Morning Report: Coronavirus kills 10 million jobs

Vital Statistics:

 

Last Change
S&P futures 2452 4.4
Oil (WTI) 22.16 1.89
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.54%

 

Stocks are flattish after a record 6.6 million people file for unemployment. Bonds and MBS are flat.

 

So, with last week’s revised filing of 3.3 million, a total of 10 million people have lost their jobs over the Coronavirus. Compared to the roughly 200k cases in the US, that works out to be 50 jobs lost per case. That puts the cost of social distancing in perspective.

 

Construction spending fell 1.3% MOM and rose 6% YOY. These are February numbers, so they were still largely unaffected by the COVID-19 crisis.

 

Pretty much everyone has gone to 680 minimum FICOs on FHA loans now. Secondary bulk buyers are pulling back their bids for all loans as well. Everybody is padding margins to take into account the various risks in the financial system.

 

Good piece on mortgage forbearance and what needs to be done. Bottom line, you can’t just stop paying your mortgage and assume everything is fine. Call your servicer before you start missing payments. FHFA Director Mark Calabria estimates that 700,000 mortgage will need forbearance. Given that 10 million people lost their jobs in the past two weeks, that number is probably way too low.

 

New York State has loosened restrictions on in-person showings, appraisals and inspections.

 

Rent was due yesterday for the nation’s renters. Washington is looking for a way to get some relief to them. New York State is considering allowing the security deposit to take the place of rent. I know that Fannie and Fred are allowing forbearance for multifam investors, but I have not seen anything for 2-4 units specifically. The multifam relief is conditional on a freeze of evictions.

 

 

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: Initial Jobless Claims spike

Vital Statistics:

 

Last Change
S&P futures 2463 -4.4
Oil (WTI) 23.84 -0.69
10 year government bond yield 0.81%
30 year fixed rate mortgage 3.44%

 

Stocks are flattish as volatility begins to receded. Bonds and MBS are down. The Fed should be buying another $50 billion of MBS today.

 

Initial Jobless Claims jumped eleven-fold to 3.3 million last week. In a period where it seems like everything is considered “unprecedented,” this one is too.

 

initial jobless claims bbg

 

The third revision to fourth quarter GDP was unchanged at 2.1%. Estimates for second quarter GDP at this point are all across the board, but down double digits is certainly a possibility.

 

The Senate passed the stimulus bill yesterday and the House is trying to pass it without being in session. AOC is supposedly granstanding on this and wants to bring everyone back.

 

Good explainer on what is happening in the mortgage REIT sector. Essentially, the non-agency REITs are the big buyers of non-QM paper, and they are getting margin calls. While much of this non-QM paper is probably money good, it doesn’t matter. Also, servicers are getting slammed as well. Suffice it to say the buyers of non-QM paper, assuming they make it through this whole thing, are probably going to have a much lower appetite going forward. The non-QM market is probably going to be on hold for a long time. Annaly and AGNC are doing the best in this market, although even they are not immune.

 

The House’s stimulus bill included language for a Fed servicing advance line to be extended to servicers who go along with the program and let people defer mortgage payments during the crisis. The big Ginnie servicers are going to need the help.

 

The government is considering taking equity stakes in the airlines as part of a bailout package.

 

Redfin is seeing a 27% decrease in traffic due to the Coronavirus, but it is still flat on a YOY basis. Remote tours are becoming more popular. Note that all of the ibuyers (Zillow, OpenDoor and Redfin) have all suspended buying.

Morning Report: Fiscal stimulus on the way

Vital Statistics:

 

Last Change
S&P futures 2422 -19.4
Oil (WTI) 23.61 -0.49
10 year government bond yield 0.85%
30 year fixed rate mortgage 3.44%

 

Stocks are lower this morning despite a deal on the fiscal stimulus bill. Bonds and MBS are up. The Fed will be continuing its normal $50 billion in MBS purchses this morning.

 

Congress came to a deal on a stimulus bill which aims to ease as much of the economic shock from Coronavirus as it can. Most Americans will get a $1,200 check, small businesses will get $367 billion in relief and state / local governments will get $500 billion in loans. Unemployed workers will get an additional $600 a week up to 4 months.

 

Trump says that he wants the “country opened” by Easter in order to salvage the US economy. The idea would be to re-open restaurants and in-person employment in the non-hotspots. Needless to say, health experts are aghast at the idea, and yes, health concerns are a concern. They aren’t the only concern. Of course state governments are going to have the last word on that as well.

 

A consortium of originators, credit agencies and lobbyists sent a letter to the government discussing relief for homeowners affected by Coronavirus. The idea would be to allow people affected by the crisis to defer mortgage payments for 90 days without interest or penalties. The missed payments would essentially be added to the final payments of the mortgage without interest. Of course servicers are on the hook for the advances, and non-bank servicers don’t have the liquidity to make these advances. The group urges the government to provide some sort of borrowing facility for non-bank servicers to draw upon to make the these additional payments.

 

The Coronavirus has impacted commercial mortgage backed securities as well. As businesses shut down, they can’t make their mortgage payments. This means that the mortgages securing the complex are having issues. Lots of small business owners are combing over the force majure clauses in their contracts right now. For mortgage bankers, this is an issue because the same folks that buy CMBS often buy RMBS. To make matters worse, some of the biggest buyers of mortgage backed are sovereign wealth funds, and with less goods coming from overseas, the less demand for MBS from foreign funds. The Fed will purchase agency CMBS with the help of Blackrock.

 

Mortgage Applications fell 29% last week as rate spiked and bottlenecks in the mortgage market increased. “The 30-year fixed mortgage rate reached its highest level since mid-January last week, even as Treasury yields remained at relatively low levels. Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With these higher rates, refinance activity fell 34 percent, and both the conventional and government indices dropped to their lowest level in a month. Looking ahead, this week’s additional actions taken by the Federal Reserve to restore liquidity and stabilize the mortgage-backed securities market could put downward pressure on mortgage rates, allowing more homeowners the opportunity to refinance.”

 

Have been hearing that Fannie cash window pricing was 50 – 200 basis points wider yesterday. FHA rates have been getting smashed on the basically worthless servicing value. Every co-issue partner is on hiatus. Tough to manage a pipeline when the bids for your loans are lower and the NY Fed is pushing your hedge inexorably higher which is driving margin calls. I keep saying the mortgage banking business will feast once this is over, but we gotta get to the table first.

 

 

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: The Fed announces further stimulus measures

Vital Statistics:

 

Last Change
S&P futures 2323 34.4
Oil (WTI) 22.71 0.09
10 year government bond yield 0.76%
30 year fixed rate mortgage 3.84%

 

Stocks are higher after the Fed announced additional support measures for the markets. Bonds and MBS are up as well.

 

The NY Fed announced further measures to support the markets this morning.  Essentially, the Fed will do whatever it takes to keep the financial market working properly.

Effective March 23, 2020, the Federal Open Market Committee (FOMC) directed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to increase the System Open Market Account (SOMA) holdings of Treasury securities and agency mortgage-backed securities (MBS) in the amounts needed to support the smooth functioning of markets for Treasury securities and agency MBS.  The FOMC also directed the Desk to purchase agency commercial mortgage-backed securities (CMBS).

The Fed expects to buy $75 billion of Treasuries and $50 billion of MBS every day this week. As of right now (pre-open), TBAs are up, but bid ask spreads are wide.

 

The chart below (courtesy of Reuters) shows MBS spreads, which is the difference between the yield on the current coupon mortgage backed security and the comparable duration Treasury.  This represents the market’s reluctance to bid MBS and that flows through to rate sheets. Yes, the Treasury market yields are lower than February. Yes, the Fed Funds rate is lower than February. No, mortgage rates are not. Once those green bars get back to where they were in February we will be seeing lousy pricing in the primary market. The Fed’s $250 billion purchasing activity in the MBS market should help though.

MBS spreads

The Fed is also extending credit to other parts of the economy, specifically the muni market and the corporate credit market. The Fed will start purchasing investment grade corporate loans, it will re-launch the Term Asset-Backed Lending Facility which lent money to investors who buy credit card receivables and other consumer debt. The Fed also plans to roll out a Main Street Business Lending Program which will lend to small businesses.

 

Late last week, pretty much everyone stopped buying non-QM loans, and it looks like jumbos will end soon as well. The securitization markets are halted. I have heard that some non-QM lenders are even refusing to honor locks they have already extended. Aggregators were also declining to buy MBS with rates below 3% as well.

 

Lenders are still waiting for guidance out of Fannie Mae regarding verbal verifications of employment and drive-by appraisals. So far, people have been closing loans in parking lots, but loans are getting done. The last thing Fannie needs is for the mortgage finance pipeline to stop, so I assume they’ll find a way to make things work. The FHFA website apparently contains an announcement that it directs the GSEs to grant flexibility for appraisal and employment verification, so something should be forthcoming.

 

Washington is set to vote on a relief bill today at noon. The Democrats are complaining about executive compensation and stock buybacks, though the bill does contain some limitations on those. Treasury Secretary Steve Mnuchin said the bill could help the Fed direct $4 trillion to the business sector. Companies that take the money will be required to maintain payroll “to the extent practicable.” Supposedly the portion of the loan that goes to maintaining payroll could be forgiven.

 

Interesting data point: Lennar reported good first quarter earnings, which pretty much was expected. Pre-Coronavirus, homebuilding was set to have the best year in over a decade. Their quarter ends in February, and the company said that orders were up 16% in the first two weeks of this quarter – i.e. the first two weeks in March. In most of their markets construction continues, and with interest rates as low as they are PITI payments are lower than market rents.

 

The deadline for filing taxes has been extended to July 15.

 

Existing Home Sales increased 6.5% in February, according to NAR. “February’s sales of over 5 million homes were the strongest since February 2007,” said Lawrence Yun, NAR’s chief economist. “I would attribute that to the incredibly low mortgage rates and the steady release of a sizable pent-up housing demand that was built over recent years.” Social distancing and economic uncertainty is expected to weigh on sales going forward, but the fundamentals of the housing market remain strong, with tremendous pent-up demand.

 

 

 

Morning Report: Spring Selling Season slows down dramatically

Vital Statistics:

 

Last Change
S&P futures 2359 -52.4
Oil (WTI) 21.91 2.39
10 year government bond yield 1.14%
30 year fixed rate mortgage 3.58%

 

Stocks are lower this morning as volatility continues. Bonds and MBS are down.

 

Late yesterday, the Fed announced measures to support short-term money market mutual funds. Global central banks have been cutting rates and conducting currency interventions.

 

Initial Jobless Claims came in at 288k last week, a big increase but hardly recessionary. The big tell will what happens next week, which will include people who were laid off this week.

 

The government has imposed a 60 day moratorium on foreclosures and evictions.

 

Redfin has suspended its iBuying program. This was the program where Redfin would buy homes directly from sellers and handle the sale. I have to imagine Zillow won’t be far behind. While the Fed is pulling out all the stops to keep the financial markets functioning, if lines of credit are at risk of getting pulled, this strategy absolutely does not work.

 

The NYSE has shut down floor operations and is going all electronic in response to the virus. To be honest, I am surprised at how well the stock market has functioned during this whole sell-off. I thought the algorithmic traders would disappear with this volatility. So far, so good.

 

The Spring Selling Season it taking a hiatus due to Coronavirus. After a 27% increase in traffic, it was flat over the past week. Redfin has canceled open houses, and at some point appraisals will become an issue if appraisers don’t want to go into homes.

 

Dismayed by the lack of inventory at your local supermarket? Don’t be.