banks – The Daily Tearsheet

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: Advance facility needed

Vital Statistics:

	Last	Change
S&P futures	2567	84.4
Oil (WTI)	27.46	-0.89
10 year government bond yield		0.65%
30 year fixed rate mortgage		3.44%

Stocks are higher as early signs show a plateauing in the COVID-19 crisis. Bonds and MBS are down.

Ex-MBA President Dave Stevens penned an editorial in Housing Wire that is worth a read. The CARES act mortgage forbearance policy is wreaking havoc on the mortgage banking system in general. The unintended consequences of this must be dealt with immediately. The servicers are Ground Zero of the crisis, as the CARES act requires them to make advances they don’t have. Ginnie Mae envisions a facility to make advances, but so far the GSEs do not. Also, the government’s estimate that only 750,000 homeowners will take advantage of this program is simply wishful thinking. There are probably 50 million mortgaged properties in the US. 10 million people lost their jobs in the last two weeks. Dave Stevens argues that the government must establish an advance line facility for Fannie and Freddie loans, and they need to be clear on how advances will be replenished. The cost of not figuring this out is already evident:

Bid-ask spreads have widened, servicing bids have all but dried up or are being severely curtailed, lenders are having to pull back on minimum credit score, maximum DTI, certain loan products, and more. The Jumbo market is all but gone, especially in the third-party channels. In short, any prospective homebuyer right now is more likely to find fewer or no options for mortgage financing. This is greatly the outcome of the massive uncertainty surrounding the rollout of these federal interventions.

We are going to start hearing about some of the more tangible effects when the banks start reporting first quarter earnings in about a week. I can’t imagine what JP Morgan and Wells are going to have to say. Note JP Morgan is already publicly musing about cutting the dividend.

Black Knight Financial Services has a white paper discussing how to navigate the COVID-19 environment.

Bank of America has seen massive demand for the SBA Payroll Protection loans. Bank of America CEO Brian Moynihan said that the bank would serve its borrowing customers (i.e. existing clients) first. There remain issues regarding reps and warrants relief for fraud and money laundering, which have to get solved before the banks will really start doing these.

St. Louis Fed President James Bullard said that the COVID-19 stimulus bill was the correct size, and another one is probably not needed. He envisions the US economy having a sharp rebound once this is over.

New York is beginning to plan for re-opening business.

Morning Report: Markets down on travel restrictions

Vital Statistics:

	Last	Change
S&P futures	2601	-139.25
Oil (WTI)	31.12	-1.89
10 year government bond yield		0.70%
30 year fixed rate mortgage		3.5%

Stocks are lower after Trump announced a 30 day travel ban from Europe. Bonds and MBS are up.

Initial Jobless Claims came in at 211,000 last week, below expectations. If Coronavirus is going to cause a recession, this will be the first place you see it. So far, it looks like companies are hanging on to their workers. This is key to preventing a recession.

Credit spreads are beginning to widen, however. The banks have been crushed YTD, with Wells down something like 40%, JPM down 30%. We are nowhere near 2008 levels (and probably aren’t heading there), but widening credit spreads are the canary in the coal mine.

Speaking of widening spreads, mortgage backed security spreads are widening. The difference between the implied yield of mortgage backed securities and treasuries is about 150 basis points right now. It was about 110 at the end of February. In a nutshell, this means that mortgage rates right now are about the same as they were when the 10 year was yielding 1%. If all you watch is the 10 year bond yield indicator on CNBC. It isn’t telling the whole story.

We are entering “oh crap” season, where companies that are going to miss their first quarter earnings expectations disclose it to the market. This could be an opportunity for companies to “kitchen sink” a lot of things as Coronavirus provides an opportunity for them to build in cushion for future earnings releases. In other words, if the Street expects you to make $1.16 in your first quarter earnings, and you are going to come in around $1.12 – $1.13, you might disclose that you will make only $1.10 and take the opportunity to write down a whole bunch of assets and doubtful accounts to create some cushion to make sure they make their numbers going forward. Companies aren’t supposed to do this, but they do. Certainly look for airlines, hotels, banks, consumer discretionaries, and energy to warn on Q1.

Inflation at the wholesale level fell 0.6% MOM in February, and is up 1.3% on a YOY basis. Ex-food and energy it is down 0.3% MOM and up 1.4% YOY. Again, inflation no longer matters to the Fed.

The Fed Funds futures are now predicting a 60% chance cut of 75 bps next week and a 40% chance of a 100 bp cut. Note that the CME indicates that the inter-meeting cut has screwed up the probability graphs, but they don’t quantify it. Oh, by the way, the CME is suspending all open-outcry trading until further notice starting Friday.

Morning Report: Bank earnings coming in

Vital Statistics:

	Last	Change
S&P futures	3287	-2.25
Oil (WTI)	58.63	0.54
10 year government bond yield		1.84%
30 year fixed rate mortgage		3.88%

Stocks are flattish as we await the China trade deal and earnings season begins in earnest. Bonds and MBS are flat.

Inflation remains under control, and more or less where the Fed would like it. The Consumer Price Index rose 0.2% MOM and 2.3% YOY. Ex-food and energy it rose 0.1% MOM and 2.3% YOY.

JP Morgan reported better than expected earnings this morning driven by higher bond trading revenue. Origination volume increased to $33 billion, up 3% on a sequential basis, which is impressive given the seasonality of the mortgage business. On a YOY basis, it almost doubled. Full year origination volume increased 32% to $105 billion. Servicing took a bite however as prepayment speeds increased. Overall, home lending revenue was down 5% compared to the 4th quarter a year ago as negative servicing valuations offset increased production income. JPM stock is up about a buck pre-open.

Wells reported earnings that missed expectations driven largely by litigation expenses. Mortgage origination volume rose sequentially to $60 billion in the quarter, and servicing was revalued upward from the 3rd quarter. Production income was flat at 1.21%. The stock is down about 3.5% pre-open.

Small business optimism dipped a touch in December, according to the NFIB. “Owners are aggressively moving forward with their business plans, proving that when they’re given relief from the government, they put their money where their mouth is, and they invest, hire, and increase wages,“ said NFIB Chief Economist William Dunkelberg. “What really matters to small business owners are issues directly impacting their bottom lines. Currently, their biggest problem is finding qualified labor, surpassing taxes or regulations.” A net 29% of small businesses reported increasing compensation, an a net 24% plan on increasing comp in the next two months. That said, any sort of profit pressures are coming from weak sales, not increased costs.

Delinquenices hit a 20 year low in October, according to CoreLogic. 30 day DQs fell from 4.1% to 3.7% YOY. The foreclosure rate fell from 0.5% to 0.4%. Separately, CoreLogic reported home prices grew 3.3% in October. “Home price growth builds homeowner equity and reduces the likelihood of a loan entering foreclosure,” said Frank Nothaft, chief economist with CoreLogic. “The national CoreLogic Home Price Index recorded a 3.3% annual rise in values through October 2019, and price growth was the primary driver of the $5,300 average gain in equity reported in the latest CoreLogic Home Equity Report.”

Morning Report: Bank earnings looking strong

Vital Statistics:

	Last	Change
S&P futures	2991	-6.25
Oil (WTI)	52.97	0.14
10 year government bond yield		1.74%
30 year fixed rate mortgage		3.97%

Stocks are lower this morning as bank earnings come in. Bonds and MBS are down.

Retail Sales disappointed, falling 0.3%, which was lower than expected. Ex autos and gas, they were flat, although August numbers were revised upward across the board. The control group was flat, and sales rose 4.1% YOY.

Mortgage Applications rose 0.5% last week as purchases fell 4% and refis rose 4%. “The ongoing interest rate volatility is impacting a borrowers’ ability to lock in the lowest rate possible. Despite a slight rise in mortgage rates last week, refinance applications increased 4 percent and were 199 percent higher than a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications slowed for the second week in a row. While near term economic uncertainty is still a factor, other fundamental issues, such as a lack of housing inventory in many markets, is preventing purchase activity from meaningfully rising. However, purchase applications were still much higher than a year ago. This is a reminder that the purchase environment in 2019 continues to be stronger than in 2018.”

Bank earnings are generally looking good, and mortgage backed securities trading desks are doing well as rates have fallen and volumes have picked up. The other side of the coin is that the drop in rates have negatively affected the values of mortgage servicing rights. Wells is a good example: despite a $127 million increase in origination revenue, total mortgage banking revenue fell by $292 million as their servicing book took a $419 million mark-to-market loss.