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: Banks pan the SBA loan program

Vital Statistics:

 

Last Change
S&P futures 2517 4.4
Oil (WTI) 28.56 3.29
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.5%

 

Stocks are flattish after the jobs report. Bonds and MBS are flat as well.

 

Jobs report data dump:

  • Nonfarm payrolls down 710,000
  • Unemployment rate 4.4%
  • Labor force participation rate 62.7%
  • Average hourly earnings up 3.1%

Job losses were concentrated in the service sector, with leisure and hospitality losing 459k jobs. Health care lost 61k jobs (mainly support people) and construction was down as well. FWIW, the 710k number is probably not representative of what is really going on – it will be the cumulative weekly initial jobless claims, which are at something like 10 million.

 

The government is supposed to launch its SBA loan program next week. Apparently many banks will be sitting out. The biggest concern will be reps and warrants, especially when it comes to preventing fraud. The banking system remembers well when the Obama Administration used the False Claims Act to extract massive penalties with FHA lending. Many of those banks, like JPM, never returned to the sector. Also, the requirements to prevent terrorist financing and money laundering, which under the best circumstances takes weeks to do. Finally, the rate the banks will be forced to charge will be too low and will cost them money. But there will have to be reps and warrants relief to get banks to participate. They remember what happened in 2009 and 2010 too well.

 

All of the Fed’s buying has driven its balance sheet up to 5.86 trillion in assets. Before 2008, it was about $800 billion.

 

While most of us are focused on what COVID-19 is doing to the residential market, the commercial market is even worse. The CMBS market is completely frozen. Multifamily, retail, office tenants etc are simply not paying rent right now, and that is going to cascade onto the balance sheets of the banks.

 

There had been talk of a Fed facility to allow servicers to borrow to make advances to bondholders. It looks like that isn’t going to happen, at least not yet. Treasury wants to get a read on how many borrowers actually take advantage of the program. The problem is that if you tell someone that they can skip the next few payments on their mortgage, with no hit to their credit rating, no penalties, and the missed payments will just get tacked on to the end of the mortgage, who isn’t going to take advantage of it? A dollar today is worth more than a dollar tomorrow.

 

Moody’s has downgraded the non-bank mortgage sector from “stable” to “negative” as the financial markets seize up. We have seen the big non-agency mortgage REITs like New Rez, Two Harbors, and Redwood make distressed asset sales in order to meet margin calls.

Morning Report: Fiscal stimulus on the way

Vital Statistics:

 

Last Change
S&P futures 2422 -19.4
Oil (WTI) 23.61 -0.49
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.44%

 

Stocks are lower this morning despite a deal on the fiscal stimulus bill. Bonds and MBS are up. The Fed will be continuing its normal $50 billion in MBS purchses this morning.

 

Congress came to a deal on a stimulus bill which aims to ease as much of the economic shock from Coronavirus as it can. Most Americans will get a $1,200 check, small businesses will get $367 billion in relief and state / local governments will get $500 billion in loans. Unemployed workers will get an additional $600 a week up to 4 months.

 

Trump says that he wants the “country opened” by Easter in order to salvage the US economy. The idea would be to re-open restaurants and in-person employment in the non-hotspots. Needless to say, health experts are aghast at the idea, and yes, health concerns are a concern. They aren’t the only concern. Of course state governments are going to have the last word on that as well.

 

A consortium of originators, credit agencies and lobbyists sent a letter to the government discussing relief for homeowners affected by Coronavirus. The idea would be to allow people affected by the crisis to defer mortgage payments for 90 days without interest or penalties. The missed payments would essentially be added to the final payments of the mortgage without interest. Of course servicers are on the hook for the advances, and non-bank servicers don’t have the liquidity to make these advances. The group urges the government to provide some sort of borrowing facility for non-bank servicers to draw upon to make the these additional payments.

 

The Coronavirus has impacted commercial mortgage backed securities as well. As businesses shut down, they can’t make their mortgage payments. This means that the mortgages securing the complex are having issues. Lots of small business owners are combing over the force majure clauses in their contracts right now. For mortgage bankers, this is an issue because the same folks that buy CMBS often buy RMBS. To make matters worse, some of the biggest buyers of mortgage backed are sovereign wealth funds, and with less goods coming from overseas, the less demand for MBS from foreign funds. The Fed will purchase agency CMBS with the help of Blackrock.

 

Mortgage Applications fell 29% last week as rate spiked and bottlenecks in the mortgage market increased. “The 30-year fixed mortgage rate reached its highest level since mid-January last week, even as Treasury yields remained at relatively low levels. Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With these higher rates, refinance activity fell 34 percent, and both the conventional and government indices dropped to their lowest level in a month. Looking ahead, this week’s additional actions taken by the Federal Reserve to restore liquidity and stabilize the mortgage-backed securities market could put downward pressure on mortgage rates, allowing more homeowners the opportunity to refinance.”

 

Have been hearing that Fannie cash window pricing was 50 – 200 basis points wider yesterday. FHA rates have been getting smashed on the basically worthless servicing value. Every co-issue partner is on hiatus. Tough to manage a pipeline when the bids for your loans are lower and the NY Fed is pushing your hedge inexorably higher which is driving margin calls. I keep saying the mortgage banking business will feast once this is over, but we gotta get to the table first.