All Things in Moderation

Vital Statistics:

Stocks are lower this morning despite a deal on the fiscal stimulus bill. Bonds and MBS are up. The Fed will be continuing its normal $50 billion in MBS purchses this morning.

Congress came to a deal on a stimulus bill which aims to ease as much of the economic shock from Coronavirus as it can. Most Americans will get a $1,200 check, small businesses will get $367 billion in relief and state / local governments will get $500 billion in loans. Unemployed workers will get an additional $600 a week up to 4 months.

Trump says that he wants the “country opened” by Easter in order to salvage the US economy. The idea would be to re-open restaurants and in-person employment in the non-hotspots. Needless to say, health experts are aghast at the idea, and yes, health concerns are a concern. They aren’t the only concern. Of course state governments are going to have the last word on that as well.

A consortium of originators, credit agencies and lobbyists sent a letter to the government discussing relief for homeowners affected by Coronavirus. The idea would be to allow people affected by the crisis to defer mortgage payments for 90 days without interest or penalties. The missed payments would essentially be added to the final payments of the mortgage without interest. Of course servicers are on the hook for the advances, and non-bank servicers don’t have the liquidity to make these advances. The group urges the government to provide some sort of borrowing facility for non-bank servicers to draw upon to make the these additional payments.

The Coronavirus has impacted commercial mortgage backed securities as well. As businesses shut down, they can’t make their mortgage payments. This means that the mortgages securing the complex are having issues. Lots of small business owners are combing over the force majure clauses in their contracts right now. For mortgage bankers, this is an issue because the same folks that buy CMBS often buy RMBS. To make matters worse, some of the biggest buyers of mortgage backed are sovereign wealth funds, and with less goods coming from overseas, the less demand for MBS from foreign funds. The Fed will purchase agency CMBS with the help of Blackrock.

Mortgage Applications fell 29% last week as rate spiked and bottlenecks in the mortgage market increased. “The 30-year fixed mortgage rate reached its highest level since mid-January last week, even as Treasury yields remained at relatively low levels. Several factors pushed rates higher, including increased secondary market volatility, lenders grappling with capacity issues and backlogs in their pipelines, and remote work staffing challenges,” said Joel Kan, MBA’s Associate Vice President of Economic and Industry Forecasting. “With these higher rates, refinance activity fell 34 percent, and both the conventional and government indices dropped to their lowest level in a month. Looking ahead, this week’s additional actions taken by the Federal Reserve to restore liquidity and stabilize the mortgage-backed securities market could put downward pressure on mortgage rates, allowing more homeowners the opportunity to refinance.”

Have been hearing that Fannie cash window pricing was 50 – 200 basis points wider yesterday. FHA rates have been getting smashed on the basically worthless servicing value. Every co-issue partner is on hiatus. Tough to manage a pipeline when the bids for your loans are lower and the NY Fed is pushing your hedge inexorably higher which is driving margin calls. I keep saying the mortgage banking business will feast once this is over, but we gotta get to the table first.

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Vital Statistics:

Stocks are higher this morning on overseas strength. Bonds are up, while MBS are down.

The MBS market has decoupled from the Treasury market, with weakness across the coupons. It got so bad yesterday that bid/ask spreads widened to about a point and some coupons in the Ginnie space simply stopped trading. Despite a rally in 1.5 point rally in the 10 year, 2.5% TBAs are down half a point. The Fed has taken notice and has directed even more QE money to the sector. They are expected to buy about $35 billion of MBSs today.

The issues in the TBA market are probably due to a few things: First mortgage backed security investors are probably deleveraging. The massive sell-off we saw in the mREIT sector on Wednesday (with some stocks down 50%+) was due to rumors that banks were pulling their repo lines. Also, with the trade deficit (probably) falling with China we are seeing less Chinese purchasing of mortgage backed securities. This is affecting pricing as well.

Fannie Mae’s window pricing took a turn for the worse yesterday as well. Perhaps they are simply full, but take a look at the worse. We are back to mid-January levels. In other words, all the improvement from the emergency rate cuts are gone. Chart courtesy of Optimal Blue.

Warehouse banks are beginning to demand huge haircuts on jumbo loans and are rejecting non-QM loans. So forget about those for a while.

European banks are struggling right now, and the fear is that it will spread to the US banks. Deutsche Bank has always been a problem child, and I don’t even want to get started on what the markets think of Italian banks Unicredito and Intesa SanPaolo Imi. This is going to affect US banks and reduce a lot of the risk tolerance in the system.

Home buyers need to bake in more time to close. Meanwhile the industry waits for guidance regarding verbal verifications of employment, and hopes that drive-by appraisals will become acceptable.

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Vital Statistics:

Stocks are down big this morning as we continue the volatile markets. Bonds are getting slammed, where the US Treasury is following the carnage in Europe.

Volatility begets volatility, and that is what we are seeing. Oil is now at a 17 year low. The ironic thing is that gasoline prices will be ridiculously low for the summer driving season, but there will be nowhere to go. European bonds are selling off due to fears that the Italian economy is going to be so bad that they will need a bailout from Germany. The German Bund has picked up 50 basis points in yield, going from -78 basis points on Friday to -28 today. The US Treasury is being pulled along for the ride.

Washington is putting together a panoply of measures to try and support the economy while everyone hunkers down at home. It looks like the government is going to give everyone $1,000 in a couple of weeks to get people through this tough time. Multiple industries will probably get some sort of help, with hospitality and airlines at the front of the line. As oil falls, the frackers will be soon behind, and I suspect the mall REITs will be next. Companies are suspending stock buybacks left and right, which may explain some of the sogginess in the stock market.

Homebuilder sentiment fell in March to 72, which is still strong. I have heard that construction activity has been suspended in the Bay Area, and I saw that Loan Depot has ceased accepting loans from all of the counties surrounding San Francisco.

Housing starts came in at 1.6 million again in February. Building Permits were 1.45 million. February was probably too early to be affected by Coronavirus, so March will be a better tell.

Mortgage applications fell 8% last week as purchases fell 1% and refis fell 10%. Between margin calls and a lack of investor appetite for refis, mortgage rates backed up last week. Don’t forget that mortgage backed security investors detest volatility in the bond market. It makes hedging their portfolios more expensive, and the prepay option (which an MBS investor is short) more valuable.

Despite the moves by the Fed in the markets, the mortgage REITs continue to get slammed. I suspect this is a “shoot first, ask questions later” mentality on the part of investors, but some of these stocks are looking crazy cheap, trading at half of book value and some with dividend yields of 20% + (one of which declared its normal dividend yesterday) Watch the REITs, because their appetite for paper flows through to mortgage rates.

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Vital Statistics:

Stocks are up slightly after yesterday’s bloodbath. Bonds and MBS are down.

The actions taken by the Fed over the weekend seemed to help things in the mortgage market. According to Optimal Blue, the average 30 year fixed rate mortgage fell 23 basis points yesterday. Some of this was due to interest rate movements, but the biggest reason was a narrowing of MBS spreads.

Let me throw a little inside baseball stuff to explain what is going on. Mortgage backed securities are the basic input into rate sheets. They have an imputed yield and as of Friday, the difference between the imputed yield on the mortgage backed security and the corresponding Treasury was pushing 150 basis points. A month ago, it was around 100 basis points. The widening of MBS spreads (which translate into higher mortgage rates) was driven by a number of things, including prepayment fears, high refinance volumes, mortgage backed investors (think mortgage REITs) deleveraging, and a fear that repo rates will rise. The Fed’s actions over the weekend did two big things. The Fed’s commitment to provide liquidity to the markets soothed a lot of fears over repo lines getting pulled. The restarting of quantitative easing meant that one of the biggest players in the MBS market was back and went from being a net seller to a net buyer. That was just what the MBS market needed.

Annaly Capital (one of the biggest investors in mortgages) held a conference call yesterday to explain what is going on in the MBS market. Mortgage bankers should understand how the people on the “other side of the trade” – i.e. MBS buyers think. Here are my notes from the call yesterday

• Fed much more accomodating with liquidity than it was in 2008.
• MBS are the most attractive since before the financial crisis
• Not seeing banks pull repo lines
• Private label securitization markets will take a hiatus for a while
• Repo haircuts remain unchanged.

The punch line is that the Fed is 110% committed to preventing a replay of 2008, where liquidity dried up and affected business. They do not want to see warehouse lines being pulled, repo lines being pulled, etc. Note the Fed committed to adding $500 billion in overnight repo financing as well.

Annaly investors were concerned that the upcoming year will be the biggest refinancing wave than 2003. For those that weren’t in the business then, 2003 origination volume was around $3.7 trillion. That is 75% higher than last year. The industry is about to be inundated with files, once the Coronavirus issue passes.

If the private label securitization markets go on hiatus, don’t be surprised to see the non-QM business slow down, and maybe mediocre pricing in the jumbo market. Simply put, the banks are being encouraged to keep businesses afloat and not just fill their balance sheet with portfolio products. Stock buybacks are also going to be suspended until this is over.

No, you can’t get that 0% mortgage rate you heard about on TV.

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Vital Statistics:

Stocks are limit down after the Fed made an emergency cut over the weekend. Bonds and MBS are up.

Yesterday, the Fed cut interest rates to zero and re-initiated QE. The Fed will begin purchasing up to $500 billion in Treasuries and $200 billion in mortgage backed securities over the coming months. For what its worth, stocks are unimpressed. S&P 500 futures went limit down immediately on the Asian open and have been sitting there ever since. The 10 year is trading at 77 basis points pre-open, which is much higher than where it was a week ago.

Mortgage backed securities seem to like the re-introduction of quantitative easing. The current coupon TBA is up about 2 points, but it is early and we could just be seeing some short covering. The NY Fed plans to purchase $80 billion of TBAs over the next month.

Companies have been taking down their lines of credit to maximize cash on the balance sheet. This is another reason for the rate cut. Banks have been getting clobbered in the sell-off, with the XLF down 25% since the start of the Coronavirus contagion. The Fed is watching to make sure we don’t see a repeat of 2008 when businesses were unable to borrow in the commercial paper market. The banks have all suspended their stock buyback as well.

Right now, the immediate concern for the markets is the state of airlines and the energy patch. Oil below $30 a barrel is a problem for almost all of the shale producers. Airline bankruptcies have been a fact of life forever, and many will hit the wall if this drags on. In the meantime the labor market is entering this crisis as strong as it has ever been. Remote working is about to face its biggest test, and if productivity doesn’t take a hit, it could become more mainstream. Certainly for employers it saves money for office space, while improving quality of life for employees. Less commuting is also better for the planet.

Coronavirus is going to put a damper on the Spring Selling Season for real estate. Have to imagine traffic is going to fall, although inventory is so tight we probably won’t see much of an impact on prices. Also, this should be an issue for the builders, so supply is going to remain constrained. Refis will continue to drive the business. FWIW, Redfin took the temperature of the average consumer on how it will impact housing. Roughly 40% think it will be bad, while 50% see no effect. The drop in stock prices isn’t going to help the animal spirits in the real estate market, but I find it hard to imagine any sort of decline in prices, aside from the overheated markets on the West Coast.

We do have quite a bit of data this week. The FOMC meeting on Tuesday and Wednesday will be more about the press conference than anything, with particular emphasis on whether credit spreads are widening and if we are seeing indications of financial stress in the system. Aside from the FOMC meeting, we will get housing starts, home prices, industrial production and existing home sales. Of course none of this will matter to the bond market, which will be driven by headlines.

What does this mean for mortgage rates? The re-introduction of QE will certainly help things, especially if it encourages trading in the lower note rates. Mortgage rates may take a while to adjust. I also suspect that the big money center banks, which drive jumbo pricing are about to increase margins to free up capital to lend to small and medium sized enterprises which are facing cash crunches.

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Vital Statistics:

Stocks are lower after Trump announced a 30 day travel ban from Europe. Bonds and MBS are up.

Initial Jobless Claims came in at 211,000 last week, below expectations. If Coronavirus is going to cause a recession, this will be the first place you see it. So far, it looks like companies are hanging on to their workers. This is key to preventing a recession.

Credit spreads are beginning to widen, however. The banks have been crushed YTD, with Wells down something like 40%, JPM down 30%. We are nowhere near 2008 levels (and probably aren’t heading there), but widening credit spreads are the canary in the coal mine.

Speaking of widening spreads, mortgage backed security spreads are widening. The difference between the implied yield of mortgage backed securities and treasuries is about 150 basis points right now. It was about 110 at the end of February. In a nutshell, this means that mortgage rates right now are about the same as they were when the 10 year was yielding 1%.  If all you watch is the 10 year bond yield indicator on CNBC. It isn’t telling the whole story.

We are entering “oh crap” season, where companies that are going to miss their first quarter earnings expectations disclose it to the market. This could be an opportunity for companies to “kitchen sink” a lot of things as Coronavirus provides an opportunity for them to build in cushion for future earnings releases. In other words, if the Street expects you to make $1.16 in your first quarter earnings, and you are going to come in around $1.12 – $1.13, you might disclose that you will make only $1.10 and take the opportunity to write down a whole bunch of assets and doubtful accounts to create some cushion to make sure they make their numbers going forward. Companies aren’t supposed to do this, but they do. Certainly look for airlines, hotels, banks, consumer discretionaries, and energy to warn on Q1.

Inflation at the wholesale level fell 0.6% MOM in February, and is up 1.3% on a YOY basis. Ex-food and energy it is down 0.3% MOM and up 1.4% YOY. Again, inflation no longer matters to the Fed.

The Fed Funds futures are now predicting a 60% chance cut of 75 bps next week and a 40% chance of a 100 bp cut. Note that the CME indicates that the inter-meeting cut has screwed up the probability graphs, but they don’t quantify it. Oh, by the way, the CME is suspending all open-outcry trading until further notice starting Friday.

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Vital Statistics:

Stocks are after the Bank of England cut interest rates by 50 basis points. Bonds and MBS are up.

Coronavirus update: 120,000 worldwide, cases in the US breaches 1,000. A big pocked in the US centers around Westchester County in New Rochelle.

Washington is working on some sort of fiscal stimulus to support the economy while we deal with the Coronavirus. Republicans are pushing for a payroll tax holiday while Democrats want paid sick leave. They will probably come to some sort of deal. What politician doesn’t like to spend money in an election year, especially with an excuse as bulletproof as this?

Speaking of politics, Joe Biden is looking more and more like he will be the D nominee.

The MBA has raised its 2020 origination forecast to $2.6 trillion from $2.1 trillion. 2019 volume was $2.2 trillion. Refis are forecast to increase to $1.2 trillion, while purchases are expected to come in at 1.4 trillion.  “This month, our forecast is for mortgage rates to average around 3.4 percent for 2020, and we have revised our refinance forecast to a total of $1.2T for 2020 roughly double our previous forecast of $665B,” they said. “The revised refinance estimate is a 37 percent increase in refinance volume in 2020 relative to 2019. Additionally, we expect purchase originations to be stronger in 2020, showing an 8 percent increase for the year given the strength in new residential construction and in purchase applications to date. ”

Separately, mortgage originations increased 55.4% last week as purchases rose 6% and refis rose 79%. “Market uncertainty around the coronavirus led to a considerable drop in U.S. Treasury rates last week, causing the 30-year fixed rate to fall and match its December 2012 survey low of 3.47 percent,” said Joel Kan, MBA Associate Vice President of Economic and Industry Forecasting. “Homeowners rushed in, with refinance applications jumping 79 percent–the largest weekly increase since November 2008. With last week’s increase, the refinance index hit its highest level since April 2009.”

The consumer price index rose 0.1% MOM in February and is up 2.3% on a YOY basis. Ex-food and energy it rose 0.2% MOM and 2.4% YOY. Of course with the Fed knocking on ZIRP’s door, the inflation numbers are completely irrelevant to the bond market.

Mortgage credit availability dipped in February. “Mortgage credit supply decreased in February, as both conforming and jumbo segments of the market saw a decline,” said Joel Kan, MBA’s associate vice president of economic and industry forecasting. “There were also reductions in ARM program offerings, as well as in low credit score programs offered by investors. Last month’s activity was the calm before the storm. Mortgage rates dropped steeply in the last week of February and a large surge of refinance activity followed. Investors may adjust their future mortgage credit offerings based on the sudden upswing in demand.” With pipelines full, many mortgage bankers are simply saying no to new loans.

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Vital Statistics:

Stocks are higher this morning after yesterday’s violent sell-off. Bonds and MBS are down.

Despite the huge drop in bond yields yesterday, mortgage rates only improved by 4 basis points. It seems like the main buyers in the TBA market are originators adjusting their hedge positions. Pipelines are full, and most people are building in more margin on their rate sheets. I can’t imagine sub 2% yields for a security with pretty heavy interest rate risk is going to entice many bond funds.

If you called Bank of America to get a refinance yesterday, there was a two-hour wait to speak with a loan officer. Lenders are inundated with business right now. “Demand has ramped up in a way that many lenders have never experienced,” said Matthew Graham, chief operating officer at Mortgage News Daily, which tracks rates every morning. “Some of them have taken to raising rates in order to deter new business.  Others have completely stopped accepting new applications.” Once rates stabilize and the margin calls / fallout fears recede, the industry is going to feast. 2020 will probably break records.

The VIX (which is the CBOE volatility index, a measure of fear in the market) spiked over 60 yesterday, which is the highest since the financial crisis. Anyone remember what the spike in February 2018 was all about? The market had the worst 1 day point decline in history up until that point. How about the one in August 2015? The Dow lost 1,000 points and the S&P lost 120 in one day. If you search the news stories, the sell-offs are attributed to some bad economic number out of China, or something else transitory. Who knows, in two years we might look back at this sell off and scratch our heads wondering what was going on.

Small business remained optimistic in February, according to the NFIB. The survey pre-dates the market freakout and Fed cut, so maybe it is too early to see an impact from Coronavirus. “The small business economic expansion continued its historic run in February, as owners remained focused on growing their businesses in this supportive tax and regulatory environment,” said NFIB Chief Economist William Dunkelberg. “February was another historically strong month for the small business economy, but it’s worth noting that nearly all of the survey’s responses were collected prior to the recent escalation of the coronavirus outbreak and the Federal Reserve rate cut. Business is good, but the coronavirus outbreak remains the big unknown.”

The White House is looking at a payroll tax cut to ease the pain of Coronavirus. Other measures being considered involve paid sick leave for those who become ill. This is in addition to the big spending bill that was just passed.

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Vital Statistics:

Don your crash helmets, it is ugly out there. Stock index futures are limit down. Bonds and MBS are up.

The 10 year is trading at 0.46% after hitting a low of 0.33% in the overnight session. Granted, the Asian overnight session can be illiquid and whippy, but that is shocking. Oil is down 22% due to a tiff between Saudi Arabia and Russia. The German Bund hit a new record low yield, trading at -88 basis points.

The 30 year Treasury is up 10 points. 10. points. The yield is 0.88%. Astounding. The chart of the iShares 20 year government bond ETF looks like an internet stock circa 1999.

TBAs are participating in the bond market rally, but not like the 10 year. The 10-year bond is up 3.375 points this morning. 2.5% TBAs are up 1/2 of a point, and 3% and higher notes are up a quarter. So  rates will be better this morning, but not by as much as you think they should. Also, many correspondents have full pipelines, so they will be adding margin to their rate sheets. We may see little to no improvement over Friday. Just be prepared to explain that to your borrowers.

The March Fed Funds futures are predicting a 90%+ chance that the Fed will cut to zero at the March 18 meeting. The site cautions that the March 3 cut has made the probabilities somewhat inaccurate, but the bet is that we are back at ZIRP by the end of the month. Don’t discount the possibility of another intra-meeting cut. Check out the Feb 7 predictions… roughly a 90% chance of a 2% Fed Funds rate. Now it is a 90% chance of a 0% Fed funds rate.

The week after the jobs report is usually data-light and this week is no exception. The only numbers of note are inflation, and those aren’t going to make any difference.

There are now 110,000 confirmed cases of Coronavirus. There are just under 30,000 cases outside China. 554 are in the US and it has resulted in 21 deaths. Italy is taking drastic measures to quarantine people, so if you had planned a trip to Milan or Venice this spring, you might want to re-think it.

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Vital Statistics:

Stocks are getting clobbered as the flight-to-safety trade takes hold. Bonds and MBS are up. Note we  will have a lot of Fed-speak today, so be aware.

Despite the big move upward in bonds (the 10 – year is up about 2 points), TBAs are barely up. The 2.5 coupon is up about 1/4, and the 3s and up are flat. There is a huge push-pull event happening in the TBA market right now.  First, originators who hedge their pipelines with TBAs are getting hit with margin calls, which is causing a bit of a short squeeze in the market. Basically, if an originator can’t make the margin call, the broker will close out their position, and that means buying TBAs to close out the short position. Most lenders have had a call from their friendly TBA broker-dealer already, and you will probably be able to hear the champagne corks popping after we get past Class A settlement next week. People have been white-knuckling it all week.

On the other hand, increasing prepay speeds are making the higher note rates less and less attractive. If you buy a 3.5% Fannie TBA, you’ll pay 104. You will get back 100. You are hoping that you get enough coupon payments to cover that premium you paid. As rates fall, that chance of making back that 4% premium you paid becomes less and less. So, even though the 10 year keeps falling, eventually mortgage backed securities will participate less and less in the rally (or at least the higher note rates will). And it looks like we are about there. This is a big relief for mortgage bankers who have full pipelines and want to ring the register. Now, about that servicing portfolio….

Margin calls harken back to the bad old days of 2008. Are we experiencing something similar? Emphatically, no. In 2008, we had a collapsing residential real estate bubble, and these are the Hurricane Katrinas of banking. Despite all the fears of a recession, delinquencies are at 40 year lows, and the labor economy remains strong.

Speaking of the labor economy, it is jobs day. Jobs report data dump:

• Nonfarm payrolls up 273,000 (expectation was 177)
• Unemployment rate 3.5% (expectation 3.6%)
• Average hourly earnings up 0.3% MOM / 3% YOY
• Labor force participation rate 63.4%

Overall, a strong report that should take some wind out of the sails of the bond market. Note that this is February’s report, so much of it will be pre-Coronavirus. US corporations are preparing for a mass experiment in remote working, so some of the effects of virus could be relatively well mitigated.

Remember yesterday, when I showed the Fed Funds futures prediction and said it was a toss-up between how big of a cut it will be? Well, it still is. Except now it is a toss-up between a 50 basis point cut and a 75 basis point cut. ZIRP by June?

Who else is driving the rally in the 10 year? Banks. Banks who hedge their interest rate risk with Treasuries are facing similar issues that mortgage bankers are in the Treasury market. Banks with huge portfolios of mortgage loans will sell the 10 year against it in order to hedge interest rate risk. As rates fall, they will need to buy back some of that hedge. According to JP Morgan, banks need to buy about $1.2 trillion in 10 year bonds to adjust their hedges.

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