All Things in Moderation

Vital Statistics:

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.

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Vital Statistics:

Stocks are higher this morning as the government extended social distancing for another two weeks. Bonds and MBS are flattish.

Margin calls have been driving the independent mortgage bankers crazy over the past month. The Fed’s dramatic actions in the mortgage backed securities market may have helped liquidity, but it has pushed the IMBs to the wall. The MBA has been in discussions with the Fed and policy makers to make them aware of what is happening.

“While lenders can expect to recognize gains on their pipelines, they will also recognize losses on short TBA positions used for hedging purposes,” MBA said. “These pipeline gains will be recognized over a period of weeks, but the sharp movement in lenders’ hedge positions typically entails daily adjustments and margin calls from their broker-dealer counterparties. Because of these dramatic price changes, broker-dealers’ margin calls on mortgage lenders reached staggering and unprecedented levels by the end of the past week. For a significant number of lenders, many of which are well-capitalized, these margin calls are eroding their working capital and threatening their ability to continue to operate.”

For what its worth, the Fed’s MBS purchase guidance for today. It is “only” $40 billion versus the $50 billion last week. I see a lot of “tentative” notes, so hopefully they will let them breathe a little. Unfortunately, the April 2.5s are 105 bid this morning, so it isn’t a good start. The regulators need to figure something out: either tell FICC to call off the dogs, or perhaps let independent broker dealers assign their short TBAs to Fannie.

There is talk that Ginnie Mae is going to put out an APM that will allow GNMA to cover advances for servicers who get hit by a wave of DQs. The government has to do something, because non-bank servicers simply don’t have the liquidity to handle it.

Economists forecast that the Coronovirus will cause a record recession and a record expansion all in the same year. Wells Fargo predicts a 15% contraction in Q2, a 6% contraction in Q3 and a 4% expansion in Q4. They are calling for the 30 year fixed rate mortgage to fall to 2.9%.

Zillow is working to cancel all of its existing contracts to buy homes under its iBuyer program. I guess Zillow’s offers are contingent after all, and you have to wonder if paying 7.5% and up is worth it.

New Jersey has instituted a 90 day mortgage holiday for those who have been impacted by Coronavirus. No late fees, no credit hit. Note that the mortgage forbearance plans that have been advertised in the press involve adding the missed payments to the end of the loan. That isn’t necessarily the case. Check with your bank.

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Vital Statistics:

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.

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Vital Statistics:

Stocks are flattish as volatility begins to recede. 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.

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.

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Vital Statistics:

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.

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds are up, while MBS are down.

The MBS market has decoupled from the Treasury market, with weakness across the coupons. It got so bad yesterday that bid/ask spreads widened to about a point and some coupons in the Ginnie space simply stopped trading. Despite a rally in 1.5 point rally in the 10 year, 2.5% TBAs are down half a point. The Fed has taken notice and has directed even more QE money to the sector. They are expected to buy about $35 billion of MBSs today.

The issues in the TBA market are probably due to a few things: First mortgage backed security investors are probably deleveraging. The massive sell-off we saw in the mREIT sector on Wednesday (with some stocks down 50%+) was due to rumors that banks were pulling their repo lines. Also, with the trade deficit (probably) falling with China we are seeing less Chinese purchasing of mortgage backed securities. This is affecting pricing as well.

Fannie Mae’s window pricing took a turn for the worse yesterday as well. Perhaps they are simply full, but take a look at the worse. We are back to mid-January levels. In other words, all the improvement from the emergency rate cuts are gone. Chart courtesy of Optimal Blue.

Warehouse banks are beginning to demand huge haircuts on jumbo loans and are rejecting non-QM loans. So forget about those for a while.

European banks are struggling right now, and the fear is that it will spread to the US banks. Deutsche Bank has always been a problem child, and I don’t even want to get started on what the markets think of Italian banks Unicredito and Intesa SanPaolo Imi. This is going to affect US banks and reduce a lot of the risk tolerance in the system.

Home buyers need to bake in more time to close. Meanwhile the industry waits for guidance regarding verbal verifications of employment, and hopes that drive-by appraisals will become acceptable.

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Vital Statistics:

Stocks are down big this morning as we continue the volatile markets. Bonds are getting slammed, where the US Treasury is following the carnage in Europe.

Volatility begets volatility, and that is what we are seeing. Oil is now at a 17 year low. The ironic thing is that gasoline prices will be ridiculously low for the summer driving season, but there will be nowhere to go. European bonds are selling off due to fears that the Italian economy is going to be so bad that they will need a bailout from Germany. The German Bund has picked up 50 basis points in yield, going from -78 basis points on Friday to -28 today. The US Treasury is being pulled along for the ride.

Washington is putting together a panoply of measures to try and support the economy while everyone hunkers down at home. It looks like the government is going to give everyone $1,000 in a couple of weeks to get people through this tough time. Multiple industries will probably get some sort of help, with hospitality and airlines at the front of the line. As oil falls, the frackers will be soon behind, and I suspect the mall REITs will be next. Companies are suspending stock buybacks left and right, which may explain some of the sogginess in the stock market.

Homebuilder sentiment fell in March to 72, which is still strong. I have heard that construction activity has been suspended in the Bay Area, and I saw that Loan Depot has ceased accepting loans from all of the counties surrounding San Francisco.

Housing starts came in at 1.6 million again in February. Building Permits were 1.45 million. February was probably too early to be affected by Coronavirus, so March will be a better tell.

Mortgage applications fell 8% last week as purchases fell 1% and refis fell 10%. Between margin calls and a lack of investor appetite for refis, mortgage rates backed up last week. Don’t forget that mortgage backed security investors detest volatility in the bond market. It makes hedging their portfolios more expensive, and the prepay option (which an MBS investor is short) more valuable.

Despite the moves by the Fed in the markets, the mortgage REITs continue to get slammed. I suspect this is a “shoot first, ask questions later” mentality on the part of investors, but some of these stocks are looking crazy cheap, trading at half of book value and some with dividend yields of 20% + (one of which declared its normal dividend yesterday) Watch the REITs, because their appetite for paper flows through to mortgage rates.

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