Morning Report - Government shutdown looms

Vital Statistics:

	Last	Change	Percent
S&P Futures	1670.9	-15.5	-0.92%
Eurostoxx Index	2882.4	-36.9	-1.26%
Oil (WTI)	101.7	-1.2	-1.15%
LIBOR	0.249	0.001	0.20%
US Dollar Index (DXY)	80.14	-0.382	-0.47%
10 Year Govt Bond Yield	2.61%	-0.02%
Current Coupon Ginnie Mae TBA	105.7	0.1
Current Coupon Fannie Mae TBA	104.9	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are lower as participants contemplate a government shutdown. The Street has viewed this issue as a kabuki dance, but we are now getting to the short strokes. Bonds and MBS are rallying.

Aside from the government shutdown issues, this week also contains the all-important jobs report. The Street is at an increase of 182k and an unemployment rate of 7.3%. St Louis Fed Head James Bullard raised the possibility of tapering at the October meeting. I think if we have any sort of shutdown, tapering will be off the table until the Dec meeting at the earliest. Of course if there is a shutdown, we won't be getting any economic data this week.

One potential issue coming down the pike is the fee limit on mortgages starting Jan 1. The cap makes sub $100k loans uneconomic for originators. I wonder how the CFPB will handle the sudden unavailability of loans below 100k. Not sure if they thought this through or they just plan on hitting everyone with fair lending / CRA lawsuits.

Housing equity rose 30% or more than $2 trillion over the past year, according to NAR. 

Another interesting data point on the manufacturing renaissance in the US - low value added industries like textiles are onshoring. The problem is finding people.

Morning Report - Breakdown of the government shutdown.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1685.0	-7.5	-0.44%
Eurostoxx Index	2913.5	-9.5	-0.32%
Oil (WTI)	102.8	-0.2	-0.21%
LIBOR	0.248	0.000	0.10%
US Dollar Index (DXY)	80.22	-0.307	-0.38%
10 Year Govt Bond Yield	2.63%	-0.02%
Current Coupon Ginnie Mae TBA	105.4	-0.3
Current Coupon Fannie Mae TBA	104.7	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are lower ahead of Continuing Resolution Weekend. Personal income rose .4% in August, while personal spending rose .3%. The prior months were revised upward. Bonds and MBS are up.

The government's new fiscal year begins on Tuesday, and unless Congress comes up with a way to keep the lights on the government will shut down. You have all-out war between Democrats and Republicans and a civil war in the Republican party. Here is the state of play: The House passed a continuing resolution that funds the government through the end of the year, but it contains language that de-funds obamacare. The Senate passed a continuing resolution that funds the government through the end of the year, but it removed the obamacare language and sent it back to the House. So that leaves Boehner with 3 possible outcomes: 1) He can convince the Tea Party Republicans to go along with a clean continuing resolution, 2) He passes a bill with primarily Democratic party support (and that support won't be free, plus it will probably cost him the Speakership), or 3) He attempts to pass a clean CR and it fails, which shuts down the government. Democrats are confident that any shutdown will be a replay of 1995, where the public sided with Clinton. How to handicap it:  I think the fact that the Republican leadership is so vocal against the rebellious Tea Party republicans is important and it brings them on board. #1 is the most likely scenario, followed by #2. If we do have a shutdown, it will be short. 

If the government shuts down, what does that mean for the mortgage markets? Ginnie Mae will be open for business, according to HUD's contingency plan from 2011, which supposedly would be used in this case. I have yet to see what FHA will do. Bottom line, I don't foresee any major disruptions to the financial markets. Macroeconomic Advisers estimates that a 2 week shutdown will lop .3% off of 4Q GDP. Mark Zandi of Moody's estimates that number to be 1.4% if it goes 3 - 4 weeks. (Mark, you didn't get the Treasury Secretary gig - you don't need to keep carrying water for the Administration).

Pending Home sales fell 1.6% in August, according to the National Association of Realtors. The NAR blames the drop on an acceleration of home sales in early summer, as buyers accelerated purchase decisions as interest rates began to rise. The NAR is anticipating 2014 sales to be flat with 2013 and median existing home sale prices to increase 5% - 6%. Note that almost half of all home sales right now are all-cash transactions and that number is usually close to 20%. So even if existing home sales are flat next year, year over year, the mortgage business could still improve markedly as distressed / cash sales run their course. 

The number of loans in the process of of foreclosure at the end of the second quarter decreased 40% to 744k. This is an interesting statistic, MBA estimates the shadow inventory of homes to be 3.3 million. I know MBA also includes 90 day DQs, which may account for some of the difference - 90 day DQs in judicial states which haven't been permitted to move to the foreclosure process yet. Other tidibits - the overall percent of loans that were seriously delinquent fell from 15% a year ago to 3.8%. Almost 91% of all loans in the report were current and performing. 

Does the high shadow inventory number necessarily mean that cash sales will continue to be half of all existing home sales? Probably not. Professional investors who bought property for rentals are noting the increase in prices, and will certainly think about ringing the register. They won't be selling to other professional investors, so that inventory will be coming soon. Plus, as we have seen in the D, many of these homes will be bulldozed, not sold. 

Morning Report - Distressed sales and cash percentages

Vital Statistics:

	Last	Change	Percent
S&P Futures	1690.2	4.4	0.26%
Eurostoxx Index	2921.3	-6.1	-0.21%
Oil (WTI)	103.1	0.4	0.40%
LIBOR	0.248	0.001	0.20%
US Dollar Index (DXY)	80.51	0.179	0.22%
10 Year Govt Bond Yield	2.65%	0.02%
Current Coupon Ginnie Mae TBA	105.6	0.0
Current Coupon Fannie Mae TBA	104.7	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are higher after initial jobless claims came in at 305k, better than expected and second quarter QDP was revised downward to 2.5%. Personal Consumption Expenditures increased 1.8%. Bonds and MBS are down small.

New Home Sales increased at a 421k pace in August, in line with expectations. This is an increase from July but still on the low side for 2013. Household net worth increased by 1.3 trillion in the second quarter and is now 6 times disposable personal income.

The RealtyTrac August Residential and foreclosure sales report reports that the national medial sales price rose 3% to $175,000, which is a 6 pct increase from a year ago. The median distressed price was $116,000, up 1 percent from a month ago, but down 3% from a year ago. This decline in the price of distressed properties is relatively new and bears watching. All cash purchases represented 45% of all residential sales in August, up from 39% in July and 30% a year ago. No wonder the mortgage banking business is struggling - the refi boom is over, and the percent of puchase business with a mortgage is falling as well. 

Morning Report - bank mortgage rejection rates

Vital Statistics:

	Last	Change	Percent
S&P Futures	1690.7	-1.8	-0.11%
Eurostoxx Index	2918.0	-4.9	-0.17%
Oil (WTI)	103.9	0.7	0.70%
LIBOR	0.248	-0.003	-1.04%
US Dollar Index (DXY)	80.44	-0.120	-0.15%
10 Year Govt Bond Yield	2.64%	-0.01%
Current Coupon Ginnie Mae TBA	105.4	0.0
Current Coupon Fannie Mae TBA	104.5	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.32

Markets are slightly weaker this morning as durable goods orders came in better than expected, but still weak. Ted Cruz continues to tell bedtime stories. Mortgage applications rose 5% as rates fell.

CFPB Director Richard Cordray spoke to the American Banker Regulatory Symposium yesterday. He lamented that consumers cannot sever ties with certain entities, namely debt collectors and mortgage servicers. They will also use the disparate impact theory when determining whether discrimination is taking place, which unfortunately means that FICO is all that matters, and if the value of the underlying collateral in one area is likely to be more volatile than another, tough cookies, you have to lend to both borrowers at the same rate, assuming all other risk factors are the same. The volatility of the underlying collateral is an important issue that the regulators conveniently ignore because it negates the validity of their argument. The speech is basically a shot at mortgage bankers, payday lenders, servicers, debt collectors and other unsavory financial services folks.

Ever wonder how much banks differ in their loan approval percentages? It turns out that there is a bit of a spread between the big ones and the smaller ones. The biggest banks - Wells, JPM, BOA - have the highest rejection rates, in fact JPM rejects 1/3 of its applications!

So, LOs the next time a borrower says that "Wells or JP Morgan is quoting me X% with so many points, tell them that unless they have a commitment, they are taking a risk going with a big bank. It would be a shame to go all the way through the process, only to get rejected at the last minute. 

Moody's is warning that a government shutdown may slow economic activity and would damage the nation's credit quality. I suspect Ted Cruz knows that we aren't going to shut down the government over obamacare, and this "filibuster" - is his last stand on the issue. Once he sits down, we'll get a continuing resolution and a debt ceiling increase in short order. Certainly the stock market, the bond market, and the US dollar are taking that view. The risk: Democrats demand an end to the sequester and try and stick in tax hikes. I don't think they do that because Republicans will reject that and then a government shutdown becomes a case of "he said, she said" where Democrats take some risk of getting dirty with the Republicans. Here is a list of cuts that can avert a government shutdown.

Morning Report - Homebuilder earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1692.0	-0.7	-0.04%
Eurostoxx Index	2923.4	17.0	0.59%
Oil (WTI)	102.8	-0.8	-0.79%
LIBOR	0.25	0.000	-0.16%
US Dollar Index (DXY)	80.59	0.140	0.17%
10 Year Govt Bond Yield	2.68%	-0.02%
Current Coupon Ginnie Mae TBA	105	0.2
Current Coupon Fannie Mae TBA	104.4	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.39

Markets are flattish amidst a couple of big transactions - Applied Materials is buying Tokyo Electron (yes a Japanese company is being bought by an American firm) and there is a possibility of an "IPO" for Chrysler as Fiat and the UAW pension fund debate the value of the company. Bonds continue their post FOMC rally.

We have a couple real estate indices this morning - Case-Shiller increased 12.4% YOY, pretty much in line with forecasts, while the FHFA House Price Index increased 1.0% MOM. The FHFA index is more of a central tendency index because it focuses on homes with conforming mortgages attached to it - in other words, it ignores the jumbo space and cash transaction which are often distressed sales.

We have earnings from a couple of homebuilders today: Lennar (LEN) and KB Home (KBH). Orders dropped 9% on a unit basis, but increased 7% on a dollar basis. Their cancellation rate was 33%.  Revenues increased 29% and average selling prices rose 22% to 299k. KB's increase in ASPs is due to a strategic shift on their part. The stock is down small premarket. Lennar reported ASPs of 291k, with new orders up 14% on a unit basis and 32% on a dollar basis. Cancellation rate was 18%. The stock is up 1.5% preopen.

Jeffrey Metzger, CEO of KB Home said "The fundamentals of the current housing recovery are firmly in place, supported by low inventory levels, an improving economy, and positive demographic trends. Given these factors, we believe that the recent slower pace of recovery caused by an uptick in mortgage interest rates is a temporary effect and we expect to see steady upward demand for housing as consumers adjust to both higher rates and pricing."

Stuart Miller, CEO of Lennar said: "We continue to see long-term fundamental demand in the housing market driven by the significant shortfall of new single family and multi family homes built over the last five years. While there may be bumps along the road that may impact the short-term pace of the recovery, the long-term outlook for our business remains extremely bright."

Morning Report - People don't understand HARP

Vital Statistics:

	Last	Change	Percent
S&P Futures	1699.3	-3.1	-0.18%
Eurostoxx Index	2914.4	-12.8	-0.44%
Oil (WTI)	104.5	-0.3	-0.24%
LIBOR	0.251	0.001	0.40%
US Dollar Index (DXY)	80.39	-0.038	-0.05%
10 Year Govt Bond Yield	2.73%	0.00%
Current Coupon Ginnie Mae TBA	104.8	0.1
Current Coupon Fannie Mae TBA	103.9	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.42

Markets are lower as they start to worry about the machinations over the debt ceiling and the continuing resolution. Bonds and MBS are more or less flat.

We will have lots of relevant data this week, with Case-Shiller and the FHFA Home Price Index on Tuesday, Lennar and KB Home earnings on Tuesday as well, and the third revision to 2Q GDP on Thursday. Note the Fed took down 2013 GDP projections by 30 basis points in its economic forecast, so maybe they know the revision is going to be bad. The Street is at 2.6%. Don't forget Q1 GDP started at something like 2.5% and was revised downward to 1.1%. 

The tea party wing of the Republican Party is demanding that obamacare be delayed or de-funded as a condition to raising the debt ceiling. Needless to say, this is going nowhere in a Democratically controlled Senate and won't be signed by the author either. The continuing resolution will be the first hurdle, and Republicans do have something to protect in that it keeps sequestration-level spending in place. The debt ceiling is a messier affair, but Republican leadership is dead-set against defaulting on the debt, so this will get passed one way or the other, but it may cost Boehner his speakership if he passes an increase in the debt ceiling by relying on Democratic votes.

The FHFA is trying to figure out why eligible borrowers are not taking advantage of HARP. There seems to be this perception that you have to be delinquent to take advantage of it, which is false. LO's take note.

Morning Report - Fed may move in October

Vital Statistics:

	Last	Change	Percent
S&P Futures	1715.4	-2.0	-0.12%
Eurostoxx Index	2927.8	-8.4	-0.28%
Oil (WTI)	105.7	-0.7	-0.64%
LIBOR	0.25	-0.001	-0.24%
US Dollar Index (DXY)	80.46	0.083	0.10%
10 Year Govt Bond Yield	2.75%	0.00%
Current Coupon Ginnie Mae TBA	104.8	-0.2
Current Coupon Fannie Mae TBA	103.8	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.37

Slow news day. Markets are taking a breather after a tumultuous week. There are no economic data this morning, and bonds / MBS are flat.

Federal Reserve Bank of St. Louis President James Bullard told Bloomberg TV that Wednesday's decision not to slow bond buying was a "close call" and and a "small" tapering is possible next month. Given that there is no press conference scheduled after the Oct Fed meeting and no economic forecasts, this is a bit of a surprise. That said, if the Fed is in fact contemplating moving at the next meeting, then this rally in bonds will probably prove to be very short-lived. LOs, is you have customers on the fence, get 'em locked. 

Wells is out with a bearish call on the S&P 500. Their end of year call on the S&P? 1440, down 16% from here. The thesis:  the market growth has been all multiple expansion and earnings are going to disappoint. Gina Adams is trying to become the next Elaine Gazarelli.

Speaking of earnings, we are now in the "oh crap" season, where companies who are going to miss their quarterly estimates begin to fess up. Earnings season officially starts in 3 weeks with Alcoa on 10/8. Last Wed, Oracle took advantage of the FOMC distractions to announce they were going to miss. 

Warren Buffett called the Fed the "greatest hedge fund in history." It is generating 80 and 90 billion a year in revenue for the US government.  I bet Ben is thinking "hey, can I get 2 and 20?"

Morning Report - Party at the Fed

Vital Statistics:

	Last	Change	Percent
S&P Futures	1721.8	4.0	0.23%
Eurostoxx Index	2940.7	31.7	1.09%
Oil (WTI)	108.2	0.1	0.07%
LIBOR	0.25	-0.002	-0.89%
US Dollar Index (DXY)	80.2	-0.042	-0.05%
10 Year Govt Bond Yield	2.70%	0.01%
Current Coupon Ginnie Mae TBA	105	1.3
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.42

Markets are higher this morning after yesterday's furious rally on the Fed's decision to keep asset purchases in place. The 10 year had a trading range of over 30 basis points in yield yesterday. Initial Jobless Claims increased to 309,000. Bonds and MBS are up small.

The FOMC statement was obviously a surprise, and it is clear from the reaction in the markets that a LOT of people were leaning short heading into the announcement. What does that mean for rates going forward? The markets will now begin to fret about the December meeting, which isn't going to be bond bullish. I think if you are considering locking right now, you do it. 2.7% seems to be resistance on the 10 year, and we could be looking at a 2.7% - 3.0% trading range. At these levels, take the money and run.

The Fed's decision certainly provides support for the theory that the Fed was really targeting leverage with its announcement last Spring. The economic data has never supported a reduction of stimulus, and the Fed has been consistently too high with its economic forecasts. The thing is, they can't un-ring the bell - so people are not going to be piling into levered curve flattening trades. REITs have significantly de-leveraged. Mission Accomplished.

The Fed took down its forecasts again, with the 2013 GDP range now 2.0% - 2.3% from 2.3% - 2.6% in June. Unemployment's forecast ticked down as well, from a range of 7.2% - 7.3% to 7.1% to 7.3%. Ben Bernanke was asked in the press conference about the labor force participation rate and how it seemed to be driving unemployment. Bernanke acknowledged that there is more to the labor picture than simply the headline unemployment number, and also stressed that these are guideposts, not thresholds. In other words, if unemployment gets to their 7% target, but it is due to the wrong reasons (a drop in the participation rate), then the Fed may decide to remain accomodative. 

The beatdown goes on... Wells Fargo is cutting 1,800 jobs in its mortgage unit, in addition to the 3,000 announced earlier this year.

Morning Report - Taper Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1698.8	0.5	0.03%
Eurostoxx Index	2907.4	16.4	0.57%
Oil (WTI)	105.8	0.4	0.39%
LIBOR	0.252	0.001	0.20%
US Dollar Index (DXY)	81.14	0.001	0.00%
10 Year Govt Bond Yield	2.86%	0.01%
Current Coupon Ginnie Mae TBA	103.7	0.0
Current Coupon Fannie Mae TBA	102.8	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.48

Markets are flattish ahead of the FOMC meeting this afternoon. The announcement is expected around 2:00pm, so don't try and lock anything around that time period. Bonds and MBS are down small.

Mortgage applications rose 11.2% last week, which was a big increase after a depressed short Labor Day week. The refi index jumped 18% as rates ticked down a little. The purchase index was up 2.5%.

Housing starts and building permits came in lower than expected, with housing starts at an annualized 891k and permits at an annualized 918k. SFR continued to increase while multi-fam dipped. Sub - 1 million levels in housing starts is still a highly depressed level. After touching 1 million units in March, activity has been slowing. You can see from the chart we have been underbuilding for a long time. I guess you won't see a major increase in starts until the first time homebuyer returns to the market and that is going to be jobs-driven. In related news, the National Association of Homebuilder Confidence Index was flat last month, but still at post-crisis highs. The builders are also noting that momentum seems to have stalled for the moment. 

Certainly the Fed is noticing the drop-off in housing sector activity as rates have risen. This will probably make them want to maintain current purchases of MBS and cause them to lower Treasury purchases only. The consensus seems to be the "tiny taper" scenario, where the Fed cuts Treasury purchases by $10 billion a month starting in October.

The SEC is going to force companies to disclose the ratio of CEO pay to the median pay of employees at the firm. Glad to see the SEC is on class warfare beat - much more important than, say, doing something about high frequency trading  /sarc. 

Morning Report - Tight inventory continues in California

Vital Statistics:

	Last	Change	Percent
S&P Futures	1692.1	0.9	0.05%
Eurostoxx Index	2888.0	-6.7	-0.23%
Oil (WTI)	105.9	-0.7	-0.64%
LIBOR	0.252	0.000	0.04%
US Dollar Index (DXY)	81.15	-0.146	-0.18%
10 Year Govt Bond Yield	2.83%	-0.03%
Current Coupon Ginnie Mae TBA	104.1	0.1
Current Coupon Fannie Mae TBA	103.1	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.53

Markets are flattish as we head into Day 1 of the FOMC meeting. We should get the actual announcement tomorrow around 2:15 pm. Bonds and MBS are rallying as the market continues to digest the fact that Summers won't be the next Fed Chairman.

The Consumer Price Index came in at .1% month-over-month, below expectations, and frankly below what the Fed would like to see. As long as (a) there are no bubbles and (b) there is no inflation, the Fed will likely try and err on the side of accommodation.

That said, I believe this reprieve we have been given in rates will be short-lived. Don't lose the forest for the trees - rates are going up, and if you have any borrowers who have been on the fence or who were floating, now is a good time to lock. 

The California Association of Realtors reported that increasing mortgage rates are starting to bite as activity slipped 2%. Prices are still increasing though, as the median home price hit $441k, the highest since Dec 2007. Inventory is improving in the sub 750k bucket, although month's supply is still extremely low at just about 3 months. 

Morning Report, Summers out, ushering in the third term of Alan Greenspan

Vital Statistics

	Last	Change	Percent
S&P Futures	1688.6	3.7	0.22%
Eurostoxx Index	2893.2	26.1	0.91%
Oil (WTI)	106.2	-2.0	-1.86%
LIBOR	0.252	-0.002	-0.81%
US Dollar Index (DXY)	81	-0.449	-0.55%
10 Year Govt Bond Yield	2.79%	-0.10%
Current Coupon Ginnie Mae TBA	103.8	0.0
Current Coupon Fannie Mae TBA	103.3	0.7
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.57

Markets are higher after Larry Summers withdrew his name from consideration for the Fed Chairmanship. Bonds and MBS are rallying hard, with the 10 year yield down 10 basis points.

Janet Yellen is a Greenspan clone, as is Bernanke. Summers would have ended QE a bit earlier than Yellen would have. I have to say I am skeptical of the 10 year here at 2.79%. If you wanted to refi and missed the boat, the market just let you back in. I would take advantage of it, because the secular story on bonds is unchanged. LO's should go back and contact their borrowers who are on the fence and let them know they just got a gift that won't last forever.

Does this change what the Fed will do on Tuesday and Wed?  Probably not. The consensus seems to be a taper of $10 billion a month, which will be Treasuries and not MBS. 

We have some industrial numbers today, with the Empire State Manufacturing Index, Industrial Production, Capacity Utilization, and Manufacturing Production. Later this week, we will get housing starts, building permits, and existing home sales. All important data for us.

The CFPB made some changes to the QM rule.  Here is a summary.

Morning Report - Retail Sales weak

Vital Statistics:

	Last	Change	Percent
S&P Futures	1684.9	-3.9	-0.23%
Eurostoxx Index	2858.6	-3.5	-0.12%
Oil (WTI)	107.6	-1.0	-0.89%
LIBOR	0.254	-0.001	-0.20%
US Dollar Index (DXY)	81.46	-0.030	-0.04%
10 Year Govt Bond Yield	2.88%	-0.03%
Current Coupon Ginnie Mae TBA	103.7	0.0
Current Coupon Fannie Mae TBA	102.6	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.55

Markets are flattish on no real news. Bonds and MBS are up small. Liquidity should be light due to the Jewish holiday. Today is the last big data day before the FOMC meeting.

Mohammed El-Arian of PIMCO says the Fed is tapering to head off excessive risk taking. PIMCO is forecasting a "taper-lite" announcement of $10 billion in Treasuries, which would mean the Fed will continue to purchase MBS at its current rate. Given that foreigners have been net sellers of MBS and REITs have been de-leveraging (in other words, they have been net sellers too), it makes you wonder where the replacement for the Fed's buying will come from. What does that mean for your average mortgage banker? If TBAs are weak (bond prices falling), then mortgage rates will be higher. 

Twitter announced its IPO in 140 characters or less:  "We confidentially submitted an S-1 to the SEC for a planned IPO. This Tweet does not constitute an offer of any securities for sale." Note that roughly half of the characters are legal disclaimer. Some things never change.

The Producer Price Index came in flat ex food and energy, showing that there is no inflation at the wholesale level. Inflation has been figuring into the Fed's calculus for a while now, primarily on the downside. They desperately want to create a little inflation. 3% inflation and 3% wage growth feels a lot better to the average American than no inflation and no wage growth does. 

Retail sales came in lower than expected, .2% on the headline number, and the same for the control group. Looks like back-to-school sales were disappointing, which bodes ill for the holiday shopping season. Since consumption is roughly 70% of the US economy, it doesn't bode will for the 2H recovery we are supposed to be seeing according to Fed forecasts.

It will be Summers, at least according to the Nikkei newspaper. Supposedly this will be announced next week sometime. Summers would mean a quicker withdrawal of quantitative easing and a more vocal support of fiscal measures to stimulate the economy. The knives are out for Summers on the Left.

Morning Report - CFPB Chairman Richard Cordray speaks to mortgage bankers

Vital Statistics:

	Last	Change	Percent
S&P Futures	1688.5	-0.3	-0.02%
Eurostoxx Index	2863.1	-0.3	-0.01%
Oil (WTI)	108.4	0.8	0.78%
LIBOR	0.254	0.000	0.00%
US Dollar Index (DXY)	81.64	0.126	0.15%
10 Year Govt Bond Yield	2.89%	-0.03%
Current Coupon Ginnie Mae TBA	103.8	0.1
Current Coupon Fannie Mae TBA	102.5	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.56

Markets are flat this morning on no real news. Initial Jobless Claims printed below 300,000 for the first time since May 2007 on a technical glitch. Bonds and MBS are up small.

CFPB Chairman Richard Cordray spoke to a conference of mortgage lenders yesterday and told them that the new QM rules will give responsible lenders an advantage. One of the things he pointed out was that the CFPB intended to level the playing field between banks and non-banks (the banks are more highly regulated). Cordray stressed that the QM rules were intended to provide legal protection for lenders:  "You should keep this perspective in mind if you hear people dreaming up hypothetical factual disputes in an effort to sow anxiety about potential litigation," he said. 

Now that Richmond, CA has decided to go the eminent domain route, the court challenges begin. Blackrock, PIMCO, and other bondholders have asked a federal judge to halt the city's plans to force bondholders to sell their mortgages at a discount to appraised value to a hedge fund that will modify and refinance the borrowers. The city will have to run the table on court challenges.

As the refi boom ends, banks are laying off people in their mortgage operations. J.P. Morgan is laying off 2,000, Bank of America is cutting 2,100 jobs, Wells has let 3,000 go... the list goes on. That said, while the MBA mortgage applications index fell by 13.5% last week, the purchase index fell by only 2.6%. As home price appreciation gives people equity in their homes, purchase transactions will undoubtedly increase as people can finally move. Existing home sales are just approaching historical norms of 5.5 million / year, but the difference is that 60% of these sales are cash, as estimated by Goldman Sachs. Pre-bubble, cash sales were about 20% of all sales. So, in the past, you were looking at an average 5.5 million run rate, with 80% non-cash (i.e. a mortgage), which meant roughly 4.4 million purchase mortgages a year. So far in 2013 we have averaged a 5 million run rate and with only 40% involving a mortgage, you are looking at 2 million purchase mortgages a year. In other words, purchase finance activity has to more than double just to reach normalcy. So while housing has recovered according to the home price indices and the sales volume indices, we are still in nuclear winter for the mortgage banking business. Negative equity is undoubtedly driving a lot of this, and as prices rise, this phenomenon will reverse. 

Morning Report - CA city decides to go the eminent domain route

Vital Statistics:

	Last	Change	Percent
S&P Futures	1681.2	-1.2	-0.07%
Eurostoxx Index	2858.5	7.1	0.25%
Oil (WTI)	107.6	0.2	0.18%
LIBOR	0.254	-0.002	-0.59%
US Dollar Index (DXY)	81.76	-0.059	-0.07%
10 Year Govt Bond Yield	2.94%	-0.03%
Current Coupon Ginnie Mae TBA	103.3	1.0
Current Coupon Fannie Mae TBA	102.5	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.58

Markets are flattish on no real news. Bonds and MBS are up small, which means that Syria wasn't figuring in anyone's market analysis. 

Credit isn't tight for everyone - Verizon just did a $49 billion bond offering at the 10 year + 225. Low interest rates - get 'em while they last. The issue is looking 2x oversubscrbed.

Negative equity took a dive in Q2, according to CoreLogic, with 2.5 million homes dropping below the 100% LTV mark. 7.1 million homes (or 14.5% of homes with a mortgage) still have negative equity. The average LTV of all homes with a mortgage is 62.5. They caution that the recent home price appreciation may not continue at the rapid pace we have been seeing over the past year.

Mortgage applications fell 13.5% last week, primarily due to the Labor Day holiday. Refis were down 20%, while purchases were down 2.6%. 

Richmond CA has voted to go the eminent domain route. They intend to use the threat of eminent domain as a club to force lenders to sell the underlying loans at a deep discount to the city. SIFMA has already said that any locality that uses eminent domain will find loans originated in that locality to be ineligible for TBA trading, which makes them more or less unsecuritizable. The mayor is a Green Party Wall Street basher, so this could get interesting. For the hedge fund to be able to make money on this trade, they have to be able to buy the mortgages at a discount to appraised value, which will undoubtedly be a non-starter for the banks.

Morning Report - Increasing employment in the context of declining earnings?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1680.0	10.9	0.65%
Eurostoxx Index	2843.9	45.6	1.63%
Oil (WTI)	107.4	-2.1	-1.96%
LIBOR	0.256	0.000	0.00%
US Dollar Index (DXY)	81.91	0.119	0.15%
10 Year Govt Bond Yield	2.96%	0.05%
Current Coupon Ginnie Mae TBA	103.2	-0.3
Current Coupon Fannie Mae TBA	102.6	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.56

Markets are higher on the possibility of a peaceful resolution to the Syrian crisis. Overnight, Syria has accepted a Russian framework of surrendering chemical weapons to international authorities. This has sent oil down and stock index futures up. Bonds and MBS are weaker

The NFIB Small Business Optimism Index came in at 94, a touch weaker than expected. Interestingly, the plans to increase employment increased 7 percentage points to a net 16%, however, earnings trends fell 13 points to -35%. So profitability is falling, but companies plan to increase headcount anyway? Surprising result. This survey also shows that while things are going well for the big cap S&P 500 names with international exposure, small businesses are still struggling. 

Speaking of stock indices and struggling, the Dow Jones Industrial Average is making some changes. Out: Hewlett-Packard, Alcoa, and Bank of America. In: Goldman, Nike, Visa.

Higher interest rates are beginning to dampen people's expectations for future home price appreciation, according to the latest Fannie Mae Housing Survey. The expected home price appreciation for the next 12 months has fallen to 3.4% in August from 3.9% in May.

The National Association of Homebuilders Improving Markets Index reached a record high in September as a total of 291 metro areas now qualify as improving markets. Here is a map of the improving areas:

Morning Report - K deals

Vital Statistics:

	Last	Change	Percent
S&P Futures	1657.2	3.7	0.22%
Eurostoxx Index	2788.8	-14.6	-0.52%
Oil (WTI)	110.1	-0.4	-0.40%
LIBOR	0.256	-0.001	-0.20%
US Dollar Index (DXY)	81.99	-0.160	-0.19%
10 Year Govt Bond Yield	2.88%	-0.05%
Current Coupon Ginnie Mae TBA	103	3.1
Current Coupon Fannie Mae TBA	102.8	0.3
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.6

Slow news day. Markets are higher this morning on no real news. Bonds and MBS are up.

Now that the jobs report is out of the way, the markets will fret about the upcoming FOMC meeting for the next week and a half. The consensus seems to be that the Fed will make at least a symbolic reduction in asset purchases, and it will probably be Treasuries not MBS. 

Are K-deals the future of residential loan securitization? Would future securitizations involve subordinate and mezzanine tranches? Essentially, a pool of mortgages would be cut up into a senior guaranteed tranche, which would resemble what we already have now, with Ginnie or GSE MBS. There would be a two additional tranches - a subordinate tranche which would bear the first losses on the pool, and then a mezzanine tranche which would bear losses after the sub piece is wiped out. 

Morning Report - Jobs Day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1659.7	6.7	0.41%
Eurostoxx Index	2779.6	5.4	0.19%
Oil (WTI)	109.1	0.7	0.66%
LIBOR	0.256	-0.002	-0.66%
US Dollar Index (DXY)	82.13	-0.499	-0.60%
10 Year Govt Bond Yield	2.89%	-0.10%
Current Coupon Ginnie Mae TBA	103	0.7
Current Coupon Fannie Mae TBA	102.6	1.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.67

Stocks and bonds are higher after a disappointing jobs report. Bond investors were clearly leaning short in a big way going into the report. The 10 year was trading above 3% before the report, but has moved back down to 2.89%

The jobs report was relatively weak, although the headline unemployment number dropped to 7.3% from 7.4%. Payrolls increased 169k, lower than the 180k the Street was looking for. The prior two months were revised down by a total of 74k. The unemployment rate dropped from 7.4% to 7.3%, while the labor force participation rate dropped to 63.2% from 63.4%. For those keeping score at home, the last time the labor force participation rate was that low, "Miss You" by the Rolling Stones was the #1 song on the hit parade. Weekly earnings rose .2% while weekly hours ticked up by 6 minutes. Overall, a disappointing report.

Where does this report leave us with tapering QE? Since the default path is to start tapering, and some of the other reports are showing strength, I would expect the Fed to make at least a symbolic decrease in purchases, probably in Treasuries and not MBS.

Morning Report - deeply underwater homes down 14.5% year over year.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1655.4	2.0	0.12%
Eurostoxx Index	2764.4	6.1	0.22%
Oil (WTI)	107.8	0.6	0.56%
LIBOR	0.258	-0.001	-0.35%
US Dollar Index (DXY)	82.18	0.012	0.01%
10 Year Govt Bond Yield	2.92%	0.03%
Current Coupon Ginnie Mae TBA	103.1	-0.5
Current Coupon Fannie Mae TBA	102	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.56

Markets are higher this morning after the ADP jobs report predicted 176 private sector jobs were created in August and initial jobless claims came in at 323k. Productivity was higher, while unit labor costs fell. Bonds and MBS are down small.

RealtyTrac is reporting that 10.7 million homeowners are deeply underwater (LTV > 125%), which represents 23% of properties with a mortgage. This number is down from 12.5 million (or 28%) a year ago. Another 8.3 million are in the 90 - 110 LTV range, and if real estate prices continue their recent appreciation, this could bring the supply / demand dynamics back into equilibrium as these homes gain equity and become available for sale. Lack of inventory has been a problem in the market and has been distorting some of the repeat-sales indices as professionals and cash buyers compete for the few homes that are available. Needless to say, this is welcome news for originators as it would boost purchase activity as refis dry up. 

Washington Post has a quick and dirty on what a Summers Fed would look like. Punch line: not a lot different than a Bernanke Fed, at least as far as policy is concerned. So far, it looks like Summers is Obama's first choice.

Yesterday's Fed Beige Book didn't have much new to say. Eight districts reported moderate growth while 5 reported modest growth. Residential real estate activity increased moderately, while lending activity was mixed. Lending standards were largely unchanged, while credit quality improved. Hiring and wages increased modestly.