The summer is now officially behind us while month and quarter end loom at the close of this week. Despite the Federal Reserve holding its fire last week at 5.50%, Powell’s post-meeting presser reinforced the hawkish leanings of the central bank while governor Bowman piled on with her own hawkish words last Friday. The SEP also raised the Fed’s outlook for where the Fed funds target will be at the end of next year by 50 basis points to a median forecast of 5.10% while hints that another rate hike before year-end may be in the cards are dropped liberally. Both Powell and Bowman reiterated that getting inflation under control matters above all else, and there is a long chain of great economic minds that agree. Back in 1924 F.A. Hayek himself insisted that “price stability has the highest priority from a social and fiscal viewpoint.” Not to mention the moral viewpoint, as well.
In response to the Fed’s hawkish words, the Optimal Blue 30-year mortgage lending rate closed at7.30% Friday, its highest level in at least half a decade while both the 10- and 30-year Treasury yields hit 4.49% and 4.57%, respectively, on Thursday,their highest levels over the same time period. Fed fund futures that had forecast four rate cuts in 2024 at the beginning of this month now foresee abouttwo and a half. The days of 3% 30-year mortgages are unlikely to return anytime soon, and despite the short-term pain tighter monetary policy will undoubtedly bring it is a necessary process to heal the wounds inflicted by QE4.
This week will be chock full ofeconomic data, starting with home prices on Tuesday (both the FHFA and S&P indexes are expected to see a month-over-month increases) along with new home sales (expected to drop back below 700k/annualized.) A third guess at 2Q GDP comes on Thursday along with pending home sales, while UMich expectations indexes and the Fed’s beloved PCE Core YoY (forecast to come in at 3.9% from 4.2%) wrap things up on Friday. We will also get plenty ofopportunities to hear what Fed officials think about all this, with seven of them on tap to hit the speakers circuit. Six out of the seven are voters, so between Fed tongues wagging, the heavy economic data calendar and month-end, it will be a busy and possibly volatile week.
Last week was a tough one for mortgages, with the US MBS indexlosing 17 basis points in excess return, it’s worst weekly performance in seven weeks.For the second week running it was the higher coupon UMBS 30-year TBA that were the belle of the ball in terms of performance, thoughI still see best value in 30-year conventional and Ginnie Mae space within the higher production coupons on an I-spread basis. In 30-year conventional spec pools, Texas and Florida in the 5.5% and higher coupons look enticing along with 275k loan balance in the 6.5% and higher coupons.
We have been seeing interest in lower coupon Ginnie Mae 15-year and higher coupon 20-year pools. On an OAS basis, the Fannie Mae 15- and 20-year indexes look cheapest within the Bloomberg MBS family. As we pointed out in Friday’scommentary, look for more seasoned pools in lower coupon 15-year Ginnie Mae space as they look like they are peaking in the 30 to 40 WALA range. With essentially the entire universe of American home owners lacking refinance incentive, it’s more important than ever to look where you can squeeze the most prepays out of any positions you onboarded at a discount.
We would like to invite you to join the“Mortgage Chat – BOK” IB group, available via the Bloomberg terminal. It is an anonymous chat room, meaning nobody can see anyone else’s identity. Both BOKF employees and clients are to join. Please feel free to use it as a forum to discuss/ask questions about everything mortgage related. We look forward to chatting with you; all you need do is reach out to me and ask to be added to the roster
Notable
Mortgage rates started the week at 7.28%, got as high as 7.47%, and ended at 7.39%. The yearly high is 7.49%
Mortgage performance improvement could be reaching an inflection point as continued slowing in the annual pace of change might mean delinquency rates are near cycle lows, Black Knight said
Bank Usage of Federal Reserve of Select Lending Facilities (as of Sept. 20, 2023)
Monday, Sept. 18: Hope Springs Eternal — it will be a long slog back to the Fed’s 2% inflation target (which I expect them to stick to) and an economic downturn does not necessarily come in tandem with falling prices (remember the 1970s)
Tuesday, Sept. 19: Such Are the Times — the latest US homebuilder sentiment index has slid lower two months in a row; this following a slight bounce higher following 2022’s record decline of twelve straight months
Wednesday, Sept. 20: Quicken Still Has It — Quicken continues to be one of the fastest paying servicers across the board, making the top five within every incentive bucket. For discount Fannie Mae 15-year purchasers, Quicken is the servicer to look for in your pools
Thursday, Sept. 21: Much Ado About Nothing — the Federal Reserve left its Fed funds target rate unchanged. Overall, though, the statement and presser that followed offered much the same opinions, statements and questions as the previous few pressers
Friday, Sept. 22: The Devil is in the Details — on both a spread and OAS basis, the 15-year index now looks cheapest among all the Bloomberg indexes, so it may have taken enough of a beating with the long end of the Treasury curve beginning to reset higher
Performance Snapshot (bps)
Percentage
Index Name
Duration
Daily
MTD
YTD
2022
2021
Bloomberg U.S. MBS
6.36
38
-179
-86
-1181
-104
Bloomberg Corporate IG
6.87
47
-151
121
-1576
104
Bloomberg U.S. Treasury
5.95
32
-158
-89
-1246
-232
Excess Return
Index Name
Duration
MTD
YTD
2022
2021
Bloomberg U.S. MBS
6.36
-18
5
-223
-68
Fannie Mae 30-year
6.86
-13
7
-222
-53
Fannie Mae 15-year
3.81
-32
-60
-198
20
Ginnie Mae 30-year
6.27
-21
29
-205
-144
Today in History
This past weekend in 1387 saw one of the most extravagant medieval English feasts ever recorded. It was held for Richard II and John of Gaunt in London and 14 salted oxen, 120 sheep, 1200 pigeons and 11,000 eggs were on the menu. There was a law passed in 1336 in England that forbade the serving of more than two courses at any one meal, except during feast days when one could serve three. I’m not sure if the law was still in effect by 1387, but as we modern Americans well know Laws Are For The Little People. Plus, Richard II and John of Gaunt habitually went about armed, so they could do as they pleased.Silly laws have been part of all governments since the dawn of time, because if one can’t make others’ lives miserable, what’s the point of being a ruler?
Alfred the Great made it illegal to eat any oxen that had gored someone to death (and the oxen was required to be stoned to death) while all beached whales in England belonged to the Crown, though it was really only the tongue they wanted (whale tongue was considered quite the delicacy in those times.) Did you really need a law like that to stop people from dining on beached whales? Well…you get hungry enough (and famine was a routine experience before capitalism) you’ll eat anything. For example, during the horrific siege of Leningrad (now St. Petersburg) from 1941 to 1944, those trapped within the city were reduced to eating machine grease, motor oil and, at times, each other. Happy Monday, and have a productive day.
