Morning Report: Tough times in mortgage banking

Vital Statistics:

			Last	Change
S&P futures			2840	0.75
Eurostoxx index			388.33	-0.84
Oil (WTI)			69.29	0.8
10 Year Government Bond Yield				2.95%
30 Year fixed rate mortgage				4.58%

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

The week after the jobs report is invariably data-light and this week is no exception. We will get inflation data on Thursday and Friday and JOLTS data tomorrow and that is about it. 

Everyone knows that 2018 has been an awful year for mortgage banking. How bad is it? Check out the graph below courtesy of Garrett Macauley:

The one thing that jumped out at me (aside from the -8 basis points this year) is how little the industry made during the bubble years. Is it as simple as saying the mortgage business lives and dies on the refinance business and even in great purchase markets (like 04-06) mortgage banking is a marginal activity at best? 

If you are tired of hearing predictions of an inverted yield curve, check this out. Jamie Dimon thinks the 10 year bond yield should be 4% right now, and is saying that 5% is a possibility. "I think rates should be 4 percent today," Dimon said from the gala, according to Bloomberg News. "You better be prepared to deal with rates 5 percent or higher - it's a higher probability than most people think." While it is impossible to rule that forecast out, take a look at the chart below: Interest rate cycles are long and during periods of low inflation they just don't move around all that dramatically.  It took rates 20 years (1946 - 1966) to go from 2% to 5%. What was inflation in 1966? 5%. With the core CPI sitting at 2%, a 5 handle on inflation seems pretty unlikely. Not saying it is impossible - lots of differences between the mid 20th century and today - but.... 

Chinese buying has been supporting prices in some big West Coast markets, and it is drying up. While trade war concerns are probably playing a role, we are seeing declines in other global real estate markets, like London and Vancouver. This is a signal that the issue is probably internal to China, which has a real estate bubble of its own. The government has issued regulations limiting the purchase of foreign property, and seems worried about the currency. If the Chinese real estate bubble bursts, expect to see more selling in West Coast markets because that will be the only way for Chinese investors to raise cash. 

Morning Report: Dec Fed funds futures still leaning towards 3 hikes this year

Vital Statistics:

			Last	Change
S&P futures			2767	-8.25
Eurostoxx index			385.56	-0.38
Oil (WTI)			65.78	-0.17
10 Year Government Bond Yield				2.93%
30 Year fixed rate mortgage				4.59%

Markets are lower this morning on negative news out of Apple. Bonds and MBS are down small. 

Something to watch: We are seeing bigger bets against emerging markets currencies and some European bonds. These trades will bump up against Treasury shorts, which were increased last week in the wake of the Italian election results. One of the biggest trades in the hedge fund community is short Treasuries - which means hedge funds are betting on rising rates. A sell-off in Euro bonds and emerging markets will add buying pressure to Treasuries on the flight to quality trade. So, expect some volatility in Treasuries as fast money enters and exits the market.

Rising interest rates are creating another phenomenon - increased flows into money market funds. Money market funds had been a moribund asset class after the crisis, with interest rates at 0% and the memories of breaking the buck still fresh in many investors minds. Money market funds are seeing the biggest inflows since 2013. Expect to see more of this as bond investors also look for ways to shorten duration. This is yet another reason why hedge funds are short Treasuries. 

After the Italian led drop in rates, the market adjusted its prediction for the Fed Funds rate. Still sitting at a 60-40 bet for 3 or less hikes this year / 4 or more. 

Warren Buffett and Jamie Dimon are exceedingly bullish on the US economy. "Right now, there's no question: It's feeling strong. I mean, if we're in the sixth inning, we have our sluggers coming to bat right now" is how Warren Buffet characterized it. Jamie Dimon's view: "The way I look at it, there is nothing that is a real pothole," he said. "Business sentiment is almost at the highest level it's ever been, consumer sentiment is at its highest levels, markets are wide open, housing's in short supply and my guess is mortgage credit will expand a little bit."

Buffett and Dimon are also arguing for companies to stop providing earnings guidance. They claim that focusing on short term quarterly earnings causes companies to de-emphasize long-term growth. Berkshire Hathaway does not provide any sort of guidance to the Street. It is an interesting idea, however companies provide guidance to the Street because investors as a general rule prefer predictable companies to unpredictable ones. 

How not to "teach your servicer a lesson." Yikes. If you think your lender is making a mistake, or you are unhappy with the service, don't stop paying as a means of retaliation. 

The OCC is taking a more constructive approach with the banks. At the top of the agenda: re-writing community reinvestment rules to be less onerous for the industry. Obama's head of the OCC was a career regulator who made a point of challenging the perception that the OCC was too close to the banks it regulated. The Obama administration pushed hard for banks to take less credit risk, and I wonder how much of the issue with a lack of housing construction is due to that. While this wouldn't affect the Lennars of the world, most construction is with smaller builders who would have to go to their local community bank for financing. 

Morning Report: Jamie Dimon discusses the state of affairs

Vital Statistics:

			Last	Change
S&P futures			2660	13.5
Eurostoxx index			373.93	6.6
Oil (WTI)			63.22	-0.16
10 Year Government Bond Yield				2.81%
30 Year fixed rate mortgage				4.41%

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

Initial Jobless Claims increased to 242k last week. Job cuts also jumped to 60k from 30k according to outplacement firm Challenger, Gray and Christmas. Retailers (probably Toys R Us) drove the increase. This is the biggest jump in 2 years. 

JP Morgan CEO Jamie Dimon discusses the state of the economy in his annual letter to shareholders. He argues with normal growth and inflation around 2% (the current state of affairs) historically, we would expect to see short-term rates around 2.5% and the 10 year trading around 4%. He argues that QE (both here and abroad) is what is suppressing the 10 year yield. That will reverse for the Fed this year, and in the near future overseas. There will be some countervailing forces at work, but we are in such uncharted territory that no one knows how it will turn out. Dimon then starts discussing the surprise 1979 rate hike (100 basis points on a Saturday!) and talks about how the Fed Funds rate then opened 200 bps higher that Monday. Just for the record, I want to put this chart out there - interest rate cycles are long. We are probably a generation (or two) from that sort of situation again, at least if historical observations are any guide. 

Dimon makes another point in his letter about the state of the financial system. On one hand, it is much more stable and well-capitalized. Money market funds have higher restrictions, and there is much less leverage in the system overall. That said, post-crisis policy has removed the counter-cyclical levers in the financial system. First of all, the Volcker rule has meant less market-making. Investors have noted that it is much harder to trade securities, especially the less liquid ones. In a downturn, expect to see many securities go no-bid. In other words, investors will be stuck riding something down. Second, the newer bright lines means that banks will not be able to use their reserves to step in and lend. In Reminiscences of a Stock Operator, there was a credit crunch and banks were fully lent out to the reserve point. J.P. Morgan exhorts the banks to use their reserves. That is what they are for! And finally, in a swipe at the Obama Administration, the big banks are not going to agree to buy out the failing ones. JP Morgan bought Bear at the height of the crisis, as a favor to the Bush Administration. The Obama Admin then slammed them with fines for all of Bear's sins. 

We aren't going to see much in the way of inflation without wage growth, and at least one economist (Noah Smith) is arguing that we aren't seeing any because employers have too much market power. He also argues that minimum wage laws are not job killers, at least in the aggregate, despite what Econ 101 would say. His argument is that if employers do have market power, then they are earning a higher return than they would otherwise accept on their workforce. In other words, you could force them to hike wages, and they still will make enough that it won't make sense to fire people. He then cites the usual Rx for increasing wages: higher minimum wage laws and more unions. The question is then where employers have market power. Perhaps in one-company towns that could be the case. But en masse? Possible, but not probable. 

The trade deficit increased again in February, giving ammo to those who agitate for a trade war. A trade war could have an effect on interest rates. Right now, China sends us ships of stuff (phones, plastic goods, all sorts of things). In return (they aren't giving it away), they have to take something. Right now, they largely take things like agricultural products. We would prefer it if they bought even more stuff. Since they aren't, the get US dollars instead, which they then invest in Treasuries and other US assets. If trade decreases with China, they will theoretically buy less Treasuries, and that would mean higher interest rates, at least at the margin. To put this in perspective, the trade deficit with China in February was $29 billion. During QE, the Fed was buying $45 billion in Treasuries and MBS a month. So that isn't chump change. 

It is important to understand that we are in a negotiation phase with China, that many of these things are just proposals. Historically, these things get solved by a meaningless pledge that allows the US to claim victory, but doesn't really make that much of a difference. As China gets richer, it will undoubtedly purchase more US goods and services. However, the savings rate is sky-high there - which means that consumption is low. They are in building mode. 

Ginnie Mae has noted the abuses in VA IRRRLs and is taking action against some lenders. New Day and Nations Lending are no longer eligible to issue securities into multi-issuer pools. They will only be able to issue spec pools, which will trade at a discount. 

Morning Report: Regulatory relief proposals

Vital Statistics:

	Last	Change
S&P Futures	2329.3	-1.8
Eurostoxx Index	380.6	-1.3
Oil (WTI)	52.8	-0.3
US dollar index	89.9
10 Year Govt Bond Yield	2.22%
Current Coupon Fannie Mae TBA	102.78
Current Coupon Ginnie Mae TBA	104
30 Year Fixed Rate Mortgage	3.98

Stock futures are largely flat this morning as many overseas investors are on holiday. Bonds and MBS are flat as well. 

Bond yields have broken decisively to the downside over the past week as international tensions escalate. North Korea's failed missile launch, combined with developments in Syria have sent bonds and gold higher. The 10 year yield is at the lowest level since mid-November. 

While international tensions have certainly played a part in the bond rally, weak retail sales and inflation data have as well. The Fed Funds futures are now factoring a less-than-50% probability of a June rate hike, down from a 2/3 probability only a week ago. 

Business conditions softened in New York State last month after the Empire State Manufacturing Survey fell after two unusually strong months. We are starting to see bottlenecks in the supply chain. Employment rose.

Homebuilder sentiment slipped slightly in April, however sentiment remains strong. 

Jamie Dimon of JP Morgan took aim at regulations in his annual letter to stockholders. He was especially critical of the FHA's use of the False Claims Act to hammer lenders who commit unintentional clerical errors but had no intention of committing fraud. This has caused FHA lending (which is the only game in town for subprime borrowers) to become restricted, especially at the big banks. He also called for new uniform standards for mortgage servicing. The cost of servicing delinquent loans has skyrocketed, and this has caused lenders to further restrict credit. JPM estimates that $1 trillion in additional lending could have increased GDP by half a percentage point. 

Rep David Kustoff penned an editorial at CNBC calling for a reform of Dodd-Frank, especially in how it affects smaller community banks. The regulatory burden that was imposed on the system is more easily borne by the JP Morgans and the Wells Fargos of the world than it is by the smaller banks who are the lenders to small business. There is a general bipartisan consensus in DC that something needs to be done to give the smaller lenders some relief, however the political environment is so entrenched and partisan that it is hard to imagine much getting done legislatively. 

The MBA sent its proposals to the Senate. The first one includes a request for more clarity from the CFPB, while the second includes a suggestion to widen the QM safe harbor to all loans that satisfy the QM rule and to increase the ceiling for small loan status under QM to $200k from just over $100k now. The remainder of the suggestions largely concern capital requirements for banks and servicing.

Median house prices rose 7.5% to $273,000 according to RedFin. Sales growth was also up a strong 8.9%. Inventories were down 13%, however. The typical home went under contract within 49 days, which is pretty fast for a March. The average sale to list price was 93.7%, which was a decrease. Perhaps the bidding wars in the hottest markets are cooling off a bit. Note this statement by a real estate agent: 

“As a seller’s agent, the first thing I do when I receive an offer is ask who the lender is. The best offers come from buyers who are pre-approved by a local lender with a strong reputation for speed and reliability. If I’ve worked with the lender before and know they can fund the loan and close on time, I am sure to highlight that for my client.” — Tiffany Aquino, Redfin Agent in Woodbridge, VA

The Fed is assembling its plan to shrink its portfolio of Treasuries and mortgage backed securities, and may actually begin the process this year. The Fed currently owns just under $2 trillion in mortgage backed securities, and we could see that number cut in half over the next decade, according to a paper released in January. The big question for MBS holders is whether they will stop reinvesting maturing proceeds all at once or whether they will phase that in. Given that QE didn't materially affect MBS spreads when it was implemented, it is hard to imaging tapering re-investments will make much of a difference either. 

Morning Report - Optimism on housing, but pessimism on the economy

Vital Statistics:

	Last	Change	Percent
S&P Futures	2110.1	3.2	0.15%
Eurostoxx Index	3571.8	45.3	1.28%
Oil (WTI)	60.88	-0.5	-0.90%
LIBOR	0.286	0.003	1.17%
US Dollar Index (DXY)	95.07	0.423	0.45%
10 Year Govt Bond Yield	2.44%	-0.05%
Current Coupon Ginnie Mae TBA	100.2	-0.2
Current Coupon Fannie Mae TBA	98.81	0.3
BankRate 30 Year Fixed Rate Mortgage	4.14

Stocks are higher this morning after retail sales came in better than expected. Bonds and MBS are up.

Retail Sales rose 1.2% in May, matching estimates. The control group, which strips out some of the more volatile components rose 0.7%, higher than the 0.5% estimate. The big gainers were building supplies, autos and gasoline. 

Import prices rose 1.3% on a month-over-month basis. Business Inventories picked up 0.4% as well.

Initial Jobless Claims came in at 279,000, a strong number. This is the 14th consecutive week below 300k. 

The Bloomberg Consumer Comfort index slipped to 40.1 from 40.5. These sorts of consumer confidence / sentiment indices are really inverse gasoline price indices. 

2015 could be the best year in housing since 2006, according to the NAR. Rising rates are not discouraging buyers - in fact the opposite is happening. Buyers are worried that affordability is going down and that is motivating them to buy now. 

Separately, consumers are getting more bullish on housing, according to the Fannie Mae National Housing Survey. They are not getting more bullish on the economy however, even though their incomes are rising. Pessimism about the economy is at a six month high. 

The left is all up in arms after Jamie Dimon said that Elizabeth Warren doesn't understand the business of banking. I have seen stories where she confuses lending and servicing, so Jamie has a point. She has found her niche as the Ted Cruz of the Left - happy to play to the base and annoy her adversaries with overheated rhetoric. It is okay, Liz, even the really smart people don't understand it all that well.