Morning Report: The OCC solicits input for CRA modernization

Vital Statistics:

	Last	Change
S&P futures	2897	-4.25
Eurostoxx index	379.06	-3.45
Oil (WTI)	71.13	1.33
10 year government bond yield		2.88%
30 year fixed rate mortgage		4.55%

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

The highlight of the upcoming week will be the jobs report on Friday, although we will get a lot of Fed-speak on Wednesday. Productivity and costs on Thursday will be an important report as well. 

Construction spending rose 0.1% which was lower than the Street 0.4% expectation. Residential construction rose 0.6% MOM and 6.6% YOY. 

Manufacturing expanded in August, according to the ISM PMI Index. The August PMI increased 3.1% to 61.3, driven by increases in production and new orders. Employment rose as well. Many of the participants noted that trade is injecting some uncertainty into their business, especially with respect to price negotiations with suppliers. The reading of 61.3 is unusually strong, and is typically associated with 5.6% GDP growth. 

The OCC is asking for input regarding the CRA and modernization. “As a long-time banker, I have seen firsthand the benefit of CRA investment and how it makes communities vibrant. I applaud the effort of community development practitioners and bankers who work together to make an important difference in our nation’s neighborhoods,” said Comptroller of the Currency Joseph M. Otting. “I have also seen how limitations in the current CRA regulation can fail to provide consideration to a bank that wants to lend and invest in a community with a need for capital, including many low- and moderate-income areas. Unfortunately, the operation of the current CRA regulation can result in restricted resources. It is time for a national discussion on how we can make the CRA work better.”

The ANPR solicits comment on a number of questions regarding improvements to the CRA regulations related to

• increasing lending and services to people and in areas that need it most, including in LMI areas;
• clarifying and expanding the types of activities eligible for CRA consideration;
• revisiting how assessment areas are defined and used;
• establishing metric-based thresholds for CRA ratings;
• making bank CRA performance more transparent;
• improving the timeliness of regulatory decisions related to CRA; and
• reducing the cost and burden related to evaluating performance under the CRA.

Donald Trump was jawboning Canada over trade and threatening China with $200 million in higher tariffs. I think markets are pretty much shrugging off trade threats any more. Note that Trump will need legislation to carry out some of the changes he wants to make with Canada, which isn't going to happen. 

Home prices increased 0.3% MOM and 6.2% YOY in July, according to CoreLogic. They are forecast to rise about 5% over the upcoming year. We are seeing sellers in the hot markets decide to pull properties off the market to see if they can ride the home price appreciation for a bit longer. This is adding to the supply crunch. CoreLogic's model always seems to predict a slowdown in home price appreciation that never seems to materialize. 

An interesting tidbit - the median lot size fell to 8.560 square feet in 2017 (about 1/5 of an acre). Lot sizes had been trending downward, but climbed during the bubble years as more and more building was done in the exurbs. New England has the largest lot sizes at about 0.4 acres, while the left coast has the smallest (.15 acres). Note this study is only looking at single family spec homes. It looks like this is basically a secular trend, and the the bubble years (building in the exurbs) was largely a blip. It also could be a function of building activity being dominated in regions (like the West Coast), where lots are smaller.  

The ultra-high end luxury market has been getting whacked as foreign investors step away. Changes in tax laws might be having an impact, but it could have also been driven by overbuilding at the top end. I suspect it is the latter, since we are seeing softness in states like Florida which benefit from the tax law. 

Morning Report: Wages increasing at the low end of the scale

Vital Statistics:

	Last	Change
S&P Futures	2470.8	-0.8
Eurostoxx Index	382.4	-1.6
Oil (WTI)	46.6	-0.4
US dollar index	86.7	0.2
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.31
Current Coupon Ginnie Mae TBA	104.375
30 Year Fixed Rate Mortgage	3.96

Stocks are flat this morning on another Summer Friday. Bonds and MBS are flat. 

Should be a dull day as much of the mortgage business is at the Western Secondary conference, there is no data or Fed-Speak, and the rest of the Street will be on the LIE by noon. 

What states still have the highest foreclosure issues? New Jersey is the worst, with 1% of all homes in some state of foreclosure. They are followed by DE. MD, IL, CT, NV, FL, SC, OH, and NM. Note there isn't a lot of overlap between these areas and the best places to start a business. 

Republicans in Congress plan to use the Congressional Review Act to overturn the Obama-era CFPB ruling that eliminates mandatory arbitration. The left wanted to overturn mandatory arbitration in order to make it easier to use class-action lawsuits to attack what it considers bad corporate behavior. The right worries that it will restrict credit, and amount to nothing more than a sop to the trial lawyers lobby. 

Are we beginning to see the stirrings of wage inflation" Certainly at the low end of the wage scale we are. We are also starting to see wage inflation at the high end, where there are shortages of skilled labor. The middle is still lumbering along at 2.5% wage growth or so - better than inflation, but not all that satisfying. Especially since rental costs are outpacing inflation due to tightness in the real estate market. I have said this before: getting housing starts up fixed two major problems: lack of middle class jobs and a tight real estate market. Both would go a long way towards making the economy feel better. 

Further to the above, Axios has a cool moving graph that demonstrates the malaise in the jobs market over the past decade. It plots the number of jobs on the vertical axis and wages on the horizontal axis. You can see in some professions where both the number and the wages have been falling. 

Morning Report - The disparate impact.

Vital Statistics:

	Last	Change	Percent
S&P Futures	1511.8	-0.6	-0.04%
Eurostoxx Index	2626.5	-3.8	-0.14%
Oil (WTI)	95.4	-0.3	-0.33%
LIBOR	0.293	0.001	0.38%
US Dollar Index (DXY)	80.4	0.151	0.19%
10 Year Govt Bond Yield	1.95%	0.00%
RPX Composite Real Estate Index	193.2	-0.1

Markets are flattish on no real news. Most of Asia was closed overnight for the lunar new year.  The G7 is expected to make a statement against competitive devaluation.  There is no economic data this morning, but many will be looking at tomorrow's retail sales report to get a gauge on how much consumers have been affected by the increase in taxes.  Bonds and MBS are flat.

The internal debate at the Fed concerns how to start extricating itself from the market. As QE winds down, the Fed wants to prevent the market from getting ahead of it and prematurely slowing down the economy. The fear is that the market will interpret the end of QE as a signal that the end of ZIRP is imminent. Since the Fed has given numerical targets for the end of ZIRP, this fear is probably overblown, but targets can be changed. That said, if you look at the float numbers, the Fed has effectively cornered the market in 10 to 20 year bonds. And they have the buying power to maintain it.  The exit may involve simply holding the paper and letting it mature.

HUD just made it easier to prove discrimination cases.  Under the disparate impact rule, statistical proof that your lending mix is different that the population as a whole means you are guilty of discrimination, no matter what your policy or intention is.  Period. Obviously this is a huge victory for affordable housing advocates. The Mortgage Bankers Association is unhappy. IMO, this whole debate of FICO explaining everything misses the point that collateral valuation volatility in some neighborhoods is higher than in others.  Since the borrower is effectively long a put (if the house drops below the loan amount, they can toss the keys to the bank), and the value of a put is a function of volatility, then that has to be priced in the loan. And if house prices are more volatile in Detroit, or Harrisburg, or Newark then loans there should cost more to reflect that.  Which means FICO is not the whole story, contrary to what housing advocates insist.

45 Democrats sent a letter calling on President Obama to permanently replace Acting FHFA Director Ed DeMarco with someone more "willing to implement all of Congress' directives to meet the critical challenges still facing our nation's housing finance markets."  This statement means willing to forgive principal on Freddie and Fannie loans. The mandate to put taxpayers first is at loggerheads with the desire to ease the financial burden on consumers.

Separately, the White House is considering more mortgage relief for homeowners through executive order. The plan would allow underwater homeowners who are current on their mortgage to refinance at today's rates, even if their loans are private label.