The rigging of interest rates by hapless central banks continues to do its job in distorting the market. In addition to boosting both bonds and stocks, it also has homeowners drawing on cash out refinancings at the quickest clip since the last global financial crisis.
In a world where over $16 trillion in debt now trades with negative yields…
… the US remains one of the outliers where nominal yields are still positive (if not for too long). Still, with rates in the US remaining caught in a tight range, and as bank funding conditions increasingly normalize, it means that yields on mortgages continue to shrink, and sure enough according to the latest Freddie Mac data, the average yield for a 30-year, fixed loan dropped to 2.81%, down from 2.87% last week, which was not only the lowest in almost 50 years of data-keeping, but also the 10th record low this year. The previous all time low – 2.86% – held for about a month.
The availability of record cheap loans – which is unlikely to change with the Fed signaling it will hold its benchmark rate near zero through at least 2023 – has fueled a home buying spree which while bolstering the pandemic economy, has resulted in yet another bubble (for more details see Visualizing The U.S. Housing Frenzy In 34 Charts)
Meanwhile, the surging demand for the scarce supply of properties on the market is pushing up prices, putting home ownership out of reach for many Americans, and leading to even greater wealth inequality which, as a reminder, is how we got here in the first place. Adding insult to injury, lenders have tightened credit standards to near record levels, presenting another potential obstacle for would-be buyers.
“It’s important to remember that not all people are able to take advantage of low rates, given the effects of the pandemic,” Sam Khater, Freddie Mac’s chief economist, said in the statement.
Best ‘K’ shaped economic recovery ever…
(Christopher Whalen) Watching the talking heads pondering the next move in US interest rates, we are often amazed at the domestic perspective that dominates these discussions. Just as the Federal Open Market Committee never speaks about foreign anything when discussing interest rate policy, so too most observers largely ignore the offshore markets. Yen, dollar and euro LIBOR spreads are shown below.
Zoltan Pozsar, the influential money-market strategist at Credit Suisse (NYSE:CS), warns that the short-end of the US money markets are likely to be awash in cash over the end-of-year liquidity hump. Unlike the unpleasantness in 2018, for example, we may see instead a surfeit of lending as banks scramble for yield in a wasteland bereft of duration. Would that it were so.
The Pozsar view does not exactly fit well with the rising rate, end of the world scenario popular in some corners of the financial media ghetto. The 10-year note is certainly rising and with it the 30-year mortgage rate. Indeed, Pozsar reminds CS clients that yen/$ swaps are now yielding well-above Treasury yields for seven years. Hmm.
We believe short-term rates will remain low in the US, even as offshore demand for dollars soars. If the 10-year Treasury backs up much further, then we’d look for the FOMC to act on some calls by governors to buy longer duration securities. That is, a very direct and large scale increase in QE and particularly on the long end of the curve.
We expect that Chairman Powell knows that underneath the comfortable blanket of low interest rates lie some truly appalling credit problems ahead for the global economy, the US banking sector and also for private debt and equity investors. We expect the low interest rate environment to drive volumes in corporate debt and residential mortgages, even as other sectors like ABS languish and commercial real estate gets well and truly crushed.
“The pandemic is putting unprecedented stress on CMBS markets that even the Fed is having difficulty offsetting,” writes Ralph Delguidice at Pavilion Global Markets.
“Limited reserves are being exhausted even as rent collection and occupancy levels remain serious issues… Bondholders expecting cash are getting keys instead, and in our view, ratings downgrades and significant losses are now only a formality.”
We noted several months ago that the resolution of the credit collapse in commercial mortgage backed securities or CMBS will be very different from when a bank owns the mortgage. As we discussed with one banker this week over breakfast in Midtown Manhattan, holding the mortgage and even some equity in a prime property allows for time to recover value.
With CMBS, the “AAA” tranche is first in line, thus the seniors have no incentive to make nice with the subordinate investors. The deals will liquidate, the property will be sold and the junior bond investors will take 100% losses. But as Delguidice and others note with increasing frequency, this time around the “AAA” investors are getting hit too. More to come.
Meanwhile, over in the relative calm of the agency collateral markets, large, yield hungry money center banks led by Wells Fargo & Co are deploying liquidity to buy billions of dollars in delinquent government loans out of MBS pools.
The bank buys the asset and gives the investor par, with a smidgen of interest. Market now has more cash, but less cash than it had before buying the mortgage bond in the first place. Why? Because it likely took a loss on the transaction. Buy at 109. Prepayment at par six months later. You get the idea.
In fact, if you look at the Treasury yield curve, rates are basically lying flat along the bottom of the chart out to 48 months. Why? Because this nice fellow named Fed Chairman Jerome Powell, along with many other buyers, are gobbling up the available supply of risk free assets inside of five years.
Spreads on everything from junk bonds to agency mortgage passthroughs are contracting, suggesting that the private bid for paper remains strong. When you look at the fact that implied valuations for new production MBS and mortgage servicing rights (MSR) have been rising since July, this even though prepayment rates are astronomical, certainly implies that there is a great deal of cash sitting on the sidelines.
Remember that the price of an MSR is not just about cash flows and prepayments, but it’s also about default rates and the relationship with the consumer. We described in our last missive for The IRA Premium Service (“The Bear Case for Mortgage Lenders”), that a rising rate environment could generate catastrophic losses for residential lenders, particularly in the government loan market. We write:
“For both investors and risk professionals operating in the secondary mortgage market, the next several years contain both great opportunities and considerable risks. We look for the top lenders and servicers to survive the coming winter of default resolution that must inevitably follow a period of low interest rates by the FOMC. The result of the inevitable consolidation will be fewer, larger IMBs.”
Don’t get distracted by the rising rate song from the Street. We don’t look for short or medium term interest rates to rise in the near term or frankly for years. Agency 1.5% coupons “did not find a place in the latest Fed’s purchase schedule. It is possible (they) are included in the next update,” writes Nomura this week. This seems a pretty direct prediction of lower yields. But as one veteran mortgage operator cautions The IRA: “Not just yet.”
We don’t think that the Fed is going to take its foot off the short end of the curve anytime soon, in part because the system simply cannot withstand a sustained period of rising rates. In fact, we note that our friends at SitusAMC are adding 1.5% MBS coupons to forward rate models this month. But that does not necessarily mean that mortgage rates will fall any time soon.
We hear that the Fed of New York has bought a few 1.5s in recent days, but supply is sorely lacking. You see, the mortgage industry is not quite ready to print many new 1.5% MBS coupons and will not do so anytime soon. As the chart above suggests, mortgage rates are in fact rising. Why? Is not the FOMC in charge of the U.S mortgage market?
No, the market rules. Today you can make more money selling a new 1-4 family residential mortgage into a 2.5% coupon from Fannie, Freddie or Ginnie Mae at 105. You book a five point gain on sale and are therefore a hero. And a year from now, after the liquidity does in fact migrate down to 1.5s c/o the beneficence of the FOMC, you can again be a hero.
Specifically, you call up that same borrower and refinance the mortgage into a brand new 1.5% Fannie, Freddie or Ginnie Mae at 105. You take another five point gain on sale. Right? And who paid for this blessed optionality? The Bank of Japan, Peoples Bank of China, and PIMCO, among many other fortunate global investors.
These multinational holders of US mortgage bonds may not like negative returns on risk free American assets, but that’s life in the big city. And thankfully for Chairman Powell, it’s not his problem. Many years ago, a friend in the mortgage market said of loan repurchase demands from Fannie Mae: “What do you want from me?”
(Calculated Risk) Note: Both Black Knight and the MBA (Mortgage Bankers Association) are putting out weekly estimates of mortgages in forbearance.
This data is as of October 6th.
From Forbearances See: Largest Single Week Decline Yet
After a slight uptick last week, active forbearance volumes plummeted over the past seven days, falling by 649K from the week prior. An 18% reduction in the number of active forbearances, this represents the largest single-week decline since the beginning of the pandemic and its related fallout in the U.S. housing market.
New data from Black Knight’s McDash Flash Forbearance Tracker shows that as the first wave of forbearances from April are hitting the end of their initial six-month term, the national forbearance rate has decreased to 5.6%. This figure is down from 6.8% last week, with active forbearances falling below 3 million for the first time since mid-April.
This decline noticeably outpaced the 435K weekly reduction we saw when the first wave of cases hit the three-month point back in July.
As of October 6, 2.97 million homeowners remain in COVID-19-related forbearance plans, representing $614 billion in unpaid principal.
… Though the market continues to adjust to historic and unprecedented conditions, these are clear signs of long-term improvement. We hope to see a continuation of the promising trend of forbearance reduction in the coming weeks, as an additional 800K forbearance plans are slated to reach the end of their initial six-month term in the next 30 days.
Readers may recall last week ZeroHedge outlined the dam of pent up mortgage delinquencies continued to crack, with the share of delinquent Federal Housing Administration’s loans hitting a record high in the second quarter.
With millions of Americans out of work due to the virus-induced recession, their personal income has become overly reliant on Trump stimulus checks, as we’ve outlined, a quarter of all personal income now comes from the government.
A fiscal cliff hit the economy on August 01, when the program to distribute stimulus checks to tens of millions of broke Americans ran out of funds. Even though President Trump signed an executive order to fund additional rounds of checks, only one state, as of August 21, has paid out new jobless benefits and paused evictions as stimulus talks in Washington have failed to materialize into a deal.
The number of homes with mortgage payments past due by 90 days or more rose by 376,000 in July to a total of 2.25 million. Serious mortgage delinquencies have jumped by 1.8 million since July 2019, a decade high, not seen since the last financial crisis.
Black Knight’s July 2020 Month-End Mortgage Performance Statistics:
Black Knight said, “foreclosure activity continues to remain muted due to widespread moratoriums; though starts rose for the month, overall activity remains near record lows.”
Cracks in the dam of pent up mortgage delinquencies are becoming larger as the presidential election nears. Still, millions of folks are unable to service mortgages, remain protected from foreclosure by the federal forbearance program, in which borrowers with pandemic-related hardships can delay payments for as much as a year without penalty. What happens when the program finally ends, and all the payments that were deferred come due could result in housing market weakness.
The prospect of a tidal wave of foreclosures could be ahead as the mortgage industry and government’s policies were merely short-term measures to push a housing crisis off until after the election.
If homeowners still can’t find jobs as the labor market recovery falters, then their ability to service future mortgage becomes impossible. At the same time, deep economic scarring is being realized, resulting in the shape of the economic recovery transforming from a “V” to a “Nike Swoosh.”
Even with part of the housing market booming, that is primarily due to folks ditching metro areas for suburbia and ultra-low mortgage rates pulling demand forward in such a massive way that today’s boom will lead to much lower activity in the future.
Think about it, millions of folks still can’t pay their mortgage, and many of them still can’t find jobs. But, of course, none of that matters as President Trump distracts the sheep and points to how well the Nasdaq is doing.
Freddie Mac reported that the Single-Family serious delinquency rate in June was 2.48%, up from 0.81% in May. Freddie’s rate is up from 0.63% in June 2019.
This is the highest serious delinquency rate since October 2013.
Freddie’s serious delinquency rate peaked in February 2010 at 4.20%.
These are mortgage loans that are “three monthly payments or more past due or in foreclosure”.
With COVID-19, this rate will increase significantly again in July (it takes time since these are mortgages three months or more past due).
Mortgages in forbearance are being counted as delinquent in this monthly report, but they will not be reported to the credit bureaus.
This is very different from the increase in delinquencies following the housing bubble. Lending standards have been fairly solid over the last decade, and most of these homeowners have equity in their homes – and they will be able to restructure their loans once they are employed.
Note: Fannie Mae will report for June soon.
(Reuters) – Wells Fargo & Co (WFC.N) said on Thursday it has hired Flagstar Bank’s Kristy Fercho to run its mortgage division following the retirement of 23-year veteran Michael DeVito from the company.
Fercho will oversee home lending operations of the largest mortgage lender in the United States during a time of uncertainty in the industry. She had run Flagstar’s mortgage business for the past three years.
Wells Fargo has pared back some mortgage offerings and raised requirements for certain kinds of loans during the coronavirus-fueled economic downturn. As of last month, the bank had received forbearance requests for roughly 13% of its mortgage balances, it has said.
Since taking over as chief executive late last year, Charles Scharf has shaken up leadership at the bank and installed a slew of former colleagues in top positions. In the wake of racial tensions across the United States, Scharf has also pledged to diversify the bank’s leadership team.
“She has been an inspiring and vocal leader across the mortgage industry while driving transformational growth at Flagstar,” said Mike Weinbach, new CEO of Consumer Lending at Wells Fargo, referring to Fercho, who is Black.
DeVito, who ran the mortgage division for two years, will retire later this summer.
Power Woman with Class Interview – Kristy Fercho
- The number of active mortgage forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22.
- Increases happened every day for the past five business days.
- As of Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months.
- This represents 8.8% of all active mortgages, up from 8.7% last week.
After declining for three weeks, the number of borrowers delaying their monthly mortgage payments due to the coronavirus rose sharply once again.
The number of active forbearance plans rose by 79,000 in the past week, erasing roughly half of the improvement seen since the peak of May 22, according to Black Knight, a mortgage data and technology firm. By comparison, the number of borrowers in forbearance plans fell by 57,000 the previous week. Increases happened every day for the past five business days.
As of Tuesday, 4.68 million homeowners were in forbearance plans, allowing them to delay their mortgage payments for at least three months. This represents 8.8% of all active mortgages, up from 8.7% last week. Together, they represent just over $1 trillion in unpaid principal.
The mortgage bailout program, part of the CARES Act, which President Donald Trump signed into law in March, allows borrowers to miss monthly payments for at least three months and potentially up to a year. Those payments can be remitted either in repayment plans, loan modifications, or when the home is sold or the mortgage refinanced.
While some borrowers who initially asked for the mortgage bailouts in March and April ended up making their monthly payments, the vast majority now are not. There were expectations that the mortgage bailout numbers would improve as the economy reopened and job losses slowed. But this surge is a red flag to the market that homeowners are still struggling as coronavirus cases continue to increase in several states.
By loan type, 6.9% of all Fannie Mae and Freddie Mac-backed mortgages and 12.5% of all FHA/VA loans are currently in forbearance plans. Another 9.6% of loans in private label securities or banks’ portfolios are also in forbearance.
The volumes rose across all types of loans but were sharpest for FHA/VA loans. FHA offers low down payment loans to borrowers with lower credit scores. Such loans are popular among first-time home buyers. The number of FHA/VA borrowers in forbearance plans increased by 42,000 last week, while government-sponsored enterprise and non-agency loan forbearances increased by 25,000 and 12,000, respectively.
At today’s level, mortgage servicers may need to advance up to $3.5 billion per month to holders of government-backed mortgage securities on Covid-19-related forbearances. That is in addition to up to $1.4 billion in tax and insurance payments they must make on behalf of borrowers.
Why it’s impossible to stop SARS-CoV-2 and what can be done about it …
If mortgage demand is an indicator, buyers are coming back to the housing market far faster than anticipated, despite coronavirus shutdowns and job losses.
(CNBC) Mortgage applications to purchase a home rose 6% last week from the previous week, according to the Mortgage Bankers Association’s seasonally adjusted index. Purchase volume was just 1.5% lower than a year ago, a rather stunning recovery from just six weeks ago, when purchase volume was down 35% annually.
“Applications for home purchases continue to recover from April’s sizable drop and have now increased for five consecutive weeks,” said Joel Kan, an MBA economist. “Government purchase applications, which include FHA, VA, and USDA loans, are now 5 percent higher than a year ago, which is an encouraging turnaround after the weakness seen over the past two months.”
As states reopen, so are open houses, and buyers have been coming out in force, if masked. Record low mortgage rates, combined with strong pent-up demand from before the pandemic and a new desire to leave urban down towns due to the pandemic, are driving buyers back to the single-family home market. It remains to be seen if this is simply the pent-up demand or a long-term trend.
Buoying buyers, the average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances of up to $510,400 decreased to 3.41% from 3.43%. Points including the origination fee increased to 0.33 from 0.29 for 80 percent loan-to-value ratio loans.
Low rates are not, however, giving current homeowners much incentive to refinance. Those applications fell 6% for the week but were still 160% higher than one year ago, when interest rates were 92 basis points higher. That is the lowest level of refinance activity in over a month.
“The average loan amount for refinances fell to its lowest level since January — potentially a sign that part of the drop was attributable to a retreat in cash-out refinance lending as credit conditions tighten,” said Kan. “We still expect a strong pace of refinancing for the remainder of the year because of low mortgage rates.”
Federal regulators this week changed lending guidelines for Fannie Mae and Freddie Mac, allowing refinances on loans that were or still are in the government’s mortgage bailout, part of the coronavirus relief package. Those loans can be refinanced once borrowers have made at least three regular monthly payments. Given tough economic conditions and rising unemployment, more borrowers may be looking to save money on their monthly payments.
Weaker refinance demand pushed total mortgage application volume down 2.6% for the week.
The refinance share of mortgage activity decreased to 64.3% of total applications from 67% the previous week. The share of adjustable-rate mortgage activity increased to 3.2% of total applications.
(ZeroHedge) Back in March 2017, a bearish trade emerged which quickly gained popularity on Wall Street, and promptly received the moniker “The Next Big Short.”
As we reported at the time, similar to the run-up to the housing debacle, a small number of bearish funds were positioning to profit from a “retail apocalypse” that could spur a wave of defaults. Their target: securities backed not by subprime mortgages, but by loans taken out by beleaguered mall and shopping center operators which had fallen victim to the Amazon juggernaut. And as bad news piled up for anchor chains like Macy’s and J.C. Penney, bearish bets against commercial mortgage-backed securities kept rising.
The trade was simple: shorting malls by going long default risk via CMBX 6 (BBB- or BB) or otherwise shorting the CMBS complex. For those who have not read our previous reports (here, here, here, here, here, here and here) on the second Big Short, here is a brief rundown via the Journal:
each side of the trade is speculating on the direction of an index, called CMBX 6, which tracks the value of 25 commercial-mortgage-backed securities, or CMBS. The index has grabbed investor attention because it has significant exposure to loans made in 2012 to malls that lately have been running into difficulties. Bulls profit when the index rises and shorts make money when it falls.
The various CMBX series are shown in the chart below, with the notorious CMBX 6 most notable for its substantial, 40% exposure to retail properties.
One of the firms that had put on the “Big Short 2” trade back in late 2016 was hedge fund Alder Hill Management – an outfit started by protégés of hedge-fund billionaire David Tepper – which ramped up wagers against the mall bonds. Alder Hill joined other traders which in early 2017 bought a net $985 million contracts that targeted the two riskiest types of CMBS.
“These malls are dying, and we see very limited prospect of a turnaround in performance,” said a January 2017 report from Alder Hill, which began shorting the securities. “We expect 2017 to be a tipping point.”
Alas, Alder Hill was wrong, because while the deluge of retail bankruptcies…
… and mall vacancies accelerated since then, hitting an all time high in 2019…
… not only was 2017 not a tipping point, but the trade failed to generate the kinds of desired mass defaults that the shorters were betting on, while the negative carry associated with the short hurt many of those who were hoping for quick riches.
One of them was investing legend Carl Icahn who as we reported last November, emerged as one of the big fans of the “Big Short 2“, although as even he found out, CMBX was a very painful short as it was not reflecting fundamentals, but merely the overall euphoria sweeping the market and record Fed bubble (very much like most other shorts in the past decade). The resulting loss, as we reported last November, was “tens if not hundreds of millions in losses so far” for the storied corporate raider.
That said, while Carl Icahn was far from shutting down his family office because one particular trade has gone against him, this trade put him on a collision course with two of the largest money managers, including Putnam Investments and AllianceBernstein, which for the past few years had a bullish view on malls and had taken the other side of the Big Short/CMBX trade, the WSJ reports. This face-off, in the words of Dan McNamara a principal at the NY-based MP Securitized Credit Partners, was “the biggest battle in the mortgage bond market today” adding that the showdown is the talk of this corner of the bond market, where more than $10 billion of potential profits are at stake on an obscure index.
However, as they say, good things come to those who wait, and are willing to shoulder big losses as they wait for a massive payoffs, and for the likes of Carl Icahn, McNamara and others who were short the CMBX, payday arrived in mid-March, just as the market collapsed, hammering the CMBX Series BBB-.
And while the broader market has rebounded since then by a whopping 30%, the trade also known as the “Big Short 2” has continued to collapse and today CMBX 6 hit a new lifetime low of just $62.83, down $10 since our last update on this storied trade several weeks ago.
That, in the parlance of our times, is what traders call a “jackpot.”
Why the continued selling? Because it is no longer just retail outlets and malls: as a result of the Covid lock down, and America’s transition to “Work From Home” and “stay away from all crowded places”, the entire commercial real estate sector is on the verge of collapse, as we reported last week in “A Quarter Of All Outstanding CMBS Debt Is On Verge Of Default“
Sure enough, according to a Bloomberg update, a record 167 CMBS 2.0 loans turned newly delinquent in May even though only 25% of loans have reported remits so far, Morgan Stanley analysts said in a research note Wednesday, triple the April total when 68 loans became delinquent. This suggests delinquencies may rise to 5% in May, and those that are late but still within grace period track at 10% for the second month.
Looking at the carnage in the latest remittance data, and explaining the sharp leg lower in the “Big Short 2” index, Morgan Stanley said that several troubled malls that are a part of CMBX 6 are among the loans that were newly delinquent or transferred to special servicers. Among these:
- Crystal Mall in Waterford, Connecticut, is currently due for the April and May 2020 payments. There has been a marked decline in both occupancy and revenue. This loan accounts for nearly 10% of a CMBS deal called UBSBB 2012-C2
- Louis Joliet Mall in Joliet, Illinois, is also referenced in CMBX 6. The mall was originally anchored by Sears, JC Penney, Carson’s, and Macy’s. The loan is also a part of the CMBS deal UBSBB 2012-C2
- A loan for the Poughkeepsie Galleria in upstate New York was recently transferred to special servicing for imminent monetary default at the borrower’s request. The loan has exposure in two 2012 CMBS deals that are referenced by CMBX 6
- Other troubled mall-chain tenants include GNC, Claire’s, Body Works and Footlocker, according to Datex Property Solutions. These all have significant exposure in CMBX 6.
Of course, the record crash in the CMBX 6 BBB has meant that all those shorts who for years suffered the slings and stones of outrageous margin calls but held on to this “big short”, have not only gotten very rich, but are now getting even richer – this is one case where everyone will admit that Carl Icahn adding another zero to his net worth was fully deserved as he did it using his brain and not some crony central bank pumping the rich with newly printed money – it has also means the pain is just starting for all those “superstar” funds on the other side of the trade who were long CMBX over the past few years, collecting pennies and clipping coupons in front of a P&L mauling steamroller.
One of them is mutual fund giant AllianceBernstein, which has suffered massive paper losses on the trade, amid soaring fears that the coronavirus pandemic is the straw on the camel’s back that will finally cripple US shopping malls whose debt is now expected to default en masse, something which the latest remittance data is confirming with every passing week!
According to the FT, more than two dozen funds managed by AllianceBernstein have sold over $4 billion worth of CMBX protection to the likes of Icahn. One among them is AllianceBernstein’s $29 billion American Income Portfolio, which crashed after written $1.9bn of protection on CMBX 6, while some of the group’s smaller funds have even higher concentrations.
The trade reflected AB’s conviction that American malls are “evolving, not dying,” as the firm put it last October, in a paper entitled “The Real Story Behind the CMBX. 6: Debunking the Next ‘Big Short’” (reader can get some cheap laughs courtesy of Brian Philips, AB’s CRE Credit Research Director, at this link).
Hillariously, that paper quietly “disappeared” from AllianceBernstein’s website, but magically reappeared in late March, shortly after the Financial Times asked about it.
“We definitely still like this,” said Gershon Distenfeld, AllianceBernstein’s co-head of fixed income. “You can expect this will be on the potential list of things we might buy [more of].”
Sure, quadruple down, why not: it appears that there are still greater fools who haven’t redeemed their money.
In addition to AllianceBernstein, another listed property fund, run by Canadian asset management group Brookfield, that is exposed to the wrong side of the CMBX trade recently moved to reassure investors about its financial health. “We continue to enjoy the sponsorship of Brookfield Asset Management,” the group said in a statement, adding that its parent company was “in excellent financial condition should we ever require assistance.”
Alas, if the plunge in CMBX continues, that won’t be the case for long.
Meanwhile, as stunned funds try to make sense of epic portfolio losses, the denials got even louder: execs at AllianceBernstein told FT the paper losses on their CMBX 6 positions reflected outflows of capital from high-yielding assets that investors see as risky. They added that the trade outperformed last year. Well yes, it outperformed last year… but maybe check where it is trading now.
Even if some borrowers ultimately default, CDS owners are not likely to be owed any cash for several years, said Brian Phillips, a senior vice-president at AllianceBernstein.
He believes any liabilities under the insurance will ultimately be smaller than the annual coupon payment the funds receive. “We’re going to continue to get a coupon from Carl Icahn or whoever — I don’t know who’s on the other side,” Phillips added. “And they’re going to keep [paying] that coupon in for many years.”
What can one say here but lol: Brian, buddy, no idea what alternative universe you are living in, but in the world called reality, it’s a second great depression for commercial real estate which due to the coronavirus is facing an outright apocalypse, and not only are malls going to be swept in mass defaults soon, but your fund will likely implode even sooner between unprecedented capital losses and massive redemptions… but you keep “clipping those coupons” we’ll see how far that takes you. As for Uncle Carl who absolutely crushed you – and judging by the ongoing collapse in commercial real estate is crushing you with every passing day – since you will be begging him for a job soon, it’s probably a good idea to go easy on the mocking.
Afterthought: with CMBX 6 now done, keep a close eye on CMBX 9. With its outlier exposure to hotels which have quickly emerged as the most impacted sector from the pandemic, this may well be the next big short.
First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.
(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities (CMBS), an early sign of a pandemic-induced real estate crisis.
Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.
Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.
“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”
A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.
Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.
There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.
Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.
Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.
Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.
Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.
“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”
Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.
“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.
But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.
“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”
Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.
Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.
Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.
CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.
“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.
History doesn’t repeat itself, but it often rhymes,” as Mark Twain is often reputed to have said. Before the 2007-2008 GFC, people built real estate portfolios based around renters. We all know what happened there; once consumers got pinched in the GFC, rent payments couldn’t be made, and it rippled down the chain and resulted in landlords foreclosing on properties. Now a similar event is underway, that is, over leveraged Airbnb Superhosts, who own portfolios of rental properties built on debt, are now starting to blow up after the pandemic has left them incomeless for months and unable to service mortgage debt.
Zerohedge described the financial troubles that were ahead for Superhosts in late March after noticing nationwide lock downs led to a crash not just in the tourism and hospitality industries, but also a plunge in Airbnb bookings. It was to our surprise that Airbnb’s management understood many of their Superhosts were over leveraged and insolvent, which forced the company to quickly erect a bailout fund for Superhosts that would cover part of their mortgage payments in April.
The Wall Street Journal has done the groundwork by interviewing Superhosts that are seeing their mini-empires of short-term rental properties built on debt implode as the “magic money” dries up.
Cheryl Dopp,54, has a small portfolio of Airbnb properties with monthly mortgage payments totaling around $22,000. She said the increasing rental income of adding properties to the portfolio would offset the growing debt. When the pandemic struck, she said $10,000 in rental income evaporated overnight.
“I made a bargain with the devil,” she said while referring to her financial misery of being overleveraged and incomeless.
Dopp said when the pandemic lock downs began, “I thought, ‘Holy God. We’re about to lose everything.'”
Market-research firm AirDNA LLC said $1.5 billion in bookings have vanished since mid-March. Airbnb gave all hosts a refund, along with Superhosts, a bailout (in Airbnb terms they called it a “grant”).
“Hosts should’ve always been prepared for this income to go away,” said Gina Marotta, a principal at Argentia Group Inc., which does credit analysis on real estate loans. “Instead, they built an expensive lifestyle feeding off of it.”
We noted that last month, “Of the four million Airbnb hosts across the world, 10% are considered “Superhosts,” and many have taken out mortgages to accumulate properties to build rental portfolios.”
Airbnb spokesman Nick Papas said the decline in bookings and slump in the tourism and travel industry is “temporary: Travel will bounce back and Airbnb hosts—the vast majority of whom have just one listing—will continue to welcome guests and generate income.”
Papas’ optimism about a V-shaped recovery has certainly not been echoed in the petroleum and aviation industry. Boeing CEO Dave Calhoun warned on Tuesday that air travel growth might not return to pre-corona levels for years. Fewer people traveling is more bad news for Airbnb hosts that a slump could persist for years, leading to the eventual deleveraging of properties.
AirDNA has determined that a third of Airbnb’s US hosts have one property. Another third have two and 24 properties and get ready for this: a third have more than 24.
Startups such as Sonder Corp. and Lyric Hospitality Inc. manage properties for hosts that have 25+ properties. Many of these companies have furloughed or laid off staff in April.
Jennifer Kelleher-Hazlett of Clawson, Michigan, spent $380,000 on two properties in 2018. She and her husband borrowed $100,000 to furnish each. Rental income would net up to $7,000 per month from Airbnb after mortgage payments, which would supplement her income as a part-time pharmacist and husband’s work in academia.
Before the virus struck, both were expecting to buy more homes – now they can’t make the payments on their Airbnb properties because rental income has collapsed. “We’re either borrowing more or defaulting,” she said.
Here’s another Airbnb horror story via The Journal:
“That sum would provide little relief to hosts such as Jennifer and David Landrum of Atlanta. In 2016, they started a company named Local, renting the 18 apartments they leased and 21 apartments they managed to corporate travelers and film-industry workers. They spent more than $14,000 per apartment to outfit them with rugs, throw pillows, art and chandeliers. They grossed about $1.5 million annually, mostly through Airbnb, Ms. Landrum said.
They spend about $50,000 annually with cleaning services, about $25,000 on an inspector and $30,000 a year on maintenance staff and landscapers, Ms. Landrum said, not to mention spending on furnishings.
When Airbnb began refunding guests March 14, the Landrums had nearly $40,000 in cancellations, she said. The couple has been able to pay only a portion of April rent on the 18 apartments they lease and can’t fulfill their obligations to pay three months’ rent unless bookings resume. They have reduced pay to cleaning staff and others. Adding to the stress, Georgia banned short-term rentals through April.
“It’s scary,” said Ms. Landrum, who said she has discounted some units three times since mid-March. The Landrums have negotiated to get some leniency from apartment owners on their leases. If not, Ms. Landrum said, they would have to sell their house.”
To make matters worse, and this is exactly what we warned about last month, Airbnb Superhosts are now panic selling properties:
Greg Hague, who runs a Phoenix real-estate firm, said Airbnb hosts are “desperate to sell properties” in April.
“There’s been a flood of people. You have people coming to us saying, ‘I’m a month or two away from foreclosure. What’s it going to take to get it sold now?'” Hague said.
And here’s what we said in March: “We might have discovered the next big seller that could ruin the real estate market: Airbnb Superhosts that need to get liquid.”
The jumbo loan market is facing a classic liquidity crunch. A perfect storm is brewing as millions of homeowners are seeking forbearances as the economy crashes into depression from coronavirus lock downs, and firms who usually bundle up jumbo loans have immediately exited the market.
Jumbo loans are mortgages for the best credit risk borrowers who want to purchase mansions. In pre-corona times, lenders were falling over each other to welcome jumbo borrowers, but not anymore.
Greg McBride, the Bankrate chief financial analyst, recently said demand has dried up for jumbo mortgages as investors shift to mortgage bonds for government-backed loans where “they’re assured of receiving payments even if large numbers of borrowers are in forbearance.”
“Most mortgages get made by lenders who then sell it to someone else,” McBride said. “If there is no willing buyer, lenders will stop closing loans so as not to be stuck holding the bag.”
Tendayi Kapfidze, the chief economist at LendingTree Inc., said in normal times, jumbo loans were all the rage. Now because these loans “don’t have the government guarantee, a lot of those loans end up on the bank balance sheet.”
According to Optimal Blue, a Texas-based firm that monitors mortgage rates, lenders are charging more for jumbos than conventional mortgages, and this is the first time in seven years. Lenders have also tightened lending standards for wealthy households.
David Adler, an aerospace executive in Irvine, California, told Bloomberg that he thought it would be easy to get a jumbo loan at a rate of 3.7% on his $700,000 home. Even with excellent credit, he was told the rate would be much higher.
“I told the guy at the bank, ‘I’m trying to use logic here,'” Adler said in an interview. “And he said, ‘That’s your problem.'”
The Mortgage Bankers Association said the availability for jumbo loans has plunged by 37% since March, making it harder for the best credit risk borrowers to get jumbos versus all other mortgages.
Before the pandemic, lenders welcomed jumbo borrowers, but now, since the economy crashed and 22 million people have lost their jobs, with the expectation the economic downturn could extend into 2021, the market for jumbos has dried up, hence why rates are surging.
Lenders are pulling out of the jumbo loan market because a correction in real estate could be nearing, and many of the loans aren’t government guaranteed.
Wells Fargo has suspended the purchase of jumbo loans from other lenders, but not “direct-to-consumer originations through their retail mortgage channel,” said Tom Goyda, senior VP of consumer lending communications at Wells Fargo.
“Due to unprecedented market conditions, Wells Fargo Home Lending is temporarily suspending the purchase of non-conforming mortgage loans from correspondent sellers, effective immediately and until business conditions stabilize,” Goyda said in an email statement to Bloomberg. “This difficult business decision reflects efforts to prioritize how we serve customers and maintain prudent balance sheet discipline.”
Truist Financial Corp. and Flagstar Bancorp Inc. are other banks that have “pulled back by limiting refinancings, suspending their purchases of new loans made by correspondent lenders or pulling short-term credit lines from smaller mortgage companies they fund that make jumbo loans,” said Bloomberg.
Freedom Mortgage Corp. CEO Stanley Middleman said much of the pullback is from investors who would typically buy these loans no longer want them because of the challenging economic conditions.
“Whether the assets are good or not good is irrelevant because there’s no liquidity to buy them,” Middleman said.
Damon Germanides, a broker at Beverly Hills-based Insignia Mortgage, said closing loans is getting much more difficult than ever before. He said a wealthy client that has good credit and owns a business in the area might not be able to qualify for a mortgage.
“A month ago, he was a no-brainer,” Germanides said. “Now he’s 50-50.”
Last week, JPMorgan scrambled to raise borrowing standards on new home loans as the “moves to mitigate lending risk stemming from the novel coronavirus disruption.”
JPM also reported that its loan loss provision surged fivefold to over $8.2 billion for the first quarter, the biggest quarterly increase since the financial crisis.
The bank also said it would stop accepting new home equity lines of credit, or HELOC, applications.
And as a reminder, we noted earlier this month the residential mortgage market is already free falling after borrower requests to delay mortgage payments exploded by 1,896% in the second half of March. Moody’s Analytics predicted as many as 30% of Americans with home loans – about 15 million households – could stop paying if lock downs continued through summer.
The largest US bank is quietly shutting down ahead of a historic default shit storm that is about to hit the U.S.
Earlier this week, JPMorgan reported that its loan loss provision surged five fold to over $8.2 billion for the first quarter, the biggest quarterly increase since the financial crisis (even if its total reserve for losses is still a fraction of what it was during the 2008-2009 crash).
And while Jamie Dimon was mum on how much more losses the bank may be forced to take in coming quarters to offset the coming default surge (something we discussed in Houston: The Banks Have A Huge Problem), it hinted that things are about to get much worse when it first halted all non-Paycheck Protection Program based loan issuance for the foreseeable future (i.e., all non-government guaranteed loans) because as we said “the only reason why JPMorgan would “temporarily suspend” all non-government backstopped loans such as PPP, is if the bank expects a default tsunami to hit coupled with a full-blown depression that wipes out the value of any and all assets pledged to collateralize the loans.”
Then, just a few days later, the bank also said it would raise its mortgage standards, stating that customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value, a dramatic tightening since the typical minimum requirement for a conventional mortgage is a 620 FICO score and as little as 5% down. Reuters echoed our gloomy take, stating that “the change highlights how banks are quickly shifting gears to respond to the darkening U.S. economic outlook and stress in the housing market, after measures to contain the virus put 16 million people out of work and plunged the country into recession.”
In short, JPM appears to be quietly exiting the origination of all interest income generating revenue streams over fears of the coming recession, which prompted us to ask“just how bad will the US depression get over the next few months if JPMorgan has just put up a “closed indefinitely” sign on its window.”
That question was especially apt today, when JPM exited yet another loan product, when it announced that it has stopped accepting new home equity line of credit, or HELOC, applications. The bank confirmed that this change was made due to the uncertainty in the economy, and didn’t give an end date to the pause according to the Motley Fool.
Like in the other previous exits, the move doesn’t affect customers who already have HELOCs with the bank. They’ll still be able to withdraw funds on their existing HELOCs as they wish.
With HELOCs generally seen as riskier for banks than purchase or refinance mortgages as they represent a second lien on the home, it was only a matter of time before the bank – which had already exited new first-lien loan issuance would but up a “closed” sign on this particular product.
In short, JPMorgan wants no part of the shit storm that is about to be unleashed on middle America, and especially the housing sector which is about to be hammered like never before.
While the U.S. housing market was on a steady footing earlier this year, all hell broke loose as a result of the economic paralysis and deepening depression resulting from the Coronavirus pandemic. And with would-be home buyers unable to view properties or close purchases due to social distancing measures, the health crisis now threatens to derail the sector, especially as banks are going to make it next to impossible to get a new mortgage.
To be sure, as we reported last week the residential mortgage market is already free falling after borrower requests to delay mortgage payments exploded by 1,896% in the second half of March. And unfortunately, this is just the beginning: last week, Moody’s Analytics predicted that as much as 30% of homeowners – about 15 million households – could stop paying their mortgages if the U.S. economy remains closed through the summer or beyond. Bloomberg called this the “biggest wave of delinquencies in history.”
This would result in a housing market depression and would lead to tens of billions in losses for mortgage servicers and originators such as JPMorgan.
(Bloomberg) — Tension is rising in the messy fight over commercial rent payments.
With stores shuttered, struggling retailers are skipping rent and asking for concessions, while landlords are demanding payment and having their own tricky conversations with lenders.
There are no easy answers as officials ponder how to safely get the economy back open. So far this month, some mall owners and other retail landlords collected as little as 15% of what they were owed, according to one estimate. And it’s expected to get worse, with more than $20 billion in rent payments coming due in May.
“It’s all over the map what’s happening out there,” said Tom Mullaney, a managing director in restructuring at Jones Lang LaSalle Inc. “More and more defaults are coming in every single day.”
Companies across the U.S. — from small mom-and-pop operations to giant corporations — have missed April payments or sent out relief requests citing store closures because of the pandemic.
Landlords have been pitching rent deferment, saying tenants can make reduced payments now as long as they pay the balance at some point. Some businesses are pushing back on that option and asking for rent cuts even after stores are open again.
U.S. retail landlords typically collect more than $20 billion in rent each month, according to data from CoStar Group Inc. So far, April rent collection has ranged from 15% to 30% for landlords with higher concentrations of shuttered businesses, according to an estimate from brokerage firm Marcus & Millichap.
Landlords, who are facing their own debt defaults, are getting frustrated. Some are complaining that large corporations are using the crisis to skip out on rent. Others say they’re not responsible for bailing out tenants and that the federal government or insurance companies should cover the costs instead.
“The landlords are triaging the battlefield,” said Gene Spiegelman, vice chairman at Ripco Real Estate Corp. “The super powerful and strong are not going to get any help and the ones that’ll die anyways, landlords will say why would I help them?”
To be sure, some landlords and tenants are working out deals on a case-by-case basis. And some companies are paying rent for their stores. That includes AT&T Inc. and T-Mobile USA Inc. according to people familiar with the matter. J.C. Penney also said it paid for April.
Ross Stores Inc. and fitness chain Solidcore, meanwhile, are among those standing firm on requests for rent abatements and asking for additional concessions. Williams-Sonoma Inc. is another chain that has stopped paying rent, according to people familiar.
Ross has told landlords that after the shutdown ends their rent on some stores should be cut until sales rebound. Solidcore hasn’t agreed to rent deferral and said it likely won’t be able to pay the same rent as it was before pandemic.
“We’re not going to be bullied by the landlords during this time,” said Anne Mahlum, the fitness company’s founder and chief executive officer said. “We have some leverage here. What are they going to do, say get out and then have vacancy for months on end?”
Tenants’ refusal to pay will likely backfire, according to Jackson Hsieh, CEO of retail landlord Spirit Realty Capital Inc.
The firm, which owns more than 1,700 properties, has seen requests for rent relief since the crisis started. But several of those tenants ended up paying, according to Hsieh.
One agreed to pay after getting loans from the government’s relief package, while another did so after being asked to provide financial information. A discount retailer and a company in the auto industry paid after Spirit refused to consider their rent deferral requests.
“If a tenant just says I’m not going to pay, fine, I’ll default you, I’m going to go to the courts, and you have 30 days to pay or quit,” Hsieh said. “I don’t want to be negative, but we own the building.”
Many landlords are rushing to work out deals with lenders to stave off their own defaults. Banks and insurance companies are negotiating deals on a case-by-case basis, but borrowers in commercial mortgage-backed securities have fewer options.
About 11% of U.S. CMBS retail property loan borrowers have been late on April payments so far, according to preliminary analysis by data firm Trepp. If that number holds up, $13 billion worth of CMBS loans could miss payments for the month.
“The banks are a little more fluid and often there’s recourse,” said Camille Renshaw, CEO brokerage firm B+E. “But many large properties have CMBS debt and when there’s a crisis, no one is there to pick up the phone to negotiate.”
It’s just not retail stores that are suffering. Office space is a ghost town thanks to the Wuhan (bat) virus outbreak. But with tools like Zoom, Webex, Microsoft Teams, GotoMeeting, Skype, etc., one wonders if the days of massive office building demand is over. Other than for socializing and monitoring employees (as Bill Lumbergh did in “Office Space.”)
(HousingWire) With the housing industry at large raising alarms about mortgage servicers’ desperate need for liquidity as more borrowers are requesting forbearance, the nation’s largest mortgage aggregator is now warning originators that it could force them to buy back loans that go into forbearance.
Late last week, PennyMac, which grew last year into the largest mortgage aggregator in the country, told its correspondent originators that it will not buy any loan that is currently in forbearance.
Beyond that, PennyMac also said that it may force originators to buy back a loan that goes into forbearance within 15 days of PennyMac buying it.
“Any loan in forbearance or for which forbearance has been requested is not eligible for purchase by PennyMac,” the company said in a note to originators. “Additionally, any loan that is in forbearance or for which forbearance has been requested up to 15 days post purchase by PennyMac may result in a repurchase.”
The move by PennyMac is a notable one considering its status as the largest mortgage aggregator in the country last year, according to data from Inside Mortgage Finance.
As an aggregator, PennyMac purchases loans from smaller originators, which then allows those smaller lenders to continue originating.
Per the company’s latest 10-K filing with the Securities and Exchange Commission, PennyMac purchased nearly $50 billion in loans through its correspondent channel last year. Of those, PennyMac asked for a repurchase on just over $12 million in loans.
But that could change as more borrowers are requesting forbearance due to loss of income or employment in the wake of the spread of the coronavirus.
The latest data from the Department of Labor shows that nearly 10 million people have filed for unemployment in the last few weeks, and that number is expected to continue to climb.
The massive surge in unemployment in recent weeks will likely lead to a significant number of forbearance requests, as under the CARES Act, homeowners with federally backed mortgages can request forbearance of up to 12 months.
That’s leading companies like PennyMac to take steps to protect themselves because they don’t want to be on the hook for advancing the principal and interest to investors, as they are required to do when a loan goes into forbearance.
And without clarification from the government on what will happen to servicers as loans go into forbearance, odds are that PennyMac won’t be the only aggregator to make such a move.
“The COVID-19 epidemic has caused unprecedented disruption to the lives and incomes of many current and prospective mortgage borrowers throughout the country,” PennyMac said in its announcement. “In this challenging time, it is important that borrowers whose ability to repay a mortgage loan has been compromised be directed to appropriate borrower assistance programs while new loans be made available for those borrowers who maintain the capacity to make payments.”
The cascading failures that have been set into motion by this “coronavirus shutdown” are going to make the financial crisis of 2008 look like a Sunday picnic. As you will see below, it is being estimated that unemployment in the U.S. is already higher than it was at any point during the last recession. That means that millions of American workers no longer have paychecks coming in and won’t be able to pay their mortgages. On top of that, the CARES Act actually requires all financial institutions to allow borrowers with government-backed mortgages to defer payments for an extended period of time. Of course this is a recipe for disaster for mortgage lenders, and industry insiders are warning that we are literally on the verge of a “collapse” of the mortgage market.
Never before in our history have we seen a jump in unemployment like we just witnessed. If you doubt this, just check out this incredible chart.
Millions upon millions of American workers are now facing a future with virtually no job prospects for the foreseeable future, and former Fed Chair Janet Yellen believes that the unemployment rate in the U.S. is already up to about 13 percent…
Former Federal Reserve Chair Janet Yellen told CNBC on Monday the economy is in the throes of an “absolutely shocking” downturn that is not reflected yet in the current data.
If it were, she said, the unemployment rate probably would be as high as 13% while the overall economic contraction would be about 30%.
If Yellen’s estimate is accurate, that means that unemployment in this country is already significantly worse than it was at any point during the last recession.
And young adults are being hit particularly hard during this downturn…
As measures to slow the pandemic decimate jobs and threaten to plunge the economy into a deep recession, young adults such as Romero are disproportionately affected. An Axios-Harris survey conducted through March 30 showed that 31 percent of respondents ages 18 to 34 had either been laid off or put on temporary leave because of the outbreak, compared with 22 percent of those 35 to 49 and 15 percent of those 50 to 64.
As I have documented repeatedly over the past several years, most Americans were living paycheck to paycheck even during “the good times”, and so now that disaster has struck there will be millions upon millions of people that will not be able to pay their mortgages.
A broad coalition of mortgage and finance industry leaders on Saturday sent a plea to federal regulators, asking for desperately needed cash to keep the mortgage system running, as requests from borrowers for the federal mortgage forbearance program are pouring in at an alarming rate.
The Cares Act mandates that all borrowers with government-backed mortgages—about 62% of all first lien mortgages according to Urban Institute—be allowed to delay at least 90 days of monthly payments and possibly up to a year’s worth.
Needless to say, many in the mortgage industry are absolutely furious with the federal government for putting them into such a precarious position, and one industry insider is warning that we could soon see the “collapse” of the mortgage market…
“Throwing this out there without showing evidence of hardship was an outrageous move, outrageous,” said David Stevens, who headed the Federal Housing Administration during the subprime mortgage crisis and is a former CEO of the Mortgage Bankers Association.
“The administration made a huge mistake bringing moral hazard in and thrust extraordinary risk into the private sector that could collapse the mortgage market.”
Of course a lot of other industries are heading for immense pain as well.
At this point, even JPMorgan Chase CEO Jamie Dimon is admitting that the U.S. economy as a whole is plunging into a “bad recession”…
Jamie Dimon said the U.S. economy is headed for a “bad recession” in the wake of the coronavirus pandemic, but this time around his company is not going to need a bailout. Instead, JPMorgan Chase is ready to lend a hand to struggling consumers and small businesses.
“At a minimum, we assume that it will include a bad recession combined with some kind of financial stress similar to the global financial crisis of 2008,” Dimon, the CEO of JPMorgan Chase, said Monday in his annual letter to shareholders.
And the longer this coronavirus shutdown persists, the worse things will get for our economy.
In fact, economist Stephen Moore is actually predicting that we will be “facing a potential Great Depression scenario” if normal economic activity does not resume in a few weeks…
Sunday on New York AM 970 radio’s “The Cats Round Table,” economist Stephen Moore weighed in on the potential impact of the coronavirus to the United States economy.
Moore warned the nation could be “facing a potential Great Depression scenario” if the United States stays on lock down much past the beginning of May, as well as an additional amount of deaths caused by the raised unemployment rate.
The good news is that the “shelter-in-place” orders all over the globe appear to be “flattening the curve” at least to a certain extent.
The bad news is that we could see another huge explosion of cases and deaths once all of the restrictions are lifted.
And the really bad news is that what we have experienced so far is nothing compared to what is coming.
But in the short-term we should be very thankful that the numbers around the world are starting to level off a bit.
Of course that is only happening because most people are staying home, but having people stay home is absolutely killing the economy.
And if people stay home long enough, a lot of them will no longer be able to pay the mortgages on those homes.
Our leaders are being forced to make choices between saving lives and saving the economy, and those choices are only going to become more painful the longer this crisis persists.
Let us pray that they will have wisdom to make the correct choices, because the stakes are exceedingly high.
No business is immune to the country’s coronavirus shutdown, including the President’s. In fact, it was was reported yesterday that the Trump Organization is actively seeking out concessions from Deutsche Bank, one of its lenders, due to the pandemic.
Representatives from the President’s company reached out to Deutsche Bank late in March and talks between the company and the bank are ongoing, according to Bloomberg.
Or, as one person simply put it on social media: “Two broke organizations restructuring debt”.
Deutsche Bank is said to be having similar talks with other commercial real estate companies in the U.S., as well. The pandemic, and ensuing economic shutdown, has squeezed both borrowers and lenders across the world. Central banks have worked on a plan to try and backstop banks and provide relief to companies, even considering lending to some businesses directly. However, it is going to be tough to paper over every single company that is facing a default.
The request from the Trump organization is noteworthy, since President Trump is arguably the most powerful person in the world and Deutsche Bank has been under scrutiny for years, with many speculating the bank could have solvency issues behind the scenes. The loans, which were taken out by Trump between 2012 and 2015, include a personal guarantee from Trump.
That means that in the case of a default, the lenders would have to collect from a sitting President.
The loans that the bank has provided for the Trump Organization include money for a Florida golf resort, a Washington D.C. hotel and a Chicago skyscraper.
Doral, Trump’s golf resort near Miami, has closed all operations. Trump’s hotel in Washington has shut down its restaurant and its bar. Additionally, a sale of the hotel’s lease has been halted while the commercial real estate market goes up in flames.
Deutsche Bank has been under scrutiny since Trump first took office back in 2016. The bank had previously considered the idea of extending Trump’s maturities to his loans to 2025, after the end of a second potential term, but ultimately decided against entering into any new business with a sitting President.
Unlike in the 2008 financial crisis when a glut of subprime debt, layered with trillions in CDOs and CDO squareds, sent home prices to stratospheric levels before everything crashed scarring an entire generation of home buyers, this time the housing sector is facing a far more conventional problem: the sudden and unpredictable inability of mortgage borrowers to make their scheduled monthly payments as the entire economy grinds to a halt due to the coronavirus pandemic.
And unfortunately this time the crisis will be far worse, because as Bloomberg reports mortgage lenders are preparing for the biggest wave of delinquencies in history. And unless the plan to buy time works – and as we reported earlier there is a distinct possibility the Treasury’s plan to provide much needed liquidity to America’s small businesses may be on the verge of collapse – an even worse crisis may be coming: mass foreclosures and mortgage market mayhem.
Borrowers who lost income from the coronavirus, which is already a skyrocketing number as the 10 million new jobless claims in the past two weeks attests, can ask to skip payments for as many as 180 days at a time on federally backed mortgages, and avoid penalties and a hit to their credit scores. But as Bloomberg notes, it’s not a payment holiday and eventually homeowners they’ll have to make it all up.
According to estimates by Moody’s Analytics chief economist Mark Zandi, as many as 30% of Americans with home loans – about 15 million households – could stop paying if the U.S. economy remains closed through the summer or beyond.
“This is an unprecedented event,” said Susan Wachter, professor of real estate and finance at the Wharton School of the University of Pennsylvania. She also points out another way the current crisis is different from the 2008 GFC: “The great financial crisis happened over a number of years. This is happening in a matter of months – a matter of weeks.”
Meanwhile lenders – like everyone else – are operating in the dark, with no way of predicting the scope or duration of the pandemic or the damage it will wreak on the economy. If the virus recedes soon and the economy roars back to life, then the plan will help borrowers get back on track quickly. But the greater the fallout, the harder and more expensive it will be to stave off repossessions.
“Nobody has any sense of how long this might last,” said Andrew Jakabovics, a former Department of Housing and Urban Development senior policy adviser who is now at Enterprise Community Partners, a nonprofit affordable housing group. “The forbearance program allows everybody to press pause on their current circumstances and take a deep breath. Then we can look at what the world might look like in six or 12 months from now and plan for that.”
But if the economic turmoil is long-lasting, the government will have to find a way to prevent foreclosures – which could mean forgiving some debt, said Tendayi Kapfidze, Chief Economist at LendingTree. And with the government now stuck in “bailout everyone mode”, the risk of allowing foreclosures to spiral is just too great because it would damage financial markets and that could reinfect the economy, he explained.
“I expect policy makers to do whatever they can to hold the line on a financial crisis,” Kapfidze said hinting at just a trace of a conflict of interest as his firm may well be next to fold if its borrowers declare a payment moratorium. “And that means preventing foreclosures by any means necessary.”
“I don’t know how I’m going to pay my mortgage and my condo dues and still be able to feed myself,” Habberstad said. “I just hope that, once things open up again, we who are impacted by Covid-19 are given consideration and sufficient time to bring all payments current without penalty and in a manner that does not bring us even more financial hardship.”
Borrowers must contact their lenders to get help and avoid black marks on their credit reports, according to provisions in the stimulus package passed by Congress last week. Bank of America said it has so far allowed 50,000 mortgage customers to defer payments. That includes loans that are not federally backed, so they aren’t covered by the government’s program.
Meanwhile, Treasury Secretary Steven Mnuchin has convened a task force to deal with the potential liquidity shortfall faced by mortgage servicers, which collect payments and are required to compensate bondholders even if homeowners miss them. The group was supposed to make recommendations by March 30.
“If a large percentage of the servicing book – let’s say 20-30% of clients you take care of – don’t have the ability to make a payment for six months, most servicers will not have the capital needed to cover those payments,” QuickenChief Executive Officer Jay Farner said in an interview. But not Quicken, of course.
Quicken, which serves 1.8 million borrowers, and in 2018 surpassed Wells Fargo as the #1 mortgage lender in the US, has a strong enough balance sheet to serve its borrowers while paying holders of bonds backed by its mortgages, Farner said, although something tells us that in 6-8 weeks his view will change dramatically. Until then, the company plans to almost triple its call center workers by May to field the expected onslaught of borrowers seeking support, he said.
Ironically, as Bloomberg concludes, “if the pandemic has taught us anything, it’s how quickly everything can change. Just weeks ago, mortgage lenders were predicting the biggest spring in years for home sales and mortgage refinances.”
Habberstad, the bar manager, was staffing up for big crowds at the beer garden, which is across from National Park, home of the World Series champions. Then came coronavirus. Now, she’s dependent on her unemployment check of $440 a week.
“Everybody wants to work but we’re being asked not to for the sake of the greater good,” she said.
(Bloomberg) — Chuck Sheldon, a landlord and property manager in Albuquerque, New Mexico, has owned apartments for more than half a century. These days, he can barely keep up with all the moving pieces.
He’s talking with owners of roughly 1,700 units he manages, who are worried what’s going to happen if rent checks stop coming in. He’s talking with tenants, about half of whom he assumes will be delinquent this month because they lost jobs or choose not to pay. And he’s in discussions with banks, trying to figure out how he’ll make mortgage payments on the properties he owns during a rapidly worsening global health crisis.
“That’s the $100,000 question,” said Sheldon, the president of T&C Management. “I’ve never seen something like this.”
It’s rent day in America, with roughly $22 billion in monthly payments on apartments due, according to CoStar. But just how much of it gets paid in the coming days is anybody’s guess.
Some large property owners have already rolled out payment plans and halted evictions as the coronavirus outbreak roils the economy. But many apartments in the U.S. are essentially small businesses that tend to have less financial flexibility and will need help in the coming months.
There are few good choices for the millions of Americans who lost their jobs and have no clear prospects for when they’ll get them back. Eviction moratoriums, unemployment benefits and cash payments from the federal government could help many keep a roof over their heads.
But nearly half of the nation’s 44 million renter households were already stretched financially. Over the next six months, they could need as much as $96 billion in relief, according to a recent analysis by the Urban Institute.
Housing advocates have urged Congress to protect low-income renters and homeowners as deadlines loom. On a conference call Tuesday, the Center for Popular Democracy called for eviction freezes and rent and mortgage payment cancellations. The group stopped short of pushing for a rent strike, an idea other activists have floated.
Sid Lakireddy, a landlord and the president of the California Rental Housing Association, said such efforts are “just plain wrong.” Property owners need to help tenants if they’re able, but renters should not take advantage of the situation, he added.
On a recent visit to an apartment building he co-owns in Berkeley, California, Lakireddy bumped into a tenant who threatened to withhold rent because of a new ban on evictions. He pointed out that the tenant hadn’t lost a job.
“I said, ‘You’re not affected by this economy. You’re on Social Security,’” Lakireddy recalled. “‘Don’t screw with me, man.’”
Not far away, in Oakland, Krista Gulbransen manages a duplex for a small property owner. She recently got a request from a tenant to lower the $3,495 monthly rent on his three-bedroom unit by roughly 40%. The renter makes about $172,000 a year at an established technology company, she said.
“I just didn’t understand,” said Gulbransen. “He’s asking for a rent reduction of about $1,500, saying he doesn’t know where his job is going to be in the next few months.”
Such anecdotes are probably rare, said Maya Brennan, a policy analyst at the Urban Institute.
“There will be a very small sliver of economically privileged renters who will try to use this to get some extra advantage,” she said. “The vast majority of renters know that they need to figure out a way to keep a roof over their heads and are going to be trying to ask only for the level of relief that they truly need.”
Not all the conversations between landlords and tenants are fraught. Hasan Leviathan, 20, lives by himself in a two-bedroom house in Frostburg, Maryland, where he is studying to become a physical therapist. In March, he lost his job at Kay Jewelers. Without that income, his $570 in rent is too burdensome, even with help from his mother, he said.Leviathan was prepared to move home, but his landlord agreed to stretch the April payment over the next six months, and also offered him a minimum wage construction job, which he plans to accept.
“People need help more than ever,” Leviathan said.
Chris Athineos, a Brooklyn landlord who owns nine buildings with about 150 apartments, half of which are rent-stabilized, said he’s sure some of his tenants have lost jobs and plans to work with them, perhaps offering the option of making partial payments.
Some rent checks for April have trickled in, he added. And a handful of tenants who have relocated out of the city called about making payments electronically, he said. It won’t be until the middle of the month that he’ll get a full accounting of how much of the expected rent came in.
Athineos said rent freezes don’t make sense, unless landlords get relief from property taxes. For now, he’s still paying a staff of five maintenance workers — on top of his mortgage, taxes and water and sewer bills.
“It’s kind of wait and see,” he said. “We’re holding our breath.”
Update (1500ET): A top U.S. regulator is exploring whether to throw a lifeline to mortgage servicers stressed by the coronavirus pandemic by tapping a program meant to address natural disasters.
Bloomberg reports that, in order to prepare for an expected wave of missed payments as borrowers deal with the economic fallout from the virus, officials at Ginnie Mae are considering using relief programs most often activated in the wake of hurricanes, floods and other calamities, according to people familiar with the matter.
Mortgage-industry lobbyists unsuccessfully tried to get Congress to include some sort of liquidity facility for servicers in the stimulus bill. Still, many servicers expect the Treasury Department and the Federal Reserve to create a lifeline for servicers out of other money in the $2 trillion package.
Earlier this week, ZeroHedge highlighted the fact that numerous mortgage-related companies were facing considerable – and in some cases existential – crises in their day-to-day operations amid margin calls, illiquidity, and a drying up of demand for non-agency products thanks to The Fed’s intervention.
First, its was AG Mortgage Investment Trust which last Friday said it failed to meet some margin calls and doesn’t expect to be able to meet future margin calls with its current financing. Then it was TPG RE Finance Trust which also hit a liquidity wall and could not repay its lenders. Then, on Monday it was first Invesco, then ED&F Man Capital, and then the mortgage mayhem took down MFA Financial, which stated “due to the turmoil in the financial markets resulting from the global pandemic of the COVID-19 virus, the Company and its subsidiaries have received an unusually high number of margin calls from financing counterparties, and have also experienced higher funding costs in respect of its repurchase agreements.”
And now that mortgage-mayhem has impacted one of the largest U.S. mortgage firms catering to riskier borrowers.
Earlier in the week, we mentioned Angel Oak Mortgage Solutions – which specializes in so-called non-qualified mortgages that can’t be sold to Fannie Mae or Freddie Mac – pointing out that the company would pause all originations of loans for two weeks “due to the constant shifts and the inability to appropriately evaluate credit risk.”
And now Sreeni Prabhu, co-chief executive officer of the firm’s parent, Angel Oak Cos., is slashing 70% of the comany’s workforce (almost 200 of its 275 employees).
“The world has dramatically changed,” Prabhu said.
“We have to slow down and re-underwrite in the new world that we’re in. That’s going to take some time.”
Bloomberg reports that Angel Oak is primarily known for its riskier lending arm, which is one of the leaders in funding non-qualified mortgages. Such loans include those made to borrowers who verify their incomes with bank statements instead of tax returns and others who may have recently filed for bankruptcy or had a previous foreclosure that hurt their credit scores.
Angel Oak Mortgage Solutions funded some $3.3 billion of non-QM loans in 2019, making it one of the biggest lenders in the space. In January, Angel Oak’s mortgage units said they planned to fund more than $8 billion of home loans in 2020, but the total is now likely to be perhaps a quarter of that, Prabhu said.
The coronavirus pandemic has brought non-QM lending to a virtual standstill industrywide. Many non-QM borrowers are self-employed, making them among the hardest hit by a broad slowdown in business activity.
Citadel Servicing Corp., another top non-QM lender, said it was halting originations for 30 days, and Mega Capital Funding Inc. told brokers last week that it was suspending its programs for those mortgages “for the foreseeable future,” according to a notice seen by Bloomberg.
Add this halting of originations to the margin calls of the fund side, and it all sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
Detroit-based mortgage giant Quicken Loans could be facing a cash crunch in coming weeks and possibly need temporary emergency federal assistance if lots of borrowers stop making payments on their home mortgages during the coronavirus pandemic, according to a news report.
The Wall Street Journal identified Quicken Loans as one of the major firms that are bracing for a wave of missed mortgage payments that would require them to quickly come up with billions of dollars that they hadn’t planned on.
This liability would pertain to mortgages that Quicken Loans services. Those are mortgages for which Quicken collects the borrower payments, then passes the payments on to investors who own the mortgages.
Quicken Loans, which survived the Great Recession and real estate market collapse, greatly expanded its mortgage servicing portfolio in the 2010s yet is still better known for originating mortgages.
The company is one of Detroit’s largest employers and the biggest revenue-generator in the business empire of its founder Dan Gilbert.
Mortgage servicers typically must advance the planned mortgage payments to the investors — regardless of whether borrowers make the actual payments that are due. The servicers are also responsible for payments when borrowers are granted a forbearance, or temporary suspension of their mortgage payments.
Even though mortgage servicers are eventually reimbursed for those advanced payments by entities such as Fannie Mae or Freddie Mac that guarantee mortgages, there is a timing mismatch, which can result in a cash crunch.
The Mortgage Bankers Association, an industry group, this week warned the Treasury Department and the Federal Reserve that, under one theoretical scenario, should one-quarter of mortgage borrowers stop making payments or enter forbearance for six months or more, mortgage servicing firms could be on the hook for $75 billion to $100 billion or more.
“In normal and even stressed environments, such as a localized natural disaster, servicers can withstand this liquidity pressure,” Robert Broeksmit, the association’s chief executive, wrote in a letter this week to Treasure Secretary Steven Mnuchin and Federal Reserve Chairman Jerome Powell.
“Widespread, national borrower forbearance at the levels being proposed in response to the COVID-19 outbreak, however, extends well beyond any servicer advance obligations previously envisioned, and is beyond the capacity of the private sector alone to support.”
A Quicken Loans spokesman on Tuesday would not comment on whether the company is facing any potential cash crunch because of mortgage servicing. Quicken was among the first large companies in Detroit to have employees work from home in hopes of slowing the spread of the coronavirus.
“What I can tell you is that Quicken Loans continues to have record-breaking mortgage origination days and weeks,” Aaron Emerson, senior vice president of communications, said in an email. “This is occurring while more than 98% of our team members work from home.”
The mortgage bankers association is recommending that the Federal Reserve set up a temporary lending program for mortgage services to keep them solvent during the coronavirus crisis. The program — known as a “liquidity facility” — should be set up before mortgage servicing companies are in a state of emergency, the association says.
The association’s letter described general conditions for mortgage servicers and didn’t name specific firms.
“Virtually no servicer, regardless of its business model or size, will be able to make sustained advances during a large-scale pandemic when a significant portion of borrowers could cease making their payments for an extended period of time,” Broeksmit wrote.
Last week, government-backed mortgage enterprises Fannie Mae and Freddie Mac announced they would suspend foreclosures and evictions for 60 days for borrowers impacted by the coronavirus crisis. Many of Quicken Loans’ mortgages are guaranteed by Fannie and Freddie and other government-backed enterprises.
Quicken pools the mortgages that it originates and bundles them into securities, which it then sells into the secondary market.
A representative for Pontiac-based United Shore, another major mortgage firm in metro Detroit that also services mortgages, could not be reached for comment.
(ZeroHedge) We warned last week that, despite The Fed’s unlimited largesse, there is trouble brewing in the mortgage markets that has an ugly similarity to what sparked the last crisis in 2007. For a sense of the decoupling, here is the spread between Agency MBS (FNMA) and 10Y TSY yields…
At that time, WSJ’s Greg Zuckerman reported that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counterparties,” AG Mortgage said Monday morning.
Well, they are not alone.
As Bloomberg reports, the $16 trillion U.S. mortgage market – epicenter of the last global financial crisis – is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Fed to intervene. But, as we previously noted, it is too late and too limited (the central bank is focusing on securities consisting of so-called agency home loans and commercial mortgages that were created with help from the federal government).
And the aftershocks of a chaotic rush to offload mortgage bonds are spilling over to regional broker-dealers facing mounting margin calls.
Flagstar Bancorp, one of the nation’s biggest lenders to mortgage providers, said Friday it stopped funding most new home loans without government backing. Other so-called warehouse lenders are tightening terms of financing to mortgage providers, either raising costs or refusing to support certain types of home loans.
One prominent mortgage funder, Angel Oak Mortgage Solutions, said Monday it’s even pausing all loan activity for two weeks. It blamed an “inability to appropriately evaluate credit risk.”
Things escalated over the weekend, according to Bloomberg, when some firms rushed to raise cash by requesting offers for their bonds backed by home loans.
“I ran dealer desks for over 20 years,” said Eric Rosen, who oversaw credit trading at JPMorgan Chase & Co., ticking off the collapse of Long-Term Capital Management, the bursting of the dot-com bubble some 20 years ago, and the 2008 global financial crisis. “And I never recall a BWIC on a weekend.”
And now, commodity-broker ED&F Man Capital Markets has been hit with growing demands to post more capital to cover souring hedges in its mortgage division, according to people with knowledge of the matter.
The requests are coming from central clearinghouses and exchanges, forcing the firm to put up almost $100 million on Friday alone, the people said, asking not to be identified because the information isn’t public.
ED&F, whose hedges exceed $5 billion in net notional value, has been in discussions with the clearinghouses and has met all the margin calls, one of the people said.
As a reminder, ED&F Man Capital is the financial-services division of ED&F Man Group, the 240-year-old agricultural commodities-trading house.
It has about $14 billion in assets and more than $940 million in shareholder equity, according to the firm’s website.
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
“The Fed is going to do whatever it takes to restore normal functioning in the market,” said Karen Dynan, a Harvard University economics professor who formerly worked as a Fed economist and senior official at the Treasury Department.
“But we need to remember that the root of the problem is that financial institutions and investors are desperately seeking cash, so in that sense the Fed’s announcement is not everything that needs to be done.”
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
On the day when The Fed unveils it will be buying agency MBS and CMBS (along with IG corporate debt) in unlimited size “to maintain the smooth functioning of markets,” The Wall Street Journal reports that for at least one major mortgage investor – it could be too late.
For a sense of the scale of collapse in CMBS markets alone, here is CMBX Series 6 BBB- tranche (a popular hedge fund “next big short” trade that is heavily exposed to malls/retail)…
And mortgage markets are becoming notably illiquid (hence The Fed’s unlimited injections)…
And the infamous ‘basis’ trade in ETF land, is extreme…
All of which has left an investment fund focused on mortgage investments struggling to meet margin calls from lenders.
WSJ’s Greg Zuckerman reports that the AG Mortgage Investment Trust, a real-estate investment trust operated by New York hedge fund Angelo, Gordon & Co., is among those feeling pressure, the company said, and, in the latest sign of turmoil in crucial areas of the credit markets, is examining a possible asset sale.
“In recent weeks, due to the turmoil in the financial markets resulting from the global pandemic of the Covid-19 virus, the company and its subsidiaries have received an unusually high number of margin calls from financing counter parties,” AG Mortgage said Monday morning.
The company said it had met “or is in the process of meeting all margin calls received,” though it acknowledged missing the wire deadline for some on Friday.
On Friday evening, the company “notified its financing counter parties that it doesn’t expect to be in a position to fund the anticipated volume of future margin calls under its financing arrangements in the near term,” AG Mortgage said in its statement, which said the company is in discussions with its lenders “with regard to entering into forbearance agreements.”
It’s stock has collapsed…
As have the Preferreds…
Concern about losses in mortgage bonds could feed turmoil in the overall mortgage market that ultimately drives up borrowing costs for consumers looking to buy homes and refinance. Mortgage rates have risen in recent weeks, despite a fall in benchmark rates.
All of which sounds ominously similar to July 2007, when two Bear Stearns hedge funds (Bear Stearns High-Grade Structured Credit Fund and the Bear Stearns High-Grade Structured Credit Enhanced Leveraged Fund) – exposed to mortgage-backed securities and various other leveraged derivatives on same – crashed and burned and started the dominoes falling…
We just witnessed a global collapse in asset prices the likes we haven’t seen before. Not even in 2008 or 2000. All these prior beginnings of bear markets happened over time, relatively slowly at first, then accelerating to the downside.
This collapse here has come from some of the historically most stretched valuations ever setting the stage for the biggest bull trap ever. The coronavirus that no one could have predicted is brutally punishing investors that complacently bought into the multiple expansion story that was sold to them by Wall Street. Technical signals that outlined trouble way in advance were ignored while the Big Short 2 was already calling for a massive explosion in $VIX way before anybody ever heard of corona virus.
Worse, there is zero visibility going forward as nobody knows how to price in collapsing revenues and earnings amid entire countries shutting down virtually all public gatherings and activities. Denmark just shut down all of its borders on Friday, flight cancellations everywhere, the planet is literally shutting down in unprecedented fashion.
Payments on mortgages for families and small businesses will be suspended across the whole of Italy due to the coronavirus outbreak’s worsening impact on the country’s economy, the deputy economy minister said today.
‘Yes, that will be the case, for individuals and households,’ Laura Castelli, Italy’s deputy economy minister, said in an interview with Radio Anch’io today, when asked about the possibility.
Italy’s banking lobby ABI said on Monday lenders representing 90 per cent of total banking assets would offer debt moratoriums to small firms and households grappling with the economic fallout from Italy’s coronavirus outbreak.
The news comes as Italy announced that it had doubled the amount it plans to spend on tackling its coronavirus outbreak to £6.5billion and is raising this year’s deficit goal to 2.5 per cent of national output from the current 2.2 per cent target.
In this recession 2020 video YOU are going to discover 5 reasons (NO ONE IS TALKING ABOUT) the next recession will be far worse than the 2008/2009 recession. The Fed has created so much mal investment, by keeping interest rates artificially low, we now have the EVERYTHING BUBBLE. Stocks are in a bubble, bonds are in a bubble, housing is in a bubble and the 2020 recession (which the data suggests is highly probable) will be the pin that pricks them all.
We’ve had recessions in the US every 6-8 years throughout our history, and we’re currently 10 years into an expansion which makes the US due for a recession in 2020. While not all recessions are devastating, because the debt bubbles are so much bigger now than in 2009, the next recession has the potential to be the worst by far.
The GSEs (Government Sponsored Enterprises) of Fannie Mae and Freddie Mac have seeming forgotten the financial crisis.
Fannie Mae, for example, now has the highest average combined loan-to-value (CLTV) ratio in history. Even higher than during the financial crisis.
How about borrower debt-to-income (DTI) ratios? Fannie Mae’s average DTI is the highest its been since Q4 2008.
At least the average FICO scores remains above kickoff of the last financial crisis.
Household debt surged by more than $600 billion in 2019, marking the biggest annual increase since just before the financial crisis, according to the New York Federal Reserve.
Total household debt balances rose by $601 billion last year, topping $14 trillion for the first time, according to a new report by the Fed branch. The last time the growth was that large was 2007, when household debt rose by just over $1 trillion.
Fed economists said on the Liberty Street Economics blog that the growth was driven mainly by a large increase in mortgage debt balances, which increased $433 billion and was also the largest gain since 2007.
Housing debt now accounts for $9.95 billion of the total balance. Balances for auto loans and credit cards both increased by $57 billion for the year, according to the Fed.
The economists said in the blog post that credit cards have again surpassed student loans as the most common form of initial credit history among young borrowers, following several years after the crisis when student loans were higher.
“The data also show that transitions into delinquency among credit card borrowers have steadily risen since 2016, notably among younger borrowers,” Wilbert Van Der Klaauw, senior vice president at the New York Fed, said in a statement.
However, even as the total amount of household debt has risen, the level of household debt service as a percentage of disposable personal income is at all-time lows going back to 1980.
The new report showed that credit standards tightening for some forms of debt even as the overall balance increased. The median credit score for newly originating borrowers for mortgages and auto loans increased slightly in the fourth quarter, according to the Fed.
Mortgage originations were $752 billion in the fourth quarter, the highest quarterly increase since 2005, but this was mostly due to an increase refinancing activity, the Fed said in a press release.
Fair Isaac, the company behind FICO credit scores, announced the rollout of a new scoring method that will dramatically shift credit scores for millions of Americans in either direction.
In a nutshell – ‘FICO Score 10 Suite’ is supposedly better at identifying potential deadbeats from those who can pay, and claims to be able to reduce defaults by as much as 10% among new credit cards, and nine percent on new auto loans.
Around 40 million people with already ‘high’ scores (above 680) are likely to see their credit rise, while those with scores at or below 600 could see a dramatic drop.
According to Fair Isaac, around 110 million people will see their scores swing an average of 20 points in either direction.
“Consumers that have been managing their credit well … paying bills on time, keeping their balances in check are likely going to see a gain in score,” said Dave Shellenberger, VP of product management scores.
The changes come as consumers are accumulating record levels of debt that has worried some economists but has shown no sign of slowing amid a strong economy. Consumers are putting more on their credit cards and taking out more personal loans. Personal loan balances over $30,000 have jumped 15 percent in the past five years, Experian recently found. –Washington Post
That said, according to WalletHub, delinquency rates are in much better shape than they were a decade ago, with 6% of consumers late on a payment in 2019 vs. around 15% in 2009. Meanwhile, the average FICO score went from bottoming out at 686 in October of 2009 to an average of 706 in September of 2019.
As we noted in October, FICO has been talking about recalculating credit scores for some time now. According to the Wall Street Journal, anyone with “at least several hundred dollars” in their bank account and who don’t overdraw are also likely to see their scores rise. Specifically, anybody with an average balance of $400 in their bank accounts without an overdraft history over the last three months would likely get a boost.
And with non-revolving debt such as student and auto loans recently rising by $14.9 billion, identifying potential deadbeats is more important than ever.
(Bloomberg) — Two of the biggest hurdles constraining the world economy have just been cleared.
Dogged for most of 2019 by trade tensions and political risk that hammered business confidence, the outlook for global growth will enter 2020 on a firmer footing after the U.S. and China struck a partial trade deal and outlook for Brexit cleared somewhat.
“The China trade deal and U.K. election result have taken out a major tail risk overhanging markets and companies,” said Ben Emons, managing director for global macro strategy at Medley Global Advisors in New York. “Business confidence should see a large boost that could see a restart of global investment, inventory rebuild and a resurgence of global trade volume.”
Like financial markets, most economists had factored in some kind of phase-one trade agreement between the world’s largest economies when projecting the world economy would stabilize into 2020 after a recession scare earlier this year.
But at a minimum, the agreement between President Donald Trump and President Xi Jinping means some of the more dire scenarios being contemplated just a few months ago now appear less likely.
Bloomberg Economics estimated in June that the cost of the U.S.-China trade war could reach $1.2 trillion by 2021, with the impact spread across the Asian supply chain. That estimate was based on 25% tariffs on all U.S.-China trade and a 10% drop in stock markets.
Both the VIX and TYVIX are near historic lows.
With this bevy of good news, how long before residential mortgage rates rise??
Of course, forecasting is difficult … like forecasting your second wife.
Foodbank South Australia has been approached by banks wanting to refer their clients to the charity, in the hope it will prevent people from defaulting on mortgage payments.
It comes as a new report has shown mental distress is increasing in older Australians, with nearly half of all homeowners aged 55 to 64 still paying off a mortgage — up from just 14 per cent 30 years ago.
Foodbank South Australia is now working on a new agreement which would enable clients to access its food services directly, with a voucher funded by the major bank.
However, Foodbank South Australia chief executive Greg Pattinson told ABC Radio Adelaide it was still exploring how the program would work.
“That’s what we are exploring with some of the banks at the moment … it hasn’t started yet because we are still working through the process.
“We’ve never been approached by financial institutions in the past and the banks, to their credit, are doing the right thing in trying to find a way of keeping people in their houses.”
He said traditionally, Foodbank worked through charities and the welfare sector but it had seen an increase in the number of people who require food assistance that are working.
“Increasingly we are being approached now by organisations other than traditional charities, so schools for example, where the schools have identified the children of parents who are doing it tough,” he said.
“Each year we’ve seen an increase in South Australia of anywhere up to 20 per cent in the number of people seeking food assistance.”
‘Cost of living’ is causing a shift
Mr Pattinson said the stereotype of a person or family that required food assistance was diminishing.
He said more people must be suffering from mortgage stress because more of those needing help were from working families.
“We certainly do provide services to the unemployed and to people who are homeless,” he said.
“But we are seeing an increase in the numbers of working families and working Australians who are needing to seek food assistance because of cost of living increases.
“We see an increase in demand, for example every three months, when people get their electricity bills.
“It’s a case of those weeks where people are saying, ‘we’ll make sure the kids are fed, the roof is over our head but mum and dad don’t eat this week’.”
Trying to help clients ‘balance their budget’
Mr Pattinson said the fact it had been approached by the banks had shown a significant shift and Foodbank was working on a project to support those in need.
“We’re getting inquiries from schools, pastoral care workers, from principals at various schools around the state,” he said.
“And increasingly, we are now seeing inquiries from banks and financial institutions who are looking to try and find a way of helping their clients balance their budget.”
He said the program was still in its early stages, but he hoped Foodbank would have a concrete program in place within the next two to three months.
“It may even be as simple as the banks referring their clients to the Foodbank food hubs,” he said.
“But there would obviously be conditions to that which would have to be assessed by the bank to make sure those people … are genuinely in need of those services.
“We don’t want to shift the food away from people who are genuinely needing it.”
Ah, to be a mortgage banker doing refinancings as the global economy grinds to a halt.
According to the Mortgage Bankers Association, refinancing applications rose 37% week-over-week (WoW).
Refi applications have soared to their highest level since mid-2016 as mortgage rates plunge.
Mortgage purchase applications have not been the same since lenders tightened their lending standards and banks increased capital ratios. Not to mention the creation of the Consumer Financial Protection Bureau.
As the NY Fed. pointed out, housing debt is almost back to its prior housing bubble peak of $10 trillion.
Phoenix AZ leads the nation in QoQ mortgage debt growth. Why? A rebound effect in the lower tier of Phoenix home prices.
Through a new rule announced Wednesday, the Federal Housing Administration (FHA) is making it easier for aspiring entry level housing buyers and condo owners to get reverse mortgages with FHA insured financing.
The FHA published a final regulation and policy implementation guidance this week establishing a new process for condominium approvals which will expand FHA financing for qualified first time home buyers as well as seniors looking to age in place, the Department of Housing and Urban Development said in a press memo.
In a stated Trump Administration effort to “reduce regulatory barriers restricting affordable home ownership,” the new rule introduces a new single-unit approval procedure that eases the ability for individual condominium units to become eligible for FHA-insured financing. It also extends the recertification requirement for approved condominium projects from two years to three.
The rule will also allow more mixed-use projects to be eligible for FHA insurance, the department said in a press release. HUD Secretary Ben Carson touted the rule’s ability to assist both first-time home buyers, as well as seniors aiming to age in place.
“Condominiums have increasingly become a source of affordable, sustainable home ownership for many families and it’s critical that FHA be there to help them,” said Carson in a press release announcing the new rule. “Today, we take an important step to open more doors to home ownership for younger, first-time American buyers as well as seniors hoping to age-in-place.”
Acting HUD Deputy Secretary and FHA Commissioner Brian D. Montgomery added that this rule is being implemented partially in response to the demands of the housing market.
“Today we are making certain FHA responds to what the market is telling us.
Montgomery said in the release. “This new rule allows FHA to meet its core mission to support eligible borrowers who are ready for home ownership and are most likely to enter the market with the purchase of a condominium.”
The last notable action taken by FHA in terms of condominium approvals took place in the fall of 2016, when the agency proposed new rules that would allow individual condo units to become eligible for FHA financing, including Home Equity Conversion Mortgages (HECMs).
FHA estimated this new policy will notably increase the amount of condominium projects that can now gain FHA approval. 84 percent of FHA-insured condominium buyers have never owned a home before, according to agency data. Only 6.5 percent of the more than 150,000 condominium projects in the United States are approved to participate in FHA’s mortgage insurance programs.
“As a result of FHA’s new policy, it is estimated that 20,000 to 60,000 condominium units could become eligible for FHA-insured financing annually,” the press release said.
Read the final rule in the Federal Register.
A bank in Denmark is offering borrowers mortgages at a negative interest rate, effectively paying its customers to borrow money for a house purchase.
Jyske Bank, Denmark’s third-largest bank, said this week that customers would now be able to take out a 10-year fixed-rate mortgage with an interest rate of -0.5%, meaning customers will pay back less than the amount they borrowed.
To put the -0.5% rate in simple terms: If you bought a house for $1 million and paid off your mortgage in full in 10 years, you would pay the bank back only $995,000.
It should be noted that even with a negative interest rate, banks often charge fees linked to the borrowing, which means homeowners could still pay back more.
“It’s another chapter in the history of the mortgage,” the Jyske Bank housing economist Mikkel Høegh told Danish TV, according to the news website Copenhagen Post. “A few months ago, we would have said that this would not be possible, but we have been surprised time and time again, and this opens up a new opportunity for homeowners.”
Jyske Bank’s negative rate is the latest in a series of extremely low interest offers from banks to Danish homeowners.
According to The Local, Nordea Bank, Scandinavia’s biggest lender, said it would offer a 20-year fixed-rate mortgage with 0% interest. Bloomberg reported that some Danish lenders were offering 30-year mortgages at a 0.5% rate.
It should also be noted that negative rates have been available on short-term mortgage bonds in Denmark since May, according to Bloomberg; they have only just been made directly available to consumers.
“It’s never been cheaper to borrow,” Lise Nytoft Bergmann, the chief analyst at Nordea’s home finance unit in Denmark, told Bloomberg.
It may seem counterintuitive for banks to lend out their money at such low rates — but there is a rationale behind it.
Many investors fear a substantial crash in the near future. As such, some banks are willing to lend money at negative rates, accepting a small loss rather than risking a bigger loss by lending money at higher rates that customers cannot meet.
“It’s an uncomfortable thought that there are investors who are willing to lend money for 30 years and get just 0.5% in return,” Bergmann said.
“It shows how scared investors are of the current situation in the financial markets, and that they expect it to take a very long time before things improve.”
Easy Money Blog Observations:
This doesn’t mean borrowers are being paid to take mortgages.
Jyske Bank appears to describe in the attached press release that they add a 1% “variable contribution rate” + fees to a -0.5 negative “bond rate”, resulting in borrowers qualifying to pay a positive amortized rate over a maximum 10 year period, plus taxes and insurance, to 80% loan to value at closing.
Most home buyers are unable to qualify for a ten year mortgage with 20% down. This means the program is being targeted to existing equity rich homeowners interested in cash out mortgages.
(John Myers) Gov. Gavin Newsom’s administration said Friday it would begin work on transferring $331 million back into a special fund designed to help California homeowners hit hard by the recession-era mortgage crisis, money that the courts have ruled was wrongly used to help balance the state budget.
The California Supreme Court refused earlier this week to hear an appeal by the administration disputing lower court rulings that found the state mistakenly used a portion of the money — paid by large banks and lenders as part of a nationwide legal agreement in 2012 — to pay off housing bonds. In some cases, those bonds were enacted a decade before the mortgage settlement. In all, three years of state budget expenses were covered by a portion of what California received from the mortgage settlement.
The decision to use the money was championed by Newsom’s predecessor, former Gov. Jerry Brown. Legislators subsequently ratified the plan, and last year went even further: They passed legislation seeking to block a court ruling to repay more than $331 million into a fund originally designed for statewide homeowner assistance efforts. Groups that waged a five-year court battle over the funds expressed relief that the legal fight was finally over.
“Truth prevails,” said Faith Bautista, president and chief executive of the National Asian American Coalition. “They’re now facing the reality that the money belonged to the homeowners in distress.”
While the money in question was undoubtedly tempting at the time it was diverted — California’s budget was still reeling from successive years of back-to-back deficits — the state’s coffers are now overflowing. The budget signed by Newsom last month includes $19.2 billion in cash reserves, making the repayment of the mortgage settlement money limited only by how fast state leaders can take action. The Legislature will return next month for the final weeks of its 2019 session.
The money diverted to state budget needs was a small portion of what both California homeowners and the government received from the national settlement agreed to by 49 states in 2012. Those states, along with the federal government and the District of Columbia, had earlier filed suit against the nation’s five largest mortgage servicers: Ally (formerly known as GMAC), Bank of America, Citigroup, J.P. Morgan Chase and Wells Fargo. The legal action alleged a number of federal law violations, and the financial institutions agreed to pay more than $20 billion to homeowners affected by the mortgage crisis. The companies also agreed to pay the states a total of $2.5 billion.
California’s share of the state payments was $410 million, to be used for a variety of services directed by then-Atty. Gen. Kamala Harris. But most of the money was used instead for budget-balancing items which, while related to housing, were long-term costs that further shrank the funds available for basic government services. A coalition including representatives for Asian American and Latino communities sued the state in 2014 over its decision to use the money to help erase a projected budget deficit. A Sacramento judge ruled for the coalition in 2015 and the 3rd District Court of Appeal agreed with that ruling last year.
State leaders, however, refused to back down. At the end of the 2018 legislative session, lawmakers and Brown crafted a bill that said the money was used correctly, and the enacted law sought to give the Legislature the power to “abrogate,” or revoke, the appeals court order to replenish the spent money.
In April, the same appeals court again rebuked state officials.
“It is the judicial branch that has the constitutional authority to interpret statutes,” the three-judge panel wrote in its ruling, stating that the mortgage settlement “money was unlawfully diverted from a special fund in contravention of the purposes for which that special fund was established.”
On Wednesday, the California Supreme Court refused Newsom’s request to hear the case, allowing the appeals ruling to stand.
“Now that the Supreme Court has issued its decision in this matter, we will move forward to implement the ruling,” said H.D. Palmer, a spokesman for the California Department of Finance.
Bautista, whose Daly City-based group works with low-income communities of color across the state, said she hopes the $331 million will be supplemented by money from the nation’s leading lenders to offer services such as down payment assistance for those who went through foreclosure during the housing crisis and want to again own a home. She said other services, including financial literacy efforts and those helping Californians with low credit scores, should also be considered. And she urged Newsom to make such efforts part of his larger discussion about the state’s housing crisis.
“People are hurting in East L.A., Riverside, the Central Valley,” Bautista said. “Let’s pick what’s best and use the money wisely.”
Neil Barofsky, an attorney who represented the groups that fought the cash diversion in the courts, said it was disappointing that state officials spent so many years on “frivolous appeals,” culminating in what he called the “ginned- up legislative action” last year designed to block repayment of the money and the appeals court ruling.
“We understand it was a desperate time for the state when this happened,” he said. “But once we returned to surpluses, the idea that they would just keep fighting this has been breathtaking.”
Adjustable-rate mortgage (ARM) prepayments hit their highest levels in 12 years during June, according to new data from Black Knight Inc.
The company also noted that prepays on 2018 vintage loans were up by more than 300 percent over the prior four months. As of June 27, Black Knight estimated there were 1.5 million potential refinance candidates in the 2018 vintage alone, matching the total of potential refinance candidates in the 2013-2017 vintages combined.
“Overall, prepayment activity–largely driven by home sales and mortgage refinances–has more than doubled over the past four months,” said Black Knight Data & Analytics President Ben Graboske. “It’s now at the highest levels we’ve seen since the fall of 2016, when rates began their steep upward climb. While we’ve observed increases across nearly every investor type, product type, credit score bucket and vintage, some changes stand out. For instance, prepayments among fixed-rate loans have hewed close to the overall market average, rising by more than two times over the past four months. However, ARM prepayment rates have now jumped to their highest level since 2007 as borrowers have sought to shed the uncertainty of their adjustable-rate products for the security of a low, fixed interest rate over the long haul.”
Graboske added that “some 8.2 million homeowners with mortgages could now both benefit from and likely qualify for a refinance, including more than 35 percent of those who took out their mortgages just last year. Early estimates suggest closed refinances rose by more than 30 percent from April 2019, with May’s volumes estimated to be three times higher than the 10-year low seen in November 2018.”
Black Knight also reported that approximately 44 million homeowners with mortgages have more than 20 percent equity in their home. With a combined $5.98 trillion, that works out to an average of $136,00 per borrower with tappable equity. While this level is near last summer’s all-time high of $6.06 trillion, Black Knight also observed the annual growth rate slowed to three percent in the first quarter, down from five percent in the prior quarter and 16 percent.
After years of farm income falling and the U.S./China trade war now taking its toll on the sector, Wall Street banks look as though they are giving up on lending to farmers, according to Reuters.
Meanwhile, total U.S. farm debt is slated to rise to $427 billion this year, up from an inflation adjusted $317 billion just 10 years ago. The debt is reaching levels not seen since the 1980’s farm crisis.
Agricultural loan portfolios of the nation’s top 30 banks was lower by $3.9 billion, to $18.3 billion between their peak in December 2015 and March 2019. This is a 17.5% fall.
An analysis performed by Reuters identified the banks by their quarterly filings of loan performance with the FDIC and grouped banks that were owned by the same holding company.
The slide in farm lending is happening as cash flow worries surface for farmers. We’ve highlighted numerous instances of farmers under pressure due to the U.S./China trade war and poor conditions, like this report from early June and this report on farmer bankruptcies from May.
Sales of products like soybeans have fallen significantly since China and Mexico imposed tariffs in retaliation to U.S. duties on their goods. The trade war losses exacerbated an already strained sector, under pressure from “years over global oversupply and low commodity prices.”
Chapter 12 bankruptcy filings for small farmers were up from 361 filings in 2014 to 498 in 2018.
Minneapolis-St. Paul area bankruptcy attorney Barbara May said:
“My phone is ringing constantly. It’s all farmers. Their banks are calling in the loans and cutting them off.”
At the same time, surveys are showing that demand for farm credit is growing. The demand is most pronounced among Midwest grain and soybean producers. Having fewer options to borrow could threaten the survival of many farms, especially when incomes have been cut in half since 2013.
Gordon Giese, a 66-year-old dairy and corn farmer in Mayville, Wisconsin, was forced to sell most of his cows, his farmhouse and about one-third of his land last year to pay off his debt obligations.
“If you have any signs of trouble, the banks don’t want to work with you. I don’t want to get out of farming, but we might be forced to.”
Michelle Bowman, a governor at the U.S. Federal Reserve called the decline in farm incomes a “troubling echos of the 1980’s farm crisis”.
Between the end of 2015 and March 31 of this year, JP Morgan pared back its farm loan holdings by 22%, or $245 million. Capital One’s farm-loan holdings at FDIC-insured units fell 33% between the end of 2015 and March 2019. U.S. Bancorp’s fell by 25%. Agricultural loans at BB&T Corp have fallen 29% since summer of 2016. PNC Financial Services Group Inc has cut its farm loans by 12% since 2015.
The four-quarter growth rate for farm loans at all FDIC-insured banks slowed from 6.4% in December 2015 to 3.9% in March 2019. But many smaller, regional banks depend on farms as the main key to their loan books.
In March, FDIC insured banks reported 1.53% of farm loans were 90 days past due, up from 0.74% at the end of 2015.
Curt Everson, president of the South Dakota Bankers Association said: “All you have are farmers and companies that work with, sell to or buy from farmers.”
Despite the hype of soaring mortgage applications (refis, not purchases) and homebuilder stocks, housing starts tumbled 0.9% MoM in May (drastically missing expectations for a 0.3% rise), and while permits rose a better than expected 0.3% MoM, it remains very flat for the last six months.
Multi-family permits fell in May (to 820k) as single-family rose modestly (to 449k)…
The better than expected print for overall starts (at 1.294mm), was thanks to a massive spike in rental units…
- Housing Starts 1-Unit: -6.4%, from 876K, to 820K
- Housing Starts Multi Unit: +13.8%, from 383K to 436K
Not exactly a picture of health for the future of millennial homeownership as rental nation remains front and center, despite plunging mortgage rates.
At least 1-unit starts got one surge from declining mortgage rates in January 2019.
Go Jay Powell! Go Jay Powell!
A recent in-depth investigation on foreclosure actions related to reverse mortgages published late Tuesday by USA Today paints a bleak picture surrounding the activities and practices of the reverse mortgage industry, but also relates some questionable and out-of-date information in key areas highlighted by the investigation, according to industry participants who spoke with RMD.
The investigative piece was the first in a new series of articles released by the outlet, touching on subjects including “questions to ask before getting a reverse mortgage,” ways to “fix” the reverse mortgage program, and details on how reverse mortgages work.
Referring to a wave of reverse mortgage foreclosures that predominantly affected urban African-American neighborhoods as a “stealth aftershock of the Great Recession,” the investigative article focuses on nearly 100,000 foreclosed reverse mortgages as having “failed,” and affecting the financial futures of the borrowers, negatively impacting the property values in the neighborhoods that surround the foreclosed properties.
In a related article, the publication details the various sources from which it drew information and the methodologies used to reach their conclusions, including some of the challenges involved in such an analysis.
The article authors detailed the ways in which they went about their information gathering, which included inquiries of the Department of Housing and Urban Development (HUD). However, some of the interpretations based on that data are largely out of date, according to sources who spoke with RMD about the coverage.
A major component of the USA Today investigation revolved around a non-borrowing spouse who was taken off of the liened property’s title in order to allow for the couple’s access to a higher level of proceeds in 2010. When the borrowing husband passed away in 2016, the lender instituted a foreclosure action that has resulted in the non-borrowing wife having to vacate the property.
“Even when both husband and wife are old enough to qualify, reverse mortgage lenders often advise them to remove the younger spouse from loans and titles,” the article reads. The article does not address protections implemented in 2015 to address non-borrowing spouse issues.
In 2015, the Federal Housing Administration (FHA) released a series of guidelines that were designed to strengthen protection for non-borrowing spouses in reverse mortgage transactions. In the revised guidelines, lenders were allowed to defer foreclosure for certain eligible non-borrowing spouses for HECM case numbers assigned before or after August 4, 2014.
Lenders are also allowed to proceed with submitting claims on HECMs with eligible surviving non-borrowing spouses by assigning the affected HECM to HUD upon the death of the last surviving borrower, where the HECM would not otherwise be assignable to FHA as part of a Mortgagee Optional Election Assignment (MOE).
A lender may also proceed by allowing claim payment following the sale of the property by heirs or the borrower’s estate, or by foreclosing in accordance with the terms of the mortgage and filing an insurance claim under the FHA insurance contract as endorsed.
Foreclosure vs. eviction
“A foreclosure is a failure, no matter the trigger,” said one of the article’s sources.
Multiple sources who wished to remain unnamed told RMD that positioning a foreclosure as a “failure” of the reverse mortgage is itself misleading particularly when taking a borrower’s specific circumstances into account, and that the article appears to, at times, conflate the terms “foreclosure” and “eviction.” One of the USA Today article’s own sources also added a perspective on a perceived incongruity between the use of the terms.
“There is a difference between foreclosure and eviction that isn’t really explained in the article,” said Dr. Stephanie Moulton, associate professor of public policy at Ohio State University in an email to RMD. “We would need to know the proportion of foreclosed loans that ended because of death of the borrower, versus other reasons for being called due and payable (including tax and insurance default).”
HECM evolution since the Great Recession
One of the factual issues underlying some of the ideas of the article is that it presents older problems of the HECM program in a modern context, without addressing many of the most relevant changes that have been made to the program in the years since many of the profiled loans were originated, particularly during a volatile period for the American housing market: the Great Recession.
This was observed by both industry participants, as well as Moulton.
“The other thing to keep in mind about this particular time period is the collapse of home values underlying HECMs that exacerbated crossover risk—which would increase the rate of both types of foreclosures,” Moulton said. “And, this was prior to many of the changes that have been made to protect borrowers and shore up the program, including limits on upfront draws, second appraisal rules, and financial assessment of borrowers.”
This includes the aforementioned protections instituted for non-borrowing spouses, in addition to changes including the addition of a financial assessment (FA) regulation designed to reduce persistent defaults, especially those related to tax-and-insurance defaults that regularly afflicted the HECM program in years prior to its implementation. These newer protections received only cursory mention in the USA Today article.
The National Reverse Mortgage Lenders Association (NRMLA) is preparing an industry response to the ideas and conclusions presented by USA Today, according to a statement made to RMD.
“A reverse mortgage is one potential and essential component for many Americans seeking to fund retirement,” said Steve Irwin, executive vice president of NRMLA in a call with RMD. “NRMLA and its members are committed to working with all stakeholders to continually improve the HECM program. NRMLA is developing a response to the piece.”
Read the full investigative article at USA Today.
(John Rubino) There are trillions of dollars of bonds in the world with negative yields – a fact with which future historians will find baffling.
Until now those negative yields have been limited to the safest types of bonds issued by governments and major corporations. But this week a new category of negative-yielding paper joined the party: mortgage-backed bonds.
(Investing.com) – At the biggest mortgage bank in the world’s largest covered-bond market, a banker took a few steps away from his desk this week to make sure his eyes weren’t deceiving him.
As mortgage-bond refinancing auctions came to a close in Denmark, it was clear that homeowners in the country were about to get negative interest rates on their loans for all maturities through to five years, representing multiple all-time lows for borrowing costs.
“During this week’s auctions, there were three times when I had to stand back a little from the screen and raise my eyebrows somewhat,” said Jeppe Borre, who analyzes the mortgage-bond market from a unit of the Nykredit group that dominates Denmark’s $450 billion home-loan industry.
For one-year adjustable-rate mortgage bonds, Nykredit’s refinancing auctions resulted in a negative rate of 0.23%. The three-year rate was minus 0.28%, while the five-year rate was minus 0.04%.
The record-low mortgage rates, which don’t take into account the fees that homeowners pay their banks, are the latest reflection of the global shift in the monetary environment as central banks delay plans to remove stimulus amid concerns about economic growth.
Denmark has had negative rates longer than any other country. The central bank in Copenhagen first pushed its main rate below zero in the middle of 2012, in an effort to defend the krone’s peg to the euro. The ultra-low rate environment has dragged down the entire Danish yield curve, with households in the country paying as little as 1% to borrow for 30 years. That’s considerably less than the U.S. government.
The spread of negative yields to mortgage-backed bonds is both inevitable and ominous. Inevitable because the current amount of negative-yielding debt has not ignited the kind of rip-roaring boom that overindebted countries think they need, which, since interest rates are just about their only remaining stimulus tool, requires them to find other kinds of debt to push into negative territory. Ominous because, as the world discovered in the 2000s, mortgages are a cyclical instrument, doing well in good times and defaulting spectacularly in bad. Giving bonds based on this kind of paper a negative yield appears to guarantee massive losses in the next housing bust.
Meanwhile, this is year ten of an expansion – which means the next recession is coming fairly soon. During recessions, the US Fed, for instance, tends to cut short-term rates by about 5 percentage points to counter the slowdown in growth.
With Europe and much of the rest of the world already awash in negative-yielding debt…
… this imminent slide in interest rates will turn the rest of the global financial system Danish, giving us bank accounts and bond funds that charge rather than pay, and very possibly mortgages that pay rather than charge.
Anyone who claims to know how this turns out is delusional.
“A Crack in The Foundation?” Part 2: Three Decades of Red Flags — Mortgage Policy & Praxis, 1970-1999
Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.
Part 2 begins at the start of the 1970s and follows the uneasy path of government policy and economic turmoil as we creep towards the end of the century. (Missed Part 1? Read it here). This section will follow the astronomical growth in the secondary market, the mounting government pressure put on Fannie and Freddie to increase their offerings to lower- and moderate-income borrowers, as well as a widespread shift towards deregulation in the market that (spoiler alert) will prove to have disastrous consequences as the new millennium begins.
“A Crack in The Foundation?” Part 1: Fannie & Friends — The Evolution of Mortgage Policy from 1930-1960
Welcome to “A Crack in the Foundation?”, a four-part series in which Maxwell Digital Mortgage Solutions will examine the evolution of the mortgage industry and homeownership in America, with an eye on government policies and how GSEs can promote (or prohibit) periods of economic growth.
Part I starts at the turn of the 20th century and traces the establishment of the Federal Housing Administration (FHA), as well as the birth of Fannie and Ginnie, to look at the inception of the modern mortgage and its impact on home ownership.
A larger volume of CMBS loans are being issued with interest-only (IO) structures, but this rise may put the CMBS market in a dicey position when the economy reaches its next downturn. To put things in perspective, interest-only loan issuance reached $19.5 billion in Q3 2018, six times greater than fully amortizing loan issuance. In comparison, nearly 80% of all CMBS issued in the FY 2006 and FY 2007 was either interest-only or partially interest-only loans.
In theory, the popularity of interest-only loans makes sense, because they provide lower debt service payments and free up cash flow for borrowers. But these benefits are partially offset by some additional risks in the interest-only structure, with the borrower’s inability to deleverage during the loan’s life perhaps being the biggest concern. Additionally, borrowers who opt for a partial interest-only structure incur a built-in “payment shock” when the payments switch from interest-only to principal and interest.
Why are we seeing a spike in interest-only issuance if the loans are inherently riskier than fully amortizing loans? Commercial real estate values are at all-time highs; interest rates are still historically low; expectations for future economic and rent growth are fundamentally sound, and competition for loans on stabilized, income-producing properties is higher than ever. Furthermore, the refinancing pipeline is miniscule compared to the 2015-2017Wall of Maturities, so more capital is chasing fewer deals. This causes lenders to augment loan proceeds and loosen underwriting parameters, including offering more interest-only deals.
Then and Now: Why the Rise in 10 Debt Has Raised Concerns
Between Q1 2010 and Q1 2012, fully amortizing loans dominated new issuance, with its market share amassing as much as 80.4% (Q1 2012). Interest-only issuance was nearly equal to the fully amortizing tally by Q3 2012, as interest-only debt totaled $5.10 billion, only $510 million less than fully amortized loans. Interest-only issuance would soon overtake fully amortizing loan issuance by Q2 2017, as its volume skyrocketed from $5.3 billion in Q1 2017 to $19.5 billion in Q3 2018.
Prior to the 2008 recession, the CMBS market experienced a similar upward trend in interest-only issuance. By 02 2006, interest-only loans represented 57.6% of new issuance, outpacing fully amortizing notes by 38.86%. The difference in issuance between interest-only and fully amortizing loans continued to widen as the market approached the recession, eventually reaching a point where interest-only debt represented 78.8% of new issuance in 01 2007. Even though the prevalence of interest-only debt is mounting, why would this be a concern in today’s market?
IO Loans Are More Likely to Become Delinquent
Interest-only loans have historically been more susceptible to delinquency when the economy falters. Immediately following the recession, delinquency rates across all CMBS loans moved upward. Once the economy began to show signs of recovery, the delinquency rate for fully amortized loans began to decline, while interest-only and partially interest-only delinquencies continued to rise. In July 2012, the delinquency rate for fully amortizing loans was sitting at 5.07% while the interest-only reading reached 14.15%. The outsized delinquency rate for interest-only loans during this time period is not surprising, since many of the five-year and seven-year loans originated in the years prior to the recession were maturing. Many of the borrowers were unable to meet their payments due to significant declines in property prices paired with loan balances that had never amortized.
Over time, the stabilization of the CMBS market led to subsequent declines in the delinquency rates for both the interest-only and partial interest-only sectors. The delinquency rate for interest-only loans clocked in at 3.17% in December 2018, which is down nearly 11 % from its peak. Delinquency rates across all amortization types have failed to return to pre-crisis levels.
Just because a large chunk of interest-only debt became delinquent during the previous recession does not mean the same is destined to happen in the next downturn.
Measuring the likelihood of a loan turning delinquent is typically done by calculating its debt-service coverage ratio (DSCR). Between 2010 and 2015, the average DSCR across all interest-only loans was a relatively high 1.94x. Since 2016, the average DSCR for interest-only debt has fallen slightly. If the average DSCR for interest-only loans continues to decline, the inherent risk those loans pose to the CMBS market will become more concerning.
The average DSCR for newly issued interest-only loans in March 2019 registered at 1.61 x, which is about 0.35x higher than the minimum DSCR recommended by the Commercial Real Estate Finance Council (CREFC). In 2015, CREFC released a study analyzing the impact of prudential and securities regulation across the CRE finance sector. In the study, CREFC cited a 1.25x-DSCR as the cutoff point between relatively healthy and unhealthy loans. The value was chosen through loan-level analysis and anecdotal information from conversations with members.
The figure below maps the DSCR for both fully amortizing and interest-only loans issued between 2004 and 2008. Notice that toward the end of 2006, the average DSCR hugged the 1.25x cutoff level recommended by CREFC. Beyond 2006, the average DSCR for interest-only loans oscillated between healthy and concerning levels.
The second figure focuses on CMBS 2.0 loans, where a similar trend can be spotted. After roughly converting interes-tonly loan DSCRs to amortizing DSCRs using underwritten NOI levels and assuming 30-year amortization, the average DSCR for interest-only loans issued between 2010 and mid- 2014 (2.04x) is much greater than that for fully amortizing issuance (1.78x). While part of this trend can be attributed to looser underwriting standards and/or growing competition, the other driver of the trend is due to selection bias. Lenders will typically give interest-only loans to stronger properties and require amortization from weaker properties, so it makes sense that they would also require less P&I coverage for those interest-only loans on lower-risk properties.
What Lies Ahead for the IO Sector?
Rising interest-only loan issuance paired with a drop in average DSCR may spell for a messy future for the CMBS industry if the US economy encounters another recession. At this point, CMBS market participants can breath a little easier since interest-only performance has remained above the market standard. However, this trend is worth monitoring as the larger volume could portend a loosening in underwriting standards.
Something unexpected happened after the financial crisis: Americans have become far more responsible when it comes to their finances. At least that is the conclusion one would derive by looking at the average US credit score, which has increased by nearly 20 points, from 686 in 2009 to 704 in 2018.
Additionally, according to Moody’s, there are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660.
As we discussed recently, on the surface, this “disappearance” of subprime borrowers is good news. But is there more than meets the eye to the American consumer’s FICO score renaissance? And, separately, are FICO scores subject to “grade inflation“, as the Federal Reserve recently claimed?
To answer these questions, Goldman recently conducted an analysis into the causes behind this welcome development in US credit scores. The bank founds that, as expected, some of this increase reflects legitimate improvements in the credit behavior of US consumers. For example, household debt has declined as a percentage of GDP:
Since measures of indebtedness / over-extension represent roughly 30% of the FICO credit score calculation, this de-leveraging will, appropriately, lead to higher credit scores.
Some of the increase in average FICO scores is also a reflection of the relatively benign macro-economy to which consumers have been exposed in recent years, according to Goldman. Past payment history is the largest driver of most credit score formulas, and low current delinquency rates help drive credit scores higher even if these low rates of delinquency are partly explained by the strong economy.
With these two considerations in mind, Goldman cautions that in light of the strong economy and lack of a (recent) stressful economic scenario, with unemployment rates now below 4%, high credit scores for 2019 vintage borrowers might overstate credit quality.
Echoing this point, Cris deRitis, Moody’s deputy chief economist said that “borrowers with low credit scores in 2019 pose a much higher relative risk. Because loss rates today are low and competition for high-score borrowers is fierce, lenders may be tempted to lower their credit standards without appreciating that the 660 credit-score borrower today may be relatively worse than a 660-score borrower in 2009.”
“Borrowers’ scores may have migrated up, but inherently their individual risk, and their attitude towards credit and ability to pay their bills, has stayed the same. You might have thought 700 was a good score, but now it’s just average,” deRitis continued.
Indeed, despite the record high average FICO score, cracks are already starting to show on the surface: there has been a rising number of missed payments by borrowers with the highest risk, despite the past decade of “growth”. And now that the economy is starting to show weakness, these delinquencies could accelerate and lead to larger than expected losses.
Ethan Dornhelm, vice president of scores and predictive analytics at FICO doesn’t seem to notice score inflation and blames the issue on underwriters: “The relationship between FICO score and delinquency levels can and does shift over time. We recognize there’s a lot more context you can obtain beyond a consumer’s credit file. We do not think that score inflation is the issue, but the risk layering on underwriting factors outside of credit scores, such as DTI, loan terms, and even trends in macroeconomic cycles, for example.”
Marketplace and peer to peer lending has also been showing signs of stress. Missed payments and writedowns increased last year, according to NY data and analytic firm PeerIQ. “We don’t see the purported improvement in underwriting just yet,” PeerIQ wrote in a recent report.
And the pressure isn’t just showing up in auto loans and marketplace lending. Private label credit cards, those issued by stores, instead of big banks, saw the highest number of missed payments in seven years last year. “As an investor it’s incumbent on you to do that deep credit work, which means you have to know as much as possible about how things should pay off or default”, said Michelle Russell-Dowe, who invests in consumer asset-backed securities at Schroder Investment Management. “If you don’t think you’re being paid for the risk, you have no business investing in it.”
Of course, with FICO scores rising to new all time highs, it is only logical to expect that virtually no underwriter will actually bother to understand the underlying credit risk(s), which is also why consumers will likely be saddled with even more debt just as the broader economy is set to turn. The only question is whether such inflation FICO scores will be the catalyst behind the next debt-driven meltdown.
Consumer credit scores have been artificially inflated during the past decade and are covering up a very real danger lurking behind hundreds of billions of dollars in debt. And when Goldman Sachs is the one ringing the alarm bell, you know the issue may actually be serious.
Joined by Moody’s Analytics and supported by “research” from the Federal Reserve, the steady rise of credit scores during our last decade of “economic expansion” has led to a dangerous concept called “grade inflation”, according to Bloomberg.
Grade inflation is the idea that debtors are actually riskier than their scores indicate, due to metrics not accounting for the “robust” economy, which may negatively affect the perception of borrowers’ ability to pay back bills on time. This means that when a recession finally happens, there could be a larger than expected fallout for both lenders and investors.
There are around 15 million more consumers with credit scores above 740 today than there were in 2006, and about 15 million fewer consumers with scores below 660, according to Moody’s.
On the surface, this disappearance of subprime borrowers is good news. But is there more than meets the eye to the American consumer’s FICO score renaissance?
Cris deRitis, deputy chief economist at Moody’s Analytics said: “Borrowers with low credit scores in 2019 pose a much higher relative risk. Because loss rates today are low and competition for high-score borrowers is fierce, lenders may be tempted to lower their credit standards without appreciating that the 660 credit-score borrower today may be relatively worse than a 660-score borrower in 2009.”
The problem is most acute for smaller firms that tend to lend more to people with poor credit histories. Many of these firms rely on FICO scores and are unable to account for other metrics, like debt-to-income levels and macroeconomic data. Among the most exposed outstanding debts are car loans, consumer retail credit and personal loans that are doled out online. These types of debt total about $400 billion – and about $100 billion of that sum has been bundled into securities that have been sold to
ravenous yield chasers “investors”.
Meanwhile, cracks are already starting to show on the surface: there has been a rising number of missed payments by borrowers with the highest risk, despite the past decade of “growth”. And now that the economy is starting to show weakness, these delinquencies could accelerate and lead to larger than expected losses.
Goldman Sachs analyst Marty Young said in an interview: “Every credit model that just relies on credit score now – and there’s a lot of them – is possibly understating the risk. There are a whole bunch of other variables, including the business cycle, that need to be taken into account.”
FICO credit scores are used by more than 90% of U.S. lenders to determine whether a borrower is an acceptable risk. Most scores range from 300 to 850, with a higher score purporting to show that someone is more likely to pay back their debts. Some big banks and lenders have recognized the problem and have included other factors in their underwriting decisions.
“Borrowers’ scores may have migrated up, but inherently their individual risk, and their attitude towards credit and ability to pay their bills, has stayed the same. You might have thought 700 was a good score, but now it’s just average,” deRitis continued.
Ethan Dornhelm, vice president of scores and predictive analytics at FICO magically doesn’t seem to notice score inflation and blames the issue on underwriters: “The relationship between FICO score and delinquency levels can and does shift over time. We recognize there’s a lot more context you can obtain beyond a consumer’s credit file. We do not think that score inflation is the issue, but the risk layering on underwriting factors outside of credit scores, such as DTI, loan terms, and even trends in macroeconomic cycles, for example.”
Goldman’s Young attributes the rise in missed auto loan payments to the change in scores. The Federal Reserve Bank of New York said the number of auto loans at least 90 days late topped 7 million at the end of last year.
Michelle Russell-Dowe, who invests in consumer asset-backed securities at Schroder Investment Management, said: “Some deep-subprime auto lenders may be deeply reliant on credit scores, although there’s a pretty wide range within the auto industry of how lenders use scores and other metrics. For marketplace lending, regardless of the statistics you collect on borrowers, there is something adversely selective about somebody looking for loans online.”
Marketplace and peer to peer lending has also been showing signs of stress. Missed payments and writedowns increased last year, according to NY data and analytic firm PeerIQ. “We don’t see the purported improvement in underwriting just yet,” PeerIQ wrote in a recent report.
And the pressure isn’t just showing up in auto loans and marketplace lending. Private label credit cards, those issued by stores, instead of big banks, saw the highest number of missed payments in seven years last year.
“As an investor it’s incumbent on you to do that deep credit work, which means you have to know as much as possible about how things should pay off or default. If you don’t think you’re being paid for the risk, you have no business investing in it,” Russell-Dowe concluded, stating what should be – but isn’t – the obvious.
After months (or years) of on-again, off-again headlines, President Trump is expected to sign a memo on an overhaul of Fannie Mae and Freddie Mac this afternoon, kick-starting a lengthy process that could lead to the mortgage giants being freed from federal control.
The White House has been promising to release a plan for weeks, and its proposal would be the culmination of months of meetings between administration officials on what to do about Fannie and Freddie.
Bloomberg reports that while Treasury Secretary Steven Mnuchin has said it’s a priority to return the companies to the private market, such a dramatic shift probably won’t happen anytime soon.
In its memo, the White House sets out a broad set of recommendations for Treasury and HUD, such as increasing competition for Fannie and Freddie and protecting taxpayers from losses.
The memo itself has a worryingly familiar title (anyone else thinking 2007 housing bubble?):
President Donald J. Trump Is Reforming the Housing Finance System to Help Americans Who Want to Buy a Home
“We’re lifting up forgotten communities, creating exciting new opportunities, and helping every American find their path to the American Dream – the dream of a great job, a safe home, and a better life for their children.”
President Donald J. Trump
REFORMING THE HOUSING FINANCE SYSTEM: The United States housing finance system is in need of reform to help Americans who want to buy a home.
- Today, the President Donald J. Trump is signing a Presidential memorandum initiating overdue reform of the housing finance system.
- During the financial crisis, Fannie Mae and Freddie Mac suffered significant losses and were bailed out by the Federal Government with billions of taxpayer dollars.
- Fannie Mae and Freddie Mac have been in conservatorship since September 2008.
- In the decade since the financial crisis, there has been no comprehensive reform of the housing finance system despite the need for it, leaving taxpayers exposed to future bailouts.
- Fannie Mae and Freddie Mac have grown in size and scope and face no competition from the private sector.
- The Department of Housing and Urban Development’s (HUD) housing programs are exposed to high levels of risk and rely on outdated business processes and systems.
PROMOTING COMPETITION AND PROTECTING TAXPAYERS: The Trump Administration will work to promote competition in the housing finance market and protect taxpayer dollars.
- The President is directing relevant agencies to develop a reform plan for the housing finance system. These reforms will aim to:
- End the conservatorship of Fannie Mae and Freddie Mac and improve regulatory oversight over them.
- Promote competition in the housing finance market and create a system that encourages sustainable homeownership and protects taxpayers against bailouts.
- The President is directing the Secretary of the Treasury and the Secretary of Housing and Urban Development to craft administrative and legislative options for housing finance reform.
- Treasury will prepare a reform plan for Fannie Mae and Freddie Mac.
- HUD will prepare a reform plan for the housing finance agencies it oversees.
- The Presidential memorandum calls for reform plans to be submitted to the President for approval as soon as practicable.
- Critically, the Administration wants to work with Congress to achieve comprehensive reform that improves our housing finance system.
HELPING PEOPLE ACHIEVE THE AMERICAN DREAM: These reforms will help more Americans fulfill their goal of buying a home.
- President Trump is working to improve Americans’ access to sustainable home mortgages.
- The Presidential memorandum aims to preserve the 30-year fixed-rate mortgage.
- The Administration is committed to enabling Americans to access Federal housing programs that help finance the purchase of their first home.
- Sustainable homeownership is the benchmark of success for comprehensive reforms to Government housing programs.
* * *
Because what Americans need is more debt and more leverage at a time when home prices are at record highs and rolling over.
Hedge funds that own Fannie and Freddie shares have long called on policy makers to let the companies build up their capital buffers and then be released from government control.
It’s unclear whether the White House would be willing to take such a significant step without first letting lawmakers take another stab at overhauling the companies.
But not everyone is excited about the recapitalizing Fannie Mae and Freddie Mac. Edward DeMarco, president of the Housing Policy Council, warned that releasing them from conservatorship would do nothing to fix the mortgage giants’ charters or alter their implied government guarantee:
“I’m not sure what is good about recap and release,” DeMarco, a former acting director of the Federal Housing Finance Agency, said in a phone interview.
DeMarco also noted that the government stepped in to save the companies in 2008, and they continue to operate with virtually no capital. On Tuesday, DeMarco told the Senate, during the first of two hearings on the housing finance system that “recap and release should not even be on the table.”
But shareholders in the firms were excitedly buying… once again.
Deciding the fate of Fannie and Freddie, which stand behind about $5 trillion of home loans, remains the biggest outstanding issue from the 2008 financial crisis.
The most prescient recession indicator in the market just inverted for the first time since 2007.
Don’t believe us? Here is Larry Kudlow last summer explaining that everyone freaking out about the 2s10s spread is silly, they focus on the 3-month to 10-year spread that has preceded every recession in the last 50 years (with few if any false positives)… (fwd to 4:20)
“Actually we’re reading the spread wrong,” Larry Kudlow says of the flattening yield curve. “There’s no recession in sight right now.” #DeliveringAlpha https://t.co/gcJmBKvV1x pic.twitter.com/zj2SWqIXhd
— CNBC (@CNBC) July 19, 2018
As we noted below, on six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal.
And here is Bloomberg showing how the yield curve inverted in 1989, in 2000 and in 2006, with recessions prompting starting in 1990, 2001 and 2008. This time won’t be different.
On the heels of a dismal German PMI print, world bond yields have tumbled, extending US Treasuries’ rate collapse since The Fed flip-flopped full dovetard.
The yield curve is now inverted through 7Y…
With the 7Y-Fed-Funds spread negative…
Bonds and stocks bid after Powell threw in the towell last week…
But the message from the collapse in bond yields is too loud to ignore. 10Y yields have crashed below 2.50% for the first time since Jan 2018…
Crushing the spread between 3-month and 10-year Treasury rates to just 2.4bps – a smidge away from flashing a big red recession warning…
Critically, as Jim Grant noted recently, the spread between the 10-year and three-month yields is an important indicator, James Bianco, president and eponym of Bianco Research LLC notes today. On six occasions over the past 50 years when the three-month yield exceeded that of the 10-year, economic recession invariably followed, commencing an average of 311 days after the initial signal.
Bianco concludes that the market, like Trump, believes that the current Funds rate isn’t low enough:
While Powell stressed over and over that the Fed is at “neutral,” . . . the market is saying the rate hike cycle ended last December and the economy will weaken enough for the Fed to see a reason to cut in less than a year.
Equity markets remain ignorant of this risk, seemingly banking it all on The Powell Put. We give the last word to DoubleLine’s Jeff Gundlach as a word of caution on the massive decoupling between bonds and stocks…
“Just because things seem invincible doesn’t mean they are invincible. There is kryptonite everywhere. Yesterday’s move created more uncertainty.”
With nearly 90% of millennials reporting that they have less than $10,000 in savings and more than 100 million Americans of working age with nothing in retirement accounts, we have bad news for basement-dwelling millennials invested in the “waiting for Mom and Dad to die” model;
Reverse mortgages are set to make a comeback if a consortium of lenders have their way, according to Bloomberg.
Columbia Business School real estate professor Chris Mayer – who’s also the CEO of reverse mortgage lender Longbridge Financial, says the widely-panned financial arrangements deserve a second look. Mayer is a former economist at the Federal Reserve of Boston with a Ph.D. from MIT.
In 2012, Mayer co-founded Longbridge, based in Mahwah, New Jersey, and in 2013 became CEO. He’s on the board of the National Reverse Mortgage Lenders Association. He said his company, which services 10,000 loans, hasn’t had a single completed foreclosure because of failure to pay property taxes or insurance. –Bloomberg
Reverse mortgages allow homeowners to pull equity from their home in monthly installments, lines of credit or lump sums. Over time, their loan balance grows – coming due upon the borrower’s death. At this point, the house is sold to pay off the loan – typically leaving heirs with little to nothing.
Elderly borrowers, meanwhile, must continue to pay taxes, insurance, maintenance and utilities – which can lead to foreclosure.
While even some critics agree that reverse mortgages make sense for some homeowners – they have been criticized for excessive fees and tempting older Americans into spending their home equity early instead of using it for things such as healthcare expenses. Fees on a $100,000 loan on a house worth $200,000, for example, can total as much as $10,000 – and are typically wrapped into the mortgage.
“The profits are significant, the oversight is minimal, and greed could work to the disadvantage of seniors who should be protected by government programs and not targeted as prey,” said critic Dave Stevens – former Obama administration Federal Housing Administration commissioner and former CEO of the Mortgage Bankers Association.
To support his claims that reverse mortgages are far less risky than they used to be, Mayer cites a 2014 study by Alicia Munnell of Boston College’s Center for Retirement Research. Munnell, a professor and former assistant secretary of the Treasury Department in the Clinton Administration (who once invested $150,000 in Mayer’s company and has since sold her stake). Munnell concluded that industry changes requiring lenders to assess a prospective borrower’s ability to pay property taxes and homeowner’s insurance significantly reduces the risk of a reverse mortgage.
The number of reverse mortgages, or Home Equity Conversion Mortgages (HECM) in the United States between 2005 and 2018 has not shown a recent upward trend – however that may change if Mayer and his cohorts are able to convince homeowners that reverse mortgages aren’t what they used to be.
Cleaning up their image
For years, the reverse mortgage industry has relied on celebrity pitchmen to convince Americans to part with the equity in their homes in order to maintain their lifestyle.
The late Fred Thompson, a U.S. senator and Law & Order actor, represented American Advisors Group, the industry’s biggest player. These days, the same company leans on actor Tom Selleck.
“Just like you, I thought reverse mortgages had to have some catch,” Selleck says in an online video. “Then I did some homework and found out it’s not any of that. It’s not another way for a bank to get your house.”
Michael Douglas, in his Golden Globe-winning performance on the Netflix series The Kominsky Method, satirizes such pitches. His financially desperate character, an acting teacher, quits filming a reverse mortgage commercial because he can’t stomach the script. –Bloomberg
In 2016, American Advisers and two other companies were accused by the US Consumer Financial Protection Bureau of running deceptive ads. Without admitting guilt, American Advisers agreed to add more caveats to its promotions and paid a $400,000 fine.
As a result, the company has made “significant investments” in compliance, according to company spokesman Ryan Whittington, adding that reverse mortgages are now “highly regulated, viable financial tools,” which require homeowners to undergo third-party counseling before participating in one.
The FHA has backed more than 1 million such reverse mortgages. Homeowners pay into an insurance fund an upfront fee equal to 2 percent of a home’s value, as well as an additional half a percentage point every year.
After the last housing crash, taxpayers had to make up a $1.7 billion shortfall because of reverse mortgage losses. Over the past five years, the government has been tightening rules, such as requiring homeowners to show they can afford tax and insurance payments. –Bloomberg
As a result of tightened regulations, the number of reverse mortgage loans has dropped significantly since 2008.
Making the case for reverse mortgages is Shelly Giordino – a former executive at reverse mortgage company Security 1 Lending, who co-founded the Funding Longevity Task Force in 2012.
Giordino now works for Mutual of Obama’s reverse mortgage division as their “head cheerleader” for positive reverse mortgages research. One Reverse Mortgage CEO Gregg Smith said that the group is promoting “true academic research” to convince the public that reverse mortgages are a good idea.
Mayer under fire
University of Massachusetts economics professor Gerald Epstein says that Columbia may need to scrutinize Mayer’s business relationships for conflicts of interest.
“They really should be careful when people have this kind of dual loyalty,” said Epstein.
Columbia said it monitors Mayer’s employment as CEO of the mortgage company to ensure compliance with its policies. “Professor Mayer has demonstrated a commitment to openness and transparency by disclosing outside affiliations,” said Chris Cashman, a spokesman for the business school. Mayer has a “special appointment,” which reduces his salary and teaching load and also caps his hours at Longbridge, Cashman said.
Likewise, Boston College said it reviewed Professor Munnell’s investment in Mayer’s company, on whose board she served from 2012 through 2014. Munnell said another round of investors in 2016 bought out her $150,000 stake in Longbridge for an additional $4,000 in interest.
“Anytime I had a conversation like this, I had to say at the beginning that I have $150,000 in Longbridge,” said Munnell. “I had to do it all the time. I’m just as happy to be out, for my academic life.”
- A letter to the Alternative Reference Rates Committee (ARRC) from the Secured Finance Industry Group (SFIG) put an end to the fiction that major financial institutions support SOFR.
- Financial institutions are justly concerned that SOFR could fatally squeeze bank margins in a crisis.
- Nevertheless, other proposed alternatives, such as the changes to LIBOR proposed by Intercontinental Exchange (ICE), do not fit the regulators’ requirement that the replacement be determined by liquid market transactions prices.
- Regulators cannot introduce a new financial instrument. LIBOR’s replacement must be the result of private sector innovation.
(Kurt Dew) A recent Secured Finance Industry Group (SFIG) comment letter is SFIG’s response to a request for comment by the Alternative Reference Rates Committee (ARRC) – a Fed-appointed committee of bankers tasked to solve the LIBOR problem. The Fed’s ARRC creation was an embarrassingly transparent attempt by the regulators to co-opt industry objections to their LIBOR replacement. ARRC proposes to replace LIBOR by the Secured Overnight Financing Rate (SOFR) – a Fed-created version of the overnight repurchase agreement rate. The SFIG comment details the objections of financial institutions to SOFR. Importantly, SFIG serves as chair of ARRC. The critical comment letter is thus the final blow to the regulators’ failed effort to gain the appearance of financial institution support for SOFR.
However, more importantly, neither financial institutions nor their regulators have a clear plan to resolve the need to replace LIBOR. If replacing LIBOR were not such a critical matter, the Byzantine machinations of the bank regulators and financial institutions around SOFR would be amusing. However, the pricing of tens of trillions in debt instruments and hundreds of trillions in derivative instruments depends on a smooth transition to some reference rate other than LIBOR. I contend that this enormous magnitude is a low estimate of the financial market assets at risk due to poorly governed debt markets.
Financial markets’ failure to solve the LIBOR replacement problem is the result of a misunderstanding of the reasons for the LIBOR problem. Understanding of LIBOR suffers from journalistic misdirection, on one hand, and a misunderstanding of the root problem that the LIBOR brouhaha exemplifies, on the other.
The failure of LIBOR is a market structure failure. However, the financial press bills LIBOR’s failure mistakenly as a failure of ethics among bankers. Recorded transcripts of telephone, email, and chat room conversations of small groups of traders provided the evidence of ethical weaknesses leading to attempted market manipulation that drove the post-Financial Crisis LIBOR embarrassment.
However, markets themselves typically are the best antidote to attempted market manipulation. The market solution to trader cabals formed to alter prices has always been a simple one. In a liquid market, larger market forces inevitably swamp organized efforts to manipulate prices. Cabals don’t work in a liquid market because the manipulators lose money.
The split over a LIBOR is an enormous opportunity.
Financial institutions have quite reasonably insisted on two key properties that SOFR lacks.
- The LIBOR replacement should be forward-looking. That is, the rate should reflect the market’s opinion of overnight interest costs on average in the coming three months.
- The LIBOR replacement should reflect the interest cost of private unsecured borrowers, instead of the lower interest costs of the Treasury.
Thus, coupled with the TBTF banks’ endorsement of the Intercontinental Exchange Inc. (ICE) candidate for a LIBOR replacement, the SFIG letter shows that ARRC’s SOFR proposal does not represent the banks and other financial institutions that are ARRC members. Worse, it raises a serious threat. If regulators seize on an index that might potentially bankrupt one or more major financial institutions during a financial crisis, those institutions do not plan to allow the Fed to pass the blame for this disastrous decision to them.
However, the banks (or a third party) will, I believe, have to do more than provide another bank-calculated index. The self-acknowledged problem with the ICE (TBTF endorsed) LIBOR replacement is that any index the procedure produces is the result of a transaction selection process by banks themselves. Thus, the ICE fix remains vulnerable to the same ethical vulnerabilities that LIBOR itself faced.
In short, any satisfactory LIBOR replacement must be a form of debt that doesn’t exist now. We could throw up our hands and use the hazardous SOFR, but this seems to be a negative way of looking at the situation.
This is an obvious opportunity to seize an enormous chunk of the financial markets in one fell swoop by addressing bond market illiquidity more generally. Moreover, it is an opportunity that anybody with the courage and the capital could pursue. The problem is one of creating a new debt market with a different structure. Such a new market would have no incumbent oligopolies and no reactionary regulators. Capital, a few hotshot IT professionals, and some people with skills of persuasion would be enough ammunition to get the job done. Island overwhelmed the incumbent stock exchanges with less.
Interestingly, in all likelihood, TBTF banks, incumbent exchanges, and regulators are at a disadvantage in the pursuit of a debt market innovation since they are married to old ways of generating revenues. An incumbent TBTF bank pursuing a new market structure, for example, would not find management friendly to ideas such as putting an end to collateral hypothecation in the repo market.
Why are we getting LIBOR wrong?
SFIG and the TBTF banks also concede that there is no existing instrument that meets the minimal standards required of a LIBOR replacement – the replacement should be a term (probably three-month, or six-month) unsecured debt instrument, traded in a liquid marketplace where recorded transaction prices are the result of the combined forces of supply and demand. SFIG’s comment letter to ARRC’s request to comment on SOFR points to a central quandary that neither SOFR nor its detractors have addressed. No financial instrument meets these criteria today.
Don’t blame the Fed. The Fed did everything imaginable to get industry support for repurchase agreements, the only existing liquid instrument where an honest broker (the Fed) records market transactions. Blame the markets themselves. Organized market participants are adopting the time-honored “See no evil; hear no evil; speak no evil.” approach. Once ARRC had endorsed SOFR, CME Group (CME) helpfully created a futures contract based on SOFR.
All that remained was for the markets to begin trading the SOFR-based instruments. However, that didn’t happen. CME volume in SOFR futures remains a small fraction of Eurodollar (LIBOR) futures volume. In itself, this is not a failing of the marketplace. It’s simply the market’s recognition that SOFR futures don’t provide adequate protection for their existing risks.
How big is the LIBOR problem?
No matter how dire you believe the LIBOR problem to be, the underlying problem of debt market illiquidity that the LIBOR problem reveals is many times bigger. A LIBOR fix only resolves the issue of illiquidity in the short-term end of the market for unsecured debt.
LIBOR became important to society when it began to appear as a factor in the cost of mortgages, municipal debt, and credit card debt. In other words, LIBOR is different from the interest cost of a corporate bond because of LIBOR’s visibility. However, of course, all bank debt, no matter how obscure, is a factor in the cost of consumer borrowing.
An exchange trading liquid tailor-made debt issues that capture the primary price risks associated with debt issuance at all maturities would have a massive beneficial effect on the cost of financing. This market would generate transactions comparable to the combined volume of the stock exchanges, assuming turnover in the two markets to be comparable.
What flaw in market structure creates the LIBOR/debt market liquidity problem? In the markets for corporate liabilities, the issuer is concerned about the market appeal of the terms upon which debt is sold only once – the issue date. After that, any action the corporation might take that benefits its stockholders at the expense of its debtholders faces a single low hurdle – is it legal? Investors are wise to devote more time and attention to debt acquisition than to share acquisition.
If bondholders could devise an instrument that liberates its holder from the negative effects on debt valuation of the decision-making power of a single issuer, it would be interesting to see what effect that would have on the position within corporate politics of debtholders relative to stockholders. One could imagine the popularity of this buyer-friendly instrument growing relative to the popularity of the current issuer-centric debt issues. As this form of debt grows as a share of the market for debt, the management of this debt would become gatekeepers for bond market liquidity. They might gradually induce issuers to write more buyer-friendly forms of debt.
The legal obligation of corporate management to consider the interest of stockholders when these interests conflict with the interests of debtholders is writ in stone. Nevertheless, there is no legal barrier to investors – the final constituency for all corporate obligations – using their influence to discriminate among debt issues. If debtholders confront stockholders with a positive payoff to pleasing debtholders, there might be multiple systemic improvements. The value of buyer-friendly debt would rise relative to issuer-friendly issues, driving down its interest cost and resulting in capital gains to both debt and shareholders. The result would be an altogether safer financial system as a whole.
Ah, the problems of trying to model residential mortgage purchase and refinancing applications. When mortgage rates fall, models predict a rise in both purchase and refinancing applications. This has left mortgage modelers dazed and confused.
Mortgage rates have been dropping since November, yet mortgage purchase applications dropped in for the latest week. Very likely this was the displacement of purchase applications was simply the “start of the year” effect after a sleepy holiday season.
Ditto for mortgage refinancing applications. Despite mortgage rates declining. there was “start of the year” surge. But continued rate decreases have resulted in generally declining purchase applications after the surge.
On a long term view, purchase applications have remained sedate following the financial crisis and new regulations.
Mortgage refinancing applications remain in Death Valley.
The latest alarm signal that the US economy is on collision course with a recession came after today’s release of the latest Senior Loan Officer Opinion Survey (SLOOS) by the Federal Reserve, which was conducted for bank lending activity during the fourth quarter of last year, and which reported a double whammy of tightening lending standards and terms for commercial and industrial loans on one hand, and weaker demand for those loans on the other. Even more concerning is that banks also reported weaker demand for both commercial and residential real estate loans, echoing the softer housing data in recent months.
This tightening in C&I lending standards coupled with sharp declines loan demand, especially for mortgage and auto loans, is shown below.
Here are the details via Goldman:
- 20% of banks surveyed reportedly widened spreads of loan rates over the cost of funds for large- and medium-sized firms, while 16% narrowed spreads. 14% of banks surveyed reported higher premiums charged on riskier loans, while 4% reported lower premiums. Other terms, such as loan covenants and collateralization requirements, remained largely unchanged. Demand for loans reportedly weakened on balance.
- Relative to the last survey, standards on commercial real estate (CRE) loans tightened on net over the fourth quarter of the year. On net, 17% of banks reported tightening credit standards on loans secured by multifamily residential properties, while 13% of banks on net reported tightening standards for construction and land development loans. As above, banks reported that demand for CRE loans across a broad range of categories moderately weakened on net.
- Banks reported that lending standards for residential mortgage loans remained largely unchanged on net in 2018Q4 relative to the prior quarter. However, this benign environment was largely as a result of slumping demand for credit, as banks reported weaker demand across all surveyed residential loan categories, including home equity lines of credit.
- While banks reported that lending standards on consumer installment loans and autos remained largely unchanged, banks reported that lending standards for credit cards had tightened slightly. Here too demand – for all categories of consumer loans – was moderately weaker, while respondent willingness to make consumer installment loans tumbled to the lowest value since the financial crisis.
Finally, and most concerning of all, is that in their response to special questions on their 2019 outlook, assuming that economic activity continues to be in line with consensus forecasts, banks reported they plan to tighten lending standards somewhat for C&I loans, commercial real estate loans, and residential mortgage loans, in other words the most important credit would become even more difficult to attain. As a result, or perhaps due to the slowdown in the economy, banks also expect demand for C&I, CRE, and residential mortgage loans to weaken somewhat in 2019.
Banks also reported expecting delinquencies and charge-offs to increase somewhat on C&I, CRE, and residential mortgage loans; as Bloomberg’s Andrew Cinko muses “if America was heading toward an economic contraction that would be a typical expectation. But this doesn’t seem to be the case for the foreseeable future. So what gives?”
Perhaps “what gives” is that the economy is not nearly as strong as consensus would make it appear, and behind closed door, loan officers are already batting down the hatches and preparing for a recession.
* * *
Here would be a good time to remind readers that according to a Reuters investigation conducted in mid-December, when looking behind headline numbers showing healthy loan books, “problems appear to be cropping up in areas such as home-equity lines of credit, commercial real estate and credit cards” according to federal data reviewed by the wire service and interviews with bank execs.
Worse, banks are also starting to aggressively cut relationships with customers who seem too risky, which is to be expected: after all financial conditions in the real economy, if not the markets which just enjoyed the best January since 1987, are getting ever tighter as short-term rates remain sticky high and the result will be a waterfall of defaults sooner or later. Here are the all too clear signs which Reuters found that banks are starting to prepare for the next recession by slashing and/or limiting risky loan exposure:
- First, nearly half of the applications from customers with low credit scores were rejected in the four months ending in October, compared with 43 percent in the year-ago period, according to a survey released by the Federal Reserve Bank of New York.
- Second, banks shuttered 7 percent of existing accounts, particularly among subprime borrowers, the highest rate since the Fed started conducting surveys in 2013.
- Third, home-equity lines of credit declined 8 percent across the industry, with growth slowing in areas such as credit cards and commercial-and-industrial loans, the survey showed.
Then there are the bank-specific signs, starting with Capital One – one of the biggest U.S. card lenders – which is restricting how much it lends to each customer even as it aggressively recruits new ones, CEO Richard Fairbank said last December.
We have been more cautious in the extension of credit, initial credit lines, the broad-based credit line increase programs,” he said. “At this point in the cycle, we’re going to hold back on that option a bit.”
Regional banks have become more cautious lately as well, as they avoid financing riskier projects like early-stage construction loans and properties without pre-lease agreements (here traders vividly recall the OZK commercial real estate repricing fiasco that sent the stock crashing). New Jersey’s OceanFirst Bank also pulled back on refinancing transactions that let customers cash out on their debt, and has started reducing exposure to industrial loans, CEO Chris Maher told Reuters.
“In a downturn, industrial property is extremely illiquid,” he said. “If you don’t want it and it’s not needed it could be almost valueless.”
What happens next?
While a recession is looking increasingly likely, especially as it becomes a self-fulfilling prophecy with banks slashing loans resulting in even slower velocity of money, while demand for credit shrinks in response to tighter loan standards and hitting economic growth, the only question whether a recession is a 2019 or 2020 event, bankers and analysts remain optimistic that the next recession will look much more like the 2001 tech bubble bursting than the 2007-09 global financial crisis.
We wonder why they are so confident, and statements such as this one from Flagship Bank CFO Schornack will hardly instill confidence:
“I lived through the pain of the last recession. We are much more prudent today in how we underwrite deals.”
We disagree, and as evidence we present Exhibit A: the shock write down that Bank OZK took on its commercial real estate, which nobody in the market had expected. As for banks being more “solid”, let’s remove the $1.5 trillion buffer in excess reserves that provides an ocean of artificial liquidity, and see just how stable banks are then. After all, it is this $1.5 trillion in excess reserves that prompt Powell to capitulate and tell the markets he is willing to slowdown or even pause the Fed’s balance sheet shrinkage.
(Source: by Victor Whitman | Scotsman Guide) Changes are likely to come soon that will make it harder for prospective borrowers to obtain Federal Housing Administration (FHA) loans. It’s all part of an effort to dial back loosening credit standards that have seen FHA borrower debt loads and cash-out refinancing activity rise to record levels, top officials with the U.S. Department of Housing and Urban Development (HUD) told reporters on Thursday.
“We will be making some additional changes soon,” said FHA Commissioner Brian Montgomery during a morning conference call. HUD released its fiscal 2018 annual report to Congress on the health of the FHA insurance fund.
“I couldn’t give you an exact date, but again we want to find that critical balance between providing people with the opportunity for sustainable home ownership, but again we have to maintain the right balance and protect taxpayers against risk.”
Montgomery didn’t reveal any specific plans on where the tightening may occur, but indicated cash-out refinancing activity was in the cross-hairs of the agency.
In a year where refinances dropped dramatically, FHA’s cash-out counts rose 6percent, to 150,883, in fiscal 2018.
“Cash-out refinances, both as a percentage of our over all business and our refinance endorsement volume, are growing astronomically,”Montgomery said. Cash-out refinances comprised nearly 63 percent of all refinance transactions in fiscal 2018, up from nearly 39 percent last year, he said.
“The increase in cash-outs presents a potential future risk for us, but also challenges the core tenants of FHA’s taxpayer-backed mission.”
Montgomery said rising debt-to-income (DTI) ratios are another major concern.
“Almost a quarter of our forward-purchase business was comprised of mortgages in which a borrower had a DTI ratio above 50 percent,”he said. “That is the highest percentage since 2000. When you couple that with a trend of decreasing average credit scores — 670 this year versus 676last year and the lowest average since 2008 — most underwriters and housing-finance experts will say that managing this type of risk without corresponding scrutiny becomes problematic.”
Montgomery also said HUD has concerns about the jurisdictional right and the extent to which government entities, such as state housing-finance agencies, provide down payment assistance to FHA borrowers.
Montgomery also indicated that HUD will not be cutting FHA insurance rates in the near future.
“While the [insurance] fund is sound at this point in time,I think we are still far away from being in a position to consider any reduction in our mortgage-insurance premium,” he said.
HUD’s insurance fund ended the 2018 fiscal year in September in better shape than the end of fiscal 2017. The net worth of the fund increased to $34.9 billion, up $8.12 billion at the end of fiscal 2017. The fund’s capital ratio, a closely watched metric that compares the net worth of the fund to the dollar balance of all active insured loans, stood at a 2.76 percent, up from 2.18 percent at the end of fiscal 2017. This was the fourth-consecutive year that the capital ratio has been above Congress’s mandated 2 percent threshold, a level it considers sufficient to sustain losses without government intervention.
The overall fund, however, was once again dragged down by FHA’s reserve-mortgage program, known as the Home Equity Conversion Mortgage (HECM). Reverse mortgages are loans that allow seniors to tap their home equity and remain in their homes for life. They represent a small portion of all FHA-insured loans, but have had an out sized impact on the risk to the fund.
The FHA portfolio of HECM-insured mortgages was estimated to have a negative value of $16.3 billion. The reverse portfolio also had a negative capital ratio of 18.83 percent.
By contrast, FHA’s regular forward-loan portfolio — loans commonly taken out by first-time home buyers — had an estimated positive value of $46.8 billion and a healthy positive capital ratio of 3.93 percent.
Montgomery and HUD Secretary Ben Carson, who also joined the morning call with reporters, said that elderly borrowers in the reverse program are being subsidized to an unsustainable degree by the typically lower-income,often minority, first-time home buyers in the FHA’s forward-loan program.
“We are committed to maintaining a viable HECM program, so seniors can continue to age in place, but we can’t continue to see future HECM books being subsidized by our forward-mortgage programs,” Montgomery said. “It is not beneficial to anyone, including taxpayers.”
HUD has taken steps to tighten the program already,including most recently requiring a second appraisal on homes where the value could have been inflated. Montgomery said FHA is working on a plan to conduct a census of all families who live in homes with a HECM mortgage.
Mortgage Bankers Association President Robert Broeksmit said HUD’s scrutiny of FHA’s credit standards was “prudent.”
“We are glad to see that FHA is closely monitoring the increasing risk in the forward portfolio, indicated by rising debt-to-income ratios, declining credit scores, and the increasing use of down payment-assistance programs,” Broeksmit said. “While current FHA delinquencies are quite low, it is prudent to keep an eye on these trends to ensure the program does not face undue challenges if, and when, the economy and job market cool.”
Broeksmit also noted that MBA has previously drawn attention to the HECM portfolio’s drain on the fund, and supported recent tightening moves.
“Policy makers should continue considering ways to insulate the forward program from the volatility in the reverse program,” he said.
That HUD might crack down on FHA-lending standards is worrisome for non-banks, however. Non-banks are now originating the bulk of FHA loans today. Reacting to the report, non-bank trade group the Community Home Lenders Association (CHLA) said HUD should loosen restrictions on the program by eliminating an Obama-era requirement that borrowers hold FHA insurance for the life of the loan.
“CHLA also renews its call for a cut in annual premiums, a move justified by FHA’s strong financial performance,” CHLA Executive Director Scott Olson said.
Total household debt hit a new record high, rising by $219 billion (1.6%) to $13.512 trillion in Q3 of 2018, according to the NY Fed’s latest household debt report, the biggest jump since 2016. It was also the 17th consecutive quarter with an increase in household debt, and the total is now $837 billion higher than the previous peak of $12.68 trillion, from the third quarter of 2008. Overall household debt is now 21.2% above the post-financial-crisis trough reached during the second quarter of 2013.
Mortgage balances—the largest component of household debt—rose by $141 billion during the third quarter, to $9.14 trillion. Credit card debt rose by $15 billion to $844 billion; auto loan debt increased by $27 billion in the quarter to $1.265 trillion and student loan debt hit a record high of $1.442 trillion, an increase of $37 billion in Q3.
Balances on home equity lines of credit (HELOC) continued their downward trend, declining by $4 billion, to $432 billion. The median credit score of newly originating mortgage borrowers was roughly unchanged, at 760.
Mortgage originations edged up to $445 billion in the second quarter, from $437 billion in the second quarter. Meanwhile, mortgage delinquencies were unchanged improve, with 1.1% of mortgage balances 90 or more days delinquent in the third quarter, same as the second quarter.
Most newly originated mortgages continued went to borrowers with the highest credit scores, with 58% of new mortgages borrowed by consumers with a 760 credit score or higher.
The median credit score of newly originating borrowers was mostly unchanged; the median credit score among newly originating mortgage borrowers was 758, suggesting that with half of all mortgages going to individuals with high credit scores, mortgages remain tight by historical standards. For auto loan originators, the distribution was flat, and individuals with subprime scores received a substantial share of newly originated auto loans.
In what will come as a surprise to nobody, outstanding student loans rose $37BN to a new all time high of $1.44 trillion as of Sept 30. It should also come as no surprise – or maybe it will to the Fed – that student loan delinquencies remain stubbornly above 10%, a level they hit 6 years ago and have failed to move in either direction since…
… while flows of student debt into serious delinquency – of 90 or more days – spiked in Q3, rising to 9.1% in the third quarter from 8.6% in the previous quarter, according to data from the Federal Reserve Bank of New York.
The third quarter marked an unexpected reversal after a period of improvement for student debt, which totaled $1.4 trillion. Such delinquency flows have been rising on auto debt since 2012 and on credit card debt since last year, which has raised a red flag for economists.
Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $9 billion in the quarter, to $1.24 trillion. Meanwhile, credit card balances rose by $14 billion, or 1.7%, after a seasonal decline in the first quarter, to $829 billion.
Despite rising interest rates, credit card delinquency rates eased slightly, with 7.9% of balances 90 or more days delinquent as of June 30, versus 8.0% at March 31. The share of consumers with an account in collections fell 23.4% between the third quarter of 2017 and the second quarter of 2018, from 12.3% to 9.4%, due to changes in reporting requirements of collections agencies.
Auto loan balances also hit an all time high, as they continued their six-year upward trend, increasing by $27 billion in the quarter, to $1.265 trillion. Meanwhile, credit card balances rose by $15 billion to $844 billion. In line with rising interest rates, credit card delinquency rates rose modestly, with 4.9% of balances 90 or more days delinquent as of Sept 30, versus 4.8% in Q2.
Overall, as of September 30, 4.7% of outstanding debt was in some stage of delinquency, an uptick from 4.5% in the second quarter and the largest in 7 years. Of the $638 billion of debt that is delinquent, $415 billion is seriously delinquent (at least 90 days late or “severely derogatory”). This increase was primarily due to the abovementioned increase in the flow into delinquency for student loan balances during the third quarter of 2018. The flow into 90+ day delinquency for credit card balances has been rising for the last year and remained elevated since then compared to its recent history, while the flow into 90+ day delinquency for auto loan balances has been slowly trending upward since 2012. About 215,000 consumers had a bankruptcy notation added to their credit reports in 2018Q3, slightly higher than in the same quarter of last year. New bankruptcy notations have been at historically low levels since 2016.
This quarter, for the first time, the Fed also broke down consumer debt by age group, and found that debt balances remain more concentrated among older borrowers. The shift over the past decade is due to at least three major forces. First, demographics have changed with large cohorts of baby boomers entering into retirement. Second, demand for credit has shifted, along with changing preferences and borrowing needs following the Great Recession. Finally, the supply of credit has changed: mortgage lending has been tight, while auto loans and credit cards have been more widely available.
In addition to an overall increase in the share of debt held by older borrowers, there has been a noticeable shift in the composition of debt held by different age groups. Student and auto loan debt represent the majority of debt for borrowers under thirty, while housing-related debt makes up the vast majority of debt owned by borrowers over sixty.
Confirming what many know, namely that Millennial borrowers are screwed, the Ny Fed writes that older borrowers have longer credit histories with more borrowing experience, as well as higher and typically steadier incomes; “thus, they often have higher credit scores and are safer bets for lenders.” Tighter mortgage underwriting during the years following the Great Recession has limited mortgage borrowing by younger and less creditworthy borrowers; meanwhile, student loan balances – and as most know “student” loans are usually used for anything but tuition – and participation rose dramatically and credit standards loosened for auto loans and credit cards. Consequently, there has been a relative shift toward non-housing balances among younger borrowers, while housing balances moved to the older and more creditworthy borrowers with lower delinquency rates and better performance overall.
And since this is a circular Catch 22, absent an overhaul of how credit is apportioned by age group, Millennials and other young borrowers will keep getting squeezed out of the credit market resulting in a decline in loan demand – and supply – which is slow at first and then very fast.
Back in 2017, we explained why the “fate of the world economy is in the hands of China’s housing bubble.” The answer was simple: for the Chinese population, and growing middle class, to keep spending vibrant and borrowing elevated, it had to feel comfortable and confident that its wealth would keep rising. However, unlike the US where the stock market is the ultimate barometer of the confidence boosting “wealth effect”, in China it has always been about housing as three quarters of Chinese household assets are parked in real estate, compared to only 28% in the US, with the remainder invested financial assets.
Beijing knows this, of course, which is why China periodically and consistently reflates its housing bubble, hoping that the popping of the bubble, which happened in late 2011 and again in 2014, will be a controlled, “smooth landing” process. For now, Beijing has been successful in maintaining price stability at least according to official data, allowing the air out of the “Tier 1” home price bubble which peaked in early 2016, while preserving modest home price appreciation in secondary markets.
How long China will be able to avoid a sharp price decline remains to be seen, but in the meantime another problem faces China’s housing market: in addition to being the primary source of household net worth – and therefore stable and growing consumption – it has also been a key driver behind China’s economic growth, with infrastructure spending and capital investment long among the biggest components of the country’s goal seeked GDP. One result has been China’s infamous ghost cities, built only for the sake of Keynesian spending to hit a predetermined GDP number that would make Beijing happy.
Meanwhile, in the process of reflating the latest housing bubble, another dire byproduct of this artificial housing “market” has emerged: tens of millions of apartments and houses standing empty across the country.
According to Bloomberg, soon-to-be-published research will show that roughly 22% of China’s urban housing stock is unoccupied, according to Professor Gan Li, who runs the main nationwide study. That amounts to more than 50 million empty homes.
The reason for the massive empty inventory glut: to keep supply low and prices artificially elevated by taking out as much inventory off the market as possible. This, however, works both ways, and while it helps boost prices on the way up as the economy grow and speculators flood the housing market with easy money, the moment the trend flips the spike in supply as empty units are offloaded will lead to a panic liquidation of homes, resulting in what may be the biggest housing market crash ever observed, and putting the US home bubble of 2006 to shame.
Indeed, as Bloomberg notes, the “nightmare scenario” for Chinese authorities is that owners of unoccupied dwellings rush to sell when cracks start appearing in the property market, causing a self-reinforcing downward price spiral.
Worse, the latest data, from a survey in 2017, also suggests Beijing’s efforts to curb property speculation – which alongside shadow banking and the persistent threat of sudden bank runs (like the one discussed last week) is considered by Beijing a key threat to financial and social stability – have failed.
“There’s no other single country with such a high vacancy rate,” said Gan, of Chengdu’s Southwestern University of Finance and Economics. “Should any crack emerge in the property market, the homes to be offloaded will hit China like a flood.”
How did the Chinese researcher obtain this troubling number? To find the percentage of vacant housing, thousands of researchers spread out across 363 Chinese counties last year as part of the China Household Finance Survey, which Gan runs at the university.
Gan said that the vacancy rate, which excludes homes yet to be sold by developers, was little changed from a 2013 reading of 22.4%. And while that study showed 49 million vacant homes, Gan puts the number now at “definitely more than 50 million units.“
Meanwhile, Beijing – which is fully aware of these stats, and is also aware that even a modest price decline could be magnified instantly as millions of “for sale” units hit the market at the same time – is worried. That’s why Chinese authorities have imposed buying restrictions and limited credit availability, only to see money flooding into other areas. Rampant price gains also mean millions of people are shut out from the market, exacerbating inequality.
In fact, China’s president Xi famously said in October last year that “houses are built to be inhabited, not for speculation”, and yet a quarter of China’s housing is just that: empty, and only serves to amplify speculation.
While holiday homes and the empty dwellings of migrants seeking work elsewhere account for some of the deserted properties, Gan found that investment purchases have been the biggest factor keeping the vacancy rate high. That’s despite curbs across the country meant to discourage buying of multiple dwellings.
There is another economic cost to this speculative frenzy: the drop in supply puts upward pressure on prices and crowds young buyers out of the market, according to Kaiji Chen, who co-authored a Fed paper called “The Great Housing Boom of China.”
And, as Americans so fondly recall, the result of chasing unaffordable homes for the purpose of price speculation has resulted in yet another unprecedented debt bubble: according to Caixin, outstanding personal home mortgages in China have exploded seven fold from 3 trillion yuan ($430 billion) in 2008 to 22.9 trillion yuan in 2017, according to PBOC data
By the end of September, the value of outstanding home mortgages had surged another 18% Y/Y to a record 24.9 trillion yuan, resulting in a trend that as Caixin notes, has turned many people into what are called “mortgage slaves.”
It has also resulted in yet another housing bubble: home mortgage debt now makes up more than half of total household debt in China. As of the third quarter, it accounted for 53% of the 46.2 trillion yuan in outstanding household debt.
For now, few are losing sleep over what will be the next massive housing bubble to burst. An example of a vacant home is a villa on the outskirts of Shanghai that 27-year-old Natalie Feng’s parents bought for her. The two-story residence was meant to be a weekend escape for the family of three. In reality, it’s empty most of the time, and Feng says it’s too much trouble to rent it out.
“For every weekend we spend there, we need to drive for an hour first, and clean up for half a day,” Feng said. She joked that she sometimes wishes her parents hadn’t bought it for her in the first place. That’s because any apartment she buys now would count as a second home, which means she’d have to make a bigger down payment.
* * *
What is troubling is that despite relatively stable home prices, the foundations behind the housing market are cracking. As the WSJ recently reported, in early December, a group of homeowners stormed the sales office of their Shanghai complex, “Central Washington”, whose developer, Shanghai Zhaoping Real Estate Development, was advertising new apartments at a fraction of the prices of the ones sold earlier in the year. One apartment owner said the new prices suggested the value of the apartment she bought from the developer in March had dropped by about 17.5%.
“There are people who bought multiple homes who are now trying to sell one to pay off the mortgage on another,” said Ran Yunjie, a property agent. One of his clients bought an apartment last year for about $230,000. To find a buyer now, the client would have to drop the price by 60%, according to Ran.
Meanwhile, in a truly concerning demonstration of what will happen when the bubble finally bursts, last month we reported that angry homeowners who paid full price for units at the Xinzhou Mansion residential project in Shangrao attacked the Country Garden sales office in eastern Jiangxi province last week, after finding out it had offered discounts to new buyers of up to 30%.
“Property accounts for roughly 70 per cent of urban Chinese families’ total assets – a home is both wealth and status. People don’t want prices to increase too fast, but they don’t want them to fall too quickly either,” said Shao Yu, chief economist at Oriental Securities. “People are so used to rising prices that it never occurred to them that they can fall too. We shouldn’t add to this illusion,” Shao added, echoing Ben Bernanke circa 2005.
But the biggest surprise once the music finally stops may be that – as a fascinating WSJ report revealed one year ago – China’s housing downturn is likely far, far worse than meets the eye, as under Beijing’s direction more than 200 cities across China for the last three years have been buying surplus apartments from property developers and moving in families from condemned city blocks and nearby villages. China’s Housing Ministry, which is behind the purchases, said it plans to continue the program through 2020. The strategy, supported by central-government bank lending, has rescued housing developers and lifted the property market.
In other words, while China already has a record 50 million empty apartments, the real number – when excluding the government’s own stealthy purchases of excess inventory – is likely significantly higher. It is this, and not China’s stock market, that has long been the biggest time bomb for Beijing, and if Trump and Peter Navarro truly want to crush China in their ongoing trade war, they should focus on destabilizing the housing market: the Chinese stock market was, and remains just a distraction.
- China has more than 50 million vacant apartments
- Mortgage loans have grown 8-fold in the past decade
- Prices are kept steady thanks to constant government purchases of surplus inventory
- Home prices are already cracking, with some homebuilders forced to cut prices by 30%.
- Homebuyers revolt, forming angry militias and storm homesellers’ offices when prices dip
For now, China has been able to maintain the illusion of stability to preserve social order. However, should the housing slowdown accelerate significantly and tens of millions in empty units suddenly hit the market, then the “working class insurrection” that China has been preparing for since 2014…
… will become an overnight reality, with dire consequences for the entire world.
Fannie Mae and Freddie Mac are bankrolling significantly fewer loans this year, reflecting the general slowdown in the residential U.S. mortgage market.
In the nine months through the third quarter, the government-sponsored enterprises (GSEs) purchased a combined 2.47 million home loans, down 9 percent for the same nine months in 2017, the companies reported last week in quarterly reports.
The GSEs bankroll around 45 percent of all residential mortgages, according to the Urban Institute, by purchasing loans from lenders, wrapping them with a government guarantee and securitizing most of them for sale in the secondary market.
The combined balance of these loans through the third quarter was $577 billion, down 7 percent from the 2017 level for the same nine months.
GSE funding activity has dropped for the second consecutive year.
The 2018 year-to-date counts and volume balances were down 16 percent and 15 percent, respectively, compared to same nine months in 2016.
During a conference call last week, Fannie Mae Chief Financial Officer Celeste Brown alluded to tough conditions for lenders.
“At a high level, what I see is that our customers are facing a lot of headwinds in the market,” she said. “Rates are up, volumes are down, and margins are tight, so lender profitability is challenged. New housing supply is up but not all the supply has been created where it’s needed. While we do see income growth nationally, in many markets home-price growth has outstripped income growth so affordability for home buyers remains a challenge,” Brown said.
The numbers have waned as a result of the big drop in refinancing activity. The combined GSE refinance counts totaled 909,000, down 26 percent from the 1.23 million refinance loans acquired by the GSEs through the first nine months of 2017. The GSE reports indicate that cash-out refinancing levels have remained fairly stable, whereas rate-reduction and term refinances are falling steeply.
Meanwhile, the home-purchase market hasn’t grown at anywhere near the pace that refinance activity has been falling.The combined GSE home-purchase loan counts through the third quarter totaled 1.56 million, up 5 percent over the 2017 level.
U.S. home sales are expected to be flat this year or even decline marginally due to rising prices; a lack of affordable, entry-level homes for sale; and rising rates.
“Our expectations for housing have become more pessimistic,” Fannie Mae Chief Economist Doug Duncan said in October. “Rising interest rates and declining housing sentiment from both consumers and lenders led us to lower our home sales forecast over the duration of 2018 and through 2019. Meanwhile, affordability, especially for first-time home buyers, remains atop the list of challenges facing the housing market.”
Fannie Mae’s most recent forecast calls for the origination volume for the entire market to fall 10.5 percent year over year in 2018, to $1.63 trillion. Refinance volume is predicted to decline by 30 percent over the 2017 level to $454 billion. Purchase volume in 2018 will remain essentially flat with the 2017 level at $1.18 trillion, Fannie forecasts.
With purchase applications tumbling alongside the collapse in refinancings, the headline mortgage application data slumped to its lowest level since September 2000 last week.
This should not be a total surprise as Wells Fargo’s latest results shows the pipeline is collapsing – a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis.
But in the month since those results, mortgage rates have gone higher still… (this is now the biggest 2Y rise in mortgage rates since 2000)…
Sparking further weakness in the housing market…
And absent Christmas weeks in 2000 and 2014, this is the weakest level of mortgage applications since September 2000…
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
And, as famed housing-watcher Robert Shiller recently noted, the weakening housing market is similar to the last market high, just before the subprime housing bubble burst a decade ago.
The economist, who predicted the 2007-2008 crisis, told Yahoo Finance that current data shows “a sign of weakness.”
“This is a sign of weakness that we’re starting to see. And it reminds me of 2006 … Or 2005 maybe,”
Housing pivots take more time than those in the stock market, Shiller said, adding that:
“the housing market does have a momentum component and we’re seeing a clipping of momentum at this time.”
The Nobel Laureate explained:
“If the markets go down, it could bring on another recession. The housing market has been an important element of economic activity. If people start to get pessimistic about housing and pull back and don’t want to buy, there will be a drop in construction jobs and that could be a seed for another recession.”
When reminded that 2006 predated the greatest financial crisis in a lifetime, RT notes that Shiller acknowledged that any correction would likely be far less severe.
“The drop in home prices in the financial crisis was the most severe drop in the US market since my data begin in 1890,” the Yale economist said.
“It could be that we’re primed to repeat it because it’s in our memory and we’re thinking about it but still I wouldn’t expect something as severe as the Great Financial Crisis coming on right now. There could be a significant correction or bear market, but I’m waiting and seeing now.”
Tick, tick, Mr Powell.
The Mortgage Bankers Association released their weekly survey of members (I don’t know if Quicken Loans is a member or not) and it revealed that mortgage REFINANCING applications remain in Death Valley since mortgage rates started increasing back in mid-2016.
Both purchase and refinancing applications were down from the previous week.
Of course, subprime borrower originations have declined since the finacial crisis and the housing bubble burst. But home prices continue to soar despite the malaise in mortgage purchase applications.
Of course, higher capital requirements for commercial banks and the Consumer Financial Protection Bureau helped chill the mortgage market. But with the Federal Reserve encouraging banks NOT to lend by paying interest on bank excess reserves, are we surprised at the malaise in mortgage purchase applications or originations?
Hence, it is not surprising to see a slowdown in the growth of bank credit YoY.
Yes, it is Death Valley Days … at least for mortgage refinancing.
“You can’t bail out the banks, leave the debts in place, and rescue the economy. It’s a zero-sum game. Somebody has to lose. That’s what happened in 2009 when President Obama came in. He invited the bankers to the White House and he said, “I’m the only guy standing between you and the mob with pitchforks,” by which he meant the voters that he was bamboozling. He reassured the bankers. He said, “Look, my loyalty is to my campaign donors not to the voters. Don’t worry; my loyalty is with you.”
LIBOR, the London Interbank Offered Rate, which sets the rate for 2.8 million adjustable-rate mortgages (ARMs) and most reverse mortgages, is set to expire in three years. The index that appears to be LIBOR’s most likely successor, the Secured Overnight Financing Rate (SOFR), could potentially create a $2.5 to $5.0 billion annual windfall for forward mortgage holders and an equivalent loss for investors.
Fannie Mae, Freddie Mac (the government-sponsored enterprises, or GSEs), and their regulator, the Federal Housing Finance Agency (FHFA), have the greatest influence on the transition from LIBOR to a new index. Given the scope of the potential impact on investors and consumers, it’s important that the FHFA and the GSEs continue planning for the LIBOR change.
The LIBOR, dubbed “the world’s most important number,” is the rate at which banks report that they lend money to each other. It is a reference index, setting interest rates on mortgages and millions of other financial contracts totaling $200 trillion. Because of the “LIBOR fixing” scandal, in which certain banks deliberately misrepresented their lending rates (which are used to create the LIBOR), LIBOR is expected to be replaced by an alternative index by the end of 2021.
There are about $1 trillion in LIBOR-based adjustable-rate forward mortgages, or 2.8 million mortgages which represent close to 10 percent of the outstanding mortgage market. The greatest concentration is in loans held in bank portfolios and in private-label securities.
Approximately 57 percent of these 2.8 million LIBOR-based mortgages were originated pre-crisis. In terms of credit characteristics, LIBOR ARMs tend to look similar to fixed-rate loans originated at the same time, except in the private label securities market, where the characteristics of the pre-crisis LIBOR product were weaker. LIBOR ARMs tend to be larger loans than their fixed rate counterparts. This is particularly pronounced in the bank portfolio space, where the average ARM loan is $582,400 versus $306,200 for all portfolio loans.
We also need to consider the possibility of a “zombie” LIBOR
LIBOR is apt to disappear at the end of 2021. Regulatory bodies are encouraging banks to continue to submit the numbers used to create the LIBOR through the end of 2021, at which point they are likely to stop. At that point, a substitute index will need to be used.
The legal documents on most adjustable-rate mortgages allow for the substitution of a new index based on comparable information if the original index is no longer available. But contract language for most mortgages is largely silent on how to define a reasonable substitute and what it means for LIBOR to be unavailable.
On the latter issue, there is also the possibility that the LIBOR will become increasingly unreliable before it expires. As banks begin to pull back from providing information, they may create what has been nicknamed a “Zombie LIBOR,” which would be an unreliable LIBOR index and a real risk.
We believe that Fannie Mae and Freddie Mac, while they play a small role in the LIBOR market for adjustable-rate mortgages (20 percent by loan count), will decide under FHFA guidance how they want to handle GSE adjustable-rate mortgages, and the rest of the market will follow suit.
What will the SOFR do to mortgage rates?
A group convened by the Federal Reserve has recommended that the SOFR be the successor to the LIBOR, but the SOFR differs from the LIBOR in two important ways:
- The SOFR is a secured rate, while the LIBOR is unsecured and, therefore, includes a risk premium. Historically, this has meant that the SOFR has been both lower than the LIBOR and less volatile.
- The SOFR is an overnight rate, while the LIBOR is quoted for a variety of terms.
Efforts have been made to encourage the development of a longer-term SOFR, but this market has not yet matured, so it’s not clear how the longer-term SOFR will be priced. But by comparing the historic LIBOR and SOFR rates and comparing one-year LIBORs with one-year Treasuries (as a proxy for the still-emerging longer-term SOFR), we estimate that a one-year SOFR will be 25 to 50 basis points lower than a one-year LIBOR. If this is accurate, substituting the SOFR for the LIBOR could decrease the mortgage rate on the outstanding LIBOR-indexed ARMs by 25 to 50 basis points.
If SOFR was substituted for LIBOR, we estimate that, over the entire $1 trillion forward ARM market, this differential would give borrowers a change in cumulative payments and investors an increased cost of $2.5 to $5.0 billion a year, or $15 to $30 billion on a present-value basis.
Close to 90 percent of the recent reverse mortgage market originations (home equity conversion mortgages, or HECMs) and 60 percent, or $50 billion, of the overall HECM market is also LIBOR based. In the $50 billion LIBOR HECM market, the likely beneficiary would be the heirs or the Federal Housing Administration (FHA) for any paid insurance claims, and the investors in Ginnie Mae securities would face increased costs. We estimate this transfer could be about $125 million a year, or a present value of $2 billion.
Why not align the SOFR more closely with the LIBOR?
Conceptually, the SOFR rate could be more closely aligned with the LIBOR rate by defining the new index as term SOFR + x basis points. This would leave borrowers, on average, in the same position as they are now. But even here, there are potential issues.
Any add-on may work on average or “ex ante,” but it is subject to dispute. Reasonable people may come up with different estimates of the add-on, and even 1 basis point on $1 trillion is $100 million a year. We have seen litigation over smaller amounts. It may also be difficult for the mortgage market to use an add-on if the larger $200 trillion LIBOR market does not make this adjustment.
Historically, the GSEs have tried to be considerate of borrowers when reference rates are discontinued, and we would indeed see a benefit to consumers if the GSEs move to the SOFR index without an add-on.
Given the scope of the potential impact on investors and consumers, it is important that the FHFA and the GSEs continue planning for the LIBOR change in the forward market and that the FHA think about the impact in the reverse market. This is a complicated issue with no easy solution.
After sliding 2.1% the prior week, mortgage applications collapsed 7.1% last week as mortgage rates topped 5.00%…
Ignoring the collapses during the Xmas week of 12/29/00 and 12/26/14, this is the lowest level of mortgage applications since September 2000…
The Refinance Index decreased 9 percent from the previous week.
The seasonally adjusted Purchase Index decreased 6 percent from one week earlier. The unadjusted Purchase Index decreased 6 percent compared with the previous week and was 2 percent higher than the same week one year ago.
Perhaps this is why…
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) increased to its highest level since February 2011, 5.10 percent, from 5.05 percent, with points increasing to 0.55 from 0.51 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
Still, The Fed should keep on hiking, right? Because – “greatest economy ever..” and so on…
As we noted previously, the refinance boom that rescued so many in the post-2008 ‘recovery’ is now over. If rates hit 5%, the pool of homeowners who would qualify for and benefit from a refinance will shrink to 1.55 million, according to mortgage-data and technology firm Black Knight Inc. That would be down about 64% since the start of the year, and the smallest pool since 2008.
Naturally, hardest hit by the rising rates will be young and first-time buyers who tend to make smaller down payments than older buyers who have built up equity in their previous homes, and middle-income buyers, who can least afford the extra cost. Khater said that about 45% of the loans that Freddie Mac is backing are to first-time buyers, up from about 30% normally, which also means that rising rates could have an even bigger impact on the market than usual.
Younger buyers are also more likely to be shocked by higher rates because they don’t remember when rates were more than 18% in the early 1980s, or more recently, the first decade of the 2000s, when rates hovered around 5% to 7%.
“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.
Between Hurricanes Michael and Hurricane Jerome (Powell), mortgage refinancing applcations are taking a big hit.
The Mortgage Bankers Association (MBA) refinancing applications index fell 9% from the previous week as 30-year mortgage rate continued to rise.
Mortgage purchase applications fell 5.52% WoW, but it is in the “mean season” for mortgage purchase applications and there was a hurricane (Michael). And then you have hurricane Jerome (Powell) battering the mortgage markets.
In addition to Hurricane (weather and Federal government), there is also the decline in Adjustable Rate Mortgages (ARMs) since the financial crisis.
(ZeroHedge) When we reported Wells Fargo’s Q1 earnings back in April, we drew readers’ attention to one specific line of business, the one we dubbed the bank’s “bread and butter“, namely mortgage lending, and which as we then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013.”
Then, a quarter ago a glimmer of hope emerged for the America’s largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.
However, it was not meant to last, because buried deep in its presentation accompanying otherwise unremarkable Q3 results (modest EPS miss; revenues in line), Wells just reported that its ‘bread and butter’ is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.
Yet while the mortgage pipeline has not been worse in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $67BN in Q2 to $57BN in Q3, down 22% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered recently in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, dropping $4BN sequentially from $50 billion to just $46 billion. And since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.
That said, it wasn’t all bad news for Wells, whose Net Interest Margin managed to post a modest increase for the second consecutive quarter, rising to $12.572 billion. This is what Wells said: “NIM of 2.94% was up 1 bp LQ driven by a reduction in the proportion of lower yielding assets, and a modest benefit from hedge ineffectiveness accounting.” On the other hand, if one reads the fine print, one finds that the number was higher by $80 million thanks to “one additional day in the quarter” (and $54 million from hedge ineffectiveness accounting), in other words, Wells’ NIM posted another decline in the quarter.
There was another problem facing Buffett’s favorite bank: while true NIM failed to increase, deposits costs are rising fast, and in Q3, the bank was charged an average deposit cost of 0.47% on $907MM in interest-bearing deposits, nearly double what its deposit costs were a year ago.
Just as concerning was the ongoing slide in the scandal-plagued bank’s deposits, which declined 3% or $40.1BN in Q3 Y/Y (down $2.3BN Q/Q) to $1.27 trillion. This was driven by consumer and small business banking deposits of $740.6 billion, down $13.7 billion, or 2%.
But even more concerning was the ongoing shrinkage in the company’s balance sheet, as average loans declined from $944.3BN to $939.5BN, the lowest in years, and down $12.8 billion YoY driven by “driven by lower commercial real estate loans reflecting continued credit discipline” while period-end loans slipped by $9.6BN to $942.3BN, as a result of “declines in auto loans, legacy consumer real estate portfolios including Pick-a-Pay and junior lien mortgages, as well as lower commercial real estate loans.” This is a problem as most other banks are growing their loan book, Wells Fargo’s keeps on shrinking.
And finally, there was the chart showing the bank’s overall consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $11.3BN Y/Y across most product groups.
What these numbers reveal, is that the average US consumer can barely afford to take out a new mortgage at a time when rates continued to rise – if not that much higher from recent all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
With US consumers suddenly dreading to see the bottom line on their next 401(k) statement, they now have the housing market to worry about.
As interest rates spiked in the past month, one direct consequence is that U.S. mortgage rates, already at a seven-year high, surged by the most since the Trump elections.
According to the latest weekly Freddie Mac statement, the average rate for a 30-year fixed mortgage jumped to 4.9%, up from 4.71% last week and the highest since mid-April 2011. It was the biggest weekly increase since Nov. 17, 2016, when the 30-year average surged 37 basis points.
With this week’s jump, the monthly payment on a $300,000, 30-year loan has climbed to $1,592, up from $1,424 in the beginning of the year, when the average rate was 3.95%.
Even before this week’s spike, the rise in mortgage rates had cut into affordability for buyers, especially in markets where home prices have been climbing faster than incomes, which as we discussed earlier this week, is virtually all. That’s led to a sharp slowdown in sales of both new and existing homes: last month the NAR reported that contracts to buy previously owned properties declined in August by the most in seven months, as purchasing a new home becomes increasingly unaffordable.
“With the escalation of prices, it could be that borrowers are running out of breath,” said Sam Khater, chief economist at Freddie Mac.
“Rising rates paired with high and escalating home prices is putting downward pressure on purchase demand,” Khater told Bloomberg, adding that while rates are still historically low, “the primary hurdle for many borrowers today is the down payment, and that is the reason home sales have decreased in many high-priced markets.”
Meanwhile, lenders and real-estate agents say that, even now, all but the most qualified buyers making large down payments face borrowing rates of 5%. And while rates have been edging higher in recent months, “the last week we’ve seen an explosion higher in mortgage rates,” said Rodney Anderson, a mortgage lender in the Dallas area quoted by the WSJ.
Meanwhile, the WSJ reports that once-hot markets are showing signs of cooling down. Bill Nelson, president of Your Home Free, a Dallas-based real-estate brokerage, said that in the neighborhoods where he works, the number of homes experiencing price cuts is more than double the number that are going into contract.
The rise in rates could have far-reaching effects for the mortgage industry. Some lenders—particularly non-banks that don’t have other lines of business —could take on riskier customers to keep up their level of loan volume, or be forced to sell themselves. Many U.S. mortgage lenders, including some of the biggest players, didn’t exist a decade ago and only know a low-rate environment, and many younger buyers can’t remember a time when rates were higher.
Meanwhile, in more bad news for the banks, higher rates will kill off any lingering possibility of a refinancing boom, which bailed out the mortgage industry in the years right after the 2008 financial crisis. If rates hit 5%, the pool of homeowners who would qualify for and benefit from a refinance will shrink to 1.55 million, according to mortgage-data and technology firm Black Knight Inc. That would be down about 64% since the start of the year, and the smallest pool since 2008.
Naturally, hardest hit by the rising rates will be young and first-time buyers who tend to make smaller down payments than older buyers who have built up equity in their previous homes, and middle-income buyers, who can least afford the extra cost. Khater said that about 45% of the loans that Freddie Mac is backing are to first-time buyers, up from about 30% normally, which also means that rising rates could have an even bigger impact on the market than usual.
Younger buyers are also more likely to be shocked by higher rates because they don’t remember when rates were more than 18% in the early 1980s, or more recently, the first decade of the 2000s, when rates hovered around 5% to 7%.
“There’s almost a generation that has been used to seeing 3% or 4% rates that’s now seeing 5% rates,” said Vishal Garg, founder and chief executive of Better Mortgage.
It was inevitable. Federal Reserve rate hikes and balance sheet shrinkage is having the predictive effect: killing mortgage refinancing applications.
And, mortgage purchases applications SA have stalled in terms of growth with Fed rate hikes and balance sheet shrinkage.
WASHINGTON, D.C. (October 10, 2018) – Mortgage applications decreased 1.7 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending October 5, 2018.
The Market Composite Index, a measure of mortgage loan application volume, decreased 1.7 percent on a seasonally adjusted basis from one week earlier. On an un-adjusted basis, the Index decreased 2 percent compared with the previous week. The Refinance Index decreased 3 percent from the previous week. The seasonally adjusted Purchase Index decreased 1 percent from one week earlier. The un-adjusted Purchase Index decreased 1 percent compared with the previous week and was 2 percent higher than the same week one year ago.
The refinance share of mortgage activity decreased to 39.0 percent of total applications from 39.4 percent the previous week. The adjustable-rate mortgage (ARM) share of activity increased to 7.3 percent of total applications.
The FHA share of total applications increased to 10.5 percent from 10.2 percent the week prior. The VA share of total applications remained unchanged at 10.0 percent from the week prior. The USDA share of total applications increased to 0.8 percent from 0.7 percent the week prior.
Chase, one of the biggest home lenders, announces cutting employees in Florida, Ohio, Arizona.
J.P. Morgan Chase CEO Jamie Dimon, Getty Images
JPMorgan Chase & Co. is laying off about 400 employees in its consumer mortgage banking division as parts of the market slow down, people familiar with the matter said.
The bank JPM, -0.56% one of the largest mortgage lenders with about 34,000 mortgage-banking employees, is in the midst of laying off employees in cities including Jacksonville, Fla.; Columbus, Ohio; Phoenix and Cleveland particularly as mortgage servicing has fallen, the people said.
Home sales have slowed as the rise in mortgage rates has been compounded by a lack of homes for sale, increasing prices and a tax bill that reduced some incentives for home ownership. Rising interest rates have also discouraged homeowners from either refinancing their current mortgage or moving and having to get a new mortgage.
JPMorgan isn’t the only bank to lay off mortgage employees. Wells Fargo & Co. WFC, -0.60% the largest U.S. mortgage lender, said in August it is laying off about 650 mortgage employees who mainly work in retail fulfillment and mortgage servicing “to better align with current volumes.”
More layoffs at Movement Mortgage mean about 200 jobs have been cut since opening Norfolk headquarters in 2017
Movement Mortgage CEO Casey Crawford addresses employees at the weekly Friday Morning Meeting.
(Nedbank) The first half of 2018 was dominated by tighter global financial conditions amid the contraction in Global $-Liquidity, which resulted in the stronger US dollar weighing heavily on the performance of risks assets, particularly EM assets.
GLOBAL BOND YIELDS ON THE MOVE AMID TIGHTER GLOBAL FINANCIAL CONDITIONS
Global bond yields are on the rise again, led by the US Treasury yields, which as we have highlighted in numerous reports, is the world’s risk-free rate.
The JPM Global Bond yield, after being in a tight channel, has now begun to accelerate higher. There is scope for the JPM Global Bond yield to rise another 20-30bps, close to 2.70%, which is the ‘Rubicon level’ for global financial markets, in our view.
If the JPM Global Bond yield rises above 2.70%, the cost of global capital would rise further, unleashing another risk-off phase. Our view is that 2.70% will hold, for the time being.
We believe the global bond yield will eventually break above 2.70%, amid the contraction in Global $-Liquidity.
GLOBAL LIQUIDITY CRUNCH NEARING AS GLOBAL YIELD CURVE FLATTENS/INVERTS
A stronger US dollar and the global cost of capital rising is the perfect cocktail, in our opinion, for a liquidity crunch.
Major liquidity crunches often occur when yield curves around the world flatten or invert. Currently, the global yield curve is inverted; this is an ominous sign for the global economy and financial markets, especially overvalued stocks markets like the US.
The US economy remains robust, but we believe a global liquidity crunch will weigh on the economy. Hence, we believe a US downturn is closer than most market participants are predicting.
GLOBAL VELOCITY OF MONEY WOULD LOSE MOMENTUM
The traditional velocity of money indicator can be calculated only on a quarterly basis (lagged). Hence, we have developed our own velocity of money indicator that can be calculated on a monthly basis.
Our Velocity of Money Indicator (VoM)is a proprietary indicator that we monitor closely. It is a modernized version of Irving Fisher’s work on the Quantity Theory of Money, MV=PQ.
We believe it is a useful indicator to understand the ‘animal spirits’ of the global economy and a leading indicator when compared to PMIs, stock prices and business cycle indicators, at times.
The cost of capital and Global $-Liquidity tend to lead the credit cycle (cobweb theory), which in turn filters through to prospects for the real economy.
Prospects for global growth and risk assets are likely to be dented over the next 6-12 months, as the rising cost of capital globally will likely weigh on the global economy’s ability to generate liquidity – this is already being indicated by our Global VoM indicator.
Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing. We think the answer is playing out right in front of us. With mortgage rates recently breaching the highest level since 2011, housing data has been coming in on the weak side all year long, and may be set to get even worse in the coming months. Let’s explain…
In the first chart below we show pending home sales (blue line, left axis) overlaid on the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As we can see, pending home sales are closely inversely related to the level of mortgage rates, and rates lead pending home sales by about two quarters. The breakout in mortgage rates we’ve seen over the last few months portend more weakness in pending sales.
The next chart compares mortgage applications (blue line, left axis) to the 30 year fixed mortgage rate (red line, right axis, inverted) and shows that these two series are also closely inversely related. Higher rates are slowing demand for financing and demand for overall housing. Not exactly a heroic observation, but an important one nonetheless.
The home builders seem to have caught on, as we would expect. In the next chart we show the 1 year change in private residential construction including improvements (blue line, left axis) compared to the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As rates have moved higher this year, new home construction growth has slowed to just 2.5% YoY. If rates are any indication, new home construction growth may turn negative in the months just ahead.
To be fair, everything housing related isn’t that bad. Inventory levels, even though they have moved up a lot over the last several years, are still at reasonable levels and well shy of peak bubble levels of 2005-2007. Even so inventory levels may no longer be supportive of housing action.
And these moderate levels of inventory have helped keep prices stable, for now.
But, housing affordability is taking a nosedive. Here we show the National Association of Realtors housing affordability index (blue line, left axis) against mortgage rates (red line, right axis, inverted, leading by 1 quarter). Up until a few months ago housing affordability was well above trend. But now we’ve moved back to into the range which prevailed from 1991-2004.
In sum, the effects of higher long-term interest rates are starting to be squarely felt in the housing space. Pending sales, mortgage applications and new construction have all been weak and look set to get even weaker in the quarters to come as the lagged effects of higher mortgage rates set in. Home prices have yet to respond since inventory levels are still moderate, but inventories aren’t the support they were just two years ago. Meanwhile, affordability levels are no longer very supportive. All this suggests that the housing sector, which has been a bright spot of this recovery over the last five or six years, may not be the same source of wealth accumulation and growth over the next few years, or as long as higher mortgage rates continue to take the juice out of this sector.
Nightmare scenario for the markets? They just shrugged. But home buyers haven’t done the math yet.
There’s an interesting thing that just happened, which shows that the US Treasury 10-year yield is ready for the next leg up, and that the yield curve might not invert just yet: the 10-year yield climbed over the 3% hurdle again, and there was none of the financial-media excitement about it as there was when that happened last time. It just dabbled with 3% on Monday, climbed over 3% yesterday, and closed at 3.08% today, and it was met with shrugs. In other words, this move is now accepted.
Note how the 10-year yield rose in two big surges since the historic low in June 2016, interspersed by some backtracking. This market might be setting up for the next surge:
And it’s impacting mortgage rates – which move roughly in parallel with the 10-year Treasury yield. The Mortgage Bankers Association (MBA) reported this morning that the average interest rate for 30-year fixed-rate mortgages with conforming loan balances ($453,100 or less) and a 20% down-payment rose to 4.88% for the week ending September 14, 2018, the highest since April 2011.
And this doesn’t even include the 9-basis-point uptick of the 10-year Treasury yield since the end of the reporting week on September 14, from 2.99% to 3.08% (chart via Investing.com; red marks added):
While 5% may sound high for the average 30-year fixed rate mortgage, given the inflated home prices that must be financed at this rate, and while 6% seems impossibly high under current home price conditions, these rates are low when looking back at rates during the Great Recession and before (chart via Investing.com):
And more rate hikes will continue to drive short-term yields higher, even as long-term yields for now are having trouble keeping up. And these higher rates are getting baked in. Since the end of August, the market has been seeing a 100% chance that the Fed, at its September 25-26 meeting, will raise its target for the federal funds rate by a quarter point to a range between 2.0% and 2.25%, according to CME 30-day fed fund futures prices. It will be the 3rd rate hike in 2018.
And the market now sees an 81% chance that the Fed will announced a 4th rate hike for 2018 after the FOMC meeting in December (chart via Investing.com, red marks added):
The Fed’s go-super-slow approach – everything is “gradual,” as it never ceases to point out – is giving markets plenty of time to prepare and adjust, and gradually start taking for granted what had been considered impossible just two years ago: That in 2019, short-term yields will be heading for 3% or higher – the 3-month yield is already at 2.16% — that the 10-year yield will be going past 4%, and that the average 30-year fixed rate mortgage will be flirting with a 6% rate.
Potential home buyers next year haven’t quite done the math yet what those higher rates, applied to home prices that have been inflated by 10 years of interest rate repression, will do to their willingness and ability to buy anything at those prices, but they’ll get around to it.
As for holding my breath that an inverted yield curve – a phenomenon when the 2-year yield is higher than the 10-year yield – will ominously appear and make the Fed stop in its tracks? Well, this rate-hike cycle is so slow, even if it is speeding up a tiny bit, that long-term yields may have enough time to go through their surge-and-backtracking cycles without being overtaken by slowly but consistently rising short-term yields.
There has never been a rate-hike cycle this slow and this drawn-out: We’re now almost three years into it, and rates have come up, but it hasn’t produced the results the Fed is trying to achieve: A tightening of financial conditions, an end to yield-chasing in the credit markets and more prudence, and finally an uptick in the unemployment rate above 4%. And the Fed will keep going until it thinks it has this under control.
After the uproar about the Equifax hack, Congress did do something. And credit freezes are now a lot easier to place and lift.
Starting September 21, 2018, placing or lifting a “credit freeze” – aka “security freeze” – will be free for all Americans in all states. In response to the Equifax-hack uproar and the grassroots movement it triggered, after the personal data of nearly half of all adult Americans had been stolen, Congress passed a bill in May that contained a provision about credit freezes.
It requires that all three major consumer credit bureaus – Equifax, Experian, and TransUnion – make credit freezes and unfreezes available for free in all states. Under most existing state laws, credit bureaus were able to charge a fee for placing and lifting a credit freeze. This could add up: for an effective credit freeze, you need to freeze your accounts at all three major credit bureaus, and pay each of them – and then pay each of them again to unfreeze those accounts if you want to apply for a credit card or loan.
The new law also requires credit bureaus to fulfill consumer requests for a credit freeze within one business day if made online or by phone, and within three business days if made by snail-mail.
Why is this important?
Credit bureaus collect personal and financial data on just about all adult Americans, whether they know it or not. These dossiers are extensive. They include the Social Security number, date of birth, address history, credit-card history, loan history, bank relationships, payments history, etc.
These dossiers are used to build a “credit report.” This is an extensive file (not just a credit score) that shows in detail your entire credit history – such as mortgages, other loans, credit cards, late payments, etc. These reports are sold – you’re the product – to third parties, such as lenders, credit-card promoters, and others.
Credit bureaus hate credit freezes because they cut into their revenues. But years ago, state laws forced them to make credit freezes available, though credit bureaus could make the process of freezing and unfreezing the account cumbersome, time-consuming, and costly. Now, under the new federal law, it’s easier and free.
When you put a credit freeze on your account with the three credit bureaus, they can no longer release this report to third parties, and it becomes impossible to open a credit-card account or bank account in your name – impossible for you as well as identity thieves.
After you place credit freezes on your accounts and then want to open a new loan account or open an account with the Social Security administration (yes!), you need to first lift the credit freezes.
All this has now become a lot easier, faster, and as of September 21, free.
Identity theft is hitting Equifax-hack victims
During the Equifax hack that was first disclosed a year ago, the personal data, including birth dates and Social Security numbers, of over 148 million Americans (according to the latest Equifax estimates) were stolen. These were the crown jewels for identity thieves.
Since then, 21% of the victims have seen “unusual” activity on their accounts, according to a survey by the Identity Theft Resource Center. Of these victims:
- 24% had a new credit-card account opened in their name
- 34% experienced changes to an existing credit card
- 23% had other accounts opened in their name, including loans, debit cards, bank accounts, and cable, internet, or utility accounts.
- 10% had some sort of medical identity issue, including receiving a medical bill or collection notice for services they never received, learning that medical records were compromised, or discovering another person’s information on their medical records.
- 4% had either state or federal taxes filed fraudulently in their name to collect a refund.
- Other issues included email flagged as being on the dark web.
A credit freeze at the three major credit bureaus cannot prevent all forms of identity theft and fraud, but it’s the single biggest and most effective defense mechanism consumers in the US can deploy.
Since I first started reporting on the Equifax hack last September, I included the links to the credit-freeze pages at the credit bureaus. The credit bureaus have changed those links several times, perhaps to make it more confusing. Here are the updated and functional new links to the pages of the three major credit bureaus where you can request or lift a credit freeze (aka security freeze):
Wolf Richter initiated a security freeze with the major credit bureaus in 2010 after the University of Texas at Austin, where he’d gotten his MBA years earlier, notified him that all his data, including Social Security number, had been stolen. It was the Wild West of credit freezes. It was cumbersome, took weeks, and had to be done by a combination of fax, mail, and phone that involved a lot of road blocks they put in his way. But it was a great decision.
As a positive side-effect, it stopped most of the “pre-approved” cash-advance and credit-card promos that showed up in the mail – an identity theft risk if they fall into the wrong hands – since credit bureaus could no longer sell my data to promoters.
Making credit freezes & unfreezes available to all Americans for free in a quick and convenient manner is one of the best little things Congress has done for US consumers, and was long overdue.
You’d think the previous decade’s housing bust would still be fresh in the minds of mortgage lenders, if no one else. But apparently not.
One of the drivers of that bubble was the emergence of private label mortgage “originators” who, as the name implies, simply created mortgages and then sold them off to securitizers, who bundled them into the toxic bonds that nearly brought down the global financial system.
The originators weren’t banks in the commonly understood sense. That is, they didn’t build long-term relationships with customers and so didn’t need to care whether a borrower could actually pay back a loan. With zero skin in the game, they were willing to write mortgages for anyone with a paycheck and a heartbeat. And frequently the paycheck was optional.
In retrospect, that was both stupid and reckless. But here we are a scant decade later, and the industry is headed back towards those same practices. Today’s Wall Street Journal, for instance, profiles a formerly-miniscule private label mortgage originator that now has a bigger market share than Bank of America or Citigroup:
Its rise points to a bigger shift in the home-lending business to specialized mortgage lenders that fall outside the banking sector. Such non-banks, critically wounded in the housing crisis, have re-emerged to become the market’s dominant players, with 52% of U.S. mortgage originations, up from 9% in 2009. Six of the 10 biggest U.S. mortgage lenders today are non-banks, according to the research group.
They symbolize both the healthy reinvention of a mortgage market brought to its knees a decade ago—and how the growth in that market almost exclusively has been in its less-regulated corner.
Post crisis regulations curb bank and non-bank lenders alike from making the “liar loans” that wiped out many lenders and forced a wave of foreclosures during the crisis. What worries some industry participants is that little has changed about non-bank lenders’ structure.
Their capital levels aren’t as heavily regulated as banks, and they don’t have deposits or other substantive business lines. Instead they usually take short-term loans from banks to fund their lending. If the housing market sours, banks could cut off their funding—which doomed some non-banks in the last crisis. In that scenario, first-time buyers or borrowers with little savings would be the first to get locked out of the mortgage market.
“As long as the good times roll on, it’s fine,” said Ed Pinto, co-director of the Center on Housing Markets and Finance at the American Enterprise Institute. “But all I can say is, we’re in a boom, and you cannot keep going up like this forever.”
Freedom was just a small lender in the last crisis. When it became hard to borrow money, Freedom Chief Executive Stan Middleman embraced government-backed loans on the theory they would offer more stability.
As Quicken Loans Inc., the biggest and best-known non-bank, grew with the help of flashy technology and advertising campaigns, Freedom stayed under the radar, buying smaller lenders and scooping up other companies’ huge portfolios of loans, often made to relatively risky borrowers.
Mr. Middleman is fond of saying that one man’s trash is another man’s treasure. “I always believed that, if somebody is applying for a loan, we should try to make it for them,” says Mr. Middleman.
One afternoon this spring, a dozen or so employees lined up in front of Freedom Mortgage’s office in Mount Laurel, N.J., to get their picture taken. Clutching helium balloons shaped like dollar signs, they were being honored for the number of mortgages they had sold.
Freedom is nowhere near the size of behemoths like Citigroup or Bank of America; yet last year it originated more mortgages than either of them, some $51.1 billion, according to industry research group Inside Mortgage Finance. It is now the 11th-largest mortgage lender in the U.S., up from No. 78 in 2012.
What does this mean? Several things, depending on the resolution of the lens you’re using.
In the mortgage market it means that emerging private sector lenders are taking market share – presumably by being more aggressive – which puts pressure on the relatively stodgy brand-name banks to lower their own standards to keep up. To grasp the truth of this, just re-read the last sentence in the above article: “I always believed that, if somebody is applying for a loan, we should try to make it for them.” That is fundamentally not how banks work. Their job is to write profitable loans by weeding out the applicants who probably won’t make their payments.
Now, faced with competitors from the “No Credit, No Problem!” part of the business spectrum, the big guys will once again have to choose between adopting that attitude or leaving the business. See Bad Bankers Drive Out Good Bankers: Wells Fargo, Wall Street, And Gresham’s Law. Since the biggest mortgage lender is currently Wells Fargo, for which cutting corners is standard practice, it presumably won’t be long before variants of liar loans and interest only mortgages will be back on the menu.
From a broader societal perspective, this is par for the late-cycle course. After a long expansion, most banks have already lent money to their high-quality customers. But Wall Street continues to demand that those banks maintain double-digit earnings growth, and will punish their market caps if they fall short.
This leaves formerly-good banks with no choice but to loosen standards to keep the fee income flowing. So they start working their way towards the bottom of the customer barrel, while instructing their prop trading desks and/or investment bankers to explore riskier bets. Miss allocation of capital becomes ever-more-common until the system blows up.
Perhaps the greatest single trend impacting the next decade
Total debt (public + private) in America is currently at a staggering $67 trillion.
That number has been rising fast over the past 47 years, following the US dollar’s transformation into a fully-fiat currency in August of 1971.
Perhaps this wouldn’t be such a big concern were America’s income, measured by GDP, growing at a similar rate. But it’s not.
Growth in debt has far outpaced GDP, as evidenced by this chart:
In 1971, the US debt-to-GDP ratio was 1.48x. That’s roughly the same multiple it had averaged over the prior century.
But today? That ratio has spiked to to 3.47x, more than doubling over just 4 decades.
There are many troubling conclusions to draw from this, but here’s a simple way to look at it: It’s taking more and more debt to eke out a unit of GDP growth.
Put in other words: the US economic engine is seizing up, requiring increasingly more effort to function.
At some point — quite possibly some point soon — the economy will no longer be able to grow because all of its output must be used to service the ballooning debt load rather than future investment.
Accelerating this point of reckoning are two major recent trends: rising interest rates and the end of global QE.
Why? Because much of the recent explosion in debt has been fueled by central bank policy:
- Interest rates have been on a steady decline since the 1980s, making debt increasingly cheaper to issue and to service.
- Since 2008, central banks have been voracious buyers of debt. Countries/companies have been able to borrow $trillions, enabled (both directly and indirectly) by these “buyers of last resort”.
But both of those trends are ending, fast.
Interest rates have been rising off of their all-time rock-bottom lows over the past two years. While still low by historic standards, the rise is certainly material enough already to make the US’ $70 trillion in total debt more expensive to service, putting an even greater weight on America’s already-burdened economy.
And all indicators point to even higher rates ahead; with the Federal Reserve expected to increase the federal funds rate another 50% by 2020:
These higher rates make the US debt overhang even more expensive to service, while also forcing valuations downwards for major asset classes like bonds, housing and equities (the prices of which are derived in part by interest rates, as explained here).
These higher expected rates also co-incide with the cessation of global quantitative easing (QE). The world’s major central banks have announced that they will cease making purchases by 2020:
Without these indiscriminate buyers-of-last-resort, debt issuers will need to offer higher rates to entice the next marginal buyer. How much higher will rates need to rise as a result? It’s pretty easy to make the argument for “a lot”.
We’ve been talking quite a bit recently about the implications of hitting America’s “Peak Debt” threshold with David Stockman in preparation for our upcoming seminar with him next week. He’s extremely concerned. Here’s what he has to say on the matter (4m:42s):
He also fears that we have the exact wrong expertise in place inside our financial markets to deal with the coming crisis, as there’s an entire generation of Wall Streeters who have never seen rates as high as they are today. More than that, there’s virtually no one left in today’s financial industry with actual experience operating within a rising interest rate environment (2m:09s):
James Howard Kunstler, another co-presenter at next week’s seminar, is similarly worried that the current state of the financial system is so fragile that a “convulsion” (i.e., a painful downdraft that violently reprices assets) is inevitable at this point (5m:46s):
(Forbes) Despite the volatility and brief correction earlier this year, the U.S. stock market is back to making record highs in the past couple weeks. To many observers, this market now seems downright bulletproof as it keeps going higher and higher as it has for nearly a decade in direct defiance of the naysayers’ warnings. Unfortunately, this unusual market strength is not evidence of a strong, organic economy, but of an extremely unhealthy, artificial bubble economy that will end in a crisis that will be even worse than we experienced in 2008. In this report, I will show a wide variety of charts that prove how unsustainable the current bull market is.
Since the Great Recession low in March 2009, the S&P 500 stock index has gained over 300%, taking it nearly 80% higher than its 2007 peak:
The small cap Russell 2000 index and the tech-heavy Nasdaq Composite Index are up even more than the S&P 500 since 2009 – nearly 400% and 500% respectively:
The reason for America’s stock market and economic bubbles is quite simple: ultra-cheap credit/ultra-low interest rates. As I explained in a Forbes piece last week, ultra-low interest rates help to create bubbles in the following ways:
- Investors can borrow cheaply to speculate in assets (ex: cheap mortgages for property speculation and low margin costs for trading stocks)
- By making it cheaper to borrow to conduct share buybacks, dividend increases, and mergers & acquisitions
- By discouraging the holding of cash in the bank versus speculating in riskier asset markets
- By encouraging higher rates of inflation, which helps to support assets like stocks and real estate
- By encouraging more borrowing by consumers, businesses, and governments
The chart below shows how U.S. interest rates (the Fed Funds Rate, 10-Year Treasury yields, and Aaa corporate bond yields) have remained at record low levels for a record period of time since the Great Recession:
U.S. monetary policy has been incredibly loose since the Great Recession, which can be seen in the chart of real interest rates (the Fed Funds Rate minus the inflation rate). The mid-2000s housing bubble and the current “Everything Bubble” both formed during periods of negative real interest rates. (Note: “Everything Bubble” is a term that I’ve coined to describe a dangerous bubble that has been inflating in a wide variety of countries, industries, and assets – please visit my website to learn more.)
The Taylor Rule is a model created by economist John Taylor to help estimate the best level for central bank-set interest rates such as the Fed Funds Rate. If the Fed Funds Rate is much lower than the Taylor Rule model (this signifies loose monetary conditions), there is a high risk of inflation and the formation of bubbles. If the Fed Funds Rate is much higher than the Taylor Rule model, however, there is a risk that tight monetary policy will stifle the economy.
Comparing the Fed Funds Rate to the Taylor Rule model is helpful for visually gauging how loose or tight U.S. monetary conditions are:
Subtracting the Taylor Rule model from the Fed Funds Rate quantifies how loose (when the difference is negative), tight (when the difference is positive), or neutral U.S. monetary policy is:
Low interest rates/low bond yields have enabled a corporate borrowing spree in which total outstanding non-financial U.S. corporate debt surged by over $2.5 trillion, or 40% from its peak in 2008. The recent borrowing boom caused total outstanding U.S. corporate debt to rise to over 45% of GDP, which is even worse than the level reached during the past several credit cycles. (Read my recent U.S. corporate debt bubble report to learn more).
U.S. corporations have been using much of their borrowed capital to buy back their own stock, increase dividends, and fund mergers and acquisitions – activities that are known for boosting stock prices and executive bonuses. Unfortunately, U.S. corporations have been focusing on these activities that reward shareholders in the short-term, while neglecting longer-term business investments – hubristic behavior that is typical during a bubble. The chart below shows how share buybacks and dividends paid increased dramatically since 2009:
Another Federal Reserve policy (aside from the ultra-low Fed Funds Rate) has helped to inflate the U.S. stock market bubble since 2009: quantitative easing or QE. When executing QE policy, the Federal Reserve creates new money “out of thin air” (in digital form) and uses it to buy Treasury bonds or other assets, which pumps liquidity into the financial system. QE helps to push bond prices higher and bond yields/interest rates lower throughout the economy. QE has another indirect effect: it causes stock prices to surge (because low rates boost stocks), as the chart below shows:
As touched upon earlier, low interest rates encourage stock speculators to borrow money from their brokers in the form of margin loans. These speculators then ride the bull market higher while letting the leverage from the margin loans boost their returns. This strategy can be highly profitable – until the market turns and amplifies their losses, that is.
There is a general tendency for speculators to use margin most aggressively just before the market’s peak, and the current bull market/bubble appears to be no exception. During the dot-com bubble and housing bubble stock market cycles, margin debt peaked at roughly 2.75% of GDP. In the current stock market bubble, however, margin debt is nearly at 3% of GDP, which is quite concerning. The heavy use of margin at the end of a long bull market exacerbates the eventual downturn because traders are forced to sell their shares to avoid or satisfy margin calls.
In the latter days of a bull market or bubble, retail investors are typically the most aggressively positioned in stocks. Sadly, these small investors tend to be wrong at the most important market turning points. Retail investors currently have the highest allocation to stocks (blue line) and the lowest cash holdings (orange line) since the Dot-com bubble, which is a worrisome sign. These same investors were the most cautious in 2002/2003 and 2009, which was the start of two powerful bull markets.
The chart below shows the CBOE Volatility Index (VIX), which is considered to be a “fear gauge” of U.S. stock investors. The VIX stayed very low during the housing bubble era and it has been acting similarly for the past eight years as the “Everything Bubble” inflated. During both bubbles, the VIX stayed low because the Fed backstopped the financial markets and economy with its aggressive monetary policies (this is known as the “Fed Put“).
The next chart shows the St. Louis Fed Financial Stress Index, which is a barometer for the level of stress in the U.S. financial system. It goes without saying that less stress is better, but only to a point – when the index remains at extremely low levels due to the backstopping of the financial markets by the Fed, it can be indicative of the formation of a dangerous bubble. Ironically, when that bubble bursts, financial stress spikes. Periods of very low financial stress foreshadow periods of very high financial stress – the calm before the financial storm, basically. The Financial Stress Index remained at extremely low levels during the housing bubble era and is following the same pattern during the “Everything Bubble.”
High-yield (or “junk”) bond spreads are another barometer of investor fear or complacency. When high-yield bond spreads stay at very low levels in a central bank-manipulated environment like ours, it often indicates that a dangerous bubble is forming (it indicates complacency). The high-yield spread was unusually low during the dot-com bubble and housing bubble, and is following the same pattern during the current “Everything Bubble.”
In a bubble, the stock market becomes overpriced relative to its underlying fundamentals such as earnings, revenues, assets, book value, etc. The current bubble cycle is no different: the U.S. stock market is as overvalued as it was at major generational peaks. According to the cyclically-adjusted price-to-earnings ratio (a smoothed price-to-earnings ratio), the U.S. stock market is more overvalued than it was in 1929, right before the stock market crash and Great Depression:
Tobin’s Q ratio (the total U.S. stock market value divided by the total replacement cost of assets) is another broad market valuation measure that confirms that the stock market is overvalued like it was at prior generational peaks:
The fact that the S&P 500’s dividend yield is at such low levels is more evidence that the market is overvalued (high market valuations lead to low dividend yields and vice versa). Though dividend payout ratios have been declining over time in addition, that is certainly not the only reason why dividend yields are so low, contrary to popular belief. Extremely high market valuations are the other rarely discussed reason why yields are so low.
The chart below shows U.S. after tax corporate profits as a percentage of the gross national product (GNP), which is a measure of how profitable American corporations are. Thanks to ultra-cheap credit, asset bubbles, and financial engineering, U.S. corporations have been much more profitable since the early-2000s than they have been for most of the 20th century (9% vs. the 6.6% average since 1947).
Unfortunately, U.S. corporate profitability is likely to revert to the mean because unusually high corporate profit margins are typically unsustainable, as economist Milton Friedman explained. The eventual mean reversion of U.S. corporate profitability will hurt the earnings of public corporations, which is very worrisome considering how overpriced stocks are relative to earnings.
During stock market bubbles, the overall market tends to be led by a smaller group of high-performing “story stocks” that capture the investing public’s attention, make early investors rich, and light the fires of greed and envy in practically everyone else. During the late-1990s dot-com bubble, the “story stocks” were tech stocks like Amazon.com, Intel, Cisco, eBay, etc. During the housing bubble era, it was home builder stocks like Hovanian, D.R. Horton, Lennar, mortgage lenders, and alternative energy companies like First Solar, to name a few examples.
In the current stock market bubble, the market is being led by a group of stocks nicknamed FAANG, which is an acronym for Facebook, Apple, Amazon, Netflix, and Google (now known as Alphabet Inc.). The chart below compares the performance of the FAANG stocks to the S&P 500 during the bull market that began in March 2009. Though the S&P 500 has risen over 300%, the FAANGs put the broad market index to shame: Apple is up over 1,000%, Amazon has surged more than 2,000%, and Netflix has rocketed over 6,000%.
After so many years of strong and consistent performance, many investors now view the FAANGs as “can’t lose” stocks that will keep going “up, up, up!” as a function of time. Unfortunately, this is a dangerous line of thinking that has ruined countless investors in prior bubbles. Today’s FAANG phenomenon is very similar to the Nifty Fifty group of high-performing blue-chip stocks during the 1960s and early-1970s bull market. The Nifty Fifty were seen as “one decision” stocks (the only decision necessary was to buy) because investors thought they would keep rising virtually forever.
Investors tend to become most bullish and heavily invested in leading stocks such as the FAANGs or Nifty Fifty right before the market cycle turns. When the leading stocks finally fall during a bear market, they usually fall very hard, as Nifty Fifty investors experienced in the 1973-1974 bear market. The eventual unwinding of the FAANG stock boom/bubble is going to burn many investors, including institutional investors who have gorged on these stocks in recent years.
How The Stock Market Bubble Will Pop
To keep it simple, the current U.S. stock market bubble will pop due to the ending of the conditions that created it in the first place: cheap credit/loose monetary conditions. The Federal Reserve inflated the stock market bubble via its record low Fed Funds Rate and quantitative easing programs, and the central bank is now raising interest rates and reversing its QE programs by shrinking its balance sheet. What the Fed giveth, the Fed taketh away.
The Fed claims to be able to engineer a “soft landing,” but that virtually never happens in reality. It’s even less likely to happen in this current bubble cycle because of how long it has gone on and how distorted the financial markets and economy have become due to ultra-cheap credit conditions.
I’m from the same school of thought as billionaire fund manager Jeff Gundlach, who believes that the Fed will keep hiking interest rates until “something breaks.” In the last economic cycle from roughly 2002 to 2007, it was the subprime mortgage industry that broke first, and in the current cycle, I believe that corporate bonds are likely to break first, which would then spill over into the U.S. stock market (please read my corporate debt bubble report in Forbes to learn more).
The Fed Funds Rate chart below shows how the last two recessions and bubble bursts occurred after rate hike cycles; a repeat performance is likely once rates are hiked high enough. Because of the record debt burden in the U.S., interest rates do not have to rise nearly as high as in prior cycles to cause a recession or financial crisis this time around. In addition to raising interest rates, the Fed is now conducting its quantitative tightening (QT) policy that shrinks its balance sheet by $40 billion per month, which will eventually contribute to the popping of the stock market bubble.
The 10-Year/2-Year U.S. Treasury bond spread is a helpful tool for determining how close a recession likely is. This spread is an extremely accurate indicator, having warned about every U.S. recession in the past half-century, including the Great Recession. When the spread is between 0% and 1%, it is in the “recession warning zone” because it signifies that the economic cycle is maturing and that a recession is likely just a few years away. When the spread drops below 0% (this is known as an inverted yield curve), a recession is likely to occur within the next year or so.
As the chart below shows, the 10-Year/2-Year U.S. Treasury bond spread is already deep into the “Warning Zone” and heading toward the “Recession Zone” at an alarming rate – not exactly a comforting thought considering how overvalued and inflated the U.S. stock market is, not to mention how indebted the U.S. economy is.
Although I err conservative/libertarian politically, I do not believe that President Trump can prevent the ultimate popping of the U.S. stock market bubble and “Everything Bubble.” One of the reasons why is that this bubble is truly global and the U.S. President has no control over the economies of China, Australia, Canada, etc. The popping of a massive global bubble outside of the U.S. is enough to create a bear market and recession within the U.S.
Also, as the charts in this report show, our stock market bubble was inflating years before Trump became president. I believe that this bubble was slated to crash to regardless of who became president – it could have been Hillary Clinton, Bernie Sanders, or Marco Rubio. Even Donald Trump called the stock market a “big, fat, ugly bubble” right before the election. Concerningly, even though the stock market bubble is approximately 30% larger than when Trump warned about it, Trump is no longer calling it a “bubble,” and is actually praising it each time it hits another record.
Many optimists expect President Trump’s tax reform plan to result in a powerful boom that creates millions of new jobs and supercharges economic growth, which would help the stock market grow into its lofty valuations. Unfortunately, this thinking is not grounded in reality or math. As my boss Lance Roberts explained, “there will be no economic boom” (Part 1, Part 2) because our economy is too debt-laden to grow the way it did back in the 1980s during the Reagan Boom or at other times during the 20th century.
As shown in this report, the U.S. stock market is currently trading at extremely precarious levels and it won’t take much to topple the whole house of cards. Once again, the Federal Reserve, which was responsible for creating the disastrous Dot-com bubble and housing bubble, has inflated yet another extremely dangerous bubble in its attempt to force the economy to grow after the Great Recession. History has proven time and time again that market meddling by central banks leads to massive market distortions and eventual crises. As a society, we have not learned the lessons that we were supposed to learn from 1999 and 2008, therefore we are doomed to repeat them.
The purpose of this report is to warn society of the path that we are on and the risks that we are facing. I am not necessarily calling the market’s top right here and right now. I am fully aware that this stock market bubble can continue inflating to even more extreme heights before it pops. I warn about bubbles as an activist, but I approach tactical investing in a slightly different manner (because shorting or selling too early leads to under performance, etc.). As a professional investor, I believe in following the market’s trend instead of fighting it – even if I’m skeptical of the underlying forces that are driving it. Of course, when that trend fundamentally changes, that’s when I believe in shifting to an even more cautious and conservative stance for our clients and myself.
Learn about Trumps latest moves on trade negotiations with Canada and Mexico…
Michael Lebowitz previously penned an article entitled “Face Off” discussing the message from the bond market as it relates to the stock market and the economy. To wit:
“There is a healthy debate between those who work in fixed-income markets and those in the equity markets about who is better at assessing markets. The skepticism of bond guys and gals seems to help them identify turning points. The optimism of equity pros lends to catching the full run of a rally. As an ex-bond trader, I have a hunch but refuse to risk offending our equity-oriented clients by disclosing it. In all seriousness, both professions require similar skill sets to determine an asset’s fair value with the appropriate acknowledgment of inherent risks. More often than not, bond traders and stock traders are on the same page with regard to the economic outlook. However, when they disagree, it is important to take notice.”
This is an interesting point given that despite the ending parade of calls for substantially higher interest rates, due to rising inflationary pressures and stronger economic growth, yields have stubbornly remained below 3% on the 10-year Treasury.
In this past weekend’s newsletter, we discussed the current “bullish optimism” prevailing in the market and that “all-time” highs are now within reach for investors.
“Currently, the “bulls” remain clearly in charge of the market…for now. While it seems as if much of the “tariff talk” has been priced into stocks, what likely hasn’t as of yet is rising evidence of weakening economic data (ISM, employment, etc.), weakening consumer demand, and the impact of higher rates.
While on an intermediate-term basis these macro issues will matter, it is primarily just sentiment that matters in the short-term. From that perspective, the market retested the previous breakout above the March highs last week (the Maginot line)which keeps Pathway #1 intact. It also suggests that next weekwill likely see a test of the January highs.“
“With moving averages rising, this shifts Pathway #2a and #2b further out into the August and September time frames. The potential for a correction back to support before a second attempt at all-time highs would align with normal seasonal weakness heading into the Fall. “
One would suspect with the amount of optimism toward the equity side of the ledger, and with the Federal Reserve on firm footing for further rate increases at a time where the U.S. Government is about to issue a record amount of new debt, interest rates, in theory, should be rising.
But they aren’t.
As Mike noted previously:
“Given our opinions on the severe economic headwinds facing economic growth and steep equity valuations, we believe this divergence poses a potential warning for equity holders. Accordingly, we thought it appropriate to provide a few graphs to demonstrate the ‘smarter’ guys are not on board the growth and reflation train.”
In today’s missive, we will focus on the “price” and “yield” of the 10-year Treasury from a strictly “technical”perspective with respect to the signal the bond market may be sending with respect to the stock market. Given that “credit” is the “lifeblood” of the Government, corporate and consumer markets, it should not be surprising the bond market tends to tell the economic story over time.
We can prove this in the following chart of interest rates versus the economic composite of GDP, inflation, and wages.
Despite hopes of surging economic growth, the economic composite has remained in an elongated nominal range between 40 and 60 since 2011. This stagnation has never occurred in history and is a function of the massive interventions by the Government and the Federal Reserve to support economic growth. However, now those supports are being removed as the Federal Reserve lifts short-term borrowing costs and reduces liquidity support through their balance sheet reinvestments.
As I said, credit is the “lifeblood” of the economy. Think about all the ways that higher rates impact economic activity in the economy:
1) Rising interest rates raise the debt servicing requirements which reduces future productive investment.
2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments.
3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations.
4) The “stocks are cheap based on low interest rates” argument is being removed.
5) The massive derivatives and credit markets are at risk. Much of the recovery to date has been based on suppressing interest rates to spur growth.
6) As rates increase so does the variable rate interest payments on credit cards.
7) Rising defaults on debt service will negatively impact banks.
8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage.
9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.
10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.
I could go on, but you get the idea.
So, with the Fed hiking rates, surging bankruptcies for older Americans who are under-saved and over-indebted, stumbling home sales, inflationary prices rising from surging energy costs, what is the 10-year Treasury telling us now.
On a very short-term basis, the 10-year Treasury yield has started a potential-topping process. Given that “yield” is the inverse of the “price” of bonds, the “buy” and “sell” signals are also reversed. As shown below, the 10-year yield appears to be forming the “right shoulder” of a “head and shoulder” topping formation and is currently on a short-term “buy” signal. Such would suggest lower yields over the next couple of months.
The two signals above aren’t a rarity. The chart below expands this view back to 1970. There have only been a few times historically that yields have been this overbought and trading at 3 to 4 standard deviations above their one-year average.
The outcome for investors was never ideal.
Even using monthly closing data, which smooths out volatility to a greater degree, the same message appears. The chart below goes back to 1994. Each time yields have been this overbought (remember since yield is the inverse of price, this means bonds are very oversold) it is has signaled an issue with both the economy and the markets.
Again, we see the same issue going back historically. Also, notice that yields are currently not only extremely overbought, they are also at the top of the long-term downtrend that started back in 1980.
Even Longer Term
Okay, let’s smooth this even more by using quarterly data closes. again, the picture doesn’t change.
As I noted yesterday, the economic cycle is extremely advanced and both stocks and bonds are slaves to the full market cycle.
“The “full market cycle” will complete itself in due time to the detriment of those who fail to heed history, valuations, and psychology.”
Of course, during the late stage of any market advance, there is always the argument which suggests “this time is different.” Mike made an excellent point in this regard previously:
“Given the divergences shown between bond and equity markets, logic says somebody’s wrong. Another possibility is that neither market is sending completely accurate signals about the future state of the economy and inflation. It is clear that bond traders do not buy into this latest growth narrative. Conversely, equity investors are buying the growth and reflation narrative lock, stock and barrel. To be blunt, with global central banks buying both bonds and stocks, the integrity of the playing field as well as normally reliable barometers of market conditions, are compromised.
This divergence between bond and equity traders could prove meaningless, or it may be a prescient warning for one or both of these markets. Either way, investors should be aware of the divergence as such a wide gap in economic opinions is unusual and may portend increased volatility in one or both markets.”
While anything is certainly possible, historical probabilities suggest that not only is “this time NOT different,” it will likely end the same way it always has for investors who fail to heed to bond markets warnings.
The Justice Department announced that embattled Wells Fargo, which has seen its name feature in virtually every prominent banking scandal in the past year, will pay a civil penalty of $2.09 billion under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) based on the bank’s alleged origination and sale of residential mortgage loans that it knew contained misstated income information and did not meet the quality that Wells Fargo represented.
According to the DOJ, investors, including federally insured financial institutions, suffered billions of dollars in losses from investing in residential mortgage-backed securities (RMBS) containing loans originated by Wells Fargo.
“Abuses in the mortgage-backed securities industry led to a financial crisis that devastated millions of Americans,” said Acting U.S. Attorney for the Northern District of California, Alex G. Tse. “Today’s agreement holds Wells Fargo responsible for originating and selling tens of thousands of loans that were packaged into securities and subsequently defaulted. Our office is steadfast in pursuing those who engage in wrongful conduct that hurts the public.”
“This settlement holds Wells Fargo accountable for actions that contributed to the financial crisis,” said Acting Associate Attorney General Jesse Panuccio. “It sends a strong message that the Department is committed to protecting the nation’s economy and financial markets against fraud.”
The United States alleged that, despite its knowledge that a substantial portion of its stated income loans contained misstated income, Wells Fargo failed to disclose this information, and instead reported to investors false debt-to-income ratios in connection with the loans it sold.
Wells Fargo also allegedly heralded its fraud controls while failing to disclose the income discrepancies its controls had identified. The United States further alleged that Wells Fargo took steps to insulate itself from the risks of its stated income loans, by screening out many of these loans from its own loan portfolio held for investment and by limiting its liability to third parties for the accuracy of its stated income loans.
Wells Fargo sold at least 73,539 stated income loans that were included in RMBS between 2005 to 2007, and nearly half of those loans have defaulted, resulting in billions of dollars in losses to investors.
Wells Fargo stock dipped on the news, and is now back to unchanged on the day.
There are a large number of public and private services that measure the change in home prices. The algorithms behind these services, while complex, are primarily based on recent sale prices for comparative homes and adjusted for factors like location, property characteristics and the particulars of the house. While these pricing services are considered to be well represented measures of house prices, there is another important factor that is frequently overlooked despite the large role in plays in house prices.
In August 2016, the 30-year fixed mortgage rate as reported by the Federal Reserve hit an all-time low of 3.44%. Since then it has risen to its current level of 4.50%. While a 1% increase may appear small, especially at this low level of rates, the rise has begun to adversely affect housing and mortgage activity. After rising 33% and 22% in 2015 and 2016 respectively, total mortgage originations were down -16% in 2017. Further increases in rates will likely begin to weigh on house prices and the broader economy. This article will help quantify the benefit that lower rates played in making houses more affordable over the past few decades. By doing this, we can appreciate how further increases in mortgage rates might adversely affect house prices.
In 1981 mortgage rates peaked at 18.50%. Since that time they have declined steadily and now stands at a relatively paltry 4.50%. Over this 37-year period, individuals’ payments on mortgage loans also declined allowing buyers to get more for their money. Continually declining rates also allowed them to further reduce their payments through refinancing. Consider that in 1990 a $500,000 house, bought with a 10%, 30-year fixed rate mortgage, which was the going rate, would have required a monthly principal and interest payment of $4,388. Today a loan for the same amount at the 4.50% current rate is almost half the payment at $2,533.
The sensitivity of mortgage payments to changes in mortgage rates is about 9%, meaning that each 1% increase or decrease in the mortgage rate results in a payment increase or decrease of 9%. From a home buyer’s perspective, this means that each 1% change in rates makes the house more or less affordable by about 9%.
Given this understanding of the math and the prior history of rate declines, we can calculate how lower rates helped make housing more affordable. To do this, we start in the year 1990 with a $500,000 home price and adjust it annually based on changes in the popular Case-Shiller House Price Index. This calculation approximates the 28-year price appreciation of the house. Second, we further adjust it to the change in interest rates. To accomplish this, we calculated how much more or less home one could buy based on the change in interest rates. The difference between the two, as shown below, provides a value on how much lower interest rates benefited home buyers and sellers.
Data Courtesy: S&P Core Logic Case-Shiller House Price Index
The graph shows that lower payments resulting from the decline in mortgage rates benefited buyers by approximately $325,000. Said differently, a homeowner can afford $325,000 more than would have otherwise been possible due to declining rates.
The Effect of Rising Rates
As stated, mortgage rates have been steadily declining for the past 37 years. There are some interest rate forecasters that believe the recent uptick in rates may be the first wave of a longer-term change in trend. If this is, in fact, the case, quantifying how higher mortgage rates affect payments, supply, demand, and therefore the prices of houses is an important consideration for the direction of the broad economy.
The graph below shows the mortgage payment required for a $500,000 house based on a range of mortgage rates. The background shows the decline in mortgage rates (10.00% to 4.50%) from 1990 to today.
To put this into a different perspective, the following graph shows how much a buyer can afford to pay for a house assuming a fixed payment ($2,333) and varying mortgage rates. The payment is based on the current mortgage rate.
As the graphs portray, home buyers will be forced to make higher mortgage payments or seek lower-priced houses if rates keep rising.
The Fed has raised interest rates six times since the end of 2015. Their forward guidance from recent Federal Open Market Committee (FOMC) meeting statements and minutes tells of their plans on continuing to do so throughout this year and next. Additionally, the Fed owns over one-quarter of all residential mortgage-backed securities (MBS) through QE purchases. Their stated plan is to reduce their ownership of those securities over the next several quarters. If the Fed continues on their expected path with regard to rates and balance sheet, it creates a significant market adjustment in terms of supply and demand dynamics and further implies that mortgage rates should rise.
The consequences of higher mortgage rates will not only affect buyers and sellers of housing but also make borrowing on the equity in homes more expensive. From a macro perspective, consider that housing contributes 15-18% to GDP, according to the National Association of Home Builders (NAHB). While we do not expect higher rates to devastate the housing market, we do think a period of price declines and economic weakness could accompany higher rates.
This analysis is clinical using simple math to illustrate the relationship, cause, and effects, between changes in interest rates and home prices. However, the housing market is anything but a simple asset class. It is among the most complex of systems within the broad economy. Rising rates not only impact affordability but also the general level of activity which feeds back into the economy. In addition to the effect that rates may have, also consider that the demographics for housing are challenged as retiring, empty-nest baby boomers seek to downsize. To whom will they sell and at what price?
If interest rates do indeed continue to rise, there is a lot more risk embedded in the housing market than currently seems apparent as these and other dynamics converge. The services providing pricing insight into the value of the housing market may do a fine job of assessing current value, but they lack the sophistication required to see around the next economic corner.
Yesterday when looking at the latest MBA Mortgage Application data, we found that, as mortgage rates jumped to the highest level since 2011, mortgage refi applications, not unexpectedly tumbled to the lowest level since the financial crisis, choking off a key revenue item for banks, and resulting in even more pain for the likes of Wells Fargo.
Today, according to the latest Freddie Mac mortgage rates report, after plateauing in recent weeks, mortgage rates reversed course and reached a new high last seen eight years ago as the 30-year fixed mortgage rate edged up to 4.61% matching the highest level since May 19, 2011.
But while the highest mortgage rates in 8 years are predictably crushing mortgage refinance activity, they appears to be having the opposite effect on home purchases, where there is a sheer scramble to buy, and sell, houses. As Bloomberg notes, citing brokerage Redfin, the average home across the US that sold last month went into contract after a median of 36 only days on the market – a record speed in data going back to 2010.
To Sam Khater, chief economist of Freddie Mac, this was a sign of an economy firing on all cylinders: “This is what happens when the economy is strong,” Khater told Bloomberg in a phone interview. “All the higher-rate environment does is it either causes them to try and rush or look at different properties that are more affordable.”
Of course, one can simply counter that what rising rates rally do is make housing – for those who need a mortgage – increasingly more unaffordable, as a result of the higher monthly mortgage payments. Case in point: with this week’s jump, the monthly payment on a $300,000, 30-year loan has climbed to $1,540, up over $100 from $1,424 in the beginning of the year, when the average rate was 3.95%.
As such, surging rates merely pulls home demand from the future, as potential home buyers hope to lock in “lower” rates today instead of risking tomorrow’s rates. It also means that after today’s surge in activity, a vacuum in transactions will follow, especially if rates stabilize or happen to drop. Think “cash for clunkers”, only in this case it’s houses.
Meanwhile, the short supply of home listings for sale and increased competition is only making their purchases harder to afford: according to Redfin, this spike in demand and subdued supply means that home prices soared 7.6% in April from a year earlier to a median of $302,200, and sellers got a record 98.8% of what they asked on average.
Call it the sellers market.
Furthermore, bidding wars are increasingly breaking out: Minneapolis realtor Mary Sommerfeld said a family she works with offered $33,000 more than the $430,000 list price for a home in St. Paul. The listing agent gave her the bad news: There were nine offers and the family’s was second from the bottom.
For Sommerfeld’s clients, the lack of inventory is a bigger problem than rising mortgage rates. If anything, they want to close quickly before they get priced out of the market — and have to pay more interest.
“I don’t think it’s hurting the buyer demand at all,” she said. “My buyers say they better get busy and buy before the interest rates go up any further.”
Then again, in the grand scheme of things, 4.61% is still low. Kristin Wilson, a loan officer with Envoy Mortgage in Edina, Minnesota, tells customers to keep things in perspective. When she bought a house in the early 1980s, the interest on her adjustable-rate mortgage was 12 percent, she said.
“One woman actually used the phrase: ‘Rates shot up,’” Wilson said. “We’ve been spoiled after a number of years with rates hovering around 4 percent or lower.”
Of course, if the average mortgage rate in the America is ever 12% again, look for a real life recreation of Mad Max the movie in a neighborhood near you…
On the heels of the 10Y treasury yield breaking out of its recent range to its highest since July 2011, this morning’s mortgage applications data shows directly how Bill Gross may be right that the economy may not be able to handle The Fed’s ongoing actions.
As Wolf Richter notes, the 10-year yield functions as benchmark for the mortgage market, and when it moves, mortgage rates move. And today’s surge of the 10-year yield meaningfully past 3% had consequences in the mortgage markets, as Mortgage News Daily explained:
Mortgage rates spiked in a big way today, bringing some lenders to the highest levels in nearly 7 years (you’d need to go back to July 2011 to see worse). That heavy-hitting headline is largely due to the fact that rates were already fairly close to 7-year highs, although today did cover quite a bit more distance than other recent “bad days.”
The “most prevalent rates” for 30-year fixed rate mortgages today were between 4.75% and 4.875%, according to Mortgage News Daily.
And that is crushing demand for refinancing applications…
Despite easing standards – a net 9.7% of banks reported loosening lending standards for QM-Jumbo mortgages, respectively, compared to a net 1.6% in January, respectively.
According to Wolf Richter over at Wolf Street, the good times in real estate are ending…
The big difference between 2010 and now, and between 2008 and now, is that home prices have skyrocketed since then in many markets – by over 50% in some markets, such as Denver, Dallas, or the five-county San Francisco Bay Area, for example, according to the Case-Shiller Home Price Index. In other markets, increases have been in the 25% to 40% range. This worked because mortgage rates zigzagged lower over those years, thus keeping mortgage payments on these higher priced homes within reach for enough people. But that ride is ending.
And as Peter Reagan writes at Birch Group, granted, even if rates go up over 6%, it won’t be close to rates in the 1980’s (when some mortgage rates soared over 12%). But this time, rising rates are being coupled with record-high home prices that, according to the Case-Shiller Home Price Index, show no signs of reversing (see chart below).
So you have fast-rising mortgage rates and soaring home prices. What else is there?
It’s not just home refinancing demand that is collapsing… as we noted yesterday, loan demand is tumbling everywhere, despite easing standards…
But seriously, who didn’t see that coming?
Having thrown in the towel on his bond bear market call two weeks ago, Janus Henderson’s billionaire bond investor Bill Gross now believes that the most recent bearish bond price (rise in yields) will stop here as the economy cannot support higher yields.
As Gross said two weeks ago, yields won’t see a substantial move from here.
“Supply from the Treasury is a factor in addition to what the Fed might do in terms of a mild, bearish tone for U.S. Treasury bonds,” Gross told Bloomberg TV.
“I would expect the 10-year to basically meander around 2.80 to perhaps 3.10 or 3.15 for the balance of the year. It’s a hibernating bear market, which means the bear is awake but not really growling.”
Since then, yields have tested the upper-end of his channel and are breaking out today to their highest since 2011 (10Y)…
and back to their critical resistance levels (30Y)…
Bill Gross thinks they won’t be right. He highlights the long-term downtrend over the past 30-years, which comes in a 3.22%.
“30yr Tsy long-term downward yield trend line for the past 3 decades now at 3.22%, only ~4bps higher than today’s yield.”
“Will 3.22% be broken to upside?” he asks.
“I don’t think so. The economy can’t support yields higher than 3.25% for 30s and 10s, nor 3% for 5s.
Continuing hibernating bond bear market is best forecast.”
Asa ForexLive also notes, if he’s right it doesn’t necessarily mean the US dollar will reverse right away but it would be a good sign for stocks and would limit how far the US dollar might run.
So, will Gross be right? Is this latest spike all rate-locks on upcoming IG issuance? And will this leave speculators with a record short position now wondering who will be the one holding the greatest fool bag by the end of the year…
Well worth your time to hear what geo-economic consultant Martin Armstrong has to say.
The Reserve Bank of Australia (RBA), Australia’s central bank, warns of a $7000 Spike in Loan Repayments as interest-only term periods expire.
Every year for the next three years, up to an estimated 200,000 home loans will be moved from low repayments to higher repayments as their interest-only loans expire. The median increase in payments is around $7000 a year, according to the RBA.
What happens if people can’t afford the big hike in loan repayments? They may have to sell up, which could see a wave of houses being sold into a falling market. The RBA has been paying careful attention to this because the scale of the issue is potentially enough to send shockwaves through the whole economy.
Interest Only Period
In 2017, the government cracked down hard on interest-only loans. Those loans generally have an interest-only period lasting five years. When it expires, some borrowers would simply roll it over for another five years. Now, however, many will not all be able to, and will instead have to start paying back the loan itself.
That extra repayment is a big increase. Even though the interest rate falls slightly when you start paying off the principal, the extra payment required is substantial.
For now, the RBA is unconcerned: “This upper-bound estimate of the effect is relatively modest,” the RBA said.
Good luck with that.
Australian Government Rolls Out Universal Reverse Mortgage Plan
The Australian government has proposed a wide-ranging reverse mortgage plan that would make an equity release program available to every senior over the age of 65.
Previously restricted to those who partially participate in the country’s social pension program, the government-sponsored plan will extend to any homeowner above the age cutoff, according to a report from Australian housing publication Domain.
Under the terms of the government-sponsored plan, homeowners can receive up to $11,799 each year for the remainder of their lives, essentially taken out of the equity already built up in their homes. Domain gives the example of a 66-year-old who can receive a total of $295,000 during a lifetime that ends at age 91.
As in the United States, older Australians have a significant amount of wealth tied up in their homes; the publication cited research showing that homeowners aged 65 to 74 would likely have to sell their homes in order to realize the $480,000 increase in personal wealth the cohort enjoyed over the previous 12-year span.
In fact, the Australian government last year attempted to encourage aging baby boomers to sell their empty nests to free up the properties for younger families. Under that plan, homeowners 65 and older could get a $300,000 benefit from the government, a powerful incentive in a tough housing market for downsizers — and in a government structure that counts income against seniors when calculating pension amounts.
“Typically, older homeowners have been reluctant to sell for both sentimental and financial reasons,” Domain reported last year. “Often selling property is costly, and funds left over after buying a smaller home could then be considered in the means test.”
But the baked-in reverse mortgage benefit represents a shift toward helping seniors age in place instead of downsizing. The Australian government’s “More Choices for a Longer Life” plan also expands in-home care access by 14,000 seniors, according to the Financial Review, while boosting funding for elder physical-fitness initiatives and other efforts to reduce isolation among aging Australians.
The reverse mortgage plan will offer interest rates of 5.25%, which Domain noted is less than most banks, and will cost taxpayers about $11 million through 2022. Loan-to-value ratios are calculated to ensure that the loan balance can never exceed the eventual sale price of the home.
Australia Debating Universal Basic Income Plans
Greens leader Richard Di Natale has proposed a radical overhaul of Australia’s welfare system through the introduction of a universal basic income scheme, but critics believe this would only increase inequality.
Di Natale gave a speech at the National Press Club on Wednesday, outlining why he thought Australia’s current social security system was inadequate.
“With the radical way that the nature of work is changing, along with increasing inequality, our current social security system is outdated,” Di Natale said.
“It can’t properly support those experiencing underemployment, insecure work and uncertain hours.
“A modern, flexible and responsive safety net would increase their resilience and enable them to make a greater contribution to our community and economy.”
To address this, Di Natale called for the introduction of a universal basic income scheme, which he labelled a “bold move towards equality”.
“We need a universal basic income. We need a UBI that ensures everyone has access to an adequate level of income, as well as access to universal social services, health, education and housing,” he said.
“A UBI is a bold move towards equality. It epitomises a government which looks after its citizens, in contrast to the old parties, who say ‘look out for yourselves’. It’s about an increased role for government in our rapidly changing world.
“The Greens are the only party proudly arguing for a much stronger role for government. Today’s problems require government to be more active and more interventionist, not less.”
However Labor’s shadow assistant treasurer Andrew Leigh, responded on Twitter that Australia had the most targeted social safety net in the world and that Di Natale’s plan would increase inequality.
Leigh was unavailable for comment when contacted by Pro Bono News, but in a speech given at the Crawford School of Public Policy in April last year, he explained why he opposed a UBI.
“As it happens, using social policy to reduce inequality is almost precisely the opposite of the suggestion that Australia adopt a ‘universal basic income’,” Leigh said.
“Some argue that a universal basic income should be paid for by increasing taxes, rather than by destroying our targeted welfare system. But I’m not sure they’ve considered how big the increase would need to be.
“Suppose we wanted the universal basic income to be the same amount as the single age pension (currently $23,000, including supplements). That would require an increase in taxes of $17,000 per person, or around 23 percent of GDP. This would make Australia’s tax to GDP ratio among the highest in the world.”
Liberal Senator Eric Abetz described Di Natale’s plan as “economic lunacy”.
“Its catastrophic impact would see the biggest taxpayers in Australia, the banking sector, become unprofitable and shut down and his plan for universal taxpayer handouts would see our nation bankrupted in a matter of years,” Abetz said.
“This regressive and ultra-socialist approach of less work, higher welfare and killing profitable businesses has been tried and failed around the world and you need only look at the levels of poverty and riots in Venezuela.
“Senator Di Natale must explain… who will pay for this regressive agenda when he runs out of other people’s money.”
Despite this criticism, welfare groups said they welcomed a conversation on a “decent income for all”.
Dr Cassandra Goldie, the CEO of the Australian Council of Social Service, indicated that a UBI would be discussed among their member organisations.
“We are very glad a decent income for all is being discussed. Too many people lack the income they need to cover even the very basic essentials such as housing, food and the costs of children,” Goldie told Pro Bono News.
“We will be discussing basic income options with our member organisations.
“Our social security system has a job to protect people from poverty and help with essential costs and life transitions such as the costs of children and decent housing. It is failing at this. The basic minimum allowance for unemployed people is just $278 per week.
“Budget cuts – including the freezing of family payments – have made matters worse.”
Goldie said that working out if a basic income proposal would increase or reduce inequality depended on the detail.
“We don’t oppose universal payments on principle, but reform of social security should begin with those who have the least. This must be the first priority,” she said.
“The principle that everyone should have access to at least a decent basic income is a good starting point for reform. Let’s have that debate.”
The convenor of the Anti-Poverty Network SA, Pas Forgione, told Pro Bono News that a UBI would only address inequality if payments were set to an adequate level.
“If universal basic income means that everyone gets the same income that people on Newstart gets, roughly $260 a week, then I don’t think that’s going to do much to alleviate poverty,” Forgione said.
“It needs to be set at an adequate level. And I think that involves looking at what it takes to have a reasonable standard of living and a reasonable quality of life in a country like Australia. So it depends on the details.
“If it is set at an adequate level, than it would be a terrific thing for the quality of life for a number of very low income people. I’m not saying that it’s a panacea… but I think you could make a very strong case for looking at a UBI.”
Di Natale’s speech also called for the creation of a nationalised “People’s Bank”, to give more people access to affordable banking services and to add “real competition” to the banking sector.
“A people’s bank, along with more support for co-operatives and mutuals, would inject some real competition into the banking sector,” he said.
“We have a housing crisis that has been created by governments.
“So now is the time for government to step in: through a People’s Bank, by ending policies skewed in favour of investors like negative gearing and the capital gains tax discount, and through a massive injection of funds for social and public housing.”
When ZH reported Wells Fargo’s Q4 earnings back in January, they drew readers’ attention to one specific line of business, the one they dubbed the bank’s “bread and butter“, namely mortgage lending, and which as they then reported was “the biggest alarm” because “as a result of rising rates, Wells’ residential mortgage applications and pipelines both tumbled. Specifically in Q4 Wells’ mortgage applications plunged by $10bn from the prior quarter, or 16% Y/Y, to just $63bn, while the mortgage origination pipeline dropped to just $23 billion”, and just shy of the post-crisis lows recorded in late 2013.
Fast forward one quarter when what was already a grim situation for Warren Buffett’s favorite bank, has gotten as bad as it has been since the financial crisis for America’s largest mortgage lender, because buried deep in its presentation accompanying otherwise unremarkable Q1 results (modest EPS and revenue beats), Wells just reported that its ‘bread and butter’ is virtually gone, and in Q1 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline failed to rebound, and remained at $24 billion, the lowest level since the financial crisis.
Yet while the mortgage pipeline has not been worse since in a decade despite the so-called recovery, at least it has bottomed. What was more troubling is that it was Wells’ actual mortgage applications, a forward-looking indicator on the state of the broader housing market and how it is impacted by rising rates, that was even more dire, slumping from $63BN in Q4 to $58BN in Q1, down 2% Y/Y and the the lowest since the financial crisis (incidentally, a topic we covered just two days ago in “Mortgage Refis Tumble To Lowest Since The Financial Crisis, Leaving Banks Scrambling“).
Meanwhile, Wells’ mortgage originations number, which usually trails the pipeline by 3-4 quarters, was nearly as bad, plunging $10BN sequentially from $53 billion to just $43 billion, the second lowest number since the financial crisis. Since this number lags the mortgage applications, we expect it to continue posting fresh post-crisis lows in the coming quarter especially if rates continue to rise.
Adding insult to injury, as one would expect with the yield curve flattening to 10 year lows just this week, Wells’ Net Interest margin – the source of its interest income – failed to rebound from one year lows, and missed consensus expectations yet again. This is what Wells said about that: “NIM of 2.84% was a stable LQ as the impact of hedge ineffectiveness accounting and lower loan swap income was offset by the repricing benefit of higher interest rates.” But we’re not sure one would call this trend “stable” as shown visually below:
There was another problem facing Buffett’s favorite bank: while NIM fails to increase, deposits costs are rising fast, and in Q1, the bank was charged an average deposit cost of 0.34% on $938MM in interest-bearing deposits, exactly double what its deposit costs were a year ago.
And finally, there was the chart showing the bank’s consumer loan trends: these reveal that the troubling broad decline in credit demand continues, as consumer loans were down a total of $9.5BN sequentially across all product groups, far more than the $1.7BN decline last quarter.
What these numbers reveal, is that the average US consumer can not afford to take out mortgages at a time when rates rise by as little as 1% or so from all time lows. It also means that if the Fed is truly intent in engineering a parallel shift in the curve of 2-3%, the US can kiss its domestic housing market goodbye.
In the latest quarter, the broker-dealer suffered a net loss of 145 brokers
Once again, when the government intervenes – this time in housing – the left hand is starting a fire that the right hand is trying to put out. Rising prices for homes are once again pricing out prime borrowers and nobody can “figure out” why this is happening.
It is news like this article reported this morning by the Wall Street Journal that continues to perpetuate the hilarious notion of Keynesian economics as giving a job to one man digging a hole and another job to another man filling it, simply so that they both have jobs.
There is nothing funnier (or sadder) than “economists” struggling to understand how housing prices got so high and why people are taking on more debt in order to purchase them. However, that is the great mystery that the Wall Street Journal reported on Tuesday morning, making note of the fact that people are “stretching“ in order to purchase homes. What’s the solution to this problem? How about just easing lending standards again? After all, what could go wrong?
Apparently blind to the obvious – that forced inflation could amazingly make things more expensive relative to income – “economists” have hilariously blamed this price/debt delta on lack of supply. Of course, no one has mentioned the credit worthiness of borrowers getting worse or the fact that homes prices are being manipulated in order to offer home ownership to people who otherwise may not be in the market.
More Americans are stretching to buy homes, the latest sign that rising prices are making homeownership more difficult for a broad swath of potential buyers.
Roughly one in five conventional mortgage loans made this winter went to borrowers spending more than 45% of their monthly incomes on their mortgage payment and other debts, the highest proportion since the housing crisis, according to new data from mortgage-data tracker CoreLogic Inc. That was almost triple the proportion of such loans made in 2016 and the first half of 2017, CoreLogic said.
Economists said rising debt levels are a symptom of a market in which home prices are rising sharply in relation to incomes, driven in part by a historic lack of supply that is forcing prices higher.
The “lack of supply” argument is just wonderful – a bunch of “economists” finding a basic free market capitalism solution to a problem that has nothing to do with free market capitalism. Perhaps “economists” can also argue that building more, despite the lack of prime borrower demand, will also have the added benefit of puffing up GDP. From there, it’s only a couple more steps down the primrose path that leads to China’s ghost cities.
And of course, people are worried that we could have a “weak selling season” upcoming. In a free market economy, weakness is necessary and normal. In Keynesian theory, it’s the devil incarnate. The Wall Street Journal continued:
Real-estate agents worry that buyers’ weariness from being priced out of the market could make this one of the weakest spring selling seasons in recent years.
Consumers are growing more optimistic about the economy and their personal financial prospects but less hopeful that now is the right time to buy a home, according to results of a survey released in late March by the National Association of Realtors.
At the same time, the average rate for a 30-year, fixed-rate mortgage has risen to 4.40% as of last week from 3.95% at the beginning of the year, according to Freddie Mac, putting still more pressure on affordability.
These factors “are working against affordability and that’s why you get the pressure to ease credit standards,” said Doug Duncan, chief economist at Fannie Mae. He said that pressure has to be balanced against the potential toll if underqualified buyers eventually default on their mortgages.
CoreLogic studied home-purchase loans that generally meet standards set by Fannie Mae and Freddie Mac, the federally sponsored providers of 30-year mortgage financing.
The amount of these loans packaged and sold by Fannie and Freddie increased 73% in the second half of 2017, compared with the first half of the year, according to Inside Mortgage Finance, an industry research group. In that same period, overall new mortgages rose 15%.
As if the signs weren’t clear enough that manipulating the economy and manipulating the housing market has a detrimental effect, the article continued that Fannie Mae and Freddie Mac are “experimenting with how to make homeownership more affordable, including backing loans made by lenders who agree to help pay down a buyer’s student debt“. Sure, solve one government subsidized shit show (student loan debt) with another one!
Is it any wonder that the entire supply and demand environment for housing has been thrown completely out of order? On one hand, the government wants to make housing affordable so that everybody can have it, which closely resembles socialism. On the other hand, they are targeting prices to rise 2% every single year and claim that this is normal and healthy economic policy that we should all be buying into and applauding. The left hand doesn’t know what the right hand is doing!
We were on this case back in October 2017 when we wrote an article pointing out that home prices had again eclipsed their highest point prior to the financial crisis. We knew this was coming. We at the time that the ratio of the trailing twelve month averages of median new home sale prices to median household income in the U.S. had risen to an all time high of 5.454, which following revisions in the data for new home sale prices, was recorded in July 2017. The initial value for September 2017 is 5.437.
In other words, the median new home in the US has never been more unaffordable in terms of current income.
Here we are 6 months later and “economists” are just figuring this out. What’s wrong with this picture?
What’s really happening is clear. Instead of letting the free market determine the pricing and availability of housing, the government has continued to try and manipulate the market in order to give everyone a house. This is simply going to lead to the same type of behavior that led Fannie Mae and Freddie Mac to fail during the housing crisis.
If we are going to have free market capitalism, the reality of the situation is that not everybody is going to own a house.
Furthermore, while there are many benefits to owning a house, there are also many reasons why people rent. Peter Schiff, for instance, often makes the case that renting is generally worth it because you’re saving yourself on upkeep and it allows you to be flexible with where you live and when you have the opportunity to move. He himself rents property for these reasons, which he often notes in his podcast. Sure, there are some benefits of homeownership, namely that a homeowner is supposed to be building equity in something, but looking again at the situation we are in today, is it worth investing in the equity of a home that might see its price crash significantly again, similar to the way housing prices did in 2008?
The government is creating both the problem and the solution here and instead of trying to continually fix the housing market, they should just keep their nose out of it and allow the free market to determine who should own a house and at what price. Call us crazy, but we don’t think that’s going to happen.
This morning at 8am, the New York Fed, in cooperation with the Treasury Department’s Office of Financial Research, launched a much-anticipated, if largely worthless (for now) benchmark interest rate to replace Libor, together with two other reference rates, which traders and market participants hope will prove more reliable than the infamously rigged and manipulated index after a long and complex switch over.
The so-called Secured Overnight Financing Rate (SOFR), was set at 1.80 percent, roughly 17bp below the GC repo rate and 12bp above the fed effective.
Here is the full breakdown of today’s rates:
- Secured Overnight Financing Rate (SOFR) set at 1.80%
- Broad General Collateral Rate (BGCR) set at 1.77%
- Tri-party General Collateral Rate (TGCR) set at 1.77%
SOFR – which unlike Libor is secured – is based on the overnight Treasury repurchase agreement market, which trades around $800 billion in volume daily. As Reuters notes, publishing the rate is the first step in a multi-year plan to transition more derivatives away from the London interbank offered rate (Libor), which regulators say poses systemic risks if it ceases publication; ironically it also poses systemic risks if it keeps rising as it references a total of $300 trillion in financial (swaps, futs and derivatives) and non-financial (loans, mortgages) debt.
Some are delighted by the new rate: “It’s going to be based on a very, very robust set of transactions. I don’t think a lot of the issues and unknown volatility around Libor is going to exist,” said Blake Gwinn, an interest rate strategist at NatWest Markets in Stamford, Connecticut.
To be sure, the relentless ramp higher in both LIBOR and L-OIS has confused many: “Instances like what we’ve been going through this past month where it’s not even a clear cut bank credit issue or a dollar funding issue per se. It’s kind of got everybody scratching their heads trying to figure out why it’s doing what it’s doing,” Gwinn said.
And speaking of 3M USD Libor, today’s fixing rose yet again, up from 2.3118% to 2.3208%, the highest since November 2008 and up for their 38th straight session, longest streak since November 2005.
Still, a move away from Libor is expected to be gradual and complicated: the most pragmatic reason is that there is not yet a market for term loans such as one and three months, as in Libor. And there may never be one, unless floating debt creators are incented to shift the reference benchmark from Libor to SOFR.
“It’s hard to imagine a way they could come up with a similar calculation for a term rate and that’s the big difference between whether or not people would be comfortable adopting SOFR as a straight replacement for Libor,” said Thomas Simons, a money market economist at Jefferies in New York.
To be sure, it will take a long time to develop liquidity in derivatives based on the rate; it will take even longer to transplant existing Libor-linked securities to SOFR. The CME Group will launch futures trades based on SOFR on May 7, while major dealers will enable swaps trading on the rate this year.
Investors will also need to adjust to the day to day volatility of the repurchase market, where rates typically increase ahead of monthly and quarterly closings.
“A lot of folks have not really followed the repo market and some of the intramonth variations particularly closely,” said Mark Cabana, head of STIR at Bank BofA. “On a day to day basis it will be more volatile, but smoothing out over a three month time horizon it should be similarly volatile.”
Now, the only question is whether it will ever be adopted.
As we detailed on Tuesday, the mortgage refis have cratered to levels not seen since December ’08 amid a spike in interest (and mortgage) rates. Simply put, the population of borrowers who both qualify for a refi and want one given the higher rates has collapsed.
Consequently, the remaining homeowners seeking to refinance are overwhelmingly “cashing out” also known as taking out a new mortgage that’s bigger than the remaining balance on the existing one and using the extra money to
do sensible things like home improvements maintain their lifestyle.
And why not: just look at all that sweet, sweet equity…
“When rates are low, the primary goal of refinancing is to reduce the monthly payment,” wrote researchers for the Urban Institute in a recent report. “But when rates are high, borrowers have no incentive to refinance for rate reasons. Those who still refinance tend to be driven more by their desire to cash out.”
To better quantify the drop-off in refis, Black Knight reports the recent spike in interest rates cut the population of borrowers with an interest rate incentive to refinance by nearly 40 percent in 40 days
- Virtually all of the decline in potential refinance candidates was among 2009 and later vintages; Fewer than 100K traditional refinance candidates (720+ credit score, <80 percent loan-to-value (LTV) ratio) remain in 2012 and later vintages
“As people stay in their homes longer we see people reinvesting in their homes by using equity to update their homes and do repair work,” said Rick Sharga, executive VP for Carrington Mortgage Holdings and an industry veteran (via MarketWatch). “We’ve seen a huge expansion of the types of retirement options people have. One is aging in place and retrofitting your house.”
In the last go-around, many homeowners “blew the money,” in Sharga’s words, on splashy purchases like vacations and boats. But lenders were complicit too, offering loans that were as much as 120% of the existing value of the home.
Do you believe that? While homeowners may not be taking Hummer limos to Vegas with their cashed-out home equity “winnings” like idiots of ten-years past, it should be noted that the U.S. savings rate is at crisis lows, credit card debt has gone “completely vertical,” and 61% of Americans don’t have enough in savings to cover a $1,000 emergency.
Here are some troubling charts revealing the true state of the US consumer:
And while it is nobody’s intention to have a negative outlook on things, every several days or so, we notice, and are compelled to point out that there are some very sick looking canaries in familiar coal mines. We would also be remiss if we didn’t caution that home prices may even come down, as once upon a time “markets” moved in a thing called a cycle.
To visualize the impact the recent spike in mortgage rates is having on the US housing market in general, and home refinancing activity in particular…
… look no further than this recent chart from the January Mortgage Monitor slidepack by Black Knight: it shows the recent collapse of the refi market using the recent jump in 30Y and mortgage rates.
As Black Knight writes, it looks at the – quite dramatic – effect the mortgage rate rise has had on the population of borrowers who could both likely qualify for and have interest rate incentive to refinance. It finds that the number of potential refinance candidates has tumbled to the lowest since December 2008.
Some more details from the source:
- the recent spike in interest rates cut the population of borrowers with an interest rate incentive to refinance by nearly 40 percent in 40 days
- Virtually all of the decline in potential refinance candidates was among 2009 and later vintages; Fewer than 100K traditional refinance candidates (720+ credit score, <80 percent loan-to-value (LTV) ratio) remain in 2012 and later vintages
- Approximately 1.4 million borrowers lost the interest rate incentive to refinance in just the first six weeks of 2018
- 2.65 million potential candidates could still both benefit from and likely qualify for a refinance at today’s rates
- That is the smallest this population has been since late 2008, prior to the initial decline in rates during the recession
- Though the population is only 10 percent off its February 2017 mark, rate/term refinance production could see a more significant impact than this might suggest due to increasing burnout in the market
- A corresponding drop in the average credit score of refinance originations is typically observed when rates rise
To be sure, it is hardly a shock that after a decade of record low rates, the current rise in rates means a collapse in refi activity: after all anyone who could, and would, refinance, already has, while the universe of those who have yet to take advantage of lower rates and are eligible to do so, has collapsed.
Which is bad news not only for homeowners, but also for the banks, whose refi pipeline – a steady source of income and easy profit – is about to vaporize.
Here are some more details from the WSJ: last year, 37% of mortgage-origination volume was because of refinancings, according to industry research group Inside Mortgage Finance. That is the smallest proportion since 1995, and the number of refinancings is widely expected to shrink again this year. In 2012, refinancings were 72% of originations.
While purchase activity has climbed steadily from a post-financial-crisis nadir in 2011, growth in 2017 wasn’t enough to offset a $366 billion decline in refinancing activity. The result: The overall mortgage market fell around 12%, to $1.8 trillion, according to Inside Mortgage Finance.
“The market has just gotten so very competitive because every loan matters,” said Ed Robinson, head of the mortgage business at Fifth Third Bancorp . He added that the bank is contacting homeowners who could be eligible for a refinancing in coming years to help maintain that business, and it is also instructing mortgage-loan officers to focus more on purchases.
We demonstrated this plunge in bank mortgage financing last quarter when we showed the near record low mortgage application activity at America’s largest traditional mortgage lender, Wells Fargo.
Non-traditional lenders face even greater peril: Quicken Loans Inc. got about 70% of its mortgage-origination volume last year from refinancings, according to Inside Mortgage Finance—a higher proportion than any other large lender.
Of course, the higher rates rise, the more mortgage applications drop, suggesting that contrary to expectations for a rebound in interest expense as Net Interest Margin rises, bank will be far worse off as a result of rising rates as refi activity grinds to a crawl.
Or, as the WSJ explains it, “increased mortgage rates can hamper refinancing activity because many homeowners have rates that are already lower than what lenders can now offer. In other cases, the higher rates cut into the savings a homeowner stands to reap by refinancing a mortgage.”
The Mortgage Bankers Association expects nothing short of a bloodbath: it forecasts overall mortgage-purchase volume to grow about 5% in 2018 but refinancing volume to drop 27%. Refinance applications fell 5% in the week ended March 16 from the prior one, according to the group.
Here is another example of how higher rates are crushing – not helping – traditional banks: since around the beginning of 2017, Valley National Bancorp , based in Wayne, N.J., has transitioned its mortgage business to 40% refinancing from 90%, said Kevin Chittenden, who runs residential lending. The bank previously relied largely on attracting homeowners through its ads for low-cost refinancings, but has since engaged with outside sales reps who are focused on purchases.
“Refi goes with the rates,” Mr. Chittenden said. “So you definitely don’t want to be too leveraged on refinancings.”
It’s about to get worse.
Guy Cecala, chief executive of Inside Mortgage Finance, said he expects some smaller nonbank lenders to sell themselves by the end of the year because of the drop in the refinancing market and mortgage originations overall. Unlike banks, nonbank lenders typically don’t rely on branches or ties to local agents, which are traditional tools for capturing mortgage purchases.
Another risk: the return of subprime borrowers. As the WSJ adds, the waning of the refinancing boom also attracts a different type of homeowner than at the beginning. As mortgage rates go up, the average credit score of refinancings tends to go down, according to industry research.
That is partly because savvy borrowers are the ones who tend to take advantage of low interest rates first. Also, some borrowers who are refinancing now are doing so to get rid of their mortgage insurance: Home prices in many parts of the country are going up, meaning some homeowners are less leveraged even if they have paid down only a small portion of their mortgage.
As for “new” mortgage platforms such as Quicken Loans which face an imminent calamity as their refi platform implodes, Chief Executive Jay Farner said the company is still enjoying demand for both purchases and refinancings, including from homeowners whose decision to refinance is focused less on rates and more on consolidating debt or switching to a shorter-term loan.
But, he added, “You’ve got to be a little bit more strategic about how you market, versus what we saw lenders do in the last few years, which is, ‘Hey, rates are low, you should do something now.’”
* * *
The biggest irony in all of the above, of course, is that there are still those who will claim that higher rates in the “new normal” are good for banks. For the far more unpleasant reality: see a chart of Wells Fargo stock.
Versus other developed nations, the United States is losing ground in terms of the rate of home ownership, new research finds.
Compared to 17 other first-world countries around the globe, the U.S. home ownership rate has fallen over time, an indicator that the American Dream is becoming less attainable, according to research published by the Urban Institute.
Researchers Laurie Goodman, vice president for housing finance policy at the Urban Institute, and Chris Mayer, professor of real estate at Columbia Business School and CEO of reverse mortgage company Longbridge Financial, prepared the findings.
Among the 18 countries for which home ownership was considered, the U.S. ranked 10th in 1990 with a 63.9% home ownership rate compared with its ranking of 13th in 2015. Several European countries followed a similar shift, with Bulgaria, Ireland, and the United Kingdom seeing slides between 1990 and 2015; the proportion of homeowners also declined in Mexico over that span.
Thirteen of the countries saw increases in their rate of home ownership, including a 39.6% spike in the Czech Republic and a 29.6% gain in Sweden.
“While cross-country comparisons are difficult, the slip in US home ownership relative to the rest of the world, and the historically low home ownership rates for Americans ages 44 and younger, should motivate us to look at US housing policies,” the researchers wrote in a blog post on the research published by the Urban Institute.
Home ownership among the senior demographic has been touted within the reverse mortgage industry as a clear retirement windfall.
Yet even for those who choose not to tap into their home equity, the option to use the property rent-free once the mortgage is paid can play an important role in retirement savings, the researchers noted in discussing the amount of home equity currently held among seniors in European countries.
Homebuyers increasingly can’t afford what they want.
Higher mortgage rates, combined with the loss of homeowner tax breaks in some of the nation’s most expensive markets, are taking away buying power.
New home sales were also down 9% in December
New home sales down 7.8% in January, on top of being down 9% in December
Sales of newly built homes are falling, and the culprit is clear. Homebuyers increasingly can’t afford what they want. Higher mortgage rates, combined with the loss of homeowner tax breaks in some of the nation’s most expensive markets, are taking away buying power.
Sales fell in December, when the new tax law was signed, and then again in January, when mortgage rates moved higher. Sales are now at their lowest level since August of last year.
The government’s measure of new home sales is based on signed contracts during the month, reflecting the people who are out shopping and signing deals with builders. It is therefore a strong read on current reactions to home affordability. Mortgage rates moved a full quarter of a percentage point higher during January, from below 4 percent to about 4.25 percent. It then took off further from there.
“It seems that the jump in mortgage rates in January had an immediate impact on contract signings,” wrote Peter Boockvar, chief investment officer at Bleakley Advisory Group. “You can’t get more interest rate sensitive when it comes to homes and cars with the associated cost to finance.”
Higher home prices are adding to the difficulty for buyers. The median price of a newly built home rose to $323,000, a 2.5 percent gain compared with January 2017. Builders are not only increasing prices, but they are also mostly focused on the move-up market, not the entry level where homes are needed most.
While there is a severe shortage of existing homes for sale, the opposite appears to be the case in the new home market. Supply rose to the highest level in four years, another sign that new construction is increasingly out of financial reach for today’s home buyers.
“The drop in sales may be due to saturation in the upper price range of the market, which should compel builders to follow the market and build more moderately priced homes,” wrote Joseph Kirchner, senior economist at Realtor.com. “We may be beginning to see this with the largest drop for new home sales in homes priced above $500,000.”
The expectation had been for an increase in new home sales in January, after the sharp drop in December. Some economists argue that when rates begin to rise, there is an initial surge reaction from buyers who want to get in before rates increase even further. That did not happen, likely because affordability stood in the way.
Builders did note a drop in buyer traffic in January, according to a monthly sentiment survey from the National Association of Home Builders. That measure did not improve in February, when rates moved even higher. Builder confidence remains high, but largely due to sales expectations over the next six months, not current sales conditions or buyer traffic.
Builders may be counting on the tight supply in the existing home market to push more business their way. Sales of existing homes fell in January as well, with the blame laid squarely on a severe shortage of homes for sale.
“This report is undoubtedly disappointing. Like 2017, 2018 isn’t setting up to be particularly favorable for builders — construction materials and permitting costs are high and rising, labor is tight, and desirable, buildable land is scarce and expensive,” wrote Aaron Terrazas, senior economist at Zillow. “It seems clear that we shouldn’t expect a big breakthrough in new home sales any time soon, and should instead look for incremental progress at best. At this point, we’ll take whatever we can get.”
After new- and existing-home sales tumbled in December, expectations were for a modest 0.5% rebound in January (despite plunging mortgage applications and soaring rates). But that did not happen as existing home sales tumbled 3.2% MoM to its lowest level since Aug 2016.
NOTE – this data is based on signed contracts from Nov/DEC, which means the recent spike in rates is not even hitting this yet)
Existing home sales are down 4.8% YoY – the biggest drop since August 2014.
The West (-5.0%) and Midwest (-6.0%) saw the biggest drop in sales and while the blame (see below) was put on inventories, data shows a 4.1% increase in “available for sale” homes?
Of course NAR is careful to blame inventories – and not soaring rates affecting affordability: Lawrence Yun, NAR chief economist, says January’s retreat in closings highlights the housing market’s glaring inventory shortage to start 2018.
“The utter lack of sufficient housing supply and its influence on higher home prices muted overall sales activity in much of the U.S. last month,” he said.
“While the good news is that Realtors® in most areas are saying buyer traffic is even stronger than the beginning of last year, sales failed to follow course and far lagged last January’s pace.
“It’s very clear that too many markets right now are becoming less affordable and desperately need more new listings to calm the speedy price growth.”
The median existing-home price in January was $240,500, up 5.8% from January 2017.
First-time buyers were 29 percent of sales in January, which is down from 32 percent in December 2017 and 33 percent a year ago.
“The gradual uptick in wages over the last few months is a promising development for the housing market, but there’s risk these income gains could be offset by the recent jump in mortgage rates,” said Yun.
“That is why the pace of added new and existing supply in the months ahead is worth monitoring. If inventory conditions can improve enough to cool the swift price growth in several markets, most prospective buyers should be able to absorb the higher borrowing costs.”
So, will higher rates break housing market momentum?
The following chart suggest ‘yes’ – that surge in rates will have a direct impact on home sales (or prices will be forced to adjust lower) as affordability collapses…
This is not tax advise and I am not your tax advisor.
Growth? Inflation? Be careful what you wish for, as the surge in Treasury yields has sent mortgage interest rates to their highest in four years, flashing a big red warning light for affordability and home sales in 2018…
The U.S. weekly average 30-year fixed mortgage rate rocketed up 10 basis points to 4.32 percent this week. Following a turbulent Monday, financial markets settled down with the 10-year Treasury yield resuming its upward march. Mortgage rates have followed. The 30-year fixed mortgage rate is up 33 basis points since the start of the year.
Will higher rates break housing market momentum?
As the following chart shows, that surge in rates will have a direct impact on home sales (or prices will be forced to adjust lower) as affordability collapses…
A housing bust may be just around the corner. Rates have climbed to a level last seen in May of 2014.
The chart does not quite show what MND headline says but the difference is a just a few basis points. I suspect rates inched lower just after the article came out.
For the past few weeks, rates made several successive runs up to the highest levels in more than 9 months. It was really only the spring of 2017 that stood in the way of rates being the highest since early 2014. After Friday marked another “highest in 9 months” day, it would only have taken a moderate movement to break into the “3+ year” territory. The move ended up being even bigger.
From a week and a half ago, most borrowers are now looking at another eighth of a percentage point higher in rate. In total, rates are up the better part of half a point since December 15th. This marks the only time rates have risen this much without having been at long term lows in the past year. For example, late 2010, mid-2013, mid-2015, and late 2016 all saw sharper increases in rates overall, but each of those moves happened only 1-3 months after a long term rate low.
Not a Drill
So far this month, MBS have stunningly dropped over 200 bps, which easily translates into a .5% or more increase in rates. I’ve been shouting “lock early” for quite a while, and this is precisely why, This isn’t a drill, or a momentary rate upturn. It’s likely the end of a decade+ long bull bond market. LOCK EARLY. -Ted Rood, Senior Originator
Housing Bust Coming
Drill or not, if rising rates stick, they are bound to have a negative impact on home buying.
In the short term, however, rate increases may fuel the opposite reaction people expect.
Those on the fence may decide it’s now or never and rush out to purchase something, anything. If that mentality sets in, there could be one final homebuilding push before the dam breaks. That’s not my call. Rather, that could easily be the outcome.
Completed Homes for Sale
Speculation by home builders sitting on finished homes in 2007 is quite amazing.
What about now?
Supply of Homes in Months at Current Sales Rate
Note that spikes in home inventory coincide with recessions.
A 5.9 month supply of homes did not seem to be a problem in March of 2006. In retrospect, it was the start of an enormous problem.
In absolute terms, builders are nowhere close to the problem situation of 2007. Indeed, it appears that builders learned a lesson.
Nonetheless, pain is on the horizon if rates keep rising.
Price Cutting Coming Up?
If builders cut prices to get rid of inventory, everyone who bought in the past few years is likely to quickly go underwater.
In the land of negative rates, yet another record has been set
(Reuters – COPENHAGEN) – Interest rates in Denmark’s mortgage bond market, one of Europe’s largest, are hovering around their lowest ever levels due to strong international appetite for the top-rated bonds.
30 year fixed for 1.5%
The country’s largest mortgage lender Nykredit on Friday began issuing 30-year mortgage loans with a fixed rate of just 1.5 percent, revisiting a 2015 record-low.
“The low risk of these triple-A rated papers combined with interest rates of 1.5 to 2.0 percent is attractive in international comparison,” chief analyst Jeppe Borre of Totalkredit, a unit of Nykredit, said.
“Therefore we’ve seen foreigners increase their share of ownership in these bonds significantly”.
Most European bonds have rallied over the past month after the European Central Bank extended asset purchases until September 2018 and left it open-ended beyond that.
Investors are paying Danes to finance negative rates
Danske Bank, the second-largest mortgage lender, on Friday concluded the latest batch of auctions over ‘flex-loans’, one-year adjustable rate-loans, with an interest rate of negative 0.20 percent, the lowest ever for that bank.
“The economic developments in Denmark and Europe are pushing interest rates to these extremely low levels. It looks as if it will continue for some time to come,” senior economist Sonia Khan of Danske Bank’s mortgage unit Realkredit Danmark, said.
Some investors may also be choosing to place their money in Danish bonds rather than German ones due to the political uncertainty stemming from the prolonged coalition talks in Berlin, Khan added.
The main owner of Nykredit late on Thursday decided to go ahead with the sale of a 10.9 percent stake to five pension funds, putting an end to plans to publicly list the company.
Director Mick Mulvaney appears on Fox Business News to discuss the ongoing tax reform efforts along with ongoing revelations within the Consumer Financial Protection Bureau (CFPB).
There are two really insightful articles, written by Ronald Rubin -who was there at the start of the bureau- about the CFPB, that deserve to be read by anyone looking to understand the organization and the left-wing constructs within it.
Here’s the two articles that deserve to be read. The first one might blow your mind:
♦ #1 Conceived as a government watchdog, with aims to financially fill the coffers of left-wing activist organizations, the CFPB was doomed by an Elizabeth Warren structure that made it an inherently political agency. READ HERE
♦ #2 The sad and sick joke – how the face of the CFPB’s first director falsely claimed caring about consumers, but the reality was entirely political. READ HERE
Immediately upon taking control within the CFPB Director Mick Mulvaney:
- Immediately shut down any further hiring and expansion for 30 days.
- Immediately froze any new rules and regulations being implemented.
- And most importantly stopped any further payments from the CFPB to left-wing political activist groups.
The CFPB was essentially created to work as a legal money laundering operation for progressive causes by fining financial institutions for conduct the CFPB finds in violation of their unilateral and arbitrary rules and regulations. The CFPB then use the proceeds from the fines to fund progressive organizations and causes. That’s the underlying reason why the Democrats are fraught with anxiety right now.
Elizabeth Warren set up the bureau to operate above any oversight. Additionally, the bureau was placed under spending authority of the federal reserve. The CFPB gets its operating budget from the Federal Reserve, not from congress. Again, this was set-up to keep congress from defunding the agency as a way to remove it.
Everything about the way the CFPB was structured was done to avoid any oversight. Hence, a DC circuit court finding the agency held too much power, and deemed the Directors unchecked position unconstitutional.
Mick Mulvaney is now in a position to look at the books, look at the prior records within the bureau, and expose the political agenda within it to the larger public. That is sending the progressives bananas.
Most likely President Trump will not appoint a replacement until Mulvaney has exposed the corruption within the bureau. That sunlight is toxic to Elizabeth Warren and can potentially be politically destructive to the Democrats. If the secrets within the bureau are revealed, there’s a much greater likelihood the bureau will be dissolved.
There are billions of scheme and graft at stake. Within the record-keeping there are more than likely dozens of progressive/Democrat organizations being financed by the secret enterprise that operates without oversight. That’s the risk to the SWAMP.
Pocahontas Financial Control Scheme Returns To Bite Its Creator…
Everyone is aware how apoplectic the Democrat loonery became when their best laid schemes to put Hillary in the White House ran into the reality of electoral Cold Anger carried by the deplorables. Lots has been written about the gobsmacked reaction to the election, yet few have outlined the underlying policy reasons for the scope of the panic.
The desperate need for post-election control showcased the lefts’ reaction to fear. However, it is only by looking at the policy groundwork they lost where a political observer can evaluate the scale of defeat. Democrats created a continuum pathway that is now entirely controlled by the very nemesis of their controlling belief system.
In a largely under-reported story last week, President Trump installed OMB Director Mick Mulvaney as interim head of the Consumer Financial Protection Bureau, the CFPB.
The CFPB was created to establish power and control over almost every financial transaction in the United States. But it is only when you review how Elizabeth Warren and the control agents structured the czar head of the CFPB that you recognize the scale of the intent carried within the construct.
When Senator Elizabeth Warren and crew set up the Director of the CFPB, in the aftermath of the Dodd-Frank Act, they made it so that the appointed director can only be fired for cause by the President.
This design was so the Director could operate outside the control of congress and outside the control of the White House. In essence the CFPB director position was created to work above the reach of any oversight; almost like a tenured position no-one could ever remove.
The position was intentionally put together so that he/she would be untouchable, and the ideologue occupying the position would work on the goals of the CFPB without any oversight.
Elizabeth Warren herself wanted to be the appointed director; however, the reality of her never passing senate confirmation made her drop out.
The CFPB Director has the power to regulate pensions, retirement investment, mortgages, bank loans, credit cards and essentially every aspect of all consumer financial transactions.
However, in response to legal challenges by Credit Unions and Mortgage providers, last October the DC Circuit Court of Appeals ruled that placing so much power in a single Czar or Commissioner was unconstitutional:
[…] The five-year-old agency violates the Constitution’s separation of powers because too much power is in the hands of its director, found the U.S. Court of Appeals for the District of Columbia Circuit. Giving the president the power to get rid of the CFPB’s director and to oversee the agency would fix the situation, the court said. (more)
After the November 8th 2016 election (during the lame-duck Obama period), the CFPB sought an en blanc review of the decision by the circuit court panel. However, in March the Trump administration reversed the government’s position. In essence, Team Trump was now positioned to use the power of the CFPB Director to eliminate itself. The entire DC panel heard the appellate case in May and a decision is pending. [Either outcome Trump wins]
Facing insurmountable legal headwinds, and simultaneously finding himself under the control of the executive branch, the Obama Director of the CFPB Richard Cordray announced his resignation.
President Trump has now appointed OMB Director Mick Mulvaney as interim head of the agency; with no rush on a permanent replacement. [Mulvaney will return to his role as OMB Director as soon as a permanent replacement is nominated. Until then he wears two
While in congress Mick Mulvaney, along with dozens of Dodd Frank critics, strongly opposed the creation of the CFPB and the scope of control within its mandate to regulate all consumer financial transactions. During his confirmation hearing Mulvaney referred to the CFPB as “one of the most offensive concepts” in the U.S. government and that he stood by an earlier comment describing it as a “sad, sick joke.”
The Democrats, most specifically Elizabeth “Pocahontas” Warren and crew, are apoplectic at the end result of their too-cute-by-half plans and the possibility of their agency being deconstructed. What is even more delicious to note – in their rush to construct the entire CFPB scheme the Dodd-Frank law does not specify the deputy director as next in line to serve in the event of a vacancy. That means President Trump is within his normal constitutional powers to appoint whomever he likes.
In appointing Mick Mulvaney President Trump has now put in place someone who can be counted on to deconstruct Warren’s leftist plan to control all our financial transactions by dictatorial fiat and unilateral authority. By their own doing Pocahontas et al created a situation they are now powerless to stop.
Expanding the Consequence: This now becomes a critical part of President Trump and Treasury Secretary Mnuchin’s overall strategy to create a secondary financial market for smaller banks and credit unions to operate the Main Street economy.
Because Dodd-Frank Act created even fewer and even bigger banks it’s become almost impossible to re-institute something like a Glass Steagall wall between commercial and investment divisions within banks.
Back in July 2010 when Dodd-Frank banking regulation was passed into law, there were approximately 12 to 17 banks who fell under the definition of “too big to fail”.
Meaning 12 to 17 financial institutions could individually negatively impact the economy, and were going to force another TARP-type bailout if they failed in the future. Dodd-Frank regulations were supposed to ensure financial security, and the elimination of risk via taxpayer bailouts, by placing mandatory minimums on how much secure capital was required to be held in order to operate “a bank”.
One large downside to Dodd-Frank was that in order to hold the required capital, all banks decreased lending to shore-up their liquid holdings and meet the regulatory minimums. Without the ability to borrow funds, small businesses have a hard time raising money to create business. Growth in the larger economy is hampered by the absence of capital.
Another downstream effect of banks needing to increase their liquid holdings was exponentially worse. Less liquid large banks needed to purchase and absorb the financial assets of more liquid large banks in order to meet the regulatory requirements.
In 2010 there were approximately twelve “too big to fail banks”, and that was seen as a risk within the economy, and more broad-based banking competition was needed to be more secure.
Unfortunately, because of Dodd-Frank by 2016 those twelve banks had merged into only four even bigger banks that were now even bigger risks; albeit supposedly more financially secure in their liquid holdings. This ‘less banks’ reality was opposite of the desired effect.
The four to six big banks (JP Morgan-Chase, Bank of America, Citigroup, Wells Fargo, US BanCorp and Mellon) now control $9+ trillion (that’s “TRILLION). Their size is so enormous that small group now controls most of the U.S. financial market.
Because they control so much of the financial market, instituting a Glass-Steagall firewall between commercial and investment divisions (in addition to the Dodd-Frank liquid holding requirements), would mean the capability of small and mid-size businesses to get the loans needed to expand or even keep their operations running would stop.
2010’s “Too few, too big to fail” became 2016’s “EVEN FEWER, EVEN BIGGER to fail”.
That’s the underlying problem for a Glass-Steagall type of regulation now. The Democrats created Dodd-Frank which: #1 generated constraints on the economy (less lending), #2 made fewer banking options available (banks merged), #3 made top banks even bigger.
This problem is why President Trump and Secretary Mnuchin are working to create a parallel banking system of community and credit union banks, individually less than $40 billion in assets, that are external to Dodd Frank regulations and can act as the primary commercial banks for small to mid-sized businesses.
The goal of “Glass Steagall”, ie. Commercial division -vs- Investment division, is created by generating an entirely new system of smaller banks under lowered regulation. The ten U.S. “big banks” operate as “investment division banks” and are subject to the rules and regulations of Dodd-Frank. The smaller banks and credit unions have less regulation and operate as the “Commercial Side” directly benefitting Main Street.
Instead of fire-walling an individual bank internally (within its organization), the Trump/Mnuchin plan firewalls the banking ‘system’ within the United States internally.
Tragic Downfall of the Consumer Financial Protection Bureau
Sen. Elizabeth Warren and CFPB director Richard Cordray on Capitol Hill, September 2014. (Reuters photo: Jonathan Ernst)
Conceived as a government watchdog with noble aims, the CFPB was doomed by a structure that made it an inherently political agency.
On October 11, 2016, in PHH Corp. v. Consumer Financial Protection Bureau, a three-judge panel of the D.C. Circuit Court of Appeals found the CFPB’s structure unconstitutional and “fixed” it by empowering the president to remove the agency’s director at will. Sounds dull, but this is a tragic story.
In 1988, during my first year of law school, I met a young professor named Elizabeth Warren. She was like a tornado — energetic, fascinating, and scary. She was also a Republican. Despite that last bit of trivia, she hadn’t changed much when Americans began to notice her two decades later.
In fact, a Reagan Republican might have written her 2007 article “Unsafe at Any Rate,” which proposed a new regulatory agency to help consumers understand credit products by simplifying disclosures and ending deceptive industry practices. Free-market economists would approve of her rationale for a “Financial Product Safety Commission:”
To be sure, creating safer marketplaces is not about protecting consumers from all possible bad decisions. . . . Terms hidden in the fine print or obscured with incomprehensible language, unexpected terms, reservation of all power to the seller with nothing left for the buyer, and similar tricks and traps have no place in a well-functioning market. . . . When markets work, they produce value for both buyers and sellers, both borrowers and lenders. But the basic premise of any free market is full information. When a lender can bury a sentence at the bottom of 47 lines of text saying it can change any term at any time for any reason, the market is broken.
Over the next two years, the economy collapsed, Democrats gained control of Congress and the White House, and Warren grew famous criticizing big banks in congressional hearings. She lobbied Democrats to include her agency in their Wall Street–reform legislation, arguing that effective enforcement of consumer-protection laws required a regulator independent from politicians beholden to the financial industry. The Democrats had a better idea: They would make her agency independent from Republicans.
Circumventing the Constitution took two steps. First, Democrats inserted a few clever workarounds into the Dodd-Frank Act, which created the CFPB on July 21, 2010. Commissions such as the one Warren first proposed are ostensibly bipartisan, so a president-appointed director would lead the new agency. Since there might be a Republican president one day, the director would be practically irremovable after Senate confirmation to a five-year term that could extend indefinitely until the next director’s confirmation. To prevent future Republican-led Congresses from cutting the bureau’s budget, funding would be guaranteed through Federal Reserve profits rather than taxpayer dollars.
Next, the enlarged new agency would be staffed with Democrats, top to bottom. There would not be a Republican director nominee for at least five years, and if one was ever confirmed, entrenched left-wing managers could undermine “attempts to weaken consumer protection.” The plan wasn’t perfect, but it was pretty good.
Warren, who had hoped to be the CFPB’s first director, led the one-year agency-building process. She chose loyal Democrats to be her senior deputies; they hired like-minded middle managers, who in turn screened lower-level job seekers. It was too risky for interviewers to discuss politics, so mistakes were possible. I was one of them.
As a Jewish graduate of a liberal college living on Manhattan’s Upper West Side, I fit the stereotypical Democratic profile. In fact, my primary influences were my business-school professors at the University of Chicago, the epicenter of free-market capitalism. I supported the agency Warren proposed in 2007 for the same reason I had worked at the Securities and Exchange Commission — accurate information improves markets’ efficiency. I had not read important sentences at the bottom of the Dodd-Frank Act’s thousands of lines of text.
In March of 2011, I interviewed with Richard Cordray, the pre-operational agency’s new enforcement chief. By May, I had surrendered my prized rent-stabilized apartment and moved to Washington to be the CFPB’s 13th enforcement attorney.
I would not have been so lucky two months later. As screening techniques improved, Republicans were more easily identified and rejected. Political discrimination was not necessarily illegal, but attempts to hide it invited prohibited race, gender, religion, and age discrimination. In retrospect, the Office of Enforcement’s hiring process, which was typical for the bureau, violated more laws than a bar-exam hypothetical.
Job seekers interviewed with two pairs of attorneys and most senior managers. All Office of Enforcement employees were invited to attend the weekly hiring meetings, where interviewers summarized the applicants. Any attendee could voice an opinion before each candidate’s verdict was rendered; even a single strong objection was usually fatal. Note taking was strictly forbidden, and interviewers destroyed their records after the meetings. I never missed one.
Clear verbal and non-verbal signals quickly emerged. The most common, “I don’t think he believes in the mission” was code for “he might not be a Democrat.” At one meeting, Kent Markus, a former Clinton-administration lawyer who had joined the bureau as Cordray’s deputy, remarked that an applicant under consideration “sounds like a good liberal to me.” After a few seconds of nervous laughter and eye contact around the room, Markus recognized his slip. “I didn’t say that,” he awkwardly joked. The episode so unnerved one attorney that he never attended another hiring meeting.
Applicants who had represented financial-industry clients were routinely rejected, depriving the bureau of critical expertise and business perspective. A memorable exception sought to become only the second African-American female enforcement attorney. Following an hour-long debate that would have doomed most applicants, her verdict was postponed pending additional interviews. Her prospects looked good at a subsequent meeting until someone expressed concerns over her frequent use of the F word. She survived a second excruciating hour of debate, and worked for the CFPB just long enough to become a partner at a big law firm.
White men over 40 received the opposite treatment. One attorney’s résumé was so spectacular that interviewers struggled to come up with plausible excuses to reject him. Finally, someone blurted out, “For the love of God, don’t hire him!” Cordray, who always spoke last, had no choice. He asked that the rejection letter be delayed until he could call the Supreme Court justice who had left a voicemail recommending the man.
Warren would have faced less opposition to being the chair of a bipartisan commission, and might have been confirmed before the 2010 midterm elections restored Republicans’ Senate filibuster and House majority. Instead, her efforts to charm Congress failed and she was heartbroken when the president declined to nominate her as director. She left the agency she had conceived and nurtured on its birthday, July 21, 2011. Biblical allusions to original sin and expulsion from the Garden of Eden were spoiled when she was elected Massachusetts’ junior senator later that year.
On July 17, 2011, the president nominated Cordray to lead the bureau. The soft-spoken Ohio Democrat and University of Chicago alumnus — a former Jeopardy champion and state attorney general who had clerked for Judge Robert Bork and two conservative Supreme Court justices — was literally and strategically a smart choice.
But in the rush to pass the Dodd-Frank Act, Democrats had made a drafting error that limited the CFPB’s most important powers until the bureau had its first director. Republicans vowed to use that leverage to filibuster any nomination until Democrats revised the bureau’s structure and funding.
Cordray was preparing for his confirmation hearing when I e-mailed him one of my favorite Ronald Reagan quotes:
“Free men engaged in free enterprise build better nations with more and better goods and services, higher wages and higher standards of living for more people. But free enterprise is not a hunting license”
He still hadn’t decided how to use the quote when I bumped into him in the office late one night. I asked if he was studying harder than he had for Jeopardy, and for the next half hour he reeled off almost every question he’d been asked a quarter-century earlier. He seemed as impressed by my correct answers as I was by his memory.
On January 4, 2012, the president bypassed the filibuster with a legally suspect recess appointment. Cordray used my Reagan quote in the opening statement of his first Senate testimony as director. Finally, on July 16, 2013, with the Supreme Court decision that clarified the recess appointment’s unconstitutionality a year away and Democrats threatening to eliminate the filibuster through a change in Senate rules, Republicans abandoned the fight. Cordray was confirmed, intensifying partisan acrimony.
From 2011 to 2016, Republicans regularly passed legislation to restructure the CFPB as a bipartisan commission and bring its funding under the congressional appropriations process. Democrats labeled and rejected all changes as attempts to weaken consumer protection.
The CFPB itself was defined by this existential threat, driven to paranoid secrecy and obsessive self-promotion. It viewed Republican legislative-oversight initiatives as insincere attacks, sometimes appropriately so. But its stonewalling of Congress, and even of its own inspector general, was shocking.
A knowledgeable friend within the bureau once debriefed me on the unit that handled oversight requests. The unwritten policy of its supervising attorneys, and in particular of one former Democratic Senate staffer, was “never give them what they ask for.” When the inspector general complained to Cordray about that supervisor, Cordray took no action because she had accepted a job in the White House. Another former Democratic staffer replaced her. Soon, a career professional in the unit who had resisted pressure to engage in witness coaching and other unethical practices was reprimanded for insubordination and reassigned. The inspector general investigated and issued a report to Cordray that concluded the reprimand was unwarranted and the supervisors had engaged in obstruction.
My own experience as a House Financial Services Committee staffer in 2015 left me no doubt the debriefing was accurate. In one episode, unbeknownst to the CFPB, the committee had obtained internal documents that showed the bureau planned to send discrimination-restitution checks to thousands of Caucasian car buyers — the only way to distribute the restitution fund it had extracted from an auto-finance company based on trumped-up allegations that car dealers had charged higher interest rates on loans to minority customers. The committee’s chairman sent Cordray a letter precisely describing and requesting the documents and related information. I was appalled by the response.
The oversight lawyers sent almost none of the requested information or documents, together with a letter from Cordray pretending the bureau had provided everything. I spent days drafting e-mails demanding either the omitted items or a declaration that they did not exist. Each time, the supervisor simply replied that the chairman’s inquiry was “better suited” to a private briefing with committee staff. Subsequent committee subpoenas fared no better. CFPB enforcement attorneys would have bankrupted a company whose lawyers used similar tactics to stonewall the bureau.
The flip side of the CFPB’s secrecy was its single-minded pursuit of publicity. External Affairs was the bureau’s most powerful division. Headlines drove and often hindered decision-making and operations, as I witnessed first hand.
Shortly after his nomination, Cordray gathered senior enforcement attorneys to discuss an op-ed by Bill McLucas, my first SEC enforcement director. The piece urged the CFPB to adopt the SEC’s Wells process and allow potential defendants to submit their cases directly to the director before he approved lawsuits and other enforcement actions. Everyone at the table rejected the idea, but I stressed the importance of fairness and due process, especially when legal expenses could destroy an innocent defendant. Cordray agreed. I would draft the procedures.
The working group added restrictions to discourage submissions, like strict page limits and a 14-day deadline. I named it the Notice and Opportunity to Respond and Advise, or NORA, process. Everybody liked the friendly, feminine acronym.
However, External Affairs decided “NORA” wasn’t testing well with journalists, and renamed it “Early Warning Notice.” On Saturday, two days before the November 7, 2011 Early Warning Notice press release and media call, the general counsel’s office sent an e-mail postponing the rollout due to legal concerns. Minutes later, External Affairs replied that it was not their problem and there would be no postponement.
Within days of the rollout, a company threatened to sue for trademark infringement, and the original name was restored. I wish I could report that a NORA submission ever persuaded the director to decline an enforcement action.
2011 was a wonderful time to work at the CFPB. Most of the employees had emigrated from distant cities, and they became each other’s second families. Five attorneys huddled with me in a small office dubbed the “Meat Locker” for its arctic air conditioning, and then changed locations every few weeks. My favorite was the “Warren Room,” a cluster of twelve cubicles permeated by non-stop clatter from a nearby ping-pong table.
We pitched ideas for the first investigations. Mine involved the currency-exchange rates credit cards use to convert foreign charges to U.S. dollars. Loud boos and cries of “Who cares about rich tourists?” filled the room. I argued that many international travelers are students and retirees, and the law protects everyone. Plus, we should show wealthier people the CFPB helps them, too. Cordray agreed, and approved my investigation.
Things changed after the recess appointment. Markus, the new enforcement chief, exacerbated hiring biases by soliciting anonymous oral comments about colleagues competing for twelve mid-level supervisor positions. Similar illegal practices throughout the bureau resulted in a dearth of real-world experience, and then socialistic management schemes camouflaged by new-age nomenclature.
Enforcement had issue groups, issue teams, working groups, strategy teams, investigation teams, and litigation teams. Individual initiative was forbidden — investigation ideas were to be submitted to the collective even before preliminary Internet research. An issue group took custody of my exchange-rate investigation and aborted it.
The “us against the world” culture that was exhilarating in a startup became debilitating in a mature agency. Internal policies to minimize record-keeping deprived the CFPB’s enemies of statistics, but limited management tools. External criticism was dismissed as disingenuous, good advice ignored. Problems that could not be acknowledged could not be fixed. Morale and productivity deteriorated. The employees unionized.
There were a few winners, most with political connections, and many more losers. Moderates who objected were marginalized or ostracized.
Leonard Chanin, a 20-year veteran of the Federal Reserve, was the rule making division’s first leader. During meetings, I was humbled by his dignified intellect and mastery of financial laws. In 2013, I asked him why he’d left the bureau. With characteristic understatement, he replied, “I thought it was going to be a professional agency.”
Other employees had fewer options. I once shared a cab with an enforcement attorney who’d had several drinks and was so despondent over her treatment at work that I was terrified she would harm herself.
During my job interview, Cordray asked what I thought Enforcement should do first. I said there was plenty of low-hanging fruit like credit-report errors, inscrutable fine print, and fraud to keep us busy until the skeptics got comfortable. He agreed.
Car dealers were the highest-hanging fruit — the Dodd-Frank Act explicitly exempted them from the CFPB’s jurisdiction. A month after his recess appointment, Cordray approved a resource-intensive campaign to stop dealers from negotiating interest rates on car loans, a critical profit source. The comically aggressive plan involved guessing car buyers’ races from their names and addresses, using manipulated statistics and the controversial disparate-impact legal doctrine to label dealer lending discriminatory, and accusing finance companies of discrimination for purchasing dealers’ loans at competitive market prices.
The original and least controversial use of the disparate-impact doctrine, which allows discrimination to be proven by statistics alone, was in employment cases. Unfortunately, a September 2013 confidential Deloitte consulting report found that CFPB minority employees received below-average performance-review scores — much stronger disparate-impact evidence than the bureau was using for dealers. Union officials were briefed on, but not given, the report.
Cordray still had not fixed the performance-review system on March 6, 2014, when a perfect storm of the CFPB’s flaws erupted. The report’s findings were leaked to the media, and Republicans pounced. During several embarrassing congressional hearings, employees described disturbing discrimination problems at the agency, like a unit nicknamed “the Plantation.”
That summer, I ran into a CFPB-union official who had shivered with me in the Meat Locker three years earlier. I said Cordray’s senior managers must have been keeping him in the dark. “No,” he replied, “Rich knows everything, the smallest details. He’s changed. He’s over at the White House playing basketball with the president. He’s not the same guy.”
Following the hearings, the CFPB attorney who had defended the bureau against Equal Employment Opportunity claims was chosen to run its EEO program. Another year passed before an African American woman in the EEO office testified to Congress that the problems had worsened; the CFPB was more concerned with preventing bad publicity than with preventing discrimination.
The Dodd-Frank Act prohibited “abusive acts or practices” that take unreasonable advantage of someone’s inability to protect their interests. The prohibition did not apply to the CFPB.
Enforcement was still hiring and training attorneys when the recess appointment was announced at the beginning of 2012. Critical procedures had not been written, there was no management structure, and administrative trials were a distant dream.
Around that time, the Department of Housing and Urban Development transferred its investigation of PHH, a huge mortgage originator, to the CFPB. Most laws contain a statute of limitations that prevents lawsuits from being filed too many years after alleged violations occurred. Chuckles and sighs of relief filled Enforcement’s weekly meeting after an attorney announced that PHH had granted him a “tolling agreement” to temporarily stop the statute-of-limitations clock. Somebody sneered, “Suckers!”
In May of 2012, PHH received a massive civil investigative demand — basically, a subpoena for documents and information issued by government agencies such as the CFPB. Enforcement’s brutal Rules of Investigation gave the company 20 days to review the interrogatories and document requests, meet with enforcement attorneys, and petition the director to scale back the CID. Cordray denied PHH’s application for a two-week extension of the filing deadline.
In July of 2012, I got a call from a law-school classmate who suggested I join his law firm. By September, visitors to my new office at the firm could read Cordray’s recommendation letter, which hung next to a photo of us shaking hands moments after he was sworn in.
Critical procedures had not been written, there was no management structure, and administrative trials were a distant dream.
On September 20, 2012, Cordray issued his decision rejecting all of PHH’s modification requests. I had doubts about the opinion, which appeared to punish the company’s defiance, even before I ran into one of PHH’s lawyers the following January. I asked what had gone wrong. “Nothing,” he replied. “We just assumed the CFPB conducted itself like other agencies.”
A month later, I understood. My first CFPB-target client was a small-business owner whose twelve-year commercial relationship with a local bank was governed by the same law PHH would later be accused of violating. In 2011, the bank’s regulator had withdrawn its blessing from the arrangement, charged the bank a small fine, and transferred jurisdiction to the bureau. The file collected dust for over a year before Enforcement asked the man to sign a tolling agreement that only a lawyer would recognize as permanent. Fortunately, he contacted me first.
The man felt he’d done nothing wrong, but uncertainty about the investigation would force him to lay off employees. I called the enforcement attorney and offered to come right over and discuss a settlement. When I declined the tolling agreement, he said I had a conflict of interest, hung up, and spent the next month trying to find one. He gave up after I reminded his supervisors that interfering with my client’s constitutional right to counsel was a serious ethics violation.
For the first two hours of the subsequent settlement conference, the attorney refused to discuss a settlement, and continued to press for the tolling agreement. I insisted he make an offer. Finally, he did — ten times more than the bank had paid. I accepted and asked for the settlement documents. Instead, the next day he sent a civil complaint and threatened to sue within 24 hours if my client didn’t sign a tolling agreement.
I replied that my client wanted to make a NORA submission before the director approved the lawsuit. No scenario could have been more appropriate: The legal expenses would crush the man’s business and cost employees their jobs; he’d had no opportunity to present evidence or tell Cordray his side of the story; and Enforcement hadn’t even conducted an investigation.
The response was swift. I was informed that the NORA process was discretionary and the director felt it was not in the bureau’s interests to let my client present his case — request denied. The poor man signed a tolling agreement, but not the irrevocable one Enforcement had sent him before he had a lawyer.
During my first-year legal-ethics seminar, we discussed a scene from A Man for All Seasons in which Will Roper urges Sir Thomas More to arrest Richard Rich, an evil man who has broken no laws. When Roper says he would cut down every law in England to get at the Devil, More replies:
Oh? And when the last law was down, and the Devil turned round on you — where would you hide, Roper, the laws all being flat?
Bruce Mann, Professor Warren’s husband, taught the seminar. Perhaps the film’s ending — More’s execution based on Rich’s perjured testimony — inspired Warren to cut down the Constitution to get at the banks.
SEC enforcement attorneys are often asked, “Is my client a target?” They’re trained to respond, “SEC investigations are a search for the truth — they don’t have targets, they have subjects.” In 2011, I mentioned CFPB attorneys’ exclusive use of “target” to Cordray. He liked the SEC’s practice, and approved the internal procedure I had written to adopt it. Whenever he slipped and used “target” at meetings, he smiled and corrected himself.
By 2013, no other label worked. For each issue the strategy team identified, one or two companies were investigated. The CFPB’s complaint database contained grievances against almost every financial business. Enforcement targeted the companies with the most revenue — what it called the “chokepoints” — rather than those with the most complaints.
Enforcement’s internal procedures restricted the contents of investigation files, about the only thing the CFPB had to turn over to defendants before administrative trials. One of the procedures’ drafters told me that withholding exculpatory evidence from targets was ethical because the bureau was like any civil litigant — it did everything it could within the law to win.
Targets were almost certain to write a check, especially if they were accused of subjective “unfair, deceptive, or abusive acts or practices.” Even the size of the checks didn’t depend on actual wrongdoing — during investigations, Enforcement demanded targets’ financial statements to calculate the maximum fines they could afford to pay.
Defendants who chose to fight the bureau could not seek relief in federal court until all administrative processes were exhausted, despite those processes’ being a farce — Floyd Mayweather Jr. would envy Enforcement’s record in appeals to the director. And even if a case did make it that far, the courts were bound to defer to the director’s judgment unless he had clearly misinterpreted a law. With no meaningful opportunity to defend themselves, many businesses were forced to pay millions of dollars, regardless of guilt or harm to consumers.
Despite these advantages, the CFPB’s misplaced priorities kept it from protecting consumers during the most widespread fraud in recent history.
On September 8, 2016, Wells Fargo paid the CFPB, the Los Angeles city attorney, and the comptroller of the currency $185 million in penalties for bank employees’ having opened millions of unauthorized customer accounts since 2011. External Affairs’ media blitz and the bureau’s $100 million share of the penalties created the illusion that Enforcement had led a heroic investigation. CFPB supporters, with Pavlovian predictability, shamed Republicans for attempting to weaken the agency.
But the settlement reserved only a few million dollars in restitution for victims. Enforcement didn’t advance consumer lawsuits by making the bank admit wrongdoing, and it didn’t do much to help criminal prosecutors beyond giving the Department of Justice legally mandated evidence.
Congressional hearings revealed that two years of examinations, thousands of bank-employee firings, and numerous complaints had failed to get the bureau’s attention before the Los Angeles Times published a detailed exposé late in 2013. Worse yet, from 2013 to 2016, the CFPB took no action while the bank continued the incentive program that drove the unauthorized account openings. Wells Fargo CEO John Stumpf and Carrie Tolstedt, the executive overseeing the program, earned tens of millions of dollars. Tolstedt retired with a huge nest egg two months before the settlement.
The CFPB had waited while the city attorney and OCC completed their investigations, and then negotiated its headline-grabbing penalty. A month after the settlement, it was clear that simply taking regulatory action to highlight the severity of the fraud had triggered the real wake-up call for bank executives. Wells Fargo’s stock lost billions of dollars in value, and its board clawed back $60 million from Stumpf and Tolstedt before firing Stumpf. The $100 million penalty may deter future violations, but no more so than a smaller fine or a CFPB lawsuit would have three years earlier.
During Senate hearings, Cordray implied that Enforcement had stood down because all available personnel were busy investigating deceptive credit-card add-on products and other violations. In doing so, he inadvertently revealed that the campaign to expand the bureau’s reach to car dealers had diverted limited resources from mission-critical tasks.
Fortunately for PHH, the CFPB had accused it of violating a specific mortgage law. For two decades, HUD had interpreted the law and provided guidance that allowed business relationships like the ones Enforcement had investigated at PHH; payments to the company and its affiliates above the reasonable market value of services rendered were deemed illegal kickbacks. An administrative-law judge, following HUD’s interpretation, ordered PHH to refund consumers $6.4 million in excess payments. PHH appealed to the director.
Cordray’s decision was stunning: HUD’s interpretation was wrong; the CFPB was not bound by the mortgage law’s three-year statute of limitations; all payments during the last eight years were kickbacks; PHH didn’t owe $6.4 million, it owed $109 million.
Centuries before a 2016 Nobel Prize winner catalogued the havoc wrought by government officials with God on their side, the founding fathers put checks and balances into the Constitution to limit it. By demonstrating the inevitable consequences of absolute power, Cordray had invited the appellate court to revoke it.
Parts of the decision by the three-judge panel were obvious: HUD’s interpretation of the law was correct; Cordray’s attempt to reinterpret it retroactively violated PHH’s due-process rights; the CFPB could not disregard deadlines in the laws it enforced.
The rest of Judge Brett Kavanaugh’s 100-page opinion, an eloquent dissertation on liberty, democracy, and justice, answered questions that had been debated for six years. The people elect the president. Executive agencies report to the president, who can remove their leaders at will. While the president cannot remove members of independent commissions, their power is tempered by bipartisan collaboration and transparency. The Dodd-Frank Act made the CFPB’s unelected director “the single most powerful official in the entire U.S. Government, other than the President,” and arguably more powerful in consumer financial-protection matters. The Constitution permits single-director executive agencies and independent commissions, but not single-director independent agencies. The most important words in the opinion were buried in footnote twelve: “An agency structure must be adjudged on the basis of what it permits to happen.”
By demonstrating the inevitable consequences of absolute power, Cordray had invited the appellate court to revoke it.
Judge Kavanaugh’s remedy was simple: He struck 18 words from the Dodd-Frank Act and announced, “The President of the United States now has the power to supervise and direct the Director of the CFPB, and may remove the Director at will at any time.” If the ruling were upheld, Warren’s agency would lose its independence. Democrats shrugged; they would undo the decision after winning the election, just 28 days away.
Shimon Peres’s death brought to mind parallels between the CFPB and the state of Israel. Both were established during a brief window of political opportunity created by sympathy for the victims of a catastrophe, both defined by existential threat, and both criticized for territorial expansion. Both might also have used the land-for-peace formula to resolve longstanding conflicts.
The CFPB’s metaphoric swap was Democrats’ restructuring the bureau as a bipartisan commission in exchange for Republicans’ recognizing the agency’s independence by blessing funding through the Federal Reserve. Unlike Israel, Democrats never offered the deal, even after losing everything but their Senate filibuster in the election.
Instead, on November 18, 2016, the CFPB petitioned the full court of appeals to rehear the case. If that fails, Democrats hope to exclude Republicans until Cordray’s term ends in 2018, or even until the 2020 election, by appealing to the Supreme Court. The strategy assumes President Trump cannot remove Cordray for cause — “inefficiency, neglect of duty, or malfeasance in office.”
Late one evening in 2012, I entered the Farragut North metro station a few steps behind Cordray, who was talking on his cell phone. I kept my distance on the long descending escalator, but overheard snippets of the conversation. “That good plan, Kemosabe.” “You plenty wise, Kemosabe.” I remember thinking that his twelve-year-old son couldn’t possibly appreciate how lucky he was. Four years later, on March 16, 2016, Cordray testified before the House Financial Services Committee, which had published its copies of the documents the CFPB refused to provide because the chairman’s requests were “better suited to a briefing.” Representative Sean Duffy asked several pointed questions about the blatant stonewalling. Under oath, Cordray replied, “If you ask for responsive documents in an area, we give you the responsive documents we can.”
A small savings bank in Michigan, Flagstar Bank, has come up with a genius, innovative new mortgage product that they believe is going to be great for their investors and low-income housing buyers: the “zero-down mortgage.” What’s better, Flagstar is even offering to pay the closing costs of their low-income future mortgage debtors. Here’s more from HousingWire:
Under the program, Flagstar will gift the required 3% down payment to the borrower, plus up to $3,500 to be used for closing costs.
According to the bank, there is no obligation for borrowers who qualify to repay the down payment gift.
The program is available to only certain low- to moderate-income borrowers and borrowers in low- to moderate-income areas throughout Michigan.
Borrowers would not have to repay the down payment or closing costs. But a 1099 form to report the income would be issued to the Internal Revenue Service by the bank. So the gifts could be taxable, depending on the borrower’s financial picture.
Flagstar said borrowers who might qualify for its new program typically would have an annual income in the range of $35,000 to $62,000. The sales price of the home — which must be in qualifying areas — would tend to be in the range of $80,000 to $175,000.
Think it’s too good to be true? Lakeshia Wiley of Detroit’s west side begs to differ…she recently went through Flagstar to purchase her new home and only had to come up with $350 of her own money. Per the Detroit Free Press:
Lakeshia Wiley, 35, said she wouldn’t have been able to buy her first home without the Fifth Third Down Payment Assistance program and two other grants, including one from Southwest Solutions.
The brick home, built in 1951, is on Detroit’s west side, needed very little work and was priced at $50,000.
“I’m very excited every time I think about it. It’s beautiful. I love it,” Wiley said.
Wiley never expected to be able to buy a home, though, because she has had a hard time saving for a down payment.
“I didn’t think I’d be able to do it,” said the single mother who has two sons, ages 17 and 10, and a daughter, age 6. She works at a Detroit pharmacy.
Thanks to the down payment assistance and the grants, Wiley was able to buy her home in April. She had to bring less than $350 to the table at closing.
The Flagstar program is available in 18 counties in Michigan, and could be used for certain homes in Detroit and Flint, along with other cities.
Of course, we would highly encourage Flagstar to take a look back into ancient history for case studies on what happened the last time banks started peddling “innovative” mortgage products. Here’s a summary of the Lehman Brothers case study:
Ironically, South Park also did some fascinating research on the topic:
I hope this article brings forward important questions about the Federal Reserves role in the US as it attempts to begin a broader dialogue about the financial and economic impacts of allowing the Federal Reserve to direct America’s economy. At the heart of this discussion is how the Federal Reserve always was, or perhaps morphed, into a state level predatory lender providing the means for a nation to eventually bankrupt itself.
Against the adamant wishes of the Constitution’s framers, in 1913 the Federal Reserve System was Congressionally created. According to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” Although parts of the Federal Reserve System share some characteristics with private-sector entities, the Federal Reserve was supposedly established to serve the public interest.
A quick overview; monetary policy is the Federal Reserve’s actions, as a central bank, to achieve three goals specified by Congress: maximum employment, stable prices, and moderate long-term interest rates in the United States. The Federal Reserve conducts the nation’s monetary policy by managing the level of short-term interest rates and influencing the availability and cost of credit in the economy. Monetary policy directly affects interest rates; it indirectly affects stock prices, wealth, and currency exchange rates. Through these channels, monetary policy influences spending, investment, production, employment, and inflation in the United States.
I suggest what truly happened in 1913 was that Congress willingly abdicated a portion of its responsibilities, and through the Federal Reserve, began a process that would undermine the functioning American democracy. “How”, you ask? The Fed, believing the free-market to be “imperfect” (aka; wrong) believed it (the Fed) should control and set interest rates, determine full employment, determine asset prices; not the “free market”. And here’s what happened:
- From 1913 to 1971, an increase of $400 billion in federal debt cost $35 billion in additional annual interest payments.
- From 1971 to 1981, an increase of $600 billion in federal debt cost $108 billion in additional annual interest payments.
- From 1981 to 1997, an increase of $4.4 trillion cost $224 billion in additional annual interest payments.
- From 1997 to 2017, an increase of $15.2 trillion cost “just” $132 billion in additional annual interest payments.
Stop and read through those bullet points again…and then one more time. In case that hasn’t sunk in, check the chart below…
What was the economic impact of the Federal Reserve encouraging all that debt? The yellow line in the chart below shows the annual net impact of economic growth (in growing part, spurred by the spending of that new debt)…gauged by GDP (blue columns) minus the annual rise in federal government debt (red columns). When viewing the chart, the problem should be fairly apparent. GDP, subtracting the annual federal debt fueled spending, shows the US economy is collapsing except for counting the massive debt spending as “economic growth”.
Same as above, but a close-up from 1981 to present. Not pretty.
Consider since 1981, the Federal Reserve set FFR % (Federal Funds rate %) is down 94% and the associated impacts on the 10yr Treasury (down 82%) and the 30yr Mortgage rate (down 77%). Four decades of cheapening the cost of servicing debt has incentivized and promoted ever greater use of debt.
Again, according to the Fed’s website, “it was created to provide the nation with a safer, more flexible, and more stable monetary and financial system.” However, the chart below shows the Federal Reserve policies’ impact on the 10yr Treasury, stocks (Wilshire 5000 representing all publicly traded US stocks), and housing to be anything but “safer” or “stable”.
Previously, I have made it clear the asset appreciation the Fed is providing is helping a select few, at the expense of the many, HERE.
But a functioning democratic republic is premised on a simple agreement that We (the people) will freely choose our leaders who will (among other things) compromise on how taxation is to be levied, how much tax is to be collected, and how that taxation is to be spent. The intervention of the Federal Reserve into that equation, controlling interest rates, outright purchasing assets, and plainly goosing asset prices has introduced a cancer into the nation which has now metastasized.
In time, Congress (& the electorate) would realize they no longer had to compromise between infinite wants and finite means. The Federal Reserve’s nearly four decades of interest rate reductions and a decade of asset purchases motivated the election of candidates promising ever greater government absent the higher taxation to pay for it. Surging asset prices created fast rising tax revenue. Those espousing “fiscal conservatism” or living within our means (among R’s and/or D’s) were simply unelectable.
This Congressionally created mess has culminated in the accumulation of national debt beyond our means to ever repay. As the chart below highlights, the Federal Reserve set interest rate (Fed. Funds Rate=blue line) peaked in 1981 and was continually reduced until it reached zero in 2009. The impact of lower interest rates to promote ever greater national debt creation was stupendous, rising from under $1 trillion in 1981 to nearing $21 trillion presently. However, thanks to the seemingly perpetually lower Federal Reserve provided rates, America’s interest rate continually declined inversely to America’s credit worthiness or ability to repay the debt.
The impact of the declining rates meant America would not be burdened with significantly rising interest payments or the much feared bond “Armageddon” (chart below). All the upside of spending now, with none of the downside of ever paying it back, or even simply paying more in interest. Politicians were able to tell their constituencies they could have it all…and anyone suggesting otherwise was plainly not in contention. Federal debt soared and soared but interest payable in dollars on that debt only gently nudged upward.
- In 1971, the US paid $36 billion in interest on $400 billion in federal debt…a 9% APR.
- In 1981, the US paid $142 billion on just under $1 trillion in debt…a 14% APR.
- In 1997, the US paid $368 billion on $5.4 trillion in debt or 7% APR…and despite debt nearly doubling by 2007, annual interest payments in ’07 were $30 billion less than a decade earlier.
- By 2017, the US will pay out about $500 billion on nearly $21 trillion in debt…just a 2% APR.
The Federal Reserve began cutting its benchmark interest rates in 1981 from peak rates. Few understood that the Fed would cut rates continually over the next three decades. But by 2008, lower rates were not enough. The Federal Reserve determined to conjure money into existence and purchase $4.5 trillion in mid and long duration assets. Previous to this, the Fed has essentially held zero assets beyond short duration assets in it’s role to effect monetary policy. The change to hold longer duration assets was a new and different self appointed mandate to maintain and increase asset prices.
But why the declining interest rates and asset purchases in the first place?
The Federal Reserve interest rates have very simply primarily followed the population cycle and only secondarily the business cycle. What the chart below highlights is annual 25-54yr/old population growth (blue columns) versus annual change in 25-54yr/old employees (black line), set against the Federal Funds Rate (yellow line). The FFR has followed the core 25-54yr/old population growth…and the rising, then decelerating, now declining demand that that represented means lower or negative rates are likely just on the horizon (despite the Fed’s current messaging to the contrary).
Below, a close-up of the above chart from 2000 to present.
Running out of employees??? Each time the 25-54yr/old population segment has exceeded 80% employment, economic dislocation has been dead ahead. We have just exceeded 78% but given the declining 25-54yr/old population versus rising employment…and the US is likely to again exceed 80% in 2018.
Given the FFR follows population growth, consider that the even broader 20-65yr/old population will essentially see population growth grind to a halt over the next two decades. This is no prediction or estimate, this population has already been born and the only variable is the level of immigration…which is falling fast due to declining illegal immigration meaning the lower Census estimate is more likely than the middle estimate.
So where will America’s population growth take place? The 65+yr/old population is set to surge.
But population growth will be shifting to the most elderly of the elderly…the 75+yr/old population. I outlined the problems with this previously HERE.
Back to the Federal Reserve, consider the impact on debt creation prior and post the creation of the Federal Reserve:
- 1790-1913: Debt to GDP Averaged 14%
- 1913-2017: Debt to GDP Averaged 53%
- 1913-1981: 46% Average
- 1981-2000: 52% Average
- 2000-2017: 79% Average
As the chart below highlights, since the creation of the Federal Reserve the growth of debt (relative to growth of economic activity) has gone to levels never dreamed of by the founding fathers. In particular, the systemic surges in debt since 1981 are unlike anything ever seen prior in American history. Although the peak of debt to GDP seen in WWII may have been higher (changes in GDP calculations mean current GDP levels are likely significantly overstating economic activity), the duration and reliance upon debt was entirely tied to the war. Upon the end of the war, the economy did not rely on debt for further growth and total debt fell.
Any suggestion that the current situation is like any America has seen previously is simply ludicrous. Consider that during WWII, debt was used to fight a war and initiate a global rebuild via the Marshall Plan…but by 1948, total federal debt had already been paid down by $19 billion or a seven percent reduction…and total debt would not exceed the 1946 high water mark again until 1957. During that ’46 to ’57 stretch, the economy would boom with zero federal debt growth.
- 1941…Fed debt = $58 b (Debt to GDP = 44%)
- 1946…Fed debt = $271 b (Debt to GDP = 119%)
- 1948…Fed debt = $252 b <$19b> (Debt to GDP = 92%)
- 1957…Fed debt = $272 b (Debt to GDP = 57%)
If the current crisis ended in 2011 (recession ended by 2010, by July of 2011 stock markets had recovered their losses), then the use of debt as a temporary stimulus should have ended?!? Instead, debt and debt to GDP are still rising.
- 2007…Federal debt = $8.9 T (Debt to GDP = 62%)
- 2011…Federal debt = $13.5 T (Debt to GDP = 95%)
- 2017…Federal Debt = $20.5 T (Debt to GDP = 105%)
July of 2011 was the great debt ceiling debate when America determined once and for all, that the federal debt was not actually debt. America had no intention to ever repay it. It was simply monetization and since the Federal Reserve was maintaining ZIRP, and all oil importers were forced to buy their oil using US dollars thanks to the Petrodollar agreement…what could go wrong?
But who would continue to buy US debt if the US was addicted to monetization in order to pay its bills? Apparently, not foreigners. If we look at foreign Treasury buying, some very notable changes are apparent beginning in July of 2011:
- The BRICS (Brazil, Russia, India, China, S. Africa…represented in red in the chart below) ceased net accumulating US debt as of July 2011.
- Simultaneous to the BRICS cessation, the BLICS (Belgium, Luxembourg, Ireland, Cayman Island, Switzerland…represented in black in the chart below) stepped in to maintain the bid.
- Since QE ended in late 2014, foreigners have followed the Federal Reserve’s example and nearly forgone buying US Treasury debt.
China was first to opt out and began net selling US Treasuries as of August, 2011 (China in red, chart below). China has continued to run record trade driven dollar surplus but has net recycled none of that into US debt since July, 2011. China had averaged 50% of its trade surplus into Treasury debt from 2000 to July of 2011, but from August 2011 onward China stopped cold.
As China (and more generally the BRICS) ceased buying US Treasury debt, a strange collection of financier nations (the BLICS) suddenly became very interested in US Treasury debt. From the debt ceiling debate to the end of QE, these nations were suddenly very excited to add $700 billion in near record low yielding US debt while China net sold.
The chart below shows total debt issued during periods, from 1950 to present, and who accumulated the increase in outstanding Treasurys.
The Federal Reserve plus foreigners represented nearly 2/3rds of all demand from ’08 through ’14. However, since the end of QE, and that 2/3rds of demand gone…rates continue near generational lows??? Who is buying Treasury debt? According to the US Treasury, since QE ended, it is record domestic demand that is maintaining the Treasury bid. The same domestic public buying stocks at record highs and buying housing at record highs.
Looking at who owns America’s debt 2007 through 2016, the chart below highlights the four groups that hold nearly 90% of the debt:
- The combined Federal Reserve/Government Accounting Series
- Domestic Mutual Funds
- And the massive rise in Treasury holdings by domestic “Other Investors” who are not domestic insurance companies, not local or state governments, not depository institutions, not pensions, not mutual funds, nor US Saving bonds.
Treasury buying by foreigners and the Federal Reserve has collapsed since QE ended (chart below). However, the odd surge of domestic “other investors”, Intra-Governmental GAS, and domestic mutual funds have nearly been the sole buyer preventing the US from suffering a very painful surge in interest payments on the record quantity of US Treasury debt.
No, this is nothing like WWII or any previous “crisis”. While America has appointed itself “global policeman” and militarily outspends the rest of the world combined, America is not at war. Simply put, what we are looking at appears little different than the Madoff style Ponzi…but this time it is a state sponsored financial fraud magnitudes larger.
The Federal Reserve and its systematic declining interest rates to perpetuate unrealistically high rates of growth in the face of rapidly decelerating population growth have fouled the American political system, its democracy, and promoted the system that has now bankrupted the nation. And it appears that the Federal Reserve is now directing a state level fraud and farce. If it isn’t time to reconsider the Fed’s role and continued existence now, then when?
The first graph shows the refinance index. The refinance index is down 76% from the levels in May 2013. Refinance activity is very low this year and will be the lowest since year 2000.
The second graph shows the MBA mortgage purchase index. According to the MBA, the unadjusted purchase index is down about 11% from a year ago.
Mortgage applications decreased 0.2 percent from one week earlier, according to data from the Mortgage Bankers Association’s (MBA) Weekly Mortgage Applications Survey for the week ending September 26, 2014 …
The Refinance Index decreased 0.3 percent from the previous week. The seasonally adjusted Purchase Index remained unchanged from one week earlier. The unadjusted Purchase Index decreased 1 percent compared with the previous week and was 11 percent lower than the same week one year ago. …
The average contract interest rate for 30-year fixed-rate mortgages with conforming loan balances ($417,000 or less) decreased to 4.33 percent from 4.39 percent, with points decreasing to 0.31 from 0.35 (including the origination fee) for 80 percent loan-to-value ratio (LTV) loans.
Wells Fargo has been in the news for allegedly doing all sorts of bad things to consumers. One thing Wells hasn’t done is collect payments on loans that were owned by someone else. Then, tell federal regulators that they are forgiving the loans they have sold to get federal credit under the huge federal mortgage settlement. Supposedly, Chase hired to company with ties to the Church of Scientology to prepare releases on thousands of loans Chase no longer owned to get the federal credit. A suit against Chase claims that is what the country’s largest bank did, allegedly with the CEO’s full knowledge. It sounds too bizarre to be real but 21 companies who bought defaulted mortgages from Chase say that is what happened. Consumers have been caught in the middle with Chase sending them notices that their loans were paid in full and the companies who say they bought the loans from Chase telling them they still owe the money.
Special Investigation: How America’s Biggest Bank Paid Its Fine for the 2008 Mortgage Crisis—With Phony Mortgages!
Alleged fraud put JPMorgan Chase hundreds of millions of dollars ahead; ordinary homeowners, not so much.
You know the old joke: How do you make a killing on Wall Street and never risk a loss? Easy—use other people’s money. Jamie Dimon and his underlings at JPMorgan Chase have perfected this dark art at America’s largest bank, which boasts a balance sheet one-eighth the size of the entire US economy.
After JPMorgan’s deceitful activities in the housing market helped trigger the 2008 financial crash that cost millions of Americans their jobs, homes, and life savings, punishment was in order. Among a vast array of misconduct, JPMorgan engaged in the routine use of “robo-signing,” which allowed bank employees to automatically sign hundreds, even thousands, of foreclosure documents per day without verifying their contents. But in the United States, white-collar criminals rarely go to prison; instead, they negotiate settlements. Thus, on February 9, 2012, US Attorney General Eric Holder announced the National Mortgage Settlement, which fined JPMorgan Chase and four other mega-banks a total of $25 billion.
JPMorgan’s share of the settlement was $5.3 billion, but only $1.1 billion had to be paid in cash; the other $4.2 billion was to come in the form of financial relief for homeowners in danger of losing their homes to foreclosure. The settlement called for JPMorgan to reduce the amounts owed, modify the loan terms, and take other steps to help distressed Americans keep their homes. A separate 2013 settlement against the bank for deceiving mortgage investors included another $4 billion in consumer relief.
A Nation investigation can now reveal how JPMorgan met part of its $8.2 billion settlement burden: by using other people’s money.
Here’s how the alleged scam worked. JPMorgan moved to forgive the mortgages of tens of thousands of homeowners; the feds, in turn, credited these canceled loans against the penalties due under the 2012 and 2013 settlements. But here’s the rub: In many instances, JPMorgan was forgiving loans it no longer owned.
The alleged fraud is described in internal JPMorgan documents, public records, testimony from homeowners and investors burned in the scam, and other evidence presented in a blockbuster lawsuit against JPMorgan, now being heard in US District Court in New York City.
JPMorgan no longer owned the loans because it had sold the mortgages years earlier to 21 third-party investors, including three companies owned by Larry Schneider. Those companies are the plaintiffs in the lawsuit; Schneider is also aiding the federal government in a related case against the bank. In a bizarre twist, a company associated with the Church of Scientology facilitated the apparent scheme. Nationwide Title Clearing, a document-processing company with close ties to the church, produced and filed the documents that JPMorgan needed to claim ownership and cancel the loans.
“If the allegations are true, JPMorgan screwed everybody.” —former congressman Brad Miller
JPMorgan, it appears, was running an elaborate shell game. In the depths of the financial collapse, the bank had unloaded tens of thousands of toxic loans when they were worth next to nothing. Then, when it needed to provide customer relief under the settlements, the bank had paperwork created asserting that it still owned the loans. In the process, homeowners were exploited, investors were defrauded, and communities were left to battle the blight caused by abandoned properties. JPMorgan, however, came out hundreds of millions of dollars ahead, thanks to using other people’s money.
“If the allegations are true, JPMorgan screwed everybody,” says Brad Miller, a former Democratic congressman from North Carolina who was among the strongest advocates of financial reform on Capitol Hill until his retirement in 2013.
In an unusual departure from most allegations of financial bad behavior, there is strong evidence that Jamie Dimon, JPMorgan’s CEO and chairman, knew about and helped to implement the mass loan-forgiveness project. In two separate meetings in 2013 and 2014, JPMorgan employees working on the project were specifically instructed not to release mortgages in Detroit under orders from Dimon himself, according to internal bank communications. In an apparent public-relations ploy, JPMorgan was about to invest $100 million in Detroit’s revival. Dimon’s order to delay forgiving the mortgages in Detroit appears to have been motivated by a fear of reputational risk. An internal JPMorgan report warned that hard-hit cities might take issue with bulk loan forgiveness, which would deprive municipal governments of property taxes on abandoned properties while further destabilizing the housing market.
Did Dimon also know that JPMorgan, as part of its mass loan-forgiveness project, was forgiving loans it no longer owned? No internal bank documents confirming that knowledge have yet surfaced, but Dimon routinely takes legal responsibility for knowing about his bank’s actions. Like every financial CEO in the country, Dimon is obligated by law to sign a document every year attesting to his knowledge of and responsibility for his bank’s operations. The law establishes punishments of $1 million in fines and imprisonment of up to 10 years for knowingly making false certifications.
Dimon signed the required document for each of the years that the mass loan-forgiveness project was in operation, from 2012 through 2016. Whether or not he knew that his employees were forgiving loans the bank no longer owned, his signatures on those documents make him potentially legally responsible.
The JPMorgan press office declined to make Dimon available for an interview or to comment for this article. Nationwide Title Clearing declined to comment on the specifics of the case but said that it is “methodical in the validity and legality of the documents” it produces.
Federal appointees have been complicit in this as well. E-mails show that the Office of Mortgage Settlement Oversight, charged by the government with ensuring the banks’ compliance with the two federal settlements, gave JPMorgan the green light to mass-forgive its loans. This served two purposes for the bank: It could take settlement credit for forgiving the loans, and it could also hide these loans—which JPMorgan had allegedly been handling improperly—from the settlements’ testing regimes.
“No one in Washington seems to understand why Americans think that different rules apply to Wall Street, and why they’re so mad about that,” said former congressman Miller. “This is why.”
Lauren and Robert Warwick were two of the shell game’s many victims. The Warwicks live in Odenton, Maryland, a bedroom community halfway between Baltimore and Washington, DC, and had taken out a second mortgage on their home with JPMorgan’s Chase Home Finance division. In 2008, after the housing bubble burst and the Great Recession started, 3.6 million Americans lost their jobs; Lauren Warwick was one of them.
Before long, the Warwicks had virtually no income. While Lauren looked for work, Robert was in the early stages of starting a landscaping business. But the going was slow, and the Warwicks fell behind on their mortgage payments. They tried to set up a modified payment plan, to no avail: Chase demanded payment in full and warned that foreclosure loomed. “They were horrible,” Lauren Warwick told The Nation. “I had one [Chase representative] say, ‘Sell the damn house—that’s all you can do.’”
Then, one day, the hounding stopped. In October 2009, the Warwicks received a letter from 1st Fidelity Loan Services, welcoming them as new customers. The letter explained that 1st Fidelity had purchased the Warwicks’ mortgage from Chase, and that they should henceforth be making an adjusted mortgage payment to this new owner.
The alleged shell game put JPMorgan hundreds of millions of dollars ahead—with federal permission.
Lauren Warwick had never heard of 1st Fidelity, but the letter made her more relieved than suspicious. “I’m thinking, ‘They’re not taking my house, and they’re not hounding me,’” she said.
Larry Schneider, 49, is the founder and president of 1st Fidelity and two other mortgage companies. He has worked in Florida’s real-estate business for 25 years, getting his start in Miami. In 2003, Schneider hit upon a business model: If he bought distressed mortgages at a significant discount, he could afford to offer the borrowers reduced mortgage payments. It was a win-win-win: Borrowers remained in their homes, communities were stabilized, and Schneider still made money.
“I was in a position where I could do what banks didn’t want to,” Schneider says. In fact, his business model resembled what President Franklin Roosevelt did in the 1930s with the Home Owners’ Loan Corporation, which prevented nearly 1 million foreclosures while turning a small profit. More to the point, Schneider’s model exemplified how the administrations of George W. Bush and Barack Obama could have handled the foreclosure crisis if they’d been more committed to helping Main Street rather than Wall Street.
The Warwicks’ loan was one of more than 1,000 that Schneider purchased without incident from JPMorgan’s Chase Home Finance division starting in 2003. In 2009, the bank offered Schneider a package deal: 3,529 primary mortgages (known as “first liens”) on which payments had been delinquent for over 180 days. Most of the properties were located in areas where the crisis hit hardest, such as Baltimore.
Selling distressed properties to companies like Schneider’s was part of JPMorgan’s strategy for limiting its losses after the housing bubble collapsed. The bank owned hundreds of thousands of mortgages that had little likelihood of being repaid. These mortgages likely carried ongoing costs: paying property taxes, addressing municipal-code violations, even mowing the lawn. Many also had legal defects and improper terms; if federal regulators ever scrutinized these loans, the bank would be in jeopardy.
In short, the troubled mortgages were the financial equivalent of toxic waste. To deal with them, Chase Home Finance created a financial toxic-waste dump: The mortgages were listed in an internal database called RCV1, where RCV stood for “Recovery.”
Unbeknownst to Schneider, the package deal that Chase offered him came entirely from this toxic-waste dump. Because he’d had a good relationship with Chase up to that point, Schneider took the deal. On February 25, 2009, he signed an agreement to buy the loans, valued at $156 million, for only $200,000—slightly more than one-tenth of a penny on the dollar. But the agreement turned sour fast, Schneider says.
Among a range of irregularities, perhaps the most egregious was that Chase never provided him with all the documentation proving ownership of the loans in question. The data that Schneider did receive lacked critical information, such as borrower names, addresses of the properties, even the payment histories or amounts due. This made it impossible for him to work with the borrowers to modify their terms and help them stay in their homes. Every time Schneider asked Chase about the full documentation, he was told it was coming. It never arrived.
As CEO, Jamie Dimon is potentially legally responsible for JPMorgan’s apparently phony mortgages.
Here’s the kicker: JPMorgan was still collecting payments on some of these loans and even admitted this fact to Schneider. In December 2009, a Chase Home Finance employee named Launi Solomon sent Schneider a list of at least $47,695.53 in payments on his loans that the borrowers had paid to Chase. But 10 days later, Solomon wrote that these payments would not be transferred to Schneider because of an internal accounting practice that was “not reversible.” On another loan sold to Schneider, Chase had taken out insurance against default; when the homeowner did in fact default, Chase pocketed the $250,000 payout rather than forward it to Schneider, according to internal documents.
Chase even had a third-party debt collector named Real Time Resolutions solicit Schneider’s homeowners, seeking payments on behalf of Chase. In one such letter from 2013, Real Time informed homeowner Maureen Preis, of Newtown Square, Pennsylvania, that “our records indicate Chase continues to hold a lien on the above referenced property,” even though Chase explicitly confirmed to Schneider that it had sold him the loan in 2010.
JPMorgan jumped in and out of claiming mortgage ownership, Schneider asserts, based on whatever was best for the bank. “If a payment comes in, it’s theirs,” he says; “if there’s a code-enforcement issue, it’s mine.”
The shell game entered a new, more far-reaching phase after JPMorgan agreed to its federal settlements. Now the bank was obligated to provide consumer relief worth $8.2 billion—serious money even for JPMorgan. The solution? Return to the toxic-waste dump.
Because JPMorgan had stalled Schneider on turning over the complete paperwork proving ownership, it took the chance that it could still claim credit for forgiving the loans that he now owned. Plus the settlements required JPMorgan to show the government that it was complying with all federal regulations for mortgages. The RCV1 loans didn’t seem to meet those standards, but forgiving them would enable the bank to hide this fact.
The Office of Mortgage Settlement Oversight gave Chase Home Finance explicit permission to implement this strategy. “Your business people can be relieved from pushing forward” on presenting RCV1 loans for review, lawyer Martha Svoboda wrote in an e-mail to Chase, as long as the loans were canceled.
Chase dubbed this the “pre DOJ Lien Release Project.” (To release a lien means to forgive the loan and relinquish any ownership right to the property in question.) The title page of an internal report on the project lists Lisa Shepherd, vice president of property preservation, and Steve Hemperly, head of mortgage originations, as the executives in charge. The bank hired Nationwide Title Clearing, the company associated with the Church of Scientology, to file the lien releases with county offices. Erika Lance, an employee of Nationwide, is listed as the preparer on 25 of these lien releases seen by The Nation. Ironically, Schneider alleges, the releases were in effect “robo-signed,” since the employees failed to verify that JPMorgan Chase owned the loans. If Schneider is right, it means that JPMorgan relied on the same fraudulent “robo-signing” process that had previously gotten the bank fined by the government to help it evade that penalty.
On September 13, 2012, Chase Home Finance mailed 33,456 forgiveness letters informing borrowers of the debt cancellation. Schneider immediately started hearing from people who said that they wouldn’t be making further payments to him because Chase had forgiven the loan. Some even sued Schneider for illegally charging them for mortgages that he (supposedly) didn’t own.
When Lauren and Robert Warwick got their forgiveness letter from Chase, Lauren almost passed out. “You will owe nothing more on the loan and your debt with be cancelled,” the letter stated, calling this “a result of a recent mortgage servicing settlement reached with the states and federal government.” But for the past three years, the Warwicks had been paying 1st Fidelity Loan Servicing—not Chase. Lauren said she called 1st Fidelity, only to be told: “Sorry, no, I don’t care what they said to you—you owe us the money.”
JPMorgan’s shell game unraveled because Lauren Warwick’s neighbor worked for Michael Busch, the speaker of the Maryland House of Delegates. After reviewing the Warwicks’ documents, Kristin Jones, Busch’s chief of staff, outlined her suspicions to the Maryland Department of Labor, Licensing and Regulation. “I’m afraid based on the notification of loan transfer that Chase sold [the Warwicks’] loan some years ago,” Jones wrote. “I question whether Chase is somehow getting credit for a write-off they never actually have to honor.”
After Schneider and various borrowers demanded answers, Chase checked a sample of over 500 forgiveness letters. It found that 108 of the 500 loans—more than one out of five—no longer belonged to the bank. Chase told the Warwicks that their forgiveness letter had been sent in error. Eventually, Chase bought back the Warwicks’ loan from Schneider, along with 12 others, and honored the promised loan forgiveness.
Not everyone was as lucky as the Warwicks. In letters signed by vice president Patrick Boyle, JPMorgan Chase forgave at least 49,355 mortgages in three separate increments. The bank also forgave additional mortgages, but the exact number is unknown because the bank stopped sending homeowners notification letters. Nor is it known how many of these forgiven mortgages didn’t actually belong to JPMorgan; the bank refused The Nation’s request for clarification. Through title searches and the discovery process, Schneider ascertained that the bank forgave 607 loans that belonged to one of his three companies. The lien-release project overall allowed JPMorgan to take hundreds of millions of dollars in settlement credit.
Most of the loans that JPMorgan released—and received settlement credit for—were all but worthless. Homeowners had abandoned the homes years earlier, expecting JPMorgan to foreclose, only to have the bank forgive the loan after the fact. That forgiveness transferred responsibility for paying back taxes and making repairs back to the homeowner. It was like a recurring horror story in which “zombie foreclosures” were resurrected from the dead to wreak havoc on people’s financial lives.
Federal officials knew about the problems and did nothing. In July 2014, the City of Milwaukee wrote to Joseph Smith, the federal oversight monitor, alerting him that “thousands of homeowners” were engulfed in legal nightmares because of the confusion that banks had sown about who really owned their mortgages. In a deposition for the lawsuit against JPMorgan Chase, Smith admitted that he did not recall responding to the City of Milwaukee’s letter.
If you pay taxes in a municipality where JPMorgan spun its trickery, you helped pick up the tab. The bank’s shell game prevented municipalities from knowing who actually owned distressed properties and could be held legally liable for maintaining them and paying property taxes. As a result, abandoned properties deteriorated further, spreading urban blight and impeding economic recovery. “Who’s going to pay for the demolition [of abandoned buildings] or [the necessary extra] police presence?” asks Brent Tantillo, Schneider’s lawyer. “As a taxpayer, it’s you.”
Such economic fallout may help explain why Jamie Dimon directed that JPMorgan’s mass forgiveness of loans exempt Detroit, a city where JPMorgan has a long history. The bank’s predecessor, the National Bank of Detroit, has been a fixture in the city for over 80 years; its relationships with General Motors and Ford go back to the 1930s. And JPMorgan employees knew perfectly well that mass loan forgiveness might create difficulties. The 2012 internal report warned that cities might react negatively to the sheer number of forgiven loans, which would lower tax revenues while adding costs. Noting that some of the cities in question were clients of JPMorgan Chase, the report warned that the project posed a risk to the bank’s reputation.
Reputational risk was the exact opposite of what JPMorgan hoped to achieve in Detroit. So the bank decided to delay the mass forgiveness of loans in Detroit and surrounding Wayne County until after the $100 million investment was announced. Dimon himself ordered the delay, according to the minutes of JPMorgan Chase meetings that cite the bank’s chairman and CEO by name. Dimon then went to Detroit to announce the investment on May 21, 2014, reaping positive coverage from The New York Times, USA Today, and other local and national news outlets. Since June 1, 2014, JPMorgan has released 10,229 liens in Wayne County, according to public records; the bank declined to state how many of these were part of the lien-release project.
Both of Larry Schneider’s lawsuits alleging fraud on JPMorgan Chase’s part remain active in federal courts. The Justice Department could also still file charges against JPMorgan, Jamie Dimon, or both, because Schneider’s case was excluded from the federal settlement agreements.
Few would expect Jeff Sessions’s Justice Department to pursue such a case, but what this sorry episode most highlights is the pathetic disciplining of Wall Street during the Obama administration.
JPMorgan’s litany of acknowledged criminal abuses over the past decade reads like a rap sheet, extending well beyond mortgage fraud to encompass practically every part of the bank’s business. But instead of holding JPMorgan’s executives responsible for what looks like a criminal racket, Obama’s Justice Department negotiated weak settlement after weak settlement. Adding insult to injury, JPMorgan then wriggled out of paying its full penalties by using other people’s money.
The larger lessons here command special attention in the Trump era. Negotiating weak settlements that don’t force mega-banks to even pay their fines, much less put executives in prison, turns the concept of accountability into a mirthless farce. Telegraphing to executives that they will emerge unscathed after committing crimes not only invites further crimes; it makes another financial crisis more likely. The widespread belief that the United States has a two-tiered system of justice—that the game is rigged for the rich and the powerful—also enabled the rise of Trump. We cannot expect Americans to trust a system that lets Wall Street fraudsters roam free while millions of hard-working taxpayers get the shaft.
Curve watchers anonymous has taken an in-depth review of US treasury yield charts on a monthly and daily basis. There’s something going on that we have not see on a sustained basis since the summer of 2000. Some charts will show what I mean.
Monthly Treasury Yields 3-Month to 30-Years 1998-Present:
It’s very unusual to see the yield on the long bond falling for months on end while the yield on 3-month bills and 1-year note rises. It’s difficult to spot the other time that happened because of numerous inversions. A look at the yield curve for Treasuries 3-month to 5-years will make the unusual activity easier to spot.
Monthly Treasury Yields 3-Month to 5-Years 1990-Present:
Daily Treasury Yields 3-Month to 5-Years 2016-2017:
Daily Treasury Yields 3-Month to 5-Years 2000:
One cannot blame this activity on hurricanes or a possible government shutdown. The timeline dates to December of 2016 or March of 2017 depending on how one draws the lines.
This action is not at all indicative of an economy that is strengthening.
Rather, this action is indicative of a market that acts as if the Fed is hiking smack in the face of a pending recession.
Hurricanes could be icing on the cake and will provide a convenient excuse for the Fed and Trump if a recession hits.
- Confident Dudley Expects Rate Hikes Will Continue, Hurricane Effect to Provide Long Run “Economic Benefit”
- Hurricane Harvey Ripple Effects: Assessing the Impact on Housing and GDP
- “10-Year Treasury Yields Headed to Zero Percent” Saxo Bank CIO
So what do you do when the bubbly market for your exorbitantly priced New York City commercial real estate collapses by over 50% in two years? Well, you lever up, of course.
As Bloomberg notes this morning, the ‘smart money’ at U.S. banking institutions are tripping over themselves to throw money at commercial real estate projects all while ‘dumb money’ buyers have completely dried up.
A growing chasm between what buyers are willing to pay and what sellers think their properties are worth has put the brakes on deals. In New York City, the largest U.S. market for offices, apartments and other commercial buildings, transactions in the first half of the year tumbled about 50 percent from the same period in 2016, to $15.4 billion, the slowest start since 2012, according to research firm Real Capital Analytics Inc.
At the same time, the market for debt on commercial properties is booming. Investors of all stripes — from banks and insurance companies to hedge funds and private equity firms — are plowing into real estate loans as an alternative to lower-yielding bonds. That’s giving building owners another option to cash in if their plans to sell don’t work out.
“Sellers have a number in mind, and the market is not there right now,” said Aaron Appel, a managing director at brokerage Jones Lang LaSalle Inc. who arranges commercial real estate debt. “Owners are pulling out capital” by refinancing loans instead of finding buyers, he said.
But don’t concern yourself with talk of bubbles because Scott Rechler of RXR would like for you to rest assured that the lack of buyers is not at all concerning…they’ve just “hit the pause button” while they wander out in search of the ever elusive “price discovery.”
At 237 Park Ave., Walton Street Capital hired a broker in March to sell its stake in the midtown Manhattan tower, acquired in a partnership with RXR Realty for $810 million in 2013. After several months of marketing, the Chicago-based firm opted instead for $850 million in loans that value the 21-story building at more than $1.3 billion, according to financing documents. The owners kept about $23.4 million.
“The basic trend is you have a really strong debt market and a sales market that has hit the pause button while it seeks to find price discovery,” said Scott Rechler, chief executive officer of RXR.
The debt market has become so appealing that landlords are looking at mortgage options while simultaneously putting out feelers for buyers, said Rechler, whose company owns $15 billion of real estate throughout New York, New Jersey and Connecticut. That’s a departure for Manhattan’s property owners, who in prior years would pursue one track at a time, he said.
Of course, this isn’t just a NYC phenomenon as sales of office towers, apartment buildings, hotels and shopping centers across the U.S. have been plunging since reaching $262 billion nationally in 2015, just behind the record $311 billion of real estate that changed hands in 2007, according to Real Capital. Property investors are on the sidelines amid concern that rising interest rates will hurt values that have jumped as much as 85 percent in big cities like New York, compounded by overbuilding and a pullback of the foreign capital that helped power the recent property boom.
The tough sales market has put some property owners in a bind — most notably Kushner Cos., which has struggled to find partners for 666 Fifth Ave., the Midtown tower it bought for a record price in 2007. The mortgage on the building will need to be refinanced in 18 months.
Thankfully, at least someone interviewed by Bloomberg seemed to be grounded in reality with Jeff Nicholson of CreditFi saying that it just might be a “red flag” that buyers have completely abandoned the commercial real estate market at the same time that owners are massively levering up to take cash out of projects.
Some lenders view seeking a loan to take money off the table as a red flag, according to Jeff Nicholson, a senior analyst at CrediFi, a firm that collects and analyzes data on real estate loans. It may signal the borrower is less committed to the project, and makes it easier to walk away from the mortgage if something goes wrong, he said.
But, it’s probably nothing …
The Department of Housing and Urban Development on Tuesday will formally announce plans to increase premiums and tighten lending limits on reverse mortgages, citing concerns about the strength of the program and taxpayer losses.
Mortgage insurance premiums on Home Equity Conversion Mortgages will rise to 2% of the home value at the time of origination, then 0.5% annually during the life of the loan, The Wall Street Journal reported Tuesday morning. In addition, the average amount of cash that seniors can access will drop from about 64% of the home’s value to 58% based on current rates, the WSJ said.
“Given the losses we’re seeing in the program, we have a responsibility to make changes that balance our mission with our responsibility to protect taxpayers,” HUD secretary Ben Carson told the WSJ via a spokesperson.
The HECM program’s value within the Mutual Mortgage Insurance Fund was pegged at negative $7.72 billion in fiscal 2016, and the WSJ noted that the HECM program has generated in $12 billion in payouts from the fund since 2009. The value of the HECM program fluctuates over time, however: In 2015, the reverse mortgage portion of the fund generated an estimated $6.78 billion in value; in 2014, the deficit was negative $1.17 billion.
Unnamed HUD officials told the WSJ that without this change, the Federal Housing Administration would need an appropriation from Congress in the next few years to sustain the HECM fund. The officials also said that the drag created by reverse mortgages has prevented them from lowering insurance premiums on forward mortgages for homeowners.
“You have this cross-subsidy from younger, less affluent people who are trying to achieve homeownership,” HUD senior advisor Adolfo Marzol told the WSJ.
The move took the industry by surprise, with the WSJ reporting that leaders were not briefed on the changes beforehand.
Every quarter, the New York Fed publishes a report on Household Debt and Credit.
The report shows serious credit card delinquencies rose for the third consecutive quarter, a trend not seen since 2009.
Let’s take a look at a sampling of report highlights and charts.
Household Debt and Credit Developments in 2017 Q2
- Aggregate household debt balances increased in the second quarter of 2017, for the 12th consecutive quarter, and are now $164 billion higher than the previous (2008 Q3) peak of $12.68 trillion.
- As of June 30, 2017, total household indebtedness was $12.84 trillion, a $114 billion (0.9%) increase from the first quarter of 2017. Overall household debt is now 15.1% above the 2013 Q2 trough.
- The distribution of the credit scores of newly originating mortgage and auto loan borrowers shifted downward somewhat, as the median score for originating borrowers for auto loans dropped 8 points to 698, and the median origination score for mortgages declined to 754.
- Student loans, auto loans, and mortgages all saw modest increases in their early delinquency flows, while delinquency flows on credit card balances ticked up notably in the second quarter.
- Outstanding student loan balances were flat, and stood at $1.34 trillion as of June 30, 2017. The second quarter typically witnesses slow or no growth in student loan balances due to the academic cycle.
- 11.2% of aggregate student loan debt was 90+ days delinquent or in default in 2017 Q2.
Total Debt and Composition:
Mortgage Origination by Credit Score:
Auto Origination by Credit Score:
30-Day Delinquency Transition:
90-Day Delinquency Transition:
Credit card and auto loan delinquencies are trending up. The trend in mortgage delinquencies at the 30-day level has bottomed. A rise in serious delinquencies my follow.
A really long, long time ago, well before most of today’s wall street analysts made it through puberty, the entire international financial system almost collapsed courtesy of a mortgage lending bubble that allowed anyone with a pulse to finance over 100% of a home’s purchase price…with pretty much no questions asked.
And while the millennial titans of high finance today may consider a decade-old case study on mortgage finance to be about as useful as a Mark Twain novel when it comes to underwriting mortgage risk, they may want to considered at least taking a look at the ancient finance scrolls from 2009 before gleefully repeating the sins of their forefathers.
Alas, it may be too late. As Black Knight Financial Services points out, down payments, the very thing that is supposed to deter rampant housing speculation by forcing buyers to have ‘skin in the game’, are once again disappearing from the mortgage market. In fact, just in the last 12 months, 1.5 million borrowers have purchased a home with less than 10% down, a 7-year high.
– Over the past 12 months, 1.5M borrowers have purchased a home by putting down less than 10 percent, which is close to a seven-year high in low down payment purchase volumes
– The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upwards in market share over the past 18 months
– Looking back historically, we see that half of all low down payment lending (less than 10 percent down) in 2005-2006 involved piggyback second liens rather
than a single high LTV first lien mortgage
– The low down payment market share actually rose through 2010 as the GSEs and portfolio lenders pulled back, the PLS market dried up, and FHA lending buoyed
the purchase market as a whole
– The FHA/VA share of purchase lending rose from less than 10 percent during 2005-2006 to nearly 50 percent in 2010
– As the market normalized and other lenders returned, the share of low-down payment lending declined consistent with a drop in the FHA/VA share of the purchase market
On the bright side, at least Yellen’s interest rate bubble means that today’s housing speculators don’t even have to rely on introductory teaser rates to finance their McMansions...Yellen just artificially set the 30-year fixed rate at the 2007 ARM teaser rate…it’s just much easier this way.
“The increase is primarily a function of the overall growth in purchase lending, but, after nearly four consecutive years of declines, low down payment loans have ticked upward in market share over the past 18 months as well,” said Ben Graboske, executive vice president at Black Knight Data & Analytics, in a recent note. “In fact, they now account for nearly 40 percent of all purchase lending.”
At that time half of all low down payment loans being made involved second loans, commonly known as “piggyback loans,” but today’s mortgages are largely single, first liens, Graboske noted.
The loans of the past were also far riskier – mostly adjustable-rate mortgages, which, according to the Black Knight report, are virtually nonexistent among low down payment mortgages today. Instead, most are fixed rate. Credit scores of borrowers taking out these loans today are also about 50 points higher than those between 2004 and 2007.
Finally, on another bright note, tax payers are just taking all the risk upfront this time around…no sense letting the banks take the risk while pretending that taxpayers aren’t on the hook for their poor decisions…again, it’s just easier this way.
Concerns over the future of Social Security play a starring role in American seniors’ overall retirement uncertainty — and that’s before considering how much of the benefit might eventually need to go toward unexpected medical expenses.
After factoring in supplemental insurance premiums and other uninsured health costs, the average retiree only takes home 75% of his or her Social Security benefits, according to a new study from researchers at Tufts University and Boston College.
“A substantial share of other households have even less of their benefits left over,” researchers Melissa McInerney of Tufts and Matthew S. Rutledge and Sara Ellen King of BC wrote.
In fact, for three percent of retirees, out-of-pocket health expenses actually exceed their Social Security Old Age and Survivors Insurance (OASI) benefits, the team concludes.
These findings are part of an overall trend: Despite positive steps such as the introduction of Medicare Part D coverage for prescription drugs in 2006, seniors have increasingly paid more for health expenses directly from their pockets.
“Until a slowdown during this decade, out-of-pocket costs for Medicare beneficiaries rose dramatically — costs increased by 44% between 2000 and 2010 — and they are expected to continue to rise faster than overall inflation,” the researchers wrote.
To perform their study, which was introduced at the annual Joint Meeting of the Retirement Research Consortium in Washington, D.C. last week, the team analyzed individual data points for Social Security recipients aged 65 and older between 2002 and 2014. They found a wide range in medical spending among that cohort: For instance, while the median retiree spent $2,400 in 2014, the total group averaged $3,100 per person, with retirees in the 75th percentile logging $4,400.
The researchers also warn that they only analyzed medical expenses, citing a 2017 paper that concluded that housing costs, taxes, and “non-housing debt” eat up about 30% of a retiree’s income.
“Although out-of-pocket medical spending has declined somewhat since the instruction of Part D … these findings suggest that Social Security beneficiaries’ lifestyles remain vulnerable to a likely revival in medical spending growth,” the team concludes.
Read McInerney, Rutledge, and King’s full findings here.
It’s been about a decade since the term “mortgage arbitrage” made headlines. It’s back.
In the clearest sign yet of just how late far the investing cycle the developed world finds itself, the FT writes that wealthy British homeowners are again borrowing against their property to invest in bonds, equities, alternative investments or commercial property as the low cost of debt creates opportunities for “mortgage arbitrage”. And while taking out a mortgage to invest in “safer” arbs like corporate bonds, commercial real estate or private equity would be at least understandable, if not excusable, in the current low-yield regime, some more extreme “investment” decisions suggest that the madness and euphoria that marked the peak of the last asset bubble is back: because while growing numbers are prepared to risk using their primary residence as collateral, some are ready to gamble on extremely volatile assets like bitcoin, wine and cars.
One broker said a mortgage-free homeowner with a house valued at £10m had taken out a fixed-rate loan of just under £2m to buy bitcoin, the crypto currency that has seen huge volatility in recent months. Others have invested in classic cars or fine wine. One former banker took out a £500,000 mortgage, not for investment purposes, but to provide a fund for routine spending and other eventualities.
To be sure, while these are extreme – and for now rare – examples of investor euphoria, even the more mundane “mortgage arbitrageurs” are willing to take major gambles: “Interest rates of less than 2 per cent on two- and five-year fixed-rate home loans are tempting high-income, mortgage-free homeowners to raise money against their property in the hope they can profit from higher rates of return elsewhere.”
Simon Gammon, director at mortgage broker Knight Frank Finance, said the arbitrage had emerged as a trend among financially sophisticated clients as mortgage rates fell.
“We’re a specialist lender at the top end but we’re seeing up to a dozen of these deals a month,” he said. “This is something that has come about because of the current environment of low rates.”
How prevalent is this behavior which peaked during the last housing/credit bubble?
Mark Pattanshetti, a mortgage manager at broker Largemortgageloans.com, said the number of borrowers taking out loans to fund investments had risen by about 50% since 2009. “Borrowers have realized the cost of debt is cheap and it isn’t going to get much cheaper,” he said. Unfortunately, what borrowers are forgetting is that home prices can drop as mortgage rates rise, while risk assets – impossible as it may sound – can correct sharply, hitting borrowers with the double whammy of rising LTVs as inbound margin calls force them to liquidate into a sliding market.
Ironically, anecdotal evidence suggests that this troubling behavior has been prompted be declining UK home prices – until recently one of the best performing British assets. This has been the result of Brexit-related concerns, a decline in Chinese and other foreign investors rushing after UK real estate, as well as concerns that the BOE will soon raise rates, resulting in increasingly more “for sale” signs.
As the FT notes, “for debt-free homeowners, remortgaging during the years of booming house prices was often a means of raising cash to carry out home improvements or expand a buy-to-let portfolio. But slowing house price growth and a regulatory and tax crackdown on landlords have made these options less attractive.
Hugh Wade-Jones, group managing director of mortgage broker Enness, said: “It’s accepted that property is no longer going to be the all-conquering investment, doubling every 10 years, so people are looking elsewhere for returns.”
In addition to bitcoin, cars and wines, borrowers with housing equity are putting money into everything from bonds and private equity and commercial property, brokers told the FT. David Adams, managing director of John Taylor, a Mayfair-based estate agent, said investors were borrowing against London residential properties to fund investment in commercial and mixed use developments from Southampton to Birmingham at returns of 6 to 7 per cent.
“Wealthy investors are no longer chasing capital gain. There is a switch to yield,” Adams said.
According to Knight Frank’s Gammon, the practice typically appealed to those with investment experience. “People who have not needed to borrow have looked at the rates available — and we’ve now got five-year fixed rates from 1.65 per cent — and said if I can’t make 1.65 per cent or more from my money, then I don’t know what I’m doing.”
Unfortunately, should home prices in the near future tumble while risk assets slide, crushing the “experienced” investors, that’s exactly what one can conclude.
Making it easier for the “smart investors” to bury themselves with margin calls, there are no regulations prohibiting this kind of behavior:
There is nothing in mortgage regulation to prevent someone raising a loan on a mortgage-free property for personal investments, as long as the lender assesses that the loan is affordable and not being used, for instance, to prop up a business generating income for its repayment.
Lenders, however, may choose to apply criteria that restrict the use of capital raised through a mortgage, although private banks are typically more relaxed about non-property investments than high street banks. For bigger mortgages, lenders will also moderate risk by insisting that the size of the loan does not exceed 60 per cent of the property’s value.
Naturally, it doesn’t take a big drop in the value of the property coupled with a slide in the “alternative investment” to wipe out the LTV buffer, pushing the value of the loan above the underlying collateral. That said, “the Financial Conduct Authority, which regulates mortgage lenders, declined to comment on individuals borrowing against their house for personal investments.”
In a tangent, the FT then focuses on the tax considerations of this risky behavior.
Unlike gains on a principal private residence, any gains on investments would be subject to capital gains tax (CGT). A wealthy homeowner may therefore seek to transfer borrowed funds to a spouse who has not used his or her annual CGT allowance. If the investment is designed to provide a stream of income, there could be a case for a transfer to a spouse who pays the basic rate of income tax, advisers said.
Nimesh Shah, a tax adviser at accountants Blick Rothenberg, said that if a homeowner took out a loan to invest in commercial property — and this was specified as the purpose of the loan — residential mortgage interest could potentially be offset against the commercial rental income.
Of course, the above assumes capital appreciation and therefore, capital gains. For now nobody is worrying on the more unpleasant outcome, one where there are no gains to book taxes again. Then again, in a wholesale wipeout at least the “smart money” will have years and years of NOLs carryforward losses to offset any future income taxes. Just like Donald Trump.
Latest on Cryptocurrency …
The housing market is suffering from a supply shortage, not a demand dilemma. As Millennial first-time homebuyer demand continues to increase, the inventory of homes for sale tightens. At the same time, prices are increasing, so why aren’t there more homeowners selling their homes?
In most markets, the seller, or supplier, makes their decision about adding supply to the market independent of the buyer, or source of demand, and their decision to buy. In the housing market, the seller and the buyer are, in many cases, actually the same economic actor. In order to buy a new home, you have to sell the home you already own.
So, in a market with rising prices and strong demand, what’s preventing existing homeowners from putting their homes on the market?
“Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”
The housing market has experienced a long-run decline in mortgage rates from a high of 18 percent for the 30-year, fixed-rate mortgage in 1981 to a low of almost 3 percent in 2012. Today, five years later, mortgage rates remain just a stone’s throw away from that historic low point. This long-run decline in rates encouraged existing homeowners to both move more often and to refinance more often, in many cases refinancing multiple times between each move.
It’s widely expected that mortgage rates will rise further. This is more important than we may even realize because the housing market has not experienced a rising rate environment in almost three decades! No longer is there a financial incentive to refinance for most homeowners, and there’s more to consider when moving. Why move when it will cost more each month to borrow the same amount from the bank? A homeowner can re-extend the mortgage term another 30 years to increase the amount one can borrow at the higher rate, but the mortgage has to be paid off at some point. Hopefully before or soon after retirement. Existing homeowners are increasingly financially imprisoned in their own home by their historically low mortgage rate. It makes choosing a kitchen renovation seem more appealing than moving.”
There is one more possibility caused by the fact that the existing-home owner is both seller and buyer. In today’s market, sellers face a prisoner’s dilemma, a situation in which individuals don’t cooperate with each other, even though it is seemingly in their best interest to do so.
Consider two existing homeowners. They both want to buy a new house and move, but are unable to communicate with each other. If they both choose to sell, they both benefit because they increase the inventory of homes available, and collectively alleviate the supply shortage. However, if one chooses to sell and the other doesn’t, the seller must buy a new home in a market with a shortage of supply, bidding wars and escalating prices. Because of this risk, neither homeowner sells (non-cooperation) and neither get what they wanted in the first place – a move to a new, more desirable home. Imagine this scenario playing out across an entire market. If everyone sells there will be plenty of supply. But, the risk of selling when others don’t convinces everyone not to sell and produces the non-cooperative outcome.
- Owner moves, but pays a price escalated by supply shortages for a more desirable home
- Owner stays in current house and does not get a more desirable home
- Owner moves, finding a more desirable home without paying a price escalated by supply shortages
Rising mortgage rates and the fear of not being able to find something affordable to buy is imprisoning homeowners and causing the inventory shortages that are seen in practically every market across the country. So, what gives in a market short of supply relative to demand? Prices. According to the First American Real House Price Index, the fast pace of house price growth, combined with rising rates, has had a material impact on affordability. In our most recent analysis in April, affordability was down 11 percent compared to a year ago. It was once said that a man’s home is his castle. In today’s market, a man’s home may be his prison, but he is getting wealthier for it.
Each new policy destroys another level of prudent fiscal/financial discipline.
The primary driver of our economy–financialization–is in a death spiral. Financialization substitutes expansion of interest, leverage and speculation for real-world expansion of goods, services and wages.
Financial “wealth” created by leveraging more debt on a base of real-world collateral that doesn’t actually produce more goods and services flows to the top of the wealth-power pyramid, driving the soaring wealth-income inequality we see everywhere in the global economy.
As this phantom wealth pours into assets such as stocks, bonds and real estate, it has pushed the value of these assets into the stratosphere, out of reach of the bottom 95% whose incomes have stagnated for the past 16 years.
The core problem with financialization is that it requires ever more extreme policies to keep it going. These policies are mutually reinforcing, meaning that the total impact becomes geometric rather than linear. Put another way, the fragility and instability generated by each new policy extreme reinforces the negative consequences of previous policies.
These extremes don’t just pile up like bricks–they fuel a parabolic rise in systemic leverage, debt, speculation, fragility, distortion and instability.
This accretive, mutually reinforcing, geometric rise in systemic fragility that is the unavoidable output of financialization is poorly understood, not just by laypeople but by the financial punditry and professional economists.
Gordon Long and I cover the policy extremes which have locked our financial system into a death spiral in a new 50-minute presentation, The Road to Financialization. Each “fix” that boosts leverage and debt fuels a speculative boom that then fizzles when the distortions introduced by financialization destabilize the real economy’s credit-business cycle.
Each new policy destroys another level of prudent fiscal/financial discipline.
The discipline of sound money? Gone.
The discipline of limited leverage? Gone.
The discipline of prudent lending? Gone.
The discipline of mark-to-market discovery of the price of collateral? Gone.
The discipline of separating investment and commercial banking, i.e. Glass-Steagall? Gone.
The discipline of open-market interest rates? Gone.
The discipline of losses being absorbed by those who generated the loans? Gone.
And so on: every structural source of discipline has been eradicated, weakened or hollowed out. Financialization has consumed the nation’s seed corn, and the harvest of instability is ripening in the fields of finance and the real economy alike.