Bankruptcy Tsunami Begins: Thousands Of Default Notices Are “Flying Out The Door”

by Tyler DurdenSat, 05/23/2020

Two weeks ago, when showing the uncanny correlation between defaults and the unemployment rates, we predicted that the number of Chapter 11 filings that is about to flood the US will be nothing short of biblical.

All that was missing was a catalyst… and according to Bloomberg that catalyst arrived in the past week or so, as retail landlords have been sending out thousands of default notices to tenants, who in turn have experienced a collapse in foot traffic, sales and cash flow due to the COVID-19 pandemic, and are simply unable to pay their debt obligations.

According to Bloomberg, restaurants, department stores, apparel merchants and specialty chains have been receiving notices from landlords – some of whom have gone as long as three months without receiving rent.

Hertz Files for Bankruptcy

“The default letters from landlords are flying out the door,” said Andy Graiser, co-president of commercial real estate company, A&G Real Estate Partners. “It’s creating a real fear in the marketplace.”

Pressure from default notices and follow-up actions like locking up stores or terminating leases was cited in the bankruptcies of Modell’s Sporting Goods and Stage Stores Inc. Many chains stopped paying rent after the pandemic shuttered most U.S. stores, gambling that they could hold on to some cash before landlords demanded payment.

The stakes are enormous, and landlords are suffering, too. An estimated $7.4 billion in rent for April hasn’t been paid, or about 45% of what’s owed, according to a recent analysis by CoStar Group, which also found that just a quarter of of expected rent payments have been received by landlords.

“If the landlords don’t put a pause on their actions, you’re going to see more bankruptcies.”

The question then becomes who will bail out the landlords, and whether their creditors will be just as generous in accepting forbearance.

That said, receipt of a default notice don’t necessarily mean a retailers will get booted anytime soon, especially since there is nobody waiting in line for the real estate: some landlords are merely sending letters to preserve their legal rights while discussing the situation with tenants, and to assure their spot as a prepetition creditor once the default tsunami begins in earnest.

One such company, Simon Property Group Inc., says it’s in active negotiations with merchants at its malls, and has been taking their tenants’ financial status into account. “The bottom line is, we do have a contract and we do expect to get paid,” said CEO David Simon during the company’s May 11 earnings call.

“The landlords do have the legal contract,” said Green Street Advisors senior analyst, Vince Tibone. “However, from a practicality standpoint, a lot of these retailers are on the brink of bankruptcy and simply cannot pay right now.”

However, as noted above, landlords are of course still stuck with their own bills – including bank debts which they’re expected to pay. On Thursday we reported that US malls are in a crisis which started in January as vacancies hit a record high.

And earlier Friday we reported that US retailers have accounted for the bulk of defaults over the past two months, as they were forced to temporarily close stores in response to the COVID-19 pandemic.

Retailers Neiman Marcus Group, J.Crew and J.C. Penney have already filed for Chapter 11 bankruptcy protection this month in the United States. But the real bankruptcy wave was just waiting for the unspoken covid-related grace period to end, and for the default notices to start flying.

The letters began arriving in March and early April, “but the rate of such notices picked up materially in late April and early May,” Stage Stores said. Some landlords began locking the company out “and threatened to evict the debtors and dispose of the in-store inventory.” The company also said that “responding to and managing these default notices and related litigation outside of Chapter 11 would have been a monumentally difficult task.”

“It’s not like there’s a lot of investors out there looking to buy retailers in a Chapter 11,” said Grasier, adding “Landlords and retailers need to really come together and realize that this a shared pain.”

Some landlords get it, according to Tom Mullaney, managing director of restructuring at real estate services firm Jones Lang LaSalle. Retailers he represents are getting default letters that are understanding and sympathetic; other landlords strike a more combative tone.

What’s more interesting is the action, or lack of it, by the landlords afterward, Mullaney said. “In a lot of cases, the letters that are being sent aren’t being followed up on,” he said – the landlords are simply preserving their legal rights. Maybe they just don’t have the fund to retain lawyers?

Others, meanwhile, are just taking the law into their own hands: some property owners have run out of patience and have locked out Mullaney’s clients. “The environment is getting pretty testy and emotional on both sides of the table,” he said. “The only thing worse than being a retailer right now is being a retail landlord.”

BY: MATTHEW GRAHAMThe Sun Also Rises For The Housing and Mortgage MarketsDecrease Font SizeTextIncrease Font SizeMay 22 2020, 3:31PM

There’s no shortage of bad news when it comes to the economy and the housing market. But that’s no surprise considering the circumstances. 

The sheer size and speed of the economic contraction makes it easy to worry about what the future will look like.  Has coronavirus changed things forever?  Is it true that many jobs have been permanently destroyed?

I don’t know.  No one can really know.  Many of the more troubling questions won’t be able to be answered any time soon.  No one can deny things are bad and that some things may stay bad for a long time.

But hidden amid the understandable sea of pessimism, there are some reasons for hope.  We’re not talking about the kind of hope that makes us complacent to the ongoing economic risks.  Rather, there are simply some positive counterpoints to the abundant negativity in the recent data.  Let’s look at both sides!

April’s Existing Home Sales numbers were released on Thursday, and they easily fell to the lowest levels in years.  There’s not much of a silver lining here apart from the fact that economists expected the number to be even lower.

The Existing Home Sales report doesn’t capture activity in new construction.  For that, we have to turn to other data released this week on new building permits and housing starts (the ground-breaking phase of new construction).  Here too, things are quite a bit weaker, but the differences between “starts” and “permits” offer a clue.  Specifically, the bigger drop in housing starts suggests quarantine measures are physically preventing new home construction to a greater degree than a lack of demand.

Perhaps that’s why builder confidence has already managed to find its footing.  The National Association of Homebuilders (NAHB) reported a 7 point uptick in confidence on Monday after hitting 8-year lows in last month’s survey.

The Mortgage Banker Association’s weekly mortgage app survey offers significantly more detail on the shift in purchase activity.  To be fair, this bounce is greatly benefiting from seasonality (i.e. March and April are typically the strongest months).  Even so, if someone says last week’s purchase applications were right in line with 2019’s average, they’re not lying.

Can we find fault with the chart above?  Is there cause for concern?  How about the decline in refinance applications?  And how does the current level of purchase applications stack up historically?  Here’s how:

In other words, refi activity is still higher than it was in 2016 and not much lower than the last major refi boom in 2011-2013.  That’s a staggering accomplishment considering the operational impediments due to social distancing.  It must have something to do with rates hitting all time lows several times in the past 2 weeks.

Is there a counterpoint to the low rate narrative?  Several recent newsletters have discussed the mortgage market being in a very precarious state due to the forbearance tidal wave.  And while that definitely kept rates higher for certain loan programs, the wave is clearly beginning to level-off now.  

The flattening of this curve means mortgage investors are beginning to calm down.  As a result, credit availability is improving and puzzlingly high rates are starting to move lower for certain programs and borrowers.  This won’t happen overnight, but at least it’s beginning to happen.

That last thought can be applied to the entire coronavirus saga.  Things have been very bad in ways we’ve never experienced.  Things won’t immediately get better for obvious reasons.  Nonetheless, we can still observe progress and improvement if we know where to look.

Strange Spring Slips Into Summer

HSH MARKET Trends

May 22, 2020 — Months of COVID-19 lockdowns that crippled the economy in the U.S. are starting to be relaxed, and we’ll know before long where the balance between safety and economic security may lie, or at least what levels of infection and death we are willing to accept as a state or nation in order to have some semblance of financial and personal normalcy.

Just as the near-complete shuttering of the U.S. economy was without precedent, so is the strange and staggered method of reopening it. Will customers, still fearful of contracting the coronavirus, return? Will employees, some of whom may be making far more money from generous unemployment benefits compared with earned wages, feel compelled to return if called? Can shopping malls survive on crowd and traffic limits, social distancing requirements and “curbside pickup”? How will both governors and the governed respond if the incidence of infection and death begin to climb again? There is no way to know, at least now at the outset, but we will start to know soon enough. Odds favor that we will continue to ask these questions until at least one of the many vaccines being worked on is deemed effective and is distributed across the globe. When that will be, no one can say for sure. 

For the moment, all we can hope to do is stanch the economic bleeding, try to protect ourselves and the most vulnerable to the extent possible, use any novel treatments than can be found to help promote recovery of those severely affected and try to understand our comfort levels as rules change. 

For its part, the economic bleeding continues to be severe and perhaps even worsening. For some, temporary layoffs have turned into long furloughs; for others, furloughs have turned into outright layoffs, and many retail, service, hospitality, travel and small businesses will not survive. Last week, another 2.438 million first-time applications for unemployment assistance were filed across the country; this was the lowest number of the unprecedented nine-week string that has seen over 38 million join the ranks of the jobless. The continuing decline is of course good news in its way, but it bears recalling that absent this nine-week period, last week’s figure was on the order of five times the previous record. In addition, these are of course initial claims — new folks losing jobs; continuing claims (folks receiving benefits) have risen to 25.1 million, and this figure is likely to continue to increase. 

In trying to address the economic train wreck, the Federal Reserve opened up the spigots on a number of fronts, from chopping rates to the bone to unlimited buys of Treasuries and residential and commercial MBS. Those keys supports have liquefied and stabilized markets, and a raft of lending programs has also helped to a degree. Another, the Main Street Lending Program has been in the works for a while and will get underway in a couple of weeks time, and could help support small and mid-sized businesses that have been struggling. The Paycheck Protection Program (PPP) has been useful but limited, and needed changes to the program to make it more flexible have stalled and may not come any time soon as Congress is taking the next week off. 

The Fed released minutes of the April 28-29 FOMC meeting this week, and there of course are expressions of concern throughout the document. What was also clear is that there are several potential outcomes that the Fed is trying to at least consider (if not plan for). As prepared for the meeting by the Fed staff, the “baseline assumptions that the current restrictions on social interactions and business operations would ease gradually this year, real GDP was forecast to rise appreciably and the unemployment rate to decline considerably in the second half of the year, although a complete recovery was not expected by year-end.” 

This is perhaps the best-case scenario. The staff also noted that “the staff judged that a more pessimistic projection was no less plausible than the baseline forecast. In this scenario, a second wave of the coronavirus outbreak, with another round of strict restrictions on social interactions and business operations, was assumed to begin around year-end, inducing a decrease in real GDP, a jump in the unemployment rate.” 

As far as FOMC members themselves were concerned, “Participants discussed several alternative scenarios with regard to the behavior of economic activity in the medium term that all seemed about equally likely. These scenarios differed in the assumed length of the pandemic and the consequent economic disruptions. On the one hand, a number of participants judged that there was a substantial likelihood of additional waves of outbreak in the near or medium term. In such scenarios, it was believed likely that there would be further economic disruptions, including additional periods of mandatory social distancing, greater supply chain dislocations, and a substantial number of business closures and loss of income; in total, such developments could lead to a protracted period of severely reduced economic activity. On the other hand, economic activity could recover more quickly if the pandemic subsided enough for households and businesses to become sufficiently confident to relax or modify social-distancing behaviors over the next several months.”

There were a great many other worries described in the minutes, ranging from bank and non-bank liquidity to high levels of corporate debt that could become difficult to service and even “some nonbank financial institutions presented vulnerabilities to the financial system that could worsen in the event of a protracted economic downturn.”

With additional fiscal support not likely to come very soon — the $3 trillion bill that passed the House of Representatives did not have bipartisan support and was said to be “dead on arrival” in the Senate. More fiscal support is likely needed — Fed Chair Powell all but advocated for it before Congress this week — but what shape it takes and when it may come aren’t clear. Treasury Secretary Mnuchin joined Mr. Powell this week before Congress and espoused a less dire view of the current situation and expressed support for the notion that the recovery would be more “V” shaped than not, and that opening up the economy was crucial to preventing longer-lasting damage. 

While the Fed’s liquefaction programs and rate cuts have provided key supports for the mortgage market, there are limits to how much they alone can help. After all, a low rate is only useful if you can qualify to borrow a loan or if you can find a product you wish to purchase. Low rates have been in place for a while, but can’t address well the issues facing the housing market at the moment, where prices are high, inventory is low, a fair group of potential homebuyers have been pushed to the sidelines due to job or income loss and millions are in loan payment forbearance programs. 

HSH.com - mortgage rates and existing home sales trends.

The diminished group that is well-aligned to buy despite these things and motivated enough as to use alternative paths for researching and visiting homes and closing a mortgage in a hands-off environment, rates are quite compelling, as they are just a hair above “all-time” lows. At least some of them actually closed in April on purchase transactions begun in the early stages of the COVID-19 outbreak and amid initial lockdown orders. The National Association of Realtors reported that an annualized 4.33 million sales took place in April, a decline of 17.8% from March. The upward momentum for home prices — goosed by low rates and limited inventories of homes to buy — continued in April, albeit at a slightly lesser pace. The median cost of an existing home sold this April was 7.4% higher than last year at this time, but that was a bit cooler than the twin 8.1% increases notched in February and March. 

In what would generally be considered good news on the inventory front is actually a bit misleading. Supply of homes available to be purchased continued to moved up from an ultra-tight 3 months of supply in February, and landed ad 4.1 months in April. However, this “increase” was all due to the sharp decline in demand; the actual number of homes listed for purchase was 1.47 million, down 1.3% from March and 19.7% below year-ago levels. There weren’t more homes for sale, only fewer buyers. Whether this slump in demand translates into softer home price gains in the future will depend on how quickly sales rebound. Given the lag in reporting, May and perhaps June will likely show further declines in sales before stabilizing or improving. 

Builder moods were a better grade of lousy in May. The Housing Market Index from the National Association of Homebuilders moved up 7 points to 37 for the month, recovering a bit of the 42-point drop from March to April. Still, any optimism is welcome; measures of single-family sales bumped 6 points higher to 42 (better, if still sub-par, and a long way from the 81 recorded for February). Optimism about the coming months kicked higher, too, posting a 10-point rise to 46, and there was even a bit more interest to be seen by potential homebuyers, with the measure of traffic at model homes and showrooms rising 8 points to 21. In this series, values below 50 indicate contraction and those above it, expansion, so things here are bad, just not as bad as they seemed in April. 

Builders would be happier if they were working more, but that wasn’t the case in April. Housing starts rang in with a 30.2% month-over-month decline, plummeting to 891,000 new units under construction. Single-family starts dropped by 25.4%, landing at 650,000 units started, while multifamily projects dropped 40.5% to just 241,000 projects underway. Permits for future activity were curtailed sharply, with the 20.8 percent decline leaving the total number at 1.074 million, a figure now about one-third below where we began the year. 

As noted above, the Fed’s moves did help the mortgage market, and certainly there was considerable refinance activity in place before the COVID-19 shutdowns happened. There was enough, in fact, to rather overwhelm mortgage lenders and cause some to even price defensively as to meter inbound business. That was late February and March; since then, refi activity has waned, but of late, purchase activity has ticked higher, or at least that seems to be the trend when looking at the Mortgage Bankers Association weekly mortgage applications index. In the week ending May 15, applications for refinancing slid again, dipping another 6.5% and are now in a five-week slide. However, the mirror image to that is another increase in applications for purchase-money mortgages, which rose 6.4% and are enjoying a 5-week string of increases. Should demand for mortgage money continue to ease there is an increasing chance that lower rates will begin to appear in the markets, bringing new record lows and in turn probably sparking new demand. As such, any downtrend for rates is likely to be gradual absent a new economic shock.

Also a better grade of lousy was the report covering manufacturing conditions in the Federal Reserve Bank of Philadelphia’s district. Their local barometer climbed by 13.5 points, rising from a harsh -56.6 in April to a less-bad -43.1 for May. Measures of orders declined at a slower pace, posting -25.7 for the month after a 70.9% plunge in April, and employment settled, too, sliding only 15.3% after recording a -46.7 mark for the previous month. Given that re-openings are just underway here and that conditions remain very uneven across the globe it may be a while before we routinely see positive values for manufacturing in these localized surveys (or nationally, for that matter). 

A properly socially-distanced holiday is upon us come Monday, the unofficial start of summer. It may be difficult to discern any difference compared to the spring for some, while others may be able to enjoy near-normal barbecues, get-togethers and excursions to the lakes and beaches. If you’re one of the lucky ones that are able to enjoy new-found freedoms, please do take care and precaution as the last thing anyone wants to see is a reversal of fortune by the time Independence Day rolls around. 

After the Monday holiday, the economic calendar picks up a bit, with sales of new homes, pending home sales and the Fed’s Beige Book adding a few more clues to the puzzle. Mortgage rates were slightly softer this week, but at a virtual standstill the last couple of days. It’s possible that we might see a slight dip in the average conforming 30-year FRM reported by Freddie Mac next Thursday. A decline of two basis points would be enough to give us a new record, and while that’s a nice headline, it does little if you can’t qualify to get a loan. 

Monday is Memorial Day, so please take a minute to remember those who fought for our freedoms and sacrificed for them… and keep in your thoughts those who bravely serve today. 

Fed Balance Sheet Rises Above $7 Trillion; Bond ETF Holdings Hit $1.8 Billion

by Tyler DurdenThu, 05/21/2020

After crossing back above the $4 trillion mark back in October 2019 in the aftermath of the JPMorgan repo bailout, also known as “No QE”, the Fed’s balance sheet is nearly double that amount a little over half a year later, with the Fed reporting in its latest H.4.1 report that as of May 20, 2020, its total assets rose above $7 trillion for the first time ever, an increase of $103 billion in the past week to $7,038 billion. Putting the increase in context, the Fed’s balance sheet hit $6 trillion on April 2.

The increase was mostly the result of a $79BN increase in settled MBS purchases as well as $32BN in Treasury purchases, while there was no change in the Fed’s holdings in its commercial paper facility.

While the Fed’s balance sheet is broadly expected to hit $12 trillion in the next 12 months, the fact that the expansion has slowed down substantially is a problem, especially after the Fed tapered its daily QE to just $6 billion last week, and JPMorgan expects it to further shrink to just $5 billion per day when the new schedule is published tomorrow.

This is a problem because the Treasury has some $3 trillion in debt issuance to go in the next 6 months, and one war or another, the Fed will have to aggressively ramp up its QE again, which as we discussed over the weekend, may mean another market crash “unexpectedly” happens in the coming weeks to provide cover to the Fed for the next massive QE expansion.

There was one surprise in the latest amount of Fed corporate ETF holdings, which can be found in the “Net portfolio holdings of Commercial Paper Funding Facility II, LLC” line time.

As a reminder, earlier today we laid out a BofA report according to which the Fed would disclose $2.5 billion in total bond ETF holdings, and which assumed that the Fed, which unveiled a total of $305MM in the one full day after the program was launched, would now have a $2.5 billion total in holdings. However, the actual number was notably lower at $1.8 billion, which means that in the past 5 work days, the Fed purchased $1.5 billion in ETFs, or $300MM per day, which appears to be the Fed’s now daily purchases of LQD (for those curious, the total assets of LQD are $48 billion).

Incidentally, judging by the sharp jump in LQD pricing, $300MM is more than enough to push this critical – for all future buybacks, not to mention anchor pillar for the US bond market – ETF back to near all-time highs.

And since nobody even jokes anymore that the Fed can one day reverse or even stop these operations, the bigger question is what will the Fed’s balance sheet be when it’s all said and done, an exercise which Deutsche Bank did earlier this week when it calculated that the maximum potential size of the Fed’s balance sheet is $130 trillion and will be hit as soon as the Fed owns… well, everything.

Mortgage delinquencies surge by 1.6M in April, the biggest monthly jump ever

Jessica MentonUSA TODAY

Delinquencies among borrowers for past-due mortgages are soaring, a sign that Americans are struggling to pay their bills due to a wave of layoffs or lost income from the coronavirus pandemic.

Mortgage delinquencies surged by 1.6 million in April, the largest single-month jump in history, according to a report from Black Knight, a mortgage technology and data provider. The data includes both homeowners past due on mortgage payments who aren’t in forbearance, along with those in forbearance plans and who didn’t make a mortgage payment in April.

At 6.45%, the national delinquency rate nearly doubled from 3.06% in March, the largest single-month increase ever recorded, and nearly three times the prior record for a single month during the height of the financial crisis in late 2008, Black Knight said. 

For context, it took more than 18 months before the first 1.6 million homeowners became delinquent during the Great Recession, says Andy Walden, economist and director of market research at Black Knight. And there is still potential for a second wave of delinquencies in May, he added. 

“The impact of COVID-19 on the housing and mortgage markets has already been substantial,” Walden says. “It will be some months before we can gauge the full extent of that impact. Whatever the ultimate scope, it is almost certain the effects will resonate for many months to come.”

The CARES Act, passed in March, allows homeowners to suspend their mortgage payments for up to a year on federally-backed mortgages. But it doesn’t protect mortgages that aren’t backed by the government, which make up about half of all mortgages in the U.S.

About 3.6 million homeowners were past due on their mortgages at the end of April, the most since January 2015 as households face financial hardship. That included the roughly 211,000 borrowers who were in active foreclosure.

House keys on top of mortgage loan documents.

The CARES Act also prevented lenders from beginning foreclosure proceedings on federally backed loans for at least 60 days after March 18.

With foreclosure moratoriums in place in response to the outbreak, both foreclosure starts and foreclosure sales, or completions, hit record lows. Starts were down more than 80% from this time last year, while foreclosure sales saw a 93% decline over the same period.

“Forbearance plans, by their very nature, are intended to assist homeowners through times of crisis until they can get back on track financially, and historically, they have proven to be broadly successful in doing so,” Walden says. “Given the sheer number of mortgage holders impacted, there remains a risk that some may progress into default and foreclosure further downstream.”

In the top 100 largest metropolitan areas, Miami (7.2%), Las Vegas (6.2%) and New York City (5.4%) topped the list for cities with the largest delinquency increases. Nevada was among the states with the biggest delinquency rates, climbing 5.2% to nearly 8%. New Jersey and New York followed, rising 5.1% and 4.9%, respectively. 

Existing Home Sales Continue Collapse To 9-Year Lows

by Tyler DurdenThu, 05/21/2020

Existing Home Sales in April plunged 17.8% MoM to the lowest SAAR since September 2011 (at 4.33mm, slightly better than the 4.22mm exp)…

Source: Bloomberg

This is the largest drop since the government’s homebuyer tax credit expired in July 2010 (the two month drop is around 25% SAAR)

Source: Bloomberg

Additionally, the median home price increased 7.4% from a year earlier to $286,800.

“The economic lockdowns – occurring from mid-March through April in most states – have temporarily disrupted home sales,” Lawrence Yun, NAR’s chief economist, said in a statement.

“But the listings that are on the market are still attracting buyers and boosting home prices.”

Inventory was down 19.7% last month from a year ago to 1.47 million units, the lowest on record for any April. The number of homes for sale would last 4.1 months at the current sales pace. Anything below five months is seen as a tight market.

Existing home sales slumped in all U.S. regions in April, led by a 25% drop in the West from a month earlier. Contract closings also fell 17.9% in the South, 12% in the Midwest and 16.9% in the Northeast.

BY: MATTHEW GRAHAMAnother Week, Another Trip to All-Time Lows For Mortgage Rates May 20 2020

Mortgage rates fell again today.  Whereas yesterday’s improvements arrived in choppy fashion only after many lenders quoted higher rates in the morning.  Today’s improvement was more conclusive and more consistent from lender to lender.  While there were a handful of mid-day improvements in response to bond market strength, most lenders were at least as low as they’d ever been to start the day.  Many lenders were decidedly lower, bringing the average top tier conventional 30yr fixed quote dangerously close to cracking below the 3.0% barrier.

If you’re hearing about rates in the high 2% range, shaking your head, and scoffing, know that you are not alone.  It continues to be the case that rate offerings vary quite a bit from lender to lender.  They can also be vastly different for different scenarios.  What may seem like a “top tier” scenario to one person due to their 800 credit score and sizeable equity is actually not that great due to some other aspect of the quote (a “cash-out” refinance as opposed to a “no-cash-out” refinance is a popular reason for this).

Scoffing or not, this is definitely the new reality for rates.  If we consider that the outlook for economic growth and inflation are two key considerations for interest rates, it’s not hard to accept that we could and should be at new all-time lows.  The bigger question is how much lower can we and will we go?  There’s no way to answer that with certainty.  What I can tell you is that lower rates are just as possible as any other outcome, but they’re increasingly likely to find a sideways range at new all-time lows (or close to them) in order to work through the surge in refinance volume associated with such movement.


Loan Originator Perspective

Bonds continued yesterday’s rally today, posting moderate gains.  Several lenders improved their pricing as a result.  Federal Reserve meeting minutes confirmed the obvious, covid-19 has (and will continue to) devastated the US economy.  I’m locking loans approved by underwriting, but in no big hurry to lock new applications. –Ted Rood, Senior Originator, Bayshore Mortgage


Ongoing Reminder on Forbearance

Coronavirus has created unprecedented challenges for people and industries.  For homeowners facing a big reduction in income due to coronavirus-related hardship, a forbearance can make excellent sense.  But for those who have the capacity to continue making mortgage payments, there are downsides to consider.  Forbearance itself does not hurt your credit score, but it does show up on your credit report.  This will affect your ability to qualify for a loan in the present and near future.  It can also result in your other creditors decreasing your available credit balances.  This has the unintended effect of increasing your ratio of debt to available credit which is a key component of credit scoring models.  Thus, even though forbearance itself is not hurting your credit, it can indirectly lower your credit score and it will absolutely impact your mortgage creditworthiness in the short term.   

Fannie, Freddie Will Need $240BN In Capital As Private Companies: Regulator

by Tyler DurdenWed, 05/20/2020

The 12 year exile of the formerly-insolvent GSEs, Fannie and Freddie, from private markets following their nationalization by the government in 2008 is almost over. There is only the small question of some $240 billion in capital they will need, in order to regain control of their own fate.

According to Bloomberg, Fannie Mae and Freddie Mac’s regulator is proposing that the mortgage giants be required to hold a quarter trillion in dollars in capital to guard against losses, “a step that could have an impact on mortgage interest rates and on the Trump administration’s efforts to free the companies from U.S. control.” A rule proposal by the Federal Housing Finance Agency released Wednesday outlines how much capital the GSEs would have to retain against their total assets as fully private companies. Based on their September 2019 asset totals, the companies would have to have a combined total of about $240 billion.

How was this number reached? According to a senior FHFA official, the ultimate goal of the rule is to ensure that the companies are never leveraged more than 25 to 1, or 4%. As of September 2019, that would have meant they needed about $243 billion in capital backing some $6.1 trillion in mostly mortgage assets, according to the FHFA, and as with other financial firms, “Fannie and Freddie would face different requirements depending on market conditions and their books of business, the agency said.”

Curiously, if Fannie and Freddie had been subject to the proposed requirement before the 2008 financial crisis, neither company would have been at risk of going under, the senior official told Bloomberg, and that makes sense: the current plan only accounts for a max 4% drop in values of mortgages held by the GSEs (a number which will likely prove overly optimistic); back during the financial crisis, however, the impairments on the US housing sector were far greater since most Americans were using real estate as the bubble assets. This time around, the real estate euphoria is far less (although it is unclear if that means the loss potential is also lower) as most Americans have lost their passion for levered home flipping, and instead appear to be giving the Fed-backstopped stock market a go instead.

“We must chart a course for the Enterprises toward a sound capital footing so they can help all Americans in times of stress,” FHFA Director Mark Calabriasaid in a statement. “More capital means a stronger foundation on which to weather crises. The time to act is now.”

The proposal is the latest sign of progress toward Calabria’s goal of freeing Fannie and Freddie from nearly 12 years in federal conservatorship. Private shareholders, including hedge funds and other investment firms, could make billions of dollars when the companies are released, and the public stock offerings would likely be among the largest ever.


During the 2008 financial crisis, Fannie and Freddie received more than $187 billion in taxpayer money after they were seized by regulators. They have since returned more than that in dividends to the U.S. Treasury in fulfilling the terms of their bailout agreements, a return that was only made possible by the Fed’s injection of trillions in liquidity in the broader market and the issuance of a record amount of debt which nobody seems to be concerned about.

Understandably, the companies maintained thin levels of capital while under U.S. control. In 2012, the government amended the bailout terms in a way that effectively eliminated their capital buffers. The terms were changed again last year to let the companies keep as much as $45 billion in earnings combined. As of March, Fannie’s net worth was about $13.9 billion while Freddie’s was $9.5 billion.

So what does the current proposal mean for the GSEs return to the private sector?

Well, according to FHFA officials, it could take years and more than one public offering for Fannie and Freddie to reach the capital levels they’d need to function outside of conservatorship. The capital levels and investors’ return expectations would affect the fees Fannie and Freddie charge to back mortgages and, by extension, the rates charged to borrowers. Spoiler alert: mortgage rates are not going to go down if a government backstop is removed.

The public will have 60 days to comment on the proposed rule after it’s published in the Federal Register, which itself could take a month. A senior FHFA official said the agency hopes to finalize the rule by the end of the year.

In any case, hopes for a quick return to normal have likely been dashed: Calabria said at an online Mortgage Bankers Association event on Tuesday that the coronavirus pandemic had delayed the FHFA’s timeline to capitalize Fannie and Freddie by three to four months, but that it could take even longer if the economy worsens.

The senior FHFA official said the agency still expects Fannie and Freddie to begin raising capital from the public markets sometime next year. He said it could take years for them to reach the capital goal.

Meanwhile, as Bloomberg notes, with the Trump administration moving forward on releasing Fannie and Freddie, it might be running low on time. While Calabria’s term runs for about four more years, he might run into difficulty if Trump fails to win re-election and a Democratic administration doesn’t want to release the companies.

A different senior FHFA official said the agency is operating with the expectation that Calabria will have the remainder of his term to either release the companies from conservatorship or at least cement his plans. He said that Fannie and Freddie could be released before reaching the capital minimums under some sort of consent order, but that no decisions surrounding that had been made.

Of course, if the coronavirus pandemic leads to a longer adverse impact on the economy, and the recession is here to stay, investor hopes that Fannie and Freddie will return to capital markets at some point in the foreseeable future will be promptly squashed.

Latest Salary Analysis Shows Home Affordability Tightening Again

Plenty Of Upside  HSH MARKET COMMENTARY

May 15, 2020 — Given the calamitous and unprecedented decline in economic activity and the still-spreading misery that the coronavirus pandemic has brought, it’s easy and even expected to be pessimistic about the situation. Certainly, that’s the case, and while few people will agree that a glass is half-full or half-empty, one thing we should be able to agree upon is that given our current station, there remains plenty of economic upside. 

What’s not yet clear is if we are currently seeing the worst of the downside. To be sure, the available economic data are backward-looking by their nature, and reflect only what was, not what is or what may come. March’s data was bad; April’s far worse, but with some places re-opening some components of some local economies, May’s at least holds the promise of improvement.

The Federal Reserve has opened a wide-ranging bag of supports, slashed rates to the bone and pledged whatever additional or expanded supports it can conjure up as they might be needed or appropriate. Although some gamblers in federal funds futures markets have placed bets that the Fed will ultimately need to follow the lead of other central banks and move policy rates to below zero, that remains an unlikely scenario. At an economic discussion this week, Fed Chair Powell noted that “The [FOMC] committee’s view on negative rates really has not changed. This is not something we’re looking at.” He also went on to note that this wasn’t solely his view, but rather that the unanimous view among all members is that negative rates are not an attractive policy option. As was the case the last time short-term rates were near the “zero bound”, the Fed would instead use forward guidance about the likely path for future monetary policy and rely on asset purchases to help keep markets liquid and rates low. 

The central bank head did have a rather cautious statement regarding the outlook for the economy, too. “The path ahead is both highly uncertain and subject to significant downside risks,” he said, and while recovery will come at some point, “the recovery may take some time to gather momentum, and the passage of time can turn liquidity problems into solvency problems. Additional fiscal support could be costly, but worth it if it helps avoid long-term economic damage and leaves us with a stronger recovery.” Such a strident appeal for additional fiscal response from the Congress is both unusual and underscores the dire nature of the current situation. 

For their part, the government has already kicked trillions of dollars in new spending and support to try to offset the economic carnage. Whether those dollars are applied properly or efficiently is always a matter of discussion, as is whether or not they will distort the path to recovery, as things like the expanded and increased unemployment benefits may deter some from returning to work even as jobs again become available. Still, the Congress did act with unprecedented speed, and discussions for up to another $3 trillion in spending are happening now, but have been subject to less unanimity and more partisan politics than the last few rounds of spending have. As such, it’s not easy to tell what (if any) new stimulus will come, or when, or where. 

The fact remains, though, that additional measures will likely be required even if the data does start to show signs of improvement. The hole the economy will be climbing out is so deep that we might see double-digit percentage gains in some metrics for an extended period and still not return to where we were as recently as February. Employment comes immediately to mind; this week, another 2.981 million unfortunate souls filed for unemployment benefits for the first time, bringing the 8-week total since pandemic-led shutdowns began to a staggering 36.5 million. Even though initial claims have been trending downward from the unprecedented 6.867 million in the end of March, the current level is still many multiples higher than all records that existed prior to February. Aside from the sheer number of folks who have applied — and the now 22.37 million who have been receiving ongoing support (a number that does not include this week’s new entrants), what’s sobering about this is that we are now at a point where the economy would need to create 1 million jobs each month for the next three years just to get us back to employment levels of just a few months ago. That said, many of these jobs did not truly disappear; a considerable amount of folks will likely eventually be re-employed when things begin to open up more fully… but how many and how fast is very unclear. Bars, restaurants and stores allowed to operate at even 50% of capacity may or may not see consumers rush back in, and even then, employers are likely to keep staffing levels lean for a fair while until it’s clear that demand is again durable. That is no sure thing at this point. 

Even with funds flowing from the government in a variety of ways, those dollars may not be able to be deployed in the most economically supportive manner. Consider retail sales for April, which sported a 16.4% monthly decline, a figure almost double the previous monthly record — which was -8.3% in March. With shops, stores and places to go largely closed, spending cratered, with only on segment of retail sales showing an increase; nonstore retailers (internet sales) posted an 8.4% spike for the month. March’s then-record decline at least showed spending surges for food and beverages and sales at general merchandisers in addition to internet, but that “stock up to shelter at home” spike has now faded. As we already know, personal savings rates bounced higher in March (latest data) as folks found it hard to spend money anywhere beyond basics, and with some households banking stimulus funds they received. Finding ways to spread those dollars around is a matter of urgency for both the economy and to help get the millions of closed businesses up and running again. 

Industrial production also wasn’t happening much in April. After a 4.5% decline in output in March, an additional 11.2% decline was recorded for April. Manufacturing led the way down, sporting a 13.7% decline, but mining output was also hurt by low oil price and more and contracted by 6.1% for the month, a third consecutive monthly decline, while utility output fared the best of the bunch with just a 0.9% fall for the month. With nothing to do, the percentage of industrial production floors in active use fell to 64.9%, the lowest recorded value in a series which dates to 1967. Even the “Great Recession” saw greater usage at its worst point. 

But perhaps the picture is worsening less for manufacturing now that we’re moving further into May. One such reference suggest as much. The Empire State Manufacturing Index from the Federal Reserve Bank of New York staged a rebound of sorts this month, rising from a value of -78.2 to -48.5, which is an improvement, if still the lowest reading ever if April is excluded. Measures of new orders rose a little from the depths, adding 23.9 points to make it to -42.4, while employment nearly stopped bleeding with a 49.2-point leap back up to just -6.1 for the month. This is by no means even an encouraging report; still, “less bad” is about the best we can hope for at the moment;

Given current trends, it is unlikely that the Fed will not need to worry about inflation for a good long while. Prices of goods coming into the United States posted a 2.6% decline in April, adding to a 2.4% decline in March, and placing costs of imports 6.8% below a year-ago level. That said, we’re not likely to be exporting any inflation anytime soon, either; the aggregate value of exports slumped by 3.3% in April, have now been falling for three months in a row, and are some 7% below last year at this time. Price declines are also being tallied at levels both upstream of and at the consumer level, too; the Producer Price Index for April declined by 1.3%, a decline far greater than was expected, and is declining now at a one percent annual rate. Excluding the most unpredictable inputs (such as energy costs) left a lesser fall of just 0.4%, and core PPI for the last year is just barely positive at 0.1 percent. 

Consumer goods costs are on the wane, too. The Consumer Price Index dropped by 0.8% for April after March’s 0.7% plummet. It was the biggest decline in about 12 years. However, as shoppers would know, the balance was uneven; energy costs dropped by 10.1% for the month, while food costs leapt by 1.5%. The “core” CPI which omits these components still managed to fall by 0.4% for the month. Headline CPI is rising now at just a 0.4% clip; in January, that was a warm 2.5% pace. Core CPI is still warm-ish, but at an annual 1.4% rate (and diminishing) it’s a full percentage point less than just two months ago. These figures are also subject to greater revision than usual, as the Bureau of Labor Statistics price collection processes were impacted by pandemic-related business shutdowns.

It would be incorrect to characterize consumer moods as improved, but they did manage a slight bounce upward in the preliminary reading of Consumer Sentiment from the University of Michigan Survey of Consumers. Any move in the right direction is noteworthy, even if the 1.9 point increase in sentiment only moved the needle to 73.7 for mid-May. The gain barely makes a dent in the 29.2 point loss from February to April, but it’s a start. As folks have come to perhaps better understand their current situations, the assessment of current conditions rose by 8.7 points to 83.0, while those tracking the outlook for the period ahead darkened, falling 3.4 points to 67.7 in the initial review. With shutdowns starting to ease but still no signs of a vaccine or even much by the way of treatment yet available the outlook for the months ahead can’t be much better than cautious at this point as there are legitimate concerns that outbreaks of COVID-19 will recur that could require new shutdowns and create more economic damage.

Applications for mortgages edged 0.3% higher in the week ending May 8, according to the Mortgage Bankers Association. We admit a little bit of surprise at the mix of applications and the trends they both are exhibiting. Take refinancing, for example; despite mortgage rates barely above record lows, applications for refinances declined by 3.3%, continuing a four-week slide. Usually, near-record low rates are enough to see homeowners looking to lower monthly payments and more, but it may be that the combination of millions of homeowners in forbearance plans and millions more who may still be paying mortgages as planned but whose household may not have the income needed to qualify for a new loan is curtailing activity. Of course, it’s also true that current rates are not all that much lower than we’ve seen recently — even rates as high as 4 percent were last seen nearly a year ago — so there may not be all that much pent-up demand of older, higher-rate mortgages to be expressed at current levels.

Conversely, mortgage applications to buy homes have been on the rise, with a 0.6% increase for the week of May 8 a fourth consecutive increase. While it is the traditional spring homebuying season, this season is most nontraditional, what with super-thin inventories of homes to buy that often must per purchased in nearly remote transactions. Still, that motivated buyers and sellers are finding each other does bode well for a return to more normal markets. Such “green shoots” of activity are encouraging even as normalcy may be a ways in to the future yet. 

Low mortgage rates will continue to incent borrowers to try to buy homes, and refinance activity will no doubt improve should rates start trending downward. Fed Chair Powell’s assessment of the current and potentially future state of the economy and a growing sense among investors that V and W-shaped recoveries may be replaced with a “swoosh” pattern saw underlying interest rates mostly ease as the week progressed, leaving a fair opportunity for a new decline in mortgage rates for next week. Nothing major, mind you, but we think we might set a new low (or will be very close) for the conforming 30-year FRM as reported by Freddie Mac come next Thursday morning. Won’t take much; we are only five basis point above that mark at the moment. 

(Bloomberg) — Mortgage rates are at record lows, but borrowers hoping to take advantage are running into the toughest loan-approval standards in years.

Mortgage Lenders Tighten Screws on U.S. Credit in Echo of 2008

Over the past month, lenders have put in place higher credit-score and down payment requirements, and in some cases stopped issuing certain types of loans altogether, in effect shutting down a large swath of the mortgage market.

The triggers, industry executives say, include lenders becoming risk-averse during the coronavirus crisis, knock-on effects of Congress allowing millions of borrowers to delay their monthly payments, and policies implemented amid the pandemic by mortgage giants Fannie Mae and Freddie Mac. The impact has been dramatic, with one model showing mortgage credit availability has plunged by more than 25% since the U.S. outbreak of the virus.

The tightened lending could add another headwind for the nation’s besieged economy by dampening home sales just as some states lift stay-at-home orders and the spring months herald the traditional buying season. Already, mortgage refinances are coming in at a much slower pace than analysts would expect, considering the rock-bottom borrowing rates.

In March, riskier borrowers “could get a mortgage but just pay a higher price than other people,” said Michael Neal, a senior research associate at the Urban Institute Housing Finance Policy Center. “Now, some people are just not going to get mortgages.”

JPMorgan Chase & Co. tightened its standards last month, requiring borrowers to have minimum credit scores of 700 and to make down payments of 20% of the home price on most mortgages, including refinances if the bank didn’t already manage the loan.

Wells Fargo & Co. increased its minimum credit score to 680 for government loans that it buys from smaller lenders before aggregating them into mortgage bonds.

The banks’ revised standards are far above the typical minimum score of 580 and down payment of 3.5% that borrowers need to qualify for home-buying programs supported by the federal government.

Wells Fargo is no longer letting borrowers refinance their mortgages while cashing out home equity, and both Wells and JPMorgan have suspended new home-equity lines of credit. Truist Financial Corp. has suspended some cash-out refinances for jumbo loans with high balances because of economic conditions, a spokesman said.

Refinance Hesitancy

There are signs that banks are even trying to limit regular refinances. Wells Fargo on Thursday quoted a refinance rate of 4% for a 30-year fixed-rate mortgage, more than half a percentage point higher than it quoted for the same loan if used to buy a home.

A Wells Fargo spokesman said the company believes its rates are within the range of what they see from other lenders. He said the company suspended home-equity lines of credit in light of uncertainty surrounding the economic recovery.

A JPMorgan spokeswoman said the bank’s changes are temporary and due to the unclear economic outlook.

Refinances surged in early March as homeowners utilized low rates to reduce their monthly payments. But refinance rate locks, a forward-looking measure of refinance activity, had plunged 80% from their peak by mid-April, according to Black Knight Inc., a mortgage information service. The company said that even the steep increase in unemployment in March and April couldn’t explain why refinance activity fell so dramatically.

Fannie-Freddie Policies

Industry executives say the tighter underwriting is partly in response to policies put in place by Fannie and Freddie that make it expensive or risky to make certain kinds of mortgages. For instance, Fannie and Freddie said last month they would buy mortgages where the borrower had already entered forbearance. But the mortgage-finance companies excluded cash-out refinances. Mortgage Bankers Association Chief Economist Michael Fratantoni said that prompted many lenders to limit issuance of those products.

Fannie, Freddie and government agencies such as the Federal Housing Administration set standards for the mortgages they’re willing to back. For example, the FHA will insure loans where the borrower has a credit score of as low as 580 with a 3.5% down payment.

However, mortgage lenders sometimes set their own, stricter standards, even if they intend to sell the loans to Fannie or Freddie or have them insured by the FHA. Fannie and Freddie, which have been under the U.S. government’s control since the 2008 financial crisis, buy mortgages from lenders and package them into trillions of dollars of bonds with guarantees that protect investors against the risk of borrowers defaulting.

The Endless Fight Over Fannie and Freddie Has a New Twist

Mortgage credit availability has fallen 26% since the end of February, the Mortgage Bankers Association said in a Thursday statement, citing an index of lending standards. Most of the pain has been for loans not supported by the government. Still, mortgages backstopped by Fannie, Freddie and federal agencies in April did have the toughest credit terms that such loans have had in more than five years.

Servicers’ Peril

Many lenders appear to have put restrictions in place in response to the $2.2 trillion stimulus bill that lawmakers passed in March. Under the new law, lenders must let borrowers with government-guaranteed mortgages delay as much as a year’s worth of payments if they were impacted by coronavirus.

Even though they eventually get reimbursed, mortgage servicers are required to advance the missed payments to bond investors. That makes lenders less eager to offer loans to borrowers who they think will need forbearance, such as consumers with low credit scores and those who can only afford minimal down payments.

Cheap Mortgages Thwarted by $5 Billion in Margin Calls

The MBA’s Fratantoni said the credit crunch has been exacerbated by the reticence of federal regulators to establish a liquidity facility that would help servicers advance payments to bondholders. While Fratantoni said large servicers may not go under, they’re still protecting themselves by tightening mortgage requirements.

“I can’t imagine any lender wanting to be aggressive at all in this environment,” said Moody’s Analytics chief economist Mark Zandi. “It’s how far deep into the bunker are you.”