Morning Report: What will be the shape of the recovery?

Vital Statistics:

 

Last Change
S&P futures 2900 -23.1
Oil (WTI) 24.79 0.29
10 year government bond yield 0.67%
30 year fixed rate mortgage 3.36%

 

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

 

About 80% of renters made a full or partial May payment as of May 6, according to the National Multifamily Housing Council’s Rent Tracker.  “Despite the fact that over twenty million people lost their jobs in April, for the second month in a row, we are seeing evidence that apartment renters who can pay rent are stepping up and doing so,” said Doug Bibby, NMHC President. “We expect May to largely mirror April, when the payment rate increased throughout the month as financial assistance worked its way to people’s bank accounts.” Meanwhile, New York extended its eviction moratorium until August. Note that rent strikes are a thing now.

 

Matt Taibbi discusses the mortgage servicers. The balloon payment issue is a hot button one for the left, and they are sounding the alarm. Basically Taibbi interviewed all the usual consumer advocate types on the left – guys like Richard Cordray, analysts at liberal think tanks and advocacy groups, and take the servicers to task for not having 4 months of advances laying around.

Should the Fed open its war chest and create a “liquidity facility” to help mortgage servicers? It seemed like the obvious move — this really was a problem caused by a bailout that encouraged even people who didn’t need forbearance to accept it — but how could this be done in a way that didn’t put homeowners at more risk?

“This is the script of a heist flick, where homeowners get screwed in the end while servicers get the money,” says Carter Dougherty of Americans for Financial Reform. “If you combine money for servicers with strong consumer protections and a vigorous regulator, then the film could have a happy ending. But I’m not holding my breath.”

That said, this unfortunately IS what the industry is up against, and a good indicator of how the regulators (at least on the left) view the industry. It is why getting some sort of liquidity facility for the servicers might be harder than it looks. Which is pretty sad when the Fed is considering buying corporate junk bonds to stabilize the economy.

 

More economic forecasters are predicting a “swoosh” style recovery. “This is not going to be a quick recovery,” said Mark Schneider, chief executive officer of Nestlé SA, the world’s biggest packaged foods maker, recently. “This is going to be a several-quarter, if not several-year kind of process.”

recoveries

For what its worth, I am somewhat skeptical of the long, drawn out recovery argument. Most recessions in the past started for a reason – a long expansion encouraged a buildup of inventory, or asset bubbles. Once the economy slows down the problems that have been building become apparent. That isn’t what happened this time around. We didn’t have a slowdown driven by organic issues in the economy. We had a government-engineered crash. Sure, there were pockets of the economy like retail which were weak to begin with, but for the most part the economy was super healthy going into the COVID Crisis. I think comparing this to the Great Depression or the Great Recession has to be done carefully. Both were driven by rotten timbers in the economy that finally collapsed. That wasn’t the case this time around, and I think that argues for a V-shaped recovery.

Morning Report: Jobs day

Vital Statistics:

 

Last Change
S&P futures 2900 23.1
Oil (WTI) 24.27 0.29
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.36%

 

Stocks are higher this morning after the jobs report. Bonds and MBS are up.

 

Jobs report data dump:

  • Nonfarm payrolls down 20.5 million
  • Unemployment rate 14.7%
  • Labor force participation rate 60.2%
  • Average hourly earnings up 4.7% MOM / 7.4% YOY

The report was not as bad as feared. One stat jumped out at me, which is how the COVID Crisis has disproportionately affected lower wage earners. Average hourly earnings increased almost 5%, simply due to hourly workers getting laid off, which means the higher wage people who are able to work from home pull the average up. Average hourly earnings increased to $30.01 an hour in April from $28.67 an hour in March.

 

That stat may also explain why the stock market doesn’t seem to care all that much about COVID any more. The people who are most affected are the least likely to hold stocks and vice versa. I am hoping however that the stock market, being a forward-looking indicator, is looking over the valley and signalling that this whole thing is on the downside. If so, then we could see a V-shaped recovery as well. FWIW, I don’t think American have the appetite to shelter in place past Memorial Day, regardless of what the health professionals say.

 

Fannie Mae’s Home Purchase Sentiment Index plunged in April, which isn’t surprising given the jobs report. “The HPSI experienced another unprecedented decline in April, falling to its lowest level since November 2011,” said Doug Duncan, Senior Vice President and Chief Economist. “The 17.8-point decrease reflected consumers’ deepening concerns about both their incomes and the housing market. Attitudes about whether it’s a good time to sell a home fell most sharply, dropping an additional 23 points this month. Individuals’ heightened uncertainty about job security, as registered in the survey over the last two months, is likely weighing on prospective homebuyers, who may be more wary of the substantial, long-term financial commitment of a mortgage. On average, consumers expect home prices to fall 2 percent over the next 12 months, the lowest expected growth rate in survey history. While consumers did grow more pessimistic in April about whether it’s a good time to buy a home, low mortgage rates remain a driver of purchase optimism. We expect that the much steeper decline in selling sentiment relative to buying sentiment will soften downward pressure on home prices.”

 

Speaking of homebuying, Redfin is resuming iBuying, and Zillow Offers isn’t far behind.

Morning Report: Mortgage Credit Tightens

Vital Statistics:

 

Last Change
S&P futures 2876 43.1
Oil (WTI) 26.27 2.29
10 year government bond yield 0.69%
30 year fixed rate mortgage 3.36%

 

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

 

Initial Jobless Claims fell to 3.2 million, taking the COVID total of job losses to 33.4 million.

 

Challenger, Gray and Christmas reported 671,000 job cuts were announced last month.

 

Productivity fell 2.5% in the first quarter, which was better than the expectations of a 5.5% drop. While next quarter will be the big test, it certainly looks like businesses are figuring out a way to work around COVID restrictions.

 

I was listening to Fannie Mae’s Q1 conference call, and their baseline scenario for forbearance is 15%. Their baseline scenario is a second half recovery, with overall negative GDP growth for 2020 and massive growth in 2021.

 

Mortgage Credit Availability fell to a 6 year low in April according to the MBA. “The abrupt weakening of the economy and job market – and the uncertainty in the outlook – drove credit availability down in April for the second consecutive month,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “The overall index fell to its lowest level since December 2014, and the sub-indexes pointed to tightened credit supply for all loan types. The decline was largely driven by lenders dropping many low credit score and high-LTV programs, as well as further reduction in jumbo and non-QM products.”

To be honest, I was expecting worse. Given the issues with forbearance and cash-outs, it probably will get worse.

 

MCAI

 

Treasury is celebrating the sequel to Top Gun by reviving the 20 year bond, last seen when aviator glasses, leather jackets, and Val Kilmer having a career.

 

 

Morning Report: 20 million jobs lost in April

Vital Statistics:

 

Last Change
S&P futures 2876 13.1
Oil (WTI) 23.27 -1.29
10 year government bond yield 0.71%
30 year fixed rate mortgage 3.36%

 

Stocks are higher this morning as investors look forward to re-opening the economy. Bonds and MBS are lower as Treasury announced its quarterly refunding for next week.

 

The economy lost over 20 million jobs in April according to the ADP Employment report. The Street is looking for a -21.2 million print in this Friday’s jobs report.

 

Mortgage applications were flattish last week as purchases rose 6% and refis fell 2%. “Mortgage application volume was unchanged last week, even as the 30-year fixed rate mortgage declined to 3.40 percent – a new record in MBA’s survey,” said Mike Fratantoni, MBA’s Senior Vice President and Chief Economist. “Despite lower rates, refinance applications dropped, as many lenders are offering higher rates for refinances than for purchase loans, and others are suspending the availability of cash-out refinance loans because of their inability to sell them to Fannie Mae and Freddie Mac.”

 

Fannie Mae is extending reps and warrants relief through June.

 

The Fed is set to start buying corporate bonds, targeting “fallen angels” – in other words bonds from corporations who were downgraded due to COVID-19 issues – names like Macy’s and Occidental Petroleum. We are seeing investors begin to snap up these bonds, although many are trading above their recovery value in a bankruptcy, which means it all reality, it is just a greater fool trade. It seems to me if the Fed can fund a facility to buy department store debt they could set up a facility to fund mortgage advances.

 

Fed Head Richard Clarida thinks the economy will return to positive growth in the third quarter, although further help from the Fed may be necessary.

“Our policies we think will be very important in making sure that the rebound will be as robust as possible. We’re in a period of some very, very, very hard and difficult data that we’ve just not seen for the economy in our lifetimes, that’s for sure. But a third-quarter rebound “is one possibility. That is personally my baseline forecast,” he added. Realistically, it’s going to take some time for the labor market to recover from this shock. I do think the recovery can commence in the second half of the year”

Meanwhile, here is a tracker of how the different states are re-opening.

Morning Report: Home Prices holding up

Vital Statistics:

 

Last Change
S&P futures 2863 30.1
Oil (WTI) 23.15 2.79
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are down.

 

Despite the COVID-19 crisis, home price appreciation is holding up. Prices rose 1.3% MOM in March and are up 4.5% YOY. April might be a better read, but still… D.R. Horton mentioned on its earnings call that pricing is holding up, and while they are offering some incentives (free fridge friday), they aren’t cutting prices to move inventory.

 

Here are the cities with the biggest drop in new listings. Allentown PA, Milwaukee WI, Scranton, PA, Detroit MI, and Buffalo NY. The Northeast and Upper Midwest seem to have been hit the hardest.

 

If you look at the CoreLogic map, most of these areas are on the undervalued side.

 

CoreLogic overvalued metros

 

Ex-MBA President Dave Stevens weighs in on how the CARES Act drove a massive tightening of mortgage credit. Comments from Mark Calabria about letting servicers fail and musing that borrowers might be better off with a bank servicer were unhelpful to say the least. The added LLPAs on first payment forbearance requests basically killed the cash-out market. He makes a point that Fannie has the liquidity (between its own net worth and the Treasury facility) to extend lines of credit. He makes a great point as well – Fannie was created during the New Deal to smooth the mortgage market during disruptions, and this one is probably the biggest since the New Deal days.

Morning Report: Further stimulus probably not forthcoming

Vital Statistics:

 

Last Change
S&P futures 2800 -20.1
Oil (WTI) 19.17 -0.79
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

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

 

The big economic event this week will be the jobs report on Friday. The street is looking for a loss of 21.3 million jobs and a 16% unemployment rate.

 

Meanwhile about half the states are beginning to open. Note that most of the world has begun to relax restrictions as well. New York States has closed schools for the year, and will probably be the last place to emerge from the bunker.

 

The running joke is that the use of the word “unprecedented” is unprecedented. The dire predictions of the virus never panned out (no millions of deaths). I expect the predictions of lasting economic implications (Great Depression II!!!!) of this are probably going to be just as wrong.

 

Treasury Secretary Steve Mnuchin is cautious on the need for more Coronavirus aid. As states re-open it may turn out that more aid is not needed. Note that lawsuit relief and vote-by-mail will be two partisan issues that both sides will push. The door might be closed for further relief.

 

Fannie and Freddie are preparing to cover advances after 4 months, according to the FHFA. “To provide servicers with stability and clarity regarding their payment obligations and to align our servicer advance requirement with Freddie Mac, FHFA’s instructions require that, effective August 2020, we cease requiring servicers to advance missed scheduled principal and interest payments after four months of missed borrower payments on a loan,” Fannie Mae said in its 10-Q filing with the Securities and Exchange Commission. Many consumers believe that the missed payments will just get tacked on to the end of the mortgage. Given Fannie’s cash position and equity that might not be possible without further government support. That will drive the whole request for balloon payments at the end of forbearance. I suspect the government is going to have to make some tough decisions in August. Especially if forbearance doubles.

 

HELOCs are disappearing quickly. Wells and Chase have already suspended these products, and other lenders will probably follow. Homeowners who are looking for liquidity should think about getting one while the getting is good.

 

 

Morning Report: The Fed maintains rates at zero

Vital Statistics:

 

Last Change
S&P futures 2908 -28.1
Oil (WTI) 16.81 3.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

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

 

The Fed maintained interest rates at 0% and pledged to continue to do what it can to support functioning markets, including buying agency mortgage backed securities and treasuries. They didn’t specify amounts, just that they wanted to keep orderly markets. As Dave Stevens noted, it is clear the Fed wants to see lower mortgage rates as a way to stimulate the economy. The problem with that of course is that the CARES Act is doing the exact opposite – it is restricting credit more than what happened in 2008. The MBA’s Mortgage Credit Availability index took a nosedive in March, and I think it will be much, much worse in April.

MCAI

Flagstar just announced a 5 point LLPA for cash-out refis. It is clear that these are the next program to go bye-bye, joining jumbos, non-QM, and sub 700 FHA. The law of unintended consequences rears its ugly head once again. I wonder if the government could tweak the CARES Act to make cash-outs ineligible for forbearance. That way the program could still exist and provide relief to people hit by COVID. Presumably if you do a cash-out, you have money to live on, so….

 

Initial Jobless Claims came in at 3.8 million, pushing the COVID job losses over 30 million.

 

Personal incomes fell 2% in March and personal spending fell 7%. The personal consumption expenditure index remained under control. I suspect that increasing food prices are being offset by lower energy prices.

 

Mortgage REITs AGNC and Annaly reported yesterday, and needless to say both were hit hard by COVID. Both have completed their deleveraging, and AGNC noted that its book value per share increased by 8% in April, after declining about 22% in Q1. For the agency REITs, it looks like the crisis is over.

 

Another round of stimulus may be a bridge too far. Nancy Pelosi wants to force states to vote by mail, and that is a non-starter with Republicans. Mitch McConnell wants lawsuit protection for businesses that remain open during the COVID crisis, and that is a non-starter to Democrats. As Travelers noted on its conference call, trial lawyers smell an opportunity here and are ginning up lawsuits as we speak.

Morning Report: First quarter GDP falls 4.8%

Vital Statistics:

 

Last Change
S&P futures 2915 48.1
Oil (WTI) 15.71 3.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

Stocks are higher this morning despite a disappointing GDP print. Bonds and MBS are up.

 

First quarter GDP fell 4.8% as the COVID lockdown depressed consumer spending, which fell 7.6%. The price index rose 1.3%, and that will be a number to watch going forward. Inflation is too much money chasing too few goods. We have managed to sidestep inflation in the past because shortages weren’t a problem. Now they are. Do you remember paying a buck a roll for TP last year? How about chicken? It averaged $3.11 a pound last year. At the local Stop and Shop it is now $3.80, and with the Tyson closures it will go higher. The black swan out of this whole thing could be a resurgence of inflation, right when that is the last thing the economy needs. 

 

The FOMC will make their announcement at 2:00 pm today. Not sure what they can say,(Information received since the Federal Open Market Committee met in March seems to indicate the economy has hit a brick wall and is sinking like an anvil….) and I can’t see it being market-moving. The mortgage industry would love to see something about a servicing advance repo line, but aside from accepting newer forms of collateral I don’t think there is much more they can do.

 

Mortgage applications fell 3.3% last week as purchases rose 12% and refis fell 7.5%. The refi market continues to tighten as investors add overlays to cash-outs. The strength in the purchase market is encouraging. Separately, the homeownership rate hit 63.5% in the first quarter, the highest since 2013. I think for many urban millennials with families, the COVID Crisis will trigger a flight to the suburbs, which should bump up the homeownership rate going forward.

 

According to a NPR poll, half of Americans have been financially affected by the Coronavirus. If that is the case, then forbearance numbers are going up.

 

Consumer confidence fell from 119 to 87, which was worse than expected.

 

 

Morning Report. Second round of stimulus passes

Vital Statistics:

 

Last Change
S&P futures 2806 14.1
Oil (WTI) 17.21 0.69
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.43%

 

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

 

The second round of stimulus passed the House yesterday and is scheduled to be signed by the President at noon today.

 

Durable goods orders fell 14% in March, driven by lower transportation orders. Ex-transports, they were down 0.2%. Core Capital Goods (a proxy for capital expenditures) rose 0.1%.

 

New Home Sales fell to 627k in March from an annualized pace of 741k in February.

 

Homebuilder Pulte reported good earnings yesterday, however this was mainly before the COVID-19 pandemic hit.  “The U.S. housing industry carried tremendous momentum into 2020, until the devastating effects of the COVID-19 pandemic began impacting the country,” said Ryan Marshall, PulteGroup President and CEO. “As the coronavirus spread and state and local governments implemented various restrictions and stay-in-place orders, we experienced a material slowdown in consumer traffic and sales activity beginning in mid-March.” Despite the COVID issues, closings and orders were up 16% and gross margins increased. Before COVID, 2020 was expected to be the year when homebuilding finally broke out of the post-bubble vortex. It looks like it will have to wait another year. As an aside, Redfin reported that 1 in 7 offers were signed by buyers who saw the home virtually.

 

About 3.4 million homeowners have requested mortgage forbearance, according to Black Knight Financial Services. This is 6.4% of all mortgages. With 26 million new unemployment claims since the shelter-in-place orders, that number is probably going up. At this level, servicers in aggregate are on the hook to advance $2.8 billion per month for Ginnie securities. So far, Treasury is refusing to create an advance facility for non-bank servicers.

 

Some states are relaxing shelter-in-place restrictions and allowing non-essential businesses to re-open. Needless to say, public health types are aghast, however it will be interesting to see how well it works, especially Texas. Speaking of Texas, the amount of newly unemployed in the US, about 26 million, is just shy of the population of the US’s second most populous state at 29 million. That puts the economic carnage of this shelter-in-place order in perspective. Even New York is beginning to look at relaxing restrictions, at least upstate.

 

 

 

 

Morning Report: Almost 3 million homeowners request forbearance

Vital Statistics:

 

Last Change
S&P futures 2815 -50.1
Oil (WTI) 11.23 -7.29
10 year government bond yield 0.63%
30 year fixed rate mortgage 3.38%

 

Stocks are lower this morning as people watch the price of oil collapse. Bonds and MBS are up small.

 

Oil is down huge this morning. Why? Nowhere to put it. We are getting back towards the late 90s, when the Economist put out its famous “drowning in oil” cover, which marked the bottom of the oil market. Note that it is the May contract, which expires this week that is down so much. Since it is no longer front month, it isn’t really actively traded and therefore not representative of the true price of oil in the markets. The June contract is trading around 22 bucks. Ironic that we are headed into the summer driving season with oil at the lowest in a generation, but there is nowhere to go.

 

oil

No major economic data this week, aside from initial jobless claims. We do get some real estate data with existing home sales, new home sales, and the FHFA House Price Index. The NY Fed is decreasing its TBA purchases to $10 billion per day.

 

The Chicago Fed National Activity Index was flashing “recession” in March, falling to -4.17. (Anything under -0.7 is considered recessionary). Mohammed El-Arian says the economy could contract 14% in 2020. Citi also warns that the markets aren’t pricing in a second wave of infections.

 

Almost 3 million people have asked for mortgage forbearance under the CARES Act. This represents 5.5% of all active mortgages. This is 4.9% of all Fannie / Freddie loans and 7.6% of FHA / VA loans. So far servicers are getting crushed by this. “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s larger mortgage servicers, who consulted with the Trump administration to set up the bailout. “When we were working on the Act, we had liquidity in it, and it did not make it into the Act. We were told it would be handled through the administration, and it’s a real problem.”

Last week Senators Sherrod Brown and Maxine Waters sent a letter to the Administration:  “The government must be prepared to respond quickly to prevent a liquidity shortfall in the single-family and multifamily mortgage markets, and to ensure that consumers are equitably served by that response. Any liquidity provided must be used to stabilize the market at a time when many families may fall behind on payments and facilitate relief to individual homeowners and renters throughout the market through forbearance, loss mitigation, and protection from displacement, rather than immediate defaults and evictions.”

Civil Rights and fair housing groups are also requesting a facility for servicers. While it seem unusual for the Professional Left to go to bat for servicers, they sense that if no facility is set up, no one will want to do FHA loans in the future. FHA business is severely restricted at the moment.