Credit Reporting’s “Massive” Cost Increase; Non-Agency/Non-QM News; Current Management Concerns

Putting out this daily commentary is like being in the army: I usually do more by 6AM than many people do during much of the day. The commentary is a little early this morning since I received an email on Thanksgiving from that my U.S. Government social security account password had expired and for me to send her my social security number and a new password. I wanted to take care of sending Isabelle the information first thing this morning, and am sure that everything will be just fine. It’s not fine in the credit world any more than the tale above is. The industry was given an early Christmas “present” by Fair Isaac and the three credit bureaus, although this is not “official”: the vast majority of the mortgage lending industry will most likely incur a massive mortgage credit report price increase for 2023. With per-loan costs over $11,000 already, this sure won’t help. For better news, today’s podcast is available here and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology, and other services in the mortgage industry and in banking. Warning: Credit Costs Will Escalate The cost of credit is going up. Lenders nationwide are trying for cost savings wins or success in negotiating vendor contracts, including those related to credit. In the credit world, can lenders save money by analyzing the number of pulls per file, or reminding staff about hard versus soft pulls, or dealing with duplicate logins? But the big news is out there:

Unofficial 4-Day Weekend

MBS live will be operating in “holiday light” mode today.   The weekly newsletter is on holiday but will be back next week. Commentary and alerts will only be written in the event of extra large bond market movement.  How would that be defined?  It’s fairly simple in this case: unless yields are breaking out side of this week’s trading range, nothing significant is happening. Even then, a range breakout on a day like today could easily be a byproduct of light
Yes, 3.842 would be the better part of a 20bp sell-off, and that might seem like a big move, but I’m still telling you that would be meaningless in the bigger picture.  On Thanksgiving week, we have to discount the pace of Wednesday’s rally, and we would also discount the pace of a similarly-sized sell-off.  After all, if last week closed at 3.833 and we’ve been saying all week to ignore these 3.5 trading days, then ending at 3.842 wouldn’t mean much.  Moreover, even if this were a full-fledged trading week, 3.842 would still only be at the top of the white rectangle and the more you back away from the chart, the smaller and smaller it looks.

Rates End Week Little-Changed at Multi-Week Lows

Bond markets will be closed for Thanksgiving tomorrow.  That means mortgage lenders won’t be publishing new rates.  While markets are technically open for a half day on Friday, it’s just as well to consider it part of a 4-day weekend.  Many mortgage lenders simply offer the same rates seen on Wednesday because market conditions are so unreliable. Today’s full trading day brought modest gains for bonds–something that would normally imply a modest drop in mortgage rates.  But the average lender is playing things safe this week, which is fairly typical.  In this context “safe” means offering rates that are slightly higher than they otherwise would be during more normal times for financial markets. Nonetheless, mortgage rates have been hovering around the best levels since late September for two straight weeks now.  The average conventional 30yr fixed rate is in the mid 6’s.

Rates Recover Nicely After Fed Minutes

Rates Recover Nicely After Fed Minutes

Today was the only day of the holiday-shortened week with any meaningful economic data on the calendar.  It’s debatable whether we should pay much attention to the intraday volatility considering the narrowness of the range and the impending holiday weekend.  The only abundantly clear takeaway is that markets were somewhat defensive heading into the 2pm Fed Minutes and then rallied to match the day’s best levels afterwards. Incidentally, the day’s best levels were right in line with the best levels since early October.

Econ Data / Events

Durable Goods 

1.0 vs 0.4 f’cast, 0.3 prev

Core Durable Goods 

0.7 vs 0.0 f’cast, -0.8 prev
last month revised down from -0.4

Jobless Claims

240k vs 225k f’cast, 223k prev

Market Movement Recap

08:41 AM Sideways to slightly weaker overnight.  Brief blip of buying after higher Jobless Claims, but 10yr still up 1.5bps at 3.772 and MBS down 6 ticks (.19). 

09:39 AM Steady gains since the last update.  10yr yield down 3.4bps at 3.726.  MBS up a quarter point and trading with better liquidity now.

12:21 PM Off the best levels now.  10yr still down 1.9bps at 3.739 and MBS still up an eighth of a point.

01:55 PM Giving up more ground ahead of the Fed Minutes.  10yr down only 1bp on the day at 3.75 and MBS unchanged after being up as much as 3/8ths. 

02:05 PM Recovering sharply after rate-friendly Fed Minutes.  10yr down 4.3bps at 3.715.  MBS up almost a quarter point after just being unchanged before the Minutes. 

03:24 PM Gains maintained into the 3pm CME close.  MBS up 10 ticks (.31) and 10yr right in line with the previous update (3.711 currently).

Early Economic Warning Signs in The Data?

We’d be the first to advocate taking Thanksgiving week trading momentum with a grain of salt, so this morning’s discussion is less about drawing connections to market movement and more about the general message in some of the econ data.  In this case, it just happens to advocate for the stronger trading levels.  One of the best indicators, weekly Jobless Claims, is also the most subtle.  It’s only up to 240k as of this morning, but that’s highest since mid-August, and it contributes to the sense of an uptrend. 

Could this be the start of some softening in the labor market?  If so, that checks one of the two big boxes for the Fed to soften its policy stance.  But admittedly, it’s a bit soon to be identifying a shift.  Ideally, there would be more of a sideways range to give traders an obvious baseline against which to measure a breakout.  The best we have at present is the previous high of 260k, which is a far cry from the fairly consistent range ceiling bounces seen before the last major economic shift.

While a break above 260k would certainly be net positive for bonds, the big difference versus 2007 is the presence of an even more important indicator in the form of inflation.  The Fed has been clear that it will sacrifice plenty of labor market strength in the name of fighting inflation.  We also need to specify what we mean by “bonds.”  An absence of traction on the inflation front would be far more damning for a 2yr Treasury whereas 10yr Treasuries would be more capable of reacting to other economic data.  Indeed, that’s the most obvious reason that the yield curve is more than 75bps inverted this morning.
Other economic data out this morning includes Consumer Sentiment, which paints an even gloomier picture.  A few months ago, we were able to blame a fuel price spike for the lowest levels in 40 years, but today’s update follows a big drop in fuel prices and still manages to be the lowest in more than a decade.

The last remaining hurdle for the markets before clocking out for a de facto 4 day weekend (Friday is technically a half day, but…) will be this afternoon’s Fed Minutes.  As a reminder, this is only a more detailed account of the Fed meeting that took place 3 weeks ago–NOT a new policy announcement.