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: 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: The Lehman moment?

Vital Statistics:

 

Last Change
S&P futures 2669 20.4
Oil (WTI) 23.86 0.49
10 year government bond yield 0.75%
30 year fixed rate mortgage 3.47%

 

Stocks are higher this morning the Trump Administration works to get the economy going again. Bonds and MBS are flat.

 

With the Fannie 2.5 over 104, the margin calls are back. The NY Fed needs to take a break.

 

The government is starting to work on getting the economy re-opened in the next four to eight weeks. The idea would be to start opening up areas which never really had too many cases to begin with, and slowly work everyone back in. Larry Kudlow said: “It’s the health people that are going to drive the medical-related decisions,” National Economic Council Director Larry Kudlow said in an interview with Politico webcast on Tuesday. “But I still believe, hopefully and maybe prayerfully, that in the next four to eight weeks we will be able to reopen the economy, and that the power of the virus will be substantially reduced and we will be able to flatten the curve.”

 

We will get the FOMC minutes out at 2:00 pm today. Usually the FOMC minutes are a non-event but today could be different. Of course MBS are marching to their own (NY Fed) drummer these days and are gently rising regardless of how the bond market is trading. At a minimum, it will make interesting reading.

 

Mortgage applications decreased 18% last week as purchases fell 19% and refis fell 12%. FWIW, pricing in the secondary market has been terrible for the past two weeks and that is flowing through to primary markets. Aggregators are pricing like they don’t want the business.

 

Mark Calabria said that no Fannie / Freddie servicing facility is going to be made available.

“Yes and no is the answer,” Calabria told HousingWire when asked whether FHFA has a plan similar to that of Ginnie Mae, which recently announced a program to aid servicers dealing with forbearance on loans backed by the Federal Housing AdministrationDepartment of Agriculture, and the Department of Veterans Affairs.

“The yes is we continue to monitor Fannie and Freddie servicers,” Calabria said. “We are, at this point, comfortable with our ability to deal with any servicers that may be distressed so that we can either turn them into subservicers or transfer their servicing to other parties. And we believe at this point, given the number on uptake of forbearance, we’ve seen that we can transfer servicing in a way that’s not too disruptive.

“So, the yes is we have contingency plans and procedures put in place were this distress to happen,” Calabria continued. “So that’s the yes part. The no part is, do we have a liquidity facility that we will be providing via Fannie and Freddie? The answer’s no. We don’t have the resources at Fannie and Freddie to do that.”

Calabria is making a bet that forbearance requests will come in around 2% of servicing portfolios, noting the MBA said that 1.7% requested forbearance in a sample. Of course that was the first week, so it probably is premature to say that is the number. But he isn’t buying the 25% estimates some are throwing around, at least for non-Ginnie servicers. For Ginnie servicers, he can buy that number. FWIW, this kind of feels like a Lehman Brothers moment for the servicers.

 

Well, this news isn’t doing anything for servicing in the bulk market.  I heard that Fannie Mae servicing trading at 1x- 2x. Freddie is 1x and GNMA is 1x to negative. In normal markets, Ginnie is a little south of 3x and Fannie is around 4x. I don’t know if theoretical marks are going to take such a dramatic hit, but if they do, bank earnings are going to take a hit next week.

 

The MBA sent out a statement urging FHFA to reconsider.

“The FHFA Director’s recent statements send a troubling message to borrowers, lenders, and the mortgage market. Servicers are required to offer borrowers widespread forbearance under a plan devised and approved first by FHFA and then codified by the CARES Act. Fannie Mae and Freddie Mac are contractually obligated for the payments to investors. Since Fannie Mae and Freddie Mac will eventually reimburse mortgage servicers for the payments they must advance during forbearance, Director Calabria should advocate for the creation of a liquidity facility at the Fed to ensure the stability of the housing finance market.

Finally, Anthony Hsieh had this to say on Linked In last night:

Loan depot

Morning Report: Trouble with non-agency mortgage REITs

Vital Statistics:

 

Last Change
S&P futures 2438 -89.4
Oil (WTI) 20.46 0.09
10 year government bond yield 0.60%
30 year fixed rate mortgage 3.5%

 

Stock indices are lower as we kick off the second quarter. Bonds and MBS are up small.

 

The Fed took up just 53% of the bonds offered to them yesterday. It sounds like they are backing off on their aggressive buying which was triggering margin calls throughout the industry.

 

Speaking of margin calls, it looks like New Rez has a deal to sell $6.1 billion of non-agency bonds. No price was indicated, but a couple days ago New Rez cut its dividend by 90% and said that book value was down about 25% – 30% from the 12/31 mark.

 

Impac recently said it would suspend lending operations for two weeks after a whole loan investor went radio-silent about its commitment to purchase whole loans. They have let go most of their employees.

 

I can’t see how the non-QM market comes out of this as anything more than a portfolio product for banks who have the werewithall to hold the paper. While I would bet the vast majority of these non-QM loans are money good and will perform as expected, they simply aren’t suitable for repo financing. Securitize them or hold them.

 

The economy lost 27,000 jobs in March, according to the ADP jobs report. In the previous report the economy gained 183k. Small business bore the brunt of the job losses, losing 90k. The Street is expecting a -150k print for Friday’s job report. with the unemployment rate increasing from 3.5% to 3.9%. The government just passed a stimulus bill with aid to help small businesses get through this period. Many are hoping to hold on until the cavalry arrives.

 

Mortgage applications rose 15% last week as purchases fell 11% and refis rose 26%.

Morning Report: MBA asks for relief from FINRA and the SEC

Vital Statistics:

 

Last Change
S&P futures 2581 -29.4
Oil (WTI) 20.94 0.89
10 year government bond yield 0.70%
30 year fixed rate mortgage 3.38%

 

Stocks are down this morning as we wrap up Q1, which was the worse quarter for stocks since 2008. Bonds and MBS are up.

 

The Fed will buy up to $30 billion in MBS today, along with some CMBS paper. It sounds like the NY Fed heard the pleas of originators and is cognizant of the margin call issue. The MBA issued a letter to the SEC and FINRA asking them to give guidance to broker-dealers to lay off the margin calls: “MBA urgently requests that FINRA and the SEC issue guidance to the nation’s broker-dealers, making clear that margin calls on mortgage lenders’ TBA hedge positions should not be escalated to destabilizing levels,” Broeksmit said. “Absent such guidance and an immediate shift in broker-dealer practices, the U.S. housing market is in danger of large-scale disruption.”

 

Been hearing chatter that a lot of originators are imposing minimum 680 FICOs on FHA loans. Also, warehouse banks are becoming more reluctant to fund them unless there is a bid in hand for the loan. It makes sense – FHA loans have the lowest margin for safety with 3.5% down and FICO scores that are generally not good enough to qualify for Home Ready or Home Possible.

 

Goldman is forecasting a Q2 GDP drop of -34% and unemployment hitting 15%. Yikes. That said, the economy should come roaring back in the third quarter as Coronavirus issues fade. The ultimate question: Did all of these small businesses that shuttered over the past month go into hibernation or did they go away? And while the banking sector has so far withstood the impact of the credit crisis, the non-banking sector is a different story. A few non-agency mortgage REITs like Two Harbors and MITT have sold their non-agency bonds to satisfy margin calls. One certainly has to worry about the CMBS mortgage REITs as well as the plain old shopping center and mall REITs. If you are anchored with a grocery story, you might be ok. If you are anchored with a Macy’s however…

 

KB Home reported better than expected numbers on Friday, and remarked that internet traffic remains up on a YOY basis. Walk-in foot traffic is not as the company has shut down its offices. In some parts of the country construction has stopped, but in most of the US it is still proceeding. Regardless of the Coronavirus issues, it appears that the demand for homes is still there, and we might see an even tighter market in existing homes as would-be sellers take their homes off the market.

 

Home prices were up 3.9% in January, according to Case-Shiller. An economist from Capital Economics expects a 4% peak-to-trough hit in real estate pricing. It will be interesting to see if home prices take a hit as a result of the Coronavirus. As KB Home mentioned, the existing home inventory should be even tighter, and homebuilders aren’t stuck with a lot of inventory at the moment and they aren’t entertaining price cuts. That said, the NY market may be a bit heavy.

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: 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: The Fed cuts to zero

Vital Statistics:

 

Last Change
S&P futures 2555 -128.4
Oil (WTI) 29.01 -2.79
10 year government bond yield 0.76%
30 year fixed rate mortgage 3.71%

 

Stocks are limit down after the Fed made an emergency cut over the weekend. Bonds and MBS are up.

 

Yesterday, the Fed cut interest rates to zero and re-initiated QE. The Fed will begin purchasing up to $500 billion in Treasuries and $200 billion in mortgage backed securities over the coming months. For what its worth, stocks are unimpressed. S&P 500 futures went limit down immediately on the Asian open and have been sitting there ever since. The 10 year is trading at 77 basis points pre-open, which is much higher than where it was a week ago.

 

Mortgage backed securities seem to like the re-introduction of quantitative easing. The current coupon TBA is up about 2 points, but it is early and we could just be seeing some short covering. The NY Fed plans to purchase $80 billion of TBAs over the next month.

 

Companies have been taking down their lines of credit to maximize cash on the balance sheet. This is another reason for the rate cut. Banks have been getting clobbered in the sell-off, with the XLF down 25% since the start of the Coronavirus contagion. The Fed is watching to make sure we don’t see a repeat of 2008 when businesses were unable to borrow in the commercial paper market. The banks have all suspended their stock buyback as well.

 

Right now, the immediate concern for the markets is the state of airlines and the energy patch. Oil below $30 a barrel is a problem for almost all of the shale producers. Airline bankruptcies have been a fact of life forever, and many will hit the wall if this drags on. In the meantime the labor market is entering this crisis as strong as it has ever been. Remote working is about to face its biggest test, and if productivity doesn’t take a hit, it could become more mainstream. Certainly for employers it saves money for office space, while improving quality of life for employees. Less commuting is also better for the planet.

 

Coronavirus is going to put a damper on the Spring Selling Season for real estate. Have to imagine traffic is going to fall, although inventory is so tight we probably won’t see much of an impact on prices. Also, this should be an issue for the builders, so supply is going to remain constrained. Refis will continue to drive the business. FWIW, Redfin took the temperature of the average consumer on how it will impact housing. Roughly 40% think it will be bad, while 50% see no effect. The drop in stock prices isn’t going to help the animal spirits in the real estate market, but I find it hard to imagine any sort of decline in prices, aside from the overheated markets on the West Coast.

 

We do have quite a bit of data this week. The FOMC meeting on Tuesday and Wednesday will be more about the press conference than anything, with particular emphasis on whether credit spreads are widening and if we are seeing indications of financial stress in the system. Aside from the FOMC meeting, we will get housing starts, home prices, industrial production and existing home sales. Of course none of this will matter to the bond market, which will be driven by headlines.

 

What does this mean for mortgage rates? The re-introduction of QE will certainly help things, especially if it encourages trading in the lower note rates. Mortgage rates may take a while to adjust. I also suspect that the big money center banks, which drive jumbo pricing are about to increase margins to free up capital to lend to small and medium sized enterprises which are facing cash crunches.

 

 

 

Morning Report: The Fed is concerned about coronavirus

Vital Statistics:

 

Last Change
S&P futures 3379 -6.25
Oil (WTI) 53.76 0.45
10 year government bond yield 1.54%
30 year fixed rate mortgage 3.69%

 

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

 

The FOMC minutes didn’t reveal anything too surprising. The central bank is concerned about coronavirus, and the situation “warranted close watching.” In his Humphrey Hawkins testimony, Jerome Powell said he wanted to see evidence that Chinese disruptions are having a material effect on the US economy that will last. China is idling factories and restricting travel, and companies are now seeing the downside of stretched supply chains. In addition they fretted about persistently low inflation and searched for reasons why it has consistently missed their 2% target to the downside. Basically the message is that if rates are going anywhere, it is down not up.

 

In other economic news, initial jobless claims came in at 210,000 and the Philadelphia Fed manufacturing survey surged to a robust level of 37.

 

Mortgage delinquencies are the lowest on record (going back to 2000).  The total 30 day + DQ rate came in at 3.22%, which was down 14% YOY and down 5% on a MOM basis. This is unusual given that DQs often spike early in the year as holiday spending gets the better of people.