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.

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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?”


US Homeownership, The Fed And Low Interest Rates (Japan Goes Negative!)

tThe world was surprised when the Bank of Japan announced they were going into negative interest rate territory, joining the European Central Bank (ECB), Sweden and Switzerland.


Japan’s home prices have not recovered from their bubble in 1991 despite the lowering of the Bank of Japan target rate.


But that is at the short-end of the yield curve. The United States housing market largely depends on the 30 year mortgage rate.

Here is a chart of the US home ownership rate relative to the 30 year mortgage rate and real median household income. From 1965 until 1980, the home ownership rate rose from 62.9% to 65.8% as real median household rose gradually until 1979.

The 1980-1983 period was notable for two recessions and mortgage rates climbing to over 18% (actually reaching over 20% in some areas of the country). High mortgage rates result in high mortgage payments relative to income making housing more UN-affordable. Not to mention that real median household income fell from 1979-1983. This resulted in declining home ownership rates until 1985.


From 1985 until 1995, home ownership rates remained fairly flat. Then in 1995, the Clinton Administration introduced The National Homeownership Strategy: Partners in the American Dream. This Department of Housing and Urban Development (HUD) initiative called for lenders to “streamline” the mortgage lending process, lower credit standards and market home loans to those who had not been mortgage borrowers before.

Note that other economic factors were in play in 1995. The 30 year mortgage rate fell from 9.18% in December 1994 to 7.11% in December 1995, a 200 basis point drop in rates. Plus, real median household income rose from 1993 to 1997 contributing to the rise in the home ownership rate. Declining mortgage rates, rising incomes and softening credit standards were doing their magic.

Then came the 2001 recession. Real median household income peaked in 1999, fell slightly in 2000, and then fell through 2004. 30 year mortgage rates fell from 8.22% in June 2000 to 5.53% in June 2005, a decline of over 270 basis points. Subprime lending and adjustable-rate mortgages were in full swing allowing home home ownership rates to peak at 69.2% in Q4 2004.

Then the “invisible foot” of the market kicked in. Real median household income has been declining since 2007. Mortgage rates have fallen again from 6.67% in June 2007 to 3.79% today, almost 300 point drop. Home ownership rates have fallen to pre-housing bubble levels of 63.8% despite the almost 300 basis point drop in the 30 year rate.

Where do we go from here? Both the US and Japan are near or under zero on their target rates (Japan actually abandoned theirs in 2013). The 30 year mortgage rate has fallen from over 18% in 1981 to under 4% today. How much lower can US mortgage rates (and the 10 year Treasury benchmark rate) go? We shall see if the US follows Japan and goes into negative territory … and introduced MOAR quantitative easing.


So, Federal Reserve and US Federal government policies have pushed us into our current situation. And the national home ownership rate is back where they started in 1994. (pictured below, President Bill Clinton, current Fed Chair Janet Yellen and former Citi CEO Robert Rubin.).


My Kuroda: Bank Of Japan Announces Negative Interest Rates

Bank of Japan is cutting key interest rate into negative territory.

(Bloomberg) — The Bank of Japan pushed interest rates below zero Friday, after years of keeping them at the lower end of the positive range. Bank of Japan Governor Haruhiko Kuroda is matching European Central Bank President Mario Draghi in pursuing negative interest rates, and even pulling ahead when it comes to driving longer-term bond yields lower.

The BOJ will pay an interest rate of -0.1% on current accounts held by financial institutions. Policy makers also signaled their willingness to do more, saying they would “cut interest rates further into negative territory if judged as necessary.”

The negative rates will be imposed on reserves worth about 10 trillion to 30 trillion yen initially and will apply only to new reserves that financial institutions deposit at the central bank, according to people familiar with knowledge of the matter. The change will take effect on Feb. 16.

Japan’s 10 year sovereign yield fell 12.5 basis points to 0.09%. That is less that 1/10th of 1% on 10Y sovereign debt, currently the lowest 10 year sovereign yield in the world after Switzerland.


The Japanese sovereign yield curve is now negative at maturities of 8 years and less.


A problem facing the Japanese economy is that the lending in Japan is DROPPING (as indicated by the white line).


To illustrate Japan’s sagging economy, their home prices peaked in 1991 and have been falling ever since despite repression of the Bank of Japan’s target rate.


Note that as of 04/04/2013, the BOJ has shifted its monetary policy focus to a targeted monetary base via Japanese government bond (JGB) purchases.

The Japanese currency, the Yen, popped on the announcement.


So, Draghi is emulating the ECB’s Mario Draghi in terms of negative interest rates. He got it from his (spiritual) daddy. I would have used “My Kuroda,” but that is too obvious.


Investors Seek Protection Against Negative Interest Rates As Yield Curve Falls To Lowest Level Since End Of 2007

Today’s financial markets are different than when The Federal Reserve lowered their Fed Funds Target Rate (Upper Bound) in 2008. Crude oil and commodity prices were relatively high. And the slope of the 10Y-2Y Treasury yield curve was at 97. on December 31, 2007.

Fast forward to today. The 10Y-2Y yield curve is at 115 despite the massive Fed intervention in the form of zero interest rates and quantitative easing.


But as the global economy continues to slow, the yield curve is plunging downwards as crude oil and commodity prices continue to fall.


While The Fed is still talking about further rate hikes, it looks more possible that NEGATIVE RATES and perhaps MORE quantitative easing are in store for the US financial market as investors seek protection against possible negative interest rates.


Here is the ECB’s explanation of their negative interest rate policy.

This is definitely a Jurassic World global economy.


Already Gone! Citi Surprise Index Falls To -43.50 As Monetary Stimulus Wears Off

To combat The Great Recession, The Federal Reserve expanded their balance sheet at an unprecedented rate while Congress and the White House introduced a $787 billion fiscal stimulus package.

But, alas, all stimulus wears off eventually. Here is a chart of corporate profits and both nominal and real GDP growth after The Great Recession (and massive stimulus from The Fed and the Federal government).


It is difficult to disentangle the impact of the stimulus versus natural rebound effects (that would have happened independent of Fed and Federal stimulus). But suffice it to say that after the initial “shock” in corporate earnings, corporate earnings growth YoY has been slowing and is in negative territory as of Q3 2015.

Citi has a global earnings revision index which reveals that global earnings have been slashed by the largest amount since 2009.


Which brings me to the Citi Economic Surprise Index.* It is now at -43.50 indicating that economic news has been worse than expected. What I want to point out is that the Surprise Index has been negative (or zero) since The Fed ended quantitative easing (bright blue box).


Now that both fiscal and monetary stimulus are “Gone With The Wind,” we shall see how 2016 GDP goes (although the consensus seems to be around 2.2%).

At least crude oil has turned up in price in recent trading.


As a tribute to the late Glenn Frey of The Eagles AND the massive monetary and fiscal stimulus that has worn off, I present you The Eagles song “Already Gone.”

*The Citi Economic Surprise Indices measure data surprises relative to market expectations. A positive reading means that data releases have been stronger than expected and a negative reading means that data releases have been worse than expected.

Why US Home Prices Are Likely To Keep Rising In 2016 (And Getting More Unaffordable)

The National Association of Realtors existing home sales report for December revealed the expected rebound from the regulatory hiccup caused by the CFPB’s TRID.

But the most interest data from the NAR is the existing home sales inventory.

Please note that rise in the Case-Shiller home price index through 2006. The existing home sales inventory rose from 2000 t0 2004, then exploded upwards in 2005 to 2007 as home prices peaked and cooled off.


Now look at the decline in existing home sales inventory since the peak in 2007 until 2012. And since 2012, existing home sales inventory have settled into a relatively low seasonal pattern compared to “The Big Short” bubble era. Yet home prices have kept growing despite of (or because of) the limited housing inventory.

Comparing nominal home prices to real median household income is a somewhat apples to oranges comparison. I only show real median household income to illustrate income is lower today (or in 2014) compared with 2007, yet home prices are rising.


If housing inventory remains constrained, it is likely that the US will see a continuance of rising home prices.

The Case-Shiller 20 home price index is currently growing at 2x US wage growth, but limited inventory may allow home price growth to continue through 2016.


So housing affordability remains a problem in the USA.

Let’s not leave it up to bureaucrats like those in Pawnee, Indiana to make the decisions to solve the affordability problem (with the exception of Ron Swanson).