JP Morgan – The Daily Tearsheet

Morning Report: Existing home sales flat YOY

Vital Statistics:

	Last	Change
S&P futures	2779	40.1
Oil (WTI)	14.11	2.59
10 year government bond yield		0.60%
30 year fixed rate mortgage		3.43%

Stocks are higher this morning after the Senate passed a stimulus bill to increase aid to small business, and oil rallies. Bonds and MBS are down.

Existing home sales fell 8.5% month over month in March, but are still up modestly on a YOY basis. “Unfortunately, we knew home sales would wane in March due to the coronavirus outbreak,” said Lawrence Yun, NAR’s chief economist. “More temporary interruptions to home sales should be expected in the next couple of months, though home prices will still likely rise.” Pricing was strong, with the median home price up 8% YOY. Inventory is still tight, down 10% YOY and is about 3.4 months worth. First time homebuyers increased to 34% of all buyers and investors fell to 13%.

Meanwhile, some are fretting about another housing crash. When demand outstrips supply as much as it does right now, you generally don’t see crashes. Residential real estate bubbles like we saw from 2004-2006 are rare (like once or twice a century). The conditions required for one simply aren’t in place right now.

Mortgage applications fell 0.3% last week as purchases rose 2% and refis fell 1%. Meanwhile, house prices rose 0.7% MOM in February and were up 5.7% YOY, according to the FHFA House Price Index.

JP Morgan is preparing to bring back workers in phases, according to an internal memo. Meanwhile, New York State will re-open in phases, based on how many COVID-19 cases are out there.

Morning Report: Bank earnings take a hit on reserve builds

Vital Statistics:

	Last	Change
S&P futures	2805	40.1
Oil (WTI)	21.23	0.29
10 year government bond yield		0.75%
30 year fixed rate mortgage		3.37%

Stocks are higher as we kick off earnings season and participants start to look forward to opening up the economy. Bonds and MBS are flattish.

JP Morgan reported earnings this morning. EPS came in at 78 cents a share, well below the $2.65 a year ago. $1.66 of the earnings hit was a reserve build for future credit losses. Originations almost doubled YOY to $28 billion and the loan portfolio shrank. The servicing portfolio also fell. The stock is up 3 bucks pre-open. No update on forbearance requests that I can see.

Wells reported a breakeven first quarter after charging 73 cents a share for reserve build. Origination was up 45% YOY to $48 billion. No update on forbearance requests that I can see. The stock is up a couple percent on the open.

Retail and hotel CMBS are missing April rent. “The market for commercial real estate mortgage loans in the United States stands on the brink of collapse,” real estate investment firm Colony Capital CEO Tom Barrack said in a Medium post late last month. “If these institutions are not permitted to maintain the flexibility and patience needed to undertake the loan restructuring efforts that will be critical to weathering the Covid-19 crisis, loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees.”

US Treasury Secretary Steve Mnuchin reassured mortgage servicers on Monday that Treasury was aware of the problems in the sector. “We’re going to make sure that the market functions properly,” he told reporters at a White House briefing. He added that the Treasury Department has had discussions with the Federal Housing Finance Agency about the mortgage market. “We have all the appropriate people on it,” he said. “We’re very aware of the issue.” Meanwhile, NAR provided some cover fire for the industry.

CNBC is reporting that 2 million homeowners have applied for forbearance so far.

Morning Report: Ginnie Mae extends help to servicers

Vital Statistics:

	Last	Change
S&P futures	2769	-10.1
Oil (WTI)	23.03	0.29
10 year government bond yield		0.75%
30 year fixed rate mortgage		3.37%

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

As the COVID-19 crisis seems to have peaked, Washington is starting to think about how to get people back to work and the economy restarted. Dr. Fauci discussed that we could start reopening parts of the economy next month, although we have seen some instances overseas where the virus re-started.

Earnings season starts this week with the big banks all reporting. Analysts don’t have a clue as to how to handle guidance in this environment. The big question with the banks will be how many borrowers are requesting forbearance. So far, no help seems to be coming, at least from Fannie and FHFA.

JP Morgan has tightened up credit requirements – instituting minimum FICOs of 700 and minimum down payments of 20%. This doesn’t apply to its low income programs (JPM doesn’t really do FHA) but this is a good indication of where things are headed across the industry. A massive tightening of mortgage credit was definitely NOT what Congress had in mind when it drafted the CARES Act, but the unintended consequences are probably not going to stop there.

Good news for Ginnie Mae servicers: Ginnie Mae will advance P&I payments for delinquent borrowers under the Pass-Through Assistance Program (PTAP). Servicers can request once per month for Ginnie to advance P&I on their MBS. Servicers would still have to handle escrows. Prepayments should help Ginnie servicers get through April, and maybe even May. It won’t solve the issue for Fannie and Freddie issuers, but it is a start.

Freddie Mac is extending further help to borrowers affected by COVID-19 including loan modifications typically only used during natural disasters.

Morning Report: Retail Sales strong

Vital Statistics:

	Last	Change
S&P futures	3019	5.35
Oil (WTI)	59.54	-0.07
10 year government bond yield		2.13%
30 year fixed rate mortgage		4.10%

Stocks are flattish as earnings season kicks off. Bonds and MBS are down.

June Retail Sales came in much higher than expectations. The headline number was up 0.4% MOM and 3.4% YOY. The control group, which excludes volatile products like autos, gas, and food was up 0.7%, well above the 0.3% Street estimate. May’s numbers were revised upwards as well. The upside surprise in retail sales pushed up the 10 year from 2.09% before the number to 2.13% after. Since consumption is such a big component of the economy, expect to see Q2 GDP estimates to be revised upwards.

Despite the strong retail sales numbers, the street is still handicapping a 25% chance of a 50 basis point cut and a 75% chance of a 25 basis point cut at the July FOMC meeting. I can’t believe we are talking about rate cuts when the economy is this strong, but here we are…

In bank earnings, JP Morgan reported an increase in net income, but mortgage banking revenue was down 17% QOQ and YOY, driven by an unfavorable mark on the MSR portfolio. Volume increased 14% YOY to 24.5 billion. Wells also reported stronger earnings, with origination volume increasing to $33 billion. Margins fell from 105 basis points to 98, and it looks like they took a hit to their servicing portfolio as well.

Industrial Production was flat in June, driven by a drop in utility output. Manufacturing production was up 0.4%. Capacity Utilization increased as well, from 75.6% to 75.9%. So, despite all the concern about tariffs, we aren’t seeing it flow through to the numbers yet.

The FHA has been trying to figure out a way to bring more lenders back into the program after many exited in the aftermath of the housing crisis. The Obama administration aggressively fined lenders for minor errors which pushed banks largely out of FHA lending. The Trump Administration is changing enforcement policies and is working to bring more clarity to to the program. A number of trade groups however have argued that the reforms don’t go far enough, and don’t provide enough certainty to encourage banks to re-enter the business.

30 day delinquencies fell 0.7% YOY to 3.6%, according to CoreLogic. The only places that saw increases were due to hurricane-related issues. Flooding in the Midwest could boost these numbers in the future however. The foreclosure rate fell from 0.5% to 0.4% as well.

Morning Report: Jamie Dimon throws cold water on mortgage banking

Vital Statistics:

	Last	Change
S&P futures	2898.75	-1.5
Eurostoxx index	390.41	0.82
Oil (WTI)	63.91	0.15
10 year government bond yield		2.56%
30 year fixed rate mortgage		4.32%

Stocks are lower as we await the Mueller report. Bonds and MBS are up on weak European data.

Initial Jobless claims fell to 192,000, yet another sub-200,000 print.

Retail sales came in better than expected, rising 1.6% MOM, ahead of the 0.9% Street expectation. Ex autos, they rose 1.2% and ex autos and gas, they rose 0.9%. The economy may well be re-accelerating as we finish the first quarter and enter the second.

Special Counsel Robert Mueller will hold a press conference this morning and release a redacted version of the report to Congress before noon. At this point, everyone’s mind is already made up, so this is just a formality. I don’t expect this to be market moving.

Bonds will close early today and the markets will be closed tomorrow in observance of Good Friday.

Jamie Dimon sounded pessimistic on the mortgage business and blamed regulators during the JP Morgan earnings call.:

“In the early 2000s, bad mortgage laws helped create the Great Recession of 2008. Today, bad mortgage rules are hindering the healthy growth of the U.S. economy. Because there are so many regulators involved in crafting the new rules, coupled with political intervention that isn’t always helpful, it is hard to achieve the much-needed mortgage reform. This has become a critical issue and one reason why banks have been moving away from significant parts of the mortgage business.”

Because of post-crisis capital rules, “owning mortgages becomes hugely unprofitable,” Dimon lamented later in his note. On a call with analysts, he called mortgage servicing – the bookkeeping for regular customer payments – hard. “You got to look at that and ask a lot of questions about whether banks should even be in it,” Dimon said.

If not banks, then, who should be “in it”? “Non-banks are becoming competitors,” Dimon told analysts.

FWIW, Wells Fargo was a bit more constructive on the mortgage banking business, but since they are currently in Elizabeth Warren’s doghouse, it probably makes more sense for them to not poke the bear.

Independent mortgage banks and subsidiaries of chartered banks made an average profit of $367 per loan in 2018, down from the $711 they made in 2917, according to the MBA. “Despite a healthy economy in 2018, the mortgage market suffered, as rate hikes hurt refinancing volume and low housing inventories priced some potential homebuyers out of the purchase market,” said Marina Walsh, MBA Vice President of Industry Analysis. “For mortgage companies, there was the perfect storm of lower production revenues combined with rising expenses, which together contributed to the lowest net production income per loan since 2008.” Expenses rose to a study high of $8,278 per loan. Servicing helped pull some firms into the black, as those that retain servicing were more profitable than those that did not. That said, there is probably a size bias at work there as well.

Herman Cain might not have the votes in the Senate to get confirmed to the Fed.

Morning Report: Bank earnings come in

Vital Statistics:

	Last	Change
S&P futures	2915	6.25
Eurostoxx index	388.92	0.82
Oil (WTI)	63.31	-0.09
10 year government bond yield		2.57%
30 year fixed rate mortgage		4.23%

Stocks are higher as bank earnings come in. Bonds and MBS are down.

Earnings season has begun, and the banks are all reporting.

Wells Fargo reported earnings that disappointed, although there was a bright spot on the mortgage origination side, where margins increased from 89 basis points to 105 basis points on “improving secondary market conditions.” That said, the bank expects Q2 margins to retrace a bit of that improvement. Originations were down 23% YOY to $33 billion, and correspondent as a percentage dropped from 63% to 55%.

JP Morgan reported that mortgage originations fell 18% in the first quarter compared to a year ago. The numbers were better than expected.

Bank of America reported better-than-expected earnings as well, and they saw a big jump in mortgage origination: $11.5 billion of first lien mortgages in the first quarter compared to $9.4 billion a year ago. In their credit card business, charge-offs are increasing a bit, which could be a warnings sign about the overall economy.

The Empire State Manufacturing Survey reported that business conditions improved modestly, however things are still “fairly subdued.” Optimism is waning, however firms continue to add workers. Inflation is declining as both prices paid and prices received fell.

Charles Evans suggested that the Fed could maintain the current level of interest rates into “late 2020.” Goldman Sachs is echoing the same sentiment. As a general rule, the Fed tries to not make any moves heading into an election for fear of appearing that they support one candidate or the other.

The Fed funds futures market is becoming a touch more hawkish, with the futures implying a 61% probability of no further moves this year and a 39% chance of a rate cut.

After waiting for better times, home sellers in Greenwich are throwing in the towel. Many sellers are fed up with selling the old-fashioned way and are auctioning off properties. How bad are things? The median home price in Greenwich fell by 17% in the fourth quarter. The luxury end was even worse, falling 19% and it appears that it is down 25% in the first quarter. After a long, long wait the market is finally beginning to clear.

Morning Report: Bank earnings coming in

Vital Statistics:

	Last	Change
S&P futures	2609	2
Eurostoxx index	347.72	0.2
Oil (WTI)	51.15	0.64
10 year government bond yield		2.74%
30 year fixed rate mortgage		4.44%

Stocks are flattish as bank earnings continue to come in. Bonds and MBS are down.

Inflation at the wholesale level declined 0.2% MOM and rose 2.5% YOY. Ex-food and energy, it rose 0.1% MOM and 2.3% YOY. Rising food prices more than offset declines in energy. More and more strategists are thinking the Fed will stand pat: “We expect the Fed to sit tight until June, and odds are rising that it could be an even longer pause given the absence of an acceleration in inflation, past tightening in financial market conditions, slowing in the global economy and uncertainty surrounding geopolitical events,” said Ryan Sweet, a senior economist at Moody’s Analytics in West Chester, Pennsylvania.

Mortgage applications jumped 13.5% last week as rates fell to the lowest levels in 9 months. Purchases rose 9% while refis rose 19%.

Last week United Wholesale announced that they were removing most LLPAs from their loans in order to guarantee the best rate. Yesterday cross state rival Quicken announced they would cut pricing as well to compete. We have a wholesale price war in Amityville.

Wells Fargo announced earnings that disappointed the street as revenues declined. Mortgage banking volumes were down 28% on a YOY basis. Despite a flattening yield curve, net interest margins were flat with Q3 at 2.94%.

JP Morgan reported a sequential drop in revenues as well, however earnings were up smartly. There is some tax cut noise in the numbers however. The mortgage business had a rough go of it as originations fell 30% to $17.4 billion.

Fitch sees a stable mortgage market in 2019, after a 9% decline in 2018. Good news: delinquencies and arrears continue to fall. Bad news: lack of affordability will depress origination.

Kansas City Fed Head Esther George thinks now would be a good time to pause in the normalization process. FWIW, she doesn’t think we are quite at “neutral” yet but we are close. Note that she is on the hawkish end of the spectrum.

Morning Report: S&P 500 enters correction territory

Vital Statistics:

	Last	Change
S&P futures	2648	4.5
Eurostoxx index	355.05	-0.48
Oil (WTI)	66.58	-0.46
10 year government bond yield		3.11%
30 year fixed rate mortgage		4.93%

Stocks are slightly higher this morning ahead of a big earnings day. Bonds and MBS are down small.

General Electric disappointed and cut its dividend to a nominal amount. Facebook reports after the close.

Stocks got kicked in the teeth again yesterday, with a 100 point intraday reversal in the S&P 500. Selling climaxed right around 3:30 before recovering some of the losses into the close. The S&P is officially in a correction, which is defined as a 10% retracement from the high. Tech was thrown overboard and investors are beginning to hide in consumer staples. Bonds largely ignored the action in stocks, with the 10 year stuck in a tight range right around 3.08%.

Personal Income rose 0.2% in September, which came in below consensus. Personal spending was strong at 0.4%, and the savings rate fell to the lowest level this year. Inflation remained tame however, with the PCE headline and core readings at 2.0%, spot on the Fed’s target. The December Fed Funds futures are beginning to up the probability that the Fed does nothing in its final meeting of the year. Between a global growth slowdown (Europe’s GDP numbers were terrible this morning), trade fears, and controlled inflation the Fed does have the leeway to take a wait and see approach in December.

JP Morgan was secretly prevented from growing by the Obama administration as a penance for sins during the housing bubble. The Obama Administration wouldn’t let them open any new branches in new states in a penalty that went back to 2012. The fascinating part was that it wasn’t disclosed to the markets. Surely that info was relevant to stockholders. Was Dimon hiding info from the market? Or did the Obama Admin not want people to know he was imposing double-secret probation on certain banks? Regardless, the Trump OCC has reversed the decision and JP Morgan is now free to add branches subject to the 10% deposit cap.

Morning Report: Bank earnings pour in

Vital Statistics:

	Last	Change
S&P futures	2797	-1
Eurostoxx index	385.18	0.81
Oil (WTI)	70.6	0.27
10 Year Government Bond Yield		2.84%
30 Year fixed rate mortgage		4.53%

Markets are flat as bank earnings come in. Bonds and MBS are up small. Slow news day.

The US government held a reasonably strong auction yesterday, where primary dealers took down their smallest positions ever. Meanwhile, speculative shorts in Treasuries (one of the biggest trades on the Street) are struggling as rates stay stubbornly low. Some continue to warn that the flattening yield curve is really telling us that a recession is around the corner.

The prepared remarks for Jerome Powell’s semiannual report to Congress should be out today. Probably won’t be market-moving, but you never know.

Import prices fell 0.4% in June as petroleum and food prices fell. For the year, they are up 4.3% however.

Consumer sentiment fell according to the University of Michigan / Reuters survey. The current conditions index drove the fall, which is usually a function of gas prices. Trade fears also weighed on sentiment.

Wells Fargo reported earnings this morning. Earnings were down due to a tax charge. Stripping out the tax charge, they were flat. They had a tough quarter for mortgages like everyone else. Origination for the quarter was $50 billion, which is up seasonally from Q1, but down 11% YOY. The current pipeline of $24 billion is down 26% YOY. Margins were 77 basis points, which is down 17 from the prior quarter and down 47 bps from a year ago. The stock is down 3% pre-open.

JP Morgan had a similar story to Wells. They originated $23.7 billion in mortgages during Q2, which was higher seasonally and down about 10% from a year ago. Mortgage banking revenue (which includes servicing) was down 6% YOY. Margin compression again was the story, especially in correspondent lending. They marked up the MSR book. JPM is flat pre-open.

A bunch of other banks reported this morning and the whole sector is getting hit, with the XLF down about a percent and a half.

Federal Reserve Chairman Jerome Powell made positive comments about the economy, although he is concerned about trade and the effects of a long trade war with China. He is concerned about rising trade tensions, although he notes that Trump’s goal is to get others to lower their tariffs. If he succeeds in that, then the trade tension would be a good thing, not a bad thing. It is important to remember that China’s biggest weapon against the US is not imposing tariffs on US goods – it is ignoring US intellectual property laws. Those sorts of things will not really show up in the balance of trade numbers, but will have huge effects on IP firms, particularly media and software.