Morning Report: More action out of the Fed.

Vital Statistics:

 

Last Change
S&P futures 2799 45.4
Oil (WTI) 26.56 1.49
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.47%

 

Stocks are higher this morning on optimism that things are turning the corner with the COVID-19 crisis. Bonds and MBS are up.

 

The bond market closes early today, and markets will be closed on Friday.

 

6.6 million people filed for unemployment benefits last week. That puts the number of COVID-19 job losses at around 16.5 million total.

 

The Fed unveiled a new round of measures to support the economy this morning. They include a program to augment the SBA’s Paycheck Protection Program by supplying liquidity to banks that participate, allowing them to pledge the actual loans as collateral. The Fed will also purchase loans under the Main Street Lending Program. The TALF program will be increased and more direct aid will be sent to state and local governments.

The Main Street Program will offer 4 year loans to companies employing up to 10,000 workers with revenues under 2.5 billion. P&I will be deferred for one year. The banks will retain 5% of the loan, and can sell the remaining 95% to the Fed.

Interestingly there is still no facility for mortgage servicers. It looks like the issue is finally getting the attention of lawmakers, however we still don’t have anything. In his comments at the Brookings Institution, Fed Chairman Jerome Powell said that he is watching the mortgage servicers closely, which means the Fed is probably considering some sort of relief.

 

Looks like Wells is out of the penalty box, at least as far as SBA loans go.

 

Jerome Powell said the Fed will act “forcefully and aggressively” to until the economy fully recovers. “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers … We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said in prepared remarks for an online event hosted by the Brookings Institution.

Morning Report: The Lehman moment?

Vital Statistics:

 

Last Change
S&P futures 2669 20.4
Oil (WTI) 23.86 0.49
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.47%

 

Stocks are higher this morning the Trump Administration works to get the economy going again. Bonds and MBS are flat.

 

With the Fannie 2.5 over 104, the margin calls are back. The NY Fed needs to take a break.

 

The government is starting to work on getting the economy re-opened in the next four to eight weeks. The idea would be to start opening up areas which never really had too many cases to begin with, and slowly work everyone back in. Larry Kudlow said: “It’s the health people that are going to drive the medical-related decisions,” National Economic Council Director Larry Kudlow said in an interview with Politico webcast on Tuesday. “But I still believe, hopefully and maybe prayerfully, that in the next four to eight weeks we will be able to reopen the economy, and that the power of the virus will be substantially reduced and we will be able to flatten the curve.”

 

We will get the FOMC minutes out at 2:00 pm today. Usually the FOMC minutes are a non-event but today could be different. Of course MBS are marching to their own (NY Fed) drummer these days and are gently rising regardless of how the bond market is trading. At a minimum, it will make interesting reading.

 

Mortgage applications decreased 18% last week as purchases fell 19% and refis fell 12%. FWIW, pricing in the secondary market has been terrible for the past two weeks and that is flowing through to primary markets. Aggregators are pricing like they don’t want the business.

 

Mark Calabria said that no Fannie / Freddie servicing facility is going to be made available.

“Yes and no is the answer,” Calabria told HousingWire when asked whether FHFA has a plan similar to that of Ginnie Mae, which recently announced a program to aid servicers dealing with forbearance on loans backed by the Federal Housing AdministrationDepartment of Agriculture, and the Department of Veterans Affairs.

“The yes is we continue to monitor Fannie and Freddie servicers,” Calabria said. “We are, at this point, comfortable with our ability to deal with any servicers that may be distressed so that we can either turn them into subservicers or transfer their servicing to other parties. And we believe at this point, given the number on uptake of forbearance, we’ve seen that we can transfer servicing in a way that’s not too disruptive.

“So, the yes is we have contingency plans and procedures put in place were this distress to happen,” Calabria continued. “So that’s the yes part. The no part is, do we have a liquidity facility that we will be providing via Fannie and Freddie? The answer’s no. We don’t have the resources at Fannie and Freddie to do that.”

Calabria is making a bet that forbearance requests will come in around 2% of servicing portfolios, noting the MBA said that 1.7% requested forbearance in a sample. Of course that was the first week, so it probably is premature to say that is the number. But he isn’t buying the 25% estimates some are throwing around, at least for non-Ginnie servicers. For Ginnie servicers, he can buy that number. FWIW, this kind of feels like a Lehman Brothers moment for the servicers.

 

Well, this news isn’t doing anything for servicing in the bulk market.  I heard that Fannie Mae servicing trading at 1x- 2x. Freddie is 1x and GNMA is 1x to negative. In normal markets, Ginnie is a little south of 3x and Fannie is around 4x. I don’t know if theoretical marks are going to take such a dramatic hit, but if they do, bank earnings are going to take a hit next week.

 

The MBA sent out a statement urging FHFA to reconsider.

“The FHFA Director’s recent statements send a troubling message to borrowers, lenders, and the mortgage market. Servicers are required to offer borrowers widespread forbearance under a plan devised and approved first by FHFA and then codified by the CARES Act. Fannie Mae and Freddie Mac are contractually obligated for the payments to investors. Since Fannie Mae and Freddie Mac will eventually reimburse mortgage servicers for the payments they must advance during forbearance, Director Calabria should advocate for the creation of a liquidity facility at the Fed to ensure the stability of the housing finance market.

Finally, Anthony Hsieh had this to say on Linked In last night:

Loan depot

Morning Report: Forbearance requests are coming in

Vital Statistics:

 

Last Change
S&P futures 2725 80.4
Oil (WTI) 26.46 0.49
10 year government bond yield 0.74%
30 year fixed rate mortgage 3.47%

 

Stocks are sharply higher again this morning as the COVID-19 fever seems to be breaking. Bonds and MBS are down, though MBS are still holding up better than the bond market.

 

There seems to be a sense that the COVID-19 crisis has passed the exponential growth phase and is entering the manageable growth phase. I suspect we will be talking about getting people back to work by the end of the month. Bottom line, the longer this drags on, the more people are going to ignore the stay-at-home warnings.

 

Home Prices rose 4.1% in February, according to CoreLogic. That said, it is old data and doesn’t really reflect what may be about to occur. “The nearly 10-year-old recovery of the U.S. housing market has run headlong into the panic and uncertainty from the global COVID-19 pandemic. In terms of home value trends, we are in uncharted territory as we battle the outbreak with measures that are generating a never-before-seen, rapid downshift in economic activity and employment. We expect that many homeowners will initially be somewhat cushioned by government programs, ultra-low interest rates or have adequate reserves to weather the storm. Over the second half of the year, we predict unemployment and other factors will become more pronounced, which will apply additional pressure on housing activity in the medium term.” The NYC metro area is most likely to bear the brunt of any negative price movements due to COVID-19. Note that Connecticut’s price appreciation was negative in February to begin with.

 

Meanwhile, New Jersey and Florida seem to be most likely to be hit by Coronavirus foreclosures. “Some parts of the country have seen home prices surge way past what average wage earners can afford, while others may be seeing equity lag if prices have flattened out recently or dipped,” Todd Teta, ATTOM’s chief product officer, said in a statement. “Homeowners who bought in the past year, at the top of the market, are more likely to fall into that group.” In New Jersey, five of those counties were in the New York City suburban area. They included Bergen, Essex, Passaic, Middlesex, and Union counties.

 

Nationstar (aka Mr. Cooper) said that 86,000 people requested forbearance already. Requests ranged from 8,000 – 22,000 a day through last Friday. This represents 2.5% of its customer base. Jay Bray, Mr. Cooper’s CEO said: “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Bray, talking about an advance facility for servicers “There is going to be complete chaos. We’re the largest nonbank. We have a strong balance sheet, but for the industry as a whole you’re going to start seeing problems soon.” Estimates for the number of forbearance requests range from about 2 million from the government to 12 million from the Urban Institute.

 

There is a massive moral hazard problem with forbearance that the government just hasn’t thought through. In 2008, you had to prove hardship to get a mod on your mortgage. Now you merely have to attest that you have been affected (and the CARES act says “directly or indirectly”). No proof required. I suspect the government’s 2 million estimate (~4% of homes with a mortgage) is probably too low. Urban Institute’s 24% is probably going to be closer to the mark. The limiting factor on this will simply be staffing for servicers. They probably don’t have have the people to handle 12 million forbearance requests. Heck, they probably don’t have enough for 2. What happens if someone can’t get through to their servicer, stops paying, and never gets approval? Or gets partially through the process, gives up, and stops paying without a plan?

 

Aggregators are already telling originators that any loan that requests forbearance within the first two weeks of purchase is getting pushed back to the originator. I have already received several unsolicited emails from funds looking to buy this paper. I think GNMA has said that loans in forbearance are ineligible for pooling in GII securities. Warehouse lenders are refusing to fund FHA and VA loans below 640, and aggregators seem to be moving towards a 680 minimum.

 

 

 

 

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: Coronavirus kills 10 million jobs

Vital Statistics:

 

Last Change
S&P futures 2452 4.4
Oil (WTI) 22.16 1.89
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.54%

 

Stocks are flattish after a record 6.6 million people file for unemployment. Bonds and MBS are flat.

 

So, with last week’s revised filing of 3.3 million, a total of 10 million people have lost their jobs over the Coronavirus. Compared to the roughly 200k cases in the US, that works out to be 50 jobs lost per case. That puts the cost of social distancing in perspective.

 

Construction spending fell 1.3% MOM and rose 6% YOY. These are February numbers, so they were still largely unaffected by the COVID-19 crisis.

 

Pretty much everyone has gone to 680 minimum FICOs on FHA loans now. Secondary bulk buyers are pulling back their bids for all loans as well. Everybody is padding margins to take into account the various risks in the financial system.

 

Good piece on mortgage forbearance and what needs to be done. Bottom line, you can’t just stop paying your mortgage and assume everything is fine. Call your servicer before you start missing payments. FHFA Director Mark Calabria estimates that 700,000 mortgage will need forbearance. Given that 10 million people lost their jobs in the past two weeks, that number is probably way too low.

 

New York State has loosened restrictions on in-person showings, appraisals and inspections.

 

Rent was due yesterday for the nation’s renters. Washington is looking for a way to get some relief to them. New York State is considering allowing the security deposit to take the place of rent. I know that Fannie and Fred are allowing forbearance for multifam investors, but I have not seen anything for 2-4 units specifically. The multifam relief is conditional on a freeze of evictions.

 

 

Morning Report: MBA asks for relief from FINRA and the SEC

Vital Statistics:

 

Last Change
S&P futures 2581 -29.4
Oil (WTI) 20.94 0.89
10 year government bond yield 0.70%
30 year fixed rate mortgage 3.38%

 

Stocks are down this morning as we wrap up Q1, which was the worse quarter for stocks since 2008. Bonds and MBS are up.

 

The Fed will buy up to $30 billion in MBS today, along with some CMBS paper. It sounds like the NY Fed heard the pleas of originators and is cognizant of the margin call issue. The MBA issued a letter to the SEC and FINRA asking them to give guidance to broker-dealers to lay off the margin calls: “MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”

 

Been hearing chatter that a lot of originators are imposing minimum 680 FICOs on FHA loans. Also, warehouse banks are becoming more reluctant to fund them unless there is a bid in hand for the loan. It makes sense – FHA loans have the lowest margin for safety with 3.5% down and FICO scores that are generally not good enough to qualify for Home Ready or Home Possible.

 

Goldman is forecasting a Q2 GDP drop of -34% and unemployment hitting 15%. Yikes. That said, the economy should come roaring back in the third quarter as Coronavirus issues fade. The ultimate question: Did all of these small businesses that shuttered over the past month go into hibernation or did they go away? And while the banking sector has so far withstood the impact of the credit crisis, the non-banking sector is a different story. A few non-agency mortgage REITs like Two Harbors and MITT have sold their non-agency bonds to satisfy margin calls. One certainly has to worry about the CMBS mortgage REITs as well as the plain old shopping center and mall REITs. If you are anchored with a grocery story, you might be ok. If you are anchored with a Macy’s however…

 

KB Home reported better than expected numbers on Friday, and remarked that internet traffic remains up on a YOY basis. Walk-in foot traffic is not as the company has shut down its offices. In some parts of the country construction has stopped, but in most of the US it is still proceeding. Regardless of the Coronavirus issues, it appears that the demand for homes is still there, and we might see an even tighter market in existing homes as would-be sellers take their homes off the market.

 

Home prices were up 3.9% in January, according to Case-Shiller. An economist from Capital Economics expects a 4% peak-to-trough hit in real estate pricing. It will be interesting to see if home prices take a hit as a result of the Coronavirus. As KB Home mentioned, the existing home inventory should be even tighter, and homebuilders aren’t stuck with a lot of inventory at the moment and they aren’t entertaining price cuts. That said, the NY market may be a bit heavy.

Morning Report: The Fed announces further stimulus measures

Vital Statistics:

 

Last Change
S&P futures 2323 34.4
Oil (WTI) 22.71 0.09
10 year government bond yield 0.76%
30 year fixed rate mortgage 3.84%

 

Stocks are higher after the Fed announced additional support measures for the markets. Bonds and MBS are up as well.

 

The NY Fed announced further measures to support the markets this morning.  Essentially, the Fed will do whatever it takes to keep the financial market working properly.

Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.  The FOMC also directed the Desk to purchase agency commercial mortgage-backed securities (CMBS).

The Fed expects to buy $75 billion of Treasuries and $50 billion of MBS every day this week. As of right now (pre-open), TBAs are up, but bid ask spreads are wide.

 

The chart below (courtesy of Reuters) shows MBS spreads, which is the difference between the yield on the current coupon mortgage backed security and the comparable duration Treasury.  This represents the market’s reluctance to bid MBS and that flows through to rate sheets. Yes, the Treasury market yields are lower than February. Yes, the Fed Funds rate is lower than February. No, mortgage rates are not. Once those green bars get back to where they were in February we will be seeing lousy pricing in the primary market. The Fed’s $250 billion purchasing activity in the MBS market should help though.

MBS spreads

The Fed is also extending credit to other parts of the economy, specifically the muni market and the corporate credit market. The Fed will start purchasing investment grade corporate loans, it will re-launch the Term Asset-Backed Lending Facility which lent money to investors who buy credit card receivables and other consumer debt. The Fed also plans to roll out a Main Street Business Lending Program which will lend to small businesses.

 

Late last week, pretty much everyone stopped buying non-QM loans, and it looks like jumbos will end soon as well. The securitization markets are halted. I have heard that some non-QM lenders are even refusing to honor locks they have already extended. Aggregators were also declining to buy MBS with rates below 3% as well.

 

Lenders are still waiting for guidance out of Fannie Mae regarding verbal verifications of employment and drive-by appraisals. So far, people have been closing loans in parking lots, but loans are getting done. The last thing Fannie needs is for the mortgage finance pipeline to stop, so I assume they’ll find a way to make things work. The FHFA website apparently contains an announcement that it directs the GSEs to grant flexibility for appraisal and employment verification, so something should be forthcoming.

 

Washington is set to vote on a relief bill today at noon. The Democrats are complaining about executive compensation and stock buybacks, though the bill does contain some limitations on those. Treasury Secretary Steve Mnuchin said the bill could help the Fed direct $4 trillion to the business sector. Companies that take the money will be required to maintain payroll “to the extent practicable.” Supposedly the portion of the loan that goes to maintaining payroll could be forgiven.

 

Interesting data point: Lennar reported good first quarter earnings, which pretty much was expected. Pre-Coronavirus, homebuilding was set to have the best year in over a decade. Their quarter ends in February, and the company said that orders were up 16% in the first two weeks of this quarter – i.e. the first two weeks in March. In most of their markets construction continues, and with interest rates as low as they are PITI payments are lower than market rents.

 

The deadline for filing taxes has been extended to July 15.

 

Existing Home Sales increased 6.5% in February, according to NAR. “February’s sales of over 5 million homes were the strongest since February 2007,” said Lawrence Yun, NAR’s chief economist. “I would attribute that to the incredibly low mortgage rates and the steady release of a sizable pent-up housing demand that was built over recent years.” Social distancing and economic uncertainty is expected to weigh on sales going forward, but the fundamentals of the housing market remain strong, with tremendous pent-up demand.