Morning Report: MBA asks for relief from FINRA and the SEC

Vital Statistics:

 

Last Change
S&P futures 2581 -29.4
Oil (WTI) 20.94 0.89
10 year government bond yield 0.70%
30 year fixed rate mortgage 3.38%

 

Stocks are down this morning as we wrap up Q1, which was the worse quarter for stocks since 2008. Bonds and MBS are up.

 

The Fed will buy up to $30 billion in MBS today, along with some CMBS paper. It sounds like the NY Fed heard the pleas of originators and is cognizant of the margin call issue. The MBA issued a letter to the SEC and FINRA asking them to give guidance to broker-dealers to lay off the margin calls: “MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”

 

Been hearing chatter that a lot of originators are imposing minimum 680 FICOs on FHA loans. Also, warehouse banks are becoming more reluctant to fund them unless there is a bid in hand for the loan. It makes sense – FHA loans have the lowest margin for safety with 3.5% down and FICO scores that are generally not good enough to qualify for Home Ready or Home Possible.

 

Goldman is forecasting a Q2 GDP drop of -34% and unemployment hitting 15%. Yikes. That said, the economy should come roaring back in the third quarter as Coronavirus issues fade. The ultimate question: Did all of these small businesses that shuttered over the past month go into hibernation or did they go away? And while the banking sector has so far withstood the impact of the credit crisis, the non-banking sector is a different story. A few non-agency mortgage REITs like Two Harbors and MITT have sold their non-agency bonds to satisfy margin calls. One certainly has to worry about the CMBS mortgage REITs as well as the plain old shopping center and mall REITs. If you are anchored with a grocery story, you might be ok. If you are anchored with a Macy’s however…

 

KB Home reported better than expected numbers on Friday, and remarked that internet traffic remains up on a YOY basis. Walk-in foot traffic is not as the company has shut down its offices. In some parts of the country construction has stopped, but in most of the US it is still proceeding. Regardless of the Coronavirus issues, it appears that the demand for homes is still there, and we might see an even tighter market in existing homes as would-be sellers take their homes off the market.

 

Home prices were up 3.9% in January, according to Case-Shiller. An economist from Capital Economics expects a 4% peak-to-trough hit in real estate pricing. It will be interesting to see if home prices take a hit as a result of the Coronavirus. As KB Home mentioned, the existing home inventory should be even tighter, and homebuilders aren’t stuck with a lot of inventory at the moment and they aren’t entertaining price cuts. That said, the NY market may be a bit heavy.

Morning Report: Massive mortgage holiday?

Vital Statistics:

 

Last Change
S&P futures 2530 -78.4
Oil (WTI) 21.84 -0.69
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.44%

 

Sloppy stock tape as we head into the weekend. Bonds and MBS are up.

 

The Fed is set to purchase another $50 billion of MBS and TBAs today. Mortgage bankers are getting killed on their hedges and fighting off the margin calls. The Fed and FICC really need to have a conversation about what they are doing.

 

The FHA market is tightening up dramatically. Sub 620 FICO? Forget about it. Seeing some aggregators add 15 point LLPAs to lower FICO FHAs. Right now, the floor is 660, and rising fast. If the government goes through with its mortgage relief plan, DQs are going way up. The government is planning to set up a facility for servicers to make advances, which should keep the biggest non-bank servicers alive during this period. Suffice it to say government servicing is worthless right now, because in all reality it is nothing more than an unbounded liability stream at this point.

 

The stimulus bill is headed to the House today. Unfortunately, the House isn’t in session at the moment, so lawmakers are scrambling to figure out a way to get a vote. In the Senate bill, there is a provision for borrowers who are affected by Coronavirus (directly or indirectly) to petition for relief from mortgage payments for up to 6 months (and extendable for another 6). No proof of hardship is required. The servicer has to report the loan as current to the reporting agencies. This language starts on page 565. Needless to say, this is incredibly generous and nobody has any idea of what the unintended consequences of that will be. I cannot imagine that stands as-is, but you never know.

 

Do renters get a break? The left will scream bloody murder if they don’t. Since relief only extends to primary residences, what does that mean for investment properties? The government really needs to think this through before they completely upend the real estate market.

 

Some good news: A new study from the University of Washington has Coronavirus deaths at about 81,000 and ending in June. In other words, just a bit worse than a typical flu season. Many of those dramatic “millions and millions are gonna die!!!” studies assume no changes in behavior, which isn’t the case.

 

 

Morning Report: Non-QM is on hold

Vital Statistics:

 

Last Change
S&P futures 2328 104.4
Oil (WTI) 24.21 0.89
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.84%

 

Stocks are higher this morning as the markets digest the actions by the Fed to stabilize markets. Bonds and MBS are up.

 

The actions from the Fed seemed to stabilize things yesterday. Lenders said that aggregators were bidding on tapes, although turn times were on the slow side. We did see some decent lock volume yesterday afternoon, so (fingers crossed) things are returning to normal for at least straightforward Fannie Mae loans.

 

Yesterday, Fannie Mae outlined some flexibility with employment verifications and appraisals. Fannie will now accept written verification of employment or bank statement confirmation. On appraisals, alternatives are permitted under certain circumstances, such as primary purchases, when the Fannie holds the previous mortgage.

 

With the Fed’s interventions in the TBA market, more bankers are getting margin calls. The fun never ends. The mortgage REIT sector has been wallopped and it looks like at least one (Invesco Mortgage) can’t make its margin calls.

 

Seeing announcements from Pingora and Mr. Cooper suspending MSR co-issuance  in the Ginnie Mae space. Can’t imagine where GN servicing is trading these days but it is probably awful.

 

The non-QM market is pretty much halted as Angel Oak and Citadel suspended non-QM lending for at least two weeks. The securitization markets are frozen at the moment so these firms don’t have much of an outlet. Citadel said that it has no liquidity issues at the moment and that its balance sheet is strong.

 

The Senate failed to pass a stimulus bill yesterday. Democrats think the bill is too “corporation centric” as opposed to “worker centric.” Of course if the employers are out of business, the workers are going to take a hit too.

 

Liquidity is drying up in the Treasury market.

Morning Report: TBAs are decoupling from Treasuries

Vital Statistics:

 

Last Change
S&P futures 2919 -96.25
Oil (WTI) 43.46 -2.49
10 year government bond yield 0.73%
30 year fixed rate mortgage 3.3%

 

Stocks are getting clobbered as the flight-to-safety trade takes hold. Bonds and MBS are up. Note we  will have a lot of Fed-speak today, so be aware.

 

Despite the big move upward in bonds (the 10 – year is up about 2 points), TBAs are barely up. The 2.5 coupon is up about 1/4, and the 3s and up are flat. There is a huge push-pull event happening in the TBA market right now.  First, originators who hedge their pipelines with TBAs are getting hit with margin calls, which is causing a bit of a short squeeze in the market. Basically, if an originator can’t make the margin call, the broker will close out their position, and that means buying TBAs to close out the short position. Most lenders have had a call from their friendly TBA broker-dealer already, and you will probably be able to hear the champagne corks popping after we get past Class A settlement next week. People have been white-knuckling it all week.

 

On the other hand, increasing prepay speeds are making the higher note rates less and less attractive. If you buy a 3.5% Fannie TBA, you’ll pay 104. You will get back 100. You are hoping that you get enough coupon payments to cover that premium you paid. As rates fall, that chance of making back that 4% premium you paid becomes less and less. So, even though the 10 year keeps falling, eventually mortgage backed securities will participate less and less in the rally (or at least the higher note rates will). And it looks like we are about there. This is a big relief for mortgage bankers who have full pipelines and want to ring the register. Now, about that servicing portfolio….

 

Margin calls harken back to the bad old days of 2008. Are we experiencing something similar? Emphatically, no. In 2008, we had a collapsing residential real estate bubble, and these are the Hurricane Katrinas of banking. Despite all the fears of a recession, delinquencies are at 40 year lows, and the labor economy remains strong.

 

Speaking of the labor economy, it is jobs day. Jobs report data dump:

  • Nonfarm payrolls up 273,000 (expectation was 177)
  • Unemployment rate 3.5% (expectation 3.6%)
  • Average hourly earnings up 0.3% MOM / 3% YOY
  • Labor force participation rate 63.4%

Overall, a strong report that should take some wind out of the sails of the bond market. Note that this is February’s report, so much of it will be pre-Coronavirus. US corporations are preparing for a mass experiment in remote working, so some of the effects of virus could be relatively well mitigated.

 

Remember yesterday, when I showed the Fed Funds futures prediction and said it was a toss-up between how big of a cut it will be? Well, it still is. Except now it is a toss-up between a 50 basis point cut and a 75 basis point cut. ZIRP by June?

 

fed funds futures

 

Who else is driving the rally in the 10 year? Banks. Banks who hedge their interest rate risk with Treasuries are facing similar issues that mortgage bankers are in the Treasury market. Banks with huge portfolios of mortgage loans will sell the 10 year against it in order to hedge interest rate risk. As rates fall, they will need to buy back some of that hedge. According to JP Morgan, banks need to buy about $1.2 trillion in 10 year bonds to adjust their hedges.