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

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.

13 Responses

  1. Regarding Horowitz’s new report:

    This report was overdue, but not because of the Trump Administration and its complaints about the FBI.

    While the FBI is a highly competent organization, FISA since its inception has invited overreach.

    First, FISA warrants rely on intel, a lower standard than evidence. There is no bottom really to that standard. Naked rumor will do.

    Second, there is no ability by anyone to oppose or otherwise attack the credibility of the Intel.

    Third, the FISA judges simply must depend on the good faith of the agents who ask for the warrants.

    Fourth, the FISA judges will err on the side of national security over civil liberties, in every case.

    These four factors are by design and are quite arguably the correct way to handle security issues. But this requires two levels of periodic oversight. First, an IG has to review procedural correctness periodically, not just when the President is aggrieved for his buddy. Second, when intel results in prosecution, the wall between intel and evidence and the establishment of an independent path to evidence must be shown. That provides another ground for IG review, in my opinion.

    These are difficult problems of long standing, and only addressed in part by this Horowitz report. As someone who opposed the original Act, I get to say “I told you so”.

    Like

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