Markets React to the American Job Pain

April 5, 2021jordanreedNews

Last Week in Review: Markets React to the American Job Pain

This past week was filled with a lot of market-moving news for the mortgage and housing industry. By week’s end, interest rates continued to stabilize, while stocks set new all-time highs. Let’s break it all down:

Enormous Government Spending on the Way

On Wednesday, President Biden laid out his $2.3T infrastructure proposal called the American Jobs Plan. Whether you like it or hate it, this plan calls for both big spending and tax increases.

This plan is a long way from passage, and it will likely be met with tons of both praise and criticism in the days and weeks ahead, thereby inviting market volatility.

Stocks generally do not like higher taxes, and bonds/rates do not like additional bond issuance, which will be needed to fund any plan, so seeing both initially improve was surprising, yet welcome.

Home Sales Not Pending

Pending home sales is a measure of signed contracts for existing homes. The February Existing Home Sales data showed 1.03M homes for sale, which is down a whopping 29% from a year ago, representing the largest year-over-year decline on record. It also represents the lowest supply of available homes on record.

The lean amount of supply, low interest rates, and scorching demand continues to drive home prices higher, as evidenced by the 11% year-over-year price increase reported by Case Shiller.

Private Sector Jobs Returning

The ADP Report on Wednesday showed a whopping 517,000 private-sector jobs created. This figure met frothy expectations and the largest monthly increase since September. The main driver of the increase is the reopening of more economies across the U.S. More vaccinations, coupled with declining cases and further reopenings should continue to drive better job figures in the months ahead.

Bottom line: Rates remain historically low. With the anticipation of better days ahead and so much stimulus, we should expect a further uptick in rates from here.

Rates May Have Just Peaked… This Is Why

March 29, 2021jordanreedNews

Last Week in Review: Rates May Have Just Peaked… This Is Why

We watched long-term interest rates improve nicely this past week from the highest levels in over a year. The recent chatter about higher inflation has cooled down, allowing other themes to come in and influence stocks and interest rates. It was mostly negative and bond-friendly. Let us break down what happened.

Bonds and rates love bad news and slower economic conditions, so when the talk of “largest tax increase in decades” went across the wires this week, stocks and rates moved lower with the 10-year Note yield dropping to 1.59% from 1.75% just days earlier.

It’s far from clear what and who will be taxed, but what is clear is that corporate tax rates are going up, and that has a negative effect on stocks – hence the pullback. Taxes, whether you love them or hate them, hamper economic growth and weigh on consumer demand, which lowers inflation pressures: another positive for rates.

“Vaccination is a national priority” – French President Emmanuel Macron

Another big negative and uncertain event has been the sharp rise in COVID cases throughout Europe. The main cause of the spike appears to be a slow vaccination rollout.

Fresh lockdowns throughout the region could cause economic harm and elevate uncertainty, which again may cause stocks and rates to move lower.

The Buck Is Strong

Despite enormous spending by the U.S. government and much more on the way, the U.S. dollar has strengthened against other global currencies, touching the highest level since November 2020.

Why does this matter? Many commodities, like oil, are priced in U.S. dollars, so as the dollar gets stronger, it has put downward pressure on the price of a barrel of oil. This has an effect of lowering inflation pressures, because so many products are made of oil.

A strong dollar also makes our imports cheaper, which also lowers inflation pressures which bonds and rates love.

Bottom line: Rates have improved week-over-week and the trend may very well continue. However, like we experienced several weeks ago, any further rate improvement may be modest and short-lived. As economies reopen, we should expect rates to continue to increase further over time.

The Fed Spoke and Bonds Didn’t Listen

March 22, 2021jordanreedNews

Last Week In Review: The Fed Spoke and Bonds Didn’t Listen

This past week the Federal Reserve issued their monetary policy statement, as well as new forecasts on the economy, inflation, and rates. Despite all the soft talk on inflation and seeming lack of concern on higher prices ahead, the bond market was not buying it. Let’s break down what happened.

Fed meetings are always market movers, but this particular one seemed to carry even more weight. The Fed has lost control of long-term rates, as they have ticked higher since January 6, despite the Fed trying to “talk down” inflation on numerous occasions and purchasing $120B worth of bonds per month.

It’s All About Inflation

Mortgage-backed securities (MBS) are the instruments which determine home loan pricing, and inflation is the main driver. If inflation moves higher, rates must move higher. Currently, inflation is not an issue. It is running at 1.7% year-over-year.

The problem? We are going to see much higher inflation over the next few months as year-over-year figures will explode due to the sharp spike in commodities, oil, lumber, and such since last spring.

In the Fed statement and press conference, the Fed continues to acknowledge that inflation will be volatile in the near-term but will moderate back towards a longer-term 2% run rate by next year.

So far, the bond market is not listening or believing the Fed’s outlook on inflation, and after further digestion of their words, bond prices plunged on Thursday, causing rates to touch the highest levels in over a year.

Three Things Bonds Didn’t Like:

Once again, bonds hate inflation, and there were three things from the Fed meeting which spooked bonds and caused the spike higher in rates:

  1. No “taper” anytime soon, meaning the Fed will continue to purchase at least $120B worth of bonds every month. Normally, you would think this would help rates. Well, the bond market is concerned about the inflationary aspect that continued low rates can fuel. Strange days indeed.
  2. Fed unity in question. Despite forecasting the next rate hike is not expected until 2024, four Fed members on the committee expect higher rates next year, and seven expect higher rates in 2023. The question of Fed unity on rates and inflation is a reason for the spike.
  3. Moving the goalposts. The Fed has a dual mandate of maintaining price stability (inflation) and promoting full employment. On the latter, the Fed has added they now want to see maximum employment as “broad-based and inclusive,” meaning the Fed will now potentially add tracking Black and/or Hispanic unemployment before considering hiking rates. The problem for the bond market? This may lead to higher inflation as the Fed will show restraint on hiking rates because they have a new measure of unemployment to track. Most peculiar Mama.

Bottom line: Rates have resumed their trend higher. As economies reopen, we should expect rates to continue to increase further over time. 

Two Big Things Moving The Market

March 15, 2021jordanreedNews

The Last Week In Review: Two Big Things Moving The Market

The volatility in the financial markets continued this past week, and at the end of it all, home loan rates were pretty much unchanged. Let’s break down two big things moving the markets.

More, More, More

1. This past Wednesday, Congress passed a whopping $1.9T stimulus plan. “How did the markets like it?” They loved it! The Dow Jones hit an all-time high, closing above 32,000 for the first time. Interest rates typically move higher when stocks soar, but not this week. Bond prices were able to pause their recent decline, giving lenders a break from the recent spike higher in home loan rates.

The $1.9T plan is expected to help the economy recover more quickly than previously expected, but it also carries two concerns for the bond market and interest rates. One is inflation. We are already seeing inflation expectations for the next ten years hit the highest levels since 2014. Throwing large amounts of money onto an economy that is already doing well where states are open, could elevate inflation further which means rates will be pressured higher again. The other concern is all of this stimulus, now $5T since the start of COVID, must be paid for by selling new bonds in the market. Who is going to purchase all of this debt? And at what price? These are questions that will be answered over time.

Cure for Higher Rates Is Higher Rates

2. The 10-Year Note yield hit 1.60% recently, and that level has been a ceiling for the Treasury market, meaning that level has kept rates from moving higher still. With the recent uptick in rates, the U.S. has attracted foreign investments from around the globe as our anemic Treasury yields are relatively attractive to other sovereign yields. If you look at the 10-Year German Bund yield at minus 0.33% or the 10-Year Japanese Government Bond at 0.10%, it is no wonder foreign investors jumped into the U.S. bond market of late, purchased our 10-Year Note and thereby helped pause the increase in rates here.

Bottom line: The recent pause in rates rising, could be just that: a pause. As economies reopen, we should expect rates to continue to increase over time.

Carrington Prime Advantage and Investor Advantage Program Enhancements

March 8, 2021rashtonNews

Overview

Effective March 8, 2021, Carrington Mortgage Services, LLC (CMS) is pleased to announce the following enhancements for the Prime Advantage and Investor Advantage loan programs.

Pricing Improvements

**Significant pricing improvements for Prime Advantage, CFA+, and Investor Advantage programs, including new “floor” rates!

Prime Advantage Program

  • Increased Loan-to-Values (see matrix for details)
  • Cash Out now allowed up to 80% LTV (720+ FICO)
  • Improved Loan Amount Tiers – expands LTV’s and reduces Reserves depending on loan size
  • Alternative Doc Programs now eligible down to a 660 FICO
  • 2-Units – Eliminated the 70% LTV cap and replaces with a program maximum LTV reduction of only 5% (LTV’s available up to 85%)
  • Condominiums – Eliminated 75% LTV cap – Same LTV’s as SFR now

Investor Advantage Program

  • Increased LTV by 5% for the 700 FICO band
  • Improved Loan Amount Tiers – expands LTV’s depending on loan size
  • 2-4 Units – Increased the Max LTV cap to 75%

Please Note: www.carringtonwholesale.com has been updated with the expanded LTV eligibility criteria and increased loan amounts.

SEE TODAY’S PRICING

SEE GUIDELINES

The Fed, Inflation, and a Twist

March 8, 2021jordanreedNews

Last Week in Review: The Fed, Inflation, and a Twist 

Home loan rates improved modestly week-over-week as the U.S. bond market attempts to stabilize after a sharp increase in rates. Back on Thursday, February 25th, the 10-year yield hit 1.61% and has since declined back beneath 1.50%. This helped mortgage-backed securities (MBS), which drive home loan rates, to also improve in price/rate.

The Sales Pitch Continues

Inflation is the main driver of interest rates. If inflation or inflation expectations move higher, rates move higher, period. The opposite is true. The Fed has had to put on its sales hat recently by continuing to try and sell to the world that inflation in the U.S. will not hit the Fed’s target of 2% over the long-term for three years.

The Fed has noted that inflation will be “volatile.” What does that mean?

Consumer inflation year-over-year is going to rise sharply in the second quarter of 2021. Here’s why. Oil, lumber, and commodity prices like copper, coffee, and grains are up sharply year-over-year. Oil, which is in many consumer products, hovered near $20 a barrel and is now over $60.

“Would need to see inflation exceed 2% in order to even think about starting to get nervous.” Fed President Evans – 3/3/21

It would not be surprising to see consumer inflation in the mid to high 2% by May, so Mr. Evans and the entire Fed will have to continue to talk down inflation in order to try and keep rates from increasing further.

“Come on baby, let’s do the Twist” – Chubby Checker

The Fed only controls the Fed Funds Rate, an overnight lending rate between banks which impacts short-term loans like credit cards and home equity lines of credit and yes, your savings account at the bank. They do not control long-term rates like mortgages, and proof- positive is the sharp rise in rates in 2021, despite increased bond purchases by the Fed in an effort to stem the rise in rates.

What other tools does the Fed have to try and stabilize long-term rates? The rumor mill is swirling that if rates move higher, the Fed may enforce Operation Twist 3.0. They did it back in 2011, and here’s how it works.

The Fed will sell short-term bonds and purchase long-term bonds. This has the effect of driving down long-term rates while modestly boosting short-term rates. Back in 2011, the impact was significant. The 10-year yield went from a high of 3.75% to a low of 1.44%. However, when the Fed stopped the “Twist” and the manipulation was over, the yield spiked back up to 3% quickly.

Bottom line: Home loan rates remain historically low. Fed bond market manipulation may be required should higher inflation cause another increase in rates. Now is a great time to take advantage of rates before we see an even further rise.

Rates Go on Vacation

March 1, 2021jordanreedNews

Last Week In Review: Rates Go on Vacation

Longer-term U.S. interest rates, including home loan rates, remain on the rise. The big story of the week is Fed Chair Jerome Powell on Capitol Hill to provide his real-time assessment of the economy and rates while attempting to “sell” the notion that higher inflation will not be a problem.

“Inflation will not hit our target for three years.” – Jerome Powell

Mortgage rates are determined by the trading action in mortgage-backed securities (MBS), and those instruments respond to inflation and inflation expectations. If inflation moves higher, MBS prices move lower and rates move higher, and vice versa.

Inflation expectations have crept up to the highest levels in seven years. The enormous economic stimulus along with COVID loosening its grip, vaccinations moving quickly, economies re-opening, and consumers ready to spend has caused the spike.

Fed Chair Powell attempted to talk down inflation by suggesting it will be volatile in short term but will not even meet the Fed’s target of 2% for three years. The bond market was not having any of it, and despite Powell’s seemingly comforting words on inflation, bond prices dropped all week, sending mortgage rates higher.

The Fed Doesn’t Control Long-Term Rates

This recent uptick in rates is a stark reminder that the Fed doesn’t control long-term rates. Despite purchasing $30B in MBS in the last week in an effort to help keep rates low, rates only moved higher.

Durable Goods Orders Tell a Good Story

On February 17, the Retail Sales Report for January came in five times better than expectations, and this past Thursday, Durable Goods Orders confirmed the strength of the U.S. consumer.

A durable good is an item with a life expectancy of at least three years. Think appliances, furniture, and electronics. These items cost more money, so it is a positive sign to see consumers have the ability, willingness, and confidence to make these purchases. We should expect future readings to be sound as the U.S. economy gets back to fully open.

$1.9T Stimulus Plan at Risk

The recent round of strong economic readings coupled with more state reopenings and vaccination progress has many on both sides of the aisle questioning the size of the $1.9 trillion stimulus plan.

One could argue there is no better stimulus than getting the entire U.S. economy back open.

A plan will need to be approved by mid-March as unemployment benefits are due to expire.

Should the bill get trimmed back, it may help the bond market and rates, as it would likely lower inflation expectations. Some of the present fear in the bond market is the idea that a large stimulus package will exacerbate rising inflation pressures.

Bottom line: Home loan rates are still historically low. With all of the good news and more and more stimulus, we should expect rates to creep higher still. Now is a great time to take advantage of rates before we see an even further rise. 

Three Things to Know This Week

February 22, 2021jordanreedNews

Last Week in Review: Three Things to Know This Week


Longer-term U.S. interest rates, including home loan rates, increased sharply this past week, touching pre-COVID levels. Let’s break down the cause and effect as well as some other stories affecting housing.

January Retail Sales Highlight Pent up Consumer Demand

Retail Sales is a monthly report which highlights the health of the U.S. consumer and their willingness and ability to spend. With consumer spending making up nearly 70% of Gross Domestic Product (GDP), it is important to see continued growth in retail sales.

Expectations were for a month-over-month sales growth of 0.8%. Instead, the number came in at 5.3%, five times hotter than expectations. It also represented the third strongest month-over-month reading ever recorded.

This incredibly strong January Retail Sales number tells us economies re-opening and more stimulus will likely lead to an uptick in consumer spending and activity and higher GDP. All of this good news about the future is bad news for bonds, hence a reason for the uptick in rates this week.

New Home Builders Looking for Lumber Relief

The National Association of Home Builders (NAHB) continues to report unprecedented strong demand for homes as many tailwinds exist for new housing such as migration from big cities, work from home, and millennial household formation.

But home builders do have a challenge on their hands: lumber inflation. The cost of lumber is up over 170% in the past ten months, thereby adding thousands of dollars to the cost of a home and making it unaffordable for many. In fact, the NAHB said customers are walking away from contracts on new homes due to the additional lumber expense. Builders are reluctant to start new developments, as they are unwilling to start projects and absorb the added cost. This could be one reason why January Housing Starts, reported on Thursday, were well below expectations. Where is the relief? It could come through lumber tariff relaxation with Canada and a push for U.S. lumber producers to significantly ramp up production to put a dent in the demand.

Inflation, like we are seeing in lumber and other commodities, is bad for rates and another reason for the recent uptick in home loan rates.

Supply Outweighing Demand

The Federal Reserve has committed to purchase “at least” $120B worth of Treasurys ($80B) and mortgage-backed securities ($40B) (MBS) per month in an effort to keep long-term rates, like mortgages relatively low.

The recent problem? The Fed has been on a pace to purchase $30B in MBS each of the last couple of weeks, yet rates ticked UP. This is because nearly $100B in MBS were available for sale, and the Fed only purchased one third available.

So basic economics kicks in. If supply outweighs demand, prices drop and, in the case of bonds, rates tick higher.

Bottom line: There is an old saying in the bond market: “Cure for higher rates, is higher rates.” Meaning, at some point, the uptick in yields makes investing or buying bonds more attractive. We have not hit that point yet. 

Redesigned Uniform Residential Loan Application

February 18, 2021rashtonNews

The Redesigned URLA is Here

At the first of the year, Fannie Mae and Freddie Mac rolled out the redesigned Uniform Residential Loan Application (URLA), along with new automated underwriting system (AUS) specifications for DU and LPA.

Get the full rundown on the form updates, which aim to:

  • Help lenders more easily capture relevant loan application information
  • Support the exchange of data and digitize the loan origination process

On March 1, 2021, the new URLA becomes mandatory for agencies on all applications. But, we’re ahead of the curve, accepting electronic applications with the new form starting February 22nd, 2021. View this video to see the major changes so you are ready before the competition!

Watch the Video

 

Resources

Introduction to the New 1003 URLA

February 10, 2021rashtonNews

The Redesigned URLA is Here

At the first of the year, Fannie Mae and Freddie Mac rolled out the redesigned Uniform Residential Loan Application (URLA), along with new automated underwriting system (AUS) specifications for DU and LPA.

Get the full rundown on the form updates, which aim to:

  • Help lenders more easily capture relevant loan application information
  • Support the exchange of data and digitize the loan origination process

On March 1, 2021, the new URLA becomes mandatory for agencies on all applications. But, we’re ahead of the curve, accepting electronic applications with the new form starting February 26th, 2021. View this video to see the major changes so you are ready before the competition!

Watch the Video

 

Resources