Category Archives: Mortgage

Weekly Mortgage Applications Point To A Remarkable Recovery In Home Buying

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.

Source: by Diana Olick | CNBC

The “Big Short 2” Hits An All Time Low As Commercial Real Estate Implodes

(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 (herehereherehereherehere 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.

Worst Commercial Property Debt Crash in Years Looming For Workout Specialists (Fitch Says 26% of CMBS Borrowers Asked About Payment Relief)

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.”

No Relief

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.

Make Money

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.”

Hardball

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.”

Troubled Hotels

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.

Ya think?

Source: Confound Interest

“Holy God. We’re About To Lose Everything” – Pandemic Crushes Over Leveraged Airbnb Superhosts

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.”

Source: ZeroHedge

“There’s No Liquidity” – Mortgage Lenders Abandon “No Brainer” Jumbo Mortgages

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.

Source: ZeroHedge

Getting Out Of Dodge: After Exiting Loans And Hiking Mortgage Standards, JPMorgan Stops Accepting HELOCs


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.

Source: ZeroHedge

Fight Over Commercial Rent Gets Ugly With Default Wave Looming

(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.

Pushing Back

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?”

Some Pay

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?”

Backfire

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.”

Pending Loans

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.”)

Of course, administrators can always contact you at home during virtual classes.

Source: Compounded Interest