MSRs already get very punitive treatment relative to other assets and regulatory reform following the banking crisis could increase it, according to some analysts.

The Wall Street giant has more than $14 billion of real estate investments, and it took a $1.15 billion hit during the second quarter from writedowns of those bets.

Even as some observers are reducing their expectations for an economic downturn, the government-sponsored enterprise changed the expected time frame that one could occur.

Mortgage rates may have spiked to the highest levels in roughly 8 months two weeks ago, but they fully recovered as of last Thursday.  Since then, very little has happened and even less has changed about the average 30yr conventional rate for top tier scenarios. At the recent highs, many lenders were well into the 7% range.  Some are still over 7%–especially for quotes that don’t rely on upfront costs to bring the rate down.  As always, the prevailing rate should be thought of in 2 parts: 1) the “note rate” that applies to the principal balance and dictates the monthly payment and  2) the upfront costs (whether in the form of origination or discount points) that go to the lender in order to secure a lower rate.  Those upfront costs are either paid out of pocket or added to the loan balance, so they should be considered in any attempt to track rate changes in an environment where they are as prevalent as they are now (i.e. much more prevalent than historically normal).   All that to say that there is a WIDE variety of mortgage rates out there.  A lender quoting 6.625% with 1 discount point is actually making more money than a lender quoting 7.125% with no points! The sideways vibes will likely begin to subside by next week’s Fed announcement–not because the Fed will surprise anyone by hiking rates one more time, but because the market wants to hear from Powell if the collective assessment of the inflation outlook has changed in the past 6 weeks.  From there, the incoming economic data in the following 2 weeks will be used to determine if rates need to revisit recent ceilings before embarking on what everyone hopes is a steady grind back toward more livable levels. 

The rate of both construction permitting and housing starts retreated from their May levels last month.  The significant increase in estimated starts from April to May was also revised lower. The U.S. Census Bureau and Department of Housing and Urban Development report that housing starts in June were at a seasonally adjusted rate of 1.434 million units. This is an 8.0 percent decline from the rate of 1.559 posted for May, a revision from the original estimate of 1.631 million. The pace of housing starts is now 8.1 percent lower than in June 2022. Single family declined 7.0 percent from the May rate of 1.005 million units to  935,000 units and starts in buildings with five or more units declined 11.6 percent to 482,000. Single-family starts were 7.4 percent and multifamily starts 11.2 percent below year-earlier rates. On an unadjusted basis, the number of starts during the month is estimated at 133,800 compared to 143,500 the prior month. Single-family starts were essentially unchanged at just over 90,000 units. Residential permits were issued at a seasonally adjusted rate of 1.440 million units, a 3.7 percent decrease from the May estimate of 1.496 units and 15.3 percent off the pace in May 2022. Single-family permits rose 2.2 percent to 922,000, 2.7 percent fewer year-over-year.  The 467,000 annual rate of permitting for multifamily construction was down 13.5 percent for the month and 33.1 percent on an annual basis. Before seasonal adjustment, there were 135,500 permits issued in June, 90,800 of them for single-family houses. The respective May numbers were 139,600 and 88,900.

Working Our Way Back to Powell

The last Fed meeting in June wasn’t a huge market mover in and of itself, but it did set the stage for Powell to talk about the dots and for markets to understand how low the bar would be for another 50bps of Fed rate hikes.  Then when the data lined up with Powell’s warnings in late June, rates spiked.  That was 2 weeks ago.  Last week offered recovery after the CPI data and bonds have been content to remain in the sideways range that preceded all of the above.  Exactly one week from now, we’ll hear from Powell again–hopefully to let us know that the Fed is seeing more of what it wants to see.  Between now and then, the least surprising course for bonds would be “sideways in a narrow range.”

Econ Data / Events

Housing Starts

1.434m vs 1.48m f’cast

Building Permits

1.44m vs 1.49m f’cast

Market Movement Recap

10:37 AM Steady losses since 8:30am, now leveling off.  10yr down .6bps at 3.783.  MBS up 2 ticks (.06).

03:03 PM Stronger afternoon led by the long end of the yield curve.  10yr down 4.7 bps at 3.742.  MBS up an eighth of a point.

04:54 PM Flat all afternoon.  MBS up 3 ticks (0.09). 10yr down 4bps at 3.75.

Think mortgage math is complicated? Many in the nation are focused on air conditioning. Why is it measured in tons? It harkens back to the days of using ice, and a “ton” measures how much heat, removed by the system, would be needed to melt 2,000 pounds, or one ton, of ice in a 24-hour period. The result is then expressed in BTUs per hour. It takes 288,000 BTUs to melt a ton of ice in 24 hours, or 12,000 BTUs per hour. 1 BTU/hr. = 0.00029307107 kWh. And the average residential electricity rate in the U.S. is about 23 cents per kilowatt-hour (kWh). When you see your utility bill in the mail, don’t think about me. Maybe the math in a company acquisition is more straightforward. I mention this since ICE and Black Knight have agreed to sell Optimal Blue to Constellation Software in an effort to get regulatory approval for their merger. Constellation Software is already buying Empower and will purchase OB for $700 million paid for in $200 MM cash and a $500MM promissory note. Meanwhile, plenty of branch-level acquisitions are occurring that don’t make the headlines and will continue. (Today’s podcast can be found here and this week’s is sponsored by Richey May, a recognized leader in providing specialized advisory, audit, tax, technology and other services to the mortgage industry for almost four decades. To experience how Richey May can help you transform your mortgage business, visit richeymay.com. Hear an interview with Seth Sprague and James Brody on the wave of loan-repurchase requests from Fannie Mae and Freddie Mac that represents another threat to lenders’ balance sheets.)

After bonds rallied hard last week, EU bonds began to rally harder.  This was most noticeable in the current week where 10yr Bund yields fell all the way back to their late June lows on the heels of favorable inflation data and conciliatory ECB speeches.  Along with the Fed next week, the ECB is seen hiking once more and then “waiting and seeing.”  This represents a starker shift from the prevailing stance for the ECB than for the Fed.  As of this morning, that trading theme seems to have run its course. US bonds were already pushing back (or at least refusing to participate in as much of the rally).  Now that EU bonds are selling at their quickest pace since late June, US bonds are free to continue confirming the bottom of the range.

More than 50 percent of transactions analyzed were risk-prone, a report published by FundingShield found.

About 14 out of every 1,000 US homes changed hands during this period, down from 19 in the same period during 2019, according to the real estate brokerage’s report examining housing turnover since the pandemic.