Morning Report. Second round of stimulus passes

Vital Statistics:

 

Last Change
S&P futures 2806 14.1
Oil (WTI) 17.21 0.69
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.

 

The second round of stimulus passed the House yesterday and is scheduled to be signed by the President at noon today.

 

Durable goods orders fell 14% in March, driven by lower transportation orders. Ex-transports, they were down 0.2%. Core Capital Goods (a proxy for capital expenditures) rose 0.1%.

 

New Home Sales fell to 627k in March from an annualized pace of 741k in February.

 

Homebuilder Pulte reported good earnings yesterday, however this was mainly before the COVID-19 pandemic hit.  “The U.S. housing industry carried tremendous momentum into 2020, until the devastating effects of the COVID-19 pandemic began impacting the country,” said Ryan Marshall, PulteGroup President and CEO. “As the coronavirus spread and state and local governments implemented various restrictions and stay-in-place orders, we experienced a material slowdown in consumer traffic and sales activity beginning in mid-March.” Despite the COVID issues, closings and orders were up 16% and gross margins increased. Before COVID, 2020 was expected to be the year when homebuilding finally broke out of the post-bubble vortex. It looks like it will have to wait another year. As an aside, Redfin reported that 1 in 7 offers were signed by buyers who saw the home virtually.

 

About 3.4 million homeowners have requested mortgage forbearance, according to Black Knight Financial Services. This is 6.4% of all mortgages. With 26 million new unemployment claims since the shelter-in-place orders, that number is probably going up. At this level, servicers in aggregate are on the hook to advance $2.8 billion per month for Ginnie securities. So far, Treasury is refusing to create an advance facility for non-bank servicers.

 

Some states are relaxing shelter-in-place restrictions and allowing non-essential businesses to re-open. Needless to say, public health types are aghast, however it will be interesting to see how well it works, especially Texas. Speaking of Texas, the amount of newly unemployed in the US, about 26 million, is just shy of the population of the US’s second most populous state at 29 million. That puts the economic carnage of this shelter-in-place order in perspective. Even New York is beginning to look at relaxing restrictions, at least upstate.

 

 

 

 

Morning Report: Unemployed top 26 million

Vital Statistics:

 

Last Change
S&P futures 2802 14.1
Oil (WTI) 16.51 2.59
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning on no real news. Bonds and MBS are up.

 

4.4 million people filed for unemployment last week. That takes the COVID-19 tally up to 26.4 million.

 

Fannie Mae and Freddie Mac will now purchase loans in forbearance, provided they funded between March and May. They will incorporate a 500 basis point LLPA for first time homebuyers and 700 for everyone else. They will only buy purchase and rate / term refis, no cash outs. After 5/31 any loan in forbearance is ineligible for purchase from Fannie Mae.

 

Mark Calabria is getting beaten up  regarding the reluctance for Fannie and Freddie to provide advance lines to servicers. Ex-MBA President Dave Stevens wrote a scathing article regarding FHFA.

The CARES Act is clear about forbearance: “If a furnisher makes an accommodation with respect to one or more payments on a credit obligation or account of a consumer, and the consumer makes the payments or is not required to make one or more payments pursuant to the accommodation, the furnisher shall (I) report the credit obligation or account as current.

In this morning’s Federal Housing Finance Agency announcement – they are limiting otherwise saleable loans that are performing, “current” according to the law just passed, or charging exorbitant delivery fees.

This is unacceptable. These are GSE-eligible loans as they are performing/current according to the law just passed, unless they were delinquent at time of going into forbearance. The GSEs need to buy these loans and either hold them on balance sheet, or pool them in TBAs if that is an option (likely not).

Good point about the loan being current. If the law says a loan in forbearance is current, then the GSEs should treat it as such.

 

Meanwhile, borrowers in forbearance will get asked to repay the entire forbearance period as a lump sum, which will be pretty much impossible for anyone who had a legitimate hardship. It is looking like the CARES act forbearance will please absolutely no one.

 

The House looks set to pass an additional stimulus bill after Democrats agreed to table the idea of mandatory vote by mail. It has already passed the Senate.

Morning Report: Existing home sales flat YOY

Vital Statistics:

 

Last Change
S&P futures 2779 40.1
Oil (WTI) 14.11 2.59
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning after the Senate passed a stimulus bill to increase aid to small business, and oil rallies. Bonds and MBS are down.

 

Existing home sales fell 8.5% month over month in March, but are still up modestly on a YOY basis. “Unfortunately, we knew home sales would wane in March due to the coronavirus outbreak,” said Lawrence Yun, NAR’s chief economist. “More temporary interruptions to home sales should be expected in the next couple of months, though home prices will still likely rise.” Pricing was strong, with the median home price up 8% YOY. Inventory is still tight, down 10% YOY and is about 3.4 months worth. First time homebuyers increased to 34% of all buyers and investors fell to 13%.

 

Meanwhile, some are fretting about another housing crash. When demand outstrips supply as much as it does right now, you generally don’t see crashes. Residential real estate bubbles like we saw from 2004-2006 are rare (like once or twice a century). The conditions required for one simply aren’t in place right now.

 

Mortgage applications fell 0.3% last week as purchases rose 2% and refis fell 1%. Meanwhile, house prices rose 0.7% MOM in February and were up 5.7% YOY, according to the FHFA House Price Index.

 

JP Morgan is preparing to bring back workers in phases, according to an internal memo. Meanwhile, New York State will re-open in phases, based on how many COVID-19 cases are out there.

Morning Report: Oil goes negative

Vital Statistics:

 

Last Change
S&P futures 2751 -50.1
Oil (WTI) 14.23 -7.29
10 year government bond yield 0.55%
30 year fixed rate mortgage 3.38%

 

Stocks are lower as oil continues to weaken. Bonds and MBS are up.

 

The front month oil contract went negative yesterday, which was probably a first. I think at one point it traded at -$40 a barrel. Why? Nowhere to put it. Storage is pretty much full, and any incremental capacity out there is expensive. The May contract still trades, but June is really the active one.

 

Forbearance requests are now up to 6% of all mortgages.  8.26% of Ginnie loans are in forbearance and 4.6% of Fannie / Freddie loans are in forbearance. “With over 22 million Americans filing for unemployment over the past month, homeowners are contacting their mortgage servicers seeking relief, leading to a sharp increase in the share of loans in forbearance across all loan types,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “Mortgage servicers continue to receive a very high level of forbearance requests, but volumes were down somewhat compared to the prior week.”

 

Most economists think the eventual recovery will be U-shaped, in other words and extended downturn before things get back to normal. The other predictions are a V-shaped recovery or a W-shaped one. Obviously it depends on how long the lockdown lasts, and whether people get back to work wearing gloves and masks. Interestingly this has begun to fall down partisan lines, with red-staters wanting to get back to work, and blue-staters hectoring them about it. Note that Texas supposedly opens this week, and Georgia and Tennessee are looking to re-open May 1.

 

Retailers are looking for bailout as well. While many small retailers will be able to access the Main Street Program, many larger ones like Macy’s or Needless Markup cannot. The government’s fear is that it would be propping up companies that have larger problems than just the COVID-19 virus and were probably heading for bankruptcy to begin with.

 

The Senate may be close to a deal for further funding of small business. Apparently one of the issues with the previous deal was that larger companies with existing relationships with the banks got there first, before the the smaller businesses did. This would set aside something like $125 billion for the smaller guys with no relationships. “We insisted that a chunk of the money be separate from the competition with the bigger companies, you know the ones that have two, three, 400 people and a relationship with the banks, and we got $125 billion that will go exclusively to the unbanked,” [Chuck Schumer] said. “To the minorities, to the rural areas and to all of those little mom and pop stores that don’t have a good banking connection and need the help.”

Morning Report: Almost 3 million homeowners request forbearance

Vital Statistics:

 

Last Change
S&P futures 2815 -50.1
Oil (WTI) 11.23 -7.29
10 year government bond yield 0.63%
30 year fixed rate mortgage 3.38%

 

Stocks are lower this morning as people watch the price of oil collapse. Bonds and MBS are up small.

 

Oil is down huge this morning. Why? Nowhere to put it. We are getting back towards the late 90s, when the Economist put out its famous “drowning in oil” cover, which marked the bottom of the oil market. Note that it is the May contract, which expires this week that is down so much. Since it is no longer front month, it isn’t really actively traded and therefore not representative of the true price of oil in the markets. The June contract is trading around 22 bucks. Ironic that we are headed into the summer driving season with oil at the lowest in a generation, but there is nowhere to go.

 

oil

No major economic data this week, aside from initial jobless claims. We do get some real estate data with existing home sales, new home sales, and the FHFA House Price Index. The NY Fed is decreasing its TBA purchases to $10 billion per day.

 

The Chicago Fed National Activity Index was flashing “recession” in March, falling to -4.17. (Anything under -0.7 is considered recessionary). Mohammed El-Arian says the economy could contract 14% in 2020. Citi also warns that the markets aren’t pricing in a second wave of infections.

 

Almost 3 million people have asked for mortgage forbearance under the CARES Act. This represents 5.5% of all active mortgages. This is 4.9% of all Fannie / Freddie loans and 7.6% of FHA / VA loans. So far servicers are getting crushed by this. “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s larger mortgage servicers, who consulted with the Trump administration to set up the bailout. “When we were working on the Act, we had liquidity in it, and it did not make it into the Act. We were told it would be handled through the administration, and it’s a real problem.”

Last week Senators Sherrod Brown and Maxine Waters sent a letter to the Administration:  “The government must be prepared to respond quickly to prevent a liquidity shortfall in the single-family and multifamily mortgage markets, and to ensure that consumers are equitably served by that response. Any liquidity provided must be used to stabilize the market at a time when many families may fall behind on payments and facilitate relief to individual homeowners and renters throughout the market through forbearance, loss mitigation, and protection from displacement, rather than immediate defaults and evictions.”

Civil Rights and fair housing groups are also requesting a facility for servicers. While it seem unusual for the Professional Left to go to bat for servicers, they sense that if no facility is set up, no one will want to do FHA loans in the future. FHA business is severely restricted at the moment.

 

 

Morning Report: Stocks jump on promising COVID-19 treatment

Vital Statistics:

 

Last Change
S&P futures 2858 70.1
Oil (WTI) 17.83 -2.29
10 year government bond yield 0.63%
30 year fixed rate mortgage 3.38%

 

Stocks are higher this morning after positive news out of Gilead regarding a treatment for COVID-19. Bonds and MBS are down small.

 

Investors are bullish after the government released its plan to re-start the economy. It will involve a staggered, 3 stage process which will be left up largely to state governors. Under the first phase, movie theaters, restaurants, sports venues, places of worship, gyms and other venues could re-open with some restrictions. Schools would remain closed, and workplaces could re-open although companies will be encouraged to telecommute. Under the second phase, non-essential travel could resume, bars and schools could re-open. Under the final phase, visits to hospitals and nursing homes could resume. The Trump Administration believes some states could be ready to open quickly, by May 1. Others will take some time. Separately, NY extended the lockdown to May 15.

 

Politicians are beginning to become more vocal regarding the need to help servicers. Senators Maxine Waters and Sherrod Brown both called on the Fed and Treasury to provide liquidity to servicers struggling with advances. “Mortgage servicers are expected to face increased strain as millions of homeowners and renters lose jobs, are furloughed, or see reduced hours, all of which will keep them from making mortgage and rent payments, as a result of this public health crisis. We must not allow the pandemic to destabilize critical markets, including our housing market,” the lawmakers wrote in their letter.

 

China’s first quarter GDP dropped for the first time on record. China went into this crisis with a real estate bubble and a shaky banking system to begin with. Their economy will bear watching going forward, especially if the real estate bubble bursts and China begins exporting deflation. If it does, plan on 0% rates in the US for longer.

 

Chase has stopped accepting HELOC applications for the time being. This is just after instituting a 700 FICO floor and 20% down on loans. Chase wasn’t really in the FHA space after getting socked with a deluge of false claims act penalties in the aftermath of the 2008 crisis.  I have to wonder if the COVID-19 Crisis restricts the FHA market even further overall going forward. This is the last thing the left wants to see, and is perhaps why we are seeing Democrats like Maxine Waters and Sherrod Brown suddenly care about servicers.

 

Last week, I participated on Louis Amaya’s Capital Markets Today podcast and discussed the issues affecting the origination market. You can get the replay here.

Morning Report: 22 million jobs lost in the past month

Vital Statistics:

 

Last Change
S&P futures 2790 15.1
Oil (WTI) 20.13 0.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.37%

 

Stocks are higher this morning as the Trump Administration works on how to re-open the economy. Bonds and MBS are up.

 

The Trump Administration is looking to ease the lockdown as it looks like cases have peaked in the US. He is planning to hold a conference call with governors this afternoon and will announce something by the end of the day. Of course it will be up to the states and local governments to make the ultimate decisions for their respective jurisdictions. State and local governments are starting to get starved for cash as sales taxes have fallen off a cliff. In all honesty, if masks and gloves work (and they appear to), then it probably makes sense to have people return to work wearing them. Note that the food supply is at risk for shortages, so that is something the government must work to avoid.

 

Initial Jobless Claims fell to 5.25 million last week. Over the past month, 22 million people have lost their jobs. That is about 34 jobs lost per case of the virus, and 770 per death from the illness.

 

Housing starts fell to 1.216 million. This is down 22% from February, but is actually up 1.4% on a YOY basis. Building permits came in at 1.35 million, which was down 6.8% sequentially, but up 5% on an annual basis. Starts are going to be super-sensitive to local economies. The rumor is that KB Home simply walked away from all their land deposits in Las Vegas.

 

Neel Kashkari is recommending that the big banks raise $200 billion in capital to help buffer against the effects of the recession. Note that Shelia Bair was jawboning the Fed to force the banks to suspend dividends and bonuses, the way most European banks have. Of course the European banks are in much weaker capital positions than the US banks, and the US banks have already suspended share buybacks. Oh, and bonuses are paid at the end of the year, so that is just a throwaway talking point. But bonuses, buybacks, and dividends are kind of an evergreen topic for liberal policy types.

 

The NHMC found that 84% of renters made a full or partial April rent payment. As of a week ago, that number was only 69%. Good news for the apartment REITs.

“We are pleased to see that it appears that the vast majority of apartment residents who can pay their rent are doing so to help ensure that their properties can continue to operate safely and so apartment owners can help residents who legitimately need help,” said Doug Bibby, President of NMHC. “Unfortunately, unemployment levels are continuing to rise and delays have been reported in getting assistance to residents, which could affect May’s rent levels. It is our hope that, as residents begin receiving the direct payments and the enhanced unemployment benefits the federal government passed, we will continue to see improvements in rent payments.”

“Anecdotally, we are hearing that different parts of the industry are experiencing different levels of rent payments,” said David Schwartz, NMHC Chair and CEO Chairman of Chicago-based Waterton. “As you would expect, more expensive Class A properties, whose resident base may be more able to work from home, are reporting much higher percentage of rent payments than operators of more affordable workforce properties whose residents are more likely to have had their incomes disrupted because of the pandemic.”

 

 

Morning Report: Retail sales take a dive

Vital Statistics:

 

Last Change
S&P futures 2776 -72.1
Oil (WTI) 20.03 0.29
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.37%

 

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

 

It is April 15, and taxes are not due. People are starting to get their stimulus checks from the government. The Fed is beginning to advise on how to get the economy started again. On one hand, the economy cannot afford the roughly $25 billion a day in lost output the lockdown costs. On the other hand, if we re-open prematurely and have a second wave of infections, the economic costs could be worse. At the end of the day, people simply aren’t going to put up with this much longer. In places where there are few cases, people are simply going to ignore the edicts out of Washington and get back to work. The local governments are going to look the other way because they need the revenue as badly as people need their paychecks.

 

Mortgage Applications rose 7% as purchases fell 2% and refis increased 10%. Purchase activity will be muted as in-home showings and appraisal issues are a problem. Separately, the homebuilder sentiment index collapsed in April, from 60 to 30.

 

Retail sales fell 8.7% in March, as weakness in autos and gasoline was offset by an increase in TP and Purell.

 

Like the other big banks, Citi’s earnings took a hit as the company reserved $5 billion for expected defaults. Citi’s exposure is less in mortgages than, say Wells, but it is huge in credit cards and commercial real estate.

 

Industrial production fell 5.4% in March, while manufacturing production fell 6.3%. Capacity Utilization fell from 77% to 72.7%.

 

If you apply for forbearance, the initial negotiating position for most banks will be that the entire amount will be due immediately at the end of the forbearance period. For what its worth, I suspect this is to deal with the precautionary forbearance borrowers, those who are gaming the system by saying “I think I could get laid off, so I will suspend my mortgage payments for 90 days and keep them in the bank. At the end of the period, I will just send it all in at once.” At the end of the day, the government should have required some sort of proof of hardship. Given that the precautionary forbearance requests will compete with the people who actually need the help, servicers are overwhelmed with requests, and it seems forbearance will go to the borrowers who have the patience and free time to sit on hold for hours. The government really should have considered servicer capacity to handle requests (among other things) when it drafted the law.

 

 

Morning Report: Bank earnings take a hit on reserve builds

Vital Statistics:

 

Last Change
S&P futures 2805 40.1
Oil (WTI) 21.23 0.29
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.37%

 

Stocks are higher as we kick off earnings season and participants start to look forward to opening up the economy. Bonds and MBS are flattish.

 

JP Morgan reported earnings this morning. EPS came in at 78 cents a share, well below the $2.65 a year ago. $1.66 of the earnings hit was a reserve build for future credit losses. Originations almost doubled YOY to $28 billion and the loan portfolio shrank. The servicing portfolio also fell. The stock is up 3 bucks pre-open. No update on forbearance requests that I can see.

 

Wells reported a breakeven first quarter after charging 73 cents a share for reserve build. Origination was up 45% YOY to $48 billion. No update on forbearance requests that I can see. The stock is up a couple percent on the open.

 

Retail and hotel CMBS are missing April rent. “The market for commercial real estate mortgage loans in the United States stands on the brink of collapse,” real estate investment firm Colony Capital CEO Tom Barrack said in a Medium post late last month. “If these institutions are not permitted to maintain the flexibility and patience needed to undertake the loan restructuring efforts that will be critical to weathering the Covid-19 crisis, loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees.”

 

US Treasury Secretary Steve Mnuchin reassured mortgage servicers on Monday that Treasury was aware of the problems in the sector. “We’re going to make sure that the market functions properly,” he told reporters at a White House briefing. He added that the Treasury Department has had discussions with the Federal Housing Finance Agency about the mortgage market. “We have all the appropriate people on it,” he said. “We’re very aware of the issue.” Meanwhile, NAR provided some cover fire for the industry.

 

CNBC is reporting that 2 million homeowners have applied for forbearance so far.

Morning Report: Ginnie Mae extends help to servicers

Vital Statistics:

 

Last Change
S&P futures 2769 -10.1
Oil (WTI) 23.03 0.29
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.37%

 

Stocks are down this morning on no real news. Bonds and MBS are flattish

 

As the COVID-19 crisis seems to have peaked, Washington is starting to think about how to get people back to work and the economy restarted. Dr. Fauci discussed that we could start reopening parts of the economy next month, although we have seen some instances overseas where the virus re-started.

 

Earnings season starts this week with the big banks all reporting. Analysts don’t have a clue as to how to handle guidance in this environment. The big question with the banks will be how many borrowers are requesting forbearance. So far, no help seems to be coming, at least from Fannie and FHFA.

 

JP Morgan has tightened up credit requirements – instituting minimum FICOs of 700 and minimum down payments of 20%. This doesn’t apply to its low income programs (JPM doesn’t really do FHA) but this is a good indication of where things are headed across the industry. A massive tightening of mortgage credit was definitely NOT what Congress had in mind when it drafted the CARES Act, but the unintended consequences are probably not going to stop there.

 

Good news for Ginnie Mae servicers: Ginnie Mae will advance P&I payments for delinquent borrowers under the Pass-Through Assistance Program (PTAP). Servicers can request once per month for Ginnie to advance P&I on their MBS. Servicers would still have to handle escrows. Prepayments should help Ginnie servicers get through April, and maybe even May. It won’t solve the issue for Fannie and Freddie issuers, but it is a start.

 

Freddie Mac is extending further help to borrowers affected by COVID-19 including loan modifications typically only used during natural disasters.