The Wrap: Pulte Crushes PennyMac; Kevin Warsh's Conflict of Visions

February 6, 2026 | This edition of “The Wrap” features our view of the key events in Washington and on Wall Street over the past week. Don’t forget to watch the podcast of “The Wrap” on The Julia LaRoche Show every Saturday. Our discussion of what’s hot and what’s not in the world of finance and investing is not to be missed!

Bill Pulte Crushes PennyMac

The big theme this week in the markets is risk off as asset classes from precious metals to AI software stocks took a drubbing. We described the carnage at market leader PennyMac Financial (PFSI) for our Premium Service subscribers. Is it really possible that PFSI’s retention of prepayments off of its servicing book were below 30%? Yup. But PennyMac may not be to blame. (See “PennyMac: Hedging Costs & Residential Loan Recapture Crater the Stock”). 

We hear that the PennyMac fiasco was largely caused by FHFA Director Bill Pulte and the Trump Administration. Most people in the markets don't realize that the GSEs already bought a ton of mortgage-backed securities (MBS) in Q4 of last year. This market manipulation in Q4 was not announced publicly and tightened mortgage spreads 15-20bps. The GSE purchases of MBS increased assumptions of mortgage prepayment speeds without a corresponding offset from hedges in the Treasury market. This set up PennyMac and other mortgage lenders for a disaster.

Since the January 8, 2026, announcement, when President Donald Trump directed Fannie Mae and Freddie Mac to purchase an additional $200 billion of their own MBS, spreads have tightened an additional 10bps. Trump’s order was aimed at lowering high mortgage rates and boosting housing affordability, but instead he caused significant losses for some mortgage lenders and investors. As Peter Wallison of American Enterprise Institute wrote this week: "Our leaders are not serious people."

Specifically, the MBS purchases by Fannie Mae and Freddie Mac increased demand for bonds, which helped decrease mortgage rates – but only for a brief time.  The appreciation of MBS crushed buyers of interest-only securities (IOs), as model speeds for prepayments are now faster and option-adjusted spread (OAS) values lower.  How is this helpful? The members of the trial bar investigating the Q4 earnings release of PennyMac ought to be interviewing FHFA Director Pulte.

AI, Silver and Crypto Sink

Another casualty of dashed earnings expectations was PayPal Holdings, Inc. (PYPL), which has lost half of its market cap in the past year.  The sharp sell-off was driven by a miss on quarterly expectations, a weak 2026 earnings outlook, and a sudden leadership change that suggests deeper issues with the fintech issuer. We’ve been concerned about PYPL’s vulnerability to competition from the myriad of new payments platforms since last year (“Fear & Loathing in Credit; Update: PayPal Holdings”). 

Spot silver retreated by more than a third from an all-time high last week, answering the question from several readers about why we prefer gold to silver.  As we discuss at length in “Inflated: Money, Debt and the American Dream,” silver is no longer a monetary asset and has not be used as money since the latter part of the 19th Century. Gold, on the other hand, is being restored as the chief monetary asset held by central banks. We continue to view silver as primarily a speculative commercial commodity and gold as a monetary asset supported by central bank buying. 

AI Goes Into Space?

Meanwhile, Elon Musk’s SpaceX acquired his artificial-intelligence startup xAI in a record-setting deal that unifies Musk's AI and space ambitions by combining the rocket-and-satellite company with the maker of the Grok chatbot. The deal, first reported by Reuters, represents one of the most audacious tie-ups in the technology sector but may also reflect the growing weakness in investor support for AI.  As Yahoo Finance noted this week: “AI is starting to eat its own.”

Meanwhile, this week Musk stated that space-based AI is "obviously the only way to scale" to meet the growing demand for computing power. Following the merger of his AI company xAI with SpaceX, Musk outlined a strategy to move large-scale AI computing from Earth to orbit in order to use solar power for AI development.

Since political opposition to AI-based power facilities is growing around the world, Musk's statement may be both practical and also a death knell for other AI ventures dependent upon terrestrial power generation. If Musk is able to put his space-based AI architecture into action, other AI ventures may no longer be viable financially or technically. The only question: How to put advanced computer chips into the harsh environment of space?

Kevin Warsh’s Conflicted Vision

The conversation continues around the appointment by President Trump of Kevin Warsh to be the next Fed chair, a decision we heartily support. The big question, however, is whether Warsh can actually cut the target for federal funds without causing the long end of the yield curve to rise given the Treasury’s massive need for cash. Every time the Treasury completes a new refunding, long-term interest rates rise.

The other big question for Warsh given the Treasury’s deficit is his desire to further reduce the size of the Fed’s balance sheet.  As readers of The Institutional Risk Analyst know very well (“Logan Riffs on SOMA; XYZ and SYF Say No Recession Yet”), when a Treasury security matures on the Fed’s balance sheet, the Treasury must refinance this liability immediately. This dynamic illustrates why the size of the Fed’s balance sheet is directly related to the size of Treasury indebtedness, the banking system and thus inflation of asset prices.

If the Fed is not replacing securities that run off the SOMA portfolio, then the Treasury must sell the new debt to a private investor and a bank deposit disappears. When the Fed is a net buyer of Treasury securities, primary dealers sell securities to the Federal Reserve Bank of New York and the Fed credits their master account, creating a new bank deposit. When the Fed grows its balance sheet, the size of the US banking system increases, asset prices rise and inflationary pressures grow. 

Now President Trump has indicated that he wants home prices to remain high, a goal that is directly in conflict with Warsh’s stated desire to see the Fed’s balance sheet shrink. While we continue to expect a home price correction ~ 2028 due to changing market dynamics, a resumption of “quantitative tightening” or QT by the Federal Reserve Board is likely to accelerate a downtown in the housing market.

Should Warsh win confirmation, its is not clear to us that there is a majority on the Board of Governors to resume QT. One big reason is that conditions in the US repo market are currently tight, characterized by increased volatility, elevated borrowing costs, and, as of late 2025/early 2026, unusual Federal Reserve intervention. 

The Secured Overnight Financing Rate (SOFR) has occasionally risen above the interest paid on bank reserves (IORB), signaling, at times, exceptional demand for cash and limited liquidity.  It's interesting to note, for example, that Morgan Stanley (MS) reported paying 45% for REPO funding last year. The table below comes from Page 77 of the MS Q4 Form 10-Q.

If a future Chairman Warsh pushes the Fed to resume shrinking the balance sheet, then he may repeat the mistake made by Jerome Powell in Q4 2018 (“The Martyrdom of Jerome Powell”).

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