Mortgage rates rise as the jobs report shows a resilient economy

Market Realist

Realist Mortgage Applications Review, November 4–8 (Part 1 of 4)

Every week, the Mortgage Bankers Association (the MBA) puts out an index of mortgage application activity

Mortgage applications are relevant to a number of industries—from banks to non-banks, to mortgage REITs like Annaly (NLY) and American Capital (AGNC), to homebuilders like KB Home (KBH), Lennar (LEN), and Toll Brothers (TOL). This series will break down the different indices and help you learn what insight you can glean from them. If you’re a bank, you’re looking at these indices and trying to determine whether you’re competitive in all the segments you want to be competitive in. If you’re a non-bank, you might be looking to see if you’re gaining share or losing share. If you’re a mortgage REIT, you’re focusing on the refinance index and what it might mean for prepayments going forward. And if you’re a homebuilder, you’re watching the purchase index as a way to gauge future demand.

Mortgage rates rose as the jobs report surprised to the upside

The average 30-year fixed-rate mortgage rose 16 basis points, from 4.21% to 4.37%, as the ten-year bond yield rose from 2.62% to 2.75%. Interest rates have been rising after the government shutdown and the debt ceiling crisis passed. The length of the shutdown and the proximity of the next showdown in early January probably puts the Fed on hold until the March meeting, although Friday’s stronger-than-expected jobs report has brought a December taper back into the picture. Most market participants believe if the Fed does in fact decide to reduce asset purchases, it will do so on the Treasury side of things, not mortgage-backed securities.

Mortgage banking has become a lot more competitive as rates have increased. The refinance business has fallen off a cliff and bankers are cutting employees and rates. This is affecting the REITs that have banking exposure, like PennyMac (PMT), Nationstar (NSM), and Redwood Trust (RWT). Nationstar recently reported disappointing earnings, but Redwood performed better. We’re starting to see vulnerability in these stocks. It’s so competitive in the jumbo space that the rate on jumbo loans has actually fallen below the conforming rate. That said, servicing has become a valued commodity, which helps Ocwen (OCN). As rates have stabilized, they’ve helped even the agency REITs with heavy leverage and duration exposure like Annaly (NLY) and American Capital Agency (AGNC).

This series will look at the three main MBA indices.

  • Part 2: The MBA Basic Index
  • Part 3: The MBA Purchase Index
  • Part 4: The MBA Refinance Index

Continue to Part 2

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