Morning Report: Dave Stevens talks at the MBA conference

Vital Statistics:

	Last	Change
S&P Futures	2567.3	3.8
Eurostoxx Index	390.5	-0.3
Oil (WTI)	52.2	0.3
US dollar index	87.2	0.1
10 Year Govt Bond Yield	2.41%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are up this morning on strong earnings, especially from CAT. Bonds and MBS are down small. 

Manufacturing continues to be strong, according to the Markit Flash PMI which came in stronger than expected. 

Whoever Trump nominates to replace Janet Yellen will have a more hawkish bent than she had, and the Street is making a bet on a flatter yield curve. This means that people are betting that short term rates will increase more than long term rates as the Fed hikes, which should translate into at least stable mortgage rates despite a rising Fed Funds rate. The yield curve flattened during the last 3 tightening cycles and even inverted in one of them. 

The Fed Funds futures are now pricing in a 97% chance for a December hike.

The Treasury Department has weighed in on the CFPB's proposed arbitration rule, and concluded that it “failed to meaningfully evaluate whether prohibiting mandatory arbitration clauses in consumer financial contracts would serve either consumer protection or the public interest — its two statutory mandates.” They conclude that the CFPB's rule will do more for trial lawyers than it ever will for consumers of businesses - it is basically a $300 million transfer of wealth to the Plaintiff's Bar, coming from consumers and business. 

The MBA National Conference is going on right now in Denver. Dave Stevens warned that the heads of the FHFA and CFPB will be replaced in the future, and that could mean big changes for the industry. Mortgage bankers have a false sense of security at the moment, with the current FHFA Chairman advocating for a strong role of government in housing finance. That could change. Making the current changes permanent will require legislation, however and housing finance reform always seems to be something down on the priority list. 

76% of people renting believe it is more affordable than home ownership, and that could help explain why the homeownership rate is so low, particularly among the young. Certainly the housing indices show prices back to the heady days of 2006, however remember these indices aren't indexed for inflation. If you make the inflation adjustment, we still have not recouped those losses. When you take into account the tax effects and interest rates, affordability hit a record in 2012 and buying is still extremely cheap compared to historical numbers. 

Morning Report: RIP the mortgage interest deduction?

Vital Statistics:

	Last	Change
S&P Futures	2158.0	12.0
Eurostoxx Index	341.2	1.6
Oil (WTI)	50.6	0.8
US dollar index	87.6	-0.2
10 Year Govt Bond Yield	1.72%
Current Coupon Fannie Mae TBA	103.3
Current Coupon Ginnie Mae TBA	104.2
30 Year Fixed Rate Mortgage	3.54

Bonds are closed today, but overseas bond markets are weaker. Stocks are up.

No economic data today. The week after the jobs report is typically data light to begin with, and there really isn't anything market-moving this week, except for may the PPI on Friday. 

Dave Stevens of the MBA raised the issue of eliminating the mortgage interest deduction, albeit with the caveat that it be done in the context of tax reform, with lowering rates and eliminating deductions. He wasn't advocating eliminating it in a vacuum. 

If Donald Trump wins, tax reform is a definite possibility. If Hillary wins, will she be more like her husband, willing to deal with Republicans to get something done, or will she be more like Obama, where both sides had hardened positions? If you were going to eliminate the mortgage interest deduction, it will certainly make housing less affordable and would have a dampening effect on home price appreciation. That said, with rates as low as they are, interest payments as a percentage of your mortgage payment are at all-time lows. So if you wanted to eliminate it at the time when it causes the least amount of pain, now is the time to do it. 

Republicans will never support eliminating deductions without cutting rates, and the historical bargain between right and left (Democrats trading increased taxes and spending for increased defense spending) might not work this time around. Believing in that trade was what got us the sequester, where Obama found his bluff called, as Republicans tolerated lower defense spending in exchange for lower discretionary spending. Given the general war fatigue of the American voter, Republicans are probably not going to be willing to trade increases in defense spending for more social spending, and certainly not for tax increases. 

Punch line: the mortgage interest deduction probably isn't going anywhere.

That said, the US subsidizes the residential real estate market six ways to Sunday, with the mortgage interest deduction, the 30 year fixed rate mortgage (try finding that anywhere else on the planet), taxpayer backing of almost all new origination, and the cornucopia of subsidies for affordable housing. Not to mention the central bank targeting of mortgage rates and real estate prices. And the powers that be still scratch their heads wondering why we had a real estate bubble...

Mortgage credit availability improved in September, according to the MBA.