US Average Hourly Earnings (3 Mo Avg) Highest Since President GWBush, Home Price Growth Lowest Since 2012 (Housing Bubble Redux?)

Unlike the housing bubble and “The Big Short” years of 2005-2007, when home price growth was greater than average hourly earnings growth, we are now in the opposite situation: slowing 2% YoY home price growth and the highest average hourly earnings growth rate since 2008 and President George W. Bush.

Home price growth is slowing …

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As average hourly earnings growth rises to its highest level since 2008 and George “Dubya” Bush.


Using a different home price growth index (FHFA Purchase Only) and an average hourly earnings for the majority of Americans, you can see where home price growth exceeds average hourly earnings growth starting in 1998 and ending in 2006 (the “Big Short” bubble) and the QE3-induced home price bubble starting in 2012 to today.

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Between HUD’s National Homeownership Strategy of 1995 and The Fed’s quantitative easing (particularly QE3). the US Federal government is doing the “housing bubble dance.”


Regulatory Arbitrage Alert! FHFA’s Calabria Ends G-Fee Discounts For High-volume Lenders Like Quicken

Recently Federal Housing Finance Agency Director Mark Calabria issued a directive ordering the end of the GSEs’ practice of guarantee fee discounts for high-volume lenders.

The Temporary Payroll Tax Cut Continuation Act of 2011 required the FHFA director, in setting guaranty fees, to:

  • “provide for uniform pricing among lenders;” and
  • “provide for adjustments in pricing based on risk levels.

From my FNAN 432 class at George Mason University using Python to analyze Freddie Mac’s Q4 2017 online mortgage data,

All Data Average St. Deviation
FICO 748 110
LTV 74 16
DTI 35 10
Count of Quicken loans: 18,261 (about 6% of all the loans)
Quicken Average St. Deviation
FICO 730 50
LTV 71 15
DTI 36 10

Quicken has the lowest FICO (credit) scores of lenders selling loans to Freddie Mac and lower LTV and higher DTI than the rest of the pack.

Yes, as lenders try to avoid regulatory burdens, lenders like Quicken originate loans and sell to Fannie Mae and Freddie Mac, we may see a change in Fannie and Freddie’s loan purchases from non-bank, high volume lenders.

My students will have an update on Fannie Mae loan purchases by Monday.

It’s Always Sunny at GMU School of Business using Python in my class! 


Rollercoaster! Mortgage Refi Wave Seems Over As Refi Apps Decline 15% WoW

Refi rollercoaster!

US home mortgage rates fell from almost 5% in November 2018 to 3.5% in September 2019 before rising a bit. This spurred a “refi wave” since late November 2018.

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But the refi party seems to have ended (for the moment).

Mortgage applications decreased 10.1 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 20, 2019.

The Refinance Index decreased 15 percent from the previous week and was 104 percent higher than the same week one year ago.

Yes, the “refi wave” seems over as


The seasonally adjusted Purchase Index decreased 3 percent from one week earlier. The unadjusted Purchase Index decreased 4 percent compared with the previous week and was 9 percent higher than the same week one year ago.

Now, as Democrats in the US House of Representatives undertake their impeachment of President Trump in part for not releasing the transcript of his call with the Ukrainian President Zelenskyy (that has been released), it will likely lead to an increase in Treasury Note 10y prices and a decline in yields (and mortgage rates) as Democrats focus on impeachment and stonewall any attempts at a trade agreement with China.


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Slow Down! Home Price Growth Slowest In 7 Years (Seattle Negative, Phoenix Fastest Growing), Manhattan Retains Crown With Highest Rents

According to the S&P CoreLogic Case-Shiller home price index for July, home prices grew at the slowest past in 7 years.


While the CS 20-city index rose at only 2% YoY, the broader US index rate at 3.18% indicating that smaller markets are seeing faster growth.


In YoY terms, Phoenix AZ leads the nation at 5.8% with Seattle in last place at -0.6%.

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While New York has almost 0% growth in home prices, Manhattan has the highest rents in the USA.

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Yes, it is a Slow Down in US home prices.


The Big Squeeze! GC Repo Rate Crashes To 0% Amid Liquidity Squeeze And The Fed’s $53.2 Billion Flood Of Liquidity


(Bloomberg) — The Federal Reserve took action to calm money markets on Tuesday, injecting billions in cash to quell a surge in short-term rates that was pushing up its policy benchmark rate and threatening to drive up borrowing costs for companies and consumers.

While the spike wasn’t evidence of any sort of imminent financial crisis, it highlighted how the Fed was losing control over short-term lending, one of its key tools for implementing monetary policy. It also indicated Wall Street is struggling to absorb record sales of Treasury debt to fund a swelling U.S. budget deficit. What’s more, many dealers have curtailed trading because of safeguards implemented after the 2008 crisis, making these markets more prone to volatility.

Money markets saw funding shortages Monday and Tuesday, driving the rate on one-day loans backed by Treasury bonds — known as repurchase agreements, or repos — as high as 10%, about four times greater than last week’s levels, according to ICAP data.

More importantly, the turmoil in the repo market caused a key benchmark for policy makers — known as the effective fed funds rate — to jump to 2.25%, an increase that, if left unchecked, could have started impacting broader borrowing costs in the economy. Because that’s at the top of the range where Fed officials want the rate to be, they are likely to make yet another tweak to a key part of their policy tool set to try to get things back on track when they meet Wednesday to set benchmark rates.

But the central bank didn’t wait until then to do something, resorting to a money-market operation it hasn’t deployed in a decade. The New York Fed bought $53.2 billion of securities on Tuesday, hoping to quell the liquidity squeeze. It appeared to help. For instance, the cost to borrow dollars for one week while lending euros retreated after almost doubling Monday.

For repo traders, hedge funds and others that rely on that market for financing, this intervention came none too soon.

A bit of an overshoot?


And something that went unnoticed by many …

The New York Fed bought $3.001b of T-bills in the secondary market Tuesday as part of its planned reinvestment purchases.


Yes, it is The Big Squeeze (not to confused with The Big Short).


What up with that?


The Big Short: Part Deux? US Home Prices Slow As Wage Growth Highest Since Early 2009 (Tiny Bubble OR BIG Bubble?)

No matter which US home price index you choose, US home prices have risen above the peak of the housing bubble in April 2007 (as highlighted in the book and film “The Big Short”).

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Thanks to relaxed credit standards, including the infamous NINJA (no income, no job) loans, the US saw a steady and increasing growth in mortgage credit and a corresponding growth in home price growth … until 2005. Then the bottom fell out out the housing market.

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Today, we are witnessing a slowing of home price growth even as earnings growth is at its highest level since early 2009.  The last time we saw home price growth and earnings growth so in alignment was back in the 1995-1998 period following the enactment of HUD’s National Homeownership Strategy. 

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The big difference between the 2000s housing bubble and today’s housing bubble is that the 2000s housing bubble was driven by subprime and ALT-A credit. But today’s housing bubble is in part driven by foreign investors on both the west and east coasts, not to mention the Federal Reserves low interest-rate policies. And we are seeing a softening of credit standards from Fannie Mae and Freddie Mac.


And Fannie and Freddie’s debt-to-income (DTI) is rising to 2008 (financial crisis levels).


So does the US have a tiny bubble? Or a big bubble?


Briar Patch: Wells Fargo, Bank of America, Quicken Loans, Others Want DTI Requirement Eliminated From QM Lending Rules

Yes, the patch for Fannie Mae and Freddie Mac from the Consumer Financial Protect Bureau (CFPB) gives some lenders an advantage over other lenders since F&F aren’t covered by the QM’s debt-to-income requirement.

Housing Wire — Four of the largest mortgage lenders in the country are leading a coalition that is calling on the Consumer Financial Protection Bureau to make to changes to the Ability to Repay/Qualified Mortgage rule.

Specifically, the group, which includes Bank of America, Quicken Loans, Wells Fargo, and Caliber Home Loans, wants the CFPB to do away with the QM rule’s debt-to-income ratio requirement.

The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them the money.

The rule also includes a stipulation that a borrower’s monthly debt-to-income ratio cannot exceed 43%, but that condition does not apply to loans backed by the government (Federal Housing Administration, Department of Veterans Affairs, or Department of Agriculture).

Additionally, Fannie Mae and Freddie Mac are not bound this requirement either, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie or Freddie are allowed to exceed to the 43% DTI ratio.

But some in the mortgage industry, including Federal Housing Finance Agency Director Mark Calabria, believe that the QM Patch gave Fannie and Freddie an unfair advantage because loans sold to them did not have to play by the same rules as loans backed by private capital.

But the QM Patch is due to expire in 2021, and earlier this year, the CFPB moved to officially do away with the QM Patch on its stated expiration date.

And now, a group of four of the 10 largest lenders in the country are joining with some sizable trade and special interest groups to call on the CFPB to make changes to the QM rule in conjunction with allowing the QM Patch to expire.

This week, Wells Fargo, Bank of America, Quicken Loans, and Caliber Home Loans joined with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others to send a letter to the CFPB, asking the bureau to eliminate the 43% DTI cap on “prime and near-prime loans.”

As the group states, a recent analysis by CoreLogic’s Pete Carroll showed that the QM patch accounted for 16% of all mortgage originations in 2018, comprising $260 billion in loans.

But the group notes that the QM Patch (or GSE Patch, as they groups refer to it as in their letter) has limited borrowers’ options for getting a mortgage. And the group believes that removing the DTI cap will allow for a responsible expansion of lending practices.

Of course, lenders can always avoid the patch by selling originated loans to Fannie Mae and Freddie Mac.

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Laurie Goodman at the Urban Institute has argued that the DTI ratio is misleading. But it is clear from the above chart (produced by George Mason University School of Business  finance students) that average DTI has been rising since 2012.

CFPB’s “patch” or briar patch is a form of regulatory arbitrage since lenders can evade regulations but selling loans to Fannie Mae and Freddie Mac.


Big Feet! Fannie, Freddie Soar as Hedge Funds Get Good News on Two Fronts (GSEs + FHA/VA Account For 63% Of Single Family Mortgage Debt Outstanding)

Fannie Mae and Freddie Mac were placed into conservatorship in September 2008, so it has been over ten years after that they may be finally released from conservatorship with their regulator, FHFA. So, Fannie and Freddie may be going home … to the private market.

(Bloomberg) — Fannie Mae and Freddie Mac soared as hedge funds and other investors that have long hoped to make a windfall on their investments in the mortgage giants got a double-dose of good news.

First, shareholders won an important legal victory after markets closed Sept. 6 that gave them renewed optimism of getting their hands on billions of dollars in company profits that now go to the government.

Then, Treasury Secretary Steven Mnuchin said Monday that he will soon reach a deal that allows Fannie and Freddie to hold on to some of their earnings, so they can start rebuilding their capital buffers.

The step is considered crucial in eventually freeing the companies from federal control, which has been their status since the 2008 financial crisis. That’s because Fannie and Freddie are currently restricted from holding more than $3 billion in capital apiece, far short of what they would need to weather another housing crash as private companies.

Fannie jumped 26% to $3.42 as of 11:23 am in New York trading, reaching its highest level since Feb. 2017. Freddie rose 25% to $3.22, also its highest level in more than two years.

Among investors benefiting from the gains are some of the biggest names in finance, including John Paulson, Bill Ackman’s Pershing Square Capital Management and Blackstone Group Inc.

Treasury is “in the process of negotiating” a plan for Fannie and Freddie to retain earnings with the Federal Finance Housing Agency, Fannie and Freddie’s regulator, Mnuchin said early Monday in an interview with Fox Business “We expect a near-term agreement to retain their earnings,” he said.

Revamping Sweep
For Fannie and Freddie to hold on to their earnings, Treasury and FHFA would have to halt or revamp a controversial policy implemented in 2012 during the Obama administration, known as the net worth sweep, that requires the companies to send virtually all their profits to the Treasury.

Hedge funds and other investors that own Fannie and Freddie shares have long fought to end the sweep through litigation, claiming it was illegal. The shareholders won a big victory Sept. 6 when a panel of federal appeals court judges overturned a lower ruling that had backed the government’s right to take all of the mortgage giants’ profits.

The Fifth Circuit appeals court judges, based in New Orleans, also concluded last week that the structure of the FHFA is unconstitutional. Investors still face many hurdles, as the decision just kicks the case back to the lower court. Many other federal courts have ruled against the shareholders, making it more likely that an appeal could ultimately be heard by the Supreme Court if the case isn’t settled before then.

Litigating Shareholders
Fannie and Freddie don’t lend money to home buyers. Instead, they purchase mortgages from banks and other lenders and package them into bonds. Those securities have guarantees that protect investors from the risk of borrowers defaulting. Fannie and Freddie backstop nearly half of the U.S.’s $10 trillion of home loans, a process that keeps the mortgage market harming and borrowing rates low.

Fannie and Freddie were put into federal conservatorship in 2008 as the housing market cratered and were sustained by taxpayer aid. They have since started making money again and paid $115 billion more in dividends to the Treasury, through the net profit sweep, than they received in bailout funds.

Assuming that Fannie and Freddie would eventually released, hedge funds started buying their shares for pennies in the years after the crisis. Paulson & Co., Pershing Square and Blackstone Group’s GSO Capital were among those who got in on the trade.

Until now, shareholders have mostly suffered setbacks in their attempts to overturn the profits sweep. Their Sept. 6 win follows what also might be a watershed moment in Fannie and Freddie getting out of the government’s grip: the release of a Treasury report a day earlier that outlines the Trump administration’s plan to end the conservatorships.

Treasury Report
The Treasury document laid out dozens of suggested reforms to protect Fannie and Freddie from another housing crash, shrink their dominant market shares and create new competitors to the companies. Yet, it is only an initial step in what still would be a long and arduous road to freeing the companies from the government’s grip.

The Treasury Department’s proposal left much to be ironed out, signaling many of the suggested changes may not come until after the 2020 presidential election. And if a Democrat beats President Donald Trump next year, the overhaul would likely be scrapped all together.

Mnuchin said Monday that while he hopes to work with Congress to implement changes to Fannie and Freddie over the next three to six months, he is “perfectly comfortable” making administrative fixes if necessary. Only Congress can create competitors to Fannie and Freddie. But there is much the Trump administration can do on its own with FHFA, including ending the profit sweep.

The Treasury secretary will testify tomorrow on the administration’s plan before the Senate Banking Committee. Joining Mnuchin will be FHFA Director Mark Calabria and Housing and Urban Development Secretary Ben Carson.

The officials are expected to face aggressive push back for Democratic lawmakers, who are concerned that the administration’s proposals will do more to help hedge funds than assist consumers in getting loans, particularly lower-income buyers.

Both Fannie Mae and Freddie Mac saw a surge in their equity price on the news.



The GSEs Fannie and Freddie account for nearly 44% of single-family mortgage debt outstanding. Note that GSEs and the Federal government (mostly FHA) jointly account for  63% of mortgage debt.

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Note that after the financial crisis, the FHFA Director Edward DeMarco and FHA Commission David Stevens promised to shrink the footprints of government lending/insurance. Yet they both rose in footprint size.

Here is Treasury’s report on Housing Finance Reform. While it seems to seek a shrinking government footprint, history teaches us that the big foot of government only increases.



Mortgage Purchase Applications Back To 1998 Levels As Mortgage Refi Applications Slow A Bit From Refi Wave

If you have recently applied for a mortgage refinancing given plunging mortgage rates, you may have noticed a delay in the underwriting. Why? US lenders are in the midst of a “refi wave” and some lenders are swamped with work, particularly underwriters.

Mortgage applications decreased 6.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending August 23, 2019.

The Refinance Index decreased 8 percent from the previous week and was 167 percent higher than the same week one year ago. The seasonally adjusted Purchase Index decreased 4 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 2 percent higher than the same week one year ago.


The 30 year mortgage rate has been generally falling since November 2018 as European (Brexit) and Asian (China trade) pressures have increased. As a consequence, we have seen a “refi wave” in 2019.


Mortgage purchase applications have risen gradually since 2014, but litigation against lenders and rules created under the Consumer Financial Protection Bureau (CFPB) resulted in mortgage purchase applications at 1998 levels.


A refi wave can feel like surfing at Nazare in Portugal.


Mortgage Market Reopens to Risky Borrowers (Strict Lending Requirements Put In Place After Financial Crisis Are Starting To Erode)

This is a surprising story …. NOT!

(Wall Street Journal) The risky mortgage is making a comeback.

More than a decade after home loans triggered the worst financial crisis in a generation, the strict lending requirements put in place during its aftermath are starting to erode. Home buyers with low credit scores or high debt levels as well as those lacking traditional employment are finding it easier to get credit.

The loans have been rebranded. Largely gone are the monikers subprime and Alt-A, a type of mortgage that earned the nickname “liar loan” because so many borrowers faked their income and assets. Now they are called non-qualified, or non-QM, because they don’t comply with post-crisis standards set by the Consumer Financial Protection Bureau for preventing borrowers from getting loans they can’t afford.

Borrowers took out $45 billion of these unconventional loans in 2018, the most in a decade, and origination is on track to rise again in 2019, according to Inside Mortgage Finance, an industry research group. Such mortgages aren’t guaranteed by government agencies and typically charge higher interest rates than conventional loans.

Proponents of unconventional loans argue that mortgages became too hard to get in the aftermath of the crisis and that their proliferation will open the housing market to sound borrowers who had been shut out of it. But some worry that the competition for customers could drive lenders to loosen standards too much.

Right now, unconventional loans are largely being extended by nonbank mortgage lenders. But big banks have found another way in: JPMorgan Chase & Co., Credit Suisse Group AG and Citigroup Inc. have in recent months been arranging mortgage bonds backed by unconventional loans.

Some $2.5 billion worth of subprime loans, those with FICO credit scores below 690, ended up in mortgage bonds in the first quarter of 2019. That is more than double a year earlier and the highest level since the end of 2007, according to Inside Mortgage Finance. There was $1.9 billion worth of subprime mortgage bonds in the second quarter.

Fannie Mae and Freddie Mac (FF) back about half of new mortgages in the U.S. 

Actually, it is no surprise to learn that credit standards have been eroding.

FF are seeing debt-to-income (DTI) ratios rising again (back to 2005/2006)/

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Average credit (FICO) scores have been declining since 2012.

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While DTI and FICO are eroding in terms of credit quality, average LTV is higher now than during the housing bubble era of 2005-2007. That is called “chasing risk.”

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Let’s see how FF behave after the “patch” is lifted.