MBA Residential Mortgage Application Index Hits Highest Level Since May 2010 .. And It Is Only April!!

As mortgage interest rates hit a new 2017 low, we now see mortgage purchase applications rising to its highest level since May 2010.

This new level is in spite of mortgage originations for borrowers with credit scores under 620 playing a lesser than during the financial crisis. Although mortgage originations for borrowers with credit scores under 620 are at their highest level since March 2010. So both mortgage purchase applications (SA) and under 620 credit score mortgage borrowers are at their highest levels since 2010.

With the worst wage recovery after a recession in modern history, expanding the “credit envelope” is about the only way to expand mortgage lending.

In other words, mortgage credit for borrowers under 620 FICO score is expanding at the fastest pace since Dodd-Frank and The Consumer Financial Protection Bureau were created in 2010.

Elizabeth Warren, architect of the Consumer Financial Protection Bureau.


Ratings Shopping Haunts Commercial Mortgage Bonds as Risks Rise

The retail slaughter caused by on-line shopping (Amazon effect) and sluggish wage growth since The Great Recession are taking a toll on large shopping mall stores and, as a consequence, commercial mortgage-backed securities (CMBS).

(Bloomberg) – Matt Scully and Adam Tempkin – Only a decade ago, global investors got a hard lesson about the dangers of relying on rosy bond ratings. Now they’re getting a reminder — this time in frothy corners of the $528 billion U.S. commercial-mortgage bondmarket.

As delinquencies on loans rise, some ratings firms are walking back their grades on bonds tied to properties like shopping malls and office towers, just a few years after assigning them. DBRS Inc. last month lowered the AAA ratings it had given 294 interest-only bonds after realizing it had been too lenient. Also in March, Kroll Bond Rating Agency Inc. cut some of its grades on a $1 billion bond issued in 2014, citing weakness in Texas loans exposed to energy prices.

The reversals underscore how forces that brought trouble to financial markets before are still percolating through Wall Street today. No one sees the dangers as being nearly as grave as they were during the home mortgage bust. But the same ratings business model used during that period still prevails — meaning that the banks that put together debt securities still pay for the credit grades, and they can shop around for the firm that will give them the highest ratings under the loosest criteria.

According to Trepp, retail delinquencies have risen to 6.12% as of March 17, 2016 (following only industrial loans).

And a foreclosure appeared in the WBCMT 2007-C32 CMBS deal (Rockvale Square in Lancaster, PA). Not to mention a non-performing property in teh BSCMS 2007-PW15 deal.

The WBCMT 2007-C32, a Wachovia deal, is now rated at CCC+ or lower for tranches B through D. Tranches E and F are rated as D by S&P. The H tranche, rated as C by Moody’s, has eaten $15.5 million in losses thus far. Tranches J and K are gone after sustaining losses of $56.6 million and $33,46 million, respectively. At least tranches A1, A2 and APB paid off with no losses.

And with delinquencies rising over the last year, the retail forecast is gloomy.

Parks and Recreation’s Tom Haverford may have to change his tune on “things are forever.” Particularly if shopping at Macy’s , Sears, JC Penney’s, The Limited, Abercrombie and Fitch, etc. 

Yes, Tom, you can buy things on-line. Unless your wages are slow to grow and you have accumulated significant debt. Particularly during the worst wage recovery after recession in modern history.


Zillow:10.5% National Negative Equity Share Declining (But Chicago And Las Vegas Have 2X National Rate)

According to Zillow (and their methodogy for calculating “underwater mortgage loans”), US negative equity hit 10.5% in Q4 2016. That is a considerable improvement of the peak of 31.4% in Q1 2012.

But more than 55 percent of all homeowners in negative equity nationwide were underwater by more than 20 percent as of the end of Q4.

Where are the negative equity “zones”? Not on the West Coast. The West Coast is home to all five major metros with the lowest rates of negative equity. As of the end of 2016, Las Vegas and Chicago had the highest rates of negative equity among the largest U.S. metros, with 16.6 and 16.5 percent of homeowners underwater, respectively.

How about EFFECTIVE negative equity rates? Even though a borrower may barely be in positive territory, brokerage fees (say 6%) on sales can push the homeowner into negative territory. The national average for EFFECTIVE negative equity still exceeds 25%.

Let’s compare Washington DC with Prince Georges County in Maryland. The share of homes with a mortgage in negative equity is almost double in PG County compared with DC. The same holds true for the shares in EFFECT negative equity (that is exactly double the rate of Washington DC).

To show how much Phoenix AZ has improved in terms of negative equity, Phoenix now has the same negative equity share as Washington DC: 10.5% and the US. But Maricopa County has a larger EFFECTIVE negative equity share of 27.3%.

But how about Chicago, home of the World Series Champion Chicago Cubs? Negative equity in Chicago is even worse than it is in Prince Georges County in Maryland!

How about Lackawanna County, PA, the home of Scranton and the Dunder-Miflin regional sales office? Even worse negative equity problems than Chicago!!

The WORST negative equity county in the US? Pulaski County in Missouri, home of the US Army’s Fort Leonard Wood with a 47.4% share of negative equity mortgages and  76.1% share of EFFECTIVE negative equity mortgages.

Despite the improvement of negative equity in the US, a number of counties (many rural) are still struggling which is an impediment to both mortgage refinancing and mortgage purchase lending despite near-record low mortgage rates.

Bubble? Home Prices in 20 U.S. Cities Rise at Fastest Pace Since 2014 (But Wage Growth Is Terrible)

Bloomberg has an interesting article on rapidly rising home prices.  Despite the fact that US wage growth has been terrible since the Great Recession and is now (depending on how you measure it) 4 times lower than home price growth.

Home prices in 20 U.S. cities climbed in the 12 months through January at the fastest pace since July 2014, while nationwide the increase in property values also accelerated, according to S&P CoreLogic Case-Shiller data reported Tuesday.

Key Points

  • 20-city property values index rose 5.7 percent from January 2016 (forecast was 5.6 percent) after increasing 5.5 percent in the year through December
  • National home-price gauge increased 5.9 percent in the 12 months through January
  • Seasonally adjusted 20-city index advanced 0.9 percent from a month earlier (forecast was 0.7 percent)

Big Picture

Lean housing inventory helps explain why home prices are appreciating at more than twice the rate of inflation and wage growth, an impediment to an even bigger advance in housing demand. That’s making it difficult for some Americans to transition from renter to homeowner, a reason investors remain a big part of the market as they purchase properties and convert them to rental units.

Economist Takeaways

“Tight supplies and rising prices may be deterring some people from trading up to a larger house, further aggravating supplies because fewer people are selling their homes,” David Blitzer, chairman of the S&P index committee, said in a statement. “The prices also hurt affordability as higher prices and mortgage rates shrink the number of households that can afford to buy at current price levels.”

The Details

  • All 20 cities in the index showed year-over-year gains, led by an 11.3 percent advance in Seattle and a 9.7 percent increase in Portland, Oregon
  • After seasonal adjustment, Seattle had the biggest month-over-month rise at 1.7 percent, followed by a 1.3 percent increase in Chicago; home prices fell 0.1 percent in Cleveland

This Bloomberg chart shows that median home price growth is not quite 4x wage growth.

My “homebrewed” chart shows that it a similar effect except I show the decline in the volume of mortgage originations to borrowers with a credit score below 620.

Anyway you want it, home price growth is beating the tar out of wage growth .. but any metric.

Has the robot monster (aka, The Fed) helped create a home price bubble with its uber-accomodative monetary policies that did not help wage growth?

Yes, The Robot Monster (Federal Reserve and other Central Banks) stalks the earth.


Freddie Mac Serious Delinquencies Fall To Lowest Since June 2008 As Home Prices Grow At 5.87% YoY Clip

Freddie Mac reported that the Single-Family serious delinquency rate in February was at 0.98%, down from 0.99% in January.  Freddie’s rate is down from 1.26% in February 2016.  That is the lowest reading since June 2008.

Notice how tame serious delinquencies were during the housing/credit bubble. The US seems to be repeating the housing bubble in terms of house price growth and low serious delinquencies, but without the higher levels of mortgage originations to borrowers with credit scores less than 620.

Bear in mind, the Case-Shiller reading is for January and it is almost April. Be that as it may, home price growth is at 5.73% YoY versus wage growth at 2.3% YoY, over 2x. And yes, Seattle, Portland and Denver lead the nation in YoY growth in home prices. The slowest growing cities? New York City and Cleveland (the Shooting Guards JR Smith/Iman Shumpert effect having been traded from the Knicks to the Cavaliers).

It says here that when home prices are growing at two times wage growth it would mean we have a housing bubble … again.




Clinton Country Credit Scores: California and New York Lead US In Credit Scores (Also Have The Worst Income Inequality)

Remember the furor over the 2016 Presidential Election where Donald Trump won the Electoral College vote, but not the Popular Vote? A substantial number of Hillary Clinton’s electoral votes (and popular votes) came from California (55 electoral votes) and New York (29 electoral votes). 

The 2016 electoral map is correlated with CoreLogic HCI Credit Score averages by state. The highest two average credit score states are California and New York. Actually, the District of Columbia has the highest average credit score in the country. The top five states (and DC) are all in Clinton Electoral Country (that is, they all voted for Hillary).

The bottom five states? All these states were in Trump Electoral Country.

Washington DC, New York and Connecticut lead the US in income inequality.  With California and Massachusetts in 5th and 6th place. 5 of the top 6 states for income inequality voted for Clinton. One 1 state (Louisiana) for Trump.

The correlation is not perfect, of course. Arizona has a higher than average credit score, yet voted for Trump. The same goes for Montana (all three electoral votes), Tennessee and North Carolina.

Wealthier, coast states have higher than average credit scores and votes for Clinton. Flyover country have lower than average credit scores and for the most part voted for Trump.

Of course, the wealthiest counties in the nation surround Washington DC, New York City and West Coast cities like Seattle, Portland, San Francisco, Los Angeles and San Diego.

Just like those who believed that all you needed was a credit score to be underwritten for a mortgage loan, one could conceivably predict Presidential voting using credit scores (at the state level).  But I do NOT recommend it!!! Just like with mortgages, we need more information than just credit scores (for both borrowers and voters).

An ALT-A mortgage borrower during 2006.



Bond Market Calm Is Threatened by Fed’s $1.75 Trillion MBS Shift

Will there be a seismic shift in bond and agency MBS volatility as The Fed gradually raises rates and starts to unwind their massive balance sheet?

(Bloomberg) -By Liz Capo McCormick, Matt Scully and Edward Bolingbroke- As far as bond buyers go, the Federal Reserve is pretty laid-back.

Even as the central bank amassed trillions of dollars of debt to prop up the economy following the financial crisis, it didn’t hedge its holdings or worry about gains and losses that might keep ordinary investors up at night. This extreme buy-and-hold stance has had an incredible calming effect on the bond market. Volatility has plummeted to lows rarely seen in recent memory.

But all that is now poised to change. With interest rates on the rise, analysts say the Fed could start shrinking its unprecedented $1.75 trillion position in mortgage-backed securities by year-end. That’s likely to leave more in the hands in private investors and result in increased hedging activity, a practice that has historically exacerbated swings in the Treasury market.

“You’ll inevitably see more volatility,” said David Ader, the chief macro strategist at Informa Financial Intelligence. In 2003, a surge in “convexity hedging” triggered widespread losses in Treasuries as benchmark yields soared 1.45 percentage points in two months. Nobody is predicting anything close to a repeat. After all, the biggest hedgers back then were government-sponsored entities like Fannie Mae and Freddie Mac, which now own just a fraction of what they did and aren’t coming back.

But at a time when beleaguered bond investors are grappling with higher rates and the potential consequences of the Trump administration’s spending plans, the prospect of more volatility adds yet another thing to their list of worries.

Negative Convexity

What exactly is convexity? At its most basic, it’s a measure of a bond’s relative sensitivity to changes in interest rates.

When a bond has positive convexity, that means its price rises more than it falls when yields move. When it’s negative, like mortgage debt, its price falls more. When rates rise, hedging against convexity grows as the expected life of mortgage debt increases. That happens when refinancing slows, and tends to leave holders more vulnerable to losses.

But by protecting against those potential losses (selling Treasuries or entering into swaps contracts are two ways), traders can end up making the bond market more turbulent. That’s already starting to happen.

On March 9, analysts say hedging activity was triggered when 10-year yields hit 2.55 percent and then 2.6 percent, which in turn, pushed yields to a three-month high of 2.628 percent March 14. They slipped to 2.50 percent at 8:30 a.m. New York time Monday.

Tighter monetary policy may accelerate hedging. The Fed lift its benchmark rate a quarter-percentage point last week and signaled two more hikes this year. A few firms like RBC Capital Markets say Fed officials will start paring back their MBS re- investments as soon as the fourth quarter. (Most predict the first or second quarter of 2018.)

New Urgency

“This is a story that will play out over the course of a couple years,” said Jason Callan, head of structured products at Columbia Threadneedle Investments, which oversees about $500 billion. “This won’t be a big bang type effect, yet there is certainly reticence in the marketplace as to when the Fed’s reinvestment announcement will happen and what it will look like.”

Minneapolis Fed President Neel Kashkari, the only official to vote against this month’s rate hike, added new urgency to the discussion when he said last week that he would prefer the central bank announce a plan that explains how and when it will begin to reduce its balance sheet before boosting rates again.

It’s not just hedging in the MBS market that could hit Treasuries. Insurers, which have been buying protection against lower yields for years, may now do the opposite, especially if the upswing in growth and inflation continues and share prices keep rising, said Dominic Konstam, Deutsche Bank AG’s global head of rates research.

“That switch can flip if there’s a real breakout of the secular-stagnation story,” he said.

Big Win

More volatility could make it harder for investors, but anypick-up in trading would be a big win for Wall Street.

Big banks, facing a profit squeeze in recent years, curtailed trading in mortgage-backed securities, and in some cases, completely exited the business. Trading desks may also see a boost as investors unwind positions they were forced into
when the Fed bought up the all MBS, according to Mark Tecotzky, co-chief investment officer of Ellington Residential.

“It will result in better profitability for banks,” said Brad Scott, head of trading at RBC Capital Markets in New York. Wall Street “will have more opportunities based on higher volatility, and there will be more participants that are likely
t  enter the market.”

You can see from the following chart that Fed purchases of assets primarily focused on agency MBS in 2009/2010. Then Fed purchases of agency MBS began picking up steam again in November 2012 (aka, QE3).

As The Fed gradually raises The Fed Funds Target Rate, and The Fed begins to unwind their balance sheet, we may see a further slowing of prepayment speeds on agency MBS.

Here is Minneapolis Fed President Neel Kashkari voting against the rest of the FOMC at the latest meeting.

And please, do not read from The Book of The Dead!.