Ahead of most states
changing their clocks Sunday morning, we have Halloween. Halloween has been
celebrated for thousands of years, or at least since anyone reading this was a
kid, as part of Celtic rituals, where initially it was associated with images
of witches, ghosts and vampires. Of course Halloween has turned into a holiday
where people young and old dress up, trick or treat, carve pumpkins and explore
haunted houses. Halloween is also an excuse for college girls to dress in
"risqué" costumes although the estimated number of potential
trick-or-treaters (children aged 5-13) is about 41 million. When I was that
age, Halloween was an innocent time when parents were far more relaxed and
clueless about what their kids were up to. "You kids have fun, and be home
by Thanksgiving!'' our parents yelled as I took off with eggs and shaving
cream. For those of you that haven't finalized plans for Halloween yet, here
are few suggestions of places you may want to visit tonight: Tombstone, AZ,
Sleepy Hollow, NY, Kill Devil Hill, NC, Slaughter Beach, DE, Casper, WY and
Truth or Consequences, NM.
Now, however, notices like this
(and I took this verbatim from someone with a child in school) go out regarding
the costume policy. "Costumes are allowed but remember the dress code and
discipline code remain fully in effect. Costumes may not cover your face, show
too much of your bare body or have a sexual, alcohol, drug, or violent theme.
No simulated weapons of any type are allowed. Also the costume may not reflect
badly on any ethnic, racial, gender, or sexual orientation or religious group.
Students who are not dressed appropriately will be required to change their
clothing."
Gaps
of all kinds are widening out, and they are impacting business. In a story
about "New Homes' Problem: Price" the
gap between the more expensive median price of newly built homes and that of
resales has exceeded $70,000 for most of the economic recovery, the widest
spread since the Commerce Department and the National Association of Realtors
started tracking the figures in 1968.
Let's not forget that Tuesday
is an election. While a Republican Congress may make more noise about
reforming/dismantling Fannie/Freddie, this is more of an economic issue than a
political one. "Housing" is a bipartisan issue and neither party
wants to disrupt it - given that the GSEs are playing such an enormous role at
present there won't be much appetite to rush through legislation passing the
companies fully back into private hands. Yes, we may see a potential Senate
change. Congress has been gone since mid-September trying to protect their
jobs. And gosh... there is no need for them to be in session and drag down
their approval ratings further, right? Right now the Senate is split 55-45
Democrat-Republican but the odds are considered high that the GOP captures 6
net seats to get them to 51 and control of the Senate. How much would
Washington change under a Republican-controlled Congress? Probably not that
much. If the majority is slim (only 1-2 seats) the gridlock won't go away (the
Senate may pass more bills but that may just mean Obama is forced to wield his
veto powers more frequently). Keep in mind that once these elections are over
the focus will immediately shift to 2016. But in reality Congress in 2015
may not function much different from how it does now.
Anyone
owning Ellie Mae stock is laughing all the way to the bank. This year
its stock is up 44% "as home lenders embrace e-signatures.
"As stiffer regulations make mortgage compliance more complicated, lenders
who still depend on fax machines are turning to technology firms."
Can
your firm afford a team of people to audit and monitor counterparties? If it
can't, you may want to reconsider any decisions to service loans. The CFPB issued a report
that highlights issues that surfaced during exams around mortgage servicing.
The report indicates examiners have found insufficiencies or weaknesses in
policies, problems with procedures and information sharing with vendors that
service loans. Experts recommend community bankers and lenders active in
mortgage lending activities double-check this area and consider ramping up
internal audit resources to avoid issues in the future.
Apparently
many in the industry wondered why Freddie Mac entered the manufactured
housing market. Multifamily VP Kelly Brady put an end to the queries by
publishing a piece titled "Behind the Scenes: The Making of The
Godfather". Uh, sorry, looking at my Netflix queue. It is titled, "Behind the Scenes: Manufactured
Housing Communities." "We needed to prove to the MHC
industry that we could be a reliable capital source in this particular market
segment. We needed to prove that lenders and borrowers would experience the
same high quality level of service and certainty of execution that they
currently receive from us on conventional multifamily loans...Next, we needed
to build expertise. So we hand-picked a core team for MHCs, with the time and
desire to develop relationships and with a deep knowledge of the intricacies of
this business. Then, we were tenacious in pursuing business. We reached out to
community owners. This was the key to our success in purchasing our first MHC
loan...With our announcement to enter this space, lenders and borrowers have
told us that they have seen the availability of funding go up and the cost of
capital go down. And, while it's still early, we are bringing mortgage funds to
locations we have not been active in before, bringing much needed capital to
rural areas where traditional multifamily apartments are scarce..."
While
we're talking about Freddie Mac, "The Community Mortgage Lenders of
America (CMLA) continued its push
for expanding mortgage credit for moderate income, minority, single parent and
first time buyers in separate meetings with White House and Interagency staff
and with Freddie Mac executives. A CMLA delegation, led by new Chair, Paulina
McGrath, President of Republic State Mortgage Co., called for changes in the
GSE loan review process to reduce rote repurchase demands for non-serious loan
flaws. In an October 15, 2014 White House/Interagency meeting, McGrath
stressed, 'the impact of current GSE policy is, unfortunately, less credit to
worthy borrowers. Lenders should be given an opportunity to correct minor flaws
in performing loans. If these flaws cannot be corrected, indemnification should
be the preferred option, rather than repurchase.' Specifically, the CMLA is
seeking a number of changes in how the GSEs review loan quality that include:
Eliminating rote demands that lenders buy back or repurchase performing loans
with minor defects, creating specific standards of materiality for errors in
loans that clearly distinguish between fatal and minor flaws, working with the
lending industry to boost lender guarantees against loan defaults or
indemnifications, with a goal of significantly reducing repurchase demands
within the next 3 years In a similar discussion with Freddie Mac Executives on
October 24, CMLA lenders cited examples of slight loan defects that have
prompted repurchase demands. This practice, they said, results in lenders extending
credit only to the safest credit quality borrowers.
And the mortgage insurance business has been in the news.
Isaac Boltansky with Compass Point writes, "On October 28, Bloomberg
ran an article focusing on HUD's
push to evaluate the merits of private mortgage insurers (PMIs) providing supplemental
insurance on VA loans. As a reminder, only 25% of a VA loan is federally
guaranteed which reportedly limits some lender participation. To that point, at
the MBA conference last week HUD Secretary Castro stated that the 25%
limitation 'leaves a lot of small lenders awfully exposed and reluctant to
offer veterans credit under this initiative.' While it is far too early to
assess the potential impact of supplementary coverage on VA loans, this policy
conversation reinforces our longer-term belief that the forthcoming
finalization of the PMIERs will soften the ground for the PMI industry's
efforts to increase and diversify the risks it insures." Mr. Boltansky
notes it is too early to estimate the potential impact on the PMI industry but
that, "The conversation surrounding supplementary insurance on VA loans
reinforces our longer-term belief that governmental entities will become
increasingly willing to allow PMIs to take additional and varying forms of risk
given their improved capital position in the wake of the Private Mortgage
Insurance Eligibility Requirements (PMIERs). We believe that the PMIERs will
place the PMIs on sound financial footing which should soften the ground for
industry efforts to increase and diversify the forms of risk they insure. These
efforts could take the form of supplementary insurance on VA loans or deeper
up-front risk sharing for PMIs (see MBA proposal). We continue
to expect the FHFA to finalize the PMIERs by the end of 2015 or early Q1 2015
which should remove a meaningful policy overhang for the group and allow for
the PMI conversation in D.C. to evolve.
The
MBA reminded us that "...last week regulators issued the final Risk
Retention rule mandated by the Dodd-Frank Wall Street Reform and Consumer
Protection Act. The final rule aligns QRM with QM and removes onerous
provisions such as down payment and maximum debt-to-income ratios that would
have restricted access to credit. Please click here for a summary of
these and other provisions that will impact the single-family market."
Yesterday
the Treasury market finished about where it ended Wednesday afternoon. The 10yr
closed at 2.30%. But agency MBS finished the day "in line to 5's & 3+
ticks tighter to 10's with under $1BB in origination." What does that mean
to the shoeshine guy down the street? It means that MBS prices did better than
Treasury prices due to supply dropping relative to the demand for mortgages.
The
economic calendar closes out the week beginning at 2:30AM Hawaii time with September
Personal Income, seen unchanged to lower (expenditures). Also out at that
timeslot is Q314 Employment Costs, also seen unchanged to lower. About an hour
later we'll have the October Chicago Purchasing Manager's Index and then the
October (final) University of Michigan survey which printed 84.6 previously. In
the early going we're at 2.34% on the 10-yr and agency MBS prices are worse
about .125.
Rate Market Report:
TRICK or
TREAT! The trick; how
to drive global stock markets higher. The treat; the Bank of Japan treated
markets with an unexpected increase in monetary stimulus overnight. The
reaction; sent stock bourses substantially higher in early trading this
morning. At 9:00 the US markets trading in the futures markets were pointing to
an all-time intraday high for the DJIA and the other indexes on fire. The bond
and mortgage markets taking a hit so far with stock markets roaring. Not a
large increase in rates however. At 9:30 DJIA opened +90, NASDAQ +75, a 14 yr
high, S&P +15. Interest rates holding well so far; the 10 2.34% +3 bp and
30 yr MBS price down just 2 bps.
The BOJ
surprised global markets overnight
increasing the monetary base by 80 trillion yen a year from 60 trillion a yr.
The bank said it will purchase exchange-traded funds so their amounts
outstanding increase by about 3 trillion yen a year. Japanese real-estate
investment trusts will be purchased with a view to raising their amounts
outstanding by about 90 billion yen annually, according to the central bank.
Japan’s government also said the $1.2 trillion Government Pension Investment
Fund would announce a boost in its holdings of foreign assets. In a press
conference held later, the GPIF said it would increase its target holdings for
both local and overseas shares to 25 percent each from 12 percent, confirming
the Nikkei report. When a central bank is out buying ETFs and foreign stocks it
logically sends investors into a frenzy of buying.
It is
interesting to listen to the CNBC commentators this morning; one would think Helicopter Ben was
dropping $1000.00 bills across the country. The Bank of Japan set the world on
its heels with the stimulus announcement. It wasn’t expected, and the massive
amount is shocking; between what the bank is saying it will do and the GPIF
saying it would buy anything around the world equity markets are on fire, The
bond market still OK given the circumstances. Maybe the bond market isn’t quite
as excited yet about the news from Japan as equity traders are now.
Turning
to domestic news;
this morning’s Sept personal income and spending data was weak at 8:30. Ignored
initially as Japan news is dominating. If it were not for the Japanese news it
is likely the US stock market would be trading lower now. Personal income was
expected up 0.3% as reported +0.2%, the slowest pace this year. Spending
expected +0.1% declined 0.2%. The PCE core up 0.1% as expected. Q3 employment
cost index expected +0.5% increased 0.7%; yr/yr +2.2% from +2.0% in Q2.
More data
at 9:45 and 9:55; the
Chicago purchasing mgrs. index was thought to be unchanged at 60.5, as reported
it jumped to 66.2. The U. of Michigan final consumer sentiment index for
October was better than thought at 86.9 against forecasts of 86.4; the index is
the highest now since July 2007.
The bond
and mortgage markets a little weaker but given the news from Japan and the
reaction to it in the equity markets, treasuries
are not suffering too much so far. Technically the 10 yesterday tested and held
its 40 day average, so far today it tested it again and has held. Stocks
rallying because Japan’s pension funds are going to buy global investments, and
where better than in the US. Volatility remains high for equity markets but at
the moment the bond market is rather stable given the backdrops. All that said,
we are not as bullish as we had been; if the 10 closes above 2.35% we will have
to accept the bullish bias turning more bearish.
PRICES @
10:15 AM
- 10 yr note: -5/32 (15 bp) 2.33% +2 bp
- 5 yr note: -7/32 (22 bp) 1.62% +4 bp
- 2 Yr note: -2/32 (6 bp) 0.51% +3 bp
- 30 yr bond: -17/32 (53 bp) 3.08% +4 bp
- Libor Rates: 1 mo 0.154%; 3 mo 0.232%; 6 mo 0.324%; 1 yr 0.541%
- 30 yr FNMA 3.5 Nov: @9:30 103.42 -4 bp (+2 bp from 9:30 yesterday)
- 15 yr FNMA 3.0 Nov: @9:30 103.70 -2 bp (+4 bp from 9:30 yesterday)
- 30 yr GNMA 3.5 Nov: @9:30 104.43 -4 bp (-3 bp from 9:30 yesterday)
- Dollar/Yen: 111.99 +2.78 (huge move)
- Dollar/Euro: $1.2511 -$0.0102 (big move)
- Gold: $1164.40 -34.20 (big decline on strong dollar) Crude Oil: $79.86 -$1.26 (psychological level under $80.00)
- DJIA: 17,338.07 +142.65
- NASDAQ: 4625.03 +58.89
- S&P 500: 2012.52 +17.87
