Loans over $765,600 are in absolute chaos with rates skyrocketing higher. 20% Down Payment? Fico Score 740 $1M Loan amount? Your looking at just under 5.89% today!!

$14 Billion Commodity Broker Facing Crushing Margin Calls After Mortgage Hedges Go Wrong
by Tyler DurdenTue, 03/24/2020
We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields…
At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning.
Well, they are not alone.
As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government).
And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls.
Flagstar Bancorp, one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans.
One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”
Things escalated over the weekend, according to Bloomberg, when some firms rushed to raise cash by requesting offers for their bonds backed by home loans.
“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”
And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter.
The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public.
ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said.
As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.

It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website.
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
“The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department.
“But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.”
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…

U.S Commercial Mortgage Market on the Brink of Disaster

(Bloomberg) — Real estate billionaire Tom Barrack said the U.S. commercial-mortgage market is on the brink of collapse and predicted a “domino effect” of catastrophic economic consequences if banks and government don’t take prompt action to keep borrowers from defaulting.

Barrack, chairman and chief executive officer of Colony Capital Inc., warns in a white paper of a chain reaction of margin calls, mass foreclosures, evictions and, potentially, bank failures due to the coronavirus pandemic and consequent shutdown of much of the U.S. economy. The paper was posted late Sunday on online publishing platform Medium.

“Loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees,” he wrote.

Barrack said the impact could dwarf that of the Great Depression.

Rescue Plan

Specifically, his paper highlights the fragility of mortgage real estate investment trusts, or REITs, and credit funds and the lenders that provide them with liquidity via repurchase financing. He argues for a rescue plan coordinated by banks and supported by government that includes the following:

$500 billion of taxpayer funds to provide liquidity to the financial system, including for loans and repurchase contractTemporary suspensions of both mark-to-market accounting and certain loan-modification rulesDelaying until 2024 a new accounting rule governing the recognition of credit lossesLeeway for banks to provide loan forbearance without triggering bank-capital rule violations

Barrack, a longtime friend of President Donald Trump, has much at stake in the outcome. Most of Colony’s investments are in or connected to real estate. The Los Angeles-based firm’s year-end financial report lists $3.54 billion of assets in hospitality real estate and $725 million of debt and equity investments at Colony Credit Real Estate Inc., its publicly traded commercial mortgage REIT.

Notes and Bond yields plummet

BY: MATTHEW GRAHAMMBS Week Ahead: 10yr Yield Bottoms Out at 0.318%. What Next? Mar 9 2020

Overnight market panic made for some truly spectacular movement in the bond market with the 10yr Treasury yield down more than 40 bps at one point to 0.32%.  That number is made all the more wild considering the previous all-time low was exactly 100bps higher in 2016.  It’s made even wilder considering that ground only took 7.5 days to cover, which is at least 1 day faster than the pace seen in November 2008 (the last time 10s moved 100bp lower in less than 2 weeks.

In both cases, the previous low range was fairly well established.  2008’s rally was facing off against lows from 2003, and multiple bounces near the same levels in 2008.  The current version is accomplishing even grander things in that regard with solid bounces in both 2012 and 2016, very close to the same levels.  There was also a fledgling bounce in the 1.4’s in 2019 which would no doubt have lasted much longer if not for coronavirus.

20200309 Open2

In the shorter term, the rally has left a trail of breadcrumbs that can be used as supportive ceilings on the way back up.  Breaching these ceilings would give us one small way to track a shift in momentum, away from fear and toward recovery.

20200309 Open4

There is a smattering of econ data this week, but none of it should have any lasting effect on trading levels.  Investors are simply watching coronavirus numbers and trying to determine when the bottom is in for both yields and stocks.  

20200309 Open

With the Fed up to bat next week, speculation is rampant about a cut to the previous all-time low Fed Funds Rate range of 0-.25% (or .125% as far as charts are concerned).  This too has been a rapid change from just a few days ago.  In fact, some analysts expect another emergency cut before next week’s meeting, but that may be too risky considering the bad reaction markets had to the last cut.  Monday morning jitters aside, if stocks are heading generally higher this week, there’s less and less of a chance of fiscal or monetary intervention (apart from the balls that are already rolling).

20200309 Open3

Above all else, keep in mind that as soon as the rest of the world can confirm China isn’t fabricating its numbers of deaths vs recoveries, that will be good for meaningful proportion of the recent move being erased.  I don’t think it would be fully erased, mind you (because actual economic damage has been done and cannot be undone), but erased enough to ruin your day (or week) if you’re not paying attention when it happens.  The center of the risk window for this is by the end of next week, although seeds of hope could be planted as soon as the end of this week.  

Bond Yields plunge below 1%

10-Year T-Note Yield Plummets To A New Record Low On Global Economic Concerns

cmdtyNewswires – Mon Mar 9, 9:53AM CDT

Jun T-notes (ZNM20) this morning are up +2-12/32 points. The 10-year T-note yield is down -33.0 bp at 0.732%.

Jun T-note prices this morning catapulted to a fresh contract high, and the nearest-futures March 2020 contract surged to an all-time high. The 10-year T-note yield plummeted to a new record low of 0.314%.

A freefall in global equity markets today, along with heightened corporate credit risk, has fueled massive safe-haven buying of T-notes and pushed yields down to record lows. Crude oil prices today have plummeted more than 21% to 4-year lows as the OPEC+ alliance disintegrated.

Crude prices are sinking today, which is bullish for T-notes, after Saudi Arabia over the weekend signaled it would ramp up oil production. Saudi Arabia’s state-owned Aramco said it plans to raise crude output well above 10 million bpd next month and could reach a record 12 million bpd. The Saudi move is retaliation from last Friday when Russian Energy Minister Novak said that Russia would not agree to further production cuts and told OPEC ministers in Vienna that, “all OPEC+ countries from April 1 have no obligation to cut output.”

Concern about the economic fallout from the spreading coronavirus is another major bearish factor for global stocks and bolsters expectations for additional Fed rate cuts. Confirmed cases of the coronavirus have risen above 108,000 in more than 90 countries, with deaths exceeding 3,700. The fed funds market has fully priced in an additional -75 bp Fed rate cut at next week’s (Mar 17-18) FOMC meeting and another -25 bp cut by July.

Concerns about corporate credit risk are also spurring safe-haven demand for T-notes. The Markit CDX North American Investment Grade Index, a credit derivatives index that measures the perceived risk of corporate credit, jumped to a 4-year high this morning. Concern the global economy may be headed for a recession has investors fleeing corporate bond markets.

Increased financial turmoil has prompted the Fed today to increase the amount offered in its daily overnight repo operations to at least $150 billion from $100 billion. The New York Fed said the offerings were an increased effort to “ensure reserves remain ample and to mitigate the risk of money market pressures that could adversely affect policy implementation.”

Global economic concerns from the spreading coronavirus also boosted government bond prices throughout the world, which is bullish for T-notes since overseas capital is being attracted into Treasury securities. The 10-year UK gilt yield today dropped to a new record low of 0.075% on expectations the UK government will boost stimulus measures to combat the adverse effects of the coronavirus.

Lowest Rates in 8 Years, But All Kinds of Disclaimers Feb 27 2020 By Mathew Graham

Mortgage rates hit the lowest levels in 8 years either today or yesterday, depending on the lender, just narrowly edging out the rates seen in early July 2016.  There are multiple caveats, however.  First off, lenders are responding to recent market movements in different ways.  Some lenders move down faster and then remain flat even as the bond market (which dictates rates) improves.  Other lenders have been slow to react, but have since moved down more steadily.  Still others are somewhere between those extremes.

Perhaps the most important thing to note about mortgage rates this week is that, while they are certainly at long-term lows, they are absolutely NOT moving lower as fast or as much as US Treasury yields.  I discussed this in greater detail in the previous rate article and then again this morning on the MBS Commentary blog.  Click the links to get caught up, if you’re curious.

Loan Originator Perspective

Wuhan contagion appears inevitable, bond yields are at all time lows, but mortgage rates have scarcely budged the last couple of days.  The prospects for significantly lower rates are far from certain, but also appears rates are unlikely to rise quickly.  I am locking March closings, floating most loans closing April and beyond. – Ted Rood, Senior Originator

Today’s Most Prevalent Rates For Top Tier Scenarios 

  • 30YR FIXED – 3.25-3.375%
  • FHA/VA -3.00%
  • 15 YEAR FIXED – 3.00% 
  • 7 YEAR ARMS –  2.875-3.125% 

Ongoing Lock/Float Considerations 

  • 2019 was the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections, but 2020’s coronavirus outbreak has provided a second wind for low-rate momentum

  • Fed policy, trade negotiations, and the 2020 presidential election will all play a part in driving rate momentum as the year progresses.

  • The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad to see just how much of an impact coronavirus will have.  Once it looks like that impact is waning, we could see sharp upward pressure in rates (unless another rate-friendly variable steals the show), but that would require a similar bounce in the economic data that has already begun to suffer due to coronavirus. 
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders.  The rates generally assume little-to-no origination or discount except as noted when applicable.  Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.

Mortgage Rates Are Low, But They’re Not Falling as Fast as The 10yr Feb 25 2020 By Mathew Graham

Mortgage rates have been putting on a rather frustrating and exciting show in the month of February.  On the one hand, they’re at their lowest levels since 2012 and are off to their strongest start of any year on record.  On the other hand, they’re not nearly as low as you’d expect them to be based on movement elsewhere in the interest rate world. In fact, even on a day like today where the mighty 10yr Treasury yield (something that a lot of people mistakenly view as the basis for mortgage rates) precipitously fell to new all-time lows, many mortgage lenders were offering the same rates as yesterday.  More than a few were offering HIGHER rates.  What’s up with that?!

It’s certainly true that the 10yr yield sets the tone for mortgage rates better than any other mainstream rate.  Treasuries set the tone for all manner of rates in the US, in fact.  They serve as the most basic expression of borrowing money in America.  After all, Treasuries are simply loans taken out by the US government.  Lend to anyone else beyond Uncle Sam and you’ll be compensated with slightly higher interest and a slightly different set of risks (Treasuries are considered “risk-free,” and I’d agree with that for all practical purposes.  Point being, sure, there’s a risk the government might not pay you back, but in a world where such a thing is actually possible, receiving loan payments will be the least of your concerns).

Either way, Treasuries carry the lowest risk of default.  They’ve been around the longest.  Their borrower has deeper pockets than anyone you know.  The market for them is bigger than for any other loans.  Simply put, they set the tone for everything else.  

To use an analogy I’ve used in the past, the 10yr yield is like an aircraft carrier and other rates are like planes, helicopters, soldiers, rafts, boats, and unmanned submersibles that are along for the ride.  At any given time, mortgage rates may or may not be on the deck of the USS 10yr Yield, but as long as the seas are calm, they’re generally not far.

In rare cases, the USS 10yr can move too quickly or erratically for mortgages and the latter can jump ship and opt to follow along in their own little row boat.  The faster the big boat moves and the more erratically it moves, the harder it is for the little boat to catch up.  If things are crazy enough, the little boat may just camp out on a convenient nearby desert island until the volatility blows over.  That’s basically where we are now when it comes to the mortgage vs Treasury relationship.

Of course there are factual and objective underlying reasons for this, but it’s much easier to understand in terms of the analogy.  The net effect is that the bonds that actually dictate mortgages (Mortgage-backed-securities or MBS) haven’t improved nearly as quickly as 10yr Treasuries.  Moreover, lenders themselves are hesitant to drop rates too quickly because doing so will lead to more of those “factual and objective underlying reasons” for the underperformance mentioned above

For those who simply must attempt to understand the nitty gritty details, this is about as simply as I can put it: most of the time, the average mortgage is only profitable to investors if it lasts.  The quicker mortgages are paid off, even if via refinancing, the less valuable they are to investors.  When investors pay less for mortgages, it puts upward pressure on rates.  That upward pressure can be big enough to offset the downward pressure coming from the general improvement in the bond market.  In other words, the mortgage market’s rowboat can temporarily move in the opposite direction from the aircraft carrier.  The net effect of that net effect is that mortgage lenders simply don’t have much to work with when it comes to pushing rates any lower.  Even if they did, it would still be slow going because mortgage lenders have a similar relationship with MBS as MBS have with Treasuries.  

Bottom line: rates aren’t as low as you think they should be if you’re a person who follows the 10yr.  And it’s going to take weeks if not months for the mortgage market to hop in its dinghy and row row row back toward the big boat.

Loan Originator Perspective

Bond yields continued touching all time lows Tuesday, as further global corona virus contagion concerns surfaced.  Mortgage rates drop far slower than actual bond yields at times like this, but pricing is still near 2012/2016 lows.  I’m not in a hurry to lock here, given that no immediate solution seems likely and rate sheets are lagging markets.  Locking loans closing within 30 days, but floating those closing further out. – Ted Rood, Senior Originator

Record low Treasury yields are dominating headlines today. They plunged yesterday and today, but mortgage rates/pricing improved only slightly over the same time frame. In highly volatile times like these, mortgage rates simply do not keep pace with Treasury yield movement. Normally, yes they track pretty closely with one another, but for the time being Mortgage Bonds have taken shelter and are in wait-and-see mode while the broader bond market storm rages. Stay tuned for updates. –Timothy Baron, Senior Loan Officer NMLS 184671, NOVA Home Loans NMLS 3087

Today’s Most Prevalent Rates For Top Tier Scenarios 

  • 30YR FIXED – 3.375%
  • FHA/VA -3.25%
  • 15 YEAR FIXED – 3.125% 
  • 5 YEAR ARMS –  3.25% depending on the lender

Ongoing Lock/Float Considerations 

  • 2019 was the best year for mortgage rates since 2011.  Big, long-lasting improvements such as this one are increasingly susceptible to bounces/corrections, but 2020’s coronavirus outbreak has provided a second wind for low-rate momentum

  • Fed policy, trade negotiations, and the 2020 presidential election will all play a part in driving rate momentum as the year progresses.

  • The Fed and the bond market (which dictates rates) will be watching economic data closely, both at home and abroad to see just how much of an impact coronavirus will have.  Once it looks like that impact is waning, we could see sharp upward pressure in rates (unless another rate-friendly variable steals the show), but that would require a similar bounce in the economic data that has already begun to suffer due to coronavirus. 
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders.  The rates generally assume little-to-no origination or discount except as noted when applicable.  Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.

California home sales volume lays low

Posted by ft Editorial Staff | Feb 16, 2020 

36,200 new and resale home transactions closed escrow in California during December 2019. The number of homes sold was 20% higher than a year earlier. Of note, December 2018 experienced the lowest home sales volume since the Great Recession, therefore December 2019’s 20% year-over-year jump isn’t as impressive as it seems at first glance. December 2019’s year-over-year increase is a reversal of the long trend of falling year-over-year sales volume, which began in the second half of 2018. Despite December’s higher numbers, 2019 total home sales volume was 1% below 2018.

2019 ended with 437,500 home sales in California. This was 4,400 fewer home sales than took place in 2018, amounting to a 1% annual decrease. 2019’s slightly down performance follows a 4% decrease in 2018. For greater perspective, 2019’s 442,000 homes sales volume was 42% below peak sales volume experienced in 2005. 

Home sales volume will continue its year-over-year decrease in 2020, slowing the flow of agent fees. Rapidly rising prices and interest rates in 2018, along with uncertainty brought on by shifting economic policies, have discouraged potential homebuyers and derailed sales. Therefore, home sales volume won’t rise significantly until after home prices bottom with the next recession, expected in 2020-2021.

Updated February 16, 2020. Original copy posted March 2009.

Chart 1

Chart update 02/15/20

Dec 2019Nov 2019Dec 2018
Southern CA 19,40018,30015,800
Northern CA16,80016,40014,500
CA Total36,20034,70030,300

The above chart tracks the home sales volume of single family residences (SFRs) on a month-to-month basis. Sales volume includes the sale of all residential resales and new homes in California, including new homes sold directly by builders.

Home sales vary from month-to-month for a variety of reasons, most significant being homebuyer demand. This demand is influenced by several factors constantly at work in California’s homebuying market, including:

Seasonal differences in annual sales volume

It’s normal for home sales volume to rise in the first half of the year and fall after June, generally speaking.

Chart 2

Chart update 02/02/19

Chart 2 shows average home sales as experienced from 2011-2018. As depicted, the most homes are regularly sold each year in June. Another small increase takes place in December, as homebuyers seek to wrap up their financial activities before the end of the year.

Therefore, real estate professionals are not to worry when they hear of falling sales volume in the latter half of the year. This is a normal seasonal progression. What to watch for is year-over sales comparing a month or other period (such as year-to-date) this year with the same month or period last year.

A very long recovery for home sales volume

Annual real estate sales numbers since the Great Recession of 2008 suggest the upcoming years through 2017 will be characterized by the same continuing bumpy plateau in home sales volume we have experienced now for eight stagnating years. As a rule, current market action, whether up or down, is reflected first in sales volume, followed by prices, and both fluctuate from month to month mostly going in opposite directions or just standing still.

Chart 3

Chart update 02/16/20

201820172005 peak
NorCal 208,300211,500213,900398,200
SoCal 229,200230,400248,000355,700
Total 437,600442,000461,900753,900

To set the stage for a forward look, a review of sales volume in the recent past is helpful:

  • Mid-2005 saw sales volume peak for all types of real estate in California, with nearly 754,000 homes sold that year;
  • Nearly 30% fewer sales were recorded in 2006 than in 2005, while sales dropped an additional 30% in 2007;
  • sales bottomed in 2008 and were artificially inflated in 2009 due to subsidy-induced purchases and speculators jumping on the momentum, but remained 40% below 2005;
  • 2010 saw a decline from the year earlier in both sales volume and prices;
  • 2011 increased slightly in sales volume while decreasing in sales prices, a normal price adjustment condition;
  • 2012 saw sales volume increase marginally and home prices jump significantly by year’s end, supported primarily by massive speculation;
  • 2013 home sales volume stagnated, while home prices continued to increase rapidly, not a good sign for the immediate future; and
  • 2014 saw home sales volume decrease throughout the year, ending the year 7% below 2013.
  • 2015 ended 9% higher than 2014 — in other words, just about level with 2013. [See Chart 4]
  • 2016 and 2017 sales volume continued a flat trend in sales which began in 2015; and
  • 2018 saw sales volume decrease rapidly in the fourth quarter, ending the year 4% below 2017.

Chart 4

Chart update 02/16/20

Dec 2019Dec 2018Dec 2017
Home sales volume

California home sales continue their year-over-year decline in 2020, ending the year 1% lower year-to-date (YTD). This continues a consistent decline in year-over-year sales volume that began in mid-2018.

Sales volume ended 2018 4.3% below 2017, amounting to 19,900 fewer sales. In contrast, 2017 home sales volume ended the year with just 3,800 more sales than in 2016. This is an increase of less than 1%. The previous year, 2016, also saw a minuscule increase over 2015.

Sales volume is not expected to languish until the years following 2021, due to:

  • fewer participating first-time homebuyers than normal;
  • lower homeowner turnover to buy an upgrade or relocate due to continued negative equity and delayed retirement;
  • reduced home inventory across the state; and
  • static turnover in rental occupancies.

Much of these disadvantages are due to the jobs recovery which has been dragged out for eight years now, a confidence issue, and is pronounced by wage increases below the rate of consumer inflation. California finally regained all jobs lost in the 2008 recession in mid-2014, but has yet to return to pre-recession employment levels after considering the 1.1 million working-aged population increase. At the current recovery pace this will occur in 2019.

Short sales, real estate owned (REOproperty resales and speculators have contributed to sales volume distortion over the past few years. Conventional positive-equity resales by owner-occupants were the exception, sometimes reminiscently called standard sales as opposed to short sales. As prices rise, move-up homeowners will return to the market to sell and concurrently buy a more suitable replacement home.

Further, as of Q3 2017, 3.2% of California mortgaged homeowners were still underwater. Thus, turnover by this chunk of owners is restricted.  These homeowners cannot sell and relocate to purchase another home because their homes are worth less than the debt encumbering them. To rid themselves of the home and the debt, they have to endure damaged credit resulting from a short sale or foreclosure. The desire to avoid this embarrassment takes most of these 3.2% homeowners out of the home buying market for years.

Home sales in the coming years

The forward trend in California home sales is mixed for both buyers and seller. Homebuyer income is going further and doing more than anytime during the past 15 years due to increased borrowing capacity brought on by low interest rates (even though they rose mid-2013 to cut back funding by 10% from one year prior, but dropped to fuel sales in 2015). In fact, the Buyer Purchasing Power Index (BPPI) went negative in June 2013 and bounced back to zero in September 2014 – this momentarily stalled home price expectations.

In December 2015, the Federal Reserve (the Fed) committed itself to raise short-term interest rates in order to keep a lid on the recovery (as they did in both 1984 and 1994 midway through those recoveries). This upward rate move by the Fed (and the bond market) will instantly be reflected in ARM rates, and eventually trickle into higher mortgage rates, likely around mid-2016. Higher FRM rates will promptly trend real estate sales volume down and some 9-12 months beyond prices will slip. As prices start to decrease, expect the short-term rate to decline in the 2017-2018 period which will slow and put an end any downward turn in real estate sales volume and the economy.

first tuesday forecasts home sales volume will return to 2006 levels around 2020-2021. The peak sales volume last seen in 2004, inflated by speculator acquisitions and excessive mortgage money, is unlikely to return for decades, when interest rates cyclically peak.

Relocating Baby Boomers going into retirement later this decade will be the primary propelling force in both selling homes and buying replacements beginning around 2019. Their Generation Y (Gen Y) children will add to the sales volume at the same time as they find jobs at better pay levels and become first-time homebuyers. Gen Y influence will peak in sales volume at the end of this decade as they complete their shift from renting to owning.

Once Californians feel the effects of two or three years of healthy employment growth, their confidence about the future will improve. They will once again be willing to invest in the economy since the expectations for tomorrow are projections based on yesterday’s most recent experience. Only then will occupying homebuyers – end users – return in sufficient numbers for sales volume to swell significantly.

In 2018, sales volume will begin to pick up in earnest, peaking in 2019-2021. Employment and labor force participation will have reached beyond its 2007 peak, and grow quickly. Then, California will once again see home prices jump beyond the rate of consumer inflation. Mortgage lenders with an eye for excess profits will then begin to loosen their lending standards to whatever extent federal regulators permit or lawyers divine. The memory of the grim mid-2000s will be politely pushed aside, and mistakes will be repeated by all participants – lenders, builders, brokers and buyers.

Favorable market conditions now at work

Several favorable market factors currently support increasing sales volume:

  1. A steady 3% annual increase in the number of new jobs;
  2. A more reasonable (though still rising) price trend as we start 2016;
  3. Slowly rising consumer confidence and spending; and
  4. the recapitalization of the private mortgage insurers to eventually replace (or fully compete with) government guarantees of home mortgages.

Trends to be concerned about

However, many unfavorable market conditions restrain the rise of home sales volume:

  1. the weakest homebuyer demographics in 15 years;
  2. failed savings for a down paymentas high rents squeeze potential first-time homebuyers out of saving;
  3. buyer borrowing power no longer enlarging the funds they can borrow as interest rates inevitably rise, reducing funding for purchase-assist financing and dampening property prices;
  4. the public’s increasingly anti-business and pessimistic attitude about American economics, wealth inequality and national politics no matter the outcomes; and
  5. tightened loan standards as lenders are forced to apply forgotten fundamentals of sound mortgage lending practices (20% down payment on non-FHA/private mortgage insured loans, lower income ratios, risk-free credit scores and full documentation of income, funds and collateral value).

30-Year Auction Prices At Lowest Yield On Record

by Tyler DurdenThu, 02/13/2020

One day after a solid 10Y auction, moments ago the US Treasury closed off the week’s coupon issuance with a bang, when it sold $19 billion in 30Y bonds with a bang, thanks to a high yield of 2.061%, which not only stopped through the When Issued 2.068% (the third consecutive stop through), but more importantly, with the yield sliding sharply from last month’s 2.341%, it was the lowest 30Y auction yield on record! And because stocks are trading at all time highs, it only makes “sense” that the 30Y should also price at the lowest yield on record.

The internals were solid as well, with the Bid to Cover dipping modestly from 2.54 to 2.43, which was still above the 2.32 six auction average. And with Indirect demand fading modestly from 63.0% in January to 61.5%, Directs were allotted 19.4%, leaving Dealers holding 19.1%, modestly below the recent average of 21.8%.

The beast of an auction sent yields across the curve sharply lower, and since we live in a world in which the lower rates slide, the highest stocks rise, we can only assume that as bond yields plumb ever lower record levels, stocks will eventually rise to infinity especially since fundamentals no longer matter.

If Not For Coronavirus… By HSH.COM

February 7, 2020 — If not for the current and expected effects of the still-spreading coronavirus, odds favor that we would be talking about rising rather than falling interest rates. Consider where the economic and political climate is compared to just a couple of months ago; new trade deals are in place, at least putting us at a state of detente with China and getting a working playing field in place for trade flows with Mexico and Canada. The presidential impeachment process and theater show has come to completion. Brexit has actually happened. The Federal Reserve has put monetary policy on a stationary platform for the foreseeable future. Prospects for global growth are said to be improving.

However, all has taken a back seat to concerns about the personal and economic impacts of trying to contain coronavirus. Quarantines, travel bans, store closures, trade-route interruptions and more do seem certain to have some impact on growth in the not-too-distant future, and that even with China injecting billions of new liquidity into financial markets and banks this week to help offset the drag from prevention measures.

Without this dark cloud hanging over the global economy, investors would more likely be focused on the fresh emerging economic data. Frankly, the latest news is actually pretty good, at least good enough to help reverse the hard sell-off in stocks last week to return to mostly gains this week. So far, that reversal has seen bond yields also reverse course, bouncing smartly off lows, but there’s not yet been much follow-through to mortgage rates.

So what’s the good news? To start with, for the first month since last July, the factory sector is no longer contracting. While one month is by no means a trend, the Institute for Supply Management’s barometer that tracks manufacturing moved up by 3.1 points to 50.9 for January, a move good enough to move the needle from contraction to expansion. In the report, measures of new orders bumped 4.4 points to a modest (but positive) 52, but employment remained pretty soft at 46.6, and that included a 1.4-point gain. In the ISM series, 50 is considered a breakeven value, with figures above this level denoting growth. If at least for a month, factories are back online and contributing a bit toward growth; however, given headwinds, readings of barely-to-mildly positive are about all that should be expected for a time yet.

The ISM’s twin survey covering non-manufacturing (service) business activity also had good things to say. The January reading moved up by 0.6 points, pushing the headline value to a moderate 55.5 for the month, the highest figure since last August. The sub-measure covering new orders for services rose by 0.9 points to lift to 56.2, while the employment tracker settled back with a 1.7-point decline to 53.1 for the month. The moderately-expanding economy is already near what is considered to be full employment, so it’s not unreasonable to see business adding workers at a more measured pace.

Meanwhile, the employment report for January was nothing short of stellar. Although some hiring was probably “borrowed” for future months due to unusually warm weather, the 225,000 new hires that took place last month would still have been very solid even if jobs in weather-affected industries were only normal. Not only did more people get jobs last month but they did so at higher wages, as average hourly earnings rose by 7 cents an hour, good enough to push the year-over-year gain to 3.1%, a level solidly above the rate of inflation. As such, “real” wages are improving, and that in turn is good news for consumer spending (and, if sustained, could have some effect on helping inflation get closer to the Fed’s 2 percent target). While the “official” unemployment rate ticked up a tenth of percentage point to 3.6%, just above a 50-year low, this was due to more people being pulled into the workforce, and at the moment, the labor force participation rate is 63.4%, the highest reading for the expansion to date.

Not only are more people working, they are also actually increasing their productivity a bit. Output per worker rose by a more-than-expected 1.4% in the fourth quarter and the overall yearlong rise in productivity for 2019 was the best since 2010, if still only a historically moderate level. Still, the increase helped push down the cost of labor per unit produced to just 1.4% from 2.5% in the third quarter, and higher productivity could allow businesses to pay workers a little bit more without undue effect on final prices or eating into profit margins. That’s both important for improving the nation’s standard of living and for stock prices, so regular gains in productivity are something we’d like to see continue even if business investment in new tools and technology has been soft for a time now.

A rise in the nation’s imbalance of trade also suggests some economic pickup in the U.S. and perhaps a bit elsewhere, too. The difference in value of inbound and outbound trade flows rose by $5.2 billion in December, with the gap between the two expanding to $48.9 billion. Exports rose by $1.5 billion to the highest nominal level since last May, and so it looks as though trading partners are starting again to pick up some goods from us. Imports, though, bounced $6.7 billion higher, and as we are a nation of net imports this is signaling at least a little pick up in economic activity here. Depending upon your leanings, the fact that the U.S. was a net exporter of petroleum products for a fourth straight month (best string since the 1970s) may be a good thing or a bad thing, but it was a positive for trade and contributes to GDP growth.

With more people working and incomes rising, consumer spending should continue to move higher. Some of the benefits of sustained employment and income gains can be seen in sales of new cars and trucks; AutoData reported that an annualized 17 million units were sold in January, up about 100K from December and part of a string of solid sales that have been expected to peter out for about the last year or two now. Although down from peak levels seen in 2016, sales of new cars and trucks are still very solid, especially given the fairly strong sales levels over a stretch of years helping to sate pent-up demand and tighter financing conditions for marginal borrowers over the last year or two. That sales haven’t tailed off is a good thing, as it helps to keep wide-ranging supply chains busy while other facets of manufacturing look to recover from a long soft patch.

Factory orders in December reflect this mix of strength and softness. Overall, orders placed to factories rose a nice 1.8% for the month, the largest monthly gain since August of 2018. However, the details weren’t as encouraging; while orders for durable goods rose by 2.4% (rebounding from a November dip) and those for non-durable goods moved 1.1% higher for the month, the measure which serves as a proxy for wide-ranging outlays by businesses (no defense spending or aircraft included) showed a decline of 0.8% for the month, so the increase in factory orders was likely concentrated to a very narrow slice of the economy. Still, more factories working more does carry beneficial effects, even if they would be better spread out on a wider basis for the best economic effect.

Inventory levels at the nation’s wholesaling firms were depleted by 0.2% in December, and that may ultimately help factories see more orders. Wholesalers reported that holdings of durable goods declined by 0.3% and those of non-durables held steady during the period. However, the decline in holdings would have been stronger except that sales also declined by 0.7% for the month, so the level of goods on hand relative to sales failed to move. At a current 1.36 months, this ratio has been holding nearly steady since last May, so there will of course still only be cautious replenishment of stockpiles.

Spending on new construction projects eased by 0.2% in December, dragged down a bit by softness in the commercial/industrial/retail and public-works sectors. Spending on new residential projects powered forward by 1.4%, a sixth consecutive month of increases, while commercial outlays declined by 1.8% in December after a -0.5% fall in November and public-project spending fell by 0.4%, erasing some of the 1% gain month prior. Despite routine ups and downs, construction spending was 5% higher this December than in December 2018, so the trend is at least moving in the right direction.

Although the outplacement firm of Challenger, Gray and Christmas recorded 67,735 announced job reductions in January — the most since February 2019 — the solid job market likely means that folks affected by layoffs should be able to locate other positions fairly quickly. Some may not even apply for unemployment assistance; even if they do, the number of people placing initial applications for unemployment benefits would probably only tick higher. As we are currently very close to cyclical (and 50+ year) lows with just 202,000 new requests placed in the week ending February 1 it would take a sustained surge of benefit-seekers to significantly change the trend here and cause alarm.

Current Adjustable Rate Mortgage (ARM) Indexes

IndexFor The Week EndingYear Ago
Jan 31Jan 03Feb 01
6-Mo. TCM1.57%1.58%2.49%
1-Yr. TCM1.50%1.57%2.58%
3-Yr. TCM1.38%1.59%2.51%
5-Yr. TCM1.41%1.66%2.51%
10-Yr. TCM1.59%1.88%2.70%
Federal Cost of Funds1.955%1.998%0.968%
FHLB 11th District COF1.036%1.035%0.639%
Freddie Mac 30-yr FRM3.51%3.64%4.41%
Historical ARM Index Data

With mortgage rates declining since the turn of the year, interest in both buying and refinancing homes has been solid. However, as we’ve discussed on a number of occasions, low and still-declining mortgage rates are fostering demand that is not being met by new supply of homes available to buy. In turn, not only are home sales tempered and will struggle to grow but prices of homes for sale are pressed higher… which in turn erases some of the improvement in affordability that lower rates bring. It’s not a fortuitous cycle at the moment, at least for existing home sales, but new home sales (where supply is more elastic) should benefit. Folks looking to refinance already have homes and so are of course unaffected, and have been coming out replace older mortgages with new in solid numbers since the holidays faded into the rearview mirror. In the week ending January 31, the Mortgage Bankers Association of America reported that applications for mortgages rose by 5%, driven there by a 15.3% in applications for refinancing but pulled back to earth by a 9.5% decline in those to purchase homes.

While fixed mortgage rates are just a stone’s throw from historic (65+ year) lows, borrowers or regulators looking to see if highly-regulated banks are loosening underwriting criteria won’t find much by way of that. The latest Senior Loan Officer Opinion Survey from the Federal Reserve covering the fourth quarter of 2019 saw more than 90 percent of respondents reporting unchanged underwriting criteria for conventional, government, QM, non-QM and other loan designations. At best, there was a slight easing overall for GSE-eligible, government-backed and QM products. Overall, while the price of money may be getting easier, accessing that cheaper funding is still a traditionally-rigorous process.

With concerns about the coronavirus causing markets to wax and wane, it’s hard to get a good read on where mortgage rates will head next week. The influential 10-year Treasury yield moved from a panic-level 1.51% about a week ago to as high as 1.65% this week and closed Friday right in the middle of those two levels. That said, mortgage yields haven’t (yet) bounced much up from the levels they dropped to in the last week of January and are holding pretty stable over the last few days, so there seems to be a bit of a mixed bag in the market at the moment. With this in mind, we’ll hedge a bit, and think that the average offered rate for a conforming 30-year FRM as reported by Freddie Mac next Thursday will be steady around present levels with perhaps a slight upward bias.

Visualizing The 700-Year Fall Of Interest Rates

by Tyler Durden 02/08/2020

How far can interest rates fall?

Currently, many sovereign rates sit in negative territory, and, as Visual Capitalist’s Dorothy Neufeld notesthere is an unprecedented $13 trillion in negative-yielding debt. 

This new interest rate climate has many observers wondering where the bottom truly lies.

Today’s graphic from Paul Schmelzing, visiting scholar at the Bank of England (BOE), shows how global real interest rates have experienced an average annual decline of -0.0196% (-1.96 basis points) throughout the past eight centuries.

The Evidence on Falling Rates

Collecting data from across 78% of total advanced economy GDP over the time frame, Schmelzing shows that real rates* have witnessed a negative historical slope spanning back to the 1300s.

Displayed across the graph is a series of personal nominal loans made to sovereign establishments, along with their nominal loan rates. Some from the 14th century, for example, had nominal rates of 35%. By contrast, key nominal loan rates had fallen to 6% by the mid 1800s.

Starting in 1311, data from the report shows how average real rates moved from 5.1% in the 1300s down to an average of 2% in the 1900s.

The average real rate between 2000-2018 stands at 1.3%.

Current Theories

Why have interest rates been trending downward for so long?

Here are the three prevailing theories as to why they’re dropping:

1. Productivity Growth

Since 1970, productivity growth has slowed. A nation’s productive capacity is determined by a number of factors, including labor force participation and economic output.

If total economic output shrinks, real rates will decline too, theory suggests. Lower productivity growth leads to lower wage growth expectations.

In addition, lower productivity growth means less business investment, therefore a lower demand for capital. This in turn causes the lower interest rates.

2. Demographics

Demographics impact interest rates on a number of levels. The aging population—paired with declining fertility levels—result in higher savings rates, longer life expectancies, and lower labor force participation rates.

In the U.S., baby boomers are retiring at a pace of 10,000 people per day, and other advanced economies are also seeing comparable growth in retirees. Theory suggests that this creates downward pressure on real interest rates, as the number of people in the workforce declines.

3. Economic Growth

Dampened economic growth can also have a negative impact on future earnings, pushing down the real interest rate in the process. Since 1961, GDP growth among OECD countries has dropped from 4.3% to 3% in 2018.

Receive a daily recap featuring a curated list of must-read stories.

Larry Summers referred to this sloping trend since the 1970s as “secular stagnation” during an International Monetary Fund conference in 2013.

Secular stagnation occurs when the economy is faced with persistently lagging economic health. One possible way to address a declining interest rate conundrum, Summers has suggested, is through expansionary government spending.

Bond Yields Declining

According to the report, another trend has coincided with falling interest rates: declining bond yields.

Since the 1300s, global nominal bonds yields have dropped from over 14% to around 2%.

The graph illustrates how real interest rates and bond yields appear to slope across a similar trend line. While it may seem remarkable that interest rates keep falling, this phenomenon shows that a broader trend may be occurring—across centuries, asset classes, and fiscal regimes.

In fact, the historical record would imply that we will see ever new record lows in real rates in future business cycles in the 2020s/30s

-Paul Schmelzing

Although this may be fortunate for debt-seekers, it can create challenges for fixed income investors—who may seek alternatives strategies with higher yield potential instead.