All Things in Moderation

Vital Statistics:

Stocks are lower this morning as people watch the price of oil collapse. Bonds and MBS are up small.

Oil is down huge this morning. Why? Nowhere to put it. We are getting back towards the late 90s, when the Economist put out its famous “drowning in oil” cover, which marked the bottom of the oil market. Note that it is the May contract, which expires this week that is down so much. Since it is no longer front month, it isn’t really actively traded and therefore not representative of the true price of oil in the markets. The June contract is trading around 22 bucks. Ironic that we are headed into the summer driving season with oil at the lowest in a generation, but there is nowhere to go.

No major economic data this week, aside from initial jobless claims. We do get some real estate data with existing home sales, new home sales, and the FHFA House Price Index. The NY Fed is decreasing its TBA purchases to $10 billion per day.

The Chicago Fed National Activity Index was flashing “recession” in March, falling to -4.17. (Anything under -0.7 is considered recessionary). Mohammed El-Arian says the economy could contract 14% in 2020. Citi also warns that the markets aren’t pricing in a second wave of infections.

Almost 3 million people have asked for mortgage forbearance under the CARES Act. This represents 5.5% of all active mortgages. This is 4.9% of all Fannie / Freddie loans and 7.6% of FHA / VA loans. So far servicers are getting crushed by this. “It’s frankly frustrating and ridiculous that we do not have a solution in place,” said Jay Bray, CEO of Mr. Cooper, one of the nation’s larger mortgage servicers, who consulted with the Trump administration to set up the bailout. “When we were working on the Act, we had liquidity in it, and it did not make it into the Act. We were told it would be handled through the administration, and it’s a real problem.”

Last week Senators Sherrod Brown and Maxine Waters sent a letter to the Administration:  “The government must be prepared to respond quickly to prevent a liquidity shortfall in the single-family and multifamily mortgage markets, and to ensure that consumers are equitably served by that response. Any liquidity provided must be used to stabilize the market at a time when many families may fall behind on payments and facilitate relief to individual homeowners and renters throughout the market through forbearance, loss mitigation, and protection from displacement, rather than immediate defaults and evictions.”

Civil Rights and fair housing groups are also requesting a facility for servicers. While it seem unusual for the Professional Left to go to bat for servicers, they sense that if no facility is set up, no one will want to do FHA loans in the future. FHA business is severely restricted at the moment.

Filed under: Economy, Morning Report | 12 Comments »

Vital Statistics:

Stocks are higher this morning after positive news out of Gilead regarding a treatment for COVID-19. Bonds and MBS are down small.

Investors are bullish after the government released its plan to re-start the economy. It will involve a staggered, 3 stage process which will be left up largely to state governors. Under the first phase, movie theaters, restaurants, sports venues, places of worship, gyms and other venues could re-open with some restrictions. Schools would remain closed, and workplaces could re-open although companies will be encouraged to telecommute. Under the second phase, non-essential travel could resume, bars and schools could re-open. Under the final phase, visits to hospitals and nursing homes could resume. The Trump Administration believes some states could be ready to open quickly, by May 1. Others will take some time. Separately, NY extended the lockdown to May 15.

Politicians are beginning to become more vocal regarding the need to help servicers. Senators Maxine Waters and Sherrod Brown both called on the Fed and Treasury to provide liquidity to servicers struggling with advances. “Mortgage servicers are expected to face increased strain as millions of homeowners and renters lose jobs, are furloughed, or see reduced hours, all of which will keep them from making mortgage and rent payments, as a result of this public health crisis. We must not allow the pandemic to destabilize critical markets, including our housing market,” the lawmakers wrote in their letter.

China’s first quarter GDP dropped for the first time on record. China went into this crisis with a real estate bubble and a shaky banking system to begin with. Their economy will bear watching going forward, especially if the real estate bubble bursts and China begins exporting deflation. If it does, plan on 0% rates in the US for longer.

Chase has stopped accepting HELOC applications for the time being. This is just after instituting a 700 FICO floor and 20% down on loans. Chase wasn’t really in the FHA space after getting socked with a deluge of false claims act penalties in the aftermath of the 2008 crisis.  I have to wonder if the COVID-19 Crisis restricts the FHA market even further overall going forward. This is the last thing the left wants to see, and is perhaps why we are seeing Democrats like Maxine Waters and Sherrod Brown suddenly care about servicers.

Last week, I participated on Louis Amaya’s Capital Markets Today podcast and discussed the issues affecting the origination market. You can get the replay here.

Filed under: Economy, Morning Report | 25 Comments »

Vital Statistics:

Stocks are higher this morning as the Trump Administration works on how to re-open the economy. Bonds and MBS are up.

The Trump Administration is looking to ease the lockdown as it looks like cases have peaked in the US. He is planning to hold a conference call with governors this afternoon and will announce something by the end of the day. Of course it will be up to the states and local governments to make the ultimate decisions for their respective jurisdictions. State and local governments are starting to get starved for cash as sales taxes have fallen off a cliff. In all honesty, if masks and gloves work (and they appear to), then it probably makes sense to have people return to work wearing them. Note that the food supply is at risk for shortages, so that is something the government must work to avoid.

Initial Jobless Claims fell to 5.25 million last week. Over the past month, 22 million people have lost their jobs. That is about 34 jobs lost per case of the virus, and 770 per death from the illness.

Housing starts fell to 1.216 million. This is down 22% from February, but is actually up 1.4% on a YOY basis. Building permits came in at 1.35 million, which was down 6.8% sequentially, but up 5% on an annual basis. Starts are going to be super-sensitive to local economies. The rumor is that KB Home simply walked away from all their land deposits in Las Vegas.

Neel Kashkari is recommending that the big banks raise $200 billion in capital to help buffer against the effects of the recession. Note that Shelia Bair was jawboning the Fed to force the banks to suspend dividends and bonuses, the way most European banks have. Of course the European banks are in much weaker capital positions than the US banks, and the US banks have already suspended share buybacks. Oh, and bonuses are paid at the end of the year, so that is just a throwaway talking point. But bonuses, buybacks, and dividends are kind of an evergreen topic for liberal policy types.

The NHMC found that 84% of renters made a full or partial April rent payment. As of a week ago, that number was only 69%. Good news for the apartment REITs.

“We are pleased to see that it appears that the vast majority of apartment residents who can pay their rent are doing so to help ensure that their properties can continue to operate safely and so apartment owners can help residents who legitimately need help,” said Doug Bibby, President of NMHC. “Unfortunately, unemployment levels are continuing to rise and delays have been reported in getting assistance to residents, which could affect May’s rent levels. It is our hope that, as residents begin receiving the direct payments and the enhanced unemployment benefits the federal government passed, we will continue to see improvements in rent payments.”

“Anecdotally, we are hearing that different parts of the industry are experiencing different levels of rent payments,” said David Schwartz, NMHC Chair and CEO Chairman of Chicago-based Waterton. “As you would expect, more expensive Class A properties, whose resident base may be more able to work from home, are reporting much higher percentage of rent payments than operators of more affordable workforce properties whose residents are more likely to have had their incomes disrupted because of the pandemic.”

Filed under: Economy, Morning Report | 9 Comments »

Vital Statistics:

Stocks are lower this morning on overseas weakness. Bonds and MBS are up.

It is April 15, and taxes are not due. People are starting to get their stimulus checks from the government. The Fed is beginning to advise on how to get the economy started again. On one hand, the economy cannot afford the roughly $25 billion a day in lost output the lockdown costs. On the other hand, if we re-open prematurely and have a second wave of infections, the economic costs could be worse. At the end of the day, people simply aren’t going to put up with this much longer. In places where there are few cases, people are simply going to ignore the edicts out of Washington and get back to work. The local governments are going to look the other way because they need the revenue as badly as people need their paychecks.

Mortgage Applications rose 7% as purchases fell 2% and refis increased 10%. Purchase activity will be muted as in-home showings and appraisal issues are a problem. Separately, the homebuilder sentiment index collapsed in April, from 60 to 30.

Retail sales fell 8.7% in March, as weakness in autos and gasoline was offset by an increase in TP and Purell.

Like the other big banks, Citi’s earnings took a hit as the company reserved $5 billion for expected defaults. Citi’s exposure is less in mortgages than, say Wells, but it is huge in credit cards and commercial real estate.

Industrial production fell 5.4% in March, while manufacturing production fell 6.3%. Capacity Utilization fell from 77% to 72.7%.

If you apply for forbearance, the initial negotiating position for most banks will be that the entire amount will be due immediately at the end of the forbearance period. For what its worth, I suspect this is to deal with the precautionary forbearance borrowers, those who are gaming the system by saying “I think I could get laid off, so I will suspend my mortgage payments for 90 days and keep them in the bank. At the end of the period, I will just send it all in at once.” At the end of the day, the government should have required some sort of proof of hardship. Given that the precautionary forbearance requests will compete with the people who actually need the help, servicers are overwhelmed with requests, and it seems forbearance will go to the borrowers who have the patience and free time to sit on hold for hours. The government really should have considered servicer capacity to handle requests (among other things) when it drafted the law.

Filed under: Economy, Morning Report | 3 Comments »

Vital Statistics:

Stocks are higher as we kick off earnings season and participants start to look forward to opening up the economy. Bonds and MBS are flattish.

JP Morgan reported earnings this morning. EPS came in at 78 cents a share, well below the $2.65 a year ago. $1.66 of the earnings hit was a reserve build for future credit losses. Originations almost doubled YOY to $28 billion and the loan portfolio shrank. The servicing portfolio also fell. The stock is up 3 bucks pre-open. No update on forbearance requests that I can see.

Wells reported a breakeven first quarter after charging 73 cents a share for reserve build. Origination was up 45% YOY to $48 billion. No update on forbearance requests that I can see. The stock is up a couple percent on the open.

Retail and hotel CMBS are missing April rent. “The market for commercial real estate mortgage loans in the United States stands on the brink of collapse,” real estate investment firm Colony Capital CEO Tom Barrack said in a Medium post late last month. “If these institutions are not permitted to maintain the flexibility and patience needed to undertake the loan restructuring efforts that will be critical to weathering the Covid-19 crisis, loan repayment demands are likely to escalate on a systemic level, triggering a domino effect of borrower defaults that will swiftly and severely impact the broad range of stakeholders in the entire real estate market, including property and home owners, landlords, developers, hotel operators and their respective tenants and employees.”

US Treasury Secretary Steve Mnuchin reassured mortgage servicers on Monday that Treasury was aware of the problems in the sector. “We’re going to make sure that the market functions properly,” he told reporters at a White House briefing. He added that the Treasury Department has had discussions with the Federal Housing Finance Agency about the mortgage market. “We have all the appropriate people on it,” he said. “We’re very aware of the issue.” Meanwhile, NAR provided some cover fire for the industry.

CNBC is reporting that 2 million homeowners have applied for forbearance so far.

Filed under: Economy, Morning Report | 40 Comments »

Vital Statistics:

Stocks are down this morning on no real news. Bonds and MBS are flattish

As the COVID-19 crisis seems to have peaked, Washington is starting to think about how to get people back to work and the economy restarted. Dr. Fauci discussed that we could start reopening parts of the economy next month, although we have seen some instances overseas where the virus re-started.

Earnings season starts this week with the big banks all reporting. Analysts don’t have a clue as to how to handle guidance in this environment. The big question with the banks will be how many borrowers are requesting forbearance. So far, no help seems to be coming, at least from Fannie and FHFA.

JP Morgan has tightened up credit requirements – instituting minimum FICOs of 700 and minimum down payments of 20%. This doesn’t apply to its low income programs (JPM doesn’t really do FHA) but this is a good indication of where things are headed across the industry. A massive tightening of mortgage credit was definitely NOT what Congress had in mind when it drafted the CARES Act, but the unintended consequences are probably not going to stop there.

Good news for Ginnie Mae servicers: Ginnie Mae will advance P&I payments for delinquent borrowers under the Pass-Through Assistance Program (PTAP). Servicers can request once per month for Ginnie to advance P&I on their MBS. Servicers would still have to handle escrows. Prepayments should help Ginnie servicers get through April, and maybe even May. It won’t solve the issue for Fannie and Freddie issuers, but it is a start.

Freddie Mac is extending further help to borrowers affected by COVID-19 including loan modifications typically only used during natural disasters.

Filed under: Economy, Morning Report | 3 Comments »

Vital Statistics:

Stocks are higher this morning on optimism that things are turning the corner with the COVID-19 crisis. Bonds and MBS are up.

The bond market closes early today, and markets will be closed on Friday.

6.6 million people filed for unemployment benefits last week. That puts the number of COVID-19 job losses at around 16.5 million total.

The Fed unveiled a new round of measures to support the economy this morning. They include a program to augment the SBA’s Paycheck Protection Program by supplying liquidity to banks that participate, allowing them to pledge the actual loans as collateral. The Fed will also purchase loans under the Main Street Lending Program. The TALF program will be increased and more direct aid will be sent to state and local governments.

The Main Street Program will offer 4 year loans to companies employing up to 10,000 workers with revenues under 2.5 billion. P&I will be deferred for one year. The banks will retain 5% of the loan, and can sell the remaining 95% to the Fed.

Interestingly there is still no facility for mortgage servicers. It looks like the issue is finally getting the attention of lawmakers, however we still don’t have anything. In his comments at the Brookings Institution, Fed Chairman Jerome Powell said that he is watching the mortgage servicers closely, which means the Fed is probably considering some sort of relief.

Looks like Wells is out of the penalty box, at least as far as SBA loans go.

Jerome Powell said the Fed will act “forcefully and aggressively” to until the economy fully recovers. “Many of the programs we are undertaking to support the flow of credit rely on emergency lending powers … We will continue to use these powers forcefully, proactively, and aggressively until we are confident that we are solidly on the road to recovery,” Powell said in prepared remarks for an online event hosted by the Brookings Institution.

Filed under: Economy, Morning Report | 12 Comments »

Vital Statistics:

Stocks are higher this morning the Trump Administration works to get the economy going again. Bonds and MBS are flat.

With the Fannie 2.5 over 104, the margin calls are back. The NY Fed needs to take a break.

The government is starting to work on getting the economy re-opened in the next four to eight weeks. The idea would be to start opening up areas which never really had too many cases to begin with, and slowly work everyone back in. Larry Kudlow said: “It’s the health people that are going to drive the medical-related decisions,” National Economic Council Director Larry Kudlow said in an interview with Politico webcast on Tuesday. “But I still believe, hopefully and maybe prayerfully, that in the next four to eight weeks we will be able to reopen the economy, and that the power of the virus will be substantially reduced and we will be able to flatten the curve.”

We will get the FOMC minutes out at 2:00 pm today. Usually the FOMC minutes are a non-event but today could be different. Of course MBS are marching to their own (NY Fed) drummer these days and are gently rising regardless of how the bond market is trading. At a minimum, it will make interesting reading.

Mortgage applications decreased 18% last week as purchases fell 19% and refis fell 12%. FWIW, pricing in the secondary market has been terrible for the past two weeks and that is flowing through to primary markets. Aggregators are pricing like they don’t want the business.

Mark Calabria said that no Fannie / Freddie servicing facility is going to be made available.

“Yes and no is the answer,” Calabria told HousingWire when asked whether FHFA has a plan similar to that of Ginnie Mae, which recently announced a program to aid servicers dealing with forbearance on loans backed by the Federal Housing Administration, Department of Agriculture, and the Department of Veterans Affairs.

“The yes is we continue to monitor Fannie and Freddie servicers,” Calabria said. “We are, at this point, comfortable with our ability to deal with any servicers that may be distressed so that we can either turn them into subservicers or transfer their servicing to other parties. And we believe at this point, given the number on uptake of forbearance, we’ve seen that we can transfer servicing in a way that’s not too disruptive.

“So, the yes is we have contingency plans and procedures put in place were this distress to happen,” Calabria continued. “So that’s the yes part. The no part is, do we have a liquidity facility that we will be providing via Fannie and Freddie? The answer’s no. We don’t have the resources at Fannie and Freddie to do that.”

Calabria is making a bet that forbearance requests will come in around 2% of servicing portfolios, noting the MBA said that 1.7% requested forbearance in a sample. Of course that was the first week, so it probably is premature to say that is the number. But he isn’t buying the 25% estimates some are throwing around, at least for non-Ginnie servicers. For Ginnie servicers, he can buy that number. FWIW, this kind of feels like a Lehman Brothers moment for the servicers.

Well, this news isn’t doing anything for servicing in the bulk market.  I heard that Fannie Mae servicing trading at 1x- 2x. Freddie is 1x and GNMA is 1x to negative. In normal markets, Ginnie is a little south of 3x and Fannie is around 4x. I don’t know if theoretical marks are going to take such a dramatic hit, but if they do, bank earnings are going to take a hit next week.

The MBA sent out a statement urging FHFA to reconsider.

“The FHFA Director’s recent statements send a troubling message to borrowers, lenders, and the mortgage market. Servicers are required to offer borrowers widespread forbearance under a plan devised and approved first by FHFA and then codified by the CARES Act. Fannie Mae and Freddie Mac are contractually obligated for the payments to investors. Since Fannie Mae and Freddie Mac will eventually reimburse mortgage servicers for the payments they must advance during forbearance, Director Calabria should advocate for the creation of a liquidity facility at the Fed to ensure the stability of the housing finance market.

Finally, Anthony Hsieh had this to say on Linked In last night:

Filed under: Economy, Morning Report | 34 Comments »