Today I head to Phoenix area for the AzAMP annual conference, and am reminded that, “Change is inevitable, except from a vending machine.” The mortgage industry is constantly changing, although Freddie and Fannie have been a somewhat stabilizing influence. But explaining to someone not in the mortgage business what they, the government sponsored enterprises (GSEs) do, is not easy, but in another one of his Mortgage Musings, attorney Brian Levy offers his thoughts on 15 years of being in conservatorship and whether that means it’s time to drop the “S” in GSE. Let’s just hope they don’t become another Amtrak. (Sign up for Musings here.) One topic that has come up at a few conferences, besides Agency buybacks, is demand for “LIP” and “VLIP” borrowers. Are F&F pushing hard for Low Income Purchase and Very Low Income Purchase business, and requesting high percentages of those products with the “threat” of hitting their overall pricing? Address any questions to your Agency rep, but some would say that in this environment, with everyone fighting for every deal and reduced volume, it doesn’t seem fair or even logical to have such a high demand for sellers with something outside of their control. (Today’s podcast can be found here and this week’s is sponsored by Built. Built is powering smarter and faster money movement for the entire construction and real estate ecosystem, all while reducing risk. Hear an interview with Verisk’s Kingsley Greenland on state level structural issues with property insurance and the current state of federal flood insurance.)

The highest mortgage rates in 20+ years drove another decline in mortgage applications during the week ended September 22. The Mortgage Bankers Association (MBA) said its Market Composite Index, a measure of mortgage loan application volume, decreased 1.3 percent on a seasonally adjusted basis from one week earlier and fell by 2.0 percent on an unadjusted basis. The Refinance Index decreased 1.0 percent from the previous week and was 21 percent lower than the same week in 2022. The refinance share of mortgage activity grew to 31.9 percent of total applications from 31.6 percent the previous week. [refiappschart] The Purchase Index was 2.0 percent lower than the prior week on both a seasonally adjusted and unadjusted basis and was down 27 percent compared to the same week one year earlier. [purchaseappschart] According to Joel Kan, MBA’s Vice President and Deputy Chief Economist, “Mortgage rates moved to their highest levels in over 20 years as Treasury yields increased late last week. The 30-year fixed mortgage rate increased to 7.41 percent, the highest rate since December 2000, and the 30-year fixed jumbo mortgage rate increased to 7.34 percent, the highest rate in the history of the jumbo rate series dating back to 2011. Based on the FOMC’s most recent projections, rates are expected to be higher for longer, which drove the increase in Treasury yields. “Overall applications declined, as both prospective homebuyers and homeowners continue to feel the impact of these elevated rates,” he said. “The purchase market, which is still facing limited for-sale inventory and eroded purchasing power, saw applications down over the week and 27 percent behind last year’s pace. Refinance activity was down over 20 percent from last year and accounted for approximately one third of applications, as many homeowners have little incentive to refinance.”

The indictment of Sen. Bob Menendez, D-N.J., is inconvenient for some Democratic priorities, but unlikely to impact a cannabis banking bill up for debate in the Senate Banking Committee.

Since the start of the year, values have pushed upward at a marked pace, separate reports from the Federal Housing Finance Agency and S&P CoreLogic Case-Shiller declared.

A New York judge ruled Donald Trump is liable for fraud for exaggerating his net worth by billions of dollars a year on financial records submitted to banks and insurers, a major victory for the state’s attorney general before a high-stakes civil trial over remaining claims in the case.

The triple threat of tight supply, elevated prices and historically high mortgage rates continues to weigh on sales, even as home builders are offering incentives to potential buyers.

The total value of U.S. housing rose more than $2.6 trillion in the past year, Zillow said, defying predictions that higher borrowing costs would lead to a prolonged slump.

In terms of day-over-day changes, today’s mortgage rate movement was forgettable.  The average borrower wouldn’t see much of a difference from yesterday’s rates at the average lender.  In both cases, those rates would be at or near the highest levels since 2001. The underlying bond market experienced a bit more drama.  The early morning hours actually pointed to slightly lower rates, but those dreams were shattered by lunchtime.  Bonds had already lost a decent amount of ground by the time mortgage lenders released rates.  This kept lenders in a more conservative mindset, but several lenders were still forced to bump rates slightly later in the day as bonds lost more ground. Best case scenario rates remain near 7.5%, but many scenarios are seeing rates closer to 8%.

Stronger Start, Weaker Finish, No Real Reason

Bonds improved in the overnight session, but reversed course the moment that the US bond market hit the 8:20am CME open.  The selling wasn’t intense, but it was consistent from that point on.  10yr yields ultimate set new long term highs just over 4.56 and MBS lost an eighth to a quarter.  The most interesting market mover of the day was the complete absence of compelling market movers.  This fits the “repricing” narrative discussed in the morning commentary.  The silver lining is that the day-over-day losses were far smaller than those seen yesterday, but it’s too soon to conclude bonds are settling in for next week’s big ticket data.

Econ Data / Events

Case Shiller Home Prices y/y

+0.1 vs -0.3 f’cast, -1.2 prev

FHFA Home Prices y/y

+4.6 vs 3.2 prev

Market Movement Recap

09:24 AM Initially weaker in Asia, but stronger in Europe.  Giving back some overnight gains.  10yr down 1.4bps at 4.517 and MBS unchanged to a few ticks lower.

12:18 PM Selling continued into PM hours.  10yr now up 1.3bps at 4.544.  MBS down just over an eighth. 

02:27 PM Treasuries continue to weakest levels with 10s up 2.9bps at 4.56.  MBS are down 3/8ths, but more than half of that weakness is due to illiquidity.

The seemingly never-ending sea of red continues.  And for good measure, this one began with a bit of hope in the form of an overnight rally that got 10yr yields back below 4.50%. Not one moment after the official end of the overnight session, domestic traders started selling, pausing only briefly for the 9:30am NYSE open before taking yields to new multi-year highs in the 11am hour.  .

Like yesterday, there are no new or significant root causes for the weakness.  It’s the same old story of broad, large-scale “repricing.”  But what even is “repricing” in this context?  It’s a term we’ve only dusted off a few times over the past 15 years.  It occurred in 2013 surrounding the taper tantrum and in 2016 after the presidential election.  Those were examples of rapid repricing to higher yields.
There is a more gradual version as well, like the pervasive rally that took place in 2014 as the market repriced expectations for European QE and in 2019 as global growth concerns collided with the trade war and an oversold bond market.
In all examples, “repricing” refers to a sustained move in one direction that requires no new surprises from typical fundamentals.  In other words, econ data didn’t justify the scope or pervasive nature of these moves.  There was some deeper, underlying x factor that caused traders to identify a destination and then to proceed methodically in that direction.  The was abundantly clear in the first half of 2022–probably the single best example of a “repricing” event in modern economic history.
But here’s the kicker: that repricing has been underway since August of 2020.  That’s when bonds first began to lift off from the covid lows and when market participants first contemplated a future where trading levels weren’t tied to covid case counts.  It’s not as if the world knew yields needed to be over 4% at the time, but it was clear they needed to be higher.  In late 2021, we could similarly see that yields needed to be MUCH higher.
Now in late 2023, with 10yr yields already around 4.5%, I wouldn’t agree there’s as compelling a case for a repricing event, but that is nonetheless how the market is trading it.  It could be that it’s a short-term affair in reaction to last week’s Fed announcement, but only if next week’s data is week.  Otherwise, it’s just the market’s way of getting in position to finally not be surprised by surprisingly resilient big-ticket data.