Morning Report - Slow news day

Vital Statistics:

	Last	Change	Percent
S&P Futures	1876.6	4.2	0.22%
Eurostoxx Index	3140.8	4.9	0.15%
Oil (WTI)	101	-0.5	-0.45%
LIBOR	0.235	0.001	0.30%
US Dollar Index (DXY)	79.87	-0.244	-0.30%
10 Year Govt Bond Yield	2.73%	0.03%
Current Coupon Ginnie Mae TBA	105.7	-0.1
Current Coupon Fannie Mae TBA	104.4	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Slow news day. Markets are higher this morning on a mixed bag of economic data. Bonds and MBS are down.

A few economic data points this morning: Challenger and Gray announced job cuts fell 24%, productivity was revised downward from 2.2% to 1.8% and initial jobless claims fell to 323k. Unit Labor costs were revised to -.1% from -.5%. Given what we saw in the personal income numbers - that pretty much all of the increases in income were due to increased transfer payments - it looks like costs are increasing without any corresponding increase in output - a recipe for stagnant wages.

Junk Bond King Michael Milken has a good editorial about the unintended consequences of government meddling in the housing market, the biggest one was the housing bubble. 

Speaking of unintended consequences, the unpopularity of obamacare is proving to be a big one for Democrats. The Administration has decided to delay rules prohibiting high deductible insurance plans until after the midterm elections and through 2015. Of course this will ensure that obamacare will remain a battleground issue for 2016. 

Morning Report - ADP signalling a weak jobs report this Friday

Vital Statistics:

	Last	Change	Percent
S&P Futures	1872.1	0.5	0.03%
Eurostoxx Index	3135.9	-0.5	-0.01%
Oil (WTI)	102.9	-0.4	-0.41%
LIBOR	0.234	-0.001	-0.40%
US Dollar Index (DXY)	80.24	0.067	0.08%
10 Year Govt Bond Yield	2.70%	0.01%
Current Coupon Ginnie Mae TBA	105.6	-0.1
Current Coupon Fannie Mae TBA	104.5	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.32

Markets are flat this morning as Ukranian Euphoria meets a putrid ADP jobs report. Bonds and MBS are flat, after bonds cratered yesterday, with the 10 year yield trading to 2.7% from 2.6%. 

The ADP jobs report came in at 139k, much lowers than the estimate of 155k. More importantly, January was revised downward form 175k to 127k. The first impulse is to blame the weather, but construction increased 14k. Manufacturing was flat, and (you guessed it) financial services fell. Friday's payroll estimate is 150k, which now seems high. N.B. - ADP has been a pretty lousy predictor of the BLS number lately, so keep that in mind. FWIW, Mark Zandi of Moody's believes weather is playing a part here, which is creating some pent-up demand for workers. He is calling for some 250k prints in the Spring. 

Last week's flight to safety bond market rally, helped increase mortgage applications by 9.4%. Both purchase and refi apps rose the same amount. The indices also benefited from an easy comparison with the holiday shortened prior week. The average 30 year fixed rate mortgage fell from 4.53% to 4.47% last week. Refis as a percent of all loans fell to 57.7%.

The FHA insurance fund will have a positive capital reserve balance at the end of 2014 and will not require a draw from the U.S. Treasury. FHA is asking for authority to collect an additional administrative fee, which will undoubtedly annoy affordable housing advocates who are pressing FHA to reduce fees. This fee may be part of the White House's 2015 budget, which is DOA.

First time homebuyers continue to struggle with tight credit and competition from professional investors. Until the first time homebuyer comes back to the market, the housing recovery (and the mortgage business itself) will be fragile. This also speaks to the completely bifurcated credit markets out there. While credit to consumers is still tight, banks are throwing money at private equity firms and institutional investors. 

It has gotten so bad that private equity firms are outbidding strategic buyers in industrial mergers, which is astounding when you consider that strategic buyers have the benefit of synergies and private equity firms do not. Historically, private equity firms were the ones who would swoop in to buy assets on the cheap; now they are winning bidding wars. 

This speaks to a theme I have been discussing for a while - the stock market is at or near record highs, and yet the broader economy is in a completely different place. Corporate America is flush with cash, and wages / hiring are flat. Ironically, the cash they have will probably be spent on productivity enhancing CAPEX, which will be good for stocks, but not necessarily good for wages. Consumption and wage growth are currently correlating at 95%, when that number has been closer to 50%. So, when you have about 2% wage growth, you get about 2% GDP growth. Which accounts for this kind of "meh" recovery we have had.

Morning Report - Home prices increase 12% year over year

Vital Statistics:

	Last	Change	Percent
S&P Futures	1861.7	18.6	1.01%
Eurostoxx Index	3120.2	66.2	2.17%
Oil (WTI)	103.9	-1.0	-0.97%
LIBOR	0.235	0.000	-0.13%
US Dollar Index (DXY)	79.94	-0.137	-0.17%
10 Year Govt Bond Yield	2.64%	0.04%
Current Coupon Ginnie Mae TBA	106.1	-0.2
Current Coupon Fannie Mae TBA	104.9	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.32

The market giveth, the market taketh away. Stocks are up (and bonds / MBS are down) on positive developments in the Ukranian situation. Expect more of the same until the situation resolves itself. LOs, be sure to explain to your borrowers that rates will be very volatile for the near future and floating is playing with fire. 

Home prices rose .9% month over month and 12% year-over-year in January, according to Corelogic. Prices remain 17.3% below their peak in April 2006. We had seen a bit of a divergence between the indices, with Case-Shiller observing month-over-month decreases (would signal a flattening of the index) and FHFA still reporting month-over-month increases. CoreLogic's numbers suggest Case Shiller is the outlier. 

Obama is set to unveil his new budget today, which will increase spending and taxes. This is a political document, meant to frame the debate for midterm elections this year. It has absolutely zero chance of being implemented

Speaking of political acts, if you like your health care plan, you can keep it (at least through midterms). Obama is planning to delay another part of obamacare, which forbids non-compliant insurance policies until after the midterm elections. Side note, obamacare accounted for the big increases we saw in yesterday's personal incomes and personal spending report.

Morning Report - International Tensions take center stage

Vital Statistics:

	Last	Change	Percent
S&P Futures	1841.3	-16.3	-0.88%
Eurostoxx Index	3069.1	-80.1	-2.54%
Oil (WTI)	104.6	2.0	1.95%
LIBOR	0.236	0.000	0.00%
US Dollar Index (DXY)	79.85	0.157	0.20%
10 Year Govt Bond Yield	2.61%	-0.04%
Current Coupon Ginnie Mae TBA	106.2	0.0
Current Coupon Fannie Mae TBA	105	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.31

Stocks are weaker and bonds are stronger on developments in Ukraine. While this situation should not have much of a direct impact on the US, it will push rates lower at the margin on the flight to safety trade. Equities will be vulnerable to the risk on trade.

Personal Income and Personal spending came in much better than expected in January. Incomes increased .3%, while spending increased .4%. December spending was revised downward from .4% to .1%. The PCE core index came in at .1%. 

The Markit US PMI came in at 57.1, a little better than expected, while the ISM indices were stronger as well. Construction spending rose .1%, which again was better than expected. 

We have a lot of data this week, culminating with the jobs report on Friday. The other big report will be the ISM surveys. That said, geopolitical concerns will probably drive the bond market more than the data will. 

The Hardest Hit Fund money (that was intended to be used to modify mortgages and help homeowners in distress) is now being used to demolish homes. In Detroit alone, 70,000 homes (or 19% of the total inventory) may need to be torn down. It may turn out that much of the shadow inventory is stuff that really isn't going to affect supply because it is unsaleable. 

Morning Report - 4Q GDP revised downward

Vital Statistics:

	Last	Change	Percent
S&P Futures	1852.3	-1.6	-0.09%
Eurostoxx Index	3128.0	-7.0	-0.22%
Oil (WTI)	102.1	-0.3	-0.32%
LIBOR	0.236	0.000	-0.19%
US Dollar Index (DXY)	79.82	-0.465	-0.58%
10 Year Govt Bond Yield	2.66%	0.02%
Current Coupon Ginnie Mae TBA	106	-0.1
Current Coupon Fannie Mae TBA	104.8	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.31

Markets are up small after a mixed bag of economic data. Bonds and MBS are up.

The second revision to 4Q GDP came in at 2.4%, lower than the 2.5% consensus, a big revision downward from the advance 3.2% estimate. Consumption came in lower than expected as well. Given that the big Q3 number (+4.1%) was driven largely by inventory build, and consumption hasn't really materialized, some of the weakness we have seen in the numbers lately can be attributed to this "borrowed" growth. Of course weather is another factor. 

In other economic data, the Chicago Purchasing Managers Index came in at 59.6, which was better than expected. Readings over 50 indicate growth. University of Michigan consumer confidence rose to 81.6 from 81.2 last month (better than expected).

Pending home sales were flat in January, according to NAR. Blame low inventory / high prices in the West and lousy weather in the East. Existing home sales are expected to be weak in the first quarter, while limited inventory is expected to drive price appreciation. While the builders have been able to raise prices at will, they seem to be at the point where buyers are balking, which means they will need to rely on volume to drive the top line. This will help solve the inventory problem.

Foreclosures were down 19% year-over-year and 11.8% month over month, according to CoreLogic. The foreclosure inventory has fallen by a third but we still have a ways to go. For every completed foreclosure, there are 954 mortgaged homes in non-judicial states and 896 mortgaged homes in judicial states. A normal ratio would be one for every 2000. The time to complete a foreclosure increased to 943 days, according to Black Knight Financial Services (formerly knows as Lender Processing Services).

The CFPB is aggressively going after servicers. Walter Investment (WAC) disclosed during their earnings report that the FTC and the CFPB has sought authority to bring enforcement action. For what, the company doesn't know. Ocwen (OCN) really couldn't comment on their call regarding the NYS action. Finally, Nationstar (NSM) is up small on no volume after reporting earnings. The CFPB has the non-bank servicers in the crosshairs and their stocks have been hit accordingly. That said, MSR valuations continue to increase. How many people bought the servicers as a way to hedge interest rate risk and ended up getting the view of the underlying assets correct, but missing the regulatory onslaught?

Speaking of the CFPB, another industry that they hate, hate, hate are payday lenders and check cashing places, which charge what they claim to be "usurious" rates. Yes, if a loan is only going to last a week, any fees are going to make the implied interest rate look huge. Given that QM has effectively shut many people out of the mortgage market and payday lenders will probably go away, it is ironic that the government will end up forcing people to go to the neighborhood loan shark all in the name of consumer protection. 

Morning Report - Annaly Capital's view on interest rates

Vital Statistics:

	Last	Change	Percent
S&P Futures	1841.5	-0.4	-0.02%
Eurostoxx Index	3122.4	-25.8	-0.82%
Oil (WTI)	102.8	0.3	0.24%
LIBOR	0.236	0.003	1.20%
US Dollar Index (DXY)	80.49	0.061	0.08%
10 Year Govt Bond Yield	2.65%	-0.01%
Current Coupon Ginnie Mae TBA	106	0.0
Current Coupon Fannie Mae TBA	104.8	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.37

Markets are flat this morning after a mixed bag of economic data. Durable Goods Orders came in better than expected, but initial jobless claims were a bit high. Bonds and MBS are rallying.

Some interesting tidbits on the Annaly conference call. Annaly is a big buyer of mortgage backed securities. 

• Regarding the Fed: "I think they will continue to taper come hell or high water; with respect to the Fed target, I think that's another story altogether. They have already backed down a little bit."
• Regarding MBS and tapering "The market has sobered up a little bit about the implications of that lack of demand." 

Annaly expects to boost their leverage ratio to 7x over the next several quarters, which is high for them. It is an aggressive bet that (a) MBS have gone down about as far as they are going to go, and (b) short term interest rates are going nowhere for the near and intermediate term. In other words, Annaly thinks the top in mortgage rates is in for the next few years.

The House will consider a reform of the CFPB to bring some sort of accountability to the agency. Right now, it is funded from the Fed and there is no Congressional oversight of the agency. The plan would be to replace the single, non-accountable director with a five member commission, subject the agency to the normal appropriations process and prevents the CFPB from undermining the safety and soundness of U.S. financial institutions through regulatory overreach. Probably DOA in the Senate if it even gets there, but a marker has been laid down. At some point, the CRA types are going to get annoyed that more credit isn't being extended to their preferred constituencies and it is possible they might put 2 and 2 together and realize that the CFPB is being a drag on credit creation. 

New Home Sales increased to an annualized pace of 468k, much higher than expected. December's numbers were revised upward. Average selling prices have been increasing for the builders due to low inventory and increasing activity at the higher price points. At some point, they won't be able to raise prices the same way and will have to pump out more homes in order to drive the top line. Remember, we used to consider 1.5 million housing starts per year normalcy. The most recent starts number of 880k was the sort of number we used to find at the depths of recessions. We have been barely keeping up with obsolescence, and we have a tremendous amount of pent-up demand. 

Morning Report - Subprime is back

Vital Statistics:

	Last	Change	Percent
S&P Futures	1849.0	2.7	0.15%
Eurostoxx Index	3142.2	-15.3	-0.48%
Oil (WTI)	102.4	0.6	0.55%
LIBOR	0.233	0.000	-0.13%
US Dollar Index (DXY)	80.29	0.150	0.19%
10 Year Govt Bond Yield	2.71%	0.01%
Current Coupon Ginnie Mae TBA	105.8	0.0
Current Coupon Fannie Mae TBA	104.5	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.3

Markets are higher this morning on no real news. Mortgage Applications fell 8.5% last week. Both purchase and refi apps fell. We will get new home sales at 10:00am

Toll Brothers didn't have anything earth shattering to say on its earnings conference call, but here are some bullet points: Remember, Toll is in the McMansion business so they will outperform in places with strong economies (DC / Texas) or quality of life (California).

• Consumer Confidence still "a bit fragile"
• Company is "a bit stumped by low demand"
• Texas and California sales are "fabulous"
• Minnesota is slow, Virginia is stronger than Maryland
• Toll will be more careful about raising prices this year
• Construction costs rose $1,700 per home in quarter
• Incentives fell
• Toll will slow land buying over the next 12-18 months 

Fun fact: the average size of a new home has increased 300 square feet from 2009 to 2013. This is part of the reason we have been seeing such growth in average selling prices from the builders and why you shouldn't automatically assume existing homes will see similar appreciation. Funny, I thought the end of the real estate boom was supposed to close the curtain on gaudy oversized McMansions. Guess not.

Cool slideshow on the housing boom and bust.

Annaly Capital reported earnings yesterday, which came in better than expected. The company continues to de-leverage, and has been swapping out of RMBS into CMBS. Leverage dropped to 5:1 from 5.4:1 in Q3 and 6.5:1 a year ago. The company is primarily invested in agency fixed rate MBS. Annaly's activity affects TBA pricing which in turn affects mortgage rates, so it pays to keep tabs on what the big agency REITs are doing. As the Fed reduces their footprint in the MBS market, the REITs will dominate again.

Hey interested in a no-money down mortgage with no credit score check and a rate under 4%? Bank of America has funded a non-profit lender who wants rekindle the subprime market for "underserved" communities. (I guess no-no loans under 4% would probably be money-losers, so the "non-profit" label is a bit superfluous). Will the CFPB come after them given that roughly 15% of the loans would not meet QM standards? Looks like we have the first lender to stick their neck out of the QM box... Not sure why BOA would fund such a thing, (they get no upside and all the downside) unless they get CRA points for it. FWIW, the guy behind this (Bruce Marks) is a CRA bomb-thrower going way back, so maybe figured out a way to extort BOA into giving him money to do this by threatening protests in front of their branches if they didn't.