lending – The Daily Tearsheet

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: Mortgage credit expands

Vital Statistics:

	Last	Change
S&P futures	2858	-14
Oil (WTI)	61.94	0.24
10 year government bond yield		2.45%
30 year fixed rate mortgage		4.15%

Stocks are lower after the US imposed further tariffs on Chinese goods. Bonds and MBS are flat.

As promised, the US increased tariffs on about $200 billion of Chinese goods as trade talks continue. The Chinese vowed to retaliate, and that sent the Chinese stock market up sharply overnight. Both parties say they want to strike some sort of deal and it is possible this could get walked back.

Inflation at the consumer level rose 0.3% MOM and 2.0% YOY, right in line with the Fed’s target. Ex-food and energy, they were up 0.2% / 2.1%. Although the Fed doesn’t really pay too much attention to CPI (they prefer PCE), it keeps the Fed at bay, probably through the 2020 election.

Uber priced its IPO at $45 a share last night, towards the bottom of the range. The bankers claim that was due to market conditions, but the IPO market has been lousy in general, partly because all of the value is extracted in the funding rounds prior to the IPO, which means they are coming to the market priced for perfection. The lousy performance of Lyft’s IPO didn’t help matters either. A labor standoff with its drivers isn’t helping either.

Neel Kashkari discusses why we aren’t seeing inflation even at 3.6% unemployment. His main point is that the unemployment rate uses a measure of the labor force that is probably understated. You have to be actively looking for a job to be considered part of the labor force, and people who have been unemployed for over 6 months no longer count. The tell, therefore is wage growth. Given productivity has been running at around 1.5% and inflation is running around 2%, then non-inflationary wage growth should be around 3.5%. Since we are closer to 3%, there is still slack in the labor market. He also cited two interesting stats: First, of the people that got jobs in April, 70% said they weren’t looking for work in March. That suggests that many of these workers were on disability, which is basically long-term unemployment. The fact that they are coming back is a good sign. Second, the fall in the labor force participation rate offsets the unemployment effect. To get an apples-to-apples comparison of today’s job market versus the late 90s, 2.3 million more prime age workers (age 25-54) would need to have jobs. This also explains why wage growth has been running below what it should.

Usury laws are back. Bernie Sanders and Alexandria Ocasio-Cortez want to cap credit card interest rates at 15%. I guess the hope is that credit card companies will say “yes, we were overcharging you and we’ll still make money at 15%, so here you go.” In reality, all they will do is stop issuing cards to people with FICOs below a certain level. Credit card debt is unsecured, which means that the lender generally gets little to nothing if the borrower defaults. So, they assign a probability of default and multiply the interest by 1 minus the default rate and decide whether that return is acceptable compared to other debt instruments. By the way, these ideas aren’t new. Much of this had been tried and rejected over the past 100 years, but i guess in politics and finance, knowledge is cyclical, versus cumulative as it is in the sciences.

Mortgage credit standards loosened last month as more lenders embraced non-QM lending. The MBA’s Mortgage Credit Availability Index increased for everything except government loans, which fell. The drop in government is probably due to VA loans, which are under scrutiny right now. By the way, although the chart below is close to highs, it doesn’t go back to the bubble years. Compared to then, credit is still much, much tighter. The current index of 190 or so is still a fraction of the 900 level which characterized the days of “pick a pay” loans.

Morning Report: VA sends subpoenas to several lenders

Vital Statistics:

	Last	Change
S&P futures	2875	-15
Oil (WTI)	61.27	-0.13
10 year government bond yield		2.43%
30 year fixed rate mortgage		4.17%

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

Trade fears have been the driver of negative sentiment in the markets this week after Trump tweeted that he is considering increasing tariffs on Chinese goods this week. It turns out that Beijing sent a marked-up agreement that basically reneged on most of their former commitments, which is what drove the response from the US.

There were 7.5 million job openings at the end of March, according to BLS. The quits rate was unchanged at 2.3%. Quits rose in real estate and fell in construction. Job openings are pretty much close to record levels and exceed the numbers we saw in 2000. This is the 13th straight month where the number of openings has exceeded the number of unemployed.

Mortgage applications rose 2.7% last week as purchases rose 4% and refis rose 1%. We saw a good week for the spring home buying season, as a 5 percent increase in purchase applications–both weekly and year-over-year–drove the results,” said MBA Associate Vice President of Economic and Industry Forecasting Joel Kan. “Average loan amounts also stayed elevated, with government purchase applications rising to the highest in the survey. Even with slower price appreciation in higher-priced markets, home prices are still rising enough to push average loan sizes higher.” The increase in government applications was driven by VA purchase activity. The typical 30 year fixed rate mortgage fell 4 basis points to 4.27%.

Speaking of VA loans, the government has sent subpoenas to at least 8 lenders seeking information regarding delinquencies and prepayments. VA prepay speeds have been an issue for both the government and investors. VA has recently put out a request for input from various stakeholders regarding VA loans and prepay speeds and is considering making some high LTV VA loan ineligible for GNMA multi-issuer pools, which would almost certainly negatively affect pricing.

Newco spelled backwards reported a first quarter loss, due to a negative mark on their MSR book. The mark was probably due more to interest rates than anything else, as both prepayments and delinquencies fell. Yet another instance where investors have loaded up the boat buying MSRs ahead of an expected increase in interest rates, only to see them head back down. This has pretty much been the story for the past several years.

Morning Report: The Fed begins to catch up with the markets

Vital Statistics:

	Last	Change
S&P futures	2898.25	3.5
Eurostoxx index	387.47	0.4
Oil (WTI)	64.02	-0.59
10 year government bond yield		2.49%
30 year fixed rate mortgage		4.14%

Stocks are higher after the UK and the EU agreed to kick the can down the road on Brexit. Bonds and MBS are flat.

The FOMC minutes didn’t reveal much new information. They did move closer to what the markets have been saying all along: that the Fed is done with rate hikes: “A majority of participants expected that the evolution of the economic outlook and risks to the outlook would likely warrant leaving the target range unchanged for the remainder of the year.” That said, the Fed Funds futures are handicapping a more than 50% chance for a rate cut this year, so there still is a disconnect. The FOMC also seemed eager to end the balance sheet reduction exercise, concerned that allowing it to fall further risks pushing up the overnight borrowing rate by creating a reserves shortage.

The CEOs of the biggest banks appeared before the House yesterday and it was basically a political posturing event. Democrats complained about diversity, deregualation and student loans. Republicans talked about Brexit and politically targeting industries by cutting them off (firearms). Aside from creating clips for donor emails, the whole dog and pony show was contained nothing of use for investors and professionals.

The Producer Price index increased 0.3% in March, which is up 2.9% YOY. Declining energy prices were offset by increasing final demand inflation.

Initial Jobless Claims were again below 200,000, falling to 196,000. These are extraordinary numbers, the like we haven’t seen in half a century.

Morning Report: Weak housing starts number

Vital Statistics:

	Last	Change
S&P futures	2821.25	14.5
Eurostoxx index	376.34	2.01
Oil (WTI)	59.65	0.83
10 year government bond yield		2.45%
30 year fixed rate mortgage		4.08%

Stocks are higher this morning on overseas strength. Bonds and MBS are up.

Lots of housing data to chew through. Let’s start with existing home sales, which increased 11.8%, according to NAR. While this month-over-month print of 5.51 million sounds impressive, we are still down on a YOY basis. Lower rates are helping, and we are beginning this season with a little more inventory to work with. We had 1.63 existing homes for sale, which represents a 3.6 month supply. A balanced market needs something like 6 months. Prices are still rising – the median house price rose by 3.6% – but the rate of appreciation has slowed. The median home price came in at $249,500, and that puts the median house price to median income ratio just over 4. Historically that is a high number, but lower interest rates help the affordability issue. The first time homebuyer represented 32% of home sales, an increase from last year but still below the historical average of around 40%.

Housing starts fell 8.7% to 1.16 million, a disappointing number. We saw a huge decrease in single family construction – from an annualized pace of 970k to 805k. Last February, the number was 900k so this is a big drop. One note of caution – the margin for error on these numbers is huge (around 17%), so there is a good chance this gets revised upward in subsequent releases. Building permits were a little better – falling only 2% to 1.3 million. Housing construction has largely been absent from this recovery, and could provide a huge boost to the economy if it ever gets back to normalcy (around 1.5 million units a year).

More evidence that home price appreciation is slowing: the Case-Shiller home price index rose 4.3% in January, the slowest pace since 2015. In general, 2018 was a year to forget for the mortgage industry as rates rose 100 basis points. They have now given back most of those gains, so perhaps 2019 will be a bit brighter, although if you have been counting on MSR unrealized gains to paper over weakness in lending, the Q1 mark is going to be harsh.

The economy seems to be slowing, according to the Chicago Fed National Activity Index. It edged downward to -.29 in February, and the 3 month moving average is negative as well. The CFNAI is a meta-index of 85 different economic indicators, of which many are leading as well as lagging. While it is too early to start declaring 2019 a slow-growth year, the first quarter is looking weak.

The FHA is backing away from a 2016 decision to loosen credit – it is now tightening standards and flagging more loans as “high risk.” The biggest effect will be for the first time homebuyer, and FHA estimates that 40,000 loans or so might be affected. At the heart of the issue is a 2016 decision to no longer require a manual underwrite for FHA loans with FICOs below 620 and DTIs above 43. FHA was largely a backwater pre-crisis, and most of these types of loans were subprime. As the subprime market disappeared, FHA stepped in to fill the void. Home Ready and Home Possible have emerged as low downpayment competitors, and FHA has suffered from negative selection bias. While FHA permits very low credit scores, most lenders don’t go as low as FHA permits in the first place.

Trump nominates free-marketer Steven Moore to the Federal Reserve Board and Paul Krugman isn’t taking it well. For a little economics inside-baseball, this resembles the Spacely Sprockets / Cogswell Cogs rivalry in the economics profession. Since most of the free-market caucus comes from the University of Chicago, they are called “fresh water economists” and Krugman comes from Ivy / Coastal academia (Princeton) so his school is called “salt water” economists. In terms of ideological bent, the fresh water economists are much more non-interventionist than the salt water economists, who support direct government intervention in the markets and economy. Steven Moore is a true believer in the free market approach, and to be honest, most of the Fed and academia are not. A little diversity of opinion is not a bad thing….

Morning Report: Friday’s jobs report in perspective

Vital Statistics:

	Last	Change
S&P futures	2756	0.4
Eurostoxx index	371.87	1.24
Oil (WTI)	56.47	0.4
10 year government bond yield		2.65%
30 year fixed rate mortgage		4.32%

Stocks are flattish on no real news. Bonds and MBS are flat.

The upcoming week has a lot of economic data, however most of it is not housing related, and probably won’t be market-moving either. The biggest housing-related number will be new home sales and construction spending. We will also get inflation data and industrial production.

Friday’s payroll number was a definite downward surprise, and the question is whether this indicates a slowing labor market? Extremely low job prints happen occasionally we had sub-20k months in Sep 2017 and May 2016. Both prints ended up being a blip, and there is a good chance this gets revised upward in next month’s number. The number to take away from the jobs report is the increase in average hourly earnings. Average hourly earnings are a notoriously non-volatile series, and this one keeps inexorably increasing by larger and larger amounts.

Just because the US economy is doing relatively well, that doesn’t mean things are rosy overseas. China has had some bad days in the stock market, and the cracks are starting to appear in the economy. In Europe, the German Bund yield (The European benchmark) is about to go negative. Growth estimates have been slashed from 1.7% to 1.1%. So there is a bit of a global slowdown, and it means that we will probably take some shrapnel in the form of lower rates.

CFPB Chair Kathy Kraninger appeared before the House Financial Services Committee last week, and the commentary broke down along partisan lines. Democrats, pining for the Cordray days, had a laundry list of complaints, ranging from a de-emphasis on payday lenders to kvetching about changes in internal reporting lines. Republicans generally supported her and the agency’s end of regulation by enforcement. Kraninger reaffirmed the Agency’s commitment to chasing bad financial actors.

Morning Report: Homebuilder sentiment improves

Vital Statistics:

	Last	Change
S&P futures	2783.25	-3
Eurostoxx index	370.68	-0.04
Oil (WTI)	56.9	0.81
10 year government bond yield		2.67%
30 year fixed rate mortgage		4.43%

Stocks are flattish on no major news. Bonds and MBS are flat as well.

Homebuilder sentiment improved markedly in February according to the NAHB / Wells Fargo Homebuilder Sentiment Index. Expectations for future sales drove the increase. The index touched a 3 year low in late 2018, so things are still disappointing compared to 2016-2017, but well above historical numbers. Challenges remain for the building industry however. “The five-point jump on the six-month sales expectation for the HMI is due to mortgage interest rates dropping from about 5% in November to 4.4% this week,” Dietz continued. “However, affordability remains a critical issue. Rising costs stemming from excessive regulations, a dearth of buildable lots, a persistent labor shortage and tariffs on lumber and other key building materials continue to make it increasingly difficult to produce housing at affordable price points.”

The FOMC minutes didn’t really contain much in the way of new information. They see the balance sheet reduction ending sooner than anticipated, which means the Fed will no longer have a $800 billion balance sheet like it had pre-crisis – it will now probably be in the $3 – $4 trillion range. Second, there is uncertainty whether there will be more hikes in 2019. The Fed Funds futures have been predicting no further hikes this year for several months now, so perhaps this is simply the members catching up with what the markets are saying. Note Cleveland Fed President Loretta Mester thinks we may need to still hike rates this year and end tapering.

MBA mortgage applications increased 3.6% from the previous week as refis increased 6% and purchases increased 2%. Rates actually increased by 8 basis points to 4.56%. While refi activity has been increasing from the dismal levels at the end of 2018, they are still well below historically anemic. A combination of prepayment burnout and rising rates are driving the decrease. Going forward, home price appreciation, not interest rates will be the impetus for refinance activity as cash-outs will inevitably rise to pay off credit card debt and FHA borrowers with sufficient equity will want to refinance into conventional loans with no MI.

Chart: MBA Refinance index 1998 = Present

Move over Rocket Mortgage, here comes mello smartloan, which is loanDepot’s new 100% digital mortgage loan experience. They claim this loan can reduce time to close by 75%.

Morning Report: Job openings exceed unemployed by over 1 million

Vital Statistics:

	Last	Change
S&P futures	2751.25	6.5
Eurostoxx index	364.16	1.38
Oil (WTI)	53.66	0.58
10 year government bond yield		2.69%
30 year fixed rate mortgage		4.43%

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

It looks like a shutdown may be avoided, as Congress has come up with a plan to allocate some funds to a smaller, cheaper border wall than Trump was looking for. The President hasn’t committed to signing anything yet, but it looks like he will go along.

The labor market continues to be on fire, as the number of job openings hit 7.3 million, a series record. The number of job openings exceeds the number of unemployed by over 1 million. Construction led the increase with a jump of 88,000, some of which is probably seasonal. The quits rate was unchanged at 2.3%, although it increased for the private sector while decreasing for government. The quits rate is a leading indicator for wage growth.

Mortgage Applications fell 3.7% last week as purchases fell 6% and refis fell .01%.

Ellie Mae is being taken private in a $3.7 billion transaction. Private Equity firm Thomas Bravo will pay $99 a share for the stock, and has allowed a 35 day “go-shop” provision, which permits Ellie Mae to seek higher bids.

Small business optimism is returning to normal levels after spiking to all time highs in 2017 and 2018 according to the National Federation of Independent Businesses. Uncertainty in Washington, exacerbated by the lengthy government shutdown is making small business worried about the future. That said, they continue to hire, though they are more cautious about expansion plans.