Where
does bank settlement money go? Well, if it is up to New York's Governor Andrew
Cuomo, it will go toward building bridges in
New York. I imagine that there are other places for it to go that
relate to the actual settlement... but what do I know?
Turning
to demographics for a moment, we're all aging - it is a fact of life. Mark
Weber writes: 110 million people over age 50 by 2020.
And builders are still building McMansions with steps!" I agree - bring on
the Japanese soaking tub option in the master bathroom! As a side note, the Fed
reports the combined wealth of Americans (value of homes, stocks and other
assets minus debt and liabilities) reached $81.5 trillion, the highest level on
record.
In
line with popular belief, BofA Merrill Lynch Global Research reported that the
millennial generation will be the largest cohort of home buyers in the coming
years, with current homeownership rate at 35.9%, if they are able to
overcome current economic hardships. BofAML stated that the decline in
homeownership rate for the young is due to a decrease in labor participation,
hindering their ability to qualify for a loan. The Federal Reserve Bank of
Cleveland reported that the labor participation rate may decline 2+ points by
2022, resulting in a homeownership rate of 62.5%. Employment rates for people
aged 55 and older has increased 9.3% since 2004, whereas those aged 16 to 19
years old has seen a 23.3% drop in employment since 2004, and the labor
participation for the 20-24 year has declined 6%. The older cohort has a
homeownership rate of 80.1%, therefore the 35 and under age group will be the
largest group of future homebuyers.
The
statistics are obvious; right now the industry is going through a
"lull" period and it will take a few years before the industry
bounces back. This is because the millennial generation is transitioning from
graduating from college and paying off student loans, to starting a career and
becoming financially stable and ready to take on the responsibility of buying a
home. First time home buyers will drive the market in the coming years.
Fannie
Mae came out with its report on why millennials are not buying homes; their research
indicated that if the homeownership rates of 2006 had been constant, there
would be 2.4 million more first time home buyers today. The younger generation
is also spending 30% of their income on housing, which is less than what was
seen in the previous decade. Fannie Mae's report stated that "housing
costs, decisions related to marriage and childbearing, student debt, length of
educational careers, mortgage credit accessibility and cost and lifestyle
preference" is deterring millennials from purchasing a home. These may be
reasons as to why the median age for first time home buyers is now 31.
But
what can our industry do about millennials lackluster desire to buy a home?
Educate. Most millennials believe they need a 20% down payment in order to
qualify for a loan, but if they knew about programs with minimal or no down
payment options, they may rethink that possibility. As Ryan Christensen from
the TheREsource.tv pointed out, we need to focus on why millennials should buy
a home and how they can benefit from it.
Considering
all the (how shall I put this?) mature faces I see at banking
conferences every year, I'll assume people can remember the 1980's; more
specifically, the Japanese economy during that time. It was robust, to say the
least. The decade to follow, however, was anything but robust, and the 1990's
have become known as the "lost decade". While there are differences
in economic qualities between our two nations (capacity being one), the United
States economy finds itself mired down in years of inefficiencies. So it was
with some interest when I read Clear Capital's The Lost Decade. Here to Stay?
The group writes, "Two and a half years of recovery hasn't been enough
to bring a close to U.S. housing's 'lost decade'," said Dr. Alex
Villacorte, vice president of research and analytics at Clear Capital.
"With our revised forecast showing only 1.8% growth through 2015, our lost
decade, like Japan's, could extend more than 10 years. Though national home
price growth since 2012 of 23.5% has outpaced historical annual averages of
3.5%, home prices are still at 2004 levels-a clear indictment of the housing
market's weakness only a few short years ago." The period in question,
from 2004-2014, where national home prices have been nominally unchanged. As
the research groups illustrates, housing is back to 2004 levels without even
accounting for inflation, leaving many homeowners with no more equity than when
they bought. "This is unusual in the history of the housing market
where prices have risen 55% over each rolling 10 year period since 1985."
There
is always a demand for money to buy or refinance homes, and there is always capital
to be lent out. The question is, of course, at what rate and price do the two
meet? We have companies "disrupting" the mortgage sector, per a story out of CNBC, asking
readers, "Would you bypass a bank for your next mortgage?" Online
lender Kabbage began offering personal loans a week or two ago as it
seeks to compete with more established online players such as Lending Club and
Prosper. Loans will be for 3Ys to 5Ys at rates of 5.73% to almost 25%.
"'During
the financial crisis, many borrowers experienced life event hardships from lost
businesses, lost jobs, divorces and/or illnesses,' said Art Yeend, Managing
Director and Head of Sales and Marketing at MountainView Capital Holdings. 'As
time has passed and the economy has improved, many of the affected borrowers
have now recovered financially but do not qualify for conforming or jumbo prime
loans...These borrowers will be prudently and responsibly underwritten and will
meet all ability-to-repay guidelines, but our expanded underwriting criteria
allows for multiple risk layering not acceptable to prime lenders.'"
And
American Banker reports that Deutsche Bank is planning a return to the U.S.
mortgage business by again financing home lenders, and it will do so by
focusing on a product that most say they are unwilling to sell - receiving the
green light to target lenders making mortgages falling outside of new
regulatory guidelines. "Deutsche sees enormous potential in nonqualified
mortgages...Deutsche cannot stand by as competitors who stayed in residential
lending begin to reap the benefits." The story notes, "The decision
to finance makers of non-QM loans is significant for Deutsche Bank, one of the
many large banks trying to recover from the subprime mortgage crisis. It is
also meaningful to the broader housing market, which seeks reassurances that
the new mortgage rules, which took effect in January, will not cut off
production for all but ultra-safe home loans. The market has the potential
to become a $600 billion a year industry for originations, Deutsche Bank
researchers said in a recent report."
The
story goes on to note that "Many traditional lenders are still hesitant,
if not afraid, to offer non-QM mortgages. They argue the Consumer Financial
Protection Bureau's Qualified Mortgage and Ability-to-Repay rules are overly
restrictive in their intent to prevent banks from making loans to borrowers who
cannot afford them. Loans that fail to meet that standard will be denied
protection from borrower claims and suits, and that is a major
deterrent....That attitude may now be slowly changing, as investors communicate
a greater willingness to take on lenders' litigation risks. Sprinkles of
nonqualified mortgages have begun to make their way into pools of residential
mortgage securitizations, testing investors' risk appetite. They include
deals issued by mortgage real estate investment trust Redwood Trust. Now, more
lenders are arranging for warehouse financing." Companies like Citadel
Servicing, Impac Mortgage, Angel Oak, and JMAC are often mentioned, as well as
more than a dozen others. (For a better list, go to www.mortgageelements.com,
type in a state, and select the non-QM box.)
Turning
to the bond markets, with all this going on, rates are almost an afterthought.
Things were pretty quiet yesterday, and again over night. For
"excitement" we have a $27 billion 3-yr note auction. Monday the
10-yr had a 2.42% close, and this morning is at 2.41% and agency MBS prices are
better by a smidge.
Daily Market
Analysis:
Interest
rates continued to improve in the early going this morning with early trading
in the US stock indexes aiming to a lower 9:30 open. European shares ended a
two-session climb, as lackluster German industrial production data dealt
another blow to the continent’s largest economy and the IMF report out today.
US stock indexes also being effected by the IMF lowering its growth outlook
once again. The 10-year German bund yields earlier approached an all-time low
as data showing industrial production dropped the most since 2009 in August
boosted speculation the outlook for Europe’s largest economy is deteriorating.
Once again
the IMF has cut its outlook for global growth in 2015 and warned about the
risks of rising geopolitical tensions and a financial-market correction as
stocks reach “frothy” levels. IMF saying the global growth will grow 3.8% in
2015, down from 4.0% from what the fund said in July. The reduction due to more
weakness in the EU, Russia and Brazil economies slowing. “In advanced economies,
the legacies of the pre-crisis boom and the subsequent crisis, including high
private and public debt, still cast a shadow on the recovery,” the IMF said in
its latest World Economic Outlook. “Emerging markets are adjusting to rates of
economic growth lower than those reached in the pre-crisis boom and the
post-crisis recovery.” Last week IMF Director Christine Lagarde warned that
officials need to act to prevent a prolonged period of sluggish growth, a trend
she called the “New Mediocre.” Raising growth in emerging and advanced
economies “must remain a priority,” the IMF report stated. According to the
report, a sustained period of policy interest rates near zero in advanced
economies has raised the risk that some financial markets may be overheating.
The euro area
will grow 1.3% next year, slower than the 1.5% pace predicted in July, after a
0.8% gain this year, according to the IMF. The IMF said Japan’s economy will
expand 0.8% next year, compared with a 1.1% advance predicted in July. The IMF
now sees Brazil growing 1.4% next year, compared with 2% in July. The US is
predicted to grow 3.5% in 2015 according to Fund.
At 9:30 the
DJIA opened -100, NASDAQ -31, S&P -12. 10 yr note at 9:30 2.39% -3 bp and 30 yr MBS prices +14
bp from yesterday’s close and +28 bps from 9:30 yesterday.
At 10:00 the
JOLTS August job openings was expected at 4.71 mil from 4.673 mil; we hardly
give the report any thought whatsoever. As reported 4.835 mil.
At 1:00
Treasury will go after $27B of 3 yr notes at the first of three auctions this
week.
As far as I
am concerned the report of the day hit at 3:00 pm this afternoon; August
consumer credit. Admittedly the report doesn’t get the attention it should but
we follow the revolving credit data within the overall report as a more
important measurement of confidence by consumers with how they employ their
credit cards, so far this year credit card use has been minimal at best.
All of our
work points to a continuing decline in long term interest rates. Technicals all
bullish. Not willing to project how low rates will fall but from a traders
perspective you have to be long the bond market at the moment. There are enough
crosswinds in the fundamentals, enough to confuse markets. Once again, we
remind that for the near term there is no better way to take advantage of the
rate declines unless you follow how the markets are performing (where the money
is flowing---the technical measurements.
PRICES @
10:15 AM
10 yr note:
+9/32 (28 bp) 2.39% -3 bp
5 yr note:
+5/32 (15 bp) 1.66% -4 bp
2 Yr note:
+1/32 (3 bp) 0.52% -1 bp
30 yr bond:
+18/32 (56 bp) 3.10% -3 bp
Libor Rates:
1 mo 0.153%; 3 mo 0.232%; 6 mo 0.326%; 1 yr 0.571%
30 yr FNMA
3.5 Oct: @9:30 102.95 +14 bp (+28 bps from 9:30 yesterday)
15 yr FNMA
3.0 Oct: @9:30 103.46 +11 bp (+18 bp from 9:30 yesterday)
30 yr GNMA
3.5 Oct: @9:30 104.09 +17 bp (+23 bps from 9:30 yesterday)
Dollar/Yen:
108.17 -0.61 yen
Dollar/Euro:
$1.2646 -$0.0009
Gold:
$1210.60 +$3.30
Crude Oil:
$89.51 -$0.83
DJIA: 16,892.43
-99.48
NASDAQ:
4428.82 -25.98
S&P 500:
1954.83 -9.99
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