Parsing the Fed Minutes

Vital Statistics:

	Last	Change	Percent
S&P Futures	1661.9	13.1	0.79%
Eurostoxx Index	2952.0	47.3	1.63%
Oil (WTI)	101.6	0.0	-0.02%
LIBOR	0.243	-0.003	-1.02%
US Dollar Index (DXY)	80.39	0.014	0.02%
10 Year Govt Bond Yield	2.70%	0.04%
Current Coupon Ginnie Mae TBA	105.2	-0.2
Current Coupon Fannie Mae TBA	104.3	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are higher on talk of a short term bump in the debt ceiling. Bonds and MBS are selling off.

Initial Jobless Claims increased to 374k. The jump was attributed to the unwinding of a computer problem in California and furloughed government employees.

The debt ceiling machinations are beginning to have more effects - in Hong Kong, the exchange increased the haircut on T-bills citing default concerns. Jack Lew is in front of the Senate Banking Committee this morning warning about the risks of not raising the debt ceiling. FWIW, Bill Gross is a buyer.

There was nothing earth-shattering in the FOMC minutes, which were released yesterday. On housing, they mentioned that the sector continued to strengthen, but they were worried about the increase in rates and what effect it would have. They noted the recent weakness in housing starts. The debt ceiling / government shutdown was mentioned as a further risk to the economy. Their estimates for GDP growth were taken down by 30 basis points.

On Page 8, they discuss the thought process behind the decision not to taper at the September meeting. For the most part, they were disappointed at the economic data and the ones who supported no changes to QE felt that reducing asset purchases would harm the housing recovery and the economy in general. The ones who were supported a reduction in QE were in favor of reducing it because they worried about sending mixed messages to the market, not because they were satisfied with the economy or were worried about inflation or asset bubbles. Because they sent the signal in June that they planned to reduce purchases and the market internalized it, they felt like they had to follow through, or else risk credibility at the Fed. They were worried about creating uncertainty. So here is the takeway, at least for me. They don't want to end QE, they don't even want to reduce it, but you may see a small tweak at the December meeting, just to prove that the Fed's communications about its intentions can be relied upon. And if the economy continues to stagnate, that may be it for a while. 

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

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It's Janet!

Vital Statistics:

	Last	Change	Percent
S&P Futures	1654.3	3.9	0.24%
Eurostoxx Index	2917.5	14.1	0.49%
Oil (WTI)	103.3	-0.2	-0.19%
LIBOR	0.246	0.002	0.82%
US Dollar Index (DXY)	80.39	0.329	0.41%
10 Year Govt Bond Yield	2.65%	0.01%
Current Coupon Ginnie Mae TBA	105.4	0.0
Current Coupon Fannie Mae TBA	104.5	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are up small after Alcoa kicked off earning season with good numbers. Bonds and MBS are down small.

Mortgage Applications increased last week by about a percent, according to the Mortgage Bankers Association. The refi index was up about 2.5%, while the purchase index fell small.

The FOMC minutes will be released at 2:00 pm EST. In the absence of economic data this will undoubtedly take on more importance.

In a move that surprised exactly no one, Obama is expected to name Janet Yellen to replace Ben Bernanke when his term expires in January. Basically it means Alan Greenspan's third term. Yellen is a dove, a bigger dove than Bernanke, who was a bigger dove than Greenspan. Expect fawning support from the media due to the groundbreaking nature of the nomination. (If only Janet Yellen had been running the Fed, we wouldn't be in this mess - never mind that while Ben Bernanke just spiked the punch bowl, Janet will be adding oxycontin to it.) The extra juice will have the Street singing Dammit Janet.

The shenanigans regarding the debt ceiling are not being felt in the 10-year, but they are being felt in the 1 month T-bill. The yield has increased from almost zero in mid September to 29 basis points currently. Any sort of default will wreak havoc in the repo market as defaulted securities are ineligible to be used for collateral. That has the makings of a credit crunch and bears watching. If there is one thing that is sure to get the market's attention it would be liquidity problems somewhere because someone can't roll over their repo lines.

Completed Foreclosures increased to 48,000 in August (up 1.3% month over month, but down 34% on an annualized basis), according to CoreLogic. Shadow inventory was 1.9 million units. Note: The MBA and Corelogic have different methodologies for calculating shadow inventory - The MBA's estimate is about 50% higher.

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

Small Business Pessimism Survey

Vital Statistics:

	Last	Change	Percent
S&P Futures	1669.2	1.5	0.09%
Eurostoxx Index	2919.6	-3.5	-0.12%
Oil (WTI)	103.5	0.4	0.43%
LIBOR	0.244	0.000	0.10%
US Dollar Index (DXY)	79.98	0.034	0.04%
10 Year Govt Bond Yield	2.65%	0.02%
Current Coupon Ginnie Mae TBA	105.5	0.0
Current Coupon Fannie Mae TBA	104.9	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Markets are flattish this morning on no real news. Bonds and MBS are down. Earnings season kicks off after the close with Alcoa. 

China and Japan are warning the US not to default on its debt. China holds just under 1.3 trillion of US Treasuries. Beijing warned that "the clock is ticking" and urged Washington to get its act together to "ensure the safety of the Chinese investments." The White House says it is open to a short-term increase in the debt ceiling, which may allow us to kick the debt ceiling can to the end of the year while we figure out the government shutdown. However, both sides are dug in, with the White House insisting on a clean debt ceiling increase, and John Boehner insisting that some spending cuts have to be a part of any deal.

Corelogic is reporting there were 48,000 completed foreclosures in August, down 34% year-over-year and up 1.3% from July.The shadow inventory is estimated to be 1.9 million homes. 2.1 million mortgages, or 5.3% of all mortgages are seriously delinquent, the lowest level since November 2008. The Northeast, Florida, and Nevada have the highest foreclosed inventory.

Corelogic also released its 2013 mortgage fraud report. They estimated that $10.5 billion of mortgage applications had fraudulent information in the first half of 2013. The mortgage fraud index decreased 5.6% nationally on a year-over-year basis. They identify six types of fraud - employment, identity, income, occupancy, property, and undisclosed debt. Income fraud is the highest risk, while property fraud is the lowest. 

Chart: NFIB Small Business Optimism Index

The National Federation of Independent Businesses say that optimism fell in September as pessimism about future business conditions increased. Small business optimism is still well below pre-crisis levels. Keep this in mind when you start hearing blowout earnings numbers from the S&P 500 companies. Many of them are overseas earning stories and you shouldn't draw too many conclusions from their strength. 

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

Warning Signs in the Money Markets

Vital Statistics:

	Last	Change	Percent
S&P Futures	1673.5	3.8	0.23%
Eurostoxx Index	2915.7	13.6	0.47%
Oil (WTI)	103.6	0.3	0.32%
LIBOR	0.243	0.000	0.00%
US Dollar Index (DXY)	79.98	0.233	0.29%
10 Year Govt Bond Yield	2.63%	0.02%
Current Coupon Ginnie Mae TBA	105.6	0.1
Current Coupon Fannie Mae TBA	105.1	0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.25

Markets are higher this morning on no major news. Since we have the government shutdown, the all-important jobs report that was scheduled for this morning will be delayed. Bonds and MBS are down small.

Even though we don't have any economic data today, we have a lot of Fed-speak. Fisher will talk at 8:30, Dudley at 9:15, Stein at 9:30, Lacker at 12:30, and Kocherlakota at 1:45 (all times EST). With no data to chew on, the market will probably react more strongly to any new revelations than it otherwise would. 

With no economic data to analyze, the Fed will almost certainly maintain its present course of asset purchases at the October FOMC meeting. While the Fed does have their own econometric models and independent sources of data, they do rely on inputs from the Federal government agencies. The bigger question is about December. Does Ben Bernanke want to start the tapering process on his watch or throw the whole thing to Janet Yellen? And does Janet Yellen want to taper at all? She may not. This whole shutdown has thrown a wrench in the conventional wisdom over tapering, which means QE may stick around a little while longer than we thought. Doing nothing at the December meeting is still a long-odds scenario, but it is getting less and less so.

The dynamic I would watch in the bond market is that anything that points to a deal would be bond bearish, and continued gridlock is bullish. Here is one area of concern though - the short term Treasury markets. I already discussed the issues with the repo market and here is another: the 1 month T-bill has increased in yield as the debt shutdown has gone on. It is now a higher yield than the 1 year. Heard on the Street has a piece on how a debt ceiling breach will impact the money markets. While no one anticipates another 2008, things could get dicey. If anything is going to push the S&P 500 over the edge and get everyone's attention in Washington, this will. 

Chart: 1 month T-bill yield

We are starting to see the Federal government move towards bringing back items piecemeal. Currently there is are bills that would commit to pay furloughed federal workers their back pay once government gets back up and running. Naturally Democrats don't like these sort of bills because they want to use the leverage of mad constituents to force Republicans to drop their opposition to a clean continuing resolution. Republicans are taking a page out of the sequester strategy, where they fixed the air traffic controller problems with a simple bill. Behind the scenes, the Tea Party is wearing thin on most everybody and at some point the more senior Republicans are going to say enough is enough. Separately, John Boehner is telling people he will avoid a default on the federal debt. It is looking more and more likely that any sort of deal with be a two-fer, handling the budget and debt ceiling.

HUD has released its own rule on QM - any mortgage (aside from HECMs) that do not meet the points and fees requirements will not be eligible for insurance. This is a proposed rule, which will be open for comment. HUD will handle the points and fees a little differently: Under CFPB, the APR has to be below 150 bps over the average prime rate offer (APOR). Under the HUD proposal, it has to be less than 115 basis points over APOR plus the mortgage insurance premium. This intends to alleviate concerns that higher MIPs are causing loans to breach the threshold. HUD believes MIP will add about 135 bps to APR, so, the punch line is that a loan that is withing 250 bps of APOR would fall within safe harbor.

Banks are abandoning mortgage pre-approvals, according to CNBC and moving towards conditional approvals that usually last about 90 days.

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

Focus Moving to Debt Ceiling

Vital Statistics:

	Last	Change	Percent
S&P Futures	1680.6	-2.5	-0.15%
Eurostoxx Index	2911.4	-6.9	-0.24%
Oil (WTI)	103.8	-0.3	-0.26%
LIBOR	0.243	-0.002	-0.61%
US Dollar Index (DXY)	79.89	-0.012	-0.02%
10 Year Govt Bond Yield	2.62%	0.01%
Current Coupon Ginnie Mae TBA	105.4	0.1
Current Coupon Fannie Mae TBA	104.9	-0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.27

Day 3 of the government shutdown. Markets are sanguine. Stocks are down small and bonds / MBS are flat.

Initial Jobless Claims came in at 308k, better than expected. Challenger Job Cuts increased 19% as the financial sector continues to lay off people.

The shutdown debate is now starting to mix with the debt ceiling debate. Remember, the even if we don't raise the debt ceiling, that doesn't automatically mean we default. Interest on the debt is about 7% of the US budget. The debt ceiling allows maturing debt to be replaced with new debt. As long as the net balance of debt remains under the limit, we can issue debt just fine. So all that really comes into play is interest, which is only 7% of the budget.

Here is the breakdown of government spending:

Of course the problem is that both sides see each other as villains in a movie and cannot fathom they believe what they do for any reason other than evilness, power hungriness, need for control, greed, stupidity, or naivete. Neither side sees any value whatsoever in the opposing party's position. As long as the markets behave there probably isn't going to be a lot of pressure being put on Washington to come to an agreement. Think of the Snicker's Ad: Not going anywhere?

Assuming we get a deal soon, don't get lulled by interest rates at these levels. If we get a solution over the weekend, the shutdown will probably be short enough to not have any effect on the economy. Which means we go back to wringing our hands about the Fed and tapering. The trend is up for rates and we are in a counter-trend move. Don't lose sight of the big picture.

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

State of Play With the Government Shutdown

Vital Statistics:

	Last	Change	Percent
S&P Futures	1676.5	-12.9	-0.76%
Eurostoxx Index	2920.1	-12.9	-0.44%
Oil (WTI)	102.1	0.0	0.05%
LIBOR	0.244	-0.002	-0.61%
US Dollar Index (DXY)	80.12	-0.017	-0.02%
10 Year Govt Bond Yield	2.61%	-0.04%
Current Coupon Ginnie Mae TBA	105.4	-0.1
Current Coupon Fannie Mae TBA	104.9	0.1
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.32

Markets are weaker after the ECB maintained interest rates at current levels and the ADP jobs report came in disappointing. Mortgage Applications fell .4% last week. Bonds and MBS are higher.

Bonds are rallying (interest rates are falling) on the shutdown. What gives? The shutdown means that the Fed is on hold for QE tapering. Certainly an October move is off the table, and perhaps December is as well. Then we get Janet Yellen, who is an even bigger dove than The Bernank. Maybe, just maybe, we can squeeze in one last refi wave if rates drop below 2.5% on the 10 year. 

If the shutdown remains in place, you just got Friday's all-important jobs report with the ADP number. The economy created 166k jobs last month, while the Street was expecting 180k. The August number was revised downward from 176k to 159k. As we have seen, the financial industry is laying off mortgage origination staff as the refi boom dries up. 

The Washington Post gives you the state of play with the shutdown. Punch Line: there are no high level negotiations happening at the moment. Both sides absolutely despise each other and neither one trusts the other further than they can throw them. Republicans are playing a strategy similar to the sequester. Democrats believed that once people started feeling the effects of the sequester (think business travelers and flight delays) that the pressure would bring everyone to the table. That didn't happen. Instead, Congress passed a bill requiring the FAA to move funds to keep the air traffic controllers on the job. That took the pressure off and the sequester stayed, much to the chagrin of Democrats. Republicans are planning to submit separate continuing resolutions to fund the most popular government activities and daring the Democrats to vote against them. In other words, this could take some time to play out.

Rob Chrisman has a decent analysis of the shutdown and its effects on the mortgage business.  Here is another. The highlights

·        Lenders needing an executed IRS Form 4506-T only need to have it signed by the borrower not processed by IRS prior to closing. However, the actual 4506-T information must be obtained.

·        USDA loans will be on hold as the Department of Agriculture is closed.

·        VA will remain open.

·        We should also see delays in FHA processing.

·        Fully approved FHA and VA loans will be able to close, but there will be delays in insuring

·        FHA case numbers will be obtainable if processed automatically. Manual processes will not.

·        FEMA flood insurance will not be obtainable

Once we climb continuing resolution mountain, we have to deal with the debt ceiling. Nobody thinks we will miss a principal or interest payment on the debt, but it could potentially affect the economy if the government stops paying some bills. One potential issue is the repo market, which could hit a bump if T-bills become classified as "defaulted securities." Defaulted securities are unacceptable as collateral for repo transactions (a repo is just a secured loan and is a huge way banks and companies handle cash management). This could start to affect the financial markets and restrict credit. 

Brent Nyitray, CFA

Dellacamera Capital Management

National Asset Direct

iServe Residential Lending

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray

Government Shutdown Breakdown

Vital Statistics:

	Last	Change	Percent
S&P Futures	1677.8	3.5	0.21%
Eurostoxx Index	2908.5	15.4	0.53%
Oil (WTI)	101.8	-0.6	-0.57%
LIBOR	0.246	-0.003	-1.21%
US Dollar Index (DXY)	80.02	-0.197	-0.25%
10 Year Govt Bond Yield	2.63%	0.02%
Current Coupon Ginnie Mae TBA	105.5	-0.1
Current Coupon Fannie Mae TBA	104.8	-0.2
RPX Composite Real Estate Index	200.7	-0.2
BankRate 30 Year Fixed Rate Mortgage	4.28

The government shuts down and markets are up.  Kind of says it all. Bonds and MBS are down small. The markets are sanguine because it means that QE will remain in place.

Shutdowns are not as rare as the media likes to portray: it shut down once under Ford, and HW Bush, twice under Clinton, five times under Carter, and eight times under Reagan. So keep this in mind when you hear all the sturm and drang over how this is "unprecedented" and it will wreck the economy. 

So there are two ways out that seem to be within the realm of possibility. The first (and most likely) is that John Boehner relents and allows a clean continuing resolution to the floor of the House and it is passed with moderate Democrats and Republicans. The far left will probably vote against it because they want the sequester cuts repealed and the Tea Party will obviously vote against it. The second (and less likely) is that Obama relents and throws the tea party a bone and disposes of some part of obamacare. The most likely candidate is the medical devices tax which is pretty much loathed universally and has powerful democrats lining up against it. It is unknown if this is enough to get the tea party on board. 

The government shutdown started at midnight but most people will not notice. Entitlement checks will still go out, the mail will still get delivered, and government workers are about to take a paid vacation. HUD will still operate for the most part. In mortgage land, big banks like Wells Fargo have told their clients it is business as usual. 

Here are some of the impacts on the mortgage business:

• FHA will continue insuring loans in Lender Insurance and FHA Connection will be operating. DE test cases and HUD insurance processing will be delayed
• VA - business as usual; minimal disruption
• Ginnie Mae - Will issue new securities; minimal impact on new issuer processing for at least the near future
• USDA - no guidance at the moment; expect no new guarantees during shutdown
• IRS - Apparently no 4506Ts during the shutdown

I noticed yesterday that some on the Street were backing off their FHA and VA pricing a little. The fact that things could get messed up at Ginnie Mae means mortgage bankers are wary of having too much inventory for fear they won't be able to move it.

What does this shutdown mean for the markets? Well, first of all, you aren't getting any government data until they are back at work. So no jobs report on Friday, which means the ADP employment report on Thursday will suddenly become a lot more important. A shutdown of any length will almost certainly take the possibility of reducing QE off the table at the October meeting, and possibly the December meeting. So, the longer it goes on, the more bullish it is for bonds.

That said, we will go from this crisis to the debt ceiling crisis. If the government does not get an increase in the debt ceiling, the government will have to prioritize payments. Principal and interest payments and social security payments will take precedence and will almost assuredly be paid, although some are warning that the computer systems at Treasury which pay the nation's bills will have to re-programmed to allow this intervention. Of course with the government shut down, that becomes more difficult.  

Brent Nyitray, CFA

iDirect Home Loans

Dellacamera Capital Management

1010 Washington St, 6th floor

Stamford CT 06901

T: 203-817-3614

C: 917-841-4938

bnyitray@dcm-funds.com

AIM bnyitray