News

Yesterday’s closing headline and most condensed recap of Powell’s press conference was simply: “data dependence continues.”  Indeed it does!  This morning’s economic data came out resoundingly stronger with all four reports beating forecasts–rather significantly in at least 2 cases.  A slightly dovish read on the European Central Bank announcement helped bonds hold their ground with minimal losses earlier in the morning, but after Lagarde’s press conference ended, the selling snowball is rolling.

We also discussed the fact that the frontier for the rate hike outlook is far into the future these days.  The market doesn’t expect much more upward pressure in terms of Fed rate hikes in the coming months.  Instead, the adjustments to the outlook have been taking place in the form of lower expectations for rate cuts in 2024.  Yesterday’s press conference helped restore some of that rate cut expectation with the March Fed meeting showing rates a quarter point lower than the level created by yesterday’s hike.  Now this morning, the econ data has fully reversed that expectation. 
Source: Mortgage News Daily

“I’m trying to organize a hide and seek tournament, but good players are really hard to find.” Good LOs (trustworthy, loyal, helpful, friendly, courteous, kind, obedient, cheerful, thrifty, brave, clean, and reverent… do I have that right?) can be hard to find. Compensation figures in there somewhere, and in this continued era of cost-cutting remember that HUD sent out a note years ago about mortgage loan officers being W-2. (Press your “Control/Ctrl” key and “F” simultaneously. Then type in W-2. There are nine mentions.) The CFPB, in its examinations, looks at LO comp. One can always ask the CFPB questions through this site, but more weight is put on LO compensation requirements under the Truth in Lending Act (Reg. Z) which addresses total loan originator compensation. It states that total income is either wages and tips reported on a W-2 or reportable income on a 1099. See 12 CFR Part 1026 (pg. 11352). One can also see the Final rule: Loan Originator Compensation Requirements under the Truth in Lending Act (Regulation Z) (consumerfinance.gov), pgs. 262-63, 274, and 517. (Today’s podcast can be found here and sponsored by ReadyPrice, offering the industry’s most powerful universal delivery portal that gives brokers the edge they need. Shop, lock and deliver with multiple lenders, all in one place, for free! Hear an interview with ReadyPrice’s Rick Soukoulis on how to win broker business and the overall direction of the wholesale channel.) Lender and Broker Products, Services, and Software
Source: Mortgage News Daily

As we discussed yesterday, it was entirely possible that today would bring a rate hike from the Fed that coincided with mortgage rates moving LOWER.  This can be confusing due to the mistaken belief that the Fed Funds Rate has an immediate and direct effect on the mortgage market. The Fed Funds Rate is a target that pertains to overnight lending between the biggest banks.  The rest of the interest rate  world radiates outward from there with different levels for different time frames.  A mortgage tends to last 5-10 years, and the outlook over that time frame can often differ substantially from the outlook over the next 24 hours. More importantly, the market is free to trade based on its expectations for Fed rate hikes.  If the Fed is seen hiking with 100% certainty (as was the case today), other interest rates have already adjusted and the Fed Funds Rate itself will be the last thing to change.  Indeed, Fed Funds Futures (the financial contracts which allow markets to bet on Fed Funds Rate levels) had today’s hike almost fully priced in by the end of May and those expectations didn’t change much at all since then. (note: the big drop in March coincided with the Silicon Valley Bank failure and the onset of the mini banking crisis) All of the above means the bond market was free to react to the content of Fed Chair Powell’s press conference as opposed to the rate hike itself.  The reaction wasn’t huge, by any means, but it was rate-friendly in today’s case with the average lender falling back below 7% for a top tier conventional 30yr fixed. 
Source: Mortgage News Daily

Needle Threaded. Data Dependence Continues

In today’s post-rate-hike press conference, Fed Chair Powell managed to hit on all of his consistent talking points (data dependent, job not done on inflation, future rate hikes not predetermined) AND introduce a few newer thoughts (policy now considered “restrictive,” 2% inflation not foreseen until 2025 or so) all without leaving the market with a clear cue to buy or sell.  Granted, there was some buying, but not much, and arguably only to defuse the defensive trades seen over the past 2 days.  This is a prime example of threading the needle.  He acknowledged developments, respected the static talking points, and left all the relevant decision making for the broader committee in the future (and even then, only with the benefit of additional economic data between now and the next meeting).

Market Movement Recap

09:45 AM essentially flat overnight. gains at the 8:20am CME open and now bouncing a bit. 10yr down 0.7bps at 3.883.  MBS up 1 tick (0.03).

01:52 PM All quiet ahead of Fed.  MBS up 2 ticks (.06) and 10yr up .4bps at 3.894

02:04 PM Slightly stronger after Fed.  10yr down 0.7bps at 3.883.  MBS up 1 tick (0.03)

03:05 PM  Additional gains during press conference.  10yr down 3.3bps at 3.857.  MBS up a quarter point
Source: Mortgage News Daily

While there’s always a chance that any of the year’s 8 scheduled Fed announcements will thread the needle, today’s installment is just as likely to provide some clarity for market participants.  To be sure, there is nothing interesting to be gleaned from today’s rate hike.  It is a foregone conclusion.  Instead, Powell can offer clarity by saying something about the extent to which Fed members have softened their inflation-fighting stance based on the changes in inflation data in the past few weeks.  Fans of low rates should not expect miracles on that front.
This morning’s chart shows the implied Fed Funds Rate based on 3 different Fed Funds Futures contracts.  July is only included to show that today’s hike has been locked in for weeks.  The more interesting developments will now be seen in the spread between the ceiling rate (currently captured by futures for either the Nov 1 or Dec 13 Fed announcements) and the early months of 2024 where the market still sees the Fed cutting rates.  This was especially notable after the most recent CPI data, but has dialed back quite a bit since then.

This is also the same dynamic seen in the market’s approach to Fed policy on multiple occasions.  Traders have consistently bet on Fed rate cuts occurring 1-2 years in the future and consistently been forced to bump those expectations farther into the future.  The biggest risk for Powell’s comments today is that they argue for another bump.  
Source: Mortgage News Daily

Today’s Fed meeting announcement is the last one until September 20. Mortgage rates, of course, are prone to moving around even without the Fed’s direction. Meanwhile, the second quarter earnings from lenders are of great interest to warehouse banks and investors (including Freddie Mac and Fannie Mae). Those counterparties are contractually limited as to what they can do with companies that are not making money and have seen their net worth erode over the months and quarters. There is continued talk of over-capacity as companies eye the end of summer, continued high rates, existing borrowers with low rates, and limited houses for sale. (Anyone displaced can post their resume for free here where, for $75, employers can view them for several months.) There is no disagreement about it being a difficult environment for most lenders, unlike there being disagreement over housing prices. Who you gonna believe? The FHFA House Price Index rose 0.7 percent MoM: U.S. house prices rose in May, up 0.7 percent from April, and were +2.8 percent from May 2022 to May 2023. Or the WSJ telling us that home prices fell year-over-year in May for the second straight month? (Today’s podcast can be found here and sponsored by ReadyPrice, offering the industry’s most powerful universal delivery portal that gives brokers the edge they need. Shop, lock and deliver with multiple lenders, all in one place, for free! Hear an Interview with Adam Quinones, Founder of dataQollab, and Matt Graham, MBS Live, on yield curve inversion, markets betting against the Fed, and bond performance.)
Source: Mortgage News Daily

Mortgage application volume during the week ended July 24 was down slightly from the prior week. Static interest rates did little to stir the refinancing pot, but purchase volume declined. The Mortgage Bankers Association said its Market Composite Index, a measure of that volume, decreased 1.8 percent on a seasonally adjusted basis from one week earlier and was down 1.5 percent on an unadjusted basis. The Refinance Index ticked down 0.4 percent week-over-week and was 30 percent lower than the same week one year ago. The refinance share of mortgage activity increased to 28.7 percent of total applications from 28.4 percent the previous week. [refiappschart] The seasonally adjusted Purchase Index fell 3 percent and declined 2 percent before adjustment. The index was 23 percent lower than the same week one year ago.   [purchaseappschart] “Mortgage rates were essentially flat last week but remained high, with the 30-year fixed staying at 6.87 percent and contributing to a pullback in mortgage applications,” said Joel Kan, MBA’s Vice President and Deputy Chief Economist. “The 2.5 percent decline in purchase activity, partly driven by a 10 percent decrease in FHA applications, pushed the purchase index to its lowest level in over a month. The decrease in FHA purchase applications contributed to an increase in the overall average purchase loan size to $432,700, its highest level since the end of this May. Refinance applications remained lackluster, running 30 percent behind year-ago levels. Many borrowers remain on the sidelines given current rates and persistent affordability challenges.”
Source: Mortgage News Daily

Mortgage rates moved moderately higher for the average lender at some point over the past 2 days.  Some lenders bumped rates yesterday afternoon and thus didn’t need to make as big of adjustment today.  Other lenders who held steady yesterday were forced to make bigger changes today.  As always, the motivations for such decisions are primarily tied to trading levels in the bond market.  As bonds lose ground, the price of the bond falls and the yield (aka “rate”) increases.  This means we can often see a popular rate benchmark like the 10yr Treasury yield moving in concert with mortgage rates.  Indeed, 10yr yields are also at 2 week highs. Tomorrow brings the latest announcement from the Federal Reserve (the Fed).  The market already fully expects another 0.25% rate hike.  Instead, it will be the verbiage with which the hike is delivered that matters.   The Fed Funds Rate doesn’t directly dictate mortgage rates.  In other words, mortgage rates CAN move lower tomorrow even if the Fed hikes.  They can also move higher depending on what Powell has to say about the Fed’s policy stance.
Source: Mortgage News Daily

Just a Bit More Pre-Fed Positioning

It ended up being a fairly uneventful day for the bond market despite starting off on a somewhat rocky note.  MBS suffered from illiquidity in the first 2 hours of the trading day and 10yr yields pushed highs of 3.92 on two occasions before dropping below 3.90 after the 3pm close.  Traders were squaring positions ahead of tomorrow’s Fed announcement and also building in concessions for the Treasury auction cycle.  

Econ Data / Events

Consumer Confidence

117 vs 111.8 f’cast

Market Movement Recap

09:44 AM Weaker overnight but finding footing.  10yr up 1.4bps at MBS down 3 ticks (.09).

10:14 AM A bit more weakness after Confidence data.  MBS down 5 ticks (.16) and 10yr up 2.2bps at 3.9

02:47 PM MBS staying sideways with 5.5 coupons down an eighth.  Treasuries underperforming with 10yr yields up 3.4bps at 3.912.

04:26 PM Mini recovery in Treasuries with 10yr now up only 1.2bps on the day at 3.89.  MBS are down 2 ticks.
Source: Mortgage News Daily

The S&P CoreLogic Case-Shiller Indices posted an annual decline in home prices for the second straight month in May while the Housing Price Index provided by the Federal Housing Finance Agency (FHFA) continues to show annual appreciation . Case-Shiller’s National Home Price Index, which covers all nine U.S. census divisions, was down 0.5 percent compared to a loss of 0.1 percent in April. The 1.0 decline in the 10-City Composite was a slight improvement from -1.1 percent the previous month. The 20-City Composite was unchanged from April’s 1.7 percent year-over-year loss. Month-over-month, however, prices were ascendent, Before seasonal adjustment, the National Index posted a 1.2 percent month-over-month increase and was up 0.7 percent after seasonal adjustment. in May. Both the 10-City and 20-City Composites rose 1.5 percent on an unadjusted basis while the 10-City Composite gained 1.1 percent and 20-City Composite 1.0 percent after adjustment. Chicago, Cleveland, and New York reported the highest year-over-year gains among the 20 cities in May. Chicago moved up one to the top spot with a 4.6 percent year-over-year price increase, while Cleveland was number two at 3.9 percent. New York debuted in the top three with a 3.5 percent increase. There was an even split of 10 cities reporting lower prices and those reporting higher prices in the year ending May 2023 versus the year ending April 2023. 
Source: Mortgage News Daily