What
can you buy on minimum wage? Well, I guess that's a relative question; relative
to a number of factors such as where you live, your current monthly expenses,
and savings rate; however, I'm going to guess 'not much'. Zillow writes, "In
2013, 3.3 million Americans worked in a job that paid at or below the federal
minimum hourly wage of $7.25. For many of these workers, finding affordable
housing is a constant challenge. Still, nearly two-thirds of suburban minimum
wage earners, and nearly half of urban minimum wage earners, owned their own
home. Of course, the ownership rate does not capture important differences in
home size, amenities, convenience and quality, but is nonetheless illustrative
of the options that minimum wage earners frequently encounter." Minimum Wageand what Zillow has to say about it.
Maybe
these folks can pick up some talent from Rushmore Home Loans, rumored to
have cut back a large number of its employees. And Bloomberg reports that Standard
& Poor's has cut 16 members of its U.S. commercial mortgage-backed
securities group and moved other analysts across the country...Peter Eastham is
stepping down as the group's head...'Standard & Poor's Ratings Services is
realigning its U.S. CMBS team to increase its resources around the country and
better leverage its staff...'"
It
sure helps to know what is going on in the industry and in the real estate
sector. Richey May, the leading public accounting firm serving the mortgage
industry, recently announced a significant price reduction for its Richey
May Select benchmarking product, which includes quarterly peer-to-peer
financial benchmarking data and operational metrics. Full access to the
customized quarterly peer benchmarking reports and industry-wide financial and
operational data is now available for only $750 quarterly, down from
$1,500. Participation among independent lenders is growing steadily and
Richey May is focused on adding a substantial number of companies to the
platform in the coming months. To learn more about participating, or to
discuss the benefits of the Richey May Select product, contact Trevor Reinhart at Richey
May or visit their website at www.RicheyMaySelect.com.
Arch
MI has released its new Housing and Mortgage Market
Review. The summer edition features the latest Arch MI
MSA-Level and State-Level Risk Index values, which estimate the likelihood of
home price declines based on local economic and housing market data, such as
affordability, unemployment rates, housing starts, foreclosure rates, etc.
According to the latest data, the probabilities of regional home prices
being lower in two years remain low to moderate. The highest-risk areas
continue to be concentrated in Florida, New York, New Jersey and the area
around the California-Arizona border.
And
Merrill Lynch thinks home prices are overvalued and
will go nowhere over the next few years. Home prices were undervalued about 6%
relative to incomes at the end of 2011, and have now rebounded to levels that
are 9.7% overvalued. Of course all real estate is local, and there is always
the possibility that incomes begin to rise as the labor market tightens.
Narrowing
our focus a little, the FHFA report on mortgage investors turned a lot of heads
Thursday. But on the CFPB side, its Policy Guidance appears to be spurred by
the CFPB's concern that mortgage brokers may be transitioning to the
mini-correspondent lender model in light of GFE and HUD-1 disclosure
requirements and the mortgage loan originator compensation and points and fees
rules, both of which govern when mortgage broker compensation must be disclosed
and when such compensation must be included in the points and fees calculation.
But who has the risk, and who actually uses their money to fund the loan?
The
CFPB states that it will closely monitor these practices to ensure that
companies are not evading the requirements that afford consumers certain
protections. Accordingly, the Policy Guidance summarizes the scope of
Regulations X and Z, and specifically notes that both regulations draw a
distinction between table-funded and secondary market transactions (the former
are subject to Regulations X and Z; the latter are not). The CFPB highlights
that the applicability of these regulations to mini-correspondents and their
transactions is not determined by the title of the parties involved but,
rather, the nature of the transaction.
The
Agencies and other impacted groups knew of the FHFA OIG report ahead of
time, of course, and had time to comment. The CMLA responded with,
"The FHFA Inspector General released a report on trends in GSE mortgage
purchases, which shows a purchase increase from nonbank lenders. The biases and
unsupported speculation regarding nonbank lenders is extremely disappointing -
one would and should expect higher quality analysis from regulators. Equally
disturbing, the report exhibited a bias towards large, too-big-to-fail banks,
largely ignoring the failure of a number of large banks during the financial
crisis that were major loans sellers to the GSEs. In contrast, numerous
non-bank, community-based lenders honored their obligations to the GSEs and
repurchased loans where mistakes were made, utilizing their own financial
resources. In addition, these community lenders did so without receiving a dime
of TARP money. CMLA supports the enhanced risk management controls referenced
in the report, which have been put in place by the GSEs. These controls serve
to strengthen loan quality at the point of origination by the lender that is
dealing directly with the consumer, a far more effective method than relying
solely on after-the-fact controls. The CMLA will work with the
FHFA and GSEs to ensure their responses to this report will continue to permit
well-managed, well-capitalized community-based lenders to fulfill their vital
role in meeting the home financing needs of consumers."
As
a reminder, since there continues to be questions about it, When the OCC issues guidance...well,
I guess you take it. Collectively "the agencies" have jointly issued
supervisory guidance on risk management practices for home equity lines of
credit (HELOC) approaching the end-of-draw period. "As HELOCs
approach scheduled maturity or repayment phases, borrowers could face
substantial payment shock when they are required to start amortizing principal.
Borrowers may be unable to meet new payment terms or refinance existing debt as
economic conditions and property values may have changed since origination. As
HELOC draw periods approach expiration, the agencies expect lenders to manage
risks in a disciplined, prudent manner; to work with troubled borrowers to
avoid unnecessary defaults; and to engage in appropriate risk recognition."
The guidance describes five core operating principles that should govern
management's oversight of HELOCs nearing their EOD period, as well as 10 EOD
risk management expectations that promote a clear understanding of potential
exposures and help guide consistent, effective responses to HELOC borrowers who
may be unable to meet contractual obligations.
The
secondary markets (versus the primary markets where originators are working
with borrowers) continue to heat up. Investors are clamoring for yields - and
happy to buy non-QM pools and other assets, almost regardless of risk. (Here we
go again!) BlackRock reportedly will launch another sale of once-toxic
residential mortgage-backed bonds tomorrow, seizing on a dramatic shift in
demand for such assets and a rebound in prices since the crisis. Last week it
sold $3.7 billion in an all-or-nothing sale to Credit Suisse. This week's $4.4
billion sale of the same stuff (backed by UBS collateral) will supposedly be
split up. I know several folks who "retired" from the business and
are making a market in this product - they must be salivating! Whatever
happened to the term "toxic assets"? Loans and pools of loans that
sold at 20 cents on the dollar have rebounded to 70 cents on the dollar.
IFR reports that TRACE data indicate Credit Suisse has already placed a
majority of the bonds it bought in the first auction, and it paid even more
than that, as the bonds fetched a second-best bid 73.16 cents from Goldman
Sachs.
The
implications of this price action are not lost on originators and buyers of
non-QM loans. We've seen a huge growth in certain lenders offering expanded
criteria loans (it is important to differentiate between credit risk and
operational risk!). Elapsed time between foreclosures and short sales and new
lending is collapsing. Are the lenders who are racing to the bottom of credit
risk being followed by investors racing to the bottom? Lenders typically don't
offer a product unless there is a market. So what is the difference between
this go-around and what we were seeing ten years ago? In my chats with lenders,
it appears to be that the loans, for now, are fully documented. We will see
how long that lasts - there isn't much new under the sun. The markets hope
that pre-securitization due diligence is top priority nowadays. Many believe
that a large, trusted company will step up to make it an integral part of the
securitization/whole loan sale process - probably a global firm that's
connected to financial markets but also has risk and legal businesses.
Turning
to rates, without much new information coming out of the U.S. last week we had
plenty of room to react to the terrible plane crash and other geopolitical
risks. Economic data last week (basically retail sales, the producer price
index, inventory growth, and a sad housing starts number) did little to move us
out of the range. Lots of economists think that consumer spending was a bit
stronger in the second quarter, and that inflation will pick up a little in the
second half of the year. (It really doesn't have anywhere to go but up, right?)
But that Housing Starts number is a problem: it posted a second monthly decline
in June raising some questions about the pace of the housing market recovery.
More forward looking building permits data also slowed but remain well above
the latest level of starts. But for the week the 10-year note gained about .250
in price and the yield declined nearly four basis points - not much of a
move.
Like
sands through an hourglass, so go the weeks of scheduled economic news. As we
always seem to learn, it is the unexpected events, usually overseas, that seem
to move the markets more than the mundane news coming out of the United States.
But you should at least know what's coming out. Today are some Chicago Fed
numbers; tomorrow are the Consumer Price Index and another house price index
(this time from the FHFA) and Existing Home Sales. Thursday is Initial Jobless
Claims and New Home Sales, and then Friday is Durable Goods Orders. This
morning the 10-yr, which closed Friday at a yield of 2.48%, is roughly
unchanged as are agency MBS prices.
Executive Rate Market Report:
Geopolitical issues are dominant this
morning within markets.
Over the weekend Pres. Obama accused Russia of providing the missile that shot
down the Malaysian passenger plane. Russian separatists have impeded rescue
workers and investigators from doing their jobs and reports that the crash
scene has been contaminated by the same separatists; so far nothing from the
Black Boxes that are thought to be in separatists’ hands. In Israel fighting is
increasing with Israeli troops continuing their ground assault. Ion the
background, and with little news, the Iraq Sunni/Shiite confrontation is
ongoing. Until now the US has led the sanctions against Russia as Europe has
been dragging back because of the direct impact additional sanctions will have
on the already soft European economies. The sanctions imposed so far have been
narrowly targeted and haven't applied to broad swaths of the Russian economy. Ukraine is ready to hand over the
investigation of the Malaysia Airlines Flight 17 disaster to Dutch authorities.
Meanwhile, fighting in eastern Ukraine
appeared to be intensifying.
Putin attempting to take the high road; asking for more international investigation
of the crash site and said that "Russia will do everything possible to
shift the current conflict in the east of Ukraine from today's current military
stage to the state of discussion at the negotiation table." The Obama
administration for the first time publicly charged Mr. Putin's government with
supplying the rebels the long-range rockets used in last Thursday's strike and
also likely providing the separatists with training. European Union foreign
ministers meeting in Brussels tomorrow will consider tougher sanctions on
Russian individuals and companies.
There are no economic releases
scheduled today; this
week has June existing and new home sales and June durable goods orders as
headliners. The week also has a huge number of key Q2 earnings reports due.
Between the data and the geopolitical events in Israel and Ukraine, markets
will likely be jittery; reacting to unfolding news about sanctions by Europe
and earnings reports. Looking ahead, the FOMC will meet next week on Tuesday
and Wednesday; expect more of the same from the meeting, however one can never
underestimate what comes out of it. There is no Yellen press conference after
the meeting. Also next week; the July employment report is on the schedule, in
the past when the first Friday of the month ell on the 1st of the month the
employment report was delayed until the second Friday. Finally next week
Treasury will auction 2s, 5s and 7 yr notes.
With all that next week, this week isn’t likely to see much change in
rates or the stock market.
US interest rates (10s and 30s) are at
the lowest rates since last May and also since June of 2013. The events in the next two weeks
will test whether investors will buy treasuries to push rates into new lows,
breaking the June 2013 low on the 10 yr. Some history; the lowest the 10 yr
yield came in August 2012 at the height of the Fed’s QE at 1.50%. There is very
little likelihood based on current conditions that rates will get that low
again. 2.44% close last May is a difficult challenge.
The DJIA opened at 9:30 -78, NASDAQ
-13, S&P -6; 10 yr 2.47% -1 bp and 30 yr MBS prices 11 bps from Friday’s
closes.
This Week’s Calendar:
Tuesday,
8:30 am June CPI (+0.3%, ex food
and energy +0.2%)
9:00 am May FHFA housing price ndex
(+0.3%, April 0.0%)
10:00 am June existing home sales
(4.99 mil +2.0%)
Wednesday,
7:00 am weekly MBA mortgage
applications
Thursday,
8:30 weekly jobless claims (+8K to
310K)
10:00 am June new home sales (475K
-5.75%)
Friday,
8:30 June durable goods orders
(+0.5%, ex transportation orders +0.7%)
The events in Ukraine and Israel are
dominant today in financial markets.
A lot of Q2 earnings and two data points will also get attention this week.
Still depends on how investors and traders treat the geopolitical events that
will dictate the interest rate markets. If stocks improve on earnings this week
the rate markets will not likely improve much regardless of international
events. A stock market improvement would
be a vote that those geo-political circumstances will not impede US economic
improvement, thus keeping interest rates from increasing. Keep in mind many Fed
officials have been speaking about an earlier increase in rates by the Fed than
what is now expected. All of our technical studies remain bullish, but it is a
thin line.
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