Morning Report: Fannie Mae cuts housing forecast.

Vital Statistics:

			Last	Change
S&P futures			2855.5	3.8
Eurostoxx index			383.49	2.43
Oil (WTI)			65.92	0.02
10 Year Government Bond Yield				2.84%
30 Year fixed rate mortgage				4.58%

Stocks are higher this morning on optimism of a deal with China. Bonds and MBS are up small. 

Late August is a generally dull time to begin with, and this week promises more of the same. We will get some housing data (Existing home sales, new home sales, FHFA price index) and one possible market-moving report (durable goods) but that is about it. We will get the FOMC minutes on Wednesday as well. 

Liquidity is drying up in the bond market as it usually does this time of year. Note that the short bond position is one of the biggest on the Street, so we could see some quick rallies in the 10 year. 

Flagstar has been released from special oversight that limited its corporate options to pay dividends, make acquisitions, etc. 

Luxury apartments in NYC are falling in price, after years of torrid growth. Some are blaming the new tax laws, however some could be from falling foreign demand. We are seeing the same thing in London. Note that luxury properties in the suburbs of NYC are doing the same thing. You can't give away properties priced at $1MM + 

Fannie Mae cut their housing forecast for 2018 for the 4th time this year. They are looking for $1.67T in originations this year and $1.7T next year. The 30 year fixed rate mortgage is expected to average 4.5% this year and 4.7% next year. They are also forecasting a major slowdown in GDP growth, from 3% this year to 2.3% next year. 

Morning Report: Administration proposes to privatize the GSEs

Vital Statistics:

			Last	Change
S&P futures			2767	14
Eurostoxx index			384.04	3.19
Oil (WTI)			67.44	1.9
10 Year Government Bond Yield				2.92%
30 Year fixed rate mortgage				4.57%

Stocks are higher on no real news. Bonds and MBS are flat.

The Trump administration released a set of principles around privatizing the GSEs. It is more or less the same thing as before - the goal is to lessen the government's footprint in the mortgage market. The idea would be to have Fannie and Fred issue MBS with a catstrophic government guarantee - in other words, some private mortgage insurer would bear the initial losses and the government would only step in if the losses exceeded that number. That is all well and good, however there are all sorts of issues that remain before private label MBS can do the heavy lifting of the mortgage market. 

First and foremost, there is a huge gulf between what the MBS investor market requires as a rate of return and current mortgage rates. In a perfect world, PL MBS would trade at similar levels to Fannie / Freddie MBS, but they won't. There are huge governance issues that need to be resolved. For just one example, will the servicer (who is probably the issuer, who may also have a second lien) service the loan to benefit the MBS holder or themselves? What about reps and warranties? I went into more depth about this whole issue here. These uncertainties need to be priced in, which means that the bid / ask spread between private label and FNMA MBS is so large that nobody would take out a mortgage at the rate the private label investors require. That is a necessary but not sufficient requirement to bring back private money into the US mortgage market. 

Taking the GSEs out of conservatorship is going to require legislation, and to be honest it isn't a priority for either party. As far as DC is concerned, yes it would be nice if the government could lessen its footprint in the mortgage market, but people are getting loans, and the market is functioning normally. It just isn't a priority. 

The US borrower believes that the 30 year fixed rate mortgage is nothing unusual. In fact, it is a distinctly American phenomenon, where the borrower bears no risk. In the rest of the world, mortgages are adjustable rate, and not guaranteed by the government. In other words, the borrower bears the interest rate risk and the bank bears the credit risk. In the US, the bank bears the interest rate risk and the taxpayer bears the credit risk. Upsetting that apple cart is going to be a tough slog politically. 

Finally, the news did nothing for the stocks of Fannie and Fred, which continue to languish. When the government took over Fannie and Fred, they left 20% of the common outstanding. This was an accounting gimmick to prevent the government from having to consolidate Fan and Fred debt on its balance sheet (incidentally, this was the reason why LBJ privatized the GSEs in the first place). The government could not take the GSEs through a bankruptcy without creating chaos in the mortgage market. So they left 20% outstanding and decided to deal with the bankruptcy part later. The stock should be worthless, but it is a litigation lottery ticket.

A Federal Judge ruled yesterday that the CFPB's structure is unconstitutional. The PHH case never made it to SCOTUS, but it will be interesting if this one does. At some point, the CFPBs structure will make it to SCOTUS, and the only one with the standing to defend the agency is the government. 

Morning Report: New Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2757.3	8.5
Eurostoxx Index	383.2	2.1
Oil (WTI)	63.3	-0.2
US dollar index	83.5	-0.1
10 Year Govt Bond Yield	2.85%
Current Coupon Fannie Mae TBA	103.591
Current Coupon Ginnie Mae TBA	103.688
30 Year Fixed Rate Mortgage	4.4

Stocks are higher this morning on the back of global strength overnight. Bonds and MBS are up. 

The highlight of the week will probably be new Fed Chairman Jerome Powell's testimony in front of Congress. There probably won't be anything market-moving (the questions will probably focus on financial regulation and wage inflation), but just be aware. He testifies on Tuesday and Thursday. The jobs report will be released next Friday, not this one. 

Economic activity moderated slightly in January, according to the Chicago Fed National Activity Index. The 3 month moving average fell as an unusually strong October reading fell off. 

New Home Sales fell in January to 593,000. December was revised upward. The median price rose to 323,000. Inventory stood at just over 300k, which amounts to about 6 month's worth of inventory at the current sales pace. 

Goldman is forecasting a 3.25% 10 year yield by the end of the year, adding that if bond yields hit 4.5% you could see a big sell-off in the stock market (no kidding). Surprisingly, they don't think that sort of yield would trigger a recession. 

Quantitative hedge funds are having their worst month in 17 years, especially the trend-following ones. Some of these funds are down 10% plus this month. If this continues, expect to see redemption notices being filed, which means they will be unwinding positions. One of the biggest positions on the street, aside from being long stocks is being short bonds. This will actually provide some support for bond prices, which means that we could be looking at stable / rising rates in the near term. 

Very surprising stat: Since the bubble peak, the median home price is up about 4.5% and the Case-Shiller Index is up 6.5%. The new home median price is up 27.5%. This demonstrates just how much the homebuilders focused on the luxury market after the bust. I think it also reflects a push towards urban construction as well. 

As the Spring Selling Season begins, inventory is sparse. Most homebuyers have been searching for 3 months or more. The biggest issue? Finding a house they can afford. 

Fannie Mae has almost delivered the 10% return on the preferred stock it sold the government during the financial crisis. Freddie has further to go. Once the GSEs pay their 10%, the preferred stock could be retired, perhaps in exchange for housing reform. 

Morning Report: Fannie will now allow AirB&B income on refi applications

Vital Statistics:

	Last	Change
S&P Futures	2593.0	0.0
Eurostoxx Index	368.2	-5.9
Oil (WTI)	60.4	-0.8
US dollar index	84.2	0.0
10 Year Govt Bond Yield	2.83%
Current Coupon Fannie Mae TBA	102.688
Current Coupon Ginnie Mae TBA	102.938
30 Year Fixed Rate Mortgage	4.33

Stock index futures are flat this morning after yesterday's closing sell-off. Bonds and MBS are up. 

There wasn't any real catalyst for yesterday's sell-off, aside from the natural phenomenon of volatility begets volatility. At the margin, stock market volatility is good for interest rates, but it does have negative consequences on your blood pressure. 

So far the sell-off has yet to be reflected much in credit spreads. The biggest high yield ETF has dropped a few points over the past week, but nothing major. It did hit a low of 66 during the financial crisis and also a low in the 70s during early 2016. When high yield debt begins to seriously drop, you tend to see big drops in interest rates overall. Treat this ETF like the proverbial canary in the coal mine. High yield spreads overall are still below the 5 year average, which means investors are not even close to panicking. 

You might not have been aware, but the government shut down for a few hours last night. Democrats in the House (and a few Republicans) balked at the Senate bipartisan plan that adds about $300 billion in spending over the next two years and kicks the debt ceiling can down the road until 2019. This takes continuing resolutions / debt ceiling grandstanding off the table for the 2018 midterms. 

Homeowners will soon be allowed to include Air B&B income on their applications for refinancings. This is a new Fannie Mae program that will initially only be offered by a few lenders. 

Fannie Mae's Home Purchase Sentiment Index hit an all-time high last month on the back of a strong economy and rising house prices. The index increase was driven by expectations of increased home price appreciation. Personal economic expectations (things like concern over losing a job / household incomes) have been in a tight range over the past year. 

Morning Report: Movement on housing reform

Vital Statistics:

	Last	Change
S&P Futures	2647.0	7.8
Eurostoxx Index	389.5	3.1
Oil (WTI)	57.6	0.9
US dollar index	87.3	0.0
10 Year Govt Bond Yield	2.38%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	3.92

Stocks are higher after a strong jobs report. Bonds and MBS are down small. 

Jobs report data dump:

• Payrolls up 228,000
• Two month revision up 38,000
• Unemployment rate 4.1%
• Labor Force participation rate 62.7%
• Average hourly earnings up 2.5% YOY

Overall a strong report, and probably good for the markets. The modest wage inflation will keep the Fed cautious, while slack continues to be taken up. That said, a rate hike is more or less a certainty next week. We probably won't see any big pickup in wage inflation until the labor force participation rate gets back up to the 65% - 66% level. 

In other labor news, job cuts increased slightly according to outplacement firm Challenger, Gray and Christmas, while initial jobless claims fell to 236,000. 

Consumer sentiment edged up slightly in November, according to the University of Michigan survey. 

Congress came up with a deal to keep the lights on for two weeks. The debt ceiling will have to be raised at some point, although the government can use cash on hand and other extraordinary measures to get through until Spring. Expect to see some conservative Republicans to balk at additional spending, which makes bringing aboard some Democrats a necessity. A deal with Democrats will involve an equal hike in defense and non-defense spending as well as some sort of immigration deal. A shutdown doesn't seem to be in the cards, at least not yet. 

With all the commotion going in Washington right now, it is easy to forget about housing reform, but Bob Corker and Mark Warner are beginning to come to a consensus over what the future of housing finance should look like. Fannie and Fred will remain, but the government will make it easier for new competitors to enter the market. Jeb Hensarling of Texas has moderated his stance on government guarantees of mortgages, which helped move things along. The goal is to keep the mortgage market more or less as-is for borrowers, while increasing competition in the secondary market and bolstering taxpayer protection. In one wrinkle, the Fannie Mae preferred shareholder might get some sort of recovery. The prefs were up 24% on the news, while the common fell slightly. 

The FHA will no longer insure mortgages for properties that include Property Assessed Clean Energy (PACE) assessments."FHA can no longer tolerate putting taxpayers at risk by allowing obligations like these to be placed ahead of the mortgage itself in the event of a default," said U.S. Department of Housing & Urban Development (HUD) Secretary Dr. Ben Carson. "Assessments such as these are potentially dangerous for our Mutual Mortgage Insurance Fund and may have serious consequences on a consumer's ability to repay, or when they attempt to refinance their mortgage or sell their home." Dave Stevens of the MBA also welcomed the decision.

Ginnie Mae is tightening requirements on securitizations in order to combat the high prepayment speeds that the securities have been experiencing. They targeted VA IRRRLs last year by making IRRRLs that refinanced a loan less than 6 months old ineligible for standard securitizations. Ginnie is now including cash-out refis and FHA streamlines as well. Some MBS strategists have predicted that this will weaken demand for the higher coupon Ginnie Mae securities, which would mean that borrowers get less and less of a pickup in points for going higher in rate.

Morning Report: Fannie is piloting a new construction loan program

Vital Statistics:

	Last	Change
S&P Futures	2578.8	-12.3
Eurostoxx Index	391.2	-3.2
Oil (WTI)	56.9	0.1
US dollar index	87.8	0.0
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.95

Stocks are lower this morning on overseas weakness. Bond and MBS are down. 

Initial Jobless Claims rose to 239k last week. We are at levels not seen since the Vietnam War. 

Fannie Mae is working on an initiative to increase affordable housing, by increasing access to construction loans. Under the program being considered, lenders will be able to sell construction loans to Fannie Mae on the day construction begins instead of the day construction is completed. This will alleviate the issue of lenders having to hold a construction loan on their books for months and hopefully spur more construction activity. This will probably have only a marginal impact on housing supply, as the supply issue is being driven more by labor and land shortages, as well as regulation.''

Meanwhile, NAR is warning that the GOP tax plan will bring affordable housing construction "to a halt." The Low Income Housing Tax Credit will remain in place, however the private activity bonds used to finance affordable housing construction will be eliminated. Second, as tax rates fall, the value of the tax credits used to encourage affordable housing construction will fall in value. Affordable housing advocates estimate that tax reform will cut affordable housing construction by 2/3.  

Fannie Mae's Home Purchase Sentiment Index fell from its highs in October. "The modest decrease in October's Home Purchase Sentiment Index is driven in large part by decreases in favorable views of the current home-buying and home-selling climates, a shift we expect at this time of year moving out of the summer home-buying season," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Indicators of broader economic and personal financial sentiment remain relatively steady. Overall, these results are consistent with our view that the housing market will continue its slow, upward grind through 2018." Despite the strong employment numbers lately, the survey saw an increase in the number of people worried about their jobs. 

The NYSE just launched FANG futures, which are led by Facebook, Amazon, Netflix, and Google. Definitely a bull market phenomenon - reminds me of stock split beepers, which were advertised in Barrons back in the late 90s. 

Some market watchers are warning that the flattening yield curve is signalling a recession. The favorite metric is the 2s-10s spread or the difference in yield between the 10 year bond and the 2 year bond. While a flattening yield curve is often associated with longer-term economic weakness, it is also associated with Fed tightenings. In fact, the yield curve has flattened in every tightening cycle since 1980. That said, nothing in the data suggests the economy is weakening - if anything the economy is accelerating. The Fed is tightening in order to bring its unusually accommodative policy back to a semblance of normalcy, not to fight inflation (despite what they are saying about it). They are being extremely cautious and are doing everything they can to prevent a Fed-induced recession.

Morning Report: Small business optimism falls

Vital Statistics:

	Last	Change
S&P Futures	2547.8	4.0
Eurostoxx Index	391.2	0.0
Oil (WTI)	50.2	0.6
US dollar index	86.6	-0.3
10 Year Govt Bond Yield	2.36%
Current Coupon Fannie Mae TBA	102.875
Current Coupon Ginnie Mae TBA	103.938
30 Year Fixed Rate Mortgage	3.9

Stocks are higher this morning after Walmart announced a $20 billion buyback. Bonds and MBS are flat.

Neel Kashkari speaks at 10:00 am. 

Small Business Optimism fell in September as the hurricanes hurt retail spending in Texas and Florida. We did see a weakening in the labor market, not just in Florida and Texas, but in 2/3 of all Census regions. The hurricanes will probably boost the economy into Q4 and Q1 next year, but at the moment they are depressing things. 57% of firms are trying to hire, but the vast majority of those are finding few or no qualified applicants. 

The US foreclosure and seriously delinquent rate remain very low, according to CoreLogic. The national Foreclosure rate was 0.7%, down from 0.9% last year. The Seriously Delinquent ratio was just under 2%. This is all July data, so pre-hurricane. We are starting to see the effects of the drop in oil prices in some of the energy intensive states like Alaska and Louisiana. 

Home Prices continue to rise, jumping 0.9% MOM and 6.9% YOY in August, according to CoreLogic. Their models hold that half of the largest 50 MSAs are now overvalued, which has been driven by low inventory. 

Fannie Mae is offering assistance to borrowers affected by the recent spate of hurricanes. Borrowers will be able to temporarily stop making monthly payments for 3 months (up to 12 months) without late fees, negative comments on their credit reports, or a requirement to get back current in one fell swoop. 

The IMF took up their forecast for global growth to 3.6% this year and 3.7% next year. At the margin, this means reduced demand for safe haven assets like Treasuries, which would mean higher interest rates going forward. That said, we have several real estate bubbles overseas at the moment, and when they bust, it should be bond bullish (i.e. encourage lower rates). 

Morning Report: Tax reform is on the agenda this week

Vital Statistics:

	Last	Change
S&P Futures	2496.8	-2.8
Eurostoxx Index	383.9	0.7
Oil (WTI)	51.2	0.5
US dollar index	85.8	0.3
10 Year Govt Bond Yield	2.25%
Current Coupon Fannie Mae TBA	103.24
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.85

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

We have a decent amount of economic data this week, along with a lot of Fed-speak. The big economic news will be the final revision to second quarter GDP and the personal income and personal spending releases. Janet Yellen speaks on Tuesday. 

Economic activity slowed in August, according the Chicago Fed National Activity Index. The index fell from 0.4 to -.31, for the lowest reading in a year. Production-related indicators drove the decrease. Employment-related indicators were a mild positive. 

The Trump Administration is going to push for tax reform this week. The highlight is a cut in the top rate to 35% and a cut in the corporate income tax to 20%. The cut in the top rate will be paid for in part by limiting deductions for state and local taxes. Chuck Schumer has insisted that "not one penny" of tax cuts go to the top 1%, so that could make the plan doomed. The estate tax will also get the axe. Republicans are working on the procedures to pass this without Democratic votes. 

Meanwhile, Obamacare repeal and replace looks like it is going to go down as well. 

We are starting to see some of the fallout from the recent hurricanes: Homebuilder D.R. Horton cut its cash flow forecast by 50%. Lennar has also said that the hurricanes will delay deliveries. At the end of the day, there is such high demand for homes that this should be a 1 quarter effect which will be made up in following quarters. 

Lenders are easing standards given the increase in interest rates and the corresponding drop in volume. “Lenders further eased home mortgage credit standards during the third quarter, continuing a trend that started in late 2016. In particular, both the net share of lenders reporting easing on GSE-eligible loans for the prior three months and the share expecting to ease standards on those loans over the next three months increased to survey highs," said Doug Duncan, senior vice president and chief economist at Fannie Mae. "Lenders’ comments suggest that competitive pressure and more favorable guidelines for GSE loans have helped to bring about more easing of underwriting standards for those loans. We believe that the GSEs’ attempts to relieve repurchase concerns and expand credit for creditworthy borrowers have contributed to the easing trend. Meanwhile, market competitiveness also led to the fourth consecutive quarter in which lenders’ net profit margin outlook deteriorated. The share of lenders citing competition from other lenders as the key reason for a negative profit market outlook rose to a new survey high.”

Morning Report: Risk-off feeling on North Korea missile launch

Vital Statistics:

	Last	Change
S&P Futures	2431.3	-12.5
Eurostoxx Index	367.6	-4.7
Oil (WTI)	46.6	0.0
US dollar index	85.1	-0.1
10 Year Govt Bond Yield	2.11%
Current Coupon Fannie Mae TBA	103.33
Current Coupon Ginnie Mae TBA	104.21
30 Year Fixed Rate Mortgage	3.84

Stocks are lower on news that North Korea fired a missile over Japan. Bonds and MBS are up.

Pre-open, the 10-year bond is trading at 2.11%, the lowest level of 2017 and we are back at immediate post-election levels. Remember, on the day of the election, the 10 year was trading around 1.83%, so we could still have further to fall in rates. The Great Trump Election Reflation simply isn't going to happen, though the Administration still intends to pivot to tax reform. The trader in me thinks we test the 1.83 level at some point. 

Home prices rose 0.1% MOM and are up 5.7% YOY according to the Case-Shiller Home Price Index. The Case-Shiller index has been lagging the FHFA index, which indicates that there might be some issues at the high end of the market. The FHFA index only looks at homes with a conforming mortgage, so jumbos and all-cash sales are excluded. 

Consumer confidence rose again in August to 122.9. The present situation component of the index hit a 16 year high, as we are back to mid 2001 levels. 

Tax reform won't be a slam dunk, but there could be a possibility for a bipartisan deal. Democrats might be willing to trade a carbon tax for an income tax cut, but that might be too tough of a deal for Republicans to stomach. A repatriation holiday for overseas corporate earnings is another possibility, however Democrats will certainly want some sort of strings attached to the repatriation break to ensure the funds don't simply go to buybacks and dividends, which is what happened last time we did one. Perhaps a deal could be found if there is a stipulation that some percentage of the savings be applied to worker compensation and training. 

A drop in the cap for the mortgage interest deduction is also something being considered, however that is such a politically risky issue that I doubt anyone does anything about it. The main beneficiaries are the wealthy and the upper middle class, and the upper middle class is really the third rail of politics. Liberals may hate the distribution of the benefits, but they probably won't go to the mat for it. Why? It isn't indexed for inflation, so the cap will hit more and more people simply due to home price appreciation. As a practical matter, the cap is declining 6% a year. 

Fannie Mae Chief Economist Doug Duncan looks at the implications of the Fed ending QE. He believes that it will increase MBS spreads, which means that mortgage rates will rise more than you would typically expect when rates rise, and fall less than you would expect when rates fall. FWIW, I think any effect would be minor: it certainly was when QE was actually happening. He also speculates that tapering will affect Fannie Mae and Freddie Mac spreads more than Ginnie spreads due to the differing capital treatment for banks. This means that FHA and VA loans will be relatively more attractive to a borrower than a Fannie or Freddie loan. The GSEs have also been ordered to reduce their balance sheets to a set level, so they won't automatically absorb that lost demand. 

Morning Report: Freddie Mac explores what is driving low inventory

Vital Statistics:

	Last	Change
S&P Futures	2473.3	3.0
Eurostoxx Index	379.6	1.3
Oil (WTI)	49.7	0.0
US dollar index	86.2	-0.3
10 Year Govt Bond Yield	2.29%
Current Coupon Fannie Mae TBA	102.93
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	3.95

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

Pending Home Sales rose 1.5% in June, according to NAR. On a YOY basis, the index is up half a percent. Housing inventory is down 7% YOY. 

Freddie Mac explores the issue of tight inventory and asks why builders aren't adding much supply. The issue largely concerns labor, especially skilled labor. The bust laid off about 1.5 million construction employees, who ended up finding new jobs in different sectors of the economy (especially the energy sector). These people are probably not coming back to the construction sector without some sort of catalyst. Second, young people don't seem all that interested in working construction, and the ones that are cannot pass a drug test. Tighter immigration enforcement and the economy in general have led to a drop in immigrants, who have historically been about 25% of the construction industry. Land costs as a percent of new home costs have been rising as well, which is creating pressure on margins. Land use regulations are also stretching out the time it takes to work through the permitting process. 

Speaking of drug tests, a factory owner in Ohio says they have plenty of jobs, but can't find people who can pass the drug test. 40% of their applicants cannot pass a drug test. 

The Fed plans to unveil soon its recommendation to replace LIBOR. LIBOR had been the benchmark interest rate for all sorts of variable rate products for decades, but had one fatal flaw: it was set based on self-reports from a consortium of investment banks. The problem is that the bank could say it was pricing LIBOR at a rate that it wasn't prepared to actually honor. Since banks have all sorts of products that are pegged to LIBOR, they have an incentive to manipulate the measure in order to get the most favorable mark for their own positions. The group is recommending a broad treasury financing rate based on Treasury repos. This rate will be based on what people are actually paying for financing in the markets, not a survey. There are something lie, $330 trillion of derivatives and loans (everything from mortgages to student loans) that are pegged to LIBOR. 

New documents bolster the case for Fannie Mae shareholders that the government lied when began to sweep all of Fannie's profits. The cover story was that Fannie was in a "death spiral" and this was necessary to hasten the wind-down of their business. The documents show Tim Geithner saying that Fannie will be earning strong revenues and can support the 10% dividend for years into the future. Does that mean shareholders will get anything? They probably shouldn't, as the government maintained a 20% public minority stake only so it didn't have to consolidate Fannie's debt on its own balance sheet. Under any sort of bankruptcy scenario shareholders would have been wiped out. The stock is a litigation lottery ticket. 

Morning Report: Decent jobs report

Vital Statistics:

	Last	Change
S&P Futures	2415.8	7.3
Eurostoxx Index	379.5	-0.9
Oil (WTI)	44.6	-0.9
US dollar index	88.3	0.1
10 Year Govt Bond Yield	2.38%
Current Coupon Fannie Mae TBA	102.88
Current Coupon Ginnie Mae TBA	103.75
30 Year Fixed Rate Mortgage	4.06

Stocks are higher this morning after a decent jobs report. Bonds and MBS are down.

Jobs report data dump:

• Nonfarm payrolls up 222,000
• Unemployment rate 4.4%
• Labor Force Participation rate 62.8%
• Avg weekly earnings up .2% MOM and 2.5% YOY

Overall, it is a decent report. The payroll number was a bit higher than expectations. The wage numbers are certainly nothing to get the Fed worried about inflation, although we still aren't making much headway on bringing the long-term unemployed back into the labor force. Bringing those folks back into the workforce is the key (along with improving housing construction) to improving the economy from "meh" to "boom."

The bifurcation in the employment market between those with jobs and those without is evident in what recruiters are saying: It is the hottest market in memory for some headhunters and things are definitely candidate-driven. Companies have been loath to give raises for over a decade, but they may be forced to in order to attract / retain talent. 

Ray Dalio and Jeffrey Gundlach believe the top is in for the bond market (in other words, rates are going higher) and that stocks are vulnerable. Being short bonds is probably one of the biggest fast-money / wiseguy trade on the Street right now. Note however that notwithstanding the pop in yields over the past week or so, most of these guys are lugging a losing position. 

Federal Reserve Governor Jerome Powell called the current US housing system unsustainable, and pointed directly at Fannie and Fred. Here is the problem: US mortgage rates are artificially low, and that is due to government subsidies. The 30 year fixed rate mortgage is a distinctly American phenomenon. In the US, the taxpayer bears the credit risk and the lender bears the interest rate risk. Loans are guaranteed by the government, which means the lender gets paid even if the borrower stops paying. The 30 year fixed rate means the borrower has no interest rate risk - it doesn't matter where rates go, their rate stays the same. Everywhere else, the lender bears the credit risk and the borrower bears the interest rate risk (because everywhere else the rate floats with interest rates after a certain time period). Without the government backing, no lender would make loans at the rates Fannie and Fred can offer. His point is that real estate prices are based on subsidized borrowing rates and that makes the real estate market more susceptible to downdrafts. Nothing is going to change however - the US residential real estate finance market has been largely the same since the New Deal and there really is no replacement for it. Just remember this any time someone blames 2008 on the "free market." There is nothing, absolutely nothing "free market" about the US residential real estate market. There hasn't been since the Great Depression. 

Morning Report: Fannie getting into Mannies

Vital Statistics:

	Last	Change
S&P Futures	2397.5	2.5
Eurostoxx Index	396.1	2.0
Oil (WTI)	46.4	-0.1
US dollar index	90.5
10 Year Govt Bond Yield	2.39%
Current Coupon Fannie Mae TBA	102.6
Current Coupon Ginnie Mae TBA	103.81
30 Year Fixed Rate Mortgage	4.05

Markets are flattish on no real news. Bonds and MBS are flat as well. 

Bond yields have been moving higher after the French election. Given that the result was not really a surprise there shouldn't be too much in the way of follow through, but Euro bonds are selling off, which will translate into rising yields in the US on the relative value trade. 

Job openings were flat in March at 5.74 million, which was slightly above estimates. The quits rate, which is a key indicator was up slightly YOY at 2.4% or about 3.1 million workers. 

Small Business Optimism slipped in April, according to the NFIB Small Business Optimism Index. We are still at historically high readings, but the dimming prospect of tax reform in DC has hit the future expectations components of the index. The bright spot was hiring, as firms added .19 workers on average in April. 33% of respondents reported job openings they could not fill, which is the highest since 2000. Finding quality workers is a significant concern for many employers, although sales and regulatory issues are the biggest problems. 

Radian's Green River unit, which provides broker price opinions on residential real estate is the subject of a SEC probe. The feds are looking to see if BPOs were inflated on some bond deals where the interest was paid from the REO to rental trade. BPOs are cheaper than appraisals and are based on "drive by" evaluations. Many bond ratings agencies haircut BPO values in their assessments. If it turns out BPOs are inflated, it will probably have a dampening effect on bonds used to finance the activity. The plus side is that if private equity firms begin to unwind the trade, it will add some much needed supply to the market, especially at the lower price points. 

Seriously delinquent loans and and foreclosure rates continue to fall, according to CoreLogic. The past due percentage dropped to 5%, the lowest level in 10 years. This is a decline from 5.5% a year ago. While rates have dropped nationally, they remain elevated in New York and New Jersey as well as some Mid-Atlantic states. We are seeing the biggest increases in the oil states. 

Fannie and Freddie are looking at lending to borrowers with manufactured homes. FHFA needs to approve the program which is intended to increase credit to low-income borrowers, especially in rural areas. 

The Fannie Mae Home Sentiment Index increased in April. Respondents are more constructive on real estate prices and the stability of their job situation, which was the catalyst to push the index up. The number of people who though now was a good time to buy increased by 5 percentage points. Respondents are also forecasting a 3% increase in home prices over the next 12 months. 

5 things your appraiser wishes you knew. A big one is that the return on some home improvement projects are relatively low. A new kitchen will help, but you will be lucky to see a fraction of that expenditure translate into a higher home price. Pools are even worse. The biggest one? Finishing a basement. Most appraisers aren't allowed to even count that square footage so that investment is valueless, at least as far as the appraisal is concerned. 

Fear in the market is the lowest since 1993. The VIX index, which measures the price of options protection has been in the single digits lately. Does that portend anything? The old saw is "VIX is low, time to go. When VIX is high, time to buy." VIX can stay low for extended periods, so the first part of that adage probably isn't the greatest advice. Earnings growth has generally been good so far, which supports markets. 

Want to really measure complacency in the market? Remember the PIIGS (Portugal, Italy, Ireland, Greece, and Spain) which were the ne'er do wells of the European sovereign market? You can now lend money to the Greek government for the princely rate of 5.5%. They peaked at 27% or so. That said, German Bund continues to experience higher yields, and you can now get 44 basis points for tying up your money with Angela Merkel for the next 10 years. Gotta pay her 66 for two though. 

The mortgage interest deduction is being targeted by the left, who claim it increases inequality. This debate will get interesting as it creates an unusual alliance between limited government flat tax types, and social justice types. IMO, the mortgage interest deduction is simply too popular to eliminate but we could see a cap on it, which would probably hit homes at the high end the most. 

Morning Report: Strong jobs report

Vital Statistics:

	Last	Change
S&P Futures	2389.0	3.5
Eurostoxx Index	391.7	-0.3
Oil (WTI)	45.1	-0.4
US dollar index	89.9
10 Year Govt Bond Yield	2.34%
Current Coupon Fannie Mae TBA	102.625
Current Coupon Ginnie Mae TBA	103.625
30 Year Fixed Rate Mortgage	4.02

Stocks are up after the strong jobs report. Bonds and MBS are up as well.

Jobs report data dump:

• Nonfarm payrolls + 211,000
• Unemployment rate 4.4%
• Labor force participation rate 62.9%
• Average hourly earnings up 0.3% MOM / 2.5% YOY

Overall a strong jobs report. The unemployment rate is the lowest in a decade, reaching close to the cyclical low right before the real estate bubble blew up. Despite the low numbers we have yet to see much in the way of wage growth. The employment-to-population ratio, which is the Fed's preferred employment indicator, rose to 60.1%.  The U-6 unemployment indicator (which is more broad and includes the long-term unemployed) fell sharply during the month from 8.9% last month to 8.6%. U-6 is down 1.1% YOY. U-6 measures how much slack there is in the labor market, and as that slack is taken up wage inflation should return. This report shouldn't really move the needle for the June FOMC meeting and the Fed. 

Yesterday, the House passed narrowly its Obamacare replacement bill, and it will now head to the Senate where it will be ignored and slow-walked. The House bill was never scored by the CBO, and pushed through on short notice, which pretty much tips the GOP's hand that this was never intended to actually become law and has a 0% chance of surviving intact. FWIW, the bill is really the Republican Primary Prevention Act of 2017, which is to say merely a political gambit. The Senate may also be waiting to see what insurance rates look like for 2018 and also how many drop out of the exchanges. The only way to get Democrats and moderate Republicans on board is if they see the Obamacare exchanges failing.  

Now that Obamacare is out of the way in the House, their attention will turn to tax reform. Individual tax reform will get zero support from Democrats, however there might be some common ground on corporate taxes. 

Fannie Mae reported income of $2.8 billion for the first quarter, all of which will go to the government sometime in June. Total equity has fallen from $6.1 billion at the end of last year to $3.4 billion at the end of Q1. This is the problem the government has to address with the current regime: sending all profit to Treasury is eroding Fannie's capital. This is one motivation to get the government serious about GSE reform, although it isn't a high priority in Washington at the moment. 

Inflation continues to be tame, and part of that is being driven by oil, which has fallen 15% over the past few weeks. The rally in oil that began with OPEC's plan to cut production has been completely given back. While the Fed will undoubtedly characterize oil as a transitory phenomenon it does flow through to other products and can help drive inflation. 

Morning Report: Pending Home Sales back to bubble years

Vital Statistics:

	Last	Change
S&P Futures	2352.5	1.0
Eurostoxx Index	377.2	-0.1
Oil (WTI)	48.6	0.2
US dollar index	90.1
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.06
Current Coupon Ginnie Mae TBA	103.36
30 Year Fixed Rate Mortgage	4.11

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

Mortgage Applications fell 0.8% last week as purchases rose 1% and refis fell 3%. Rates collapsed at the end of the week due to the failure of health care reform, so it is probably premature to see if that has affected things. Note that mortgage rates invariably lag moves in the 10-year as lenders wait to see if the changes are for real. 

Pending Home Sales increased 5.5% in February, which is 2.6% higher than a year ago, and the second-highest reading since the bubble years (the first was last April). A slight uptick in listings drove the increase. Demand is there, supply is not.

Deep Subprime auto loans (loans to borrowers with sub 550 credit scores) have increased to 1/3 of all auto loan ABS. In 2010, they were just 5%. As you can expect, delinquencies are increasing on these. It is surprising that institutional investors are happy to buy bonds securitized by assets that depreciate like sushi, while securitizing an overcollateralized pool of high quality non-QM loans is like pulling teeth. 

If there is anything in Washington that should have bipartisan support, it is finding a solution for Fannie Mae and Freddie Mac. The current situation is untenable, as the government is sweeping all of their profits, which is making them more and more undercapitalized. The Trump Administration has indicated that dealing with the GSEs is a high priority, but they have yet to give any sort of indication of how they think the future housing market should look. The model the MBA supports is to turn them into regulated utilities, with a capped rate of return. The Obama Administration supported nationalizing them, while another plan would get them out of the securitization business and into the mortgage insurance business. There are many stakeholders in this discussion, including the affordable housing types who want to ensure underserved areas can get credit, hedge funds who own the common and preferred shares, as well as lenders and borrowers. 

Here is a good backgrounder on how hard tax reform is going to be. Every "loophole" will have a constituency which will defend it to the death. The failure to end Obamacare (at least for now) will have taken the biggest "pay for" off the table. That leaves Republicans with a couple choices: Either pass a 10 year tax cut the way George W Bush did, or do revenue-neutral tax reform like Reagan did. 

Institutional Investors are implementing artificial intelligence into the stock picking business. How much do you want to bet that everyone's algorithms will look pretty much the same and will pick the same stocks? 

Morning Report: Existing Home Sales fall

Vital Statistics:

	Last	Change
S&P Futures	2340.3	-2.0
Eurostoxx Index	373.1	-2.6
Oil (WTI)	47.5	-0.7
US dollar index	90.2
10 Year Govt Bond Yield	2.42%
Current Coupon Fannie Mae TBA	102.09
Current Coupon Ginnie Mae TBA	103.39
30 Year Fixed Rate Mortgage	4.21

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

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 3%. Mortgage rates were more or less unchanged on the week. 

Existing home sales fell 3.7% YOY to 5.48 million in February, according to NAR. Low inventory and lower affordability offset the increased foot traffic. The median price rose 7.7% YOY to $228,400. Inventory represented a 3.8 month supply, which was an uptick from January, but is still lower YOY. Days on market dropped to 45 days from 50 in January and 59 a year ago. 42% of the homes sold in February were on the market less than a month. 

Home prices were flat on a month-over-month basis and are up 5.7% YOY, according to the FHFA House Price Index. The mountain states had the highest home price appreciation, while the northeast lagged. 

The story in the markets is that stocks and bonds are beginning to give back the Trump reflation trade, where bonds sold off and stocks rallied on the prospect of fiscal stimulus out of Washington. Donald Trump is getting a lesson in the limitations of the bully pulpit as health care reform appears to be stalling. Repealing and replacing Obamacare is the "pay for" for fiscal stimulus and tax reform, so if it doesn't happen then part of the basis for the post-Trump stock market rally is in jeopardy. Meanwhile, Neil Gorsuch seems to be sailing through his Senate Confirmation hearings, albeit with a little kvetching from the usual suspects. 

Punch line on Washington: health care reform is supposed to go to the House this week. If it passes, that is good for stocks and bad for bonds. If it fails, it is bad for stocks and good for bonds (in other words, if it fails, interest rates are probably heading lower). FWIW, a couple big market technicians (Ralph Acampora and Dennis Gartman) went bearish yesterday as the S&P 500 broke below the post-election uptrend. 

As anyone shopping for a home can tell you, it's slim pickings out there. We are seeing the biggest squeeze in the starter home category. It appears that part of the problem is a lack of confidence to move up to the next category. People in starter homes are staying put, which is keeping homes off the market. 

One potential issue for tax reform is affordable housing construction, which relies on tax credits to entice investors to put up money. If the corporate tax rate falls from 35% to 20% - 25%, then the value of those tax credits decreases. Affordable housing has always been a money-loser for developers and landlords, so tax incentives are used to paper them over. They used to be called tax shelters back in the day. Apparently the value of the credits (which actually trade) has dropped by 10% - 20% since Election Day. This is going to make life more difficult for Ben Carson and HUD.

Dealing with Fannie and Freddie is not an immediate priority, at least not for this year. Staffers are now starting from scratch to come up with a plan. One possibility is to end the profit sweep for the GSEs and let them retain that profit in order to build up their capital, which would take a decade or more. This would not require a legislative fix: Under the 2008 law, HUD Secretary Mel Watt has the authority to make that change. Note that Fannie is expected to pay $10 billion to the government for its fourth quarter gains. 

The Cleveland Fed takes a look at wage growth and posits that the huge capital for labor swap that has been in place since the end of the 20th century could be taking a breather. 

Interesting story in the FT about commodity trading advisors and how they are using momentum-trading strategies to put the old "portfolio insurance" wine in a new bottle. Portfolio insurance was a technique developed in the 1970s, which was largely credited with causing the Crash of 1987. These new strategies are similar, and use algorithms to follow the momentum of the markets, which would potentially add selling pressure to crashes. In the brave new world we live in, there are no longer market makers and specialists that take the other side of the trade, and we could see selling in a vacuum. The next market crash, investors may find out the downside of sub penny bid-ask spreads and commissions. 

Morning Report: Existing Home Sales strongest in 10 years

Vital Statistics:

	Last	Change
S&P Futures	2357.5	-2.5
Eurostoxx Index	373.2	-0.3
Oil (WTI)	54.0	0.6
US dollar index	91.3	.
10 Year Govt Bond Yield	2.40%
Current Coupon Fannie Mae TBA	102.045
Current Coupon Ginnie Mae TBA	103.17
30 Year Fixed Rate Mortgage	4.14

Stocks are higher this morning on no real news. Bonds and MBS are up small. 

Mortgage applications fell 2% last week as purchases fell 3% and refis fell 1%. The rate on a 30 year fixed rate mortgage rose 4 basis points to 4.36%, according to the MBA. 

The year got off to a strong start with existing home sales increasing at an annualized rate of 5.69 million in January, according to NAR. This is up 3.8% from a year ago, and is the strongest reading since Feb 2007. The median home price rose 7% to $228,900. Inventory is down 7% YOY and stands at 3.6 months' worth. Days on market dropped to 50 from 64 a year ago. The first time homebuyer accounted for 33% of sales, which is inching up. Competition is strongest for homes in the low to medium price range. Fannie's deal with Blackstone on single family rentals will probably only make the lower price points even tighter. Still, a good start for the year. If we get some regulatory relief for the smaller banks, we should see more construction for the "mom and pop" builders. 

Toll Brothers reported better than expected numbers this morning, with deliveries flat in dollars but up 12% in units, contracts up 14% in dollars and 22% in units, and backlog was up 19% in dollars and 21% in units. Average selling prices fell to 773,700 from 873,500, but that was due to an acquisition, and a geographic shift to the North and East. The company raised guidance as well for 2017. The stock is up about 6% pre-open. 

We have the potential for some volatility in rates this afternoon with a Fed speech at 1:00 and the FOMC minutes at 2:00 pm. Below is a chart of the current handicapping in the Fed Funds futures market. Looks like about a 30% chance of a March hike, about a 55% chance of a hike by May and a 75% chance of a hike by June. The dot plot from December is forecasting between 2 and 3 25 basis point hikes.

Donald Trump reversed Obama's immigration enforcement policy, which will make it easier to deport people who commit crimes. Obama's policy only deported those that were guilty of violent crimes. Trump will now include those guilty of fraud as well. The policy for "Dreamers" - those who came illegally as children - is unchanged. There are some worries that this will affect the housing market by reducing demand and making the market for construction workers even tighter. It could also tighten credit, as Dreamers are eligible for Fannie, Freddie, and FHA loans. The fear is that any sort of mass-deportation will trigger early defaults, leaving the lender on the hook for a buyback. From the look of it, the change in immigration policy is relatively minor - more for show than an actual substantive change in policy - and there are no mass deportations on the horizon. 

Any sort of increase in deportations will probably make a tight labor market even tighter, which would be inflationary. That is the fear about this afternoon's FOMC minutes. The FOMC statement from Feb 1 removed references to lower energy prices and a strong dollar, which work against inflation. Investors will also be looking to see if there was discussion around shrinking the Fed's balance sheet. This could conceivably affect mortgage pricing, as the biggest buyer of MBS pulls away. That said, spreads didn't do much when the Fed was aggressively buying, so the end of reinvestment probably won't make that big of a difference either. 

Fannie Mae shareholders got slammed yesterday after an appeals court rejected their bid to sue the US government over the "net sweep" dividend change. Fannie Mae stock was down 35% yesterday, while Freddie Mac was down 38%. Fannie stock has been on a wild ride since the election, rising from $1.65 to $4.50 before falling back to $2.71 yesterday. FNMA stock has always been a litigation lottery ticket, and the only reason it exists in the first place is because the government didn't want to have to consolidate Fannie and Freddie debt on its balance sheet so it had to leave 20% outstanding. Fannie Mae's market cap is $15.72 billion, and last year they earned $12.3 billion, which makes their P/E ratio about 1.3x. The Obama administration was adamant that FNMA shareholders should receive nothing – in their view conservatorship is tantamount to bankruptcy and in bankruptcies the common stock gets wiped out.