Morning Report: Delinquencies spike in April

Vital Statistics:


Last Change
S&P futures 3200 -19.1
Oil (WTI) 40.74 -0.41
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.02%


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


Initial Jobless claims came in at 1.3 million. It is surprising to see so many claims given the state of re-opening, however it seems like many small businesses are still closing down as a result of the COVID shutdown. There is talk of additional stimulus out of Washington, along with the end of the additional $600 a week for the unemployed.


Retail Sales increased 7.5% in June, well above the 5.2% forecast. The control group, which excludes gas, autos, and building products rose 5.7%. This is overall good news for the economy as consumption is the biggest driver.


Overall delinquencies rose to 6.1% in April, according to CoreLogic. The hardest hit states were the NYC area: NY, NJ, CT, as well as the deep south states of LA and MS. You can see how fast the DQ rate spiked in the chart below:

30 day DQ


Single family authorizations fell 10% in June, according to BuildFax, although activity might be stabilizing as builders learn to work within the restrictions of COVID. Certainly the demand is there, as first time homebuyers try and escape the cities. Note we will get housing starts and building permits tomorrow.



Morning Report: More bank earnings

Vital Statistics:


Last Change
S&P futures 3229 45.1
Oil (WTI) 40.84 0.61
10 year government bond yield 0.65%
30 year fixed rate mortgage 3.02%


Stocks are higher this morning on promising results from a COVID vaccine study. Bonds and MBS are down.


US Industrial Production rose 5.4% in June, while manufacturing production rose 7.2%. Capacity Utilization increased to 68.6%.


Mortgage Applications rose 5.1% last week as purchases decreased 6% and refis rose 12%. “Mortgage rates continued their downward trend, with the 30-year fixed rate falling 7 basis points to 3.19 percent – another record low in MBA’s survey and 63 basis points lower than the recent high in late March,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The drop in rates led to a jump in refinance activity to the highest level in a month, with refinance loan balances also climbing to a high last seen in March. Despite the decrease in purchase apps, they are still up 15% YOY.


Despite the great performance for the mortgage business in Q2, Chase’s origination volume was down on a sequential basis, from $28.1 billion in the first quarter to $24.2 billion in the second. Given the seasonality of the business this is a surprising result. Originations were more or less flat YOY. The servicing portfolio also fell, from $738 billion to $684 billion. JP Morgan also added another $8.9 billion to loan loss reserves, increasing them to $34.3 billion.


US Bank reported earnings this morning. Earnings were down substantially on increased provisions for credit losses. The residential loan portfolio remains high quality with an average FICO of 768 and LTV of 68%. 90 day DQs were at .17% of the portfolio, which was a slight increase. Mortgage banking revenue increased 64% QOQ to $648 million due to higher volume and gain on sale revenues, which were offset by a falling servicing values.


Citi reported a 5% increase in revenues, but a 74% decrease in EPS due to increased provisions for credit losses. Mortgage origination increased 64% YOY to $6.4 billion. The servicing portfolio declined about 2%.


The rebound in housing caused Fannie Mae economists to revise upward their 2020 GDP estimate from down 5.4% to down 4.2%.

Morning Report: Wells announces a big dividend cut

Vital Statistics:


Last Change
S&P futures 3148 3.1
Oil (WTI) 39.24 -0.31
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.12%


Stocks are flat as we kick off earnings season. Bonds and MBS are up.


Kind of a mixed bag for bank earnings this morning. We heard from JP Morgan, Citi, and Wells. JP Morgan and Citi beat earnings expectations, but Wells is down on a dividend cut. Wells had warned that a cut was coming, but this one was dramatic: from 51 cents a share to a dime. Wells reported a drop in mortgage banking income from the first quarter due to lower MSR values. Production margin just about doubled from 1.08% to 2.04%.


The Consumer Price Index rose 0.6% MOM and 0.6% YOY. Ex-food and energy, the index rose 0.2% MOM and 1.2% YOY. Higher inflation is actually good news for the economy at this point as the Fed is worried about deflation.


Small Business Optimism increased in June, according to the NFIB. Despite the current slowdown, small business still expects to increase hiring and capital expenditures over the next 6 months.

“Small businesses are navigating the various federal and state policies in order to reopen their business and they are doing their best to adjust their business decisions accordingly,” said NFIB Chief Economist Bill Dunkelberg. “We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”



30 day delinquencies increased to 6.1% of all mortgages during the month of April, according to CoreLogic. This is up 2.5% from April 2019.

“The COVID-19 pandemic has shocked our economic system and led to unprecedented job loss, reducing the ability of affected families to make their monthly mortgage payments. The latest forecast from the CoreLogic Home Price Index shows prices declining in 41 states through April 2021, potentially erasing home equity and increasing foreclosure risk.”

CoreLogic is also predicting that home prices will drop 6.6% nationally over the next year. FWIW, I don’t see that – the supply / demand imbalance doesn’t support it, and neither does the lower interest rates. Perhaps we will see a drop in luxury urban condos due to tougher jumbo guidelines and an exodus from urban areas, but suburban low / mid tier SFR should be just fine.


Those who make the comparison to 2009 – 2010 are missing the fact that we had a glut of properties back then. The situation is the exact opposite here. Home construction has lagged household formation for a decade.


New Home Purchase Applications rose 20% in June, according to the MBA.

“The new home purchase market continues to recover,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications surged 20 percent in June, and although this is not adjusted for seasonal impacts, it is another piece of data indicating that homebuying activity that was delayed by the pandemic in March and April is just being realized later in the season. The fact that applications are up over 50 percent from last June further reinforces that point.”


Optimal Blue is being sold to a private equity consortium.


Quicken and United Wholesale are kind of the Spaceley Sprockets and Cogswell Cogs of the D. There has been bad blood between the companies for years. Now, there is a defamation lawsuit over a facebook war and lewd text messages. The brokers versus bankers saga continues….



Morning Report: Forbearances fall

Vital Statistics:


Last Change
S&P futures 3198 23.1
Oil (WTI) 40.24 -0.31
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.12%


Stocks are higher this morning as earnings season kicks off. Bonds and MBS are down small.


Earnings season officially starts tomorrow, with JP Morgan, Wells and Citi reporting second quarter earnings. Mortgage banking revenues should be top-notch, but the big question will be whether the COVID writedowns for the first quarter are sufficient to cover expected losses. A lot of attention will be paid to commercial real estate loan performance as well.


There will be some housing economic data this week with housing starts and the NAHB Housing Market Index. Market-moving data will be rare for the time being with the Fed firmly stuck at the zero bound for the next year or two.


Forbearances are falling, according to Black Knight’s Forbearance Tracker. The number of borrowers in forbearance fell by 435,000 last week to 4.1 million. This represents 7.8% of all mortgages.


The housing recovery is as strong as ever, as prices increased 6.2% in the week ending June 27. Bidding wars are back, inventory is light, and interest rates are at record lows. I will be extremely interested in the housing starts and building permits numbers on Friday. I could see housing as the industry that takes the lead in the economic recovery. Redfin reported that over 50% of transactions were competitive.



Morning Report: Inflation is flat

Vital Statistics:


Last Change
S&P futures 3138 3.1
Oil (WTI) 39.84 0.21
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.12%


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


Inflation at the wholesale level remains well below the Fed’s target. The Producer Price Index fell 0.2% MOM and fell 0.8% YOY. Ex food and energy, the index was flat. Suffice it to say, the Fed is deeply concerned about this, and this opens the window for further measures to support the economy.


The Trump Administration is looking at another stimulus bill, which would extend unemployment benefits and permit another round of direct payments to individuals. House Democrats want something more sweeping, so we’ll see what actually gets hammered out.


Landlords in Manhattan are being forced to slash rent as vacancies increase. The Escape From New York has put a total of 10,000 apartments on the market, which is an 85% increase from a year ago. The official vacancy rate is 3.7%, however in some buildings it is much higher.


Redfin announced that over half of all transactions were competitive in June. “Bidding wars continue to be fueled by historically low mortgage rates and fewer homes up for sale than almost any time in the last two decades,” said Redfin economist Taylor Marr. “It’s like a game of musical chairs where only the best bidders get a seat. Both renters and move-up buyers who have held onto their jobs are vying for the small number of single-family homes on the market as they realize they need more space for their families.”

Morning Report: Mortgage credit continues to tighten

Vital Statistics:


Last Change
S&P futures 3170 3.1
Oil (WTI) 40.84 0.21
10 year government bond yield 0.65%
30 year fixed rate mortgage 3.12%


Stocks are higher this morning on no real news. Bonds and MBS continue to ratchet higher.


Initial jobless claims fell by 99k to 1.314 million. Despite the improvement in the economy, many retailers who were struggling before the COVID crisis are still cutting jobs.


Despite the improvement in the housing market and the mortgage market, credit availability fell again in June, according to the Mortgage Bankers Association Mortgage Credit Availability Index. “Mortgage credit supply dropped again in June, as investors further reduced their willingness to purchase jumbo loans and those with lower credit scores,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Lenders are navigating a gradual economic and housing market recovery that is still facing headwinds from the ongoing COVID-19 pandemic. Credit supply has fallen over 30 percent since February – before the pandemic – with an 18 percent decrease in government loan availability, and a 57 percent drop in jumbo loan availability.” We will need to see the securitization market turn on before we get a meaningful return to jumbo and non-QM. Low FICO FHA will probably have to wait until forbearance ends.


Fed Head James Bullard sees unemployment dropping down into the 7% – 8% range in 2020.

Morning Report: Construction hiring surges

Vital Statistics:


Last Change
S&P futures 3140 3.1
Oil (WTI) 40.54 -0.21
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.12%


Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.


The “reopening trade” which lifted shares of banks, airlines, and leisure / hospitality companies has faltered a little on fears of a COVID resurgence. This has been pushing bond yields lower. The bank sector continues to struggle.


The MBA reported that the number of loans in forbearance decreased by 8 basis points to 8.39% as of June 28. “We learned last week that the job market improved more than expected in June,” said MBA Chief Economist Mike Fratantoni. “With that as background, it is not surprising that the forbearance numbers continue to improve as more people go back to their jobs. The improvement in the forbearance data was broad-based, with declines for both GSE and Ginnie Mae loans. The decrease in new forbearance requests indicates that further declines are likely in the weeks ahead.”


Mortgage applications increased 2.2% last week as purchases increased 5% and refis rose 0.4%. Note the week had an adjustment for the July 4 holiday. “Mortgage rates declined to another record low as renewed fears of a coronavirus resurgence offset the impacts from a week of mostly positive economic data, such as June factory orders and payroll employment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Borrowers acted in response to these lower rates, after accounting for the July 4th holiday. Purchase applications continued their recovery, increasing 5 percent to the highest level in almost a month and 33 percent from a year ago. The average purchase loan size increased to $365,700 – also another high – as borrowers contend with limited supply and higher home prices.”


Job openings increased to 5.4 million in May, according to the JOLTS job report. Hires rose to 6.5 million, a series high. Construction hiring saw a huge jump with 673k new hires, although leisure and hospitality was the biggest jump with over a 1.3 million.


Quicken filed its IPO paperwork under the name Rocket Companies. The company originated $51.7 billion in loans in the first quarter of 2020. As you would expect, there are 4 classes of stock, and Dan Gilbert will hold the ones with 10 votes per share (the other class has 1 vote per share). For all intents and purposes, the new shareholders will have zero say in how the company is run. One number jumped out at me: Rocket is valuing its servicing at 2.2x, which is a pretty conservative number.



Morning Report: The service sector rebounded strongly in June

Vital Statistics:


Last Change
S&P futures 3153 -18.1
Oil (WTI) 40.44 -0.21
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.12%


Stocks are lower this morning on overseas weakness. Bonds and MBS are up.


The services economy rebounded in June, according to the ISM Non-Manufacturing Survey. Production-related indicators are leading employment indicators. That said, many of the comments in the survey pointed to higher-then-expected demand and shortages. “Sales have picked up tremendously. Sporadic supply issues. Biggest concern for us is lumber shortages.” (Construction). Overall, the headline number for the index was 57, much higher than the 50 that was expected and is consistent with an economy that is growing quickly. Further evidence that the recession probably ended in early May some time.


CoreLogic is predicting that home prices will fall at an annual rate of 6.6% by May of 2021.

Strong home purchase demand in the first quarter of 2020, coupled with tightening supply, has helped prop up home prices through the coronavirus (COVID-19) crisis. However, the anticipated impacts of the recession are beginning to appear across the housing market. Despite new contract signings rising year over year in May, home price growth is expected to stall in June and remain that way throughout the summer. CoreLogic HPI Forecast predicts a month-over-month price decrease of 0.1% in June and a year-over-year decline of 6.6% by May 2021.

Unlike the Great Recession, the current economic downturn is not driven by the housing market, which continues to post gains in many parts of the country. While activity up until now suggests the housing market will eventually bounce back, the forecasted decline in home prices will largely be due to elevated unemployment rates. This prediction is exacerbated by the recent spike in COVID-19 cases across the country.

While this is certainly possible, the supply / demand imbalance is so stark right now, I suspect that anyone who decides to wait for lower prices will regret it. I could see weakness in the luxury end of the market, where there is more inventory. Certainly urban luxury apartments are going to experience a perfect storm of people fleeing the cities and a potential drop in foreign buyer interest due to the violence. A drop of 6.6% seems aggressive to me.


Zillow Offers resumes activity in 5 more markets. Zillow Offers is a program where the company will purchase a home directly from a buyer, which would allow the buyer to submit a non-contingent offer on their next home. Zillow would then make any necessary repairs, clean and stage the home for sale. I think Zillow charges around 7.5% to do this, which is probably about the cost of the realtor charges and any fix-up costs the seller would have to pay otherwise.


Interesting reaction to COVID-19: Potential buyers need a pre-approval letter to enter the house. “Having a pre-approval letter has long been a preferred requirement by agents when submitting an offer, but having a pre-approval letter before looking at homes given the COVID-19 environment is an absolute must,” says Cara Ameer, a real estate agent with Coldwell Banker Vanguard Realty in Ponte Vedra Beach, Fla. “Sellers and listing agents are cautious about who is coming into their homes, and they want to ensure that only those that are truly qualified are coming through their doors.”

Morning Report: Forbearances decline again

Vital Statistics:


Last Change
S&P futures 3173 40.1
Oil (WTI) 40.64 0.01
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.12%


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


The week after the jobs report is usually pretty data-light and the upcoming week is no exception. We do have a lot of Fed-speak, but that is it.


The number of borrowers in forbearance plans declined last week, according to Black Knight. The number of loans in forbearance dropped by 104k, and brings us back to levels last seen in early May. Black Knight doesn’t have a concrete reason for the decline, but it does postulate that many of the initial forbearance plans were for 90 days or so, and if you received forbearance in mid-March, it was up by mid-June. Of course, the economy is improving as well, and many people who were put out of work due to stay-at-home orders are now back on the job.


Luxury home prices are falling, according to Redfin. “The pandemic is playing an outsized role in the luxury market, as very expensive homes are particularly sensitive to periods of economic uncertainty,” said Redfin economist Taylor Marr. “Many luxury buyers are nervous about pouring money into an investment that may be difficult to sell if the economy takes a nosedive. By comparison, people buying starter homes they plan to live in for 10 years are less concerned with volatile financial markets as long as they have money for a down payment and can afford monthly mortgage payments. And although access to credit is loosening up now, it tightened considerably for jumbo loans, which a lot of luxury buyers use, in April and May.”


Tappable home equity just topped $6.5 trillion, which is a record.

“Tappable equity rose by 8% year-over-year in the first quarter of 2020 to a record high of $6.5 trillion,” said Graboske. “What’s more, with mortgage interest rates hitting record lows, 90% of homeowners with tappable equity now have first lien rates above the prevailing market average. But while Q1 2020 saw overall refinance lending climb to a 7-year high, the number of cash-out refinances, as well as the dollar value of equity withdrawn via refinance, fell for the first time since early 2019. All in, cash-outs accounted for just 42% of refinance loans in the first quarter, roughly half of what was seen at the recent high in Q4 2018 and the lowest such share since Q1 2016. Likewise, the $38.7 billion in equity withdrawn from the market via cash-out refinances was down 8% from the prior quarter. Further, rate lock data – a good indicator of lending activity – suggests the trend is likely to continue, as the cash-out share of refinance activity has continued to fall throughout the second quarter.

As COVID started a mass tightening in credit, jumbos and cash-out refinances became unattractive to many lenders and MBS investors. Fears of rapid prepayment speeds meant that investor demand was weak. As confidence returns to the markets, cash out refis should provide a long-lasting opportunity for the industry. To put that $6.5 trillion into perspective, the MBA estimates that 2020 volume will be around $2.5 trillion. So this could have some legs.

Morning Report: Great jobs report

Vital Statistics:


Last Change
S&P futures 3143 40.1
Oil (WTI) 40.34 0.51
10 year government bond yield 0.7%
30 year fixed rate mortgage 3.12%


Stocks are higher after the jobs report comes in better than expected. Bonds and MBS are down.


Jobs report data dump:

  • Nonfarm payrolls up 4.8 million.
  • Unemployment rate 11%
  • Labor force participation rate 61.5%
  • Average hourly earnings down 1.2% MOM, up 5% YOY

Overall, an extremely positive report. The Street was looking for an increase of 3 million jobs, so the payroll number was much better than expected. The labor force participation rate increased by 0.7%, but is still 1.9% below February’s level. The unemployment rate fell by 2.2 percentage points despite concerns that a statistical error had understated May’s rate. The drop is average hourly earnings was simply a reversal of previous increases as lower-paid hospitality and restaurant / retail workers return to the workforce.


The FOMC minutes pretty much said what everyone expected: that rates will remain low for the forseeable future, and the Fed is going to probably err on the side of caution given how intractable low inflation has been. The FOMC seems to be considering the idea of yield capping, and idea the Fed used in the 1940s to lower the government’s borrowing costs.

The second staff briefing reviewed the yield caps or targets (YCT) policies that the Federal Reserve followed during and after World War II and that the Bank of Japan and the Reserve Bank of Australia are currently employing. These three experiences illustrated different types of YCT policies: During World War II, the Federal Reserve capped yields across the curve to keep Treasury borrowing costs low and stable; since 2016, the Bank of Japan has targeted the 10-year yield to continue to provide accommodation while limiting the potential for an excessive flattening of the yield curve; and, since March 2020, the Reserve Bank of Australia has targeted the three-year yield, a target that is intended to reinforce the bank’s forward guidance for its policy rate and to influence funding rates across much of the Australian economy. The staff noted that these three experiences suggested that credible YCT policies can control government bond yields, pass through to private rates, and, in the absence of exit considerations, may not require large central bank purchases of government debt. But the staff also highlighted the potential for YCT policies to require the central bank to purchase very sizable amounts of government debt under certain circumstances—a potential that was realized in the U.S. experience in the 1940s—and the possibility that, under YCT policies, monetary policy goals might come in conflict with public debt management goals, which could pose risks to the independence of the central bank.

You can cue the jokes about the government believing that interest rates (and asset prices) are too important to be determined by a mere market. While these are unprecedented times, the Fed runs the risk of staying too long at the party. Inflation is always a risk, but the bigger risk is asset bubbles fueled by ultra-low interest rates. When pension funds etc cannot earn a yield with Treasuries they will be forced to reach for yield because their future liability streams are not affected by interest rates.

I hope the Fed can stick the landing here, but the quote about the risks to the independence of the central bank is not an idle threat. It also assumes the Fed can fight the market indefinitely. That is by no means guaranteed, as we saw when George Soros broke the Bank of England. The Fed has been swelling its balance sheet without any injection of equity, which means the margin for error is becoming smaller and smaller. If the markets get a whiff of inflation, nobody is going to willingly tie up their money for 10 years at 70 basis points. The inverse of interest rates is bond prices, and it won’t take much of an increase in market rates to wipe out the Fed’s equity.


Escape from New York: Manhattan apartment sales the worst in 30 years, falling by 54%. Median prices fell by 18%. There were only 1147 sales in the quarter, the lowest on record. Renters are fleeing the City, and we should see an increase in rental renegotiations. While some of this is COVID-19 related, New York City seems determined to return to the 1970s.