Morning Report: Trouble with non-agency mortgage REITs

Vital Statistics:

 

Last Change
S&P futures 2438 -89.4
Oil (WTI) 20.46 0.09
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.5%

 

Stock indices are lower as we kick off the second quarter. Bonds and MBS are up small.

 

The Fed took up just 53% of the bonds offered to them yesterday. It sounds like they are backing off on their aggressive buying which was triggering margin calls throughout the industry.

 

Speaking of margin calls, it looks like New Rez has a deal to sell $6.1 billion of non-agency bonds. No price was indicated, but a couple days ago New Rez cut its dividend by 90% and said that book value was down about 25% – 30% from the 12/31 mark.

 

Impac recently said it would suspend lending operations for two weeks after a whole loan investor went radio-silent about its commitment to purchase whole loans. They have let go most of their employees.

 

I can’t see how the non-QM market comes out of this as anything more than a portfolio product for banks who have the werewithall to hold the paper. While I would bet the vast majority of these non-QM loans are money good and will perform as expected, they simply aren’t suitable for repo financing. Securitize them or hold them.

 

The economy lost 27,000 jobs in March, according to the ADP jobs report. In the previous report the economy gained 183k. Small business bore the brunt of the job losses, losing 90k. The Street is expecting a -150k print for Friday’s job report. with the unemployment rate increasing from 3.5% to 3.9%. The government just passed a stimulus bill with aid to help small businesses get through this period. Many are hoping to hold on until the cavalry arrives.

 

Mortgage applications rose 15% last week as purchases fell 11% and refis rose 26%.

Author: Brent Nyitray

In the physical sciences, knowledge is cumulative. In the financial markets, it is cyclical

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