Mortgage Rates Poised For A Sharp Drop

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Short Covering Setup

  1. Belief in the Trump economy is extremely high.
  2. Treasury Shorts keep piling on even as yields decline.
  3. Those short from 3-4 weeks ago are already underwater.
  4. A very explosive short-covering setup is in play. All it takes is one very bad economic report and yields will plunge.

Treasury Bears Beware: Explosive Short-Covering Rally Coming Up

Treasury Specs Are So Short, It Is Now A 4 Sigma Event

Ongoing Lock/Float Considerations

  • Rates had been trending higher since hitting all-time lows in early July, and exploded higher following the presidential election
  • Some investors are increasingly worried/convinced that the decades-long trend toward lower rates has been permanently reversed, but such a conclusion would require YEARS to truly confirm
  • With the incoming administration’s policies driving a large portion of upward rate momentum, mortgage rates will be hard-pressed to return to pre-election levels until well after Trump takes office.  Rates can move for other reasons, but it would take something big and unexpected for rates to get back to pre-election levels. 
     
  • We’d need to see a sustained push back toward lower rates (something that lasts more than 3 days) before anything less than a cautious, lock-biased approach makes sense for all but the most risk-tolerant borrowers.  The beginning of 2017 may be bringing such a push, but there’s no telling how long it will last.

Excerpt from Mortgage News Daily

From One Scam to Another: How Banks in Spain Intend to “Compensate” 1.4 Million Fleeced Homeowners

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Spain’s biggest banks, it seems, will never learn — not even when the highest court of the land, the European Court of Justice (ECJ), rules against their dodgy practices.

The ECJ ruled just before Christmas that Spain’s major banks would have to refund all the billions of euros they had surreptitiously overcharged borrowers as a result of the so-called “mortgage floor-clauses” that were unleashed across the whole home mortgage sector in 2009 [A Nightmare Before Christmas for Spanish Banks].

These floor clauses set a minimum interest rate, typically of between 3% and 4.5%, for variable-rate mortgages, which are a very common mortgage in Spain, even if the Euribor dropped far below that figure. In other words, the mortgages were only really variable in one direction: upwards! While this is not illegal, most banks failed to properly inform their customers that the mortgage contract included such a clause.

The ECJ’s ruling was an emphatic victory for the almost 1.4 million borrowers who had been fleeced out of thousands of euros, many of whom have spent years trying to recoup the funds through Spain’s creaking legal system. Yet even now, the banks, many of which are struggling against a backdrop of negative interest rates and tightening margins, seem loath to part with the cash.

The president of Spain’s sixth biggest bank, Josep Oliu, today called the ruling against the bank’s floor clauses an “attack against the banks,” likening claimants to “roguish swindlers.” His bank, Sabadell, has been accused of pressuring its mortgage customers to sign a “pact of silence,” by which the customers, knowingly or not, pledge never to speak publicly about the conditions of their mortgage — not even to their lawyers — and in return the bank removes the floor clause from the mortgage, without reimbursing a single cent of what it owes.

Even today, with the law firmly on the borrowers’ side, “poisoned offers” continue to proliferate, warns consumer association Facua-Consumidores en Acción.

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“It was entirely predictable that the same entities that had shafted consumers out of millions with their abusive mortgage contracts would try to do the same despite the fact that the European Court of Justice has ruled that they must reimburse absolutely all the money they have overcharged customers,” said Facua’s spokesperson, Rubén Sánchez.

Some banks are pressuring customers to sign documents seemingly designed to strip them of their rights to take the banks to court while reimbursing just part of the money they’re owed.

As usual, the banks have the Rajoy government firmly on their side. At first his coalition government considered passing a law that would have forced all the banks to reimburse all the money they had overcharged customers, as the ECJ had ruled. Unsurprisingly, such an approach was firmly opposed by the banking sector and was duly shelved.

The government then came up with a much more bank-friendly offer that included a voluntary, non-binding arrangement, which all big banks tend to love. However, the proposal was deemed too lenient by the coalition government’s “socialist” faction, which fears being seen by voters as coming down too softly on the banking sector, especially at a time when social-democratic parties are fading into irrelevance all over Europe.

In the latest offering, which could be enacted by Royal Decree as early as Saturday, the banks are not obligated to reimburse affected customers, but merely to enter into bilateral negotiation with them. The two sides will have a maximum period of three months (well over double the initial 36 days tabled) to reach a mutually satisfactory arrangement.

If, after that time, the customer is still unsatisfied, he or she can launch legal action against the bank. However, if in the end the amount awarded is less or equal to the amount initially offered by the bank, it is the customer that must cover the legal costs.

The problem with such an approach is that it treats the banks and their customers as equals, says Fernando Herrero, the secretary general of Adicae, an association representing financial end users. It’s a ludicrous proposition given the vast gulf in financial knowledge and expertise of the two sides, not the mention the fact that for the banks “negotiating means flagrantly deceiving the consumer, signing away his or her rights.”

The new proposed legislation has two main goals: to prevent the collapse of a major, cash-strapped bank (such as, say, this one) from the pressure of having to reimburse all its customers all at once, while also reducing the strain on Spain’s already over-burdened judicial system. According to Herrera, the government hasn’t even bothered to contact consumers or their representatives; “it only liaises with the banks.”

And it tells: the government’s new proposal will allow banks to repay customers not only in cash, which will be the most heavily taxed option available, but also by any other “equivalent means.” That apparently includes offering customers “financial products” (subordinated bank bonds, anyone?) of the equivalent value of the money owed, or the possibility of reducing the interest or principal payable on the mortgage, which will have a much less destructive short-term impact on the bank’s balance sheets.

Banks will also be able to offer to swap a customer’s variable mortgage (with floor clause) for a fixed rate one. The consumer association OCU has advised consumers to reject these types of offers, many of which include clauses preventing signatories from undertaking future legal action against the bank in question.

Whatever happens in the coming months, one thing is certain: regardless of what EU law may hold, the banks will do whatever they can to ensure that they refund as little as possible of the billions of euros they surreptitiously overcharged their customers. And they will have the government’s consent throughout.

Source: WolfStreet.com

How Rising Rates Are Hurting America’s Largest Mortgage Lender, In One Chart

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While one can argue that both JPM and Bank of America posted results that were ok, with some aspects doing better than expected offset by weakness elsewhere, even if moments ago JPM stock just hit an all time high, there was little to redeem the report from the scandal-ridden largest mortgage lender in America, Wells Fargo. Not only did the company miss revenues significantly, reported $21.6bn in Q4 top line, nearly $1 bn below the $22.4bn consensus, but it had to reach deep into its non-GAAP adjustment bag to convert the $0.96 EPS miss into a $1.03 EPS beat (net of “accounting effect”), but the details of its core business were, well, deplorable, which perhaps was to be expected following the recent drop in new credit card and bank account growth, following last year’s fake account scandal.

Incidentally, Wells Fargo reported its latest customer metrics alongside 4Q earnings, and in December the bank said that the retail public continued to shy away, as new checking accounts plunged 40%Y/Y while new credit card applications tumbled 43%.  On the other hand, deposit balances debit card transactions continued growing which probably is not a good sign, if only for the Keynesians in the administration: it means that consumers are saving.

But back to Wells results, which revealed that in Q4, the bank’s ROE, one of Buffett’s favorite indicators, fell to 10.94%. which was the lowest quarterly level posted in years according to the WSJ. “While the return had been grinding lower for some time, largely due to the declining interest-rate environment, the fourth quarter also marked the first, full reporting period since the bank’s sales-tactics scandal erupted in September.”

More troubling however, was that in Q4, Wells overall profit fell to $5.27 billion, or 96 cents a share (excluding the various non-GAAP addbacks, down from $5.58 billion, or EPS of $1 in Q4 2015.

So back to Wells Fargo’s retail banking business. Here the bank reported that while credit cards outstanding rose 5% compared to $33.14 billion last quarter and jumped 8% from $34.04 billion in the year-earlier period, new accounts tumbled 52% to 319,000 from 667,000 last quarter and fell 47% from 597,355 in the year-earlier period, once again this is a reflection of the bank’s ongoing legal scandals.

But it was the bank’s bread and butter, mortgage lending, that was the biggest alarm because as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, and after hitting multi-year highs in the third quarter when mortgage rates were likewise hugging multi-year lows, in Q4 Wells’ mortgage applications plunged by $25bn from the prior quarter to $75bn, while the mortgage origination pipeline plunged by nearly half to just $30 billion, and just shy of all time lows recorded in late 2013 and 2014. Moynihan’s explanation was redundant: “the pipeline is weaker because of fewer refi loans.” This should not come as a surprise: just one month ago, Freddie Mac warned that as mortgage rates continue to surge, “expect mortgage activity to be significantly subdued in 2017.”

Wells Fargo did not even have to wait that long, and as shown in the chart below, the biggest US mortgage lender is already suffering.

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Expect even greater declines in the coming quarters should rates continue to rise.

By ZeroHedge

Rent: Santa Monica Tops New York & Silicon Valley

Now referred to as “Silicon Beach,” Santa Monica’s rent rates for a one-bedroom apartment are approaching $5,000 per month.

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According to the Apartment Guide, the average monthly rent for a one-bedroom in Santa Monica is the most expensive in the nation, at $4,799.20. Comparable rents in the local area are $3,922.67 in Venice; $3,780 in Playa Vista; and $3,320.67 in Marina del Rey.

New York is now the second-most expensive market, with an average one-bedroom apartment costing $4,562.72 per month. San Francisco, once the highest cost market, has fallen to an average $3,880.44 per month. New tech companies, including Snap, Inc., are drawing wealthy young professionals to the area.

Breitbart News has chronicled how apartment rental prices in New York City and Silicon Valley have fallenn about 8 percent, due to a glut of luxury unit construction. But the effective rent rates are down substantially more, because developers are giving multiple month rent concessions “to get heads in beds as quickly as possible,” according to Alexander Goldfarb, a San Francisco analyst with Sandler O’Neill + Partners.

In San Francisco’s trendy South of Market neighborhood, referred to as SoMa, four new high-rise apartment buildings are also offering super high-end amenities that include rooftop decks, state-of-the-art gyms and bike rooms. But despite free rent and nicer digs, none of the four buildings that opened in the last 18 months has achieved the 90 percent occupancy rate that developers need to flip their short-term high-interest rate development loans into low-rate long-term “take-out” financing.

Rent.com and the Apartmentguide.com websites predict that high rental prices should stay strong due to L.A.s’ median home price rising 348.1 percent in the last 30 years, from $116,061 to $520,000. The price jump was an even higher 349.3 percent in Orange County, where the price jumped from $143,210 to $643,483.

 

But according to mortgage banker Bruce Lawrence, the “term” period for construction loans is usually limited to 36 months, and the cost of that type of financing is at least twice the interest rate of 30-year “take-out financing.” Although the default rate for long-term apartment loans has been a tiny .01 percent, he believes that has been due to a “chronic lack of apartment supply,” which supply is beginning to overwhelm.

In the quarter ending December 31, 2016, Lawrence observed that a record 50,000 new apartment units in the U.S. were rented by tenants, or about six times the number in the year-earlier period. But new apartments completed and renting during the quarter hit 88,000, the highest number since the 1980s.

Looking forward, Lawrence believes that at least 378,000 new apartment units will be completed and start renting in 2017. With construction financing in place, he expects there will be no slowdown in building. Lawrence projects that by mid-year 2017, the U.S. will have a national glut of 100,000 new apartments, and in two years that number could be over 300,000. At that point, Lawrence sees rent “getting whacked.”

Bruce Lawrence comments that Santa Monica is a special case for high rents, because the city adopted rent control three decades ago. But with no limit on the rents for new units, California’s state bird is now the “construction crane.”

by Chriss W. Street | Breitbart

Commercial Property Market Faces Uncertainty Ahead

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2015 was a spectacular year for the commercial real estate market, and 2016 was a solid year. 2017, however, is likely to be a bit of wildcard, analysts say.  

Despite a recent rise in interest rates and the uncertainty surrounding the new regime in Washington, market watchers are forecasting a good year for the market, with stable prices and lots of properties changing hands.

Still, it also could go the other way.

“If interest rates go up much more than they have, transaction volume might come down some more,” said Jim Costello, senior vice president with Real Capital Analytics (RCA). “If sellers aren’t forced to sell, they could just sit on the property for awhile until things look more favorable to them.”  

Deal volume in 2016 dropped significantly compared to 2015 for properties valued over $2.5 million. Through November, the 2016 year-to-date transaction volume stood at $424.2 billion, which was down 10 percent compared to same 11-month period in 2015, RCA reported.

RCA’s numbers for the full-year in 2016 were not yet available, but it would take a huge month in December for 2016’s deal volume to match the 2015 levels. Transaction volume was trending down at the end of the year. In November, asset sales totaled $33.9 billion, which was down 6 percent compared to November 2015, RCA reported.  

Sales in 2016 were still strong compared to previous years since the recovery. Year-to-date through November, the overall transaction volume in 2016 was 12 percent and 35 percent above the 2014 and 2015 levels, respectively.

2016 saw fewer large mega-deals involving multiple properties compared with 2015, but single-asset sales volume remained solid. “If anything, 2015 was almost an aberration,” Costello said. He was optimistic that sales volumes this year would run ahead of the 2016 pace. He noted that, outside a few pockets of the country, the commercial real estate market hasn’t generally seen a building boom that could flood the market with new space and weaken demand for pre-existing buildings.

The new year brings uncertainty, however. Costello said the higher interest rates could eventually lower property values, causing a standoff between buyers and sellers in 2017. Higher interest rates tend to lower commercial asset prices by driving up capitalization rates. Cap rates in all classes have been at historic lows, which have propelled the market forward in recent years.

Costello also said the policies of President-elect Donald Trump also are not fully known, but will ultimately have some impact on the market.

On the campaign trail, Trump proposed a huge infrastructure spending plan, which could lead to a significant rise in interest rates. However, Trump’s pro-growth tax policies also could spur more activity in the market, Costello said.

“The initial reaction of the market was that, well, President-elect Trump was talking about all these potentially inflationary policies, so we better be careful,” Costello said. “Will that come through? It remains to be seen. I am not sure that [House Speaker] Paul Ryan is going to be happy spending lots of money in a [New Deal-era] WPA-style jobs program for infrastructure. That was the thing that was thrown out there that was making the market spooked.”

Ken Riggs, president of Situs RERC, said that the market ended 2016 in a stable position, with prices perfectly matching the values. He said the performance of each property is highly dependent on its asset class and location, and varies widely. He doesn’t expect an overall market correction next year, although investors are growing more cautious with each passing year. 

“There will be continued high interest for commercial real estate,” Riggs told Scotsman Guide News. “Investors will just have to be very selective, not only about the property types, but also where they invest within the capital stack.”

By Victor Whitman | Scotsman Guide

 

Refinance Window Closing Fast: Recent Applications Plunge 22 Percent

Even after adjusting for the holidays, Mortgage Refinance Activity plunged a steep 22%.

The Mortgage Bankers Association returned from its holiday hiatus today, issuing its first update on mortgage applications’ activity since that for the week ended December 16. The results thus include data for the last two weeks and an adjustment to account for the Christmas holiday.

The Market Composite Index, a measure of application volume, for the week ended December 30 was down 12 percent on a seasonally adjusted basis compared to the December 9 summary. Before the adjustment, the drop in application activity was 48 percent.

The Refinance Index decreased 22 percent from two weeks earlier and the seasonally adjusted Purchase Index declined by 2 percent. The unadjusted Purchase Index was 41 percent lower than the two-week old reading and lost 1 percent when compared to the same week in 2015.

Purchase Applications vs. 30-Year Rates:

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Its difficult to say at what point consumers thrown in the towel on new home purchases as a number of factors are in play.

Refinance Window Closing Fast:

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Refis show a clear pattern. Only those whose interest rate is above the red dotted line is likely to refi. Given closing costs, it’s only profitable to refi when rates are substantially above the red line.

Bear in mind this data is for a slow holiday period. Nonetheless, refi applications behave as expected.

Three rate hikes in 2017? I don’t think so.

By Mike “Mish” Shedlock


Mortgage Application Activity Wraps Up 2016 on a Down Note

Residential loan application activity continued its post-election slump, declining for the sixth time in the eight weeks, according to the Mortgage Bankers Association’s survey for the week ending Dec. 30. The results included adjustments to account for the Christmas holiday.

The Market Composite Index, a measure of mortgage loan application volume, decreased 12% on a seasonally adjusted basis from two weeks earlier, the last time the MBA conducted its Weekly Application Survey. On an unadjusted basis, the index decreased 48% compared with two weeks ago. The refinance index decreased 22% from two weeks ago.

The seasonally adjusted purchase index decreased 2% from two weeks earlier, while the unadjusted purchase index decreased 41% compared with two weeks ago and was 1% lower than the same week one year ago.

The refinance share of mortgage activity increased to 52.2% of total applications from 51.8% over the previous seven-day period.

Interest rate comparisons are made with the period ended Dec. 23. The adjustable-rate mortgage share of activity decreased to 5.4%, while the Federal Housing Administration share increased to 11.6% from 10.7% the week prior.

The VA share decreased to 12.3% from 12.4% and the USDA share increased to 1.1% from 1% the week prior.

The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.39% from 4.45%. For 30-year fixed-rate mortgages with jumbo loan balances (greater than $417,000), the average contract rate decreased to 4.37% from 4.41%.

The average contract interest rate for 30-year fixed-rate mortgages backed by the FHA remained unchanged at 4.22%, while for 15-year fixed-rate mortgages backed by the FHA, the average decreased to 3.64% from 3.7%.

The average contract interest rate for 5/1 ARMs decreased to 3.28% from 3.41%.

By Glenn McCullom | National Mortgage News

Glut in Luxury Apartments: Boom Set to Fizzle in 2017

Real estate is has been one of the economic bright spots in the US for several years.

But rising interest rates and a glut of luxury apartments portends a slowdown in 2017.

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The Wall Street Journal reports Luxury Apartment Boom Looks Set to Fizzle in 2017

Landlords of upscale properties across the U.S. are bracing for rough conditions in 2017 that will likely force them to slash rents and offer deep concessions as a glut of supply brings a seven-year luxury-apartment boom to an end.

The turnaround follows a more-than-26% jump in U.S. apartment rents since early 2010, far outstripping inflation and income growth. But in 2016, rents rose a modest 3.8%, a significant drop from the recent high of 5.6% year-to-year growth in the third quarter of 2015, according to a report to be released Tuesday by MPF Research, a division of RealPage Inc. that tracks the U.S. apartment market.

Developers in New York are already offering up to three months of free rent on some projects. In Los Angeles, some landlords are offering six months of free parking, and some in Houston are waiving security deposits. Meanwhile, MPF Vice President Jay Parsons said he expects little or no rent growth in urban rental markets this year.

“This will be a very challenged leasing environment almost everywhere,” Mr. Parsons said.

More than 50,000 new units were rented by tenants in the fourth quarter in the U.S., six times the number in the year-earlier period. But that demand was overwhelmed by the 88,000 new units that were completed in the quarter, the most since the mid-1980s, according to MPF.

That gap looks set to widen in 2017. More than 378,000 new apartments are expected to be completed across the country this year, almost 35% more than the 20-year average, according to real estate tracker Axiometrics Inc.

The New York area alone will be flooded with nearly 30,000 new apartments in 2017, double the historical average, according to Axiometrics. Roughly 85% are luxury units.

Dallas is expected to see nearly 25,000 new apartments delivered, compared with the long-term average of roughly 9,000 new apartments a year, according to Axiometrics. Los Angeles is expected to get roughly 13,000 new apartments, nearly double the historical average.

Nashville could see some 8,500 new apartments, more than triple the typical 2,400 apartments completed annually.

John Tirrill, managing partner at SWH Partners, an Atlanta developer that has several projects under way in the Nashville area, is leasing a new five-story property with a fitness center, yoga and barre studio and swimming pool. He has lowered rents from $2.25 a square foot to $2.10 a square foot—a $150 discount on a 1,000-square-foot apartment—and is offering one to two months of free rent.

Banks are pulling back on lending, which could help slow the pace of construction starting in late 2018.

“We’re just being really selective,” said John Cannon, a senior vice president at Pinnacle Financial Partners, a Nashville-based financial-services company that has increased its focus on multifamily lending in the last couple of years. “Multifamily has a large number of units on the ground that they really have to demonstrate some absorption.”

2017 Real Estate Synopsis

  1. New home sales and existing home sales are already slowing because of mortgage rates.
  2. A huge supply of apartments will come online in 2017.
  3. Banks are tightening lending standards for apartments.
  4. Mall space is hugely overbuilt.

by Mike “Mish” Shedlock