Morning Report: More action out of the Fed.

Vital Statistics:

 

Last Change
S&P futures 2799 45.4
Oil (WTI) 26.56 1.49
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.47%

 

Stocks are higher this morning on optimism that things are turning the corner with the COVID-19 crisis. Bonds and MBS are up.

 

The bond market closes early today, and markets will be closed on Friday.

 

6.6 million people filed for unemployment benefits last week. That puts the number of COVID-19 job losses at around 16.5 million total.

 

The Fed unveiled a new round of measures to support the economy this morning. They include a program to augment the SBA’s Paycheck Protection Program by supplying liquidity to banks that participate, allowing them to pledge the actual loans as collateral. The Fed will also purchase loans under the Main Street Lending Program. The TALF program will be increased and more direct aid will be sent to state and local governments.

The Main Street Program will offer 4 year loans to companies employing up to 10,000 workers with revenues under 2.5 billion. P&I will be deferred for one year. The banks will retain 5% of the loan, and can sell the remaining 95% to the Fed.

Interestingly there is still no facility for mortgage servicers. It looks like the issue is finally getting the attention of lawmakers, however we still don’t have anything. In his comments at the Brookings Institution, Fed Chairman Jerome Powell said that he is watching the mortgage servicers closely, which means the Fed is probably considering some sort of relief.

 

Looks like Wells is out of the penalty box, at least as far as SBA loans go.

 

Jerome Powell said the Fed will act “forcefully and aggressively” to until the economy fully recovers. “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers … We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said in prepared remarks for an online event hosted by the Brookings Institution.

Morning Report: Banks pan the SBA loan program

Vital Statistics:

 

Last Change
S&P futures 2517 4.4
Oil (WTI) 28.56 3.29
10 year government bond yield 0.59%
30 year fixed rate mortgage 3.5%

 

Stocks are flattish after the jobs report. Bonds and MBS are flat as well.

 

Jobs report data dump:

  • Nonfarm payrolls down 710,000
  • Unemployment rate 4.4%
  • Labor force participation rate 62.7%
  • Average hourly earnings up 3.1%

Job losses were concentrated in the service sector, with leisure and hospitality losing 459k jobs. Health care lost 61k jobs (mainly support people) and construction was down as well. FWIW, the 710k number is probably not representative of what is really going on – it will be the cumulative weekly initial jobless claims, which are at something like 10 million.

 

The government is supposed to launch its SBA loan program next week. Apparently many banks will be sitting out. The biggest concern will be reps and warrants, especially when it comes to preventing fraud. The banking system remembers well when the Obama Administration used the False Claims Act to extract massive penalties with FHA lending. Many of those banks, like JPM, never returned to the sector. Also, the requirements to prevent terrorist financing and money laundering, which under the best circumstances takes weeks to do. Finally, the rate the banks will be forced to charge will be too low and will cost them money. But there will have to be reps and warrants relief to get banks to participate. They remember what happened in 2009 and 2010 too well.

 

All of the Fed’s buying has driven its balance sheet up to 5.86 trillion in assets. Before 2008, it was about $800 billion.

 

While most of us are focused on what COVID-19 is doing to the residential market, the commercial market is even worse. The CMBS market is completely frozen. Multifamily, retail, office tenants etc are simply not paying rent right now, and that is going to cascade onto the balance sheets of the banks.

 

There had been talk of a Fed facility to allow servicers to borrow to make advances to bondholders. It looks like that isn’t going to happen, at least not yet. Treasury wants to get a read on how many borrowers actually take advantage of the program. The problem is that if you tell someone that they can skip the next few payments on their mortgage, with no hit to their credit rating, no penalties, and the missed payments will just get tacked on to the end of the mortgage, who isn’t going to take advantage of it? A dollar today is worth more than a dollar tomorrow.

 

Moody’s has downgraded the non-bank mortgage sector from “stable” to “negative” as the financial markets seize up. We have seen the big non-agency mortgage REITs like New Rez, Two Harbors, and Redwood make distressed asset sales in order to meet margin calls.