Rates are up today as mortgage bonds continue yesterday’s selling–Fannie 30yr 3.5% coupon down 5 ticks (a tick is 1/32), and the 10yr Note yield is at the top end of it’s technical range of 2.09% to 2.20%. Some headlines are attributing bond losses and stock gains to higher new home construction data this morning, but a closer look at the numbers below warrants some caution. And speaking of caution, the bond market selloff this week is due largely to traders waiting to see the outcome of tomorrow’s post Fed meeting rate policy announcement and press conference.

Housing Starts  (May 2013)
- Starts (seasonally adjusted, annualized) 914,000. Previous was 856,000 (revised from 853,000).

- Permits (seasonally adjusted, annualized) 974,000. Previous was 1,005,000 (revised from 1,017,000).

- The housing data is weaker than expected.

- Here are a few important notes and a chart from Briefing.com:

- While the gain in starts was strong, it is still 9.1% below where it was in March when 1.005 mln homes were started. It was wishful thinking that starts could rebound as quickly as the consensus expected.

- Most of the drop in starts in April was the result of a massive pullback (32.2%) in multifamily construction. This volatile sector had been running much hotter than its long-term trend and starts will unlikely return to pace any time soon.

- The more worrisome trend is that single-family starts only rose a minuscule 0.3% in May from 597,000 in April to 599,000. This sector tends to be very stable. The lack of solid rebound after 4.2% decline in April could signal a slowdown in overall construction levels.

- Still, the number of homes under construction rose from 606,000 in April to 620,000 in May. The 2.3% increase should be enough to keep residential investment growth as a main contributor to second quarter GDP growth.

-The rebound in construction levels still leaves it 9.1% below where it was in March.

Consumer Price Index (May 2013)
- CPI Month/Month (overall) +0.1%. Previous was -0.4%.

- CPI Month/Month core (less food & energy) +0.2%. Previous was 0.1%

- CPI Year/Year overall +1.4%.  Previous was +1.1%.

- CPI Year/Year (core) +1.7% same as previous.

- Inflation contained

Chain Store Sales (week ended 6/15/2013)

ICSC-Goldman Store Sales
- Store Sales Week/Week +0.3%. Previous was -2.7%

- Store Sales Year/Year 2.5%. Previous was +2.2%.

Redbook
- Store Sales Year/Year +2.9%.  Previous was +2.8%.

- Store Sales are indicative of the prolonged slow growth state of the economy.
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$XHB, $ITB

Today’s homebuilder confidence was a milestone because 50 is dividing line between positive and negative sentiment, and the June index number released today came in at 52. The last 50+ reading was at the tail end of the housing boom in April 2006, so it’s a good sign indeed, especially when you look at just how bad it got during those bust years. Below is table of all monthly homebuilder confidence index levels since 1985 that provides some good perspective on this number. And here’s today’s full report from NAHB.

Housing Market Index  (June 2013)

- Housing Market Index was 52 up from 44.  Over 50 is optimistic.  Home builders are encouraged by the increases in prices.  It make more sense to start building if prices are rising.

This is a survey index from the National Association of Home Builders.

Empire State Manufacturing Survey  (June 2013)

- General Business Conditions Index 7.84. Previous was -1.43.

Manufacturing in N.Y. makes up 5.8% of the state’s contribution to GDP.  New York has fewer manufacturing jobs than North Carolina.

All week, my 4yr old and I talked about using the box from his new Star Wars shoes to make an Imperial Walker this weekend. Turns out he decided to surprise me and make it for me for Father’s Day. Best gift ever.

Happy Father’s Day to all you dads out there. Have a great day…

Let’s take a look at some bank news in recent weeks. Although there have been plenty of mergers, the pace is down relative to recent history—primarily because banks are so flush with cash they’re buying their own stock, or paying dividends. Here’s a rundown.

- Union First Market Bank ($4.0B, VA) is buying StellarOne Bank ($3.0B, VA) for about $445mm or a 20% premium to its closing stock price at that date, creating the largest community banking institution in the Commonwealth of Virginia.

- Citizens and Farmers Bank ($987mm, VA) will buy Central Virginia Bank ($387mm, VA) for $855,000 in cash plus pay off $3.3mm in TARP preferred stock.

- First Bank ($6.5B, MO) said it will sell its subsidiary that provides homeowner association services to Union Bank ($96B, CA) for an undisclosed sum.

- NexTier Bank ($516mm, PA) will buy Farmers & Merchants Bank of Western Pennsylvania ($396mm, PA) for an undisclosed sum.

- The parent of Commerce Bank ($22.0B, MO) will buy the parent of Summit Bank ($265mm, OK) for $40.6mm in stock.

- Umpqua Bank ($11.5B, OR) will buy Financial Pacific Holding Corp. for $158mm. Financial Pacific offers equipment lease financing (avg. lease is about $25,000) to small businesses nationwide (vehicles/trailers, medical, computer systems, restaurant and construction) and the portfolio is about $279mm.

- The holding company of Rockland Trust ($5.8B, MA) will buy the holding company of Mayflower Co-operative Bank ($255mm, MA) for $37mm in cash (30%) and stock (70%).

- Wilshire State Bank ($2.8B, CA) will buy BankAsiana ($207mm, NJ) for about $32.5mm.

- Texas Regional Bank ($165mm, TX) will acquire the Border Capital Bank ($162mm, TX) for an undisclosed sum.

- Bank of North Carolina ($2.9B, NC) will acquire Randolph Bank & Trust ($302mm, NC) for $10.4mm in cash and stock.

- The parent company of Mills County State Bank ($225mm, TX) will buy the parent company of The First National Bank of Hico ($46mm, TX) for an undisclosed sum.

But not everything has been rosy lately in bank deal land…

- Oxford Bank ($266mm, MI) said it has terminated its agreement to be acquired by Level One Bank ($519mm, MI) due to an improving financial picture and regulatory delays in the process.

- Regulators closed another of Capitol Bancorp’s banks, shuttering 1st Commerce Bank ($20.2mm, NV) and sold it to Plaza Bank ($438mm, CA). Plaza gets 1 branch, assumed all deposits and entered into a loss share transaction on $12.2mm of assets.

- Regulators also closed Mountain National Bank ($437mm, TN) on Friday and sold it to First Tennessee Bank ($25B, TN). First Tennessee gets 12 branches, assumed all deposits except brokered and bought most assets at a discount without a loss share.

- Old National Bank ($9.4B, IN) will close 18 branches, as it seeks to improve efficiencies.

- The holding company of Whitney Bank ($13.2B, LA) and Hancock Bank ($6.6B, MS) will close about 17% of its 258 branches, as it seeks to adapt to customer changes and reduce expenses.

- And here’s the FDIC’s failed bank list, much smaller than crisis peak years.

HOW ARE BANKS PERFORMING?
As you can see, there is jockeying in the banks, and the FDIC reported that ccommercial banks and savings institutions insured by it reported aggregate net income of $40.3 billion in the first quarter of 2013, a $5.5 billion (16%) increase from the $34.8 billion in profits that the industry reported in the first quarter of 2012.

This is the 15th consecutive quarter earnings have registered a year-over-year increase.

Increased noninterest income, lower noninterest expenses, and reduced provisions for loan losses accounted for the increase in earnings from a year ago.

Half of the 7,019 insured institutions reporting financial results had year-over-year increases in their earnings. The proportion of banks that were unprofitable fell to 8.4% from 10.6% a year earlier.

Pacific Coast Bankers Bank reports that at the end of 2012, there were 7,083 banks in the U.S. vs. 9,354 at the end of 2002 according to the FDIC (a decline of about 24% over the 10Y period). During the same period, cash balances jumped 70%, securities climbed 46% and loans increased 34%.

TOP 10 BANKS BY ASSETS
SNL Financial reports that as of Q1 2013, the top 10 largest banks and thrifts in the US by assets in order were:

1. JPMorgan Chase ($2.4T)
2. Bank of America ($2.2T)
3. Citigroup ($1.9T)
4. Wells Fargo ($1.4T)
5. Bank of New York Mellon ($356B)
6. US Bank ($356B)
7. HSBC North America ($305B)
8. PNC ($301B)
9. Capital One ($300B)
10. TD Bank US ($223B)

But rates have run up, and analysts are very interested in the impact on banks’ balance sheets. While many assume higher rates will be a positive for the industry some institutions could suffer adverse effects by the actual increase, especially if a particular bank is heavily dependent on mortgage operations for its profits.

Stay tuned…
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Follow the banks:
$XLF, $JPM, $BAC, $C, $WFC, $USB, $BK, $PNC, $COF, $UMPQ, $STEL, $UBSH

One of my top five favorite funk outfits is Quantic, a collective centered around virtuoso musician Will Holland. One iteration of his unstoppable musical machine is Quantic Soul Orchestra, and their 2003 album Stampede features a scorcher called Hold It Down. Given that this song’s title is precisely what markets implore the Fed to do with rate policy, it’s a natural pick for tonight’s Friday Funk installment. That and because it’ll immediately help you get your cool back for the weekend. And just to make sure, I’m including one extra selection from Stampede…

- Raw Ingredients – by Quantic Soul Orchestra (youtube)

Today’s Originations linkfest, kicking off with a look at this morning’s MBS and Treasury technicals by my man Matt Graham.

- Can rate improvement of the last couple days hold? (Matt Graham, MortgageNewsDaily)

- The John Hilsenrath article that’s calming rate markets (WSJ)

- Timing & size of Fed QE tapering: investor views (Annalyn Kurtz & Hibah Yousuf, CNNMoney)

- Is The Fed Going To Dial Down Its QE Taper Talk? (Yves Smith, NakedCapitalism)

- The Fed Is Tightening Whether It Wants To Or Not (Evan Soltas, Bloomberg)

- Quickly compare payments on 15yr & 30yr rates (Colin Robertson, TruthAboutMortgage)

And since it’s Friday…

- Movie of the summer: Elysium, by guy who made District 9 (youtube trailer)

Rates are down since yesterday as fears have eased, at least temporarily, that the Fed may slow the pace of QE imminently.

Producer Price Index (May 2013)
- PPI Month/Month +0.5%. Previous was -0.7%

- PPI core (less food & energy) Month/Month  +0.1%. Previous was +0.1%

- PPI overall Year/Year +1.8% – PPI core year/year +1.6%.

- Inflation is well-contained.  Attention should be paid to core.

Industrial Production (May 2013)
- Production Month/Month +0.0%. Previous was -0.5%.

- Capacity Utilization Rate 77.7. Previous was 77.8%.

- Manufacturing Month/Month +0.1%. Previous was -0.4%.

- Manufacturing in the U.S. is soft and is unlikely to become an economic force any time in the near future.

 Consumer Sentiment (June 2013)
- Consumer Sentiment Index 82.7. Previous was 84.5.

- This is a survey index which is supposed to be a leading indicator of consumer spending.   

- The previous reading of 84.5 was a post-recovery high.

Below is a recap of 2013 loan limits, a breakdown of the three loan tiers in the U.S., and rate differences between tiers. It helps explain an important rate dynamic happening right now. Rates usually rise as you move up the three tiers of loan amounts—conforming loans to $417k, high-balance conforming loans from $417k-$625k, and jumbo loans above $625k. But jumbo rates are currently about .25% lower than high-balance conforming rates.

A quick history of post-crisis government intervention in rate markets explains why.

There used to be only two tiers of loan amounts. Loans to $417,000 were conforming and everything above was jumbo. But a second tier of conforming loans—called high-balance conforming—was created in the crisis era because the jumbo securitization market froze from Fall 2007 until 2012. This freeze meant no liquidity and therefore no ability to offer low rates to borrowers with loans above $417k, which would have made the housing and economic crisis even worse. The high-balance conforming tier came with rates slightly higher than the conforming tier, but made it so Fannie and Freddie could buy $417k-$625k loan sizes from lenders—thus keeping rates low for these loan sizes—until the jumbo market thawed.

Then of course there was the government’s quantitative easing (QE), a rate stimulus program where the Fed started buying Fannie/Freddie mortgage bonds (agency MBS)—which are bonds comprised of conforming and high-balance conforming loans. The Fed announced QE on November 25, 2008, and they began buying agency MBS on January 1, 2009 and have continued through today.

QE lowers rates as the bond buying elevates bond prices, and this is the primary reason rates on loans to $625,500 have been so low. But it’s not just from the Fed buying MBS, it’s also from private investors buying. The investor strategy since that November 25, 2008 QE announcement has been to beat the Fed in and out of the agency MBS trade. Case in point: rates dropped a full 1% on a massive MBS rally from November 25, 2008 to January 1, 2009 as private investors piled into agency MBS before Fed buying even began.

What we’re seeing now is a reversal of that strategy. As speculation increases about the Fed putting the brakes on their agency MBS buying, private investors have been selling, which has caused rates on loans to $625,000 to rise about .75% since January.

Meanwhile, the jumbo MBS (or non-agency MBS) market has been ramping up. According to Bloomberg data, from 2008 to 2010 there were no securitizations of newly issued jumbo mortgages. Securitizations of newly issued jumbo mortgages totaled less than $1 billion for 2010 and 2011 combined, totaled $3.5 billion in 2012, and total about $6 billion so far this year.

Still a far cry from a peak of $1.2 trillion in 2006, but it’s enough liquidity to do two things:

(1) make jumbo lenders very agressive on jumbo rate pricing

(2) incentivize jumbo lenders to go back to the pre-crisis model of using jumbo products for all loans above $417,000

The result of all this agency and non-agency mortgage trading activity is that jumbo rates are about .25% lower than high-balance conforming and about the same as true conforming.

The Fed’s QE activities don’t impact the non-agency MBS market so that market isn’t selling like the agency MBS market is right now. It could be a short term phenomenon that jumbo rates are the same or lower than conforming loans, but for now it’s good news for rate consumers with loans above $417,000.

It’s also a good sign of broader recovery because it’s evidence that private markets are again capable of outcompeting government-subsidized markets.

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2013 CONFORMING LOAN LIMITS

Tier 1-TRUE CONFORMING: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE CONFORMING: Rates .125 to .25% higher than Tier 1 for loans to these limits:
-$625,500 (1 unit)
-$800,775 (2 units)
-$967,950 (3 units)
-$1,202,925 (4 units)
-High-Balance limits vary by county: find yours here

Tier 3-JUMBO: Rates normally .375% to .5% higher than Tier 1 for loans up to $2m, but jumbo rates are currently about the same as Tier 1 conforming.

2013 FHA LOAN LIMITS

Tier 1-TRUE FHA: Lowest rates for loans to these limits:
-$417,000 (1 unit)
-$533,850 (2 units)
-$645,300 (3 units)
-$801,950 (4 units)

Tier 2-HIGH-BALANCE FHA: Rates often same as Tier 1 for loans to these limits:
-$729,750 (1 unit)
-$934,200 (2 units)
-$1,129,250 (3 units)
-$1,403,400 (4 units)
-High-Balance limits vary by county: find yours here
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Related:
- State Of The Jumbo Mortgage Market (WSJ – with me)

- Overview of FHA Changes & Fee Hikes As Of June 2013 (TheStreet – by me)

- $RWT, $JPM, $TWO, $NLY, $MBB, $TLT, $TBT

Today’s Originations linkfest, leading with a great piece by Bloomberg’s MBS guru Jody Shenn on a critical issue driving rates.

- Fed Mortgage Stockpile Seen Cushioning Pullback (Jody Shenn, Bloomberg)

- JP Morgan, BofA cut servicing jobs as late payments fall, equity rises (Kayla Tausche, CNBC)

- Corelogic: Nearly 1m homes float back into positive equity (Brena Swanson, HousingWire)

- Comparison of housing to the BP oil spill disaster (MBA head David Stevens)

- Jumbo mortgages continue to improve (Diana Olick, CNBC)

- Are higher mortgage rates impacting housing? (SoberLook)

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Follow The Authors:
@davidhstevens, @SoberLook, @diana_olick, @kaylatausche, @jodyshenn, @BrenaSwansonHW

$JPM, $BAC, $RWT, $CLGX