purchased is children's clothing. As the economy improves, women's apparel starts to pick up, and when the economy really starts heating up, men's suits start being purchased. We'll get a read on women's apparel when Nordstrom reports on Thursday. Bonds sold off on the retail sales number, although equities didn't really react.

I said it on Friday and I'll say it again. This Obama / IRS thing could be market negative in a lot of ways - first, if there is something there, it will inevitably cause marginal foreign investment money to flee the dollar, which is equity negative. Plus it will make the debt ceiling negotiations all that more acrimonious. With the S&P 500 at record highs, it is worth bearing this in mind. You could also see a serious snap-back rally in the bond market.

Morning Report - Charles Plosser and ending TBTF

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.3	0.7	0.04%
Eurostoxx Index	2780.9	7.8	0.28%
Oil (WTI)	94.53	-1.9	-1.93%
LIBOR	0.275	0.000	0.00%
US Dollar Index (DXY)	83.03	0.240	0.29%
10 Year Govt Bond Yield	1.84%	0.03%
Current Coupon Ginnie Mae TBA	105.9	0.0
Current Coupon Fannie Mae TBA	103.5	-0.1
RPX Composite Real Estate Index	195.8	0.8
BankRate 30 Year Fixed Rate Mortgage	3.52

Markets are flattish this morning on no real news. We will get the monthly budget statement at 2:00 pm this afternoon. Bonds and MBS continue to sell off, and the 10 year is at 1.84%

The Mortgage Bankers Association reported that 90 day delinquencies ticked up to 7.25% in Q1 from 7.09% in Q4. Separately, foreclosures as a percent of total mortgages fell to 3.55% from 3.74%. This is still an elevated numbers; prior to the bubble, foreclosures were in a 1% to 1.5% range. Similarly, with delinquencies, pre-bubble the typical 90 day delinquency rate was in the 4% to 5% range. It peaked at just over 10% in Q1 2010.

Fannie and Freddie's profits have moved the debt ceiling limit to September from August. Treasury Secretary Jack Lew said that the statutory debt limit will be reached in a few days, but that there are measures the government can take to shift around funds and that we won't really start having issues until after Labor Day. Republicans have proposed a prioritization of creditors, which will go nowhere in the Democratically controlled Senate. My question:  How much of the interest owed is going to the Fed due to quantitative easing? They have been buying up 90% of Treasury issuance. And since the Fed's profits and losses are just sent right back to Treasury, isn't that just money we effectively owe ourselves?

Anyway, the debt ceiling debate is coming up this summer and the Administration and House Republicans are sure to butt heads over raising the debt ceiling. The Administration will not accept spending cuts without tax increases and the House will not accept tax increases at all. Just saying, since the S&P 500 has been a one-way bet since last Fall. There are two exits at the front of the plane and two exits over the wings. Please take a moment to locate the nearest exit, and remember that your nearest exit may be behind you.

Philly Fed President Charles Plosser is skeptical that Dodd Frank can end Too Big To Fail (TBTF). He proposes a more systematic process, in which the ultimate decision-making would be rest with a judge and and deviations from priority would be cleared through a judicial authority and not through regulatory discretion. Derivatives and repos would be treated like other claims. Separately, he is skeptical that QEIII is going to do much good. It would be refreshing to have someone on the hawkish side replace Bernake after having doves for the past 25 years, but we're probably going to get an even bigger dove in Yellen.

Morning Report - Whither the GSEs

Vital Statistics:

	Last	Change	Percent
S&P Futures	1625.8	-2.9	-0.18%
Eurostoxx Index	2768.2	-16.5	-0.59%
Oil (WTI)	95.83	-0.8	-0.82%
LIBOR	0.275	0.000	0.00%
US Dollar Index (DXY)	82	0.103	0.13%
10 Year Govt Bond Yield	1.79%	0.02%
Current Coupon Ginnie Mae TBA	105.9	0.2
Current Coupon Fannie Mae TBA	104.1	0.1
RPX Composite Real Estate Index	195	0.3
BankRate 30 Year Fixed Rate Mortgage	3.54

Markets are slightly weaker this morning.  Initial Jobless Claims came in at 323,000, better than expected. Bonds and MBS are up small.

I was surprised by the magnitude of last Friday's reaction to the jobs report and the persistence. The jobs report was good, but not great. I do not see anything in the report to prompt the Fed to end QE early. Perhaps the strength in the equity market is causing people to rotate out of stocks and into bonds. If you believe in technicals, you might be looking for the 10 year yield to do a 50% retracement, hit 1.85% and then bounce back.

Tonight is the Fannie / Fred MBS roll as we go from May to June. MBS prices will look like they just fell tomorrow morning, but it is just the roll.

Freddie Mac reported $4.6 billion in earnings in the first quarter, its second-largest in history. They required no Treasury draw and paid $5.8 billion to the government in Q1. So far, they have paid $29.6 billion. This is after Fannie Mae reported $7.6 billion in Q4.  One almost certainty is that G-fees are going up. The government wants to "crowd in" private capital and price credit risk more in line with private mortgage insurers. The game for originators going forward may well be to stick with qualified mortgage (QM) loans and compete with the government on the guarantee fee. The other sense I got from the conference is that QM is not enough of a safe harbor to really encourage lending outside of the QM box. Which means that anyone with dinged credit is more or less stuck in the FHA box.

The sense I got from the MBA Secondary Conference is that despite the Obama Administration's white paper that claims they would like to replace Fannie and Fred with some private entity, they are slow-walking reform. Certainly Mel Watt was not nominated to preside over the orderly dissolution of the GSEs. After the Administration changed the terms of the deal, the GSEs now just distribute all of their profits to the government, which has created a slush fund for general government purposes. And $13 billion a quarter isn't chump change. I think at the end of the day, Fan and Fred are going nowhere and will stay on as quasi-nationalized entities until they are fully re-capitalized and then they will be sold.

The big questions regarding Mel Watt as the new FHFA Chairman concern principal mods and an extension of the HARP window (HARP 3.0). As of now, HARP eligibility does not extend to anything originated or refinanced after  May 31, 2009. There is talk that the window might be extended to allow people who took out conforming loans in 2009 and 2010 to be HARP eligible. Also, there is talk of allowing people to "re-HARP." Anyway we could see another refi boom if Watt is confirmed. Regarding the principal mods, CBO gave FHFA the ammunition to permit mods. If Watt is rejected, expect Mark Zandi to be the next guy nominated and he fully supports principal mods.

60-day delinquencies dropped to 4.56% according to Transunion, which is the fastest drop since they started keeping records in 1992. This decrease was higher than expected.

Morning Report - CBO assumes a can opener

Vital Statistics:

	Last	Change	Percent
S&P Futures	1603.4	11.1	0.70%
Eurostoxx Index	2736.0	17.1	0.63%
Oil (WTI)	95.21	1.2	1.30%
LIBOR	0.275	0.002	0.73%
US Dollar Index (DXY)	82.43	0.204	0.25%
10 Year Govt Bond Yield	1.70%	0.07%
Current Coupon Ginnie Mae TBA	106	-0.5
Current Coupon Fannie Mae TBA	104.2	-0.3
RPX Composite Real Estate Index	193.8	0.5
BankRate 30 Year Fixed Rate Mortgage	3.42

Markets are higher this morning after a better-than-expected jobs report. Bonds and MBS got whacked on the number.

Payrolls increased by 165,000 in April and the unemployment rate fell to 7.5%. March was revised upward from 88k to 138k. The labor force participation rate remained at 63.3%, the lowest since the 70s. Retail and business services added jobs, while construction was surprisingly flat. The average workweek fell, while average hourly earnings ticked up by 4 cents.

The CBO has come out with a study saying that principal mods on Fannie and Freddie mortgages could save the taxpayer money by reducing delinquency and foreclosure costs and increasing economic growth. As far as the moral hazard issue - they dismiss the costs of moral hazard as "relatively low," provided the government requires sufficient evidence of financial hardship. The study basically assumes that the government will thread the needle with drafting rules to prevent strategic defaults. The study reminds me of the old joke where an engineer and an economist are stranded on a desert island with an unopened can of soup. The engineer proposes to use a rock to open the can. The economist says "assume a can opener."

Lloyd Blankfein sees the current environment as a parallel of 1994. Borrowers had become so used to low interest rates that they weren't ready when the Fed started hiking rates. Old timers will remember that was when Orange County blew up as mortgage backed securities got clocked.