Mortgage rates are greatly influenced by supply and demand. And if both the U.S. government and individuals need to borrow money, the government usually wins. Total U.S. household debt hit an all-time high of $13.15 trillion at the end of 2017. That’s up $193 billion from the previous quarter. Mortgage debt is at $8.88 trillion, up $139 billion. The Fed Funds futures are now predicting an 83% chance of a hike at the March meeting. By the end of 2018 the odds are good we’ll have seen 3 hikes this year taking overnight Fed Funds rate to 2.0% - 2.25%. And if the slope of the yield curve remains constant, we can expect the 10-year note to yield in the mid-high 3% area, and IF mortgages tag along, 30-year rates will be in the low 5% area. Ready for all that?


Taxes, The Budget, and the Loan Business

Intaxicaton: Euphoria at getting a tax refund, which lasts until you realize it was your money to start with.

Donald Trumps proposed 2019 budget has an 18% cut in HUD's budget, with the cuts largely coming from the end of the Community Development Block Grant program. But experts know, and we should understand, that this budget is a messaging document and has 0% chance of becoming law as-is.

But taxes, and the budget, do impact residential lending. For example, Fannie Mae had a $6.5B Q4 loss.  Fannie Mae stated that it will need $3.7 billion from the Treasury Department. Timothy J. Mayopoulos, president and CEO of Fannie Mae, blamed the government-sponsored enterprise’s dismal fourth quarter data on a "one-time accounting charge" tied to the recent tax reform legislation. Of course, unfortunately the headlines focus on Fannie turning to taxpayers rather than the reason for the loss. For some reason the press cut Freddie more slack after Freddie Mac suffered its loss and mentioned the accounting reason.

Taxpayers continue to come out way ahead with respect to the GSEs' conservatorship agreement, even after the draws that will be needed to cover 4th quarter losses. Both had one-time write-downs arising from accounting changes in response to the new tax bill – not that the current gfees and business model isn’t sufficient and that has been returning a significant amount of money to US taxpayers.

Both Freddie Mae and Fannie Mae posted strong full-year incomes for 2017 despite that both also suffered fourth quarter losses courtesy of the new tax law.  Fannie's comprehensive income was $2.5 billion after a loss of $6.7 billion in the fourth quarter. Freddie Mac's numbers for the two respective periods were $5.6 billion and a $3.3 billion loss.

Fannie Mae said its full-year results were down from $12.3 billion for all of 2016 although its 2017 pre-tax net was higher, $18.4 billion versus 18.3 billion. The $6.5 billion net loss for the quarter was down from net income of $3.0 billion in Quarter 3. The fourth quarter loss was the result of a remeasurement of the company's deferred tax assets due to the enactment of the Tax Act. The result was a one-time $9.9 billion provision for federal income taxes.

How can a builder lose money in this environment? Hovnanian attributed its $337 million loss in the recent quarter to a decline in community count and losses related to tax allowance and debt extinguishment hit the bottom line.

But to remind everyone, the tax plan that was passed hit citizens of the United States. For mortgages taken out after December 15, 2017, only interest on up to $750,000 in acquisition debt is deductible, for both primary and secondary homes. (Interest on up to $1 million in acquisition debt incurred on or before December 15, 2017 is still deductible.) The $1 million limit will still apply to anyone who refinances existing qualified residence debt that was incurred before December 15, 2017 to the extent the new loan does not exceed the old loan. The interest deduction on home equity debt is eliminated. This is any debt that is secured by a qualified residence other than acquisition debt. Deductions for state and local income tax, real property tax, and sales tax is limited to an aggregate of $10,000. The deduction for mortgage insurance premiums (PMI) was not reinstated.

Effective January 23rd, to accurately report borrower income to the IRS, Wells Fargo Funding is updating its W-9 form requirements for all Loans as follows:  W-9 form is required for every borrower who has a tax ID number. W-8 form is required for every borrower who does not have a tax ID number.

Ditech’s approved Delegated Clients: should note that USDA has suspended its requirements regarding obtaining IRS Form 4506-T tax transcripts for all adult members of the household. It is no longer necessary to complete or process an IRS 4506-T for the borrower(s) or for any other adult member in the household prior to funding. Verification of adjusted annual household income continues to be required and documentation must be retained in the loan file.  The following is still required at closing for each borrower: 4506-T for each borrower whose income is used to qualify (regardless of income type) must be signed at closing. 4506-T for the business tax return transcript(s) must be signed at closing when business returns are used for qualification.

Capital Markets

Turning to capital markets, most U.S. Treasuries ended Thursday higher after being hit hard on Wednesday. That was a response to the myriad of data released, headlined by January PPI meeting expectations, while core PPI was better than expected. Rising prices will increase concerns these costs will be transferred from producers to consumers.

The February Empire Manufacturing survey and Philadelphia Fed survey showed upward pressure on prices, but a negative Industrial Production report for January kept investors from complete optimism. The downturn in production was entirely attributable to a decrease in mining output. Additionally, the U.S. Treasury sold $7 billion in 30-yr TIPS with a high yield up from the previous sale. Low initial jobless claims reflected a tight labor market as we are in a period of increased demand when employers don’t normally make cuts to staff.

Today’s calendar includes Housing Starts and Permits (+9.7% and +7.4%, strong but January is known to be volatile), Import Prices (up a strong 1%), and the Michigan Sentiment numbers. Finally, there is a Class C Notice and a Class A FedTrade Operation scheduled for $1.015 billion of 3.5% and 4%. Heading into the holiday weekend we find the 10-year yielding 2.89% and agency MBS prices are better by .125 versus Thursday’s close. There will be no commentary Monday due to the holiday.


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With the MBA’s servicing conference concluding last week, attendees got proof that the servicing industry has finally stepped up its game. Companies can either innovate or get left in the dust by game-changing companies like The Money Source (TMS). TMS looks at the bigger picture and focuses on the relationship with the borrower. While there needed to be innovation in the origination process, the change can’t stop there. The change needs to carry into servicing, and TMS is committed to making this happen. Thanks to TMS’s servicing solution, SIME, it’s able to maintain a relationship with its customers, creating a lifelong partnership. SIME provides real-time transparency into a lender’s loan portfolio and borrower data. It’s time for the servicing industry to step into the high-tech revolution, and the way to do this is through technology like SIME.