My brain can't keep track of all the statistics coming out of lending. But you won't find many people who will argue that real estate & credit have not rebounded. Zelman and Associates reported that in Q3 of 2014, the total number of loans in delinquency and in the foreclosure process was down 20% YoY and 50% lower than the peak in Q4 of 2009. In November, default notices declined 15% based upon 11 states and were down 9% YoY and the number of homes repossessed by lenders decreased 9%. REO filings are currently at the lowest level since mid-2007 and REO listings were down 16% YoY. The total industry owned 275,000 properties in REO inventory as of 3Q2014 down 21% YoY and 59% below the peak.
Plenty of SoFi's borrowers are recent college graduates, and education holds the key to economic success according to a report published by Wells Fargo Securities Economics Group. The report found that in 2012, 32.7% of White students obtained a four-year college degree, whereas less than half of that share of Blacks and Hispanics received a college degree. More than 40% of Blacks and Hispanics had either some college or received an associate's degree in 2012, which is greater than their White counterparts. Research has also discovered that the median income for those who hold a bachelor's degree is $50,360, compared to a median income of $29,423 for those who only have a high school diploma, whereas an associate's degree leads to a median income of $38,607. People who have obtained a graduate degree see a median income of $68,064. College enrollment remains high for all races, but the percentage of those graduating with a bachelor's degree falls for Blacks and Hispanics. The study also found that Millennials put more importance on college education than previous generations, with Black and Hispanic Millennials still needing to increase college enrollment to improve labor and income prospects. Asian-Americans between the ages of 18-24 years old, have the highest rate of college enrollment at 59.8%, followed by Whites (42.1%), then Hispanics (37.5%) and African Americans (36.4%). Both African-Americans and Hispanics are earning more bachelor's degrees each year, but associate's degrees are still an important alternative for both races.
But in general mortgage lenders are worrying more about lackluster demand impacting margins, according to the latest Fannie Mae Lender Sentiment Survey. The biggest headache remains regulatory, of course. Lenders anticipate a modest housing expansion in 2015. It seems like the homebuilders agree. It is all going to hinge on the return of the first time homebuyer.
What is holding down stronger growth in the mortgage market? When people ask me to comment on what I believe is hobbling the mortgage market, I usually resort to faking an illness and then make a quick exit. As a longtime friend of mine joked, "It's equivalent to asking the question, 'What's wrong with Los Angeles? Is it the smog? Is it the freeways? Is it the crime? Is it the crowded population?" Yes, yes, yes, and yes. Last month Wells Fargo noted, "Mortgage financing activity remains a central linchpin for the economic and housing outlook. Recent data indicate that lending standards are easing and supply is increasing in the mortgage market. Yet, residential mortgage debt has fallen to historically low levels while the housing recovery remains sluggish. In addition, mortgage debt continues to decline on a year-over-year basis.
Banks out there know that the Winter 2014 issue of Supervisory Insightswas released this week. It looks at key aspects of interest rate risk (IRR) management, including the implementation of effective governance processes, the development of key assumptions for analyzing IRR, the development of an in-house independent review of IRR management systems, and what to expect during an IRR review. "Banks need to be prepared for a period of increasing interest rates," stated Doreen R. Eberley, Director, Division of Risk Management Supervision for the FDIC. "The articles in this issue of Supervisory Insights, which were prepared by FDIC field examiners who specialize in IRR reviews at community banks, can help banks identify the potential risks and take steps to mitigate the risks where needed." "Effective Governance Processes for Managing Interest Rate Risk" discusses supervisory expectations for a community bank's IRR governance process, identifies potential risks associated with a period of increasing interest rates, and discusses approaches for mitigating IRR as needed. "Developing the Key Assumptions for Analysis of Interest Rate Risk" describes common sense approaches for developing the assumptions necessary to analyze interest rate sensitivity in the current environment. "Developing an In-House Independent Review of Interest Rate Risk Management Systems" describes ways that smaller institutions may be able to effectively and economically perform an in-house IRR independent review. Finally, "What to Expect During an Interest Rate Risk Review" describes what examiners focus on during an IRR review, supervisory expectations with respect to IRR, and communication with the FDIC during an examination.
But are rates going up? No one knows for sure - remember all the smart guys a year ago saying we'd be at 3% on the 10-yr in 2014? It closed yesterday at 2.20%. We did have a little news yesterday. Besides a decent Jobless Claims number, the Philadelphia Fed Manufacturing Business Outlook Survey diffusion index of current activity decreased 16 points to 24.5 in December from a reading of 40.8 in November. And the Conference Board's index Leading Indicators Increased 0.6% in November, increasing for third month in a row. Ken Goldstein, Economist at The Conference Board, observed, "The biggest challenge has been, and remains, more income growth. However, with labor market conditions tightening, we are seeing the first signs of wage growth starting to pick up."
The headlines were grabbed by the stock markets while 30-yr agency MBS prices sold off - they are down nearly ½ point the past two days while the 10yr note is off more than 1.5 points and its yield higher by 15 basis points. There is no scheduled news today and the 10-yr, and MBS prices, are unchanged from Thursday's closing levels.
Executive Rate Market Report:
Traders, investors, analysts, and economists are happy these last two weeks are over. The volatility in equity and bond markets has been extreme over the past 10 sessions, time to take a breath and let things settle down a little. The Fed stirred the pot on Wednesday, what it always does at the FOMC meetings, suggesting the bank will be “patient” about when it decides to increase rates. Traders and investors world-wide jumped on “patient” as a green light to keep buying US stocks. No matter that Yellen said the FOMC would not consider increasing rates until the Next two FOMC meetings. The take away; the Fed will not even consider increasing rates until 12 weeks from now, investors took that as any lift off won’t happen until late Summer 2015 at the earliest. The simple truth, camouflaged by many specific details, there is no place in the world investors can go to expect a positive investment return except the US; global investors are all in for US stocks.
The DJIA yesterday up 421 points, on Wednesday +288, 709 points that returned the index t where it traded two weeks ago. The bond and mortgage markets have held well in the face of the current equity market rally, a little separation between the two markets. Equity markets also separating from crude oil movements; crude dropped to a new 5 yr low yesterday as stocks exploded. The new view about the impact of declining oil and commodity prices is that it is good for the economies of the world with a just a couple of exceptions. A couple of weeks ago the collapse of oil prices was seen as a deterrent to economic growth. Just another way to think about the uncertainty (volatility) that has gripped investors recently.
There are no economic reports on the calendar today.
US interest rates still well supported; treasuries may continue to benefit with yields higher than any other Group of Seven country and contained inflation supporting demand. Investors sold foreign bonds this year at the fastest rate ever in a move to repatriate assets as record-low yields in overseas sovereign debt are substantially lower than US sovereign debt. The betting that the ECB will begin a major stimulus program early next year has driven EU interest rates down, the strongest economy in the EU, Germany’s 10 yr bund this morning trading at 0.60% compared to the US 10 at 2.19%. It isn’t as easy as to simply pick stocks over bonds; for numerous reasons there is always demand for sovereign debt no matter how equity markets are doing; as long as the spread between other G-7 countries favors US rates our treasuries will draw demand no matter the level of the rate, 160 bps more yield between Germany and the US is attractive.
At 9:30 the DJIA opened +20, NASDAQ -7, S&P +2 (see below for 10:00 levels). The 10 at 9:30 2.20% -1 bps; 30 yr MBS price +14 bps from yesterday’s close and +16 bps from 9:30 yesterday.
Crude is trading higher this morning after declining $2.00+ yesterday. The US stock market opened a little better. Too soon to draw any conclusions about how much of an influence crude has on investors; the new thought that declining oil prices is a good thing, the reason given for the last two strong performances in the stock market, or the previous view that lower prices are not a plus hasn’t been tested yet.
Quadruple expirations of options today that may cause some unusual movements in stocks and bonds. A lot of the adjustments however were made yesterday in equity markets. The 10 yr note and MBSs are still holding slight bullish technical readings; the 10 has its first support at 2.21%/2.22% the level tested yesterday and the 20 day average on the 10. This morning so far the rate markets are holding, we expect the support will hold today.
PRICES @ 10:10 AM
- 10 yr note: +3/32 (9 bp) 2.20% -1 bp
- 5 yr note: +4/32 (12 bp) 1.64% -3 bp
- 2 Yr note: +1/32 (3 bp) 0.63% -2 bp
- 30 yr bond: -2/32 (6 bp) 2.82% unch
- Libor Rates: 1 mo 0.164%; 3 mo 0.245%; 6 mo 0.343%; 1 yr 0.605%
- 30 yr FNMA 3.5 Jan: @9:30 104.13 +15 bp (+17 bp from 9:30 yesterday)
- 15 yr FNMA 3.0 Jan: @9:30 103.80 +1 bp (+10 bp from 9:30 yesterday)
- 30 yr GNMA 3.5 Jan: @9:30 104. 81 +10 bp (+26 bp from 9:30 yesterday)
- Dollar/Yen: 119.16 +0.32 yen
- Dollar/Euro: $1.2294 +$0.0008
- Gold: $1196.90 +$2.10
- Crude Oil: $55.74 +$1.63
- DJIA: 17,812.76 +34.61
- NASDAQ: 4758.21 +9.81
- S&P 500: 2068.80 +7.57