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: The economy grew in May

Vital Statistics:

 

Last Change
S&P futures 30y7 14.1
Oil (WTI) 39.54 -0.39
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.16%

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.

 

We don’t have much in the way of market-moving data this week, however we will get some real estate data.

 

The economy rebounded substantially in May, according to the Chicago Fed National Activity Index. Given what I have heard from earnings calls etc, it sounds like the recession will have ended sometime in early May. I wonder if we are going to see the Q2 GDP estimates begin to get revised upwards.

 

Lennar mentioned something interesting on its conference call. We have known about the labor shortages in construction for a while. I guess the homebuilding industry took advantage of the shutdown and began a program to train displaced restaurant and retail workers in construction. Smart move, and if it alleviates the labor shortage we are looking at a long boom in housing construction.

 

Redfin is seeing a housing recovery in the May data as well. “Although the housing market was still mostly stalled in May, it’s worth noting that homes under contract to be sold jumped 33% between April and May after two consecutive months of decline,” said Redfin lead economist Taylor Marr. “This is a key leading indicator for home sales in June and July. New listings of homes for sale have also likely passed their bottom, but are still about 20% below February’s level, so there’s still a ways to go before the housing market has recouped the lost activity of the past few months during the shutdowns.”

 

Existing home sales fell 9.7% in May, according to NAR. “Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lockdown and hence the cyclical low point,” said Lawrence Yun, NAR’s chief economist. “Home sales will surely rise in the upcoming months with the economy reopening, and could even surpass one-year-ago figures in the second half of the year.” Note that Lennar reported June orders were up 20% YOY.

 

Another sign the global economy is healing. Commodity prices are up big over the past 2 months. Remember when oil was negative? Front-month WTI is pushing $40 a barrel.

Morning Report: Forbearances down

Vital Statistics:

 

Last Change
S&P futures 3137 24.1
Oil (WTI) 40.14 1.39
10 year government bond yield 0.73%
30 year fixed rate mortgage 3.16%

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.

 

Slow news day.

 

Many banks are closing early today, however it looks like the stock market and the bond market are open for a full session.

 

No economic news today, but we do have a lot of Fed-speak.

 

4.6 million homeowners are in forbearance, according to Black Knight. This works out to be 8.7% of homeowners, which is down from 8.8% the previous week.

 

More evidence that people are fleeing to the suburbs. Home searches for suburban zip codes are surging. “This migration to the suburbs is not a new trend, but it has become more pronounced this spring,” said Javier Vivas, realtor.com director of economic research. “After several months of shelter-in-place orders, the desire to have more space and the potential for more people to work remotely are likely two of the factors contributing to the popularity of the burbs.”

 

A repo man is not always intense

Morning Report: Lennar reports a huge turnaround in May

Vital Statistics:

 

Last Change
S&P futures 3126 4.1
Oil (WTI) 37.94 -0.39
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.16%

 

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

 

Initial Jobless Claims came in a little higher than expected – 1.5 million versus 1.3 million expected. Meanwhile, the Philly Fed survey was way stronger than expected.

 

The Conference Board Index of Leading Economic Indicators improved 2.8% in May versus the Street expectation of 2.3%. “In May, the US LEI showed a partial recovery from its sharp decline over the previous three months, as economic activity began to pick up again,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The relative improvement in unemployment insurance claims is responsible for about two-thirds of the gain in the index. The improvements in labor markets, housing permits, and stock prices also buoyed the LEI, but new orders in manufacturing, consumers’ outlook on the economy, and the Leading Credit Index™ still point to weak economic conditions. The breadth and depth of the decline in the LEI between February and April suggest the economy at large will remain in recession territory in the near term.”

 

Homebuyer mortgage demand spiked to an 11-year high. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said MBA economist Joel Kan.

 

Homebuilder Lennar reported better than expected earnings and re-introduced its guidance for the year. On the conference call, the company talked about how the markets turned around in May:

In May, our new orders increased each week sequentially and were up 7% over the prior year. Our cancellation rate in May also dropped from 18% — dropped to 18% from the 23% high in April. More importantly, our increase in sales was generally achieved while raising prices and reducing incentives throughout the month of May. We rarely comment on sales activity outside of the quarter we are reporting. However, given these fluid market dynamics, I will give you some insight on June. For the first two weeks of June, our new orders were up 20% over the same period last year. 

Now some of that might be catch-up from the March and April weakness, but it does point to a robust homebuilding market, certainly better than yesterday’s housing starts number would suggest.

 

The FHFA extended the eviction moratorium until August 31.

 

 

Morning Report: MFA Financial describes the chaos in the MBS market in late March

Vital Statistics:

 

Last Change
S&P futures 3126 4.1
Oil (WTI) 37.94 -0.39
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.16%

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.

 

Housing starts rose 4% MOM in May to 974,000. This is still 23% below last year. Building Permits rose 14% MOM but are down 9% YOY. Shelter-in-place orders were still in force for most of the country in May. Despite the drop in May, homebuilder confidence rebounded in June.

 

Jerome Powell heads to Capitol Hill for his second day of Humphrey-Hawkins testimony. Powell was cautious yesterday about how quickly jobs would come back. That said, investors ignored him, pushing stocks higher. Note that the Fed was consistently over-optimistic about the economy during the Obama Administration and has been consistently over-pessimistic about the economy during the Trump Administration. Note the COVID epidemic has swelled the Fed’s balance sheet even more. The Fed now holds $7.2 trillion in assets. Before the Great Recession, it held about $800B.

 

Fed assets

 

Mortgage REIT MFA Financial reported earnings yesterday. On the conference call, the company talked about how bad things got in the MBS market in late March:

January, February and the first two weeks of March were very normal and a good start to the new year. And in only a few days, the financial markets and the mortgage market in particular completely collapsed. With the onset of the COVID-19 pandemic, pricing dislocations for markets and residential mortgage assets was so extreme that liquidity evaporated. Prices of legacy non-agencies, which had not changed by more than 3 points in the last two to three years, were suddenly lower by 20 points. CRT securities dropped as much as 20 points to 50 points and MSR-related asset prices were lower by 20 points to 30 points, all in a few days. MFA received almost $800 million in margin calls during the weeks of March 16 and March 23 and over $600 million of these were on mortgage-backed securities. In contrast, we received $7 million of margin calls on these portfolios during the entire week of March 2 and $37 million during the week of March 9. And during the months of December, January, and February, we received a total of six margin calls, all related to factor changes with a total aggregate amount of $4 million.

MFA received almost $800 million in margin calls, and entered the year with about $70 million in unrestricted cash. This was the dislocation in the market that caused the Fed to react so aggressively to support the MBS market. Of course they almost killed the smaller originators and TBA brokers in the process….

 

Mortgage Applications increased 8% last week as purchases rose 4% and refis increased 10%. “The housing market continues to experience the release of unrealized pent-up demand from earlier this spring, as well as a gradual improvement in consumer confidence,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates dropped to another record low in MBA’s survey, leading to a 10 percent surge in refinance applications. Refinancing continues to support households’ finances, as homeowners who refinance are able to gain savings on their monthly mortgage payments in a still-uncertain period of the economic recovery.”

Morning Report: Homebuilding is back

Vital Statistics:

 

Last Change
S&P futures 3141 74.1
Oil (WTI) 38.34 1.39
10 year government bond yield 0.78%
30 year fixed rate mortgage 3.16%

 

Green on the screen this morning as Jerome Powell heads to Capitol Hill for Humprey-Hawkins testimony. Bonds and MBS are down.

 

Retail Sales came in way better than expected, rising 17.7% versus expectations of a 8% gain. Last month was revised from -16.4% to -14.7%. The control group, which excludes gas, autos, and building materials rose 11% versus expectations of a 4.7% increase.

 

Industrial production rose 1.4% in May, a little better than expected. Capacity Utilization rose to 64.8% and manufacturing output rose 3.8%.

 

Lennar reported second quarter earnings yesterday, with a 27% increase in earnings per share. Lennar is on a November fiscal year, so the quarter included both March and April, the worst months of the economic pandemic. That said, everything turned around in May, with CEO Stuart Miller saying this in the press release: “Business rebounded significantly in May, and by quarter’s end, our total new orders declined by only 10%, and deliveries ended flat year-over-year. In sync with the market rebound, we resumed starts and land spend to match the improving market conditions, and this rebound has continued into the first two weeks of June.” He also mentioned the effect COVID has had on demand: “While unemployment increased throughout the quarter due to impacts from the COVID-19 pandemic, customers moved from rental apartments and from densely populated areas to purchase homes, and home sales grew steadily, as record-low interest rates and low inventory levels drove a favorable rebound in the homebuilding industry.” Finally, the company re-instituted its 2020 guidance.

 

The MBA reported that new home purchase applications increased 26% MOM in May and 11% on YOY basis. “The solid increase in new home purchase applications in May is another indication of a recovery in the housing market,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “MBA estimates that new home sales rebounded 26 percent last month – a healthy turnaround after three months of declines. Homebuyer traffic is rising, and homebuilders are continuing to ramp up production following the COVID-19 pandemic-related restrictions. We expect to see additional near-term strength in the coming months from the resumption of delayed sales activity caused by the social distancing and stay-at-home orders during March and April.”

 

The MBA reported that the share of mortgages in forbearance has leveled out at 8.55%. “Results from the first week of June showed a slight uptick in the overall share of loans in forbearance, but this increase was primarily driven by a larger share of portfolio and PLS loans in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “Half of the servicers in our sample saw the forbearance share decline for at least one investor category. Although there continues to be layoffs, the job market does appear to be improving, and this is likely leading to many borrowers in forbearance deciding to opt out of their plan.” Given the way the CARES Act was drafted, there was almost no penalty for taking forbearance, and it sounds like many took it pre-emptively. Ginnie loans was flat at 11.8%, while GSE loans came in at 6.4% and private label mortgages were 10.2%.

 

The housing market outside New York City is booming. Local builders are getting slammed with inquiries and are selling homes at a rapid pace. “People who are now in the Hudson Valley looking for homes, many of them have never been to the Hudson Valley before,” Mr. Petersheim said. “That’s new to the marketplace, that urgency.” I guess being cooped up for 3 months in an 800 square foot studio that costs 5 grand a month will wear on anyone.

 

Fed Head Robert Kaplan says the economy will experience a historic contraction before rebounding in the second half of the year. From the sound of it, the economy is already bouncing back.

 

I will be doing a podcast for the Information Management Network this morning. I will be discussing economics, housing, and the markets. I will leave a link once I get one.

Morning Report: Quicken files for an IPO

Vital Statistics:

 

Last Change
S&P futures 3066 64.1
Oil (WTI) 36.64 -0.39
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.19%

 

Stocks are rebounding after yesterday’s bloodbath.  Bonds and MBS are down small.

 

CNBC reported that Quicken Loans is planning an IPO. I guess the S4 was filed confidentially, so we can’t tell much about the company’s financials. The company said that it originated $52 billion in the first quarter. Certainly the timing for a sale is right, with what looks to be a record period for refinances as far as they eye can see.

 

Realtor.com reports that the summer house shopping season is in full swing, with prices up about 5%. “The big surprise of the housing market is that prices have remained quite resilient,” says realtor.com Senior Economist George Ratiu. He doesn’t expect prices to drop over the next few months. “The summer housing market will be better than expected, but far off the normal pace.” The inventory situation is even worse than before – listings are down 25% from a year ago. That said, it is a bifurcated market, with multiple offers for lower priced homes, and little demand for higher priced ones. “For most people it will be a competitive buying market,” says Lawrence Yun, chief economist of the National Association of Realtors®. “For lower-priced and medium-priced homes, multiple offers will be fairly common. On the luxury end, some price reduction will be required because there’s plentiful inventory.”

 

More evidence that people are fleeing the cities: May rentals in Manhattan are down 62%. “The supply of available rental units continues to accumulate,” UrbanDigs said in its report, which looked at all five New York City boroughs, “hinting that renters will have the upper hand in negotiability when the market finally reopens.”

 

Mark Calabria said that the forbearance rates for the GSEs is manageable. “We’ve seen over the last few weeks those numbers start to stabilize,” Calabria said. “Within the GSE portfolio, you see as many borrowers canceling their forbearance programs as you see rolling on. I certainly over the last few months have been concerned about what the direction of the housing market would be coming out of COVID-19,” Calabria said. “I’ve been very pleasantly surprised.”

Morning Report: Zero percent rates until 2022.

Vital Statistics:

 

Last Change
S&P futures 3104 -84.1
Oil (WTI) 36.84 -2.39
10 year government bond yield 0.68%
30 year fixed rate mortgage 3.19%

 

Stocks are lower this morning after the Fed maintained interest rates at current levels. Bonds and MBS are up.

 

The Fed made no changes to interest rate policy  yesterday. The part that got everyone’s attention:

The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term. In light of these developments, the Committee decided to maintain the target range for the federal funds rate at 0 to 1/4 percent. The Committee expects to maintain this target range until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability goals.

The Fed will also maintain its purchases of Treasuries and MBS at the current pace. The economic projections include a 6.5% expected drop in GDP this year, an unemployment rate of 9.3%, and sub-1% inflation. The dot plot shows the Fed expects to keep rates at zero throughout 2020 and 2021.

dot plot

The gloomy outlook and the continued asset purchases are what seems to be driving the drop in stocks this morning and the strength in the bond markets. I guess we should expect mortgage rates to continue to ratchet lower as financial conditions thaw and more aggregators begin to get aggressive in pricing.

 

It seems like yesterday that the mortgage REITs were being thrown overboard. Bellwether Annaly just cut its dividend, which was to be expected, but it wasn’t that bad. In addition, it bought back $100 million worth of stock. With everyone out there deleveraging, I found it interesting that they chose to buy back stock as opposed to buying assets.

 

Meanwhile, initial jobless claims fell to 1.5 million and the producer price index fell 0.8% on a YOY basis.

 

The Trump Administration is considering another stimulus bill that would include more direct payments and further aid for small businesses. “We will have a significant amount of unemployment and we’re going to need to look at doing something there,” Mnuchin said. “I think we’re going to seriously look at whether we want to do more direct money to stimulate the economy, but I think this is all going to be about getting people back to work.”

 

Home Equity rose 6.5% in the first quarter, according to CoreLogic. The number of homes with negative equity fell by 16% to 1.8 million homes.

Morning Report: Loans in forbearance increases slightly

Vital Statistics:

 

Last Change
S&P futures 3200 -24.1
Oil (WTI) 38.94 -0.39
10 year government bond yield 0.82%
30 year fixed rate mortgage 3.32%

 

Stocks are lower this morning as we head into the Fed meeting. Bonds and MBS are flat.

 

The MBA reported that mortgage credit availability fell to a 6 year low. “Mortgage lenders in May responded accordingly to the increased risk and uncertainty in the economy,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “Credit availability continued to decline, with MBA’s overall index now at its lowest level since June 2014. There was a reduction in supply across all loan types, driven by further pullback in investors’ appetites for loan programs with low credit scores and high LTVs. Credit tightening was observed at both ends of the market, with less availability of low down-payment programs designed for first-time homebuyers, as well as for conforming and non-conforming jumbo loans.” So basically low FICO FHA and jumbo, which means forbearance and securitization issues are driving the decrease.

 

The MBA also reported that the number of mortgages in forbearance increased slightly to 8.53%. “The overall share of loans in forbearance increased by only 7 basis points compared to the prior week,” said MBA Chief Economist Mike Fratantoni. “With the job market beginning to gradually improve, more homeowners are exiting forbearance, and we are seeing declines in forbearance volume among some servicers.”

 

FWIW, the Fed Funds futures are predicting a 15% chance of a 25 basis point rate hike at the June meeting. That seems to be the consensus going all the way out to March 2021. If the economy rebounds quickly the Fed will probably choose to unwind asset purchases first, so it could be a while before we see rate hikes.

 

The National Bureau of Economic Research says the US entered a recession in February, which seems strange given the COVID crisis didn’t start until late March and the economic numbers in February were decent. “In deciding whether to identify a recession, the committee weighs the depth of the contraction, its duration, and whether economic activity declined broadly across the economy. … The committee recognizes that the pandemic and the public health response have resulted in a downturn with different characteristics and dynamics than prior recessions,” the committee said in a statement. So in other words, it sounds like they are using some sort of qualitative assessment of the economy to come up with the idea that we entered a recession in February.

 

Fed funds futures

Morning Report: Fed week

Vital Statistics:

 

Last Change
S&P futures 3208 24.1
Oil (WTI) 38.84 0.39
10 year government bond yield 0.91%
30 year fixed rate mortgage 3.32%

 

Stocks are higher this morning on no real news. Bonds and MBS are flat.

 

The FOMC will meet this week, although no changes in interest rates are expected. They may give some sort of update on the various sundry financial assets they will buy, but that is about it.

 

The unemployment rate was probably understated in Friday’s jobs report. Apparently there was a misclassification error for people who were employed but absent from work. They should have been classified as “unemployed” but were not, which means the unemployment rate was higher than advertised. Note this doesn’t affect the payroll number, which comes from the establishment survey.

 

The Fed is launching its Main Street lending program, but it looks like the high minimum amount of $500k is putting some borrowers off.  It has generated some political heat as a bailout for oil and gas industries. “It is far and away the biggest challenge of any of the 11 facilities that we’ve set up,” Fed chair Jerome Powell said last month during a Princeton University webcast in which he also said the central bank is open to adjusting the program.

 

The FHA gave some more guidance on forbearance. Loans in forbearance are generally ineligible for FHA insurance, but the government is permitting closed loans to be insured provided the lender agrees to indemnify FHA for 20% of the loan amount if the loan goes into foreclosure. “FHA has continually been at the forefront of providing assistance and assurance for borrowers, lenders, and the mortgage market since the coronavirus pandemic began,” said Department of Housing and Urban Development Secretary Ben Carson in a statement, adding the policy change “will give borrowers, lenders, and the market peace of mind as we continue our road to economic recovery in the United States.”