All Things in Moderation

Vital Statistics:

Stocks are lower this morning after it looks both parties are throwing in the towel on further stimulus. Bonds and MBS are up.

Initial Jobless Claims rose to 899,000 last week as more and more small businesses succumb to social distancing.

While restaurants and bars are struggling, housing continues to be the bright spot in the US economy. The MBA just reported that mortgage applications for new homes are up 38% YOY. “The strong year-over-year results for non-seasonally adjusted new home sales applications – up 38 percent – and estimated home sales – up 20 percent – are indicative of the fundamental strength seen in the housing market since the spring,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Demand for newly built homes is strong, as many buyers appear to seek more space for work, in-home schooling, and leisure.”

Wells announced that mortgage origination volume increased 5% from Q2 to a total of $62 billion, while Bank of America reported a 44% decrease in originations. Surprising to see a major bank pull back during one of the best years the industry has ever seen.

Rents have been falling, although the decline moderated in September. There have been fears that apartment landlords have been buying tenants by cutting rent. It looks like that might be going away.

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Vital Statistics:

Stocks are flattish this morning as stimulus talks fizzle. Bonds and MBS are up.

The big banks are all reporting this week and the takeaway is that loan loss provisioning is much lower than expected. The new CECL format which was instituted this year could be playing a part, but it looks like loan performance is stronger than people anticipated.

Mortgage Applications fell 0.7% last week as purchases fell 2% and refis fell 0.3%. “Mortgage applications for refinances and home purchases both decreased slightly last week, despite the 30-year fixed mortgage rate declining to a new MBA survey low of 3.00 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Applications for government mortgages offset some of the overall decline by increasing 3 percent, driven by a solid gain in government purchase applications and an 11 percent jump in VA refinance applications.”

United Wholesale reported that it closed over $54 billion in loans in the third quarter, up 81% from a year ago. “This is our best quarter in the company’s 34 years, showing that borrowers are recognizing that independent mortgage brokers offer better rates, greater speed and deeper experience,” said Mat Ishbia, president and CEO of UWM. “I’m grateful to the over 6,800 team members whose commitment to superior service, together with our proprietary industry-leading technology, support the success of our broker clients by enabling them to offer a best-in-class borrower experience.”

Inflation at the wholesale level remains well below the Fed’s target. The Producer Price Index rose 0.4% MOM and 0.4% YOY.

Fed Vice Chairman Richard Clarida said that it may take a year for the economy to reach pre-COVID levels. “That said, the Covid-19 recession threw the economy into a very deep hole, and it will take some time, perhaps another year, for the level of GDP to fully recover to its previous 2019 peak,” the central bank official told the Institute of International Finance. “It will likely take even longer than that for the unemployment rate to return to a level consistent with our maximum-employment mandate.” That last statement means that rates are going nowhere for a while.

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Vital Statistics:

Stocks are lower as we kick off earnings season. Bonds and MBS are up.

JP Morgan reported better-than-expected earnings this morning. The biggest news from the bank was that it took no further provisions for loan losses. Mortgage banking revenue and income increased due to wider spreads, however volumes were up 20% on a QOQ basis but down 10% compared to a year ago. The number of mortgages with payment deferrals dropped about 50% compared to June 30, which is about 4.4% of the portfolio. 91% of borrowers who exited payment deferrals were current. JPM stock is flat on the open.

Inflation at the consumer level rose 0.2% MOM and 1.2% YOY. The increase was driven mainly by an increase in the price of used cars; without transportation, inflation would have been close to zero. Ex-food and energy, inflation rose 0.2% MOM / 1.7% YOY.

Small business optimism increased in September, however uncertainty remains a huge issue.

“We are experiencing the shortest recession in modern history, starting in March or April and ending no later than September (official dates will eventually be determined by the National Bureau of Economic Research once more precise data are available). Housing is probably the hottest sector, posting record home sales last month and double digit price increases. More construction firms have unfilled job openings than in any other industry. Durable goods orders were strong except for aircraft, autos were weak after several strong months. Non-defense capital goods orders (excluding aircraft) were also very strong.”

Home prices rose 1% MOM and 5.9% YOY, according to CoreLogic. Interestingly, CoreLogic expects prices to decline over the next year. Not sure I buy that given the supply / demand imbalance and rates at record lows.

Fannie Mae’s Chief Economist Doug Duncan offers his predictions for next year.

“Current homeowners are more pessimistic than potential new buyers – they’re pessimistic because they’re afraid of somebody coming to their house and walking through with the virus or the fact that other people won’t go out and shop because of fear of the virus, so they might take a discount on their house price,” Duncan said. “They’re simply not offering houses for sale, and you did see a big drop in listings at that time.”

If there is a resurgence of COVID-19 without an effective vaccine broadly distributed, Duncan said that the ‘W-shaped’ environment could become a reality.

“In that environment, I would not expect a normal housing cycle because what would happen is, then those businesses which have been able to keep going and keep their salary workers, who tend to be more in management in place, would start laying those people off and that’s when the risks rise on the housing side,” Duncan said. “But if we get a relatively broadly distributed vaccine that is demonstrated to be effective, then I think we do return to a to a normal housing cycle, especially, unless the Fed changes its posture, if rates stay low, it will be viewed as a great opportunity for people to get in.”

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Vital Statistics:

Stocks are higher this morning on stimulus hopes. The bond market is closed for the Columbus Day holiday.

The upcoming week won’t have much in the way of market-moving data, although we will get retail sales, inflation data, and manufacturing output. Third quarter earnings season begins this week as the big banks all report numbers. The area of concern will be loan performance, especially for small businesses, along with exposure to airlines and hotels. The banks took huge provisions up front, so any increase in projected losses will be an area of concern.

It looks like the bid / ask spread for the stimulus bill is $2 trillion / $2.2 trillion. The big sticking point of the bill largely concerns aid to (deep blue) states and local governments. I am so old that I remember when a difference of $200 billion in a bill would have been insurmountable, but nowadays a 12-digit number feels like a rounding error.

Affordable Housing advocates are urging lawmakers to include substantial aid for renters facing eviction. The Center for Disease Control, which is not known for weighing in on real estate issues, put out a moratorium on evictions until the end of the year. The protections are not automatic however, and a tenant needs to “declare that their 2020 income will fall below the threshold set out in the order; that they’ve sought all potential sources of federal housing aid; and that they cannot afford to pay the rent due to a pandemic-related job loss or expense despite their best efforts to do so.” Since many tenants are unaware of the order in the first place, they aren’t taking that step.

The number of borrowers in forbearance fell by 649,000 last week as the initial six-month plans expire. The national forbearance rate now stands at 5.6%.

Boston Fed President Eric Rosengren said that the previous years of rock-bottom interest rates has made this crisis worse. He blames it on excessive risk-taking.

“Clearly a deadly pandemic was bound to badly impact the economy,” Rosengren said. “However, I am sorry to say that the slow build-up of risk in the low-interest-rate environment that preceded the current recession likely will make the economic recovery from the pandemic more difficult.”

He blames regulators for failing to see the increase in risk-taking. FWIW, the Fed made its own bed here. While it does have to follow the statutory dual mandate, the Fed has chosen to interpret the mandate to minimize unemployment while controlling inflation to mean “keep the pedal to the metal as long as the economy is below full employment.” Now that the economy is used to 0% interest rates, it really doesn’t have a lot of tools left to improve the economy. Building the balance sheet doesn’t have the effect that lowering rates does.

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Vital Statistics:

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

We will have a lot of Fed-speak today, mainly in the afteroon.

Initial Jobless Claims came in at 840,000 last week. It seems that we are stuck at a new level of around 800k a week.

The MBA’s Mortgage Credit Availability Index fell again last month to hit a 6 year low. The MBA believes it is probably due to a curtailment of ARM loans ahead of the transition from LIBOR to SOFR.

“Mortgage credit supply decreased in September to its lowest level since February 2014, driven in part by a 9.5 percent decline in the conforming loan segment,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “This reduction was the result of lenders discontinuing conforming adjustable-rate mortgage loan offerings in advance of the September 30, 2020, application deadline for GSE-eligible LIBOR-indexed ARM loans.

About a quarter of all borrowers in forbearance are still making their mortgage payments. Of the 3.4 million borrowers in forbearance, 840k are current on their mortgages. Given that servicers were required by the CARES Act to record mortgages in forbearance as current, many borrowers chose to enter forbearance as a precaution.

The Northeast and Mid-Atlantic states are most at risk to the economic effects of the pandemic, according to a study by ATTOM Data.

“The U.S. housing market continues to show remarkable resilience during a time of widespread economic trouble and high unemployment stemming from the virus pandemic. But amid continued price gains, pockets around the country face greater risk of a fall, especially in and around the Northeast,” said Todd Teta, chief product officer with ATTOM Data Solutions. “There is much uncertainty ahead, especially if another virus wave hits. We will continue to closely monitor home prices and sale patterns to see if, how and where the pandemic starts rattling local markets.”

As the economic woes drag on, a crisis in rental housing is building as tenants cannot pay their rent and small landlords who depend on that rent cannot make mortgage or property tax payments. Affordable housing advocates are urging more action from the government to do something. “The longer the federal government waits to act, the steeper the financial cliff that renters will be pushed off when the eviction moratorium expires this winter,” Yentel said. If the 800k weekly initial jobless claims is the new normal, we will have a crisis of epic proportions.

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Vital Statistics:

Stocks are higher this morning after Trump softened his stance on further stimulus measures. Bonds and MBS are flat.

We have a lot of Fed-speak today, along with the FOMC minutes at 2:00 pm. This might affect the governement bond market, but so far it looks like mortgages and govvies have decoupled a little.

Trump pulled the plug on stimulus talks yesterday, “I have instructed my representatives to stop negotiating until after the election when, immediately after I win, we will pass a major Stimulus Bill,” Mr. Trump wrote Tuesday on Twitter. He then said he was willing to accept something that gave relief to airlines and direct stimulus payments to individuals: “If I am sent a Stand Alone Bill for Stimulus Checks ($1,200), they will go out to our great people IMMEDIATELY. I am ready to sign right now,” Mr. Trump tweeted.

Meanwhile, Fed Chairman Jerome Powell urged the government to enact further stimulus, saying there is little risk to the economy of the government “overdoing it.” “By contrast, the risks of overdoing it seem, for now, to be smaller,” Powell added in remarks to the National Association for Business Economics. “Even if policy actions ultimately prove to be greater than needed, they will not go to waste. The recovery will be stronger and move faster if monetary policy and fiscal policy continue to work side by side to provide support to the economy until it is clearly out of the woods.”

Office, retail and residential vacancy rates increased in the third quarter. The average mall vacancy rate hit 10%, the highest in 20 years. Apartments are feeling the squeeze too as they are buying occupancy via reducing rents.

The third quarter statistics clearly show that property owners started to feel the impact of the pandemic. Ironically, occupancy growth in the apartment market was net positive, yet rents fell dramatically, especially in some high-priced markets as tenants had the upper hand and property owners recognized this and lowered rents to maintain occupancy.

Mortgage applications rose 4.6% last week as purchases fell 2% and refis rose 8%.

“Mortgage rates declined across the board last week – with most falling to record lows – and borrowers responded,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “The refinance index jumped 8 percent and hit its highest level since mid-August. Continuing the trend seen in recent months, the purchase market is growing at a strong clip, with activity last week up 21 percent from a year ago. The average loan size increased again to a new record at $371,500, as activity in the higher loan size categories continues to lead growth.”

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Vital Statistics:

Stocks are higher as we await a speech by Fed Chairman Jerome Powell. Bonds and MBS are down.

Trump is back at the White House and the Presidential COVID-19 scare appears to be over.

There were 6.5 million job openings at the end of August, according to the JOLTs report. Job openings fell 685,000 YOY, which represents the effect of COVID. The quits level was 2%.

After a COVID-related slumber, it looks like non-QM lending is coming back, at least for self-employed borrowers. “It’s not back to full volume, but it’s close,” says Mac Cregger, senior vice president and regional manager at Angel Oak, according to the report.

Mortgage delinquencies are expected to remain above pre-COVID levels through 2022, according to a recent report by Black Knight. The report compares the COVID experience to natural disasters, and looks at delinquency rates as the area rebuilds. Fears of another 2008-style delinquency spike are overblown; homeowners have $125k in tappable equity on average. “American homeowners now have the most equity available to them in history. Of those in forbearance, just 9% have less than 10% equity in their homes, which offers both borrowers and lenders multiple options in lieu of foreclosure,” said Ben Graboske, data and analytics president at Black Knight.

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Vital Statistics:

Stocks are lower this morning after Trump tests positive for COVID. Bonds and MBS are up.

President Trump and Melania have tested positive for Coronavirus. Vice President Pence has tested negative. Trump will be in quarantine for the next several weeks. I guess this means the next debate (if we even get one) will be via Zoom.

The economy created 661,000 jobs in September, according to the jobs report. The unemployment rate fell 0.5% to 7.9% while the labor force participation rate fell 0.3%. The job gains were primarily in leisure and hospitality, which means restaurants. Retail was next in job gains. The labor economy is still improving, but the elevated initial jobless claims as well as the declining labor force participation rate are worrisome. About 23% or workers telecommuted.

Wells put 1,600 lenders in forbearance without the borrower’s consent, according to a report from NBC. About 900 of the borrowers were going through personal bankruptcy at the time. Wells has changed its practices, although the last thing the bank needs is another regulatory or political headache.

Caliber is planning to go public, according to a report by the Wall Street Journal. That would make 4 actual or rumored mortgage banking IPOs this year: Quicken, United Wholesale, Loan Depot and Caliber.

The interesting thing about the mortgage banking IPOs is that the multiples are downright lousy. Rocket is trading at 21.87 expected to earn $3.36 this year, which means it is trading with a P/E ratio of 6.5. PennyMac is expected to earn $15.87 this year and is trading at $57. That is a P/E under 4. The winner of the low multiple derby has to go to Mr. Cooper, who is expected to earn $8.12 and is trading at $22.64, which means it has a P/E of 2.8. I understand mortgage banking is highly cyclical and all, but the Street is treating these stocks as if prepayment burnout will begin in January. Given the Black Knight estimate of the refinanceable universe, it will take years to work through that backlog.

Construction spending rose 2.5% YOY in August, according to the Census Bureau. Residential construction was up 7%.

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Vital Statistics:

Stocks are higher as we begin the fourth quarter of 2020. Bonds and MBS are down.

Initial Jobless claims remain elevated at 840,000. Smaller businesses like restaurants and retailers are struggling to remain open. Separately, 118,800 job cuts were announced in September. Aside from the airlines, the other notable one was Disney.

Personal incomes fell 2.7% in August, which was a touch below expectations. Personal spending rose 1%. Inflation remains below the Fed’s target of 2%, which means rates are going nowhere.

Pending Home Sales rose 8.8% in August, and the index hit a record. “Tremendously low mortgage rates – below 3% – have again helped pending home sales climb in August,” said Lawrence Yun, NAR’s chief economist. “Additionally, the Fed intends to hold short-term fed funds rates near 0% for the foreseeable future, which should in the absence of inflationary pressure keep mortgage rates low, and that will undoubtedly aid homebuyers continuing to enter the marketplace. While I did very much expect the housing sector to be stable during the pandemic-induced economic shutdowns, I am pleasantly surprised to see the industry bounce back so strongly and so quickly.” Take a look at the chart below, the rebound in sales has been nothing short of remarkable.

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