The bond market returned from a 3 day weekend to find yields surging higher on Tuesday.  That pushed mortgage rates to fresh 2 year highs and added emphasis to what has already been the sharpest rate spike since late 2016.   Why are rates rising so quickly? Mortgage rates are based on mortgage-backed securities (MBS), which are essentially bonds that correlate quite well with US Treasuries.   The Federal Reserve (the Fed) has been buying both Treasuries and MBS off and on (mostly on) since 2009 as a part of various stimulus efforts.  Higher demand for bonds means higher bond prices, lower bond yields, and thus, lower rates, all other things being equal. Since the pandemic, bond buying was intended to help the US economy return to full employment and "price stability."  By the fall of 2021, it became increasingly clear that the labor market wasn't going to return in exactly the same form and that inflation was going to be more persistent than the Fed expected.  As such, the Fed warned that it would begin winding down bond purchases in September, ultimately pulling the trigger at the next meeting in November. There are two phases to such a wind-down.  The first involves tapering the amount of  new bond purchases. Once the Fed is done tapering, their balance sheet stops growing, but they continue to buy bonds with the proceeds from past bond purchases.  By reinvesting those proceeds, the balance sheet remains the same.  The second phase involves shrinking (or "normalizing") the balance sheet by placing progressively smaller limits on the size of reinvestments.  

Another Green Day But MBS Underperform Bonds rallied today with 10yr yields dropping more than 6bps by the 3pm CME close.  That's the type of improvement that normally makes for a nice day of mortgage market improvement, but today, mortgage rates were just barely lower.  Blame MBS underperformance and relatively conservative lender pricing strategies heading into the weekend before an important Fed meeting.  The other "yeah but" is the fact that the bond rally received a lot of support from a massive stock market sell-off.   Econ Data / Events Fed MBS Buying  10am, 11:30am, 1pm Market Movement Recap 08:34 AM Yesterday's late-day gains extended right at the start of the overnight session and bonds have been mostly flat since then.  10yr yields down 3.2bps at 1.779 and MBS up 2 ticks (0.06), but still searching for full liquidity. 10:41 AM Additional gains into 10:00am hour, largely in line with stock losses.  Small bounce since 10:20am.  10yr down 5bps at 1.76 and MBS up just under an eighth of a point. 03:06 PM Stock selling continues benefiting bonds.  10yr down 6.7bps t 1.744%.  3.0 UMBS up 6 ticks (.19) at 102-06 (102.19).

While new home sales have been performing well over the last few months, the Mortgage Bankers Association (MBA) expects a stumble in December. Its Builder Application Survey (BAS) data for the month shows mortgage applications for new home purchases decreasing 5.0 percent compared to November and by 7.1 percent from December 2020. This change does not include any adjustment for typical seasonal patterns. Based on the BAS and other assumptions such as market coverage, MBA estimates new single-family home sales were running at a seasonally adjusted annual rate of 887,000 units in December. This is a decline of 2 percent from November’s 905,000 unit pace. On an unadjusted basis, there were an estimated 60,000 new home sales in December, down 7.7 percent from 65,000 units in November.  “Applications to buy a new home slowed in December, while the activity remained tilted to higher-priced homes ,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Supply chain challenges, labor shortages, and higher materials costs also contributed to last month’s decline, as projects were delayed or cost more to complete. The average loan size set another survey record at $423,102, as these higher building costs are pushing sales prices higher.”  By product type, conventional loans composed 77.2 percent of loan applications , FHA loans composed 12.6 percent, RHS/USDA loans composed 0.4 percent and VA loans composed 9.8 percent. The record average loan size cited by Kan is an increase from $414,114 in November.

In its first look at December’s loan performance data, Black Knight notes that 2021 ended with the foreclosure inventory at an all-time low and the national delinquency rate “just a hair off the near-record low” reached just before the onset of the pandemic. That delinquency rate, the percentage of mortgages that are 30 or more days past due but not in foreclosure, was 3.38 percent in December, down by nearly 6 percent from November and 44.46 percent below its level in December 2020. This equates to 1.799 million delinquent loans, a decrease of 107,000 and 1.452 million from the two earlier periods. Serious delinquencies, loans 90 or more days past due but not in foreclosure, are still elevated; 946,000 loans remain in that category including many that are still in forbearance. This is more than double the number pre-pandemic. Still, that is down by 80,000 loans in a single month and by 1.2 million since December 2020. The foreclosure inventory, loans in the process of foreclosure, declined by 4,000 over the previous month to 128,000 loans. This is a record low and is down 90 percent year-over-year. It may not stay that low for long, however. Five months after the federal foreclosure moratorium expired, foreclosure starts may be increasing . There were 4,100 starts in December, a 10.81 percent increase from the prior month, although this is more than 40 percent fewer than the previous December. Foreclosures are also ticking up. Black Knight expresses them as a percentage of the loans that are more than 90 days non-current. The 0.29 rate in December was 12.07 percent higher than the November rate and more than three times the rate a year earlier when the moratorium was in effect.

Bonds are off to an even stronger start on Friday, largely in response to a big risk-off move that rifled through markets in the last 90 minutes of trade yesterday and carried over to early trading in Asia.  "Risk-off" implies stock prices and bond yields moving lower together, and that's a departure from the recent trend where the two have moved in the opposite direction in response to the Fed policy outlook.  While the chart above gives a good general impression of yields and stocks varying inversely, it's even easier to see the correlation when we view bonds in terms of PRICE (effectively inverting the yellow line above).  If it helps, just think of the following chart as "asset prices," be they stocks or bonds, and then the notion that Fed policy is the tide that lifts (or sinks) all boats. Now we'll advance the same chart to include the last 24 hours of trading.  It shows a big departure from the recent trend with bonds improving and stocks falling. What's up with this?  First off, at most moments in economic history, this is the NORMAL trend (remember, the yellow line is inverted from the normal YIELD view, so this is merely showing "money flowing out of stocks and into bonds" at face value).  There are a few reasons this could be happening.  It's possible that bond traders have had their fill of selling for now and are entering into an impressionable couple of trading days before making their next big decisions after next week's Fed announcement.  It's also possible that these stock losses were big enough to force investors to seek safer havens (which is definitely a thing that sometimes happens even when the non-standard correlation seen in the first two charts had generally been in effect). Bottom line, we'll be watching the stock/bond relationship closely today to see how reliant the bond rally may be on stock market weakness.  

As I head to Northern California, and mourning the loss of Meatloaf, I’m thinking, “Dang. I guess that I shouldn’t have put my entire 401(k) into Peloton stock a year ago,” a great combination of home exercise and technology. Brad Paisley sang, “…And I'd have given anything to have my own PacMan game at home. I used to have to get a ride down to the arcade, now I've got it on my phone.” Mortgage loan originators can’t do anything about interest rates, but they can do something about their service & technology they use. Technology is roaring ahead, whether you’re on board or not, and it is certainly roaring ahead in other, non-mortgage areas. Do you have your digital driver’s license? Using your face for a boarding pass? Try The Frostbite Alert Coat. The faux fur-lined coat has a patch on it that tells you when temperatures are too dangerous for your pet so you can prove to them it's time to head inside. You may soon be able to taste the culinary delights from shows like Top Chef or The Great British Baking Show . Meiji University professor Homei Miyashita wants to introduce flavor to our screentime with Taste The TV. But be careful out there with technology and data! Venders and lenders, if they are responsible for a data breach and a release of customer information, need more than a short note of apology. As this article from attorney Phil Stein shows, the penalties can be huge and remind us that “An ounce of prevention is worth a pound of cure.” (Today’s audio version of the commentary is available here and this week’s is sponsored by Sagent . Today features an interview with Tom Hutchens, Executive Vice President of Production for Angel Oak Mortgage Solutions on the non-QM industry in 2022 and the return of private money into the mortgage space. Sagent delivers the modern experience customers expect from loan originations to servicing with platforms that let consumers manage their home-owning lives from anywhere.)

Still Waiting on Fed Above All Else Bonds enjoyed another day of modest improvement on Thursday.  On the plus side, gains are good.  On the other hand, the pattern looks eerily similar to last week's (i.e. a few days of consolidation before more weakness).  It's good to remember that recent weakness is primarily driven by the market adjusting to a shift in the Fed policy outlook.  As such, it's hard to make a case for a significant friendly bounce before next Wednesday's Fed announcement. Econ Data / Events Fed MBS Buying  10am, 11:30am, 1pm Jobless Claims ............ 286k vs 220k f'cast, 231k prev Philly Fed Index........... 23.2 vs 20.0 f'cast, 15.4 prev Existing Home Sales..... 6.18m vs 6.44m f'cast, 6.48m prev Market Movement Recap 08:59 AM Moderately stronger overnight  with most of the gains during European hours.  Little changed in the first hour with 10yr down 2.5bps at 1.829 and MBS up just over a quarter of a point. 11:45 AM Sideways to slightly weaker as the trading session continues, but still in positive territory.  MBS up 5 ticks (.16) and 10yr yield down 1.8 bps at 1.838. 02:58 PM Slightly weaker after 10yr TIPS auction, but recovering now.  Trading levels right in line with the last update.

Today was one of the most uneventful days in recent memory for mortgage rates.  The average lender is in very similar territory compared to yesterday, and there has been far less intraday volatility through 3pm E.T.  While things may be ho-hum over the past 2 days, rates are still in bad shape compared to most of the past 2 years.  In just a few short weeks, the average lender has moved roughly half a percent higher for top tier 30yr fixed scenarios. A shift in the Federal Reserve's policy outlook is primarily responsible for the pace of the move.  As such, don't expect things to improve too much before next Wednesday's official policy announcement from the Fed. [thirtyyearmortgagerates]

Fannie Mae’s Economic & Strategic Research (ESR) Group writes that it expects 2022 to be a year “of transition for both the economy and the housing market.” While it hedges its bet as to whether COVID-19 will end any time soon, it expects the market and policy choices driven by the pandemic to be gradually be replaced by more typical pre-COVID economic and housing patterns. This won’t happen overnight, and the group says the changes may never be completely reversed. Alterations to work, school, and housing arrangements may prove to be long-lasting and even though inflation is expected to slow, it may remain higher than the pre-COVID range for the foreseeable future. That said, this month’s economic commentary from the ESR describes the year ahead as ‘returning to a 'new' normal.” With unemployment below 4 percent and the Federal reserve expected to increase rates starting in March, the economy appears to be entering the mature stage of the business cycle, during which growth decelerates toward the long-run trend. Labor demand and the need to rebuild inventories should mean solid economic growth in 2022, but the period of rapid recovery has passed. The group expects improvement to supply chain difficulties , but risks around how fast this occurs, the duration of continued high inflation, and policy maker and financial market reactions to these economic conditions remain. Recent economic forecasts from Fannie Mae have been notable for many revisions to economic and housing predictions, usually moving the metrics higher. January’s report, they say, contains only modest changes. GPA growth in 2021 is still expected to be 5.5 percent, the highest since 1984, but the growth this year has been lowered 0.1 point to 3.1 percent with 2023 still expected at 2.2 percent. Recent inflation data has likewise been in line with the prior forecast, so related adjustments have also been modest.

Existing home sales dropped in December, snapping a three-month streak of increases. The National Association of Realtors® (NAR) said the month’s sales of pre-owned single-family houses, townhouses, condos, and cooperative apartments fell 4.6 percent from November’s 6.460 million-unit pace to a seasonally adjusted annual rate of 6.18 million in December. From a year-over-year perspective, sales were down 7.1 percent from 6.65 million in December 2020. Even with the year-end slide, sales in 2021, at an apparent 6.12 million units, represented an 8.5 percent increase from 2020. It was the highest annual level since 2006. Analysts substantially overshot with their December estimates. Those polled by Econoday had a consensus forecast of 6.400 million units while Trading Economics reported a consensus of 6.44 million. Single-family home sales dropped 4.3 percent from 5.77 million units in November to a seasonally adjusted annual rate of 5.52 million, a 6.8 percent year-over-year decline. Condominium and co-op sales slid 7.0 percent from the 710,000-unit level in November and were 9.6 percent lower than in December 2020 at an annual rate of 660,000 units. “December saw sales retreat, but the pullback was more a sign of supply constraints than an indication of a weakened demand for housing,” said Lawrence Yun, NAR’s chief economist. “Sales for the entire year finished strong, reaching the highest annual level since 2006.”