Morning Report - More Mel

Vital Statistics:

	Last	Change	Percent
S&P Futures	1582.8	5.5	0.35%
Eurostoxx Index	2729.8	18.1	0.67%
Oil (WTI)	91.37	0.3	0.37%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	81.75	0.263	0.32%
10 Year Govt Bond Yield	1.64%	0.01%
Current Coupon Ginnie Mae TBA	106.4	-0.1
Current Coupon Fannie Mae TBA	104.6	-0.1
RPX Composite Real Estate Index	192.8	0.3
BankRate 30 Year Fixed Rate Mortgage	3.4

Markets are stronger this morning after the ECB cut rates and initial jobless claims came in lower than expected. Productivity increased as well. Bonds and MBS are flat.

Yesterday's FOMC statement turned out to be a "steady as she goes" statement. They mention that they are ready to increase or decrease asset purchases in response to changing economic conditions. ZIRP (meaning rock bottom interest rates) will continue as long as unemployment is above 6.5% and inflation remains at 2.5% or lower.

People are still trying to understand the implications of Mel Watt as Chairman of the FHFA. The biggest one is that Mel Watt was not nominated to preside over the dissolution of the government's role in housing finance. Fannie and Fred will survive in some fashion. The elephant in the room is principal mods for people with underwater conforming mortgages. That will undoubtedly come up in the confirmation hearings. In his announcement, obama continued to press the left-wing narrative that "reckless lending" caused the financial crisis while studiously ignoring the fact that we had a housing bubble. I do think it is ironic that he talks about reckless lending when the government bears 50% of the credit risk of the entire US mortgage market. While people have hoped that the government will extricate itself from the mortgage market, this appointment suggests otherwise.

Challenger and Gray job cuts fell to 28,121 in April, a drop of 6% year-over-year. This is the lowest level since December 2012. Despite the sturm and drang over the sequester, the massive expected layoffs have yet to appear. Aerospace and defense did announce 1,928 job cuts that were related to the sequester. This is a far cry from the 900,000 jobs that were forecast by some studies.

Morning Report - New FHFA Chairman

Vital Statistics:

	Last	Change	Percent
S&P Futures	1591.2	-1.0	-0.06%
Eurostoxx Index	2712.0	0.0	0.00%
Oil (WTI)	91.87	-1.6	-1.70%
LIBOR	0.273	0.000	0.00%
US Dollar Index (DXY)	81.38	-0.367	-0.45%
10 Year Govt Bond Yield	1.65%	-0.02%
Current Coupon Ginnie Mae TBA	106.5	0.0
Current Coupon Fannie Mae TBA	104.7	0.1
RPX Composite Real Estate Index	192.5	0.4
BankRate 30 Year Fixed Rate Mortgage	3.43

Markets are slightly weaker ahead of the FOMC announcement later today. MBA mortgage applications increased 1.8% last week. The Markit Flash Manufacturing Purchasing Managers Index came in at 52.1, indicating that business conditions for manufacturers are more or less in line with historical trends. Bonds and MBS are up.

The ADP employment change (which is a forecast for Friday's jobs report) came in lower than expected at 119,000. March was revised downward as well. Lately the ADP employment change has not been all that great or a predictor of the official jobs report, but we'll see.

The FOMC's rate decision is expected to be released at 2:00 pm EST. Nobody expects any change in interest rates - the big question will be regarding asset purchases or QE. Late last year, there appeared to be a consensus that QE would end sometime this year. Subsequent comments from Federal Reserve governors however seemed to contradict that view. Now, we have some that have mentioned the possibility of additional measures. If anything that probably points to a "steady as she goes" type of statement, but we'll see.

Looks like Ed DeMarco is out at FHFA and Mel Watt is in. This probably means principal mods for conforming mortgages are on the way. Interestingly, Watt represented the Charlotte district, the same district as Bank of America. Principal mods are not a slam dunk however - the biggest MBS holders are pension funds and they are struggling to meet their obligations in this low interest rate environment. Watt's confirmation will not be a slam dunk by any means.

The homeownership rate declined to 65% in Q1, the lowest level since 1995. This speaks to the absolute dearth of household formation numbers in the last 5 years. While the number has dropped significantly from its peak in 2005, it is still more or less at historical averages.

Chart:  Homeownership rate

Morning Report: Wanna lend some money to Apple?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1587.3	-0.9	-0.06%
Eurostoxx Index	2720.1	2.7	0.10%
Oil (WTI)	93.73	-0.8	-0.81%
LIBOR	0.273	-0.001	-0.36%
US Dollar Index (DXY)	82.16	0.015	0.02%
10 Year Govt Bond Yield	1.65%	-0.02%
Current Coupon Ginnie Mae TBA	106.4	0.0
Current Coupon Fannie Mae TBA	104.7	0.1
RPX Composite Real Estate Index	192.1	1.1
BankRate 30 Year Fixed Rate Mortgage	3.43

Markets are lower this morning on no real news. The Employment Cost Index increased .3% in the first quarter and Q412 was revised down. Wages and salaries increased .5% while benefit costs dropped .1%. No inflationary pressures in the labor market. Today starts the two day FOMC meeting. Bonds and MBS are up slightly.

The S&P / Corelogic / Case-Schiller index of home values came in at + 9.32% year over year and + 1.24% month-over-month. This was the biggest increase since May 2006. Of course the real estate market is pretty bifurcated, with annual growth in the high teens out West and mid-to-high single digit growth elsewhere. They note that housing is now becoming a driver of GDP growth, although the mix still is skewed towards apartments and not single family residences.

Chart:  Case-Schiller indices

Apple is doing a massive bond issue - 6 different issues, including a 30 year bond. The proceeds will be used to fund dividends and buybacks and will help Apple avoid repatriation taxes on the over $100 billion in funds it holds overseas. The 30 year bond is supposedly going to be priced at a 115 basis point spread to Treasuries. That would be around 4%. The 5 year paper will be issued at 1.2%. Those are positively Japanese yields. Grandpa, tell me again about the days when companies would issue debt with yields lower than their dividend yield.

PIMCO's Mohammed El-Arian thinks that the tone of the FOMC meeting will shift from "when do we end QE?" to maintaining it and possibly increasing stimulus. That would certainly be MBS bullish, which could start another refi wave, although prepay burnout has got to be pretty big at this point. He does note the risks of the record amount of stimulus: "The benefits of the Fed come with costs and risks. What I worry about is when you run a system at artificial price levels, you start creating damage, resources are misallocated, too much risk is taken."  Exhibit (A):  Apple is borrowing money for 30 years at 4% to fund a stock buyback.

Morning Report - Personal Spending increases .2%

Vital Statistics:

	Last	Change	Percent
S&P Futures	1581.5	5.0	0.32%
Eurostoxx Index	2697.4	13.9	0.52%
Oil (WTI)	93.36	0.4	0.39%
LIBOR	0.274	-0.002	-0.54%
US Dollar Index (DXY)	82.12	-0.387	-0.47%
10 Year Govt Bond Yield	1.65%	-0.01%
Current Coupon Ginnie Mae TBA	106.3	0.1
Current Coupon Fannie Mae TBA	104.6	0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.43

Markets are higher this morning after better-than-expected consumer spending data. Personal Income data was lower than expected. Bonds and MBS are up small

Personal Spending was projected to be flat, but actually rose .2%. The Bureau of Economic Analysis is claiming that it was primarily due to weather - a cooler than normal spring brought higher utility spending. Personal Income was forecast to rise .4%, and ended up at .2%. The PCE deflator showed inflation remains subdued.

Pending Home Sales increased 1.5% in March, according to the National Association of Realtors. Economists had forecast a 1% increase. Pending home sales are up 5.8% year-over-year.

Lender Processing Services reported that home prices increased 1% in February and rose 7.3% year-over-year. The West is experiencing the biggest gains, while the Northeast and Mid Atlantic continue to languish. This has been borne out by the earnings reports of the homebuilders as well - the ones primarily focused on California have knocked the cover off the ball, while those with an East-Coast / Midwest focus have reported gains, but nowhere near what the West Coast builders are reporting.

Lots of data this week, but the big driver will be the FOMC meeting. We will get the rate announcement on Wed. Investors will be looking for information concerning the end of QE. We will get the jobs report on Friday, which will have the biggest potential to move interest rates.

Lots of homebuilders reported earnings last week - pretty much everyone except NVR beat estimates. Anyone with exposure to the West Coast did well and backlog is up nicely at all of the builders. We will hear from Standard Pacific and Beazer Homes this week. The Homebuilder ETF (XHB) is on a tear and sitting right at resistance.

U.S. News and World Report has a good piece on the state of the first time homebuyer.

Morning Report - Q1 GDP below expectations

Vital Statistics

	Last	Change	Percent
S&P Futures	1575.8	-5.9	-0.37%
Eurostoxx Index	2684.1	-20.3	-0.75%
Oil (WTI)	93.23	-0.4	-0.44%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.61	-0.132	-0.16%
10 Year Govt Bond Yield	1.68%	-0.03%
Current Coupon Ginnie Mae TBA	106	0.0
Current Coupon Fannie Mae TBA	104.5	0.2
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are slightly weaker after Q1 GDP came in weaker than expected. D.R. Horton reported better than expected earnings. Bonds and MBS are stronger

Q1 GDP came in at + 2.5%. lower than the 3% estimate. This is the advance estimate - Q1 GDP will be revised twice in the next two months. Consumer spending increased at 3.2% and the savings rate declined. The back-to-back drop in defense spending was the biggest since 1954. Real disposable incomes fell 5.3% in Q1 on increased taxes. C = 3.2%, I = 3%, G = -4.1%.

The Senate voted to end sequestration-related furloughs for air traffic controllers and the measure will be sent to the House today. President Obama has said he will consider whatever is sent to him.

CoreLogic has acquired Case-Schiller.

The CFPB has proposed amendments to the QM rule.  The proposals are here.

Morning Report - Homebuilder Earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1581.3	7.2	0.46%
Eurostoxx Index	2708.5	6.4	0.24%
Oil (WTI)	91.74	0.3	0.34%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.47	-0.583	-0.70%
10 Year Govt Bond Yield	1.72%	0.01%
Current Coupon Ginnie Mae TBA	106	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are higher after earnings continue to look decent. Initial Jobless Claims fell, although the data tends to be volatile this time of year. Bonds and MBS are down

Yesterday, the House Financial Services Committee held a hearing on the private label securitization market. Generally speaking the theme centered around regulatory certainty, and that until QRM issues get resolved, the private label market will still be a trickle. Everyone agreed that Fannie and Fred will remain doing what they do for quite some time. Interestingly, Ranking Member Maxine Waters expressed concern about the effects principal mods will have on investors - I wonder if CALPERs and PIMCO had a word with her. If Maxine Waters isn't onboard with principal mods, maybe the whole push is losing momentum. Fun fact that came out of the hearing:  The U.S. government currently bears 50% of the credit risk of the entire mortgage market.

We have had quite a few homebuilders report over the past week, and it is generally a tale of two geographies. The builders that are in the West Coast markets have done great (KBH, MTH, RYL), while the ones with more East Coast exposure (NVR, PHM) are doing better, but nowhere near the others. NVR actually missed estimates and the stock was clobbered for 6% at one point, but it has clawed back its losses with the general strength in the market. Pulte reported this morning and is looking down a quarter. Ryland, which focuses on the first time homebuyer and the second-time move up buyer reported great numbers. Perhaps the long-awaited return of the first-time homebuyer is finally here.

The connection between the first time homebuyer and household formation is something that I have been harping on for a while. CoreLogic talks about it in its latest Market Pulse. Household formation numbers have been depressed ever since 2006, and that has given the illusion that the homebuilders have been building enough starter homes. The problem is that the drop in household formation wasn't due to demographics - it was due to a lousy economy. If a normal run rate is 1 million new households per year, and we average around 600 for five years, that means we have roughly 2 million new households in pent-up demand, along with the normal demand. Of course as the economy improves, many of these households will become renters first, and not first-time homebuyers. But what sort of housing start number will we see in the future to accommodate this demand? Remember, 1.5 million starts is "normalcy." Certainly not the 1 million print we saw last week. Probably closer to 2 million. Think about the homebuilding stocks on double the activity...

Chart Household Formation:

Morning Report: PennyMac earnings

Vital Statistics:

	Last	Change	Percent
S&P Futures	1575.3	1.7	0.11%
Eurostoxx Index	2679.6	16.7	0.63%
Oil (WTI)	89.52	0.3	0.38%
LIBOR	0.276	0.000	0.00%
US Dollar Index (DXY)	82.97	-0.077	-0.09%
10 Year Govt Bond Yield	1.71%	0.01%
Current Coupon Ginnie Mae TBA	105.9	-0.2
Current Coupon Fannie Mae TBA	104.2	0.0
RPX Composite Real Estate Index	191	0.5
BankRate 30 Year Fixed Rate Mortgage	3.47

Markets are flat this morning after a slew of earnings releases. Apple reported a mixed bag last night, with better than expected earnings, but a disappointing Q2 forecast. They are increasing their buyback, which is raising concerns about future growth. Ford reported better than expected earnings as well. We will hear from Ryland and Meritage Homes today. MBA mortgage applications rose .2% last week, while durable goods orders fell. It appears most of the drop in durable goods was defense-related, so you probably shouldn't read too much into it. Bonds and MBS are down small.

New Home Sales rose to 417,000 units in March, which was up 1.5% from February. We are seeing a pickup in activity in the Northeast and the South. The inventory of new homes for sale was 4.4 months, while the median price was 247,000, and the average price was 279,000. Average prices actually dropped on a year-over-year basis, which means luxury building must be decreasing.

Lender Processing Services released their February Mortgage Monitor yesterday, showing delinquencies and foreclosures continue to fall. DQ + FC fell to 10.18% from a peak of 14.82% in Jan 2010. This is still well above normalcy, which is a DQ+FC percent in the 5% range. Mods are starting to pick up havter having declined for 6 consecutive quarters.

PennyMac reported earnings yesterday. Seem to be growing in all 3 business lines: origination, servicing, and distressed MBS.  Some of the highlights:

• PMT reported earnings of .90, better than expectations of .76
• Correspondent loan purchase volume $8.5B, down 15% from Q4
•  Lock volume $8.1B, down 22% from Q4
• MSR portfolio up 36% to $17B UPB
•  Strong demand for reperforming loans
• Correspondent margins decreasing but still above historical norms
• Correspondent will increase as a share of origination market
• Anticipating increase in refi activity as LTVs decrease
• Re-launched prime jumbo program, did over $100M in locks in Q1
• Targeting Q313 for first jumbo private label securitization transaction