Morning Report: New servicing guidance out of FHFA

Vital Statistics:

 

Last Change
S&P futures 2783 -23.1
Oil (WTI) 26.09 0.29
10 year government bond yield 0.63%
30 year fixed rate mortgage 3.36%

 

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

 

Initial Jobless Claims came in at 3 million last week. This puts the number of jobs lost to COVID at 36.4 million, or about 430 jobs per death.

 

The FHFA made an announcement yesterday which permits servicers to allow borrowers who enter forbearance to wait to pay back the skipped payments until they either refinance the loan or at maturity.

“For homeowners in forbearance due to COVID-19, payment deferral allows them to make up missed forbearance payments when they sell their home or refinance,” said FHFA Director Mark Calabria. “This new forbearance repayment solution responsibly simplifies options for homeowners while providing an additional tool for mortgage servicers. Borrowers who can pay their mortgage should, because missed payments remain an obligation that will ultimately have to be repaid.”

Servicers are required to evaluate borrowers for one of several repayment options, generally referred to as a “hierarchy” of repayment and loan modification options. The big question is whether the borrower can demand the servicer provide the option they want. Who has the final say on the repayment plan? The borrower or the servicer?  Plus, since Fannie will reimburse the 4 months of advances immediately, does the servicer have any financial incentive to choose one plan or the other?

One of the biggest deterrents to taking forbearance was that you would be unable to refinance your mortgage until the missed payments are made up. But, since this contemplates paying it off on a refi, then I guess that isn’t the case? I am sure FHFA and the GSEs will provide more guidance.

Remember the huge Fannie and Freddie LLPAs for loans that go into forbearance before they are sold to Fannie Mae? Correspondent lenders are removing them. I haven’t seen anything official, but it looks like the government might have backtracked on that one.

 

While Jerome Powell was greasing the skids for a prolonged recession, that might not be what happens. Don’t forget, there was nothing wrong with the economy to begin with. No bubbles, no buildup of inventory and bad debt, no mal-investments to work off. The economy was put into a medically-induced coma. The real work of recessions – working off excess inventory, disposing of bad assets, trimming bloated payrolls, isn’t applicable here.

The stimulus dollars (along with people being free to not pay their mortgage for a year) will provide an immense jolt to the economy. Think of what you would do if you all of a sudden could just, stop, paying your mortgage for a year. And you didn’t have to pay it off until you refinance or move? That is a lot of additional disposable income.

 

Even with COVID-19, some of the hottest markets are still going strong. The Denver area is still going strong. FWIW, I was listening to the Equity Residential earnings call the other day, and the company noted that traffic and applications started off down 50% on a YOY basis in March when the government initiated the stay at home orders. Things have improved so much that traffic and applications are now flat YOY. Delinquencies? About 5%. While Equity Residential is mainly affluent renters, this is a pretty interesting data point. Note however that the Multifamily Housing Council reported that 20% of renters have failed to make their May payment as of May 6, so it isn’t all great. But so far so good.

Morning Report: Home Prices holding up

Vital Statistics:

 

Last Change
S&P futures 2863 30.1
Oil (WTI) 23.15 2.79
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

 

Despite the COVID-19 crisis, home price appreciation is holding up. Prices rose 1.3% MOM in March and are up 4.5% YOY. April might be a better read, but still… D.R. Horton mentioned on its earnings call that pricing is holding up, and while they are offering some incentives (free fridge friday), they aren’t cutting prices to move inventory.

 

Here are the cities with the biggest drop in new listings. Allentown PA, Milwaukee WI, Scranton, PA, Detroit MI, and Buffalo NY. The Northeast and Upper Midwest seem to have been hit the hardest.

 

If you look at the CoreLogic map, most of these areas are on the undervalued side.

 

CoreLogic overvalued metros

 

Ex-MBA President Dave Stevens weighs in on how the CARES Act drove a massive tightening of mortgage credit. Comments from Mark Calabria about letting servicers fail and musing that borrowers might be better off with a bank servicer were unhelpful to say the least. The added LLPAs on first payment forbearance requests basically killed the cash-out market. He makes a point that Fannie has the liquidity (between its own net worth and the Treasury facility) to extend lines of credit. He makes a great point as well – Fannie was created during the New Deal to smooth the mortgage market during disruptions, and this one is probably the biggest since the New Deal days.

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: 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.

 

 

 

Morning Report: Fannie takes up growth estimates

Vital Statistics:

 

Last Change
S&P futures 3331 11.25
Oil (WTI) 57.78 -0.64
10 year government bond yield 1.78%
30 year fixed rate mortgage 3.88%

 

Stocks are higher this morning on strong earnings out of IBM. Bonds and MBS are flat.

 

Home prices rose 0.2% MOM / 4.9% YOY according to the FHFA House Price Index. We are seeing growth pick up in New England and the Middle Atlantic, which have been laggards since the bubble burst.

 

Mortgage applications fell by 1.2% last week as both purchases and refis fell slightly. “Mortgage applications dipped slightly last week after two weeks of healthy increases, but even with a slight decline, the total pace of applications remains at an elevated level,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The purchase market has started 2020 on a strong note, running 8 percent higher than the same week a year ago. Refinance applications remained near the highest level since October 2019, as the 30-year fixed rate was unchanged at 3.87 percent, while the 15-year fixed rate decreased to its lowest level since November 2016.”

 

Kathy Kraninger of the CFPB apparently sent a letter to Congress last week discussing the “QM patch” and recommending that regulators move away from debt-to-income ratios and use alternative measures as a way to determine ability to re-pay. The CFPB indicated that it does intend to extend the QM patch for a short while as the industry adapts to the new rules. The QM patch (which allows loans with DTIs over 43% to qualify for safe harbor provided they are saleable to Fannie and Fred) is set to expire in January 2021. The MBA made a statement on the proposal: “MBA appreciates CFPB Director Kathy Kraninger’s intention to temporarily extend the GSE patch and move away from the use of a standalone debt-to-income ratio,” Broeksmit said. “MBA has urged the Bureau to eliminate the use of DTI ratios as a standalone threshold in the QM definition, which would also remove the need to use the rigid, outdated Appendix Q methodology for calculating borrower income and debt. We look forward to working with the Bureau, and other stakeholders, on the proposed rule.”

 

Fannie Mae is out with a prediction that 2020 will be a good year for housing. Given Friday’s 1.6 million housing starts number, 2019 ended on a strong note – the highest in 13 years. While we have become accustomed to housing starts around 1.3 million since the bust, that is well below normalcy. In booms, it is not unusual to top 2 million. Fannie took up their GDP estimate a hair from 2.3% to 2.4%. In addition, they expect rates to remain stable. Origination volume is expected to moderate about 5% to $2.06 trillion, with purchase volume increasing 8% and refi volume falling 25%. Note that Realtor.com thinks there is a 4 million unit shortage right now.

 

 

Morning Report: Fannie / Freddie sale by 2022?

Vital Statistics:

 

Last Change
S&P futures 3088 -6.25
Oil (WTI) 57.59 0.44
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.00%

 

Stocks are lower this morning on weak overseas economic data. Bonds and MBS are up.

 

Initial Jobless Claims rose to 225k last week. We are still at extremely low levels historically. Jerome Powell will be testifying today at 10:00 am. Nothing earth-shattering came out of his testimony yesterday, although he pushed back on Trump’s suggestion that the Fed should cut rates below zero.

 

Inflation at the wholesale level came in a little hotter than expected, with the Producer Price Index rising 0.4%% MOM and 1.1% YOY. Ex-food and energy, it rose 0.3% MOM and 1.6% YOY. These readings are still well below what the Fed would like to see, which is inflation at 2%.

 

Mark Calabria said that Fannie and Fred could be ready to exit government conservatorship by 2022. “If all goes well, 2021, 2022 we will see very large public offerings from these companies,” Calabria said at an event sponsored by the American Association of Residential Mortgage Regulators and the Conference of State Bank Supervisors. “The consent decree will be able to give that window where they can go to market, do an offering and still operate under a way where we’ve got some prudential safeguards.” Fannie and Fred stock fell on the news. Fannie’s stock has been a trader’s dream, with plenty of volatility to play with.

 

FNMA chart

Morning Report: Ben Carson adjusts enforcement to entice banks back into FHA lending

Vital Statistics:

 

Last Change
S&P futures 3035 -2.25
Oil (WTI) 54.91 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are flattish as earnings continue to come in and the Fed begins its two-day FOMC meeting. Bonds and MBS are flat.

 

Ben Carson has “slayed” the False Claims Act “monster” that has kept banks out of FHA lending. The False Claims Act was used as a cudgel during the Obama Administration to extract massive settlements out of the banks, often over immaterial errors.

“[Banks] were in before and obviously they were in because it was beneficial to them,” Carson told HousingWire about banks’ presence in FHA lending.

“And then the housing crisis occurred and all of the sudden, the False Claims Act became a monster that started chasing everybody around the room, making their lives miserable, causing them an inordinate amount of pain,” Carson continued. “So they got out. But now, the monster has been slayed.”

Since 2010, the banking share of FHA origination has fallen from about 50% to 15%, and FHFA lays the blame at the feet of the False Claims Act. The DOJ will have its footprint in the enforcement process reduced, getting involved only when the Mortgagee Review Board deems it necessary.

 

Home Prices rose 0.3% MOM and 3.2% YOY in August, according to the Case Shiller Home Price Index. The hottest markets (San Francisco, Denver, and Seattle) are cooling off, and San Fran was down on a monthly and annual basis. The leading market was Phoenix.

 

The FOMC decision will come out tomorrow, and it looks like market participants will be taking a close look at the language for signs of a pause. If the rate cuts were merely an insurance policy to maintain the expansion, then they probably should take a break and see how the economy develops.

Morning Report: Existing home sales fall as prices increase

Vital Statistics:

 

Last Change
S&P futures 2992 -2.25
Oil (WTI) 53.87 -0.64
10 year government bond yield 1.74%
30 year fixed rate mortgage 4.03%

 

Stocks are flattish as earnings come in. We should be hearing from heavyweights such as Tesla, Boeing, Caterpillar, Ford and Microsoft. Bonds and MBS are flat.

 

Mortgage Applications fell 12% last week as purchases fell 4% and refis fell 17%. Mortgage rates increased 10 basis points and increased to 4.02%. “Interest rates continue to be volatile, with Brexit votes and ongoing trade negotiations swinging rates higher or lower on any given day,” said MBA Chief Economist Mike Fratantoni. “Last week, mortgage rates jumped 10 basis points and were above 4 percent for the first time since September. The increase in mortgage rates caused refinance applications to drop 17 percent, and by more than 20 percent for conventional loans. Borrowers with larger loans are the most sensitive to rate changes, and with rates climbing higher last week, the average size of a refinance loan application fell to its lowest level this year.”

 

Existing home sales fell 2.2% in September, according to NAR. Lawrence Yun, NAR’s chief economist, said that despite historically low mortgage rates, sales have not commensurately increased, in part due to a low level of new housing options. “We must continue to beat the drum for more inventory,” said Yun, who has called for additional home construction for over a year. “Home prices are rising too rapidly because of the housing shortage, and this lack of inventory is preventing home sales growth potential.” The median home price increased 5.9% to 272,100 and the supply of available homes came in at 1.83 million units, or about 4 month’s worth of inventory.

 

Home prices rose 0.2% MOM and 4.6% YOY in August, according to the FHFA House Price Index. Home price appreciation is definitely decelerating this year, compared to 2018, although lower rates will probably re-accelerate growth in the markets with tighter inventory.

 

FHFA regional

 

FHFA Director Mark Calabria said that he is willing to wipe out the shareholders of Fannie and Freddie if needed to protect taxpayers. “If the circumstances present themselves where we have to wipe out the shareholders, we will.,” he said at testimony in front of the House Financial Services Committee. He added that he believes that shareholders should have lost their stakes in the GSEs when the government rescued them in 2008. Fannie and Fred were put into conservatorship, with the government owning 79.9% of the companies. This was done largely to prevent disruption to the mortgage market if the companies were to enter formal bankruptcy, and also to prevent the government from having to consolidate all of Fannie’s debt on its own balance sheet. His comments at least leaves the door open for some recovery value for common stockholders if the GSEs are reformed. FWIW, the Obama administration was absolutely steadfast in their belief that the stock was worthless, and a change in administrations will probably return to that stance.

 

 

Morning Report: New Home purchase activity up 33%

Vital Statistics:

 

Last Change
S&P futures 2995.5 -6.25
Oil (WTI) 62.07 -0.84
10 year government bond yield 1.83%
30 year fixed rate mortgage 4.03%

 

Stocks are lower this morning as the markets continue to digest the Saudi oil situation. Bonds and MBS are up.

 

The FOMC begins its two day meeting today. The Fed funds futures further discounted the chance of a rate cut announcement tomorrow to 63% from 73% a day earlier.

 

Industrial Production rose 0.6% in August, and manufacturing production rose 0.5%. Both estimates were well in excess of street expectations. Capacity utilization rose to 77.9%. Pretty healthy numbers, and certainly don’t demonstrate that trade wars are killing the manufacturing economy.

 

New home purchase activity was up 33% on a YOY basis in August. “New home purchase activity was robust in August, as both mortgage applications and estimated home sales increased from a year ago,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Recent increases in new residential housing permits and housing starts, lower mortgage rates, and a still-strong job market all bode well for the new home sales outlook.” This is a bullish sign for the economy, as we have underbuilt for years. New Home Sales has been in the 600k – 700k range recently, which is at levels last seen in the mid 90s.

 

new home sales

 

That said, the population has grown, so mid-90s levels doesn’t really support the demand out there. Adjusting for population, the historical average would equate to about 900k new homes sold, or about 30% higher than here.

 

FHFA Director Mark Calabria was interviewed on Bloomberg TV on the GSEs. It looks like they will hit the market to raise capital by the end of 2020. The first order of business is to end the net worth sweep, which will allow them to build capital. FHFA and Treasury haven’t settled on a number for the capital increase yet. Fannie Mae stock was up a touch on the interview.

Morning Report: Surprisingly strong GDP report

Vital Statistics:

 

Last Change
S&P futures 2939 -3.25
Eurostoxx index 390.26 -0.72
Oil (WTI) 63.11 -0.18
10 year government bond yield 2.51%
30 year fixed rate mortgage 4.23%

 

Stocks are flattish as we end the month of April. Bonds and MBS are flat.

 

We have a decent amount of data this week, along with a Fed meeting. The biggest news will be the jobs report on Friday, although we will get income / spending data and the ISM.

 

Q1 GDP came in at a much higher than expected 3.2% versus the 2.3% growth that was expected. Even better, the inflation rate came in much lower than expected, which should mean the Fed is out of the way. The 10 year bond yield traded below 2.5% for the first time in 2 months, despite having the strongest Q1 growth in 4 years. Note that consumption didn’t drive the increase in growth (it only came in at 1.2%) – the growth was driven by exports  – which at a minimum should end the talking point that Trump’s trade wars are alienating our trading partners.

 

GDP

 

The immediate market reaction was subdued. The 10 year bond yield drifted lower, stocks were flat, and the Fed Funds futures didn’t change all that much – still predicting a 1/3 chance of no moves this year and a 2/3 chance of a rate cut.

 

In terms of the individual components, the trade numbers were affected by both an increase in exports (3.7%) and a drop in imports (-3.7%). Durable goods consumption fell 5.3%, which is probably related. Residential continues to be a persistent weak spot (-2.8%), and a bit of a head-scratcher given the sheer lack of inventory. Increased investment was driven by an increase in intellectual property (8.6%), which offset a decrease in building (-0.8%).

 

Housing’s contribution to GDP has been shrinking since the late 80s. The financial crisis caused it to fall from about 18% to 15%, and in the past decade it has been more or less stuck there. It looks like housing is again beginning to decline as a percent of GDP, and it is now below 15%. If housing can get back to at least normalcy, that should provide a good bump for GDP growth.

 

housing GDP

 

Personal Incomes rose 0.1% in March, which was below expectations. Consumption surprised to the upside. Inflation remains tame, with the headline PCE number up .1% MOM / 1.5% YOY and the core up 0.2% / 1.6% YOY.

 

New FHFA Director Mark Calabria has an ambitious agenda for housing reform, including solving problems with servicing, fixing the QM patch, and eventually releasing the GSEs from conservatorship. He is emphatic that he does not want to see the mortgage market return to the pre-2008 days.