All Things in Moderation

Vital Statistics:

Stocks are lower this morning as big tech earnings report fail to excite investors. Bonds and MBS are down.

Pending home sales declined 2.2% according to NAR. Despite the decline, it is still the second highest reading on record.

“The demand for home buying remains super strong, even with a slight monthly pullback in September, and we’re still likely to end the year with more homes sold overall in 2020 than in 2019,” said Lawrence Yun, NAR’s chief economist. “With persistent low mortgage rates and some degree of a continuing jobs recovery, more contract signings are expected in the near future.”

“Additionally, a second-order demand will steadily arise as homeowners who had not considered moving before the pandemic begin to enter the market,” Yun said. “A number of these owners are contemplating moving into larger homes in less densely populated areas in light of new-found work-from-home flexibility.”

Personal incomes rose 0.9% in September, much higher than the consensus estimate of 0.3%. Personal spending rose 1.4%, higher than the 1% estimate, which is good news for the economy. Inflation (at least as the Fed measures it) remains well under control with the personal consumption expenditures index only up 1.4% on an annual basis.

It sounds like the flight out of urban areas is beginning to be felt for landlords. Apartment REIT Equity Residential reported a big decline in earnings, driven by concessions and turnover in its NYC, SF and Boston markets. Suburban apartments are holding up reasonably well however.

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Vital Statistics:

Stocks are flattish this morning after yesterday’s bloodbath. Bonds and MBS are flat as well.

COVID cases are surging in Europe, prompting many governments to institute strict social distancing measures.

Third quarter GDP rose 33%, while personal consumption rose 41%. These numbers were higher than expectations. Personal incomes fell by $540 billion after increasing $1.45 trillion in the second quarter, which was supported by government stimulus payments. Overall, the economy is improving, but it is still way below pre-COVID levels.

Initial Jobless Claims fell to 751k last week.

Corelogic reported that mortgage fraud risk fell by 26.3% YOY in the second quarter. This decrease was largely driven by a shift in the purchase / refi mix. Note that these are second quarter numbers, so they are a bit old.

Freddie Mac reported that the seriously delinquent rate fell by 13 basis points to 3.04% in September.

I will be a panelist at the IMN Mortgage Servicing Rights forum this morning at 10:45 this morning. It should be a good conference.

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Vital Statistics:

Stocks are lower this morning as COVID-19 cases continue to rise. Bonds and MBS are up.

Mortgage applications rose 1.7% last week as purchases rose 0.2% and refis rose 3%. “Mortgage applications to buy a home were flat compared to the prior week, but overall activity remains strong this fall,” said Joel Kan, MBA Associative Vice President of Economic and Industry Forecasting. “Applications jumped 24 percent compared to last year, and the average loan size reached another record high at $372,600. These results highlight just how strong the upper end of the market is right now, with outsized growth rates in the higher loan size categories.”

Rental issues (nonpayment, evictions) could usher in the next housing crisis. Eviction moratoriums will end on January 1 for the Federal Government and many states. These tenants could then face eviction processes and will be on the hook for missed rent payments. Second, many landlords rely on that rental income to make the mortgage payment or to live on. That said, it probably won’t be worse than the 2009 financial crisis.

CoreLogic has received multiple bids for the stock, valuing it at over $80 per share. CoreLogic has been pursued by Cannae, which is trying to replace the board of directors.

The homeownership rate ticked down in the third quarter, from 67.9% to 67.4% according to Census. The homeownership rate topped out at 69.2% during the real estate bubble.

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Vital Statistics:

Stocks are lower this morning as COVID-19 cases continue to rise and the window to pass a stimulus bill closes. Bonds and MBS are up.

New Home Sales fell 3.5% month over month in September to a seasonally-adjusted annual rate of 959,000. This is up 32% on a YOY basis. Inventory remains tight at 284,000 homes, or a 3 month supply.

The upcoming week will have a slew of important economic data, including GDP, personal income / spending, and house prices.

Guild mortgage went public at $15 a share. It also settled a FHA lawsuit from back in the day when the HUD sued everyone under the False Claims Act. While the mortgage bankers are making huge amounts of money, multiples are disappointing. IMO, the Street is underestimating how much money will be made when 75% of the $16 trillion mortgage market is refinanceable.

Mortgage rates are at the lowest on record. This goes back to the early 70s when the surveys started. Chances are these are the lowest mortgage rates ever, going back to the New Deal when the 30 year fixed rate mortgage was first created.

The typical homeowner made $85,000 on their home sale, according to ATTOM Data Solutions.

“Home prices and seller profits across the nation continue racking up new highs as the housing market remains relatively immune from the economic havoc caused by the Coronavirus pandemic. It’s almost as if the housing market and the overall economy are operating in different worlds,” said Todd Teta, chief product officer at ATTOM Data Solutions. “Things remain in flux, given the significant uncertainty about when the pandemic might recede or what impact the recent resurgence could have in different areas of the country. But with mortgage rates at rock-bottom levels and declining supplies of homes for sale, conditions remain in place for continued strong prices and returns.”

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Vital Statistics:

Stocks are up this morning as earnings continue to come in better than expected. Bonds and MBS are down.

Existing home sales rose 9.4% to a seasonally adjusted annual pace of 6.5 million in August. This is up over 21% from a year ago. The inventory of about 1.5 million units represents a 2.7 month supply, which is a record low. 71% of homes were on the market for less than a month.

“Home sales traditionally taper off toward the end of the year, but in September they surged beyond what we normally see during this season,” said Lawrence Yun, NAR’s chief economist. “I would attribute this jump to record-low interest rates and an abundance of buyers in the marketplace, including buyers of vacation homes given the greater flexibility to work from home.”

The median home price rose 14.8% (!) to $311,800. Properties stayed on market 21 days, which is a record low. First time homebuyers accounted for about 31% of sales, which is still well below pre-Great Recession levels of around 40%.

The index for leading economic indicators rose in September, according to the Conference Board. “The US LEI increased in September, driven primarily by declining unemployment claims and rising housing permits. However, the decelerating pace of improvement suggests the US economy could be losing momentum heading into the final quarter of 2020,” said Ataman Ozyildirim, Senior Director of Economic Research at The Conference Board. “The US economy is projected to expand in Q4, but at a substantially slower rate of 1.5 percent (annual rate) according to The Conference Board’s GDP forecast. Furthermore, downside risks to the recovery may be increasing amid rising new cases of COVID-19 and continued labor market weakness.”

The National Multifamily Housing Council reported that 90.6% of all tenants made a full or partial rent payment by October 20. This is an increase from the 90.1% who did the same by September 20. We are still below historical averages however. By October 20, 2019 92.4% of renters had made a full or partial payment. “The importance of the initial support provided to apartment residents by the CARES Act is becoming increasingly clear,” said Doug Bibby, NMHC President. “However, that support has now long since expired and the savings households were able to build are evaporating quickly. NMHC continues to urge lawmakers to come together and pass meaningful assistance to support renters and keep America’s rental housing sector stable.”

Black Knight Financial reported that mortgage delinquencies declined in September for the first time since the pandemic began. The national delinquency rate fell to 6.66% from 6.88% in August. We are seeing the biggest improvement in the early stage delinquencies

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Vital Statistics:

Stocks are flattish this morning as earnings continue to pile in. Bonds and MBS are flat.

Initial Jobless Claims fell to 787k last week. We are still a long way from normalcy here.

Amerihome has filed to go public, the latest in a wave of mortgage bankers. That makes Rocket, United Wholesale, Guild, Amerihome, and Caliber. Am I missing anyone? If you were Bank of America, would you resurrect the Countrywide brand and spin it off?

The MBA forecasts that originations will increase to $3.2 trillion this year, and then slowing to $2.5 trillion next year. They see purchase originations hitting $1.5 trillion this year, however they see refinance activity falling to under $1 trillion next year as they forecast the 30 year mortgage rate hitting 3% by the end of the year and rising to 3.3% by the end of 2021. That said, if Black Knight’s numbers are correct – that there are 32 million homes that could save 75 basis points in rate by refinancing – then the refi boom should last as long as rates stay in this neighborhood. Don’t forget, the Fed is actively buying MBS in order to hold down rates. I don’t see that changing. The other wild card is homebuilding. Demand is insatiable for homes right now, and the builders will probably be snapping up undeveloped land in the exurbs all winter. Working from home has changed the entire calculus about living in the exurbs. Bidding wars for starter homes are common these days.

Financial firms are preparing for a Biden Administration, which will mean a return to the Richard Cordray days of “regulation by enforcement action.” This basically means that the agency wouldn’t tell anyone what the rules were; the only way to figure out what they were thinking was from reading an enforcement action after the fact. This would be like driving on a road with no speed limit signs, and the only way to find out the speed limit would be to get a ticket.

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Vital Statistics:

Stocks are higher this morning on hopes for a pre-election stimulus package. Bonds and MBS are down.

With the 10 year bond breaching the 80 basis point level, we are finally starting to see mortgage rates tick upwards. The inflation data seems tame, but maybe the street is starting to wonder whether the demand will be there for the huge issuance coming down the pike.

Mortgage applications fell 0.6% last week as purchases fell 2% and refis rose 0.2%.

The GSE patch has been extended “indefinitely” according to the CFPB. The final rule is here. Under the QM rules (Reg Z), loans with debt-to-income ratios (DTI) over 43% are not considered qualified mortgages (QM loans). The QM patch allows Fan and Fred loans with DTI ratios up to 50% to be considered QM loans. The CFPB has been wrestling with the issue, hoping to come up with a more flexible standard than DTI, however it isn’t ready to finalize anything yet.

The FHA is extending forbearance requests through year-end. “Homeownership is the largest wealth-builder for the majority of our nation’s families, which is why one of our top priorities is providing relief from foreclosure and eviction due to circumstances beyond [homeowners’] control,” Carson said at the Mortgage Bankers Association’s virtual Annual Convention & Expo. “This will ensure that homeowners have the resources and support they need to get back on their feet as our country continues its economic recovery.”

Fannie and Fred defended the 50 basis point adverse market fee at the MBA conference. “As you know, safety and soundness is one, two and three,” Frater said. “For us to play our role in all markets, both good and bad and large and small, we have to do it safely and soundly with long-term risk management in mind. That’s the rationale for this change. The GSEs are shouldering significant risks associated with the pandemic. As the principal risk-taker, we have to price that risk appropriately.”

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Vital Statistics:

Stocks are higher this morning on stimulus hopes and data out of China. Bonds and MBS are down.

There won’t be much in the way of market-moving data this week, however we will get housing data with the NAHB Housing Market Index, housing starts and existing home sales.

The MBA Annual Virtual Convention kicks off today.

Low mortgage rates are driving the rise in home prices according to NAR. A tight inventory situation is also an issue. I wonder if we will even see the normal seasonal downtick in prices during the winter months this year. Potential buyers are wary of rising rates in the future and may be pushing to buy now.

San Diego based lender Guild is the latest mortgage banker who has filed to go public. Like most companies these days, there will be a dual voting class structure, which means McCarthy Partners will still control the vote. Based on the midpoint of the price talk, Guild will have roughly a billion dollar market cap. Over the 12 month period ending June 30, Guild originated $27.8 billion and earned $163 million. At $18 a share, Guild would be trading at 6.6 times earnings. Guild has a pretty strong purchase business and a decent recapture rate.

I find it interesting that issuing dual voting classes is so popular these days. Theoretically investors should be willing to pay less for non-voting stock, because there is no chance of the company being taken over, and the vote should be worth something. Historically, dual voting shares were largely limited to media companies who wanted to maintain editorial control over the content. The big social media companies did the same thing, and I guess that must be an editorial control decision as well. But mortgage companies? I guess since the market doesn’t appear to penalize Google and Facebook for a dual-class structure, why not do it? I wonder if ESG funds are the reason, especially when they push for companies to do things that don’t maximize shareholder value, like we have seen in natural resource companies.

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Vital Statistics:

Stocks are higher this morning on positive economic news. Bonds and MBS are down.

Retail Sales increased 1.9% in September, which was well above what the Street was looking for. The control group, which strips out autos, gas and building products rose 1.5%.

Meanwhile, industrial production fell 0.6% last month and capacity utilization inched up to 71.5%. The numbers were below expectations, however July and August numbers were revised upward. We are still about 7% below pre-COVID numbers.

It is looking more and more like any sort of stimulus package isn’t going to happen before the election. The Republican Senate is going to put through a $500 billion package, which will go nowhere in the House because it is too small.

New home sales are outpacing housing starts, which is depressing inventory and increasing prices, according to the NAHB. Given the demand out there, housing and home construction should be a big driver of the economy for the next few years. Housing was the missing link in the post Great Recession recovery.

About 8.5% of renters missed their September payment, according to the MBA. “Rent and mortgage payment collections improved over the summer as more people went back to work, but high unemployment continues to place hardships on millions of U.S. households,” said Gary V. Engelhardt, Professor of Economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University. “There is growing concern that absent a slowdown in the number of coronavirus cases and another round of much-needed federal aid, millions of renters in the coming months face the prospects of falling further behind. With the current eviction moratorium expiring in January, the situation could be even more challenging. Many renter households across the country could find themselves with no place to live and no means to repay missed payments.” Student loans are even worse; 40% of student loan borrowers did not make their payment.

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