Tag: Morning Report

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.

 

 

Morning Report: Stocks jump on promising COVID-19 treatment

Vital Statistics:

 

Last Change
S&P futures 2858 70.1
Oil (WTI) 17.83 -2.29
10 year government bond yield 0.63%
30 year fixed rate mortgage 3.38%

 

Stocks are higher this morning after positive news out of Gilead regarding a treatment for COVID-19. Bonds and MBS are down small.

 

Investors are bullish after the government released its plan to re-start the economy. It will involve a staggered, 3 stage process which will be left up largely to state governors. Under the first phase, movie theaters, restaurants, sports venues, places of worship, gyms and other venues could re-open with some restrictions. Schools would remain closed, and workplaces could re-open although companies will be encouraged to telecommute. Under the second phase, non-essential travel could resume, bars and schools could re-open. Under the final phase, visits to hospitals and nursing homes could resume. The Trump Administration believes some states could be ready to open quickly, by May 1. Others will take some time. Separately, NY extended the lockdown to May 15.

 

Politicians are beginning to become more vocal regarding the need to help servicers. Senators Maxine Waters and Sherrod Brown both called on the Fed and Treasury to provide liquidity to servicers struggling with advances. “Mortgage servicers are expected to face increased strain as millions of homeowners and renters lose jobs, are furloughed, or see reduced hours, all of which will keep them from making mortgage and rent payments, as a result of this public health crisis. We must not allow the pandemic to destabilize critical markets, including our housing market,” the lawmakers wrote in their letter.

 

China’s first quarter GDP dropped for the first time on record. China went into this crisis with a real estate bubble and a shaky banking system to begin with. Their economy will bear watching going forward, especially if the real estate bubble bursts and China begins exporting deflation. If it does, plan on 0% rates in the US for longer.

 

Chase has stopped accepting HELOC applications for the time being. This is just after instituting a 700 FICO floor and 20% down on loans. Chase wasn’t really in the FHA space after getting socked with a deluge of false claims act penalties in the aftermath of the 2008 crisis.  I have to wonder if the COVID-19 Crisis restricts the FHA market even further overall going forward. This is the last thing the left wants to see, and is perhaps why we are seeing Democrats like Maxine Waters and Sherrod Brown suddenly care about servicers.

 

Last week, I participated on Louis Amaya’s Capital Markets Today podcast and discussed the issues affecting the origination market. You can get the replay here.

Morning Report: 22 million jobs lost in the past month

Vital Statistics:

 

Last Change
S&P futures 2790 15.1
Oil (WTI) 20.13 0.29
10 year government bond yield 0.61%
30 year fixed rate mortgage 3.37%

 

Stocks are higher this morning as the Trump Administration works on how to re-open the economy. Bonds and MBS are up.

 

The Trump Administration is looking to ease the lockdown as it looks like cases have peaked in the US. He is planning to hold a conference call with governors this afternoon and will announce something by the end of the day. Of course it will be up to the states and local governments to make the ultimate decisions for their respective jurisdictions. State and local governments are starting to get starved for cash as sales taxes have fallen off a cliff. In all honesty, if masks and gloves work (and they appear to), then it probably makes sense to have people return to work wearing them. Note that the food supply is at risk for shortages, so that is something the government must work to avoid.

 

Initial Jobless Claims fell to 5.25 million last week. Over the past month, 22 million people have lost their jobs. That is about 34 jobs lost per case of the virus, and 770 per death from the illness.

 

Housing starts fell to 1.216 million. This is down 22% from February, but is actually up 1.4% on a YOY basis. Building permits came in at 1.35 million, which was down 6.8% sequentially, but up 5% on an annual basis. Starts are going to be super-sensitive to local economies. The rumor is that KB Home simply walked away from all their land deposits in Las Vegas.

 

Neel Kashkari is recommending that the big banks raise $200 billion in capital to help buffer against the effects of the recession. Note that Shelia Bair was jawboning the Fed to force the banks to suspend dividends and bonuses, the way most European banks have. Of course the European banks are in much weaker capital positions than the US banks, and the US banks have already suspended share buybacks. Oh, and bonuses are paid at the end of the year, so that is just a throwaway talking point. But bonuses, buybacks, and dividends are kind of an evergreen topic for liberal policy types.

 

The NHMC found that 84% of renters made a full or partial April rent payment. As of a week ago, that number was only 69%. Good news for the apartment REITs.

“We are pleased to see that it appears that the vast majority of apartment residents who can pay their rent are doing so to help ensure that their properties can continue to operate safely and so apartment owners can help residents who legitimately need help,” said Doug Bibby, President of NMHC. “Unfortunately, unemployment levels are continuing to rise and delays have been reported in getting assistance to residents, which could affect May’s rent levels. It is our hope that, as residents begin receiving the direct payments and the enhanced unemployment benefits the federal government passed, we will continue to see improvements in rent payments.”

“Anecdotally, we are hearing that different parts of the industry are experiencing different levels of rent payments,” said David Schwartz, NMHC Chair and CEO Chairman of Chicago-based Waterton. “As you would expect, more expensive Class A properties, whose resident base may be more able to work from home, are reporting much higher percentage of rent payments than operators of more affordable workforce properties whose residents are more likely to have had their incomes disrupted because of the pandemic.”

 

 

Morning Report: Retail sales take a dive

Vital Statistics:

 

Last Change
S&P futures 2776 -72.1
Oil (WTI) 20.03 0.29
10 year government bond yield 0.66%
30 year fixed rate mortgage 3.37%

 

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

 

It is April 15, and taxes are not due. People are starting to get their stimulus checks from the government. The Fed is beginning to advise on how to get the economy started again. On one hand, the economy cannot afford the roughly $25 billion a day in lost output the lockdown costs. On the other hand, if we re-open prematurely and have a second wave of infections, the economic costs could be worse. At the end of the day, people simply aren’t going to put up with this much longer. In places where there are few cases, people are simply going to ignore the edicts out of Washington and get back to work. The local governments are going to look the other way because they need the revenue as badly as people need their paychecks.

 

Mortgage Applications rose 7% as purchases fell 2% and refis increased 10%. Purchase activity will be muted as in-home showings and appraisal issues are a problem. Separately, the homebuilder sentiment index collapsed in April, from 60 to 30.

 

Retail sales fell 8.7% in March, as weakness in autos and gasoline was offset by an increase in TP and Purell.

 

Like the other big banks, Citi’s earnings took a hit as the company reserved $5 billion for expected defaults. Citi’s exposure is less in mortgages than, say Wells, but it is huge in credit cards and commercial real estate.

 

Industrial production fell 5.4% in March, while manufacturing production fell 6.3%. Capacity Utilization fell from 77% to 72.7%.

 

If you apply for forbearance, the initial negotiating position for most banks will be that the entire amount will be due immediately at the end of the forbearance period. For what its worth, I suspect this is to deal with the precautionary forbearance borrowers, those who are gaming the system by saying “I think I could get laid off, so I will suspend my mortgage payments for 90 days and keep them in the bank. At the end of the period, I will just send it all in at once.” At the end of the day, the government should have required some sort of proof of hardship. Given that the precautionary forbearance requests will compete with the people who actually need the help, servicers are overwhelmed with requests, and it seems forbearance will go to the borrowers who have the patience and free time to sit on hold for hours. The government really should have considered servicer capacity to handle requests (among other things) when it drafted the law.

 

 

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: Oil market jitters and the Fed.

Vital Statistics:

 

Last Change
S&P futures 3000.5 -9.25
Oil (WTI) 60.57 5.44
10 year government bond yield 1.85%
30 year fixed rate mortgage 3.98%

 

Stocks are lower this morning after an attack on a Saudi Aramco oil facility sent oil prices up nearly 20%. Bonds and MBS are up.

 

A Saudi Aramco facility that represents about 5% of global oil output was attacked, which caused the biggest spike in oil prices since the 1991 Gulf War. Saudi Aramco estimates that it will take months to bring that capacity back on line. A Yemeni movement aligned with Iran is claiming responsibility for the attack. President Trump has announced that the US Strategic Petroleum Reserve could be used to mitigate the effect on oil prices, and the US stands “locked and loaded” to prevent future attacks. While Iran has denied responsibility, cruise missiles may have been involved in the attack, which means Iranian technology. Iran and Saudi Arabia have been enemies for years and have been fighting a war by proxy.

 

A spike in oil prices has the potential to be inflationary, however it would more likely depress growth since it would act as a tax. This will probably push the Fed to cut rates as opposed to raise them to fight potential inflation. US consumers will be somewhat insulated, since most of the country gets its supply from US West Texas Intermediate which is a US-only market. Consumers on the East Coast will feel an effect since they get their oil from the North Sea Brent market, and many in the Northeast rely on heating oil. Front month heating oil contracts are up 8% pre-open.

 

Aside from the issues in the energy space, the big even this week is the FOMC meeting on Tuesday and Wednesday. The Sep fed funds futures have made quite the reversal over the past month, going from a 100% chance of a rate cut (the only uncertainty was over whether it would be 25 or 50 basis points) to a roughly 25% chance they do nothing and a 75% chance they cut by 25 basis points.

 

fed funds futures

 

The action in the Fed announcement Wednesday will undoubtedly be in the dot plot (which is the Fed Funds forecast) and the GDP forecast. A potential war in the Middle East has got to affect the numbers, and it will be interesting to see whether they bump up the inflation numbers and / or take down the GDP estimates. Regardless, political uncertainty tends to be negative for business, so I would expect to see more dovishness in the Fed Funds futures.

 

Last week was brutal for mortgage rates, as the average rate on the 30 year fixed rate mortgage rose 20 basis points last week. It probably represents a technical reaction to the massive rally we have seen in rates this year already. “These sorts of bad performances are most often seen in the wake of stellar performances,” said Matthew Graham, chief operating officer of Mortgage News Daily. “August was the best month for mortgage rates, and 2019 has been the best year since 2011. And that’s precisely why this terrible week is possible: It’s largely a technical correction to the feverish strength in August.” In other words, markets don’t go straight up and they don’t go straight down. Volatility begets volatility and you will see massive rallies in the context of a bear market and vice versa. Remember that volatility in rates is bad for MBS investors in general and that will flow through to rates.

Morning Report: The era of low mortgage rate is over

Vital Statistics:

Last Change
S&P futures 2713 -5.75
Eurostoxx index 394.37 -1.42
Oil (WTI) 71.39 -0.08
10 Year Government Bond Yield 3.09%
30 Year fixed rate mortgage 4.69%

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

Slow news day. with no economic data.

The Wall Street Journal has declared the era of low mortgage rates is over. What does this mean for the industry? For the industry overall, it means a tougher fight to keep purchase business, but it also could depress home sales as a combination of higher home prices and higher rates make moving up too unaffordable. NAR estimates that the effect of a 100 basis point increase in mortgage rates can reduce sales by 8%. Mortgage rates have been on a tear this year, increasing 62 basis points since the end of 2017. The 10 year yield has increased by the same amount, and usually mortgage rates don’t move up in a 1:1 ratio with Treasuries. I wouldn’t be surprised to see mortgage rates fall if Treasury yields stall out here.

I suspect that “convexity selling” has been driving the moves in rates. Mortgages have a quirky characteristic called negative convexity. Negative convexity explains why a GN mortgage with an expected duration of 7 years will pay a higher yield than a Treasury with a duration of 7 years. Neither one has credit risk, but they have different interest rate risk. MBS investors (say mortgage REITs or hedge funds) will buy mortgages and hedge interest rate risk by selling Treasuries. As interest rates rise, they can get balanced by either selling MBS (which pushes mortgage rates up) or by buying Treasuries (which pushes interest rates up). Whenever you see big moves in rates during a short period of time, you are often seeing convexity hedging exacerbating the move, which is why you will see a retracement in rates after the re-hedging activity finishes. We saw a big move this week as Treasuries broke the 3.1% level. Mortgage rates have shot up as well.

Do credit cycles drive the business cycle or is it the other way around? Historically, business cycles have driven credit cycles. In other words, business dries up, making debt harder to service, which causes banks to retrench and raise cash. The last two cycles however, the credit cycle drove the business cycle. Credit tightened up first, and then the economy rolled over. Is this a new trend? My guess is that it probably isn’t, as the last two economic booms were driven by bubbles in stocks (late 90s) and residential real estate (mid 00s). This time around, asset prices are high, but we don’t have anything comparable to the stock market or real estate bubbles this time around. Your major macro credit risk is that the Fed overdoes it, not that a bunch of debt backed by garbage assets implodes.

Everyone loves ETFs these days. They have low fees, provide instant diversification, and are liquid. In the fixed income market however, the liquidity is probably a bit of an illusion. Corporate bond issuance has soared since the bottom of the cycle in 2012, yet the amount of market-making capacity has been shrunk by 80-90%. The issue for ETF investors is that they expect to have liquidity in these instruments, but in a crisis the underlying assets of these bond funds will experience a tremendous shock. Why? Because Dodd-Frank’s Volcker Rule has essentially ended market-making as a business for banks. Market-making activity means that when everyone wants to sell, the banks who issued these bonds would usually step in and act as the buyer of last resort. This time around, that won’t happen and ETFs will trade at huge discounts to their supposed net asset value. There is no such thing as a financial free lunch, and investors are going to discover the downside of low fees, tight spreads and marginal cost commissions the next time the credit cycle turns.

Morning Report: Housing starts disappoint again

Vital Statistics:

Last Change
S&P futures 2705 -3.5
Eurostoxx index 393.19 0.82
Oil (WTI) 70.93 -0.38
10 Year Government Bond Yield 3.06%
30 Year fixed rate mortgage 4.65%

Stocks are lower this morning after North Korea pushed back on the proposal to end their nuke program. Bonds and MBS are higher after the the 10 year decisively pushed through the 3% level yesterday.

The 10 year hit 3.10% yesterday on no real news. If the inflation numbers aren’t all that bad, why are rates increasing? Supply. The government will need to issue about $650 billion in Treasuries this year compared to $420 billion last year. Note that one of the downsides of protectionism will be seen here – when the US buys imports from China, they usually take Treasuries in return. Less trade means less demand for paper.

Rising rates may present problems for active money managers. The average tenure is 8 years, so this is the first tightening cycle they have ever seen. For the past decade, cash and short term debt have not been any sort of competition for stocks and long term bonds. Note that the 1 year Treasury finally passed the dividend yield on the S&P 500. Stocks and bonds are going to see money managers allocate more to short term debt.

Despite rising rates, financial conditions continue to ease. The Chicago Fed National Financial Conditions Index is back to pre-crisis levels. Note that doesn’t necessarily mean we are set up for another Great Recession – the index can stay at these levels for a long time, and we don’t have a residential real estate bubble. That said, this index can be one of those canaries in a coal mine for investors – at least selling when it goes from negative to positive.

NFCI

Mortgage Applications fell 2.7% last week as purchases fell 2% and refis fell 4%. The refi index is at the lowest level in almost 10 years, and the refi share of mortgage origination is at 36%. The typical conforming rate fell a basis point to 4.76%.

April Housing starts came in at 1.29 million, down 4% MOM but up 11% YOY. The Street was looking for 1.32 million. Building Permits 1.35 million which was right in line with estimates. Multi-family was the weak spot. Note that March’s numbers were unusually strong (relative to recent history), so April was a bit of a give-back.

Industrial production rose 0.7% last month while manufacturing production rose 0.5%. Capacity Utilization rose to 78%.

New York State is suing HUD to force them to continue to use the Obama-era standard of enforcing AFFH. HUD delayed the rule after numerous local governments were unable to implement policies in time.  Andrew Cuomo’s statement: “As a former HUD Secretary, it is unconscionable to me that the agency entrusted to protect against housing discrimination is abdicating its responsibility, and New York will not stand by and allow the federal government to undo decades of progress in housing rights,” Cuomo said in a statement. “The right to rent or buy housing free from discrimination is fundamental under the law, and we must do everything in our power to protect those rights and fight segregation in our communities.”  Of course overt housing discrimination hasn’t existed for half a century, but that isn’t what this is about.  The issue is zoning ordinances and multi-fam construction. Expect to see more of this sort of thing in blue states as the housing shortage gets worse.