Morning Report: Forbearance requests are coming in

Vital Statistics:


Last Change
S&P futures 2725 80.4
Oil (WTI) 26.46 0.49
10 year government bond yield 0.74%
30 year fixed rate mortgage 3.47%


Stocks are sharply higher again this morning as the COVID-19 fever seems to be breaking. Bonds and MBS are down, though MBS are still holding up better than the bond market.


There seems to be a sense that the COVID-19 crisis has passed the exponential growth phase and is entering the manageable growth phase. I suspect we will be talking about getting people back to work by the end of the month. Bottom line, the longer this drags on, the more people are going to ignore the stay-at-home warnings.


Home Prices rose 4.1% in February, according to CoreLogic. That said, it is old data and doesn’t really reflect what may be about to occur. “The nearly 10-year-old recovery of the U.S. housing market has run headlong into the panic and uncertainty from the global COVID-19 pandemic. In terms of home value trends, we are in uncharted territory as we battle the outbreak with measures that are generating a never-before-seen, rapid downshift in economic activity and employment. We expect that many homeowners will initially be somewhat cushioned by government programs, ultra-low interest rates or have adequate reserves to weather the storm. Over the second half of the year, we predict unemployment and other factors will become more pronounced, which will apply additional pressure on housing activity in the medium term.” The NYC metro area is most likely to bear the brunt of any negative price movements due to COVID-19. Note that Connecticut’s price appreciation was negative in February to begin with.


Meanwhile, New Jersey and Florida seem to be most likely to be hit by Coronavirus foreclosures. “Some parts of the country have seen home prices surge way past what average wage earners can afford, while others may be seeing equity lag if prices have flattened out recently or dipped,” Todd Teta, ATTOM’s chief product officer, said in a statement. “Homeowners who bought in the past year, at the top of the market, are more likely to fall into that group.” In New Jersey, five of those counties were in the New York City suburban area. They included Bergen, Essex, Passaic, Middlesex, and Union counties.


Nationstar (aka Mr. Cooper) said that 86,000 people requested forbearance already. Requests ranged from 8,000 – 22,000 a day through last Friday. This represents 2.5% of its customer base. Jay Bray, Mr. Cooper’s CEO said: “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Bray, talking about an advance facility for servicers “There is going to be complete chaos. We’re the largest nonbank. We have a strong balance sheet, but for the industry as a whole you’re going to start seeing problems soon.” Estimates for the number of forbearance requests range from about 2 million from the government to 12 million from the Urban Institute.


There is a massive moral hazard problem with forbearance that the government just hasn’t thought through. In 2008, you had to prove hardship to get a mod on your mortgage. Now you merely have to attest that you have been affected (and the CARES act says “directly or indirectly”). No proof required. I suspect the government’s 2 million estimate (~4% of homes with a mortgage) is probably too low. Urban Institute’s 24% is probably going to be closer to the mark. The limiting factor on this will simply be staffing for servicers. They probably don’t have have the people to handle 12 million forbearance requests. Heck, they probably don’t have enough for 2. What happens if someone can’t get through to their servicer, stops paying, and never gets approval? Or gets partially through the process, gives up, and stops paying without a plan?


Aggregators are already telling originators that any loan that requests forbearance within the first two weeks of purchase is getting pushed back to the originator. I have already received several unsolicited emails from funds looking to buy this paper. I think GNMA has said that loans in forbearance are ineligible for pooling in GII securities. Warehouse lenders are refusing to fund FHA and VA loans below 640, and aggregators seem to be moving towards a 680 minimum.





Morning Report: Strong wage growth in December

Vital Statistics:


Last Change
S&P futures 2480 32.75
Eurostoxx index 338.85 4.35
Oil (WTI) 48.05 0.95
10 year government bond yield 2.61%
30 year fixed rate mortgage 4.43%


Stocks are higher on no real news. Bonds and MBS are down.


Jobs report data dump:

  • Nonfarm payrolls up 312k, street expectation 177k
  • Average hourly earnings up 0.4% MOM / 3.2% YOY, street expectation 0.3% / 3.1%
  • Labor force participation rate 63.1%, November 62.9%
  • Unemployment rate 3.9%, street expectation 3.7%

Overall a strong report. The uptick in the unemployment rate was a surprise, but is still below 4% and the labor force increased by quite a bit. Wages are increasing smartly, rising 3.2%. Those in the press (and DC) hoping for recessionary data will be disappointed with this report.


Yesterday, we touched 2.57% on the 10 year bond yield. If you were hoping to see that reflected in mortgage rates, you were probably disappointed. MBS are lagging the move in Treasuries (as usual).


The action in the Fed funds futures is truly astounding. There has been a complete sea-change in market perception over the past month. Look at the January 2020 futures (a year from now). Implied probability of another hike in 2019? Zero. Chance of a rate cut? Better than 50/50. Note the implied probabilities a month ago versus today. The market is saying the Fed overshot.


fed fund futures dec 2019


Compare that to the dot plot from the December meeting which suggests another 50 basis points of hikes:


dot plot


This is an astounding change in sentiment in just a month. It is certainly possible that the Fed Funds futures have it wrong, but it is clear the market and the Fed aren’t seeing the future even remotely the same.


Chinese demand is collapsing, as evidenced by falling consumption tax receipts. People have known that China has a real estate bubble and a shaky banking system for a while, but bubbles generally go on for longer than anyone ever expects. With the Chinese pulling out of the hot US markets, we are seeing a decline in places like Manhattan, where the median apartment price fell below $1 million for the first time in 3 years. There is a 16 month supply of luxury apartments in Manhattan, compared to an overall 4.5 month supply of existing homes for sale in the US. 6.5 month’s worth is generally considered a balanced market. The same thing is happening in the hot West Coast markets.


Kathy Kraninger, the new head of the CFPB sent an email to staffers saying that the agency will “continue to vigorously enforce the law,” but keep in mind “costs and benefits” and “maintain an open mind, without presumption of guilt.” So, she sounds like a continuation of the Mick Mulvaney approach and not a return to the Cordray “regulation by enforcement” model.


Mr Cooper bought IBM’s $48 billion servicing portfolio.