What Happened Yesterday?

Mortgage backed securities (MBS) lost -7 basis points from Friday's close. The benchmark FNMA 3.50 November MBS has once again moved in a very narrow range and as a result, mortgage rates did not change.

We had two mid-level reports and one major economic report that hit Monday morning and neither really moved the needle on MBS pricing.

Both Industrial Production and Capacity Utilization were stronger than expected and would have normally pressure MBS (worse pricing for you).  But our floor of support located at the bottom of our trading channel held nicely and prevented MBS from selling off.

Existing Home Sales were much weaker than the consensus estimates (-5.6% vs est of -0.5%).  "Normally" (notice the "air quotes" around Normally), this weaker than expected economic data would be positive for MBS and you would have seen an improvement in pricing.  But we are far from "Normal" in this market.  Our overhead ceiling of resistance located at the top our intra-day trading channel would put a stopper in any rally.  But more importantly, is was the fact that the market wasn't trading on the consensus expectations.  The market was trading on "whisper" numbers.  What are "whisper" numbers?  This is basically what traders are bantering around without regards to what the egg-head economists think.  And in this case they were right.  And it makes sense. September's interest rates had risen and many consumers were concerned about their job status with the looming government shutdown that was most likely going to hit on October 1st (and it did).

We had a 2 year Treasury note auction where we sold $32 billion of our nation's debt. There was actually very strong demand for the auction with a bid-to-cover ratio of 3.32.  However, the 2 year note is too short term to impact longer bond prices like MBS.

Housing Remains Affordable

Vital Statistics:

	Last	Change	Percent
S&P Futures	1747.3	-1.2	-0.07%
Eurostoxx Index	3037.2	-1.8	-0.06%
Oil (WTI)	97.48	0.4	0.38%
LIBOR	0.237	-0.001	-0.52%
US Dollar Index (DXY)	79.25	0.066	0.08%
10 Year Govt Bond Yield	2.51%	-0.01%
Current Coupon Ginnie Mae TBA	103.6	0.0
Current Coupon Fannie Mae TBA	102.6	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

Markets are flattish on no real news. UPS, which tends to be a broad economic indicator, beat numbers. Durable Goods came in better than expected. Bonds and MBS are flat

The latest CoreLogic Market Pulse is out. They discuss mortgage fraud, negative equity, foreclosures, and home prices. The key metric of affordability - the price to income ratio - has been creeping up, but is still around historical averages, meaning housing in no longer dirt cheap, but is still reasonably priced compared to historical standards, not just the bubble years. 

It is looking like some sort of grand bargain isn't going to happen as we approach the budget negotiations. Democrats want to get rid of the sequester. Republicans are willing to replace the sequestration cuts with other cuts, particularly in Medicare and and other long-term expenses like Federal retirement. Tax hikes are a non-starter. Republicans are probably not anxious to re-live the shutdown either, so we probably get some sort of extension of the CR and the debt ceiling without much in the way of attacking spending. 

The Morning Report will be on hiatus early next week as I will be in DC for the Mortgage Bankers Conference. Hope to see some of you there.

Finally, what if Facebook was around from WWI to WWII?

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

Pulte Announces 17% Drop in New Orders

Vital Statistics:

	Last	Change	Percent
S&P Futures	1745.3	3.5	0.20%
Eurostoxx Index	3029.4	12.2	0.40%
Oil (WTI)	96.67	-0.2	-0.20%
LIBOR	0.238	0.000	-0.10%
US Dollar Index (DXY)	79.26	-0.005	-0.01%
10 Year Govt Bond Yield	2.49%	-0.01%
Current Coupon Ginnie Mae TBA	103.7	-0.1
Current Coupon Fannie Mae TBA	102.7	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markes are higher this morning after a slew of generally positive earnings reports, most notably PulteGroup, Ford, and Coca Cola. Initial Jobless Claims came in higher than expected. California is still working through its claims backlog, so that number is probably understated. Bonds and MBS are up small.

Homebuilder PulteGroup announced third quarter earnings that topped analyst estimates. New orders were down 17%. On the conference call, they noted that "housing market conditions have changed", as demand is slowing on higher prices and mortgage rates. Their Washington DC markets, particularly the higher priced markets, were affected by uncertainty over the government shutdown. California is also "softer." However, they view this as short-lived within a sustained, multiyear housing recovery. Tellingly though, they bought back stock and debt instead of re-investing idle cash back in the business.

Bank of America was found guilty for Countrywide's sins and the government wants $850 billion, stemming from a plan to pay LO's bonuses on volume. The person who led the plan (dubbed the hustle) may be personally liable for fraud. Damages have yet to be determined. I wonder how much the government "encouraged" BOA to buy Countrywide. In every financial crisis, the first thing any government does is it to force shotgun weddings between the strong and the weak. 

Lender Processing Services "First Look" Mortgage Report has delinquencies up slightly (4.2%) month over month, but still down 12.6% year over year. 

Cash sales accounted for 49% of all residential sales in September, up from a revised 40% in August according to RealtyTrac. Last year, cash sales were 30% of all residential sales. Short sales accounted for 15% of all sales. REO sales were 10%. RealtyTrac estimates the median price was 174,000, which is vastly different than NAR's estimate of the median home price which is 199,000.

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

The Powers that be Throw Lenders a Bone of Fair Lending

Vital Statistics:

	Last	Change	Percent
S&P Futures	1742.2	-7.2	-0.41%
Eurostoxx Index	3021.7	-24.1	-0.79%
Oil (WTI)	96.59	-1.7	-1.74%
LIBOR	0.238	0.000	0.00%
US Dollar Index (DXY)	79.31	0.083	0.10%
10 Year Govt Bond Yield	2.50%	-0.01%
Current Coupon Ginnie Mae TBA	103.9	0.1
Current Coupon Fannie Mae TBA	102.7	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are lower on an earnings miss from Caterpillar. Import prices rose .2% month-over-month. Bonds and MBS are up small.

Mortgage Applications fell .6% last week, which is surprising given that rates fell so much later in the week. The refi index actually fell while the Bankrate 30 year fixed rate mortgage fell 5 basis points to 4.23%. The purchase index was up small.

The FHFA Home Price index rose .3% month-over-month in August, which was lower than expected. Prices are up 8.5% year-over-year. The FHFA index only looks at houses with conforming mortgages, so it is a bit of a central tendency index in that it ignores the jumbos and the cash sales (which are usually distressed sales). The FHFA index shows the strongest recovery in home prices of all the indices out there.

Regulators gave originators a bit of breathing room by saying that originators that focus only on QM loans will not have EEOC issues if they choose to go this route. Of course that can easily change if they find that loans are not getting made in certain areas, so I would take that assurance with a grain of salt. Now that the points / fee caps pretty much make sub-$100k loans uneconomic, let’s see how the Administration reacts when credit dries up at the lower price points. You think Eric Holder is going to care that CFPB made these loans money-losers? Me neither.

Flagstar Bank reported better than expected earnings this morning, although mortgage origination suffered. Total originations declined 28.9% to $7.7 billion from $10.9 billion in Q2 and $14.5 billion in Q312. Purchase activity was up 17% though. Gain on sale margin fell to 1.14% from 1.47% based on "lower hedge performance." This is surprising given that the 30 year fixed rate mortgage started the quarter at 4.39% and ended it at 4.33%. Volatility is what kills mortgage pipeline hedging and Q3 was a bit more volatile than Q2, but not by much. Surprising result. They also made no bulk MSR sales in Q3, after having made them in Q2. Given that MSR valuations have been going up, it is surprising they haven't been ringing the register. Perhaps they are done with their Basel III MSR selling.

One of the unintended consequences of taper-talk has been the slowing of the private label market. Lewis Ranieri's (of Liar's Poker fame) Shellpoint Partners pulled a jumbo bond deal after finding it could get better pricing by selling the loans outright. Investors are shunning the bonds because they are afraid that they will be holding long-duration / low yielding assets for a long time. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

Borrowers You have Been Given a Gift by the Markets!

Vital Statistics:

	Last	Change	Percent
S&P Futures	1742.5	4.3	0.25%
Eurostoxx Index	3046.0	17.4	0.57%
Oil (WTI)	99	-0.2	-0.22%
LIBOR	0.238	0.000	-0.10%
US Dollar Index (DXY)	79.48	-0.213	-0.27%
10 Year Govt Bond Yield	2.54%	-0.06%
Current Coupon Ginnie Mae TBA	103.6	0.6
Current Coupon Fannie Mae TBA	102.4	0.6
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.34

Markets are higher on the back of a weaker-than-expected jobs report. Bonds are flying on the report, which has the 10 year down 6 basis points to 2.54%. MBS are up as well, and we are no best-exing into a 3.5% coupon. Later on today we will get international capital flows, construction spending, and Richmond Fed.

The economy created 148k jobs in September, lower than expected. August was revised upward. The unemployment rate fell to 7.2% while the labor force participation rate remained the same at 63.2%, a level we haven't seen since the late 70s. The last time the labor force participation rate was this low, "Three Times a Lady" by the Commodores was topping the charts. The workweek stayed the same at 34.5 hours and earnings increased .1%.

Overall the jobs report is weak enough to take any sort of December tapering off the table. Don't forget these numbers predate the shutdown, so October's numbers will invariably be worse. 

Existing Home Sales dropped to a seasonally adjusted annual rate 5.29 million units in September, according to the National Association of Realtors. Distressed sales accounted for 14% of sales,and cash sales were 33%. Inventory was steady at 5 months of supply. The median house price rose 11.7% year-over-year to $199,200. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

The Market is Letting You Back In

Vital Statistics:

	Last	Change	Percent
S&P Futures	1738.0	1.5	0.09%
Eurostoxx Index	3026.5	-6.8	-0.22%
Oil (WTI)	99.68	-1.1	-1.12%
LIBOR	0.239	-0.002	-0.81%
US Dollar Index (DXY)	79.76	0.104	0.13%
10 Year Govt Bond Yield	2.59%	0.01%
Current Coupon Ginnie Mae TBA	105.9	0.2
Current Coupon Fannie Mae TBA	105.1	0.0
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.23

Markets are flat this morning on no real news Bonds and MBS are down small. We will get existing home sales later this morning.

The government is still figuring out how it will release the economic reports that piled up during the shutdown. I don't see anything official from BLS regarding the jobs report, although Bloomberg has it scheduled for tomorrow. I think it will take a massive jump in payrolls (like 300k +) to bring a December tapering back into the picture. Given that we just kicked the can down the road for a few months, we are probably looking at March. FWIW, Chicago Fed President Charles Evans said pretty much the same thing on CNBC.

Homebuilder NVR rerpoted a 37% increase in revenues for the third quarter. Closed loan production was just under $700 million for the quarter. Origination volume actually increased about $50 million from Q2. New orders fell 7% and the cancellation rate edged up to 17%. Earnings came in well above expectations. NVR is more East Coast based and DC-centric (think McMansions in McClean VA) so it will be sensitive to government spending. We will hear from Pulte later this week. 

The Bankrate average 30 year fixed rate mortgage fell to 4.23% last week, the lowest since June. We had fantastic lock days on Thursday and Friday. LO's wake up any borrowers that are on the fence or were thinking about refinancing. The market just let them back in. 

JP Morgan is close to a settlement with the government over the sins of Bear Stearns. (Didn't Jamie Dimon buy Bear as a "favor" to the government?) Anyway, it is looking like it will be $13 billion. Whenever the government needs money, it shakes down Wall Street, I guess. At what point are these things no longer "fines," but "surtaxes?"

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

Still No Data

Vital Statistics:

	Last	Change	Percent
S&P Futures	1732.7	4.9	0.28%
Eurostoxx Index	3022.5	12.1	0.40%
Oil (WTI)	101.4	0.7	0.71%
LIBOR	0.241	-0.002	-0.62%
US Dollar Index (DXY)	79.62	-0.027	-0.03%
10 Year Govt Bond Yield	2.57%	-0.02%
Current Coupon Ginnie Mae TBA	105.9	0.2
Current Coupon Fannie Mae TBA	105.2	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.24

Markets are higher this morning on a couple of good earnings reports out of Morgan Stanley and GE. The 10-year continues its post-crisis rally.

The government has been back at the job, but still no economic data this morning. Apparently the September jobs report will be released Tuesday. And some of the data we will get will be less than reliable.

As bonds move lower, so do mortgage rates. Since early September, the average 30 year fixed rate mortgage has fallen to 4.24%, which is the lowest level since June. Mortgage Bankers may in fact get one last bite at the refi apple before rates start heading higher for good.

The increase in rates has brought some anecdotal evidence that the red-hot California market is beginning to cool a bit. The flippers are focusing on the higher end homes, as the lower price points have been picked over. According to the California Association of Realtors, home sales were down 5% in September, and the median price fell.

The National Association of Homebuilders sentiment index fell in October as builders worried about the cost and availability of labor as well as the events in Washington. We have been hearing about skilled labor quite a bit - in spite of high unemployment, employers are finding it hard to fill certain positions. The biggest one is skilled labor. The housing bust sent many skilled laborers to the energy patch, which means there are less electricians, plumbers, etc. The NAHB is forecasting housing starts to be around 900,000 units for the month of September. This is still well below our historical average of 1.5 million. As the echo boomers find jobs, we should be in store for a massive, massive building boom given that we have tremendous pent-up household formation and we have underbuilt for the past decade.

The beatdown goes on... Wells is laying off 925 in mortgage ops. Suntrust is laying off 800. 

Brent Nyitray, CFA

Dellacamera Capital Management

IDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

Negotiations Continue in the Senate

Vital Statistics:

	Last	Change	Percent
S&P Futures	1701.3	9.3	0.55%
Eurostoxx Index	2999.1	-5.5	-0.18%
Oil (WTI)	101	-0.2	-0.24%
LIBOR	0.246	0.003	1.03%
US Dollar Index (DXY)	80.32	-0.164	-0.20%
10 Year Govt Bond Yield	2.74%	0.01%
Current Coupon Ginnie Mae TBA	105	-0.2
Current Coupon Fannie Mae TBA	104.1	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.33

Markets are higher this morning on optimism that a deal is unfolding in the Senate. Bonds and MBS are down. The Mortgage Bankers Association reported that applications increased .3% last week.

Last night, Fitch put US sovereign debt on rating watch negative. "Although Fitch continues to believe that the debt ceiling will be raised soon, the political brinkmanship and reduced financing flexibility could increase the risk of a U.S. default"

Harry Reid and Mitch McConnel are finalizing plans to raise the debt ceiling through Feb 7 and fund the government through Jan 15. Technically the government runs out of money tomorrow, however independent analysts say that the real D-day is November 1. Note that T-bills maturing Oct 31 are trading with a yield of 36 basis points, which means the market is discounting the possibility that they get paid late. Both sides have been making small concessions to get a deal done. Of course the wild card is the House, and whatever solution that comes out of the Senate will leave obamacare largely intact. Note, as I write this, Bloomberg is saying that the T-bills maturing 10/31 now yield 52 basis points.

The dog that didn't bark - shadow inventory. People have been warning of mass dumping of REO properties, but it never occurred, and now shadow inventory is working its way down. Regulators never forced the banks to write down / dispose of bad assets like they did after the S&L crisis in the late 80s. Billions of dollars were raised to capitalize on this, and the flow has been a slow trickle. Second, judges have been slow to approve foreclosures, particularly in the Northeast. This explains the wide disparity between home price appreciation in the West, where the shadow inventory has largely been worked off and the Northeast.

Bank of America announced 3Q earnings this morning, and came in better than expected. The pipeline ended the quarter down 59% quarter on quarter. Production was $465m vs $860 in Q2 based on lower gain on sale margins and a reduction in rate lock volume. 78% were refis. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

An Emerging Deal?

Vital Statistics:

	Last	Change	Percent
S&P Futures	1702.7	-1.6	-0.09%
Eurostoxx Index	2994.3	16.6	0.56%
Oil (WTI)	101.5	-0.9	-0.86%
LIBOR	0.244	-0.002	-0.92%
US Dollar Index (DXY)	80.64	0.374	0.47%
10 Year Govt Bond Yield	2.71%	0.03%
Current Coupon Ginnie Mae TBA	105	-0.1
Current Coupon Fannie Mae TBA	104.2	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.29

Markets are flattish after Citi missed and Coca Cola and Johnson and Johnson beat earnings expectations. The Empire Manufacturing Survey came in at 1.52. Bonds and MBS are down

The Senate appears close to a deal on the government shut down and the debt ceiling. The plan would fund the government through mid-January, and extend the debt ceiling until early February. Obamacare would remain largely intact, although Republicans were able to extract a concession that would force the government to verify that people are eligible for subsidies. Democrats also want to delay a tax on existing policies which is on Big Labor's wish list. This whole thing is designed to take the pressure off and allow the government to enter into budget negotiations. Another round of spending cuts is scheduled to take effect at the beginning of the year, with defense bearing the brunt of it. Of course the problem is not in the Senate, but the House. Will the requirement that the government try and prevent fraud in obamacare enough to get the Tea party onboard? We'll see. 

What date actually matters for the debt ceiling? The government says Oct 17, when the government exhausts its borrowing authority. The Bipartisan Policy Center estimates that sometime between Oct 22 and Nov 1 the government will be unable to pay all the government's bills on time. And Bank of America is saying that by Nov 15, default is more or less inevitable.

Surprisingly, T-bills make up only 13% of the $11.6 trillion in marketable debt outstanding, the smallest share since Eisenhower was president. This is due to the Fed's Operation Twist as well as government extending duration to take advantage of low interest rates. Such short supply has had the shorter dated T-bills trading with negative yields for brief periods of time. 

Speaking of T-bills, the 1 month T-bill has been getting hammered as we approach the debt ceiling, with the yield increasing from basically zero a month ago to 33 basis points a few days ago. It is heading back down, but it is worth keeping an eye on it. Investors are dumping the short end of the curve as major banks have been discussing which T-bills they may restrict as collateral for repo transactions. 

Brent Nyitray, CFA

Dellacamera Capital Management

iDirect Home Loans

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray