All Things in Moderation

Vital Statistics:

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

The Fed maintained interest rates at 0% and pledged to continue to do what it can to support functioning markets, including buying agency mortgage backed securities and treasuries. They didn’t specify amounts, just that they wanted to keep orderly markets. As Dave Stevens noted, it is clear the Fed wants to see lower mortgage rates as a way to stimulate the economy. The problem with that of course is that the CARES Act is doing the exact opposite – it is restricting credit more than what happened in 2008. The MBA’s Mortgage Credit Availability index took a nosedive in March, and I think it will be much, much worse in April.

Flagstar just announced a 5 point LLPA for cash-out refis. It is clear that these are the next program to go bye-bye, joining jumbos, non-QM, and sub 700 FHA. The law of unintended consequences rears its ugly head once again. I wonder if the government could tweak the CARES Act to make cash-outs ineligible for forbearance. That way the program could still exist and provide relief to people hit by COVID. Presumably if you do a cash-out, you have money to live on, so….

Initial Jobless Claims came in at 3.8 million, pushing the COVID job losses over 30 million.

Personal incomes fell 2% in March and personal spending fell 7%. The personal consumption expenditure index remained under control. I suspect that increasing food prices are being offset by lower energy prices.

Mortgage REITs AGNC and Annaly reported yesterday, and needless to say both were hit hard by COVID. Both have completed their deleveraging, and AGNC noted that its book value per share increased by 8% in April, after declining about 22% in Q1. For the agency REITs, it looks like the crisis is over.

Another round of stimulus may be a bridge too far. Nancy Pelosi wants to force states to vote by mail, and that is a non-starter with Republicans. Mitch McConnell wants lawsuit protection for businesses that remain open during the COVID crisis, and that is a non-starter to Democrats. As Travelers noted on its conference call, trial lawyers smell an opportunity here and are ginning up lawsuits as we speak.

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Vital Statistics:

Stocks are higher this morning despite a disappointing GDP print. Bonds and MBS are up.

First quarter GDP fell 4.8% as the COVID lockdown depressed consumer spending, which fell 7.6%. The price index rose 1.3%, and that will be a number to watch going forward. Inflation is too much money chasing too few goods. We have managed to sidestep inflation in the past because shortages weren’t a problem. Now they are. Do you remember paying a buck a roll for TP last year? How about chicken? It averaged $3.11 a pound last year. At the local Stop and Shop it is now $3.80, and with the Tyson closures it will go higher. The black swan out of this whole thing could be a resurgence of inflation, right when that is the last thing the economy needs. 

The FOMC will make their announcement at 2:00 pm today. Not sure what they can say,(Information received since the Federal Open Market Committee met in March seems to indicate the economy has hit a brick wall and is sinking like an anvil….) and I can’t see it being market-moving. The mortgage industry would love to see something about a servicing advance repo line, but aside from accepting newer forms of collateral I don’t think there is much more they can do.

Mortgage applications fell 3.3% last week as purchases rose 12% and refis fell 7.5%. The refi market continues to tighten as investors add overlays to cash-outs. The strength in the purchase market is encouraging. Separately, the homeownership rate hit 63.5% in the first quarter, the highest since 2013. I think for many urban millennials with families, the COVID Crisis will trigger a flight to the suburbs, which should bump up the homeownership rate going forward.

According to a NPR poll, half of Americans have been financially affected by the Coronavirus. If that is the case, then forbearance numbers are going up.

Consumer confidence fell from 119 to 87, which was worse than expected.

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Vital Statistics:

Stocks are higher this morning as earnings continue to come in. Bonds and MBS are flattish.

7% of all mortgages are in forbearance, according to the MBA. Ginnie Mae loans (FHA and VA) are now at 10%. Fannie loans are 4.6% and Freddie are 5.5%. Private label increased to 7.5%. The FHFA has also released a press release saying that lump sum payments at the end of the forbearance period are not required.

The Economic Policy Institute (a lefty think tank) estimates from a poll that initial jobless claims are understated by 9 – 14 million due to system problems, in other words people who can’t register because the state unemployment sites are overwhelmed with traffic. If they are right, then the actual number of people who lost their jobs due to COVID is about 37.5 million. In other words, about 662 livelihoods per person who has died from the virus.

The COVID lockdown is beginning to affect the food supply as well. At some point the cure is worse than the disease.

The Fed begins the two-day FOMC meeting this week. They can’t do much more monetary policy wise, but it sure would be nice if they announced a facility to allow mortgage bankers to repo servicing advances.

Home prices rose 0.4% MOM and 3.5% YOY in February, according to the Case-Shiller Home Price Index. It will be interesting to see if the COVID crisis affects home prices nationally. FWIW, Pulte said on its conference call that it hasn’t cut prices at all. In some markets where there is excess spec inventory, builders are adding financing incentives, but not breaking price.

We are starting to see warehouse banks curtail high balance loans. Cash-out refis are also getting harder to do. I heard a rumor that Ginnie Mae may also introduce some sort of vehicle to pass some of the forbearance costs onto lenders (perhaps a special pool for forbearance loans). While the government’s forbearance policies may provide relief to homeowners, the unintended consequence is a severe restriction in credit.

One of the big trends in the aftermath of the financial crisis was the Millennial Generation preferring to live in urban walkable areas. COVID-19 might have stuck a fork in that trend. Good news for suburban SFR property owners.

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Vital Statistics:

Stocks are higher this morning on optimism that we have turned the corner on the COVID-19 crisis. Bonds and MBS are down.

In terms of economic data, the big number will be the first pass at Q1 GDP will be released on Wednesday. The consensus is that GDP contracted 3.8% as consumer spending falls 1.5%. Trump Administration Advisor Kevin Hassett thinks the economy could contract 30% in Q2.

The Fed will have the April FOMC meeting this week, and with rates already at zero, it probably won’t have the impact it normally has. Speaking of the Fed, they are ratcheting back MBS purchases again this week, with only $8 billion a day.

It looks like some states are beginning to relax the shelter-in-place orders, and even New York is looking to ease things in mid-May. If these states end up seeing no big uptick in cases, I expect the rest of the country to follow pretty quickly. Especially if the number of deaths settles in under 100k. FWIW, I think if most of the country is back to normal by Memorial Day, we can take the Great Depression II economic forecasts off the table.

Ex MBA President wrote a scathing editorial in Housing Wire regarding Mark Calabria and how he is the worst person for the job right now. In Mark’s defense, his job is to protect the GSEs and (and therefore the taxpayer), however Dave is correct that taking a cavalier attitude with non-bank servicers is not the best look right now when (a) the government imposed this forbearance period on everyone and (a) the GSEs are part of the government. If the government goes forward and imposes all of these costs on the industry, the least it can do is help mitigate those as much as it can. Perhaps the aid doesn’t need to come from Fannie and Freddie, but the government should provide it from somewhere.

Home price appreciation is slowing, but not dropping yet, according to Realtor.com. Inventory is tight, largely driven by sellers who are pulling their homes off the market. This could be due to fears of not getting the best price, or it could be due to people wanting to keep potentially sick strangers from entering their home.

Pulte noted on its Q1 conference call that pricing is holding up, and cancellations are unexpectedly small – about 2% and only due to job losses. Orders on the other hand are weak. In the first week of March, they got over 800 orders. By the last week of March it was 140.

Rent strikes are beginning to pop up in NYC. This one is not the usual tenant versus landlord situation where there is a dispute over fixing things. This is meant to be a political statement to goad lawmakers into doing something for renters. Bold strategy, Cotton…

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Vital Statistics:

Stocks are higher this morning on no real news. Bonds and MBS are flat.

The second round of stimulus passed the House yesterday and is scheduled to be signed by the President at noon today.

Durable goods orders fell 14% in March, driven by lower transportation orders. Ex-transports, they were down 0.2%. Core Capital Goods (a proxy for capital expenditures) rose 0.1%.

New Home Sales fell to 627k in March from an annualized pace of 741k in February.

Homebuilder Pulte reported good earnings yesterday, however this was mainly before the COVID-19 pandemic hit.  “The U.S. housing industry carried tremendous momentum into 2020, until the devastating effects of the COVID-19 pandemic began impacting the country,” said Ryan Marshall, PulteGroup President and CEO. “As the coronavirus spread and state and local governments implemented various restrictions and stay-in-place orders, we experienced a material slowdown in consumer traffic and sales activity beginning in mid-March.” Despite the COVID issues, closings and orders were up 16% and gross margins increased. Before COVID, 2020 was expected to be the year when homebuilding finally broke out of the post-bubble vortex. It looks like it will have to wait another year. As an aside, Redfin reported that 1 in 7 offers were signed by buyers who saw the home virtually.

About 3.4 million homeowners have requested mortgage forbearance, according to Black Knight Financial Services. This is 6.4% of all mortgages. With 26 million new unemployment claims since the shelter-in-place orders, that number is probably going up. At this level, servicers in aggregate are on the hook to advance $2.8 billion per month for Ginnie securities. So far, Treasury is refusing to create an advance facility for non-bank servicers.

Some states are relaxing shelter-in-place restrictions and allowing non-essential businesses to re-open. Needless to say, public health types are aghast, however it will be interesting to see how well it works, especially Texas. Speaking of Texas, the amount of newly unemployed in the US, about 26 million, is just shy of the population of the US’s second most populous state at 29 million. That puts the economic carnage of this shelter-in-place order in perspective. Even New York is beginning to look at relaxing restrictions, at least upstate.

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Vital Statistics:

Stocks are higher this morning after the Senate passed a stimulus bill to increase aid to small business, and oil rallies. Bonds and MBS are down.

Existing home sales fell 8.5% month over month in March, but are still up modestly on a YOY basis. “Unfortunately, we knew home sales would wane in March due to the coronavirus outbreak,” said Lawrence Yun, NAR’s chief economist. “More temporary interruptions to home sales should be expected in the next couple of months, though home prices will still likely rise.” Pricing was strong, with the median home price up 8% YOY. Inventory is still tight, down 10% YOY and is about 3.4 months worth. First time homebuyers increased to 34% of all buyers and investors fell to 13%.

Meanwhile, some are fretting about another housing crash. When demand outstrips supply as much as it does right now, you generally don’t see crashes. Residential real estate bubbles like we saw from 2004-2006 are rare (like once or twice a century). The conditions required for one simply aren’t in place right now.

Mortgage applications fell 0.3% last week as purchases rose 2% and refis fell 1%. Meanwhile, house prices rose 0.7% MOM in February and were up 5.7% YOY, according to the FHFA House Price Index.

JP Morgan is preparing to bring back workers in phases, according to an internal memo. Meanwhile, New York State will re-open in phases, based on how many COVID-19 cases are out there.

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Vital Statistics:

Stocks are lower as oil continues to weaken. Bonds and MBS are up.

The front month oil contract went negative yesterday, which was probably a first. I think at one point it traded at -$40 a barrel. Why? Nowhere to put it. Storage is pretty much full, and any incremental capacity out there is expensive. The May contract still trades, but June is really the active one.

Forbearance requests are now up to 6% of all mortgages.  8.26% of Ginnie loans are in forbearance and 4.6% of Fannie / Freddie loans are in forbearance. “With over 22 million Americans filing for unemployment over the past month, homeowners are contacting their mortgage servicers seeking relief, leading to a sharp increase in the share of loans in forbearance across all loan types,” said Mike Fratantoni, MBA’s senior vice president and chief economist. “Mortgage servicers continue to receive a very high level of forbearance requests, but volumes were down somewhat compared to the prior week.”

Most economists think the eventual recovery will be U-shaped, in other words and extended downturn before things get back to normal. The other predictions are a V-shaped recovery or a W-shaped one. Obviously it depends on how long the lockdown lasts, and whether people get back to work wearing gloves and masks. Interestingly this has begun to fall down partisan lines, with red-staters wanting to get back to work, and blue-staters hectoring them about it. Note that Texas supposedly opens this week, and Georgia and Tennessee are looking to re-open May 1.

Retailers are looking for bailout as well. While many small retailers will be able to access the Main Street Program, many larger ones like Macy’s or Needless Markup cannot. The government’s fear is that it would be propping up companies that have larger problems than just the COVID-19 virus and were probably heading for bankruptcy to begin with.

The Senate may be close to a deal for further funding of small business. Apparently one of the issues with the previous deal was that larger companies with existing relationships with the banks got there first, before the the smaller businesses did. This would set aside something like $125 billion for the smaller guys with no relationships. “We insisted that a chunk of the money be separate from the competition with the bigger companies, you know the ones that have two, three, 400 people and a relationship with the banks, and we got $125 billion that will go exclusively to the unbanked,” [Chuck Schumer] said. “To the minorities, to the rural areas and to all of those little mom and pop stores that don’t have a good banking connection and need the help.”

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Vital Statistics:

Stocks are lower this morning as people watch the price of oil collapse. Bonds and MBS are up small.

Oil is down huge this morning. Why? Nowhere to put it. We are getting back towards the late 90s, when the Economist put out its famous “drowning in oil” cover, which marked the bottom of the oil market. Note that it is the May contract, which expires this week that is down so much. Since it is no longer front month, it isn’t really actively traded and therefore not representative of the true price of oil in the markets. The June contract is trading around 22 bucks. Ironic that we are headed into the summer driving season with oil at the lowest in a generation, but there is nowhere to go.

No major economic data this week, aside from initial jobless claims. We do get some real estate data with existing home sales, new home sales, and the FHFA House Price Index. The NY Fed is decreasing its TBA purchases to $10 billion per day.

The Chicago Fed National Activity Index was flashing “recession” in March, falling to -4.17. (Anything under -0.7 is considered recessionary). Mohammed El-Arian says the economy could contract 14% in 2020. Citi also warns that the markets aren’t pricing in a second wave of infections.

Almost 3 million people have asked for mortgage forbearance under the CARES Act. This represents 5.5% of all active mortgages. This is 4.9% of all Fannie / Freddie loans and 7.6% of FHA / VA loans. So far servicers are getting crushed by this. “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s larger mortgage servicers, who consulted with the Trump administration to set up the bailout. “When we were working on the Act, we had liquidity in it, and it did not make it into the Act. We were told it would be handled through the administration, and it’s a real problem.”

Last week Senators Sherrod Brown and Maxine Waters sent a letter to the Administration:  “The government must be prepared to respond quickly to prevent a liquidity shortfall in the single-family and multifamily mortgage markets, and to ensure that consumers are equitably served by that response. Any liquidity provided must be used to stabilize the market at a time when many families may fall behind on payments and facilitate relief to individual homeowners and renters throughout the market through forbearance, loss mitigation, and protection from displacement, rather than immediate defaults and evictions.”

Civil Rights and fair housing groups are also requesting a facility for servicers. While it seem unusual for the Professional Left to go to bat for servicers, they sense that if no facility is set up, no one will want to do FHA loans in the future. FHA business is severely restricted at the moment.

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