Daily Quote: Discipline is the bridge between goals and achievement. - Jim Rohn

        (Note: If you don’t know Jim Rohn’s teachings you’re probably not the best version of your professional self.)


The Fed Giveth and the Fed Taketh Away…

The Fed raised rates yesterday and reiterated their desire to increase the Fed Funds target an additional two times this year if economic activity continues at its current pace.  I know…old news and something you’re already aware of.  But what you might not be aware of, and what’s critically important to interest rates from now until the Fed’s next meeting in June, are the following 4 items and please pay close attention to #4:

  1. Forecast: The Fed’s median forecast for economic growth this year (i.e. GDP growth), what they call the “Dot Plot”, remains at a muted 1.8%.  This is far from the 3% growth target the Trump administration is aiming for.
  2. Inflation: Their inflation estimates remain within an acceptable range (~2%) which means they don’t foresee any real chance in price instability.  (Granted they leave out everything you need to eat, drive and heat your home but that’s another story)
  3. Approach: The Fed doesn’t much care about rhetoric coming out of DC in terms of tax cuts and deregulation which will spur economic activity.  They look forward to it happening but they’re waiting to see the whites of the eyes of legislation before considering it as a factor to increase rates further.
  4. Purchases:  In my limited opinion the single most significantly good thing which came out of the Janet Yellen’s press conference was the discussion around whether they would maintain their purchase of Treasury and Mortgage-Backed Securities.  For those who aren’t aware the Fed has about $4.2 Trillion (Yes…trillion with a T) Treasury and MBS on its balance sheet.  Each month some of these securities mature, pay down principle and kick off interest.  The Fed has been reinvesting these monthly cashflows back into the same securities they own.  This helps keep a strong bid in both Treasury and MBS markets (meaning it helps the Mortgage Participant and Borrower).  If the Fed were to stop reinvesting, or Heaven forbid if they decided to begin liquidating this huge position, it could have disastrous consequences for our markets.  In essence, the Taper Tantrum of 2015 would look like a walk in the park compared to this.  So although most Folks aren’t looking at this closely I’m here to tell you this is as important as it gets. Luckily, thankfully, fortunately, happily, mercifully, gratefully, appreciatively (I think you get the point) the Fed seems content to continue their current practice of holding their portfolio AND reinvesting interest and principle repayments.


So What Does This Mean For Mortgage Participants?

We wait until we get closer to the June FOMC meeting and keep our eyes on items which we know the Fed is looking for.  Inflation, growth, global concerns and legislation which can change the Fed’s “Dot Plot” and therefore effect monetary policy.  I promise you that if you all focus on originations and providing exceptional service to your internal and external customers I’ll do the more tedious work of making sure we’re ready for any eventual change in the operating environment. Deal?

Daily Quote: The moment you are ready to quit is usually the moment right before a miracle happens. Don't give up.

You Know Things Are Different When…

You know things are different when big money is now more afraid of a weak Employment Situation Report (aka Jobs Friday release) then a strong one.  Let me explain.  Remember the days when the economic nerd in you would sit around the TV the 1st Friday morning of each month, precisely at 8:30 a.m., and wait for CNBC to release the latest jobs report?  Do you remember what you and most other Mortgage Participants were praying for?  I’ll remind you.  You were praying for a weak jobs number so the Federal Reserve would either increase or at a bare minimum maintain their current easy monetary policy stance so mortgage rates would (hopefully) go lower.  Ringing a bell yet?

Well today is one of the first times I can remember where you could almost feel the entire market praying for the opposite of that.  The world has grown tired of a weaker-than-expected economic growth, tired of having to rely on Fed stimulus, and is yearning for a return of the Goldilocks times when the US economy could stand on its own but rates and inflation were still low enough to make financing affordable and stock valuations reasonable.  

Well the market got what it wanted today.  Between Wednesday’s very strong ADP private payroll report and today’s favorable jobs report (which included a 0.2% increase in income) the market seems content.  We got enough evidence of growth to keep the animal spirits interested but not so much evidence of growth to be concerned with runaway inflation(or stagflation). 

Trust me when I tell you this is exactly what Mortgage Participants want too.  Yearn all you want for a return of the refinance market but I got to tell my friend…it ain’t coming back anytime soon.  So recognizing that your operating environment has permanently changed now ask yourself the same question – “What kind of Jobs report would I like to see?”  Your answer should be something like this: “I’d like a jobs report strong enough to make the average consumer living in an apartment, in their parents basement, graduating from college, or returning from the military strong enough to make buying a new home something I feel confident in being able to do.”  Trust me once again when I say this is far, far better for us all than living at the mercy of a refinance market that went on far too long.  Jobs are far more important to home ownership than interest rates!

So What Does This Mean For Mortgage Participants?

It means that despite an end to the “Halcyon Days of Refi”, when you could fill any purchase production gap with a slew of refinances, we’re beginning to enter an era of added growth and greater confidence. This is great for the housing market.  The downside to this is higher interest rates – the upside is the potential for a long period of increased home purchase activity.  So at the risk of sounding like a broken record, what are you waiting for?  Business plan, focus, build, be accountable and create a more lasting income stream by recognizing the microenvironment and taking action.

Daily Quote: From all that I have seen, time and time again, at least 90% of success derives from having a dream and knowing what you want.

The Tale of Two Trumps:

The markets continue to struggle with which Donald Trump really sits in the Oval Office.  Is it the Donald Trump who erratically tweets at 3:00 am about everything from Hollywood to Nordstrom’s to The Apprentice’s ratings or is the more staid, presidential Donald Trump we saw Tuesday night who discusses bipartisan support for pro-growth policies and initiatives?  Time will tell but if yesterday’s stock market rally was any indication the markets certainly seem to have heard enough from Tuesday’s speech to believe the real Donald is the one we saw Tuesday night.  Despite the rapid sell off in the bond market we kind of wound up right where we started.  If you’d fell asleep last Wednesday and awoke again this morning Treasury and MBS pricing, while a little lower, wouldn’t look meaningfully different today than 1 week ago or 1 month ago.

On the Federal Reserve front, the market is pricing in a 65% chance of a rate hike at this coming March meeting.  Janet Yellen and Co. have been hesitant to hike rates and have pulled more than one head fake on us over the last year but this is another indicator the market is watching anxiously.  There are some folks who believe a Fed rate hike could help the long end of the curve – which is where most of 30-year MBS partial durations sit.  So what they do at this meeting, and equally important what they say in their statement, will be a significant data point for us all.

So What Does This Mean For Mortgage Participants?

Donald is not even half way through is first 100 days so we should begin seeing a flurry of activity surrounding initiatives like infrastructure projects and tax cuts.  We’re also waiting to see how easily Ben Carson gets confirmed and then who Ben chooses to oversee some vital functions within the GSE complex.  So expect rates to trade within a wide range and be completely unpredictable for the next 2 – 3 months.  The more you see and hear from staid, presidential Donald the more traction pro-growth initiatives will get in Congress.  This in turn will likely lead to higher rates.  The more we see and hear (and read) from erratic Donald the more we’ll see rates hit the lower bound of our range.  If you’re correctly wondering what that range on the 10-year Treasury is it appears to be a low of around 2.35% and a high of about 2.75%.  Anything meaningfully higher than that makes US Treasury debt screamingly cheap to foreign investors.  So I suspect there is a temporary cap on how high rates can go.

So unless you are close to Jared and Ivanka and they’re telling you which Donald you’re dealing with each day please don’t try to game the system.  There is a much higher risk of rates getting worse for Mortgage Participants than better.  So in the immortal words of Jeff Coon:

“Dow 21000 and the rally continues.

Fed hike on tap, and back to the top of the recent range for 10's.

Lock em if ya got em....” 



One of the questions to consider when you’re buying a home is whether you want a fixed-rate or adjustable-rate mortgage (ARM).

With a fixed-rate mortgage, your payment remains the same for the duration of the loan.

An ARM is fixed for an initial period of time — three, five or seven years.  Then it fluctuates based on market interest rates. The "caps" on your loan will indicate how much the mortgage rate can change after the initial fixed period.

The risk with an ARM is that the rate can go up after that fixed period. The advantage is that the rate during the fixed period is usually lower than it would be for a conventional loan.

So your best financing option depends largely on how long you intend to occupy your home.

If you intend to stay in the same place for the life of the loan, you may be better off with a fixed-rate mortgage because you’ll be protected against rate increases. But if you think you’ll move after a few years, that’s like paying for an insurance policy that you’ll never need.

Similarly, you’ll want to consider how long you intend to be in that home before deciding on a three-, five- or seven-year ARM.

And if an ARM will produce additional cash flow for you, you’ll need to decide what to do with that money — spend it or invest it, perhaps in another house.

A qualified mortgage professional should be able to help you sort through the options available, and decide with one is best for you.

Daily Quote: A real decision is measured by the fact that you've taken a new action. If there's no action, you haven't truly decided.  Tony Robbins

FHA Makes A Move Pre-Inauguration!  Will “The Donald” Follow With A Tweet?

Christmas in January?  What I’d recently put odds of occurring at 50/50 last week came to fruition this morning…perhaps they read this Commentary?!

In a nutshell the FHA decided to reduce MIP on all new FHA loans by 25 basis points.  This reduction, from 85 to 60, brings the MIP premium to within shooting distance of its pre-crisis levels.  Great news for sure but there are some caveats you need to consider before you do the Triple “Landy”: (Thank you Brian Landy!)

  1. The FHA last reduced MIP’s by 50 b.p. in January 2015 which resulted in a huge spike in originations.  However, in 2015 rates also rallied at the same time from Saudi Arabia playing games with the oil market..  Today’s significantly higher rates, coupled with the lower magnitude of the cut, will mitigate the impact of this.
  2. This is only an FHA change.  There is no impact to VA, RHS (Rural Housing), or PIH (Section 184 Public Indian Housing).
  3. “Pre-HARP” FHA loans (generally loans closed prior to June 2009) are still eligible for MI grandfathering; these loans can refi one time and retain their current MIP payment.
  4. Note that Trump and Carson, once inaugurated, could immediately raise MIPs back to their previous levels.    There is recent precedent in the housing sector to enact and reverse a change in this fashion.  When Ed DeMarco was leaving the FHFA, to be replaced by Mel Watt, he approved a broad number of GSE g-fee reforms.  Mel Watt reversed those changes immediately and they never took effect.  But it is hard to know how likely a reversal is in this case.  I’ll note that Watt was reversing a borrower-unfriendly move, while Trump would be reversing a borrower-friendly move, so a reversal is politically more difficult.

So What Does This Mean For Mortgage Participants?

This move is clearly aimed at certain demographics of the home purchase market (Millennials, Lower Income/Higher DTI Borrowers, Renters) who will now have a slightly easily time qualifying for an FHA loan.   

  1. So the tailwinds for the purchase market just got modestly better.  This will offset some of the recent sell off in rates as well. 
  2. There might be some segments of the population which will make a refi more likely but given the sell-off in rates we’ve had plus the relatively modest reduction in MIP (25 basis points) I wouldn’t be looking at this as the start of a new refi boom by any stretch.

Interestingly enough, although I am not a conspiracy theorists at heart, this will also allow FHA to potentially steal some much needed market share from other agencies as production slows.  In order to keep the MI Fund at strong levels (well above the Congressionally mandated 2%) you need new originations…and a move like this will keep seasoned loans from skewing portfolio statistics after a rate rise.  Well played FHA…well played.   


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