Mortgage Mike’s Daily Rate Commentary

The Fed is holding true to what they have been promising all year… a taper! DUN DUN DUN


Quick recap:

2020 wreaked havoc across the global economy. To avoid economic collapse, the Fed gave a shot of adrenaline in the form of cash into the chest of the United States… a lot of cash. Fast forward to the end of 2021 and it’s time for the economy to fly on its own. So, the Fed is starting to pull back the amount of money it was spending to keep the economy afloat.


The Fed must be very careful with how they do this because giving money is easy but taking it away is really hard. The last time we saw this was post-2008. By 2013 the market was starting to stand on its own. So, the Fed announced that they would decrease QE spending at some time in the future. It’s important to know that they didn’t decrease spending… just said they planned to at some point. This caused absolute pandemonium in the T-Bill and MBS markets. Mortgage-Backed securities plummeted and mortgage rates did the opposite. This sent a shock wave of fear through the market and investors pulled their money out.



The Fed has committed to a $15B monthly taper in Nov and Dec ($5B of which will be coming from mortgage bonds). If they hold that pace through the beginning of next year, they would be done with the taper by the middle of the summer. Now, there are two reasons that the Fed only committed to the 2 months. The first is because they know they will have to increase the amount next year and are delaying the negative responses from the market. The second and more likely is because they are running these two months as a test and need to be able to hit the brakes if the market begins to fall as we saw in 2013.


This all sounds scary but the piece that most are not talking about is the Fed’s reinvestment. The Fed holds both bonds and treasuries and gets paid on them every month. Typically, the Fed would start applying those payments to its balance sheet debts and chipping away at that massive $8.5T. However, the Fed has decided they are going to keep their balance sheet ‘net neutral’ and reinvest the payments they are receiving from the securities they hold back into the bond market. So, even though they are tapering, they are doing a lot to prevent a taper tantrum.

Some are referring to this problem as the Chinese Lehman Brothers equivalent. Some people are not losing any sleep over it. This issue comes with opinions ranging from full-blown doomsdayers to complete optimists.

Let me explain.


Who is Evergrande?

They are a massive Chinese conglomerate whose portfolio ranges from an abandoned theme park called Fairy Land which was projected to surpass Disney Land in Chinese popularity by 2022 to the biggest soccer stadium ever built. But most importantly, they are one of the world’s largest and most powerful real estate holders and developers. They also happen to be the world’s most indebted real estate holder and developer. The company owns over 1,300 real estate projects across 280 cities in China and has racked up over $300 billion in liabilities.

What’s the problem?

Evergrande has notoriously carried massive debt with the intention of borrowing more and using down payments on new projects to fund the debt of their existing ones. This worked in China for a couple of reasons. One is that China has the highest homeownership rate in the world (around 90%) so they have heavily relied on turning over their residential units quickly. The second is that real estate is a big deal in China… like a really big deal. Remember, China is the biggest exporter in the world and real estate still makes up over 28% of their GDP.

As you can imagine, Evergrande’s $300 billion of debt comes with some pretty hefty interest payments. Payments they may have otherwise been able to make if China didn’t crack down on real estate leverage in 2020.

In August of 2020, China put into place “The Three Red Lines”. These are essentially 3 different debt and liquidity measurements that real estate companies must meet to take out more debt. They did this as a precaution in case the real estate market fell, their enormous amount of real estate debt would not tank the countries entire economy. As you can imagine, the worlds most indebted real estate company failed all three. So, their lines of credit were essentially frozen overnight.

Without their lines of credit, Evergrande will have a very hard time paying back their shareholders. Which is exactly what they said days before defaulting on an $83 billion bond payment. The company is now in the middle of a 30-day grace period where they can either find a way to make the payment or default.


The Grande Default Could be a Forever Problem

Let’s start with the opinions of the optimists. They believe that while Evergrande is a massive powerhouse indirectly employing millions of people, the fallout from their default will be contained. Evergrande is a relatively small portion of China’s overall GDP and despite the government repeatedly stating that they will not be bailing the company out, they will probably be forced to.

The doomsdayers opinion is the fall of Evergrande is the first domino in a worldwide financial contagion. Financial contagion is like a virus in that it spreads to anyone it contacts. Like the butterfly effect, the fall of one company causes the fall of another and another who have become dependent on them ranging in size from the massive lenders funding their projects to the independent carpenters who are furnishing them. In addition, the company has collected down payments on 1.5 million unfinished homes which could not be paid back if they were to collapse. This would create a ripple effect through China that could be devastating and is being compared the collapse of Lehman Brothers in 2008. And this devastation would not be contained to China. Evergrande has raised billions of dollars in foreign capital that would send shock waves through the global financial system. The scary thing is, Evergrande is not the only one. Since their default announcement in late September, other smaller companies have come forward saying they are in a similar situation. Only time will tell how big this problem could be.


What does this have to do with mortgage?

This is where we get a little conspiracy-ish…

As we know, the Chinese bond market is huge and is made up of investors from all over the world ranging from private investment firms to massive funds. If the real estate market is compromised, that money may start looking for a safer place. The typical 3 safe havens for cash are Switzerland, Germany, and the US. However, the benchmarks of the first two are currently negative (meaning it cost money to invest it) leaving one safe haven – the US.

If the US had the influx of bond investment that some people think is coming, mortgage rates would plummet.

Now, this is all completely speculatory… but the different opinions of what could happen is wild.

In an interview 2 years ago, Marshawn Lynch hit his younger teammates who just joined the NFL with some timeless advice. “Take care of y’all bodies. Take care of y’all mental. Take care of y’all chicken.” So today, let’s take care of our chicken!


And by chicken, he means chedda.


The Question

Is it better to make extra payments on my house to pay my loan off faster or take that money and invest it?


Well, the answer depends on your risk tolerance but let’s look at this strictly financially – what option gets me the most chicken? And I’m not looking at this as a Wall Street Bets enthusiast demanding a 450% return. I’m looking at this as the boring, conservative investor that I am who will take 6%. Now, here is an example of one of our clients who was dropping her rate from 3.375% to 2.600%, saving $381/ month, and wanted to know which was a smarter decision:


Option A) Take her new monthly savings and apply it as a principal reduction every month to pay off her loan early

Option B) Invest the monthly savings into a boring investment that produces 6% per year


Now, if you do not need the additional monthly cash flow to keep your household running, both options are a better financial decision than letting your new monthly savings sit in a bank being eaten away by inflation. Option A will reduce the amount of interest you pay over the life of the loan because there is less principal to pay interest on. Option B will result in paying higher interest over the life of the loan, but you will also be building wealth at a 6% annual average (a conservative number).


*SPOILER ALERT* – Option B is going to be a better financial decision every time. But, how much better?

$74,349… now that’s a lotta chicken. Let’s break it down.


In option A, we need to remember that the return on your home equity is 0%; however, the loan would be paid off 7.8 years early. Now, to compare apples to apples, we need to look at Option B over the same time frame (22.2 years). At the end of 22.2 years, if you chose Option A, you would own your home free and clear – your net worth would be whatever your home is worth. In option B, your net worth is whatever your home is worth, minus the balance of your mortgage plus your investment balance. If you take the difference of Option A and Option B, you get the net benefit of how much wealthier you could be by using Option B. In this client’s case, it was $74k.


Moral of the story

If you are looking for the smartest financial decision, don’t pay more money toward your mortgage. Invest the same amount and over the life of the loan, you will build much more wealth.

Labor Day was a dreaded day for those who are currently unemployed because it marked the end of the second biggest Covid relief program – Unemployment Insurance.


The Unemployment Insurance program was put into place in March 2020 when the US was losing almost 1 million jobs per day and together with traditional unemployment, has since paid out $680 billion in stimulus. Unemployment pay on the program started at $600 per week and was later reduced to $300 in August 2020. In short, around 3 million Americans stopped receiving this $300 weekly check as of Labor Day. However, the $680 billion was not only paid out to ‘unemployed’ people. During the pandemic, congress opened the restrictions of the program to include self employed and temp workers who were able to show a decrease in income.

A House Divided

The expiration of the Unemployment Insurance program has turned into a hot button topic. Those who disagree with the expiration point to the low in jobs growth over the past few weeks and the rising Delta variant which could soon displace many in the service and hospitality industry. They see this as the government ripping the rug out from under a group of people who are just getting back on their feet. The opposing feels that the additional $300 per month was disincentivizing many to go back to work as the US sees one of its largest labor shortages ever. We will keep up to date as we see the effects in the labor market and unemployment as this rolls out.


The Rates

Mortgage Backed Securities are down today. Both the MBS market and the 10-Year are in crucial positions. MBS’s are sitting on top of a floor with a lot of room to the downside while the 10-Year is at a ceiling with room to the upside. Because of the risk of the technical driving rates higher, we are holding a locking bias.

Last week, the Supreme Court turned over the Eviction Moratorium that was put into place by Trump which disallowed landlords from evicting tenants throughout the pandemic. This moratorium didn’t just end, according to the court who ended it, it should have never been a thing in the first place.


If you don’t know:

The moratorium was put into place by the CDC (not a governing body) with the goal to limit the ravages the pandemic was going to have on the economy. After learning many lessons during the 2008 crisis, they were willing to do whatever it took to keep the renters and homeowners under their own roofs. Now, this moratorium has had multiple expiration dates and multiple extensions. As of last week, Oct. 3 was the new expiration for Covid hotspots. However, in a 6-3 ruling last Thursday, the Supreme Court decided that the CDC did not have the authority to implement or extend the moratorium.


What does this mean?


For landlords, they have secured the bag and are back in business. However, hundreds of thousands of renters are new potential eviction victims. The Biden administration is working on the state level to create new renter protections as the pandemic drags on.


The rates:

MBS are flat this morning after a bad two days where we broke below the 50 DMA. We are locking before tomorrows jobs report which we anticipate will hurt the MBS market.

The devastating headlines coming from the news today could potentially cause volatility in all security markets. Two days ago, President Biden reiterated the US’ goal to have all US citizens removed from Afghanistan by Aug. 31. He has not given a statement since this mornings attacks in Kabul. If his position changes, we will see massive movement.


The rates:

Although the Jackson Hole Fed meeting is tomorrow and will likely push 10 year treasuries higher with early easy money tapering news, technical signs hint at a decrease in 10 year yields. Remember that the 10 Year Treasury yield and mortgage rates move together. When the 10 Year drops, mortgage rates tend to follow. Mortgage Backed Securities broke below their floor of support this morning but have climbed back and are flat today. With the possibility of tomorrow’s Fed meeting pushing the 10 Year higher, we are holding a locking bias.

Every 6 months, crypto investors get to look at their friends who they have begging to get into the crypto game and say, “I told you so!”. Well, today’s the day! Bitcoin broke through its 50k ceiling and bitcoin investors are losing all of their friends.


Lets break down the crypto comeback!


Consumer Sentiment

Bitcoin fell from its $65k high in April after the Chinese government announced that it was going to crack down on crypto mining. To put this into perspective, at the time, 65% of crypto mining was coming from China and over the next 2 weeks, Bitcoin mining power was cut in half. This sent Bitcoin into a tail spin to its 29k low in July. At that point, many analysts predicted that consumer sentiment had dropped so low that we could see Bitcoin hit 20k for the first time since December 2020. Almost immediately, the opposite happened. Consumer sentiment sky rocketed on the backs of crypto celebrities (including Elon Musk) loud support for the crypto future.


Wall Street and Main Street Clout

Some of the worlds biggest banks and consumer facing companies jumped on the bandwagon this summer. These companies bought up Bitcoin in order to meet consumer demand as soon as pricing had overcome the China mining news. In addition to existing companies, one of the largest crypto platforms, Coinbase, had its IPO showing the rest of the market they mean business. While both Amazon and Walmart will not accommodate purchases in crypto in the next couple of quarter, they are both gearing up their operations to handle it in the mid-term.


Interest Rates

Easy money policies are gasoline for the stock market but are jet fuel for more volatile assets like crypto. We saw millions and millions of stimi dollars put right into the crypto market during the pandemic. However, like mortgage rates, increasing interest rates is bad for business. The Fed will soon have their Jackson Hole meeting where they are expected to taper easy money spending resulting in higher interest rates. While the degree of tapering is expected to be less because of the rapidly growing Delta variant, it will likely be bad for the crypto market.


Wrap it Up

While Cindy Wood thinks Bitcoin is on its way to 500k, most analysts think that $40-$50k is its short term sweet spot. As long as it holds above its 200 dma of $45,750, it seems to be in good shape.


The rates:

In the green! MBS’ are up 13 bps and have broken above their 50 dma. We are currently floating.

The economy is a baby bird and the Fed is the mother who needs to find out if it can fly. Instead of the original mid 2022 departure date, the Fed sounds like it’s throwing the economy out of the nest this year! Stimulus tapering is a  complex topic but the Fed has made it clear where they are trimming the fat first… Mortgage Backed Security spending. The Fed spends hundreds of billions every week on economic stimulus in multiple sectors. However, with the massive success of the housing industry over the last year, the Fed thinks it’s the first sector the fly.


Dovish Fed members are looking for two things.

  1. Decreased unemployment
  • And they are getting this. Over the last week, we have seen unemployment fall to pandemic lows. Today, Jobless Claims came in at a 348k, another pandemic low. Now, this date is lagging because it is from the prior month. Going forward, the big question is not if the Delta variant will take a chunk out of this progress, it’s how big the chunk will be.


2.“Stable” Inflation

  • Like we talked about yesterday, Dovish Fed members care more about employment and GDP than inflation… and that shows in their idea of stable inflation. Our last inflation reading started with a 5. However, the Fed believes we are on track to stability and that inflation will average out around 2% over the next year.


This tapering is not good news for mortgage rates. Why? Because the lower demand the market has for Mortgage Backed Securities, the higher their return needs to be. Meaning higher mortgage rates. The mortgage market is not the only one feeling this. Because bond returns are increasing, smart money is leaving the stock market for the security of the bond market. This combined with the increasing Delta variant numbers have caused a 160 bps drop in the S&P over the last 5 days.


The Rates:

We have another day in the green as we climb back after the two week slide in the beginning of August. Today, we are sitting on the 50% Fibonacci level. Closing above this would be great news as it was a strong floor during July. However, bouncing below it is a strong possibility and because of that, we are holding a locking bias.

Or at least they are trying to…


For the last however many years, housing bears have been scratching to discount the housing market. Today is the beginning of another attempt to declare the housing market is going to be eaten.


July housing starts were released this morning showing a 7% decrease. Does this mean that hosing start will continue to decline over 7% month over month? Well, it’s too early to say but that is highly unlikely. What we do know is that builders have put up around 1.5 million units over the last 12 months. Now, some say that we are pushing toward a repeat of the 2008 housing crisis. But if we hop back to 2006, we would find ourselves in a very different situation. In 2006, builders put up over 2 million units and quickly realized that demand at the price range they were expecting was less than half of that 2 million. Today, people are looking at the market and saying that homes are staying on the market longer and that must indicate a quick slowdown. However, they are comparing that to last year while we had the biggest inventory shortage in the country’s history and houses were flying off the shelf. There were so many people looking for houses that Zillow was the US’ biggest search engine behind Google! And with the 1.5 million starts and the slightly increased time on the market, home values continue to rise – not as fast as 12 months ago but far away from declining.


The other piece that bears are biting at is the YoY decline in mortgage applications. Mortgage apps are down 19% from last year but there are some things to consider. One is that last year, refinance applications far outweighed purchases, so looking at mortgage applications is a flawed metric to base the hosing industry on. Another is that cash buyers rose from 20% in 2020 to 30% as of July 2021 – another huge decrease in mortgage applications. And again, just because the purchase market is slower than last year does not mean that we are out of a record inventory shortage.


We will continue to follow housing reports over the next few months and keep you informed before forming a final opinion.


The rates:

Mortgage Backed Securities are down 9bps so far today. Like we talked about on Monday, the Fed has a couple of ‘super doves’ that think the MBS taper should start sooner rather than later. Remember that when it comes to monetary policy there are essentially two parties – Hawks and Doves. Simply put, Hawks are more concerned with keeping inflation lower while Doves are more concerned with metrics like GDP and especially employment. Because inflation is the enemy of mortgage rates, Hawkish policy typically leads to lower rate and Dovish policy pushes them higher. The Fed is meeting today and will release its minutes later this afternoon. Because of the potential volatility from some of the doves, we are holding a locking bias.

In the last week, the conversation surrounding the tapering of Mortgage Backed Securities has rapidly increased. Some dovish Fed members are pushing for stimulus tapering sooner than the originally planned 2022/2023 and are using strong jobs statistics as the basis for why the US economy is becoming more and more self-sufficient.


However, statics are the darndest things and can be manipulated in any which way. The jobs report that came out 2 weeks ago that ignited the fall in the mortgage bond market showed a strong 943k job creations. At a closer look you will find that of the 943k, 221k were teaches returning to work after the Summer break. On the same hand, the MBS market fell when the most recent unemployment report came out showing 8.7m unemployed people making a 5.4% unemployment rate. Well, if you add back people currently working part time who want to be working full time and unemployed people who have been looking for a job for at least four weeks, the ‘unemployment’ number is closer to 20m. There are currently 10m job opening. Meaning once all covid unemployment benefits are cut, we could potentially see 20m people looking to fill 10m jobs.


The Rates:

Mortgage Backed Securities are up 9 bps today after a terrible week and a half. They have climbed above their 50 dma but are now sitting below their 50% Fibonacci retracement line. Remember, that line is a 50% recovery from the highest point the MBS market was at during last years peak. We are holding locking bias incase they bounce off that line.