All Things in Moderation

Vital Statistics:

Stocks are lower this morning as last week’s market sell-off continues. Bonds and MBS are up

Small business sentiment improved in August, according to the NFIB. The index rebounded back to its historic level. Hiring plans were definitely the bright spot in the report, as a net 21% of firms plan to hire in the next 6 months. Demand for skilled construction workers is high, but finding them is tough.

Intercontinental Exchange, the parent company of the New York Stock Exchange has completed its $11 billion purchase of Ellie Mae. ICE already owns MERS and Simplifile. “We are excited to begin the next important chapter in our journey to digitize the residential mortgage industry,” said Jeff Sprecher, founder, chairman and CEO of Intercontinental Exchange. “Ellie Mae’s industry leadership and best-of-breed technology will better enable us to further accelerate the automation of the mortgage origination workflow, which will benefit stakeholders across the production chain, including consumers.”

Productivity improved for the mortgage industry last quarter. The median productivity for sales employees (mainly LOs) was 7.4 loans per month, compared to 4.5 loans in the first quarter. Fulfillment employees were closing 8.4 loans a month versus 5.5 in the first quarter.

Urban apartment REITs are seeing big cuts in rent, as they try and “buy occupancy.” NYC rents are down 15%, while Bay Area rents are down 9%. The eviction moratorium (put out by the CDC) isn’t helping things. When the Center for Disease Control is making apartment regulations, you have to wonder if HUD is about to weigh in on vaccine efficacy. Note that campus housing REITs are struggling as well, as colleges move towards remote learning.

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Vital Statistics:

Stocks are higher this morning after a positive jobs report. Bonds and MBS are down.

Jobs report data dump:

Nonfarm payrolls up 1.4 million

Unemployment rate 8.4%

24.3% of people teleworked due to COVID

Labor force participation rate 61.7%

Overall, this is a strong report that pours cold water on the idea that we could be experiencing a W-shaped recovery (aka a double-dip recession). The labor force participation rate last year was 63.2%. It bottomed out just above 60% in April, which means we have retraced about half the COVID-related decrease.

I took a look at Quicken’s numbers and found some truly astounding things. First, their gain on sale margins are 519 basis points. I think the average according to the MBA is something like 429 bps. The more impressive number is the net profitability. Quicken made $3.5 billion on $72.3 billion in origination, or a whopping 484 basis points in net income. The MBA average for bankers was 167. Of course comparing Quicken to Pennymac or Mr. Cooper isn’t really the right model – those guys are largely aggregators while Quicken doesn’t really have much of a correspondent footprint (non-del only).

Another thing I found interesting from the conference call is that Quicken looks at its MSR book as a source of future business. In other words, they aren’t looking at the book solely as a return on assets game or even a hedge for the origination business – they are actively soliciting their borrowers for a refi. I wonder if people who are buying their spec pools are aware of this – prepay speeds are probably going to be quite higher than the rest of the industry.

Quicken is trying to build the infrastructure to get to $40 billion a month in origination and has a goal of achieving 25% market share by 2030. Finally, Quicken guided for $82 – $85 billion in origination in Q3, however margins are going to drop from 4.05% – 4.3%.

Finally, IMO the new WordPress editor is awful and klugey

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Vital Statistics:

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

Rocket Mortgage (aka Quicken) reported second quarter numbers after the close yesterday. Origination volume rose 126% YOY to $72 billion. Margins were 519 basis points. For the third quarter, Quicken is projecting volume of $82 – $85 billion with a drop in gain on sale margins to 405 – 430 basis points. About 4.7% of the company’s servicing portfolio was in forbearance. Despite the strong numbers, the stock is down 10% pre-open.

Initial Jobless Claims fell to 881,000, which was below the 958k the street was looking for. Separately, companies announced 116k job cuts in August, according to outplacement firm Challenger, Gray and Christmas. “The leading sector for job cuts last month was Transportation, as airlines begin to make staffing decisions in the wake of decreased travel and uncertain federal intervention. An increasing number of companies that initially had temporary job cuts or furloughs are now making them permanent,” said Andrew Challenger, Senior Vice President of Challenger, Gray & Christmas, Inc.

Nonfarm productivity increased 10% in the second quarter, according to BLS. Unit labor costs increased 9%. Given the chaos in the labor market during Q2, I suspect there is a lot of noise in these numbers.

The Center for Disease Control has declared evictions a national health hazard. You would be forgiven for wondering what a bunch of MDs have to do with real estate, but here we are. Needless to say, the industry is dead set against it:

“If tenants are unable to pay their rent, then millions of our nation’s housing providers – many of whom are individual landlords and small business owners – will be unable to meet their mortgage obligations, make payroll to their own employees, maintain a safe and healthy living environment for their tenants and pay their state and local government property taxes,” said Bob Broeksmit, CEO of the Mortgage Bankers Association. “The result would be a cascading reaction that would only exacerbate the current economic crisis, leading to more job loss, financial pain, and long-lasting economic effects.”

and the left doesn’t think it is enough:

“The CDC order is really quite extraordinary, but if it’s not coupled with rental assistance, it’s just pushing the issue down the line and it will snowball into a crisis that landlords and tenants will be recovering from for decades,” said Emily Benfer, a law professor at Wake Forest University and co-creator of the COVID-19 Housing Policy Scorecard with the Eviction Lab at Princeton University.

“We need $100 billion to cover this deficit and that investment is far less expensive than the cost of eviction, the cost of homelessness — all of the downward effects that this causes,” Benfer said.

PIMCO is warning that releasing the GSEs without an explicit government guarantee will raise mortgage rates. The company is one of the biggest buyers of Fannie and Freddie mortgage backed securities, and the amount it is willing to pay to invest in MBS directly influences what borrowers pay. PIMCO is not interested in returning to the vague “government sponsored entity” status of Fan and Fred that existed pre-2008. It would view them as “wholly-owned private companies with no accompanying government guarantee.”

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Vital Statistics:

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

Mortgage Applications fell by 2% last week as purchases were flat and refis fell by 3%. “Both conventional and government refinancing activity decreased last week, despite 30-year fixed and 15-year fixed mortgage rates declining to near historical lows,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Mortgage rates have remained below 3.5 percent for five months now, and it’s possible that refinance demand may be slowing and will not significantly increase again without another notable drop in rates.” Are we seeing prepayment burnout? Or was the 50 basis point adverse market fee adding some noise? I suspect it was the latter.

Independent mortgage banks made a profit of $4,548 on each loan in the second quarter, up from $1,600 in the first quarter. Average volume for the quarter was $1 billion. 96% of firms were profitable. Total production revenue increased to 429 basis points from 362 bp in the first quarter.

ADP reported 428,000 new jobs in August. The Street was looking for 900k. The consensus for Friday’s jobs report is 1.4 million.

Rental prices are collapsing in New York City and San Francisco. “Since [COVID-19] really started to affect the U.S. market in March, it has dramatically decreased the amount of people commuting to work every day—either because of social distancing measures or layoffs resulting from COVID-19’s effect on the economy. Given this, there is less of a reason for Americans to cluster in urban centers,” says Zumper analyst Neil Gerstein. “We believe this has caused a migration shift, and a subsequent demand shift, to historically cheaper cities.”

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Vital Statistics:

Stocks are flattish this morning on no real news. Bonds and MBS are flat as well.

The percentage of loans in forbearance was flat at 7.2% last week, according to the MBA. Fannie and Freddie loans decreased by 5 basis points while FHA and private label increased. The share of loans in forbearance was unchanged, as the decline in the share of GSE loans was offset by increases for Ginnie Mae, and portfolio and PLS loans,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “The pace of new forbearance requests has been relatively flat across investor types, but for those with GSE loans, the rate of exits from forbearance regularly exceeds the rate of new requests. The exception in these trends are borrowers with Ginnie Mae loans. The loss of enhanced unemployment insurance benefits, coupled with a consistently high rate of layoffs and uncertainty about the job market, are having a disproportionate impact on FHA and VA borrowers.”

Rep Maxine Waters (D-CA) laid into the FHFA over the 50 basis point adverse market fee. “Just two weeks ago, Director Calabria approved an outrageous penalty – in the middle of a pandemic and an economic recession – that would apply to homeowners looking to use today’s historically low mortgage rates to refinance their mortgages and reduce their mortgage payments,” Waters said. “Now, after bipartisan backlash, Director Calabria is attempting to save face by delaying the penalty until December 1st and then only providing very narrow exemptions moving forward. While this delay will buy homeowners looking to refinance some time, at the end of the day, the vast majority of homeowners will still pay the penalty – and homeowners in higher-cost areas like Los Angeles will disproportionately be excluded from the narrow exemptions provided. I am calling on Director Calabria to terminate this penalty altogether, not just delay it.”

CoreLogic reported that home prices rose 5.5% in July. CoreLogic CEO Frank Martell said: “On an aggregated level, the housing economy remains rock solid despite the shock and awe of the pandemic. A long period of record-low mortgage rates has opened the flood gates for a refinancing boom that is likely to last for several years. In addition, after a momentary COVID-19-induced blip, purchase demand has picked up, driven by low rates and enthusiastic millennial and investor buyers. Spurred on by strong demand and record-low mortgage rates, we expect to see more home building in 2021 and beyond, which should help support a healthy housing market for years to come.” That said, CoreLogic forecasts a deceleration for home price appreciation going forward of sub-1% for the July 21 – July 20 period.

Many companies who were planning on re-opening offices after Labor Day are rethinking that idea.

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