How China and The Deutsche Tank Are Helping The US Mortgage Market

The China slowdown is wrecking havoc on the global financial markets, including Germany’s largest bank, Deutsche Bank.


The benefit for the US mortgage market? Despite The Fed’s abandonment of QE and raising The Fed Funds target rate by 25 basis point is the decline in the 10 year Treasury yield.


Lower interest rates and relaxing credit standards are very stimulative.




Now, bear in mind that mortgage applications generally rise from January 1 to around May 15. Then begin a long downward slide until December 31.

This gets really interesting with the talk of negative interest rates.

JPM Nirp_abs


Yellen’s Victory Lap? Asset Bubbles and Lower Wage Growth After 7 Years

The Associated Press headline blasted “President Barack Obama takes victory lap on economy.” But should Federal Reserve Chair Janet Yellen take a victory lap with him?

It has been over 7 years since President Obama was sworn in for his first term in office. And it has been over 7 years since The Federal Reserve went to zero interest rates and massive asset purchases (known as QE). And things are not so good that a victory lap is warranted.

First, average hourly wage growth YoY and real median household income are lower today than in 2007. The labor force participation rate continues to fall. Finally, the U-6 underemployment rate stands at 9.9%, still higher than the 8.4% in 2007.


All this after the massive fiscal stimulus from Congress and the monetary stimulus from The Fed. But we did get asset bubbles!


Yet the mortgage market is recovering at a shockingly low rate.


And the M1 Money Multiplier and M2 Money Velocity have plummeted like a paralyzed falcon.


The problem for any victory lap is that the economic recovery has been abysmal compared to previous recoveries from a recession. Look at the GDP growth during the Reagan Recovery (where is David Stockman, Reagan’s OMB chief) when we need him?)


True, the Great Recession was terrible. But the economy recovers after every recession anyway. This recovery is particularly lousy.

So, let’s not take any victory laps for $19 trillion in Federal debt and a slow recovery with asset bubbles.


Can we try some OLD economic thinking?

Wall Street Pulls Back From Mortgage Market That Fed Made Boring (Regulation Didn’t Help Either)

Bloomberg — Matt Scully — The U.S. Federal Reserve is squeezing a good deal of the profit out of mortgage bond trading, and Wall Street banks are increasingly heading for the exits.

Barclays Plc cut 20 jobs in its U.S. government-backed mortgage bond business in January as part of a broader bank reorganization that is cutting 1,200 jobs, according to a person with knowledge of the matter. Deutsche Bank AG and Societe Generale SA have also scaled back in the market in recent weeks, people with knowledge of those moves said.

As the Federal Reserve has vacuumed up nearly a third of the government mortgage bonds in the market as part of its quantitative easing program since early 2009, average daily trading volume has plunged by more than 40 percent. Unlike other investors, the central bank rarely trades its mortgage bonds.

“What incentive do banks have to stay in the business in a largely price-controlled market?” said Danielle DiMartino Booth, a former policy adviser at the Dallas Fed. Eric Kollig, a Federal Reserve spokesman, declined to comment.

True, The Fed’s repression of the short-rates on the yield curve and attempts to manipulate the longer-term rates has made the world of agency mortgage-backed securities … boring.

-1x-1 (1)

But the same can be said as to why big banks remain in the mortgage market at all. Heavy regulation from the Consumer Financial Protection Bureau (CFPB) and rate repression/manipulation from The Federal Reserve makes mortgage lending problematic.

Indeed, large banks are shedding their residential lending.


But seeing investment banking firms shedding agency MBS is just the other shoes falling.

Take a Fannie Mae 3.5% coupon RMBS. Its yield is highly correlated by the US Treasury 10 year yield. And yields are plunging.


As is the duration (weighted-average life) of the Fannie Mae RMBS.


As we approach (perhaps) the lower-bound on longer-term interest and mortgage rates, this could cause a lack of appetite for lenders and investors.


If the 30 year mortgage rate and the 10 year Treasury yield have bottomed out, there is no where to go but up.

We now live in a plain vanilla mortgage and mortgage-backed securities world. Boring!!!


Hey Bartender! 151K Jobs Added, Mostly Low-wage Like Bartenders (Home Prices Growing At >2x Wages)

Hey bartender! Your ilk is growing!!

(Bloomberg) — Job growth settled into a more sustainable pace in January and the unemployment rate dropped to an almost eight-year low of 4.9 percent, signs of a resilient labor market that’s causing wage growth to stir.

The 151,000 advance in payrolls, while less than forecast, largely reflected payback for a seasonal hiring pickup in the final two months of 2015, Labor Department figures showed Friday. The jobless rate fell to the lowest level since February 2008. Hourly earnings rose more than estimated after climbing in the year to December by the most since July 2009.

Yes, job growth settled into creating low-wage jobs such as bartending, waitstaff and retail sales.


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Average hourly earnings YoY remained at 2.5%, lower than in the 2007-2009 period.


And home prices YoY are growing at >2x average hourly wage growth.


“Do you know where I can score a cheap apartment?”


Labor Productivity Down 3% In Q4, Third Lowest Reading Since Q1 2008 (Flint Mortgage Denials)

US Labor Productivity sagged in Q4, declining 3%. It was the third lowest reading since Q1 2008.


Given the decline in factory orders and Durable Goods orders in December, the 30 year Treasury yield fell 2.4 basis points. Things really haven’t gone well since The Fed raised their target rate on December 16th.


At least the 30 year mortgage rate will likely fall.

But that won’t help borrowers in Flint, Michigan.

From American Banker: The water-contamination disaster in Flint, Mich., may have a new consequence: mortgage lenders appear ready to put a clamp on most home purchase loans. Lenders have started to require that home buyers must provide proof that a property they want to buy does not have contamination. Nonbank lender Michigan Mutual and banks Wells Fargo and Bank of America have sent notices saying they won’t make loans on properties that don’t have drinkable water.

Flint is suffering. Low family incomes, high unemployment, lead in the drinking water, Michael Moore, Jackie Moon … now mortgage denials.


Probability of Fed Rate Increase In March Falls To 8% As Mortgage Rates Tumble

The implied probability of another rate hike at The Fed’s Open Market Committee (FOMC) meeting in March just fell to 8%.


That is good news for borrowers in the mortgage market as mortgage rates fell to near 8 month lows as the Treasury yield curve (10Y-2Y) continues to flatten.


Meanwhile, the US dollar remains strong compared with the Euro, Renminbi and Yen benefiting Americans traveling abroad … and making American exports more expensive abroad (but imports are cheaper in the USA).



Let’s hope that for GDP sake the dollar weakens.


Poppy Loans: 100% LTV Up To $2 Million (No PMI Required) In SF Bay Area

How expensive and unaffordable is the San Francisco Bay Area?


So expensive that the Wicked Witch of the West had to poison the poppies … with a bubble-inducing 100% LTV loan for up to $2 million!

Enter the San Francisco Federal Credit Union with the POPPY LOAN!!

* POPPYLOANTM is available to anyone who works in San Francisco or San Mateo County.
* The home you want to buy and will live in as your primary residence must be located in one of the 9 Bay Area Counties. These are San Francisco, San Mateo, Marin, Napa, Sonoma, Santa Clara, Alameda, Contra Costa, Solano.
*You can finance up to 100% of the purchase price or appraised value, whichever is less – all in one loan.
*Loans are available up to $2,000,000.
*There is NO added cost of Private Mortgage Insurance (PMI).

I can’t believe that the credit union is self-insuring these loans (no PMI). Something smells … and it isn’t poppies. Or are these just loans to wealthy Friscans who would rather take advantage of ultra-low mortgage rates courtesy of The Fed?


Here is the risk management team at San Francisco Federal Credit Union designing the Poppy Loan program.