forbearance – The Daily Tearsheet

Morning Report: Housing’s contribution to GDP hits a 13 year high.

Vital Statistics:

	Last	Change
S&P futures	3255	6.6
Oil (WTI)	40.23	0.32
10 year government bond yield		0.55%
30 year fixed rate mortgage		2.98%

Stocks are higher as earnings continue to come in. Bonds and MBS are flat.

Personal incomes fell 1.1% in June while consumer spending rose 5.6%. The inflation numbers are all well below the Fed’s 1% target.

I saw a piece yesterday discussing the jump in the homeownership rate. The 2.9 percentage point increase in the rate was highly unusual (in statistical parlance, an 8 sigma event) which almost certainly points to measurement or data errors. For one thing, we don’t have anywhere near that amount of existing home sales during the quarter to justify that move. While the direction is almost certainly correct, the number looks overstated and probably will be revised downward later.

Regardless of the homeownership rate measurement issues, demand is so strong that nearly half the home sales last year were never seen in person by the buyer. This is the highest share since 2015, when professional investors were the big buyers, looking to fix and rent single family properties. “Sight-unseen offers will likely continue to climb in the coming months,” said Redfin Chief Economist Daryl Fairweather. “By the end of the 2020 homebuying season, the majority of homebuyers will have made a sight-unseen offer. The pandemic has changed the way many people view homes, and on top of that, the market is highly competitive. If you aren’t using this strategy, another buyer who is could beat you to the punch.”

Housing as a percentage of GDP climbed to a 13 year high, albeit in a pretty unusual GDP print. Housing contributed 16.2% of GDP, as opposed to sub 15% in the prior quarter. Note that we are still way below historical levels. There is incredible pent-up demand.

Some borrowers who went into forbearance are finding themselves hit with unexpected bills when the period ends. Not sure if this is a one-off, but Washington will almost certainly try and make hay with these sorts of situations.

Morning Report: Number of mortgages in forbearance drops

Vital Statistics:

	Last	Change
S&P futures	3142	34.1
Oil (WTI)	41.14	0.49
10 year government bond yield		0.73%
30 year fixed rate mortgage		3.16%

Stocks are higher despite a trade scare overnight. Bonds and MBS are down small.

I was interviewed by Steve Glener at IMN about the economy and housing. You can access the podcast here.

The Markit Purchasing Managers Index (a survey of businesses on the economy) came in better than expected. Manufacturing was a bit stronger than services. Overall it looks like the economy is back on trend.

The MBA has a new origination forecast for 2020. They expect to see $2.65 trillion in origination this year. I think the previous forecast was something like $2.05 trillion, so it is quite the jump. This should be the best year for originators since 2006, when Angelo Mozillo was a fixture on CNBC.

Despite the strong forecast, mortgage credit remains tight. Jumbos are hard to get, most lenders have high minimum FICOs for FHA, and the private label market is still digesting all the production from pre-COVID. My guess is that credit won’t ease up to pre-COVID levels until the whole forbearance issue is in the rear view mirror.

The number of loans in forbearance fell to 8.48%, according to the MBA. This is a decline from the 8.55% in the previous week and is the first decline in the MBA’s series. “The lower share of loans in forbearance was led by declines in GSE and portfolio and PLS loans, as more of those borrowers exited than entered a new forbearance plan,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Fewer homeowners in forbearance underscores the continued improvements in the job market, and provides another sign of the fundamental health of the housing market, which has rebounded considerably over the past several weeks.”

The CFPB put out a notice of rulemaking for dealing with the QM Patch. “The GSE Patch’s expiration will facilitate a more transparent, level playing field that ultimately benefits consumers through promoting more vigorous competition in mortgage markets,” said CFPB Director Kathleen L. Kraninger. “The Bureau is proposing to replace the Patch with a price-based approach to QM loans to preserve consumer access to mortgage loans while also making sure consumers have the ability to repay them. ” Essentially, the 43% DTI test will be eliminated and the CFPB will use a price test, which checks the loan’s interest rate versus the average prime offer rate for a comparable transaction. There will be an adjustment for smaller balance loans and manufactured housing loans. It will be interesting to see if they make some sort of adjustment for people who are willing to pay a higher rate in order to bring less money to the closing table.

Manhattan real estate prices could drop 10% more. Prices were already down 15% even before COVID-19, so it sounds like the NYC market is going to be a bit heavy.

Why working from home may be the new normal.

Morning Report: Over 70% of the loans in forbearance don’t need the help

Vital Statistics:

	Last	Change
S&P futures	2966	37.1
Oil (WTI)	32.84	1.19
10 year government bond yield		0.71%
30 year fixed rate mortgage		3.28%

Stocks are higher this morning as retailer earnings are coming in better than expected. Bonds and MBS are flat.

The FHFA put out new guidance yesterday on forbearance and refinances. Essentially, you will will be eligible to refinance your property provided you are current with whatever repayment plan you negotiated for 3 months after exiting forbearance. “Homeowners who are in COVID-19 forbearance but continue to make their mortgage payment will not be penalized,” said Director Mark Calabria. “Today’s action allows homeowners to access record low mortgage rates and keeps the mortgage market functioning as efficiently as possible.” According to the MBA, 4.1 million borrowers are in forbearance right now and over 70% don’t need the help. That is a huge number, but i guess it is to be expected since there is no requirement to demonstrate hardship.

Mortgage Applications fell 2.6% last week as purchases increased 6% and refis fell 6%. “Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase activity – which was 35 percent below year-ago levels six weeks ago – increased across all loan types and was only 1.5 percent lower than last year. Government purchase applications, which include FHA, VA and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months. As states gradually reopen and both home buyer and seller activity increases, we will be closely watching to see if these positive trends continue, or if they reflect shorter-term, pent-up demand.”

41% of home sales had bidding wars, according to Redfin. “Demand for homes has picked back up after hitting rock bottom in April, and that uptick paired with a lack of supply is a recipe for bidding wars,” said Redfin lead economist Taylor Marr. “Homebuyers are getting back out there, searching for more space as they realize using their home as an office and school may become the norm. But sellers are still holding off on listing their homes, partially due to economic uncertainty and concerns of health risks. In some hot neighborhoods, there may only be one or two homes for sale, with multiple homebuyers vying for them.”

22% of builders reduced home prices to move inventory, according to the NAHB. This is much less than the housing recession of 2008, which was about 50%.

Morning Report: Mortgage and rent payments are due

Vital Statistics:

	Last	Change
S&P futures	2650	-48.1
Oil (WTI)	19.81	1.29
10 year government bond yield		0.61%
30 year fixed rate mortgage		3.43%

Stocks are lower this morning after disappointing comments out of Exxon, Apple and Amazon. Bonds and MBS are flat.

It is May 1. Mortgage and rent payments are due. I suspect we will see a deluge of missed payments. Meanwhile, about half of US states are looking to loosen restrictions.

Construction spending rose 0.9% in March, despite the COVID-19 concerns. The ISM Manufacturing Index fell, but not as much as feared.

Fannie Mae reported net income of $461 million in the first quarter compared to $4.4 billion in the fourth quarter of 2019. Increased provisions for loan losses drove the decline. Fannie estimates that 7% of its book (or about a million loans) is in forbearance right now. Net worth fell by a billion to 13.6 billion. 1 million loans, $13.6 billion in equity.

According to Black Knight, 3.8 million mortgages are in forbearance. 1.7 million are Fannie / Freddie, 1.2 are GNMA and the rest are private label / other. UPB is $238 billion. Black Knight estimates that there will need to be $8 billion in P&I advances and another $1.7 billion in T&I advances.

Many large corporations are thinking of keeping work-from-home a permanent thing. It looks like productivity hasn’t suffered as much as employers have feared, and this could be a win-win for both employers and employees.

Morning Report: 7% of all mortgages are in forbearance

Vital Statistics:

	Last	Change
S&P futures	2912	42.1
Oil (WTI)	12.71	-0.29
10 year government bond yield		0.64%
30 year fixed rate mortgage		3.43%

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

7% of all mortgages are in forbearance, according to the MBA. Ginnie Mae loans (FHA and VA) are now at 10%. Fannie loans are 4.6% and Freddie are 5.5%. Private label increased to 7.5%. The FHFA has also released a press release saying that lump sum payments at the end of the forbearance period are not required.

The Economic Policy Institute (a lefty think tank) estimates from a poll that initial jobless claims are understated by 9 – 14 million due to system problems, in other words people who can’t register because the state unemployment sites are overwhelmed with traffic. If they are right, then the actual number of people who lost their jobs due to COVID is about 37.5 million. In other words, about 662 livelihoods per person who has died from the virus.

The COVID lockdown is beginning to affect the food supply as well. At some point the cure is worse than the disease.

The Fed begins the two-day FOMC meeting this week. They can’t do much more monetary policy wise, but it sure would be nice if they announced a facility to allow mortgage bankers to repo servicing advances.

Home prices rose 0.4% MOM and 3.5% YOY in February, according to the Case-Shiller Home Price Index. It will be interesting to see if the COVID crisis affects home prices nationally. FWIW, Pulte said on its conference call that it hasn’t cut prices at all. In some markets where there is excess spec inventory, builders are adding financing incentives, but not breaking price.

We are starting to see warehouse banks curtail high balance loans. Cash-out refis are also getting harder to do. I heard a rumor that Ginnie Mae may also introduce some sort of vehicle to pass some of the forbearance costs onto lenders (perhaps a special pool for forbearance loans). While the government’s forbearance policies may provide relief to homeowners, the unintended consequence is a severe restriction in credit.

One of the big trends in the aftermath of the financial crisis was the Millennial Generation preferring to live in urban walkable areas. COVID-19 might have stuck a fork in that trend. Good news for suburban SFR property owners.

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: 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.

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: 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.