Aug 092017

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By G. Steven Bray

Last week’s stronger than expected jobs report had a minimal effect on interest rates, leaving them smack-dab in the middle of their recent range. Markets still are waiting for something to motivate them.

The most important motivator these days seems to be inflation data, and we have a couple measures reported this week. The one that probably will garner the most interest is the consumer price index, or CPI, this Fri. While this isn’t the Fed’s favored inflation measure, it has street cred and is widely watched by market participants.

If markets anticipate another weak inflation report, we could see rates lead off slightly lower on Thurs. However, if the report on Fri shows an uptick in inflation, rates could rise very quickly. Given that I think you could lose a lot more ground with a strong report than you could gain with a weak report, the risks of floating probably outweigh the gains.

The other motivator we’ve discussed is political uncertainty, and it’s certainly not going away. It acts as a background anchor on rates, but that could change as we get closer to Sep. Already, we’re seeing dramatic media headlines about the dangers of the fiscal cliff and a government shutdown. The drama only will increase, which means the effect on interest rates could increase, especially if Congress doesn’t start making progress when it returns from recess.

Aug 022017

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By G. Steven Bray

Bond markets seem to be stuck in the summer doldrums. Either that, or everyone is on vacation. Rates really haven’t moved much in the last couple weeks, and there doesn’t seem to be a lot to accelerate movement in the offing.

This is a jobs report week, and that usually would have markets on edge. However, job growth has been pretty steady all year. Markets will probably shrug at another solid report, and other economic indicators aren’t suggesting a weak report.

The one economic indicator that does seem to have the markets’ attention is inflation. That makes the wage growth component of the jobs report worth noting. However, the Fed’s favored measure of inflation, the PCE index, matched last month’s figure of 1.5%, still well below the Fed’s target of 2%. That suggests wage growth won’t likely be the surprise that makes rates move.

Congress is heading for vacation soon, and that will remove that source of inspiration until Labor Day. I suppose it’s still possible, but I think highly unlikely, that Congress will accomplish something meaningful in the next month. If anything, I think it’s more likely the lack of action will help keep a lid on rates as markets grow increasingly nervous about all that awaits Congress in Sep.

On the horizon, we have the Federal Reserve meeting in Sep at which the Fed is expected to put in place its balance sheet reduction plan. As we’ve noted before, this is a source of negative inspiration for rates, and it could magnify the effect of any headlines that pressure rates upwards. I don’t think floating is unreasonable at this point, but pick a bail out point if rates start to climb.

Drifting rates staying at summertime lows

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Jul 242017

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By G. Steven Bray

We were watching the European Central Bank last week to boost the momentum of our current rally, and its message, while somewhat muddled, was just soft enough to give rates a friendly nudge. That left rates at the lows for the month and looking for a new source of inspiration.

This is a Fed week, meaning the Federal Reserve meets to discuss monetary policy, and that normally could be the inspiration. However, this meeting has no post-meeting press conference, and the consensus is the Fed doesn’t make big policy changes at such meetings.

So, markets are left to drift with the tides. Because of low summertime market volumes, rates are more susceptible to choppiness around political headlines, economic data, and position squaring by investors. We discussed the first, political headlines, last week. Resurrection of the health care bill could be a negative for rates. A Russian bombshell could be a positive. For economic data, we have the Durable Goods report and 2nd quarter GDP at the end of the week. A significant positive surprise in either report could stem our current rally, but I think that’s unlikely. Finally, we have end-of-month position squaring, which tends to provide temporary support for rallies. My conclusion is that lower rates are certainly possible this week, but if you’re floating your rate, watch for headlines that would signal a reversal of fortunes.

Rate update: Policital uncertainty means lower rates

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Jul 182017

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By G. Steven Bray

The strongest gorilla in the room for mortgage rates still is the European Central Bank, but US political uncertainty has been pumping iron.

Back in Jun, the head of the ECB caused a quick rate spike suggesting the ECB will start tapering its asset purchases soon. While this really shouldn’t have surprised anyone, markets didn’t appreciate being faced with reality. The ECB promptly tried to walk back the idea, but markets know the taper is coming.

The ECB meets again this Thurs. Markets don’t expect a tapering announcement yet, but any shift in language will be parsed for hidden meanings. If the ECB is mum about tapering, it could add to the recent positive momentum for rates.

That momentum seems to be the result of soft US inflation data and relatively dovish comments from the Fed. The inflation data is old news, but it’s still very relevant. The Fed comments represent a shift, especially Fed Head Yellen’s Congressional testimony that the Fed is very close to what it considers a neutral policy rate, meaning the Fed is almost done hiking rates.

The new gorilla is US political uncertainty, and it could provide downward pressure on rates for the next few months. The Senate pulled the Obamacare replacement bill, which only adds question marks for the rest of this year’s Congressional agenda. Congress wants tax reform; Congress should pass a budget; Congress must deal with the debt ceiling – all of this by the end of Sep?

Rate update: European tantrum boosts US rates

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Jul 102017

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By G. Steven Bray

Last week’s jobs report was surprisingly strong, but bond markets hardly noticed. Instead, they seem to be laser-focused on the prospects that the European Central Bank will curtail its asset-purchase program.

It may seem odd that something seemingly so distant could impact US mortgage rates, but that’s the effect of interconnected global markets. The yield on the German Bund, considered the safest European debt, jumped right after the ECB announcement. US Treasury and mortgage rates also hopped on board the panic train, but the distance limited the damage.

The ECB announcement indicated that at some point the ECB would have to stop pumping money into the EU economy. The ECB immediately tried to back-peddle to calm markets, but the damage was done. Markets know the party eventually will end, and the ECB must be thinking about the end, or it wouldn’t have made the statement.

For those wanting rates to fall again, the glimmer of hope is recent inflation data. The Federal Reserve’s target rate is 2%. Inflation hasn’t been that high in years, and recent data shows inflation heading down again. This may give the Fed a reason to pause its plans to hike rates and shrink its balance sheet, which would be positive for rates. Markets will be listening carefully to Fed Head Yellen this week during her Congressional testimony for any signs the Fed’s plans may be changing.

Rate update: Stay cautious, my friend

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Jun 282017

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By G. Steven Bray

Mortgage rates remain near their lows for the year and still are looking for a source of inspiration. That inspiration could lead rates lower or higher, so let’s look at the possibilities.

We have two main foci at this point: economic data and central bank chatter. Recent US economic data, except for housing data, has been surprisingly weak. Particularly interesting for bond markets has been inflation data, which once again is below the Fed’s target of 2% and has been trending down. The Fed’s favored measure, the PCE index, is released this Fri. If it confirms the decline, rates could improve.

Next Fri, we get another jobs report. The last two have been a bit stinky. Another month of sub-par job growth really could rattle markets and rally rates further.

Our other focus is central bankers. Federal Reserve governors finally are acknowledging declining inflation, but so far the official line is that this is a temporary phenomenon. As such, only a few governors are suggesting the Fed should pause its rate-hike plan, which is keeping some upward pressure on rates. It didn’t help that yesterday the head of the European Central Bank (ECB) said he believes the inflation dip is transitory, and he expects inflation to accelerate.

I still recommend that you stay cautious if you’re floating your rate. I think it would take less inspiration for rates to move higher.

Congress offers relief from financial regulations – Part 2

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Jun 232017

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By G. Steven Bray

Yesterday, we reviewed how the Financial Choice Act, recently passed by the House, would affect banking regulations. Today, we’re going to look at how it would change the Consumer Financial Protection Bureau.

The bill would have three major effects:

– It would change the name of the bureau to the Consumer Law Enforcement Agency and change its mission to enforcing existing consumer financial regulations rather than creating new ones. In this sense, it would function more like other independent federal agencies.

– It would allow Congressional oversight through the appropriations process.

– It would change the leadership from a single, unaccountable director to one who serves at the pleasure of the President.

Democrats seem most exercised about this provision as they view the current untouchable director as a way to maintain their preferred regulatory scheme across presidential administrations.

As I said yesterday, the bill’s fate in the Senate seems dim, but three additional developments offer hope to those favoring change:

– A Congressional Budget Office analysis indicates the Choice Act will reduce the deficit by $33 billion, which makes it possible Republicans could use the reconciliation process to pass reforms with only 51 Senate votes.

– Second, the courts seem poised to decide that the CFPB current structure is unconstitutional, but the final decision still may be a couple years away.

– Finally, it seems likely the CFPB’s current director will resign to run for governor of OH, which would allow President Trump to appoint a reformer to the position.

Congress offers relief from financial regulations – Part 1

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Jun 222017

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By G. Steven Bray

President Trump came to office promising to cut regulations that are stifling job growth, and one of his top targets was the Obama-era Dodd-Frank Act that put tough regulations on consumer lending and created the Consumer Financial Protection Bureau (CFPB).

Congressional Republicans recently offered an assist by passing the Financial Choice Act that repeals major aspects of Dodd-Frank. Based on a Congressional Budget Office analysis, the bill offers regulatory relief to community banks and credit unions in exchange for greater capitalization, which should make them safer. Larger banks are unlikely to meet the capital requirements needed for relief.

Large banks do like provisions of the bill that would streamline and reduce the frequency of exams and that would repeal the Volker Rule. The bill also would classify some loans banks hold in portfolio as “qualified mortgages,” which could loosen up bank lending a bit.

Democrats unanimously oppose the bill, but most of their statements so far have been fear-mongering claims that the bill’s passage will lead to another financial crisis. Given the opposition, the bill’s prospects in the Senate are dim for now. Senate Banking Comm Chair Crapo said the Choice Act is a good starting point, but he will craft his own bill with input from Senate Democrats. However, those favoring major change can be cheered by the fact that the Choice Act stakes out a very strong starting point.

Tomorrow, we’ll dig into how the bill changes the Consumer Financial Protection Bureau.

Rate update: Be defensive after rate rally

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Jun 192017

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By G. Steven Bray

The Federal Reserve gave us an unexpected surprise last week by announcing details of its balance sheet reduction plan. The Fed has been the main buyer of mortgage bonds, and the concern is that when the Fed curtails its buying, the law of supply and demand will push mortgage rates higher. Even though the Fed didn’t give a start date for the plan, markets are anticipatory, and the news immediately put pressure on rates.

And that probably would have been the news of the day if not the morning’s economic data. Continuing a recent trend, the two reports, inflation and retail sales, both were weaker than expected. The inflation number was particularly disconcerting given that managing inflation is one of the Fed’s mandates. Core inflation dropped again to 1.7%, falling farther from the Fed’s 2% target.

As a result, interest rates were in rally mode by the time of the Fed announcement. The announcement stemmed the rally, but the damage could have been worse. The Fed merely paid lip service to recent economic data and didn’t change its rate hike outlook at all. Despite this, rates held onto most of their gains.

Unfortunately, this leaves us without a sense of direction for rates. This week’s economic calendar is fairly quiet, and if you’re floating your interest rate, I think it makes sense to be defensive. Rates could fall further, but that probably requires an unexpected headline in the short term. If you want to float, choose a bail-out point and keep an eye on rates.

TX home equity loans on the ballot in Nov

 Owner-occupied, Regulations, Residential Mortgage  Comments Off on TX home equity loans on the ballot in Nov
Jun 142017

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By G. Steven Bray

Texans will have a chance to vote this fall on important changes to lending rules for home equity loans. The changes will allow those with lower-valued homes and rural homes to gain access to their home equity.

Texas has strong homestead protections that are written into the state constitution. Thus, changes to rules governing home equity require voter approval.

Currently, fees associated with a home equity loan are capped at 3% of the loan amount. While a cap on fees sounds great, it doesn’t take into account that certain fees, such as the appraisal and survey fees, don’t vary by loan size. This has prevented many homeowners of lower-valued homes from accessing their equity because the fees would exceed the cap. The new rules cap the fees at 2% but exclude fees associated with the appraisal, survey, and title policy.

The new rules also will allow owners of homes on agricultural land to apply for home equity loans. While this is a favorable development, it will be interesting to see which lenders will be interested in these loans. I suspect conventional lenders will shy away because the loans will be difficult to package with other home equity loans.

A final change will particularly benefit homeowners who used higher-rate, home equity second mortgages for things like remodeling their homes. Previously, a home equity loan only could be refinanced with another home equity loan. The change allows the homeowner to refinance their first and second mortgages into a new conventional loan that is free from the home equity restrictions.

Click here for more information about the amendment.