All Things in Moderation

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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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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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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Vital Statistics:

Stocks are flattish this morning despite some positive economic data. Bonds and MBS are flat.

The final revision for Q2 GDP came in at -31.4%. Personal Consumption Expenditures fell by 34.1%.

The ADP Jobs report indicated the economy added 749,000 jobs in September, which was higher than the 650k expectation. The Street is looking for 900k jobs in Friday’s report. Note that the ADP numbers have been coming in well below the actual BLS numbers. Meanwhile, companies like Disney and mall operator Brookfield are shedding jobs.

Mortgage Applications fell 5% last week as purchases declined 2% and refis fell by 7%. “Despite the decline in rates, refinances fell over 6 percent, driven by a 9 percent drop in conventional refinance applications,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “There are indications that refinance rates are not decreasing to the same extent as rates for home purchase loans, and that could explain last week’s decline in refinances. Many lenders are still operating at full capacity and working through operational challenges, ultimately limiting the number of applications they are able to accept.” 

A group of about 85,000 landlords filed a suit challenging the Center for Disease Control’s edict to ban evictions.

New York Fed President John Williams thinks it will take about 3 years to get back to full employment. When asked about the Fed’s 2% inflation target, he responded: “We need to make sure that we’re purposely overshooting that moderately for some time to get that balance,” Williams told reporters. “To me, success is not some arithmetic or some formula but it’s really this notion of inflation expectations, how people think about what’s inflation going to be in the future.” The Fed is desperately trying to avoid what Japan has experienced, which is deflationary expectations being anchored for a generation. Young people in Japan are notorious savers, and consumption drives the economy.

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Vital Statistics:

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

New Home sales topped the 1 million seasonally adjusted annual rate in August, according to Census. This is the highest number since June 2006. There are only 282,000 new homes for sale at the moment, which translates into a 3.3 month supply.

The rise in new home sales should hopefully trigger a similar increase in housing starts. Housing has been the missing piece of the puzzle in the US economy since the bust of 12 years ago.

Loan Depot filed to go public yesterday. That makes Rocket, United Wholesale, and Loan Depot as big mortgage banking IPOs in 2020. Loan Depot planned to go public about 5 years ago, and scrapped the plan at the last minute. Initial estimates would value the company at somewhere between $12 and $15 billion. While the mortgage origination business is certainly hot, stock market valuations are not. Quicken is trading at a 2020 P/E of about 6, and PennyMac is trading with a 2020 P/E of about 3.5. Like Quicken, it looks like Loan Depot is going public with a dual voting class structure.

Durable Goods orders rose 0.4% last month, which was a bit below expectations. The core capital goods orders number, which is a proxy for capital expenditures, rose 1.8%.

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Vital Statistics:

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

Quicken’s crosstown rival United Wholesale is going public via one of those Special Acquisition Corporations (SPACs). The deal will value the company at $16 billion. When do we get to rebrand The Motor City as the Mortgage City?

Existing home sales rose 2.4% MOM to 6 million, according to NAR. They were up 10% YOY, and the median home price rose 11% to $310,600.

“Home sales continue to amaze, and there are plenty of buyers in the pipeline ready to enter the market,” said Lawrence Yun, NAR’s chief economist. “Further gains in sales are likely for the remainder of the year, with mortgage rates hovering around 3% and with continued job recovery.”

Total housing inventory sits at 1.49 million units, or about 3 month’s worth of inventory. Historically, 6.5 months worth was considered a balanced market. In addition to the dearth of inventory, NAR believes that remote work will be a growing feature of the US economy, even after a COVID vaccine is found. You can see below we are pretty much in record territory as far as housing supply goes.

Mortgage Applications rose 7% last week as purchases rose 3% and refis rose 9%. “Mortgage applications activity remained strong last week, even as the 30-year fixed-rate mortgage and 15-year fixed-rate mortgage increased to their highest levels since late August,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Purchase applications were up over 25 percent from a year ago, and the demand for higher-balance loans pushed the average purchase loan size to another record high.”

Rocket’s big announcement (which it has been hyping for weeks now) is the rebranding of its broker business from Quicken Loans Mortgage Services to Rocket Pro TPO. It will allow for e-signature technology, better visibility into loan status and allow borrowers to upload documents electronically.

“We have two pieces of technology that brokers love: One is ‘The Guru,’ and it’s kind of a Google platform for mortgage guidelines – searchable. Brokers love it,” Niemiec said in an interview. “We also have ‘The Answer,’ which is a piece of technology that brokers can interact with to ask questions and it communicates back and forth leading them to the proper answer. We actually partnered with Google over the last few months to create a new piece of technology that merges everything they love about Guru and everything they love about Answer into one tool called Pathfinder by Rocket. We’ll be rolling that out on the day of the announcement.” 

Home prices rose 1% in July and are up 6.5% YOY, according to the FHFA House Price Index.

“U.S. house prices posted a strong increase in July,” said Dr. Lynn Fisher, FHFA’s Deputy Director of the Division of Research and Statistics. “Between May and July 2020, national prices increased by over 2 percent, which represents the largest two-month price increase observed since the start of
the index in 1991. The dramatic increase in prices this summer can be attributed to the historically low interest rate environment and rebounding housing demand even as the supply of homes for sale remains constrained.”

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Stocks are higher this morning as Jerome Powell heads to Capitol Hill. Bonds and MBS are flat.

Jerome Powell heads to the Hill for his semi-annual Humprey-Hawkins testimony. Here are his prepared remarks.

Economic activity has picked up from its depressed second-quarter level, when much of the economy was shut down to stem the spread of the virus. Many economic indicators show marked improvement. Household spending looks to have recovered about three-fourths of its earlier decline, likely owing in part to federal stimulus payments and expanded unemployment benefits. The housing sector has rebounded, and business fixed investment shows signs of improvement. In the labor market, roughly half of the 22 million payroll jobs that were lost in March and April have been regained as people return to work. Both employment and overall economic activity, however, remain well below their pre-pandemic levels, and the path ahead continues to be highly uncertain.

Loans in forbearance fell to 6.93% last week, according to the MBA. Fan and Fred loans decreased to 4.55%, while Ginnies increased to 9.15%. “The share of loans in forbearance has dropped to its lowest level in five months, driven by a consistent decline in the GSE share in forbearance,” said Mike Fratantoni, MBA Senior Vice President and Chief Economist. “However, not only the did the share of Ginnie Mae loans in forbearance increase, new requests for forbearance for these loans have increased for two consecutive weeks. While housing market data continue to show a quite strong recovery, the job market recovery appears to have slowed, and we are seeing the impact of this slowdown on FHA and VA borrowers in the Ginnie Mae portfolio.”

The MBA and NAR are pushing back against proposed VA funding fee increases for IRRRL loans. “MBA and NAR have consistently registered our opposition to legislation that increases VA home loan funding fees to offset the costs associated with non-housing-related expenditures,” the letter said. “Although this proposed legislation would use the fee increase to fund job training and education programs that both organizations support, we believe the use of the VA home loan program for this purpose is inappropriate, particularly in the midst of a pandemic and a widespread economic downturn. This is exactly the time at which veterans should be encouraged to use streamlined refinancing options, such as IRRRLs, to lower their monthly mortgage payments. These savings are particularly important for those veterans who have suffered temporary job losses or reductions in income.”

The refi wave has the MBA forecasting $1.75 trillion in refis this year. The MBA believes this wave could be cresting. The MBA is forecasting that refinance volume will fall to $722 billion in 2021. That seems hard to square with the numbers out of Black Knight, who estimated that 19.3 million “high quality” refis were out there. 19.3 million loans (with an average loan size of say $350k) works out to be about $7 trillion. Taking away the “high quality” constraints (>20% equity, FICO > 720), there are 32.4 million refis (or over $11 trillion) out there. Currently 75% of homeowners have rates 75 basis points over the Freddie average rate. That 2021 forecast just seems off. The only way it can happen is if mortgage rates drift upward, which will probably require a resurgence of inflation and the Fed to take the foot off the gas with its MBS purchases.

That said, FHA loan spreads have widened compared to conforming loans, which is probably being driven by forbearance fears and the decline in servicing values, especially for FHA.

The jumbo-conforming spread, after spending the last several years at negative levels (in other words, jumbos had lower rates than Fannie / Freddie loans) spreads reverted back to positive numbers and is now around 35 basis points.

Affordable suburbs outside big cities are seeing the hottest real estate markets. Places like Camden County (outside Philly), Fairfield County CT, and El Dorado CA (outside Sacramento) are booming as people can get so much more for their dollar.

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