Despite Mortgage Rate Declines, Mortgage Purchase Applications Fall With Smokin’ Home Price Growth (What Will The Fed Do?)

While the Fed’s Jackson Hole meeting is going on, the Mortgage Bankers Association released their weekly applications data. Mortgage purchase applications fell -1.6% from the previous week. But look at the following chart.

With smokin’ home price growth, we are seeing a decline in mortgage purchase applications.

But at least mortgage refinancing applications are up 9.27% from the previous week as the MBA contract rate fell from 3.11% to 3.01%.

Is The Fed paying attention? Or riding jackalopes in Jackson Hole?

Wells Fargo’s 41.44% Earnings Surprise In Q2 Despite Lower Lending And Higher Deposits (The New [Ab]Normal?)

Is this the new normal for banking? A big 4 bank actually had a huge upside earning … on declining lending??

Yes, Wells Fargo had a 41.44% earnings surprise on July 14, 2021.

Wells Fargo Earnings Per Share (EPS) plunged during the March 2020 Covid outbreak, but has been recovering … in terms of EPS and share price.

Wells Fargo is seeing booming deposits (green) at virtually zero deposit rates while loans have fallen (green). The recent widening between deposit and loans is in the pink box while the general widening has taken place since Q4 2010.

Total loans to total assets (white) has been falling since The Financial Crisis and housing bubble burst.

Wells Fargo’s total risk based capital ratio dramatically increased after the financial crisis, as it did for all banks.

O-ho the Wells Fargo Wagon is a-comin’ down the street, but to collect deposits and make fewer loans.

Ya got trouble right here in DC city.

Divergence! Latest Bank Data Reveals Something Is Terminally Broken In The US Financial System

All I can say is “Yikes!!” Something is broken in the US financial system.

As I have discussed before, bank deposits are soaring while loan demand is … not.

The recent banking data shows a slowdown YoY in bank deposits, but also shows negative loan and lease growth at banks.

Residential mortgage growth is negative YoY. At least commercial mortgage lending is still growing, albeit at a lower rate.

Speaking of something being broken …

Powell and Yellen are probably screaming “Give our creation life!!!!!”

Yikes! Something happening.

Slowdown! Bank Lending Slows Since Fed 2020 Intervention And The Rise Of Reverse Repos (Inflation And Bubble Fears)

There is a slowdown in bank lending since The Fed’s intervention in March 2020.

Bank credit has slowed since March 2021 resulting in banks parking money with The Federal Reserve in the form of reverse repos.

Loans and leases are experiencing negative growth rates.

Residential real estate loans are also experiencing negative growth rates and a corresponding rise in reverse repo usage.

Commercial real estate lending remains in positive territory.

Commercial and industrial loans? Also experiencing negative growth rates.

Clearly, banks are nervous about inflation since lending at fixed-rates in an inflationary environment is bad news.

Not to mention fears of asset bubbles that can burst. House prices growing at 14.6% YoY and the S&P 500 stock market index growing at 34.2% YoY.

Treasury Secretary Janet Yellen says she is concerned about rapidly rising housing prices, but says inflation will calm.

Perhaps Yellen will click her heels together three times to make inflation calm.

Milton says hello!

UMich Sentiment Declines In July As Inflation Expectations Hits 4.8% (Highest Since 2008), Buying Conditions For Housing Plunges

The University of Michigan consumer survey was released this morning and revealed that their consumer sentiment index fell to 80.8 (the index was around 100 prior to the Covid outbreak in March 2020).

Inflation expectations for the coming 12 months soared to 4.8%.

UMi buying conditions for housing has collapsed (but the measure is lagged one month). House price inflation is running at 14.59% YoY making housing less affordable. Hence, lower consumer sentiment for housing.

Treasury Secretary Janet Yellen and Federal Reserve Chair Jerome Powell are slated to discuss the hot U.S. housing market and the risks it could pose to the financial system at a meeting with fellow regulators on Friday.

The aim of the closed-door session: To make sure the U.S. is not vulnerable to a crisis akin to the one it suffered more than a dozen years ago, when the bursting of a property-price bubble drove top banks to the brink of insolvency and the economy into a deep recession.

The meeting of the Financial Stability Oversight Council, or FSOC, that’s headed by Yellen will come on the heels of two days of testimony by Powell to Congress on the Fed’s semi-annual monetary policy report.

Better late than never?

Milton says hi!

Wall Street’s Math Whizzes Are Racing to Wire Up the Bond Market (Fed Created Debt Glut With Their ZIRP Policies)

When I worked at Deutsche Bank in New York City, we had an electronic bond trading system called “Autobahn.” A high speed electronic bond trading platform analogous to the German Autobahn highway system.

(Bloomberg) — For years, David Horowitz at Agilon Capital was a rare breed in the bond market: a quant in a notoriously old-school business where prices were a call rather than a click away.

Sixteen months of the pandemic is changing all that.

The work-from-home era is fueling a surge in electronic bond trading that gives the likes of Horowitz conviction a long-augured quant revolution is finally ready to sweep the debt world.

Long credit positions held by quants have doubled since 2018 according to Man Group data, outpacing the 20% growth for other asset managers as systematic players seize on the rapid market modernization — like they did in stocks years ago.

“Credit is going through a similar evolution,” said Horowitz, who led the pioneering systematic credit team at BlackRock Inc. before starting his own$290 million fund. “As we become more electronified we should expect the same sorts of forces to come into play.”

Quants have been saying that for years of course, only to have their math-based models frustrated by the cumbersome and complex debt world. The difference now is that they may have a market liquid and transparent enough to accommodate their constant churn.

Electronic venues like MarketAxess and TradeWeb accounted for 37% of investment-grade and 26% of high-yield trading in May, 8 percentage points higher than the year before, Coalition Greenwich data show.

That sets up a virtuous circle, where banks roll out more algorithms to price more bonds. Throw in a year of record flows into credit exchange-traded funds, and a broad swath of securities is becoming easier to trade vital for a cohort which typically holds hundreds of positions and trades more often than an average fund.

It’s helped answer the question of ‘will we be able to trade this tomorrow?’” said Paul Kamenski, co-head of credit at the quant firm Man Numeric.

Liquidity in the bond market has long been fragmented by its very nature — companies generally issue multiple bonds. That means quants might see their models spit out a dream portfolio but have to adjust it based on what can actually be traded, Kamenski said.

“We had to try to do things that were less natural in quant strategies,” such as trading in larger sizes or catering to dealer inventories, he said. “It’s still hard today, but it’s become more manageable.”

That doesn’t necessarily mean the whole market is suddenly highly liquid — gripes about how hard it is to offload large blocks are everywhere.

But it’s become easier to move smaller sizes and figure out where each bond is trading, which helps detect signals and cut transaction costs, Horowitz said.

Over at banks’ trading desks, Asita Anche at Barclays Plc has seen a jump in algo usage, especially to execute small trades. But she stresses that humans are still essential in fixed income since liquidity is more fragmented than in equities and it’s harder to manage risk.

“The future is not algos taking flows away from humans,” said the head of systematic market making and data science. “It’s humans enhanced by algos and automation.”

With that in mind, Anche is building algos and data analytics for voice traders, and even a recommendation engine akin to Netflix’s that finds similar securities to what a client wants to trade.

Bond quants remain a tiny minority — those long positions total around $23 billion, Man Group says, versus $537 billion for other managers. And the systematic bunch operates a range of strategies, from equity-style factors like value or momentum to arbitrage or trades based on moves in an issuer’s stock.

That all makes performance hard to judge and data is scarce. A Premialab index of systematic credit strategies built by investment banks lost 5% over the past three years of rising markets and gained nearly 3% in 2021. Among global bond mutual funds, quants trailed other investors on a three-year horizon, eVestment data show.

Nonetheless, the rise of electronic trading in equities minted billions for quants and reordered the market. Many bond players are predicting a similar trajectory for their asset class, with the bonus pitch that the kind of crowding that has undermined stock strategies is a long way off.

I’ve been doing this for 20-odd years and for most of that, doing this type of systematic credit — people wouldn’t even know what I’m talking about,” said Horowitz at Agilon. “Credit is still very much in its early innings.”

With massive Federal spending, Federal debt issuance is going to continue to explode. As will agency MBS.

Ever since 2008 and the dramatically increased presence of The Federal Reserve in markets, and particularly since the March 2020 Covid outbreak, we have seen record increases YoY in corporate debt, US public debt (aka, Treasury debt) and agency mortgage-backed securities.

Corporate debt issuance was negligible since the housing bubble years of 2002-2007, but has been relatively constant since Q4 2007 and surged to over 10% in Q2 2020.

With continued zero interest rate policies from The Fed, debt issuance will continue at break-neck speeds. It is only logical that bond quant strategies and electronic credit trading grow.

Speaking of corporate bonds, here is a graph of US corporate bond yields against modified duration.

And here is US corporate bond yield against duration sorted by bond coupon.

Freddie’s 30Y Mortgage Rate Drops To 2.90% (Pre-Covid February Level) As Fed Keeps Purchasing Agency MBS Amid Vanishing Low-end Housing

Freddie Mac’s 30-year mortgage rate index fell to 2.90% as The Fed keeps buying agency mortgage-backed securities.

As The Fed helps to lower mortgage rates, the supply of low-end housing keeps vanishing. Particularly out west for houses less than $250,000.

Throwing gas on a housing fire isn’t a great idea with limited inventory of houses, particularly for starter homes. The Fed is not operating for the benefit of lower-income home buyers.

The Fed isn’t fixing a hole, its creating a bigger hole in home affordability.

US Job Openings Rise 9.2 MILLION And Declining Labor Force Participation? (Mortgage Purchase Applications In Decline With Rising Job Openings)

Ain’t this a kick in the head.

The job openings data was released this morning and we found out that 9.2 million jobs were added!! But at the same time, we saw DECLINE in labor force participation in last month’s jobs report.

It seems something is broken. Likely numerous states still payment extraordinary unemployment benefits and this is preventing a surge in labor force participation.

So, why does The Fed keeps its foot on the accelerator pedal??

And really has never slowed much since The Great Recession and housing bubble burst?

Here is a chart of mortgage purchase application SA against jobs added and labor force participation. Mortgage purchase applications are falling despite a huge surge in job openings.

Ah, uncontrollable home price increases! Yes, housing is becoming unaffordable for those who are renting or just entering the housing market for the first time.

The Fed, on the one hand, is creating asset bubbles and the Biden Administration essentially paying people not to work, but then worries why more households are going along for the house price ride.

“Biden’s new dilemma: How to slash housing costs for low-income borrowers” Answer? Lower credit standards for low-income households for loans purchased by Fannie Mae and Freddie Mac.

Fannie And Freddie Investors Spanked By US Supreme Court (Will Biden Replace Calabria?)

(Bloomberg) — The U.S. Supreme Court dealt a blow to Fannie Mae and Freddie Mac investors in their challenge to the government’s collection of more than $100 billion in profits from the government-sponsored enterprises.

The justices threw out a core part of the investors’ lawsuit, rejecting claims that the Federal Housing Finance Agency exceeded its authority under federal law.

Common shares of Fannie Mae slumped as much as 42% and those of Freddie Mac plunged 44%, both posting their steepest intraday declines since October 2014. Fannie Mae was down 36% as of 11:05 a.m. in New York. Freddie Mac sunk 37%.

The court said investors might be able to win damages on a separate claim that some payments under the so-called profit sweep were illegal because the FHFA director was unconstitutionally insulated from being fired by the president. But the justices said they wouldn’t use that claim to toss out the entire profit sweep.

The justices sent the case back to the lower-court level, where the investors will have a chance to show they were harmed by the lack of presidential control over FHFA directors who implemented the agreements. But it means shareholders “can’t recover the bulk of the overpayments they sought,” said Bloomberg Intelligence analyst Elliot Stein.

The decision is a setback for firms including Paulson & Co., Pershing Square Capital Management and Fairholme Funds Inc. that have sought for years to persuade the government to release Fannie and Freddie from government control, thereby earning billions of dollars on their shares.

The ruling means President Joe Biden will be able to oust Mark Calabria, the FHFA director and an advocate for releasing the mortgage giants from government control. Biden will face pressure to remove Calabria and put in his place someone more likely to allow Fannie and Freddie to ease mortgage credit.

Here are Fannie and Freddie’s stock prices after The Supremes ruled against the contention that their regulator, FHFA, exceeded their authority.

Here I am testifying with FHFA’s Mark Calabria on housing finance in front of Congressman Barney Frank (D-MA).

FHFA Director Mark Calabria’s Statement on the U.S. Supreme Court’s Collins v. Yellen Decision

“I respect the Supreme Court’s decision and the authority of the President to remove the Federal Housing Finance Agency Director.

It has been the honor of a lifetime to serve as Director of the Federal Housing Finance Agency alongside world-class staff. During my tenure, FHFA has fulfilled its mission as the economy fluctuated from record-low unemployment and a strong housing market, to a pandemic-triggered recession that spared house prices but contracted supply. Through this cycle, FHFA has acted quickly and effectively to provide relief to homeowners and renters impacted by the COVID-19 pandemic, and to ensure Fannie Mae, Freddie Mac, and the Federal Home Loan Bank System operate in a safe and sound manner, all while supporting historic growth in homeownership, especially among minority households.

However, much work remains. When the housing markets experience a significant downturn, Fannie Mae and Freddie Mac will fail at their current capital levels. I wish my successor all the best in fixing the remaining flaws of the housing finance system in order to preserve homeownership opportunities for all Americans.”

— Director Mark Calabria