A Median Sales Price Home in San Francisco Requires Minimum Qualifying Income Of … $309,400

Yes, the San Francisco Bay Area is quite pricey for housing. A peninsula (restricted area) with thriving technology companies (Facebook, Google, Apple, etc.), restrictive zoning and Uber-expensive construction costs result in a mondo-expensive home prices.

San Francisco requires $309,400 in MINIMUM qualify income to purchase a median sales priced house.


If we go down the peninsula to Los Altos Hills, we see available houses in the $2-40 million dollars range.

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Of course, Los Altos Hills is not the median for the SF Bay Area. It is the Bay Area equivalent of Beverly Hills, Bel Air and Westwood in Los Angeles (non-coastal).

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Needless to say, Fannie Mae and Freddie Mac do not buy mortgages from lenders in these areas. That is the province of jumbo lenders and securitizers like Redwood Mortgage Investors.




Double Shot! World Economy Haunted by Risk Just Got a Double Shot in the Arm (How Long Before Mortgage Rates Rise??)

Its a double shot of economic love!

(Bloomberg) — Two of the biggest hurdles constraining the world economyhave just been cleared.

Dogged for most of 2019 by trade tensions and political risk that hammered business confidence, the outlook for global growth will enter 2020 on a firmer footing after the U.S. and China struck a partial trade deal and outlook for Brexit cleared somewhat.

“The China trade deal and U.K. election result have taken out a major tail risk overhanging markets and companies,” said Ben Emons, managing director for global macro strategy at Medley Global Advisors in New York. “Business confidence should see a large boost that could see a restart of global investment, inventory rebuild and a resurgence of global trade volume.”

Like financial markets, most economists had factored in some kind of phase-one trade agreement between the world’s largest economies when projecting the world economy would stabilize into 2020 after a recession scare earlier this year.

But at a minimum, the agreement between President Donald Trump and President Xi Jinping means some of the more dire scenarios being contemplated just a few months ago now appear less likely. 

Bloomberg Economics estimated in June that the cost of the U.S.-China trade war could reach $1.2 trillion by 2021, with the impact spread across the Asian supply chain. That estimate was based on 25% tariffs on all U.S.-China trade and a 10% drop in stock markets.


Both the VIX and TYVIX are near historic lows.


With this bevy of good news, how long before residential mortgage rates rise??


Of course, forecasting is difficult … like forecasting your second wife.


Risky Mortgage Bonds Are Back and Delinquencies Are Piling Up (Bubble Alert??)

Subprime mortgages (that is, loans made to subprime borrowers) are like the dinosaur — extinct. But as Ian Malcolm said in the movie Jurassic Park … life finds a way. They simply morphed into a less-threatening sounding product: the non-qualified mortgage (NQF).

(Bloomberg) The subprime mortgage-backed bond may be dead in America a decade after it helped trigger the global financial crisis, but a security with some of the same high-risk characteristics is starting to take off.

It’s called the non-qualified mortgage — basically a loan granted to borrowers whose checkered financial record made them ineligible for conventional mortgages. Lenders have bundled more than $18 billion worth of these loans into bonds this year that they then sold to investors, a 44% increase from 2018 and the most for any year since the securities became common post-crisis.

This surge in issuance of non-QM bonds, as they’re called, comes just as some initial indications of delinquency rates on the loans are starting to emerge. The short answer: They’re high. About 3% to 5% in some bonds, according to Barclays Plc. That’s multiples of the current 0.7% delinquency rate on Fannie Mae loans.

And while no one is saying these bonds are in danger of defaulting any time soon, their newfound popularity does reflect the growing risk that yield-starved investors are taking to boost returns at a time when the U.S. economy is slowing. It’s similar to the way demand for junk bonds and securities backed by fast-food franchises and private credit have all surged this year. In the case of non-QM bonds, coupons on the debt can be north of 5%. A typical Fannie Mae mortgage bond sold nowadays has a coupon closer to 3.5%.

“It’s obviously disturbing this late in the cycle to see originations for these loans at the kind of level they’ve kicked up to,” said Daniel Alpert, managing partner at Westwood Capital. “The housing market is not quite ready for a big infusion of this product.

The non-QM bond market is for now, at least, way too small to cause the kind of broader disruptions that subprime bonds did when they soured en masse a decade ago. (That’s what she said!) Moreover, the bonds are built to withstand tougher housing downturns than they used to be, and the borrowers aren’t as risky. The securities may face some sort of hit if the housing market weakens, but it won’t be severe, Alpert said.

“It’s not the subprime we remember from 2006 to 2007,” said Mario Rivera, managing director of the Fortress Credit Funds business, which has bought non-QM bonds. “It’s more of a second or third inning of non-QM. We’re getting the best collateral before the more aggressive lending comes in.”

Issuance of bonds backed by non-qualified-mortgages is surging

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Source: Sifma, Bloomberg. Figures for 2019 are through Oct. 31

But fund managers’ willingness to plow money into these securities shows how the intense suspicion that met mortgage bonds after the housing bubble burst last decade is starting to slowly fade. The subprime mortgage crisis triggered hundreds of billions of dollars of losses for investors.

There are more than $27 billion of outstanding bonds backed by non-qualified mortgages now, a small fraction of the approximately $10 trillion mortgage-bond market. In 2007, there were around $1.8 trillion of bonds backed by loans to non-prime borrowers.

The “non-qualified” moniker refers to any mortgages that don’t meet rules from the Consumer Financial Protection Bureau that went into effect in 2014. Many investors and issuers expect the market for non-QM bonds to grow. A temporary rule that lets Fannie Mae and Freddie Mac buy some home loans that don’t meet all the qualified-mortgage rules is set to expire in 2021. That will result in more debt being available to be bundled into non-QM bonds. Redwood Trust Inc., which issues mortgage securities, estimated in May that some $185 billion of home loans bought by the government-backed agencies annually would be considered non-QM.

JPMorgan, Angel Oak

A handful of lenders, including JPMorgan Chase & Co., Angel Oak Capital Advisors and Caliber Home Loans have been making the non-qualified mortgages and bundling them into bonds.

Borrowers’ scores in non-QM bonds are typically lower than what’s seen in other mortgage securities without government backing, like credit-risk transfer securities. But the consumers typically have relatively small debt loads compared with their incomes and the value of their homes. In many recent deals, non-QM borrowers have average credit scores in the low to mid 700s, a level credit reporting groups generally deem “good” to “very good.” Subprime borrowers typically have scores of 660 or less.

The bonds themselves also have more safeguards for investors than they used to. According to a Fitch Ratings analysis, an average of 36% of principal would have to be lost before the top-rated slice took a hit. The cushion in crisis-era “alt-A” bonds with the same rating was just 6%.

“There’s a lot more cushion, as there should be,” said John Kerschner, head of U.S. securitized products at Janus Henderson Group Plc, which manages $360 billion. “You can get some comfort that even if defaults inch up, the losses from those defaults aren’t going to be egregious.”

Real Risk

But even if non-QM bonds aren’t toxic, they have real risks. Many borrowers with non-qualified mortgages offer lenders bank statements to verify income instead of more stringent tax returns. Fitch says such documentation may offer only partial verification, and these borrowers could have unstable income because, for example, they own small businesses.

Making  non-qualified mortgages can be legally riskier for lenders. If a borrower misses payments, and it turns out they shouldn’t have received the loan in the first place, they can sue the lender or even the securitization trust that owns the loan. Qualified mortgages have more legal protections for lenders and bondholders.

The strength of the housing market has helped support the bonds for now. Home-price appreciation has slowed over the past year, but the average U.S. house value still rose more than 2% in August from a year earlier, according to S&P CoreLogic Case-Shiller data. In a downturn similar to the financial crisis, when home prices contracted around 34% between 2006 and 2012, Barclays expects only the riskiest, lowest-rated portions of most non-QM bonds to lose money.

Home price growth is flattening after a rapid rise

That’s partly why Barclays says the top-rated portions of non-QM bonds are a good buy at current prices. (Famous last words!) The notes tend to pay down quickly, because borrowers refinance into more conventional mortgages when they can. And the securities offer higher yield relative to alternatives like credit-risk transfer bonds.

“At least for now, credit concerns for most non-QM deals should be modest for investors who purchase the investment grade-rated classes,” Barclays strategist Dennis Lee wrote in a note in September.

That is, as long as there isn’t a home price bubble that bursts like in 2008. Like the stock market could.




Wipeout! Will Fannie Mae And Freddie Mac Adopt A Good Bank/Bad Bank Model? (FHFA Director Calabria Open To Wiping Out Shareholders)

As FHFA Director Mark Calabria ponders putting Fannie Mae and Freddie Mac back in the “private” sector, one model that is being considered is the “good bank-bad bank” model.

Under the good bank-bad bank model, legacy assets would be transferred to the “bad bank” (rather than purely troubled assets).


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Fannie Mae has $3 trillion in loans on its books, much of it acquired after Fannie Mae was placed into conservatorship in Q4 2018.


Freddie Mac is similar, but smaller.


Legacy assets could be loan acquired prior to Q1 2009 that have not been refinanced or in default. Or sell off the stressed assets (orange and red) and keep the low risk loans (green).


Will there be an appetite for Fannie and Freddie legacy assets? Other than from The Federal government?

Good bank-bad bank. You know we’ve had our share.

And then we have FHFA Director Mark Calabria saying that he is open to wiping out existing Fannie Mae and Freddie Mac shareholders

WASHINGTON — At the second of two hearings to examine the Trump administration’s housing finance reform blueprint, key officials charged with implementing the plan made clear they are abundantly focused on Fannie Mae and Freddie Mac’s capital levels.

Members of the House Financial Services Committee were mostly concerned with issues that the administration proposal did not discuss. But Treasury Secretary Steven Mnuchin, Federal Housing Finance Agency Director Mark Calabria, and Housing and Urban Development Secretary Ben Carson offered additional insight on the process to end Fannie and Freddie’s conservatorships.

Calabria told the committee that he is open to wiping out shareholders of the government-sponsored enterprises, but he cautioned that “no decision has yet been made on moving forward.” He also hinted at a future rulemaking intended to shrink Fannie and Freddie’s footprints.

Shareholder Wipeout?



Natural Born (Volatility) Killers! ECB’s Draghi’s Low Volatility Legacy (Fed Also Kills Bond Volatility AND Term Premium)

The ECB under Draghi has been effective a depressing bond volatility and yields as he passes the torch to Christine Lagarde.

(Bloomberg) — Looking through the lens of rates market volatility, Mario Draghi has performed a masterclass in the art of keeping it very low. Incoming European Central Bank President Christine Lagarde will have a challenge to achieve the same effect as monetary policy nears its limits.

A successful central bank will aim to keep market volatility controlled by the predictability of its policy. Draghi has been in the business of keeping euro rates volatility suppressed, by communicating policy shifts effectively and deploying large-scale monetary easing.

Lagarde may find it harder to achieve a consensus on easing, inheriting a divided Governing Council. Policy makers disagree on whether more monetary stimulus is needed, and have voiced louder calls for fiscal policy to do more.

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Of course, The Federal Reserve is not too shabby about killing bond volatility.


Treasury note term premium (the amount by which the yield-to-maturity of a long-term bond exceeds that of a short-term bond) has been reduced to negative territory.


Yes, the ECB and Fed are natural born volatility killers.


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.”


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.



The Reasonabilists? Negative-yielding Debt Exceeds $17 TRILLION With Japan And France Leading In Negative-yield Issuance (Danish 10-year Fixed Mortgage Rates At -0.5%!)

It has been over 100 years since The Federal Reserve System was created by Congress in December 1913 and then signed into law by President Woodrow Wilson. Since its creation, the purchasing power of the US dollar for consumers has gone from $3.32 in December 1913 to $0.13 today.


Virtually even nation has a central bank and together they have helped push down sovereign yields into negative territory in the amount of > $17 TRILLION.

The global stock of negative-yielding debt is now in excess of $17 trillion as rising market volatility lends extra force to this year’s unprecedented bond rally.


Thirty percent of all investment-grade securities now bear sub-zero yields, meaning that investors who acquire the debt and hold it to maturity are guaranteed to make a loss. Yet buyers are still piling in, seeking to benefit from further increases in bond prices and favorable cross-currency hedging rates—or at least to avoid greater losses elsewhere.

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France is the leader in Europe at $2.3 trillion in negative-yielding sovereign debt. France’s 10-year sovereign debt bears a coupon of 0.50% at €109.004 and a yield of -0.408%.


Japan, of course, is the global leader in negative-yielding debt at $7.3 TRILLION.

Mortgage rates can be negative as well. Just ask the Danish bank Jyske Bank. Jyske is offering a 10-year fixed-rate mortgage (FRM) at … -0.5%.  Finland’s Nordea Bank is offering a 20-year FRM in Denmark at … 0%.

But wait! Who on earth would buy negative interest rate mortgage bonds? PIMCO, that’s who! 

But are negative mortgage rates reasonable? Or is Zorp the Surveyor approaching?

Zorp the surveyor.