More on PHH v. CFPB, Refis Continue To Drop

By rchrisman@robchrisman.com

Yes, residential lending continues to be at the vertex of federal, state, and local regulators. For those wondering what might be coming up, this legal update from Mayer Brown LLP summarizes reports released by the CFPB, the OCC and the FCA about recent developments in their respective efforts to facilitate responsible financial innovation and offers predictions on what the industry can expect in this space during the coming months.

 Earlier this week I reminded readers of the CFPB's Compliance Bulletin 2016-02, which updates the Bureau's guidance on vendor management and oversight. The Bulletin clarifies that the depth and formality of the risk management program put in place to monitor service providers may vary depending on the type of service(s) being performed and the performance of the service provider in complying with federal consumer financial laws and regulations. Specifically, the Bureau noted that the size, scope, complexity, importance, and potential for consumer harm were factors to take into consideration when assessing the scope of a vendor risk management and oversight program.

 Jonathan Foxx wrote in addressing the CFPB's update to its service provider review requirements ("Compliance Bulletin and Policy Guidance 2016-02, Service Providers") which is an update to its Bulletin that was issued on April 13, 2012, called "CFPB Bulletin 2012-03, Subject: Service Providers." The new update has been carefully outlined in a downloadable article by Mr. Foxx of Lenders Compliance Group, on behalf of his affiliate, Vendors Compliance Group. A great feature of the article is that is provides a Question & Answer format, which brings a lot of clarity to understanding the CFPB's expectations. Head on over to Vendors Compliance Group to download his article, entitled "Compliance Bulletin and Policy Guidance 2016-02 - Service Providers - Questions and Answers."

Switching gears to the capital markets...To be or not to be. Will there be a rate hike in December? Or will this be a year of one and done? There was a consensus view that the Federal Open Market Committee (FOMC) "would elect not to raise the fed funds rate after its November meeting." That turned out to be the case. But the world has changed, and practically every economist and trader believes that the December meeting will result in a move in short-term rates. Inflation continues to increase; CPI is up 1.5% year over year. "Continued strength in services inflation and energy base effects should allow prices to rise further toward 2 percent in the coming months." The Fed has previously stated that they would like to see 2.0% inflation. Each passing month sees inflation inching closer to that target.

 Speaking of things that the fed has previously stated, they continue to discuss that they would like to see a strong labor market in order to raise interest rates. The labor market continues to improve, and some think we're already at full employment as they estimate payroll gains of at least 100,000 jobs per month - enough to reduce remaining labor underutilization and spur modestly higher wage growth. Overall, the outlook is for a tightening labor market and rising inflation to prompt a fed funds rate increase in December. 

 Economists and traders are still ruminating on the stock and bond markets surrounding the election. Besides the ups and down of the stock market over uncertainty in the election, it was a light week for economic data. During the day of the election, when there was uncertainty in the air in what was supposed to be a Clinton victory, stock market futures crashed, global financial markets were affected. Leading the charge was the Mexican Peso plummeting. Afterward there were two days of strong U.S. financial market performance, following the shock of Trump's campaign victory, led by the Dow charging to an all-time high, few expect to see a repeat of the Tuesday election night swan dive. This is important for the upcoming FOMC meeting in December which is set to raise interest rates at that time. 

 In Tuesday's bond market rates improved somewhat with the 10-year closing at 2.32%. Agency mortgage-backed security prices rallied almost .125, and spreads were mostly tighter versus treasuries - a good thing. The Treasury auctioned $34 billion five-year notes at a yield of 1.76%, the highest mark since December 2015.

 It will be interesting to watch the supply and demand dynamics over the coming months as supply falters and demand continues to be strong. November prepayment speeds are expected slow 4% to 5%, and certainly that was seen in today's MBA application data for last week with refis continuing to drop. Will lenders and vendors who made their money on refis be nimble enough to switch to a purchase market?

 Looking at today, it is a full trading day in the bond market, but one must ask who is working a full day today. Tomorrow is a holiday; Friday bond markets are open but everyone will be lightly staffed - and who is going to lock in a loan? The holiday likely contributed to the relatively light volumes yesterday.

Today we have a full platter of news with typical Thursday releases moved up a day with Friday being an early close. Weekly mortgage applications (w/e Nov 18) from the MBA kicked off the day (+5.5% with purchase apps +19%, refis -3%). We've also had the always volatile Durable Goods orders for October (+4.8%, higher than expected) and weekly Initial Jobless Claims for the week ending November 19 (251k, up from 233k, still solid).

 

Coming up are the FHFA Housing Price Index (Sep), at 9AM ET, Markit Manufacturing PMI (preliminary Nov.) at 9:45AM ET, Michigan Sentiment (final for Nov.) at 10AM, October's New Home Sales, a $28 billion 7-year note auction at 1PM ET, and the minutes from the November FOMC meeting will be released at 2PM ET. Whew! To start the day, after those strong numbers, the 10-year is at 2.35% with agency MBS prices worse .250 versus Tuesday night. Given the holiday, trading will most likely be choppy and liquidity may be an issue as we move into the afternoon.