Mortgage Rates Rise for the First Time in Weeks

July 23, 2020

Don’t let the headline fool you. We are still experiencing historically low rates and an incredibly vibrant market for home purchases here in the SF Bay Area. In fact, recently, there has been a lot of discussion and speculation on the numbers of people leaving the Bay Area for places outside California, in general. A recent study by Zumper suggest otherwise. According to the study, “…if you look at where people in San Francisco are searching to move on their site, in April and May 2020, the San Francisco Bay Area metro was still the #1 most searched for area, taking up 72% of total searches. This was followed by Sacramento, Los Angeles, Sonoma County and Seattle-Tacoma, showing that people seem to want to stay in California and definitely on the West Coast if they can.”

The migration report goes on to say:

Southern California cities are interested in moving to Phoenix and Las Vegas & Vice Versa

Looking at both inbound and outbound searches for the Southern California cities on the map, Phoenix and Las Vegas were the top recurring out-of-state cities. There is a mutual migration relationship between these areas and perhaps since Southern California, Phoenix, and Las Vegas all tend to be warm most of the year, renters in those cities who were itching to move are looking for similarly tempered environments.

Bay area cities mostly want to stay in state with 2 exceptions

Meanwhile, for our Bay Area cities, while most inbound and outbound searches were within California, the 2 exceptions were the Chicago and New York City metro areas. It seems if Bay Area residents were to move out of California, they would be the most interested in living in or around other large, metropolitan areas.

Reno ties southern and northern California together

The most amount of out-of-metro inbound searches to Reno came from cities in both southern and northern California, in particular Sacramento, San Francisco, and Los Angeles metros. The interest in moving to Reno was a common migration thread that tied this state together.

Housing Demand Continues to Rebound

While housing demand continues to rebound, the month-long swoon in economic activity has caused the 10-year Treasury benchmark to drop. In the short-term, this means the demand will continue on the back of near record low mortgage rates. However, the most recent consumer spending data has been pointing to slow growth since mid-June. The concern is that the pause in economic activity will cause unemployment to remain elevated which will lead to longer-term labor market distress.

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Week of July 20th, 2020 in Review

The economic calendar was relatively quiet, with unemployment numbers and housing reports dominating the headlines.

The news regarding jobless claims continues to reflect the pandemic’s ongoing impact on the labor sector, as another 1.416 million people filed for unemployment benefits for the first time during the week ending July 18. This was about 100,000 claims higher than last week’s number of 1.3 million first-time filers. Continuing claims, which measure people continuing to receive benefits, did improve significantly – at least, the headline figure did. There’s more to the story, as noted below.

A plethora of housing reports were also released, with June’s Existing Home Sales surging 20.7% from May, marking the largest one-month increase ever. Inventory of existing homes continues to remain a challenge for buyers, however, down 18.2% compared to June of last year. New Home Sales also rose much higher than expected in June, up 13.8% from May.

Lastly, the Federal Housing Finance Agency (FHFA) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. While home prices fell 0.3% from April to May, they are still up 4.9% compared to May of last year.

Initial Jobless Claims Rise in Latest Week

Another 1.416 million people filed for unemployment benefits for the first time during the week ending July 18, an increase of about 100,000 people from the previous week’s number of 1.3 million. California (+292K), Florida (+105K) and Georgia (+120K) saw the largest gains.

Continuing claims improved significantly from 17.304 million to 16.197 million, but there is much more to this headline number because the Pandemic Unemployment Assistance (PUA) Claims are not captured.

PUA Claims reflect people like gig workers and contractors who usually would not be approved for unemployment benefits. These claims, again which are separate and in addition to the headline claims, totaled 975,000 in the latest week. Continuing PUA Claims did improve slightly from 14.2 million to 13.18 million but they are still significant.

All told, the total number of people receiving some type of benefits improved slightly from 32 million to 31.8 million. Based on the total number of people receiving benefits, divided into the labor force of 160 million, there is likely a 20% unemployment rate.

Home Sales Surge in June

The National Association of REALTORS (NAR) reported that sales of existing homes jumped 20.7% in June, which was the largest one-month jump ever, albeit still slightly beneath expectations. The report measures closings in the month of June and likely represents buyers shopping for homes in April and May.

Sales were down 11.3% year over year, but this is a big improvement from the -27% annual reading we saw in May’s report. First-time home buyers made up 35% of home sales, up from 34%.

Inventory remains tight, as there were only 1.57 million units for sale, down 18.2% when compared to June of last year. The median home price was reported at $295,300, up 3.5% year over year.

“The sales recovery is strong, as buyers were eager to purchase homes and properties that they had been eyeing during the shutdown,” said Lawrence Yun, NAR’s chief economist. “This revitalization looks to be sustainable for many months ahead as long as mortgage rates remain low and job gains continue.”

Meanwhile, New Home Sales, which measure signed contracts on new homes, also came in strong, up 13.8% from May to June. This was much stronger than the 4% gain anticipated. Sales are now up 7% when compared to June of last year, which is quite an impressive amount especially given the pandemic.

Nationally, the median new home price increased 5.8% year over year to $329,300, while the majority of homes that sold were between $200,000 and $300,000. Here’s what the median home price looks like here in the San Francisco Bay Area:

Peninsula CitiesEast Bay Cities
Daly City$1,130,000Alamo$2,000,000
South SF$1,100,000Danville$1,566,000
Brisbane$1,436,500San Ramon$1,150,000
San Bruno$1,200,000Lafayette$1,580,000
Millbrae$1,875,000Orinda$1,500,000
San Mateo$1,550,000Moraga/Canyon$1,450,000
Belmont$1,800,000Union City$921,000
Foster City$1,800,000Hayward$705,000
San Carlos$1,910,000Castro Valley$880,000
Redwood City$1,638,500Newark$920,000
Redwood Shores$2,100,000San Leandro$705,000
Menlo Park$2,400,000San Lorenzo$710,000
Dublin$1,065,000
Pleasanton$1,230,000
Livermore$818,000
Fremont$1,150,000
Union City$925,000
Newark$950,000
Oakland All$805,000San Francisco (All)$1,600,000
Select Zip Codes (within Oakland):Select Neighborhoods or Districts (within SF):
94705 (Claremont Hills)$1,850,000Pacific Heights$5,700,000
94618 (Rockridge)$1,560,000Marina$3,115,000
94611 (Lakeshore/Grand Ave.)$1,460,000Noe, Eureka & Cole Valleys$2,495,000
94610 (Montclair)$1,250,000Richmond District/Lone Mtn$2,000,000
94609 (Temescal)$1,172,500St. Francis Wood$3,232,500
94602 (Glenview/Oakmore)$1,010,000Forest Hill$2,200,000
94608 (NOBE)$850,000Potrero Hill$1,867,000
94601 (Fruitvale)$599,000Bernal Heights$1,600,000
94603 (South Oakland)$496,000Miraloma Park$1,512,500
Sunset District$1,500,000
Excelsior/Portola$1,165,000
Bayview$994,500

An Update on Home Appreciation

There was news on home appreciation from the Federal Housing Finance Agency House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts.

Home prices fell 0.3% from April to May, but they are still up 4.9% compared to May of last year. However, May’s 4.9% year-over-year reading is a bit lower than the reported 5.5% annual gain in April and 5.9% in March.

What to Look for This Week

The last week of July brings a full slate of economic data, beginning Monday with Durable Goods Orders for June. We’ll get a sense of how consumers are feeling with July’s Consumer Confidence reading on Tuesday, plus there’s housing news with May’s Case-Shiller Home Price Index. June’s Pending Home Sales figures follow on Wednesday.

Wednesday also brings the statement from the latest Federal Open Market Committee meeting, which always has the potential to move the markets.

On Thursday, all eyes will be watching for the latest Initial Jobless Claims numbers, along with the first look at Gross Domestic Product for the second quarter. The market is expecting -35% GDP in the second quarter, following -5% in the first quarter.

Finally, on Friday we’ll get an update on the Fed’s favorite inflation reading with June’s Personal Consumption Expenditures. Also look for June’s Personal Income and Personal Spending figures along with July’s Consumer Sentiment Index and Chicago PMI (which measures manufacturing in that region).

We’ll also keep an eye on rising tensions between the U.S. and China, as well as details regarding a new stimulus package throughout the week.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities remain a stabilizing force in the markets, though they did cut back their purchases last week from $4.4 billion to $3.4 billion per day. Mortgage Bonds have been trading sideways over the past two weeks, testing overhead resistance a few times but failing to break through. Every time the 103.219 ceiling was tested, or close to being tested, Bonds have been pushed lower. Mortgage Bonds remain in the middle of a wide range between the aforementioned ceiling and support at the 25-day Moving Average, meaning they are susceptible to price swings.

Mortgage Rates Fall Below Three Percent!

July 21, 2020

Mortgage rates fell below 3 percent last week for the first time in 50 years. The drop has led to increased demand for refinancing of existing mortgages, as well as demand for new mortgages for those buying homes.

A quick word about these historically low interest rates. The lowest rates available almost always come at a cost of between 0.7 and 1 point (multiplied by the size of the loan and added to the cost). Often these “teaser” rates also have loan size limitations that require it be under the conforming loan limit, which is $510,400 here in the SF Bay Area. You’ll also need to have a credit score above 740 and maybe even above 760 to get access to these rates. Even then, it’s important to remember that rates can and do change every day!

Want to take cash out for home improvements, deb consolidation or put the kids through school, you can expect to see upward adjustments to your rate.

If you are buying an investment property or something other than a single family residence, there will be upward adjustments to the interest rate and there are other things that can and do add risk premium to the rates that are available to you.

So, can you get one of those mortgages that start with an interest rate in the 2’s? You sure can but you’ll need to check all of the boxes to get that super low rate. Do you have to check all those boxes? No. Are 2.5% interest rates available? Yes! Will you have to pay thousands of dollars to get that low of a rate? It’s certainly possible!

Rather than focus on rate, let me share an example: if you borrowed the conforming loan amount of $510,400 (again, here in the SF Bay Area, as that limit changes from county to county). The difference in principal and interest payment between 2.99% and 3.25% is …$71 per month. Don’t misunderstand me, saving money on your home mortgage is important but if your rate is in the high 3s or low 4s, getting a mortgage 3.25% could save you between $175 and $225 per month. NOW THAT’S WORTH FOCUSING ON!

Everyone’s situation is different, and the calculations above are only illustrations and for discussion purposes only. They’re simply designed to get you thinking about your home finance.

Need to get pre-approved for a purchase? Looking to refinance to a lower rate and to tap into your home equity for any reason? Give me a call so we can discuss your specific situation. I’m happy to run some scenarios for you so you can see for yourself where you’ll save. When you call, we can talk about why it’s unlikely you’ll hang on to your loan for the full term and why that’s important in your decision making process.

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Week of July 13th, 2020 in Review

The pandemic’s impact on unemployment continues, as another 1.3 million people filed for unemployment benefits for the first time during the week ending July 11. While continuing claims did improve significantly from the previous week, the headline numbers may not be telling the whole story, as highlighted below.   

Over in the housing sector, confidence among builders was on the rise in July, per the National Association of Home Builders Housing Market Index, which increased 14 points to 72. Housing Starts and Building Permits also improved from May to June, with significant increases in both for single family homes.  

June’s Consumer Price Index showed that consumer inflation rose after three previous months of declines, but the overall trend is that inflation remains tame. Meanwhile, Retail Sales came in stronger than expected last month while May’s figure was also revised higher.

There was also some good news from the manufacturing sector, as July’s Empire State Index showed that manufacturing activity in the New York region rose from essentially flat to 17.2. This is a big improvement from the -48 reading just two months ago. Meanwhile, the Philadelphia Fed Index showed a modest slowdown for manufacturing in that region in July, after a large expansion in June. However, July’s reading was higher than expected.

Lastly, there was also some positive news from the National Federation of Independent Business, as their small business optimism index for June increased to the best level since February. The NFIB chief economist, Bill Dunkelberg, said “Small businesses are navigating the various federal and state policies in order to reopen their business and they are doing their best to adjust their business decisions accordingly. We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”

Digging Deeper Into Unemployment Figures

Another 1.3 million people filed for unemployment benefits for the first time during the week ending July 11, coming in slightly higher than expectations of 1.288 million new claims. Pennsylvania (+209K), California (+127K) and Illinois (+57K) reported the largest gains. Continuing claims, which measure people continuing to receive benefits, improved significantly from 18.06 million to 17.338 million.

But … are things really improving?

There are also PUA or Pandemic Unemployment Assistance Claims that are not captured in the headline figure, and those totaled 928,000 in the latest week. Continuing PUA Claims are now above 15 million, which is significant!

This makes the total number of people receiving some type of benefit around 32 million, meaning it’s possible that the unemployment rate is really over 20%. Because of this, unfortunately, it doesn’t appear that the situation is improving in any meaningful way when we look at the amount of people who are receiving benefits.

Home Builders Feeling Optimistic

The NAHB Housing Market Index, which is a real time gauge of builder confidence, increased 14 points, rising from 58 in June to 72 in July. All three components of the index increased, with current sales rising 16 points to 79 and sales expectations up 7 points to 75. It was especially encouraging to see buyer traffic jump 15 points to 58, moving from contraction territory (below 50) to expansion (above 50).

Housing Starts, which measure the start of construction on new homes, rose 17.3% in June. This was in line with estimates and a nice move higher. Housing Starts are now down only 4% on an annual basis, which is significantly improved from down 23% in the

previous report. The gain was pretty much all in starts on single-family homes, which were up 17.2%.

Building Permits also saw an improvement from May to June, up 2.1%, though they are down 2.5% when compared to June of last year. Permits for single family homes also saw a big jump in June, up 11.8% from May.

The Latest on Consumer Inflation and Retail Sales

The Consumer Price Index (CPI), which measures inflation on the consumer level, came in at 0.6% in the month of June. While this increase ended three months of declines, the overall trend is that inflation remains tame. Of note, gasoline prices rose 12.3% in June, which was a big reason for the overall gain in inflation. The year-over-year reading increased from 0.1% to 0.6%.

Core CPI, which strips out food and energy prices, increased by 0.2% from May to June, while the annual reading remained stable at 1.2%. Within the reports, rents are rising 3.2% across the US, which is down from 3.5%.

There was some good news for retailers as sales increased by 7.5% in June, better than the expected 5.2% gain, while May’s sales figure was revised higher by 0.5% to 18.2%. Sales at clothing and accessory stores shut up a whopping 105.1% in June, while sales at electronics and appliance stores, and furniture and home furnishing stores also saw nice gains. 

What to Look for This Week

The second half of the week heats up with key housing reports. First up, the Federal Housing Finance Agency’s House Price Index for May and June’s Existing Home Sales will be released on Wednesday, followed by June’s New Home Sales on Friday. And as usual, weekly Initial and Continuing Jobless Claims will be important to monitor when the latest figures are reported on Thursday.

Technical Picture

Mortgage Rates Fall Below Three Percent!

July 16, 2020

Mortgage rates fell below 3 percent for the first time in 50 years. The drop has led to increased demand for refinancing of existing mortgages, as well as demand for new mortgages for those buying homes.

A quick word about these historically low interest rates. The lowest rates available almost always come at a cost of between 0.7 and 1 point. Often these “teaser” rates also have loan size limitations that require it be under the conforming loan limit, which is $510,400 here in the SF Bay Area. You’ll also need to have a credit score above 740 and maybe even above 760 to get access to these rates. Even then, it’s important to remember that rates can and do change every day!

Want to take cash out for home improvements, deb consolidation or put the kids through school, you can expect to see upward adjustments to your rate.

If you are buying an investment property or something other than a single family residence, there will be upward adjustments to the interest rate.

So, can you get one of those mortgages that start with an interest rate in the 2’s? You sure can but you’ll need to check all of the boxes to get that super low rate.

By way of example, if you borrowed the conforming loan amount of $510,400 (again, here in the SF Bay Area, as that limit changes from county to county). The difference in principal and interest payment between 2.99% and 3.25% is …$71 per month. Don’t misunderstand me, saving money on your home mortgage is important but if your rate is in the high 3s or low 4s, getting a mortgage 3.25% could save you between $175 and $225 per month. NOW THAT’S WORTH FOCUSING ON!

Everyone’s situation is different, and the calculations above are only illustrations and for discussion purposes only. They’re simply designed to get you thinking about your home finance.

Need to get pre-approved for a purchase? Looking to refinance to a lower rate and to tap into your home equity for any reason? Give me a call so we can discuss your specific situation. I’m happy to run some scenarios for you so you can see for yourself where you’ll save. When you call, we can talk about why it’s unlikely you’ll hang on to your loan for the full term and why that’s important in your decision making process.

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Week of July 13th, 2020 in Review

The pandemic’s impact on unemployment continues, as another 1.3 million people filed for unemployment benefits for the first time during the week ending July 11. While continuing claims did improve significantly from the previous week, the headline numbers may not be telling the whole story, as highlighted below.   

Over in the housing sector, confidence among builders was on the rise in July, per the National Association of Home Builders Housing Market Index, which increased 14 points to 72. Housing Starts and Building Permits also improved from May to June, with significant increases in both for single family homes.  

June’s Consumer Price Index showed that consumer inflation rose after three previous months of declines, but the overall trend is that inflation remains tame. Meanwhile, Retail Sales came in stronger than expected last month while May’s figure was also revised higher.

There was also some good news from the manufacturing sector, as July’s Empire State Index showed that manufacturing activity in the New York region rose from essentially flat to 17.2. This is a big improvement from the -48 reading just two months ago. Meanwhile, the Philadelphia Fed Index showed a modest slowdown for manufacturing in that region in July, after a large expansion in June. However, July’s reading was higher than expected.

Lastly, there was also some positive news from the National Federation of Independent Business, as their small business optimism index for June increased to the best level since February. The NFIB chief economist, Bill Dunkelberg, said “Small businesses are navigating the various federal and state policies in order to reopen their business and they are doing their best to adjust their business decisions accordingly. We’re starting to see positive signs of increased consumer spending, but there is still much work to be done to get back to pre-crisis levels.”

Digging Deeper Into Unemployment Figures

Another 1.3 million people filed for unemployment benefits for the first time during the week ending July 11, coming in slightly higher than expectations of 1.288 million new claims. Pennsylvania (+209K), California (+127K) and Illinois (+57K) reported the largest gains. Continuing claims, which measure people continuing to receive benefits, improved significantly from 18.06 million to 17.338 million.

But … are things really improving?

There are also PUA or Pandemic Unemployment Assistance Claims that are not captured in the headline figure, and those totaled 928,000 in the latest week. Continuing PUA Claims are now above 15 million, which is significant!

This makes the total number of people receiving some type of benefit around 32 million, meaning it’s possible that the unemployment rate is really over 20%. Because of this, unfortunately, it doesn’t appear that the situation is improving in any meaningful way when we look at the amount of people who are receiving benefits.

Home Builders Feeling Optimistic

The NAHB Housing Market Index, which is a real time gauge of builder confidence, increased 14 points, rising from 58 in June to 72 in July. All three components of the index increased, with current sales rising 16 points to 79 and sales expectations up 7 points to 75. It was especially encouraging to see buyer traffic jump 15 points to 58, moving from contraction territory (below 50) to expansion (above 50).

Housing Starts, which measure the start of construction on new homes, rose 17.3% in June. This was in line with estimates and a nice move higher. Housing Starts are now down only 4% on an annual basis, which is significantly improved from down 23% in the

previous report. The gain was pretty much all in starts on single-family homes, which were up 17.2%.

Building Permits also saw an improvement from May to June, up 2.1%, though they are down 2.5% when compared to June of last year. Permits for single family homes also saw a big jump in June, up 11.8% from May.

The Latest on Consumer Inflation and Retail Sales

The Consumer Price Index (CPI), which measures inflation on the consumer level, came in at 0.6% in the month of June. While this increase ended three months of declines, the overall trend is that inflation remains tame. Of note, gasoline prices rose 12.3% in June, which was a big reason for the overall gain in inflation. The year-over-year reading increased from 0.1% to 0.6%.

Core CPI, which strips out food and energy prices, increased by 0.2% from May to June, while the annual reading remained stable at 1.2%. Within the reports, rents are rising 3.2% across the US, which is down from 3.5%.

There was some good news for retailers as sales increased by 7.5% in June, better than the expected 5.2% gain, while May’s sales figure was revised higher by 0.5% to 18.2%. Sales at clothing and accessory stores shut up a whopping 105.1% in June, while sales at electronics and appliance stores, and furniture and home furnishing stores also saw nice gains. 

What to Look for This Week

The second half of the week heats up with key housing reports. First up, the Federal Housing Finance Agency’s House Price Index for May and June’s Existing Home Sales will be released on Wednesday, followed by June’s New Home Sales on Friday. And as usual, weekly Initial and Continuing Jobless Claims will be important to monitor when the latest figures are reported on Thursday.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities remain a stabilizing force in the markets. Mortgage Bonds continue to trade in the middle of the range between support at the 25-day Moving Average and overhead resistance at 103.219. This is a wide range, which means there can be significant price fluctuations as we have seen over the past week. However, there is also a rising trend line that Bonds are attempting to remain above, which should provide some near support.

The Fed’s ongoing purchases of Mortgage Backed Securities remain a stabilizing force in the markets. Mortgage Bonds continue to trade in the middle of the range between support at the 25-day Moving Average and overhead resistance at 103.219. This is a wide range, which means there can be significant price fluctuations as we have seen over the past week. However, there is also a rising trend line that Bonds are attempting to remain above, which should provide some near support.

Another All Time Low for Rates as Forecast for Home Appreciation Forecasts Show Decline!

Weekly Update – 7/14/2020

Mortgage Rates Hit Another All-Time Record Low – Primary Mortgage Market Survey as of July 9, 2020

The summer is heating up as record low mortgage rates continue to spur homebuyer demand. However, it remains to be seen whether the demand will continue if COVID cases rise to the point that it hinders economic growth.

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Week of July 6th, 2020 in Review

After some big labor market reports were released on July 2 and the fireworks of July 4, last week was relatively quiet on the economic report front.

Weekly initial jobless claims were once again released on Thursday, and though they beat expectations, they remain in the millions. Another 1.314 million people filed for unemployment benefits for the first time during the week ending July 4. A positive sign in the report is that continuing claims, which measure people continuing to receive benefits, did improve pretty significantly after being persistent for many weeks.

CoreLogic also released home appreciation figures for May, showing that prices rose 0.7% from April to May and 4.8% when compared to May of last year. However, CoreLogic has revised their annual forecast for the year moving forward, as detailed below.

Lastly, inflation continues to remain tame. At the wholesale level, the Producer Price Index was down 0.2% in June after rebounding in May, coming in much lower than expectations. The lack of wholesale inflation will certainly not lead to consumer inflation – and it’s one of the reasons Mortgage Bonds have moved higher and home loan rates have moved lower of late.

Initial Jobless Claims Beat Expectations

The latest weekly initial jobless claims showed that another 1.314 million people filed for unemployment benefits for the first time during the week ending July 4. This was slightly better than expectations of 1.4 million claims. California (+267K), Texas (+117K) and Georgia (+103K) reported the largest gains.

Continuing claims finally saw a big improvement, falling from 18.76 million to 18.06 million, which is the first meaningful improvement we have seen since in quite some time.

If we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the real-time unemployment rate is around 14%. This rate would be about 3% higher, or 17%, without the estimated number of temporary new jobs created by the Paycheck Protection Program.

The Latest Home Appreciation Forecasts

CoreLogic’s Home Price Index Appreciation report for May showed that home prices rose 0.7% from April to May. Home prices were also up 4.8% when compared to May of last year. This is a decline from the year-over-year reading of 5.4% appreciation in April’s report. Washington (5.0%), San Diego (4.9%) and Las Vegas (4.8%) led the gains.

CoreLogic forecasts that home prices will drop 0.1% from May to June, and they expect prices to fall 6.6% from May 2020 to May 2021. Their annual forecast dropped significantly from their previous prediction of a 1.3% decline.

Dr. Frank Nothaft, Chief Economist for CoreLogic, said, “Pending sales and home-purchase loan applications are higher than in June of last year and reflect the buying activity of millennials. By the end of summer, buying will slacken and we expect home prices will show declines in metro areas that have been especially hard hit by the recession.”

CoreLogic also noted that a lot of the demand was pent up from spring to summer with elevated unemployment, and that purchase activity and home prices could fall off once summer ends.

It remains to be seen if this latest forecast will prove true, or if the surge in sales and appreciation levels off less steeply, which could still allow for home price gains over the next year.

Wholesale Inflation Lower Than Expected

The Producer Price Index, which measures inflation on the wholesale level, was down 0.2% in June after rebounding in May. The reading was much lower than expectations of a 0.4% rise. PPI also declined 0.8% on an annual basis, which was unchanged from May’s annual reading.

The core rate, which strips out volatile food and energy prices, was down 0.3% from May to June, which was also much lower than expectations of a 0.2% gain. Year over year, core PPI was up 0.1%.

The bottom line is that the ongoing pandemic continues to depress demand. There is no wholesale inflation, which will certainly not result in consumer inflation. This is one of the reasons we have seen Mortgage Bonds on such a nice move higher.

Remember, inflation reduces the value of fixed investments like Mortgage Bonds. And since home loan rates are tied to Mortgage Bonds, when Bonds improve, home loan rates can as well.

What to Look for This Week

There’s a full slate of economic reports ahead this week across a wide range of sectors. Tuesday brings the National Federation of Independent Business Small Business Optimism Index for June and more inflation news, this time on the consumer front with June’s Consumer Price Index.

There will be an update from the manufacturing sector with July’s Empire State Index (which focuses on the New York region) on Wednesday, followed by July’s Philadelphia Fed Index on Thursday.

Thursday also brings the latest weekly jobless claims numbers, an update on Retail Sales for June and the National Association of Home Builders Housing Market Index for July, which will give us a real-time read on builder confidence.

More housing news ends the week on Friday, with June’s Housing Starts and Building Permits report. Plus, we’ll get the latest read on how consumers are feeling with July’s Consumer Sentiment Index.

Technical Picture

The Fed continues to stabilize the markets with its ongoing purchases of Mortgage Backed Securities.  Mortgage Bonds rallied more than 70bp since July 1st but are now backing off a strong ceiling of resistance at 104.625.

Mortgage Rates Hit All-Time Record Low

Mortgage Rates Hit All-Time Record Low Heading into Last Week’s Holiday Weekend

Freddie Mac Primary Mortgage Market Survey – July 2, 2020

Mortgage rates continue to slowly drift downward with a distinct possibility that the average 30-year fixed-rate mortgage could dip below 3 percent later this year. On the economic front, incoming data suggest the rebound in economic activity has paused in the last couple of weeks with modest declines in consumer spending and a pullback in purchase activity.

Week of June 29th, 2020 in Review

The July 4 holiday provided plenty of fireworks around the country, as did last week’s busy economic calendar. All eyes were on the labor sector, as three key reports were released.

First up, the ADP Employment Report showed 2.37 million job gains in the private sector during the month of June. Though this was lower than anticipated, May’s report was revised to the positive, moving from a net job loss to job gains. The more-closely watched Bureau of Labor Statistics report showed 4.8 million job gains in June, beating expectations of 2.9 million job creations. The Unemployment Rate decreased from 13.3% to 11.1%, though this figure would have been 12.1% without the classification error noted below.

The latest weekly Initial Jobless Claims showed that another 1.427 million people filed for benefits for the first time during the week ending June 27. While this was in line with expectations, it’s still a startling number to digest.

Housing was in the news as well, as May’s Pending Home Sales saw a huge rebound while home prices continued to appreciate in April per the Case Shiller Home Price Index.

Also of note, the ISM Index, which measures the health of the manufacturing sector in the US, came in at 52.6 for the month of June, which was above expectations of 49.0. However, manufacturing in the Chicago region saw just a slight rebound in June, per the Chicago PMI, after hitting a 38-year low in May.

Lastly, the minutes from the Fed’s meeting on June 9-10 were released and they showed discussion around Forward Guidance, Asset Purchases, and Yield Curve Control. Participants voiced concern over the prospect of Yield Curve Control and adoption seems unlikely at this time. Fed officials also noted that the fiscal help provided by Congress ‘might prove to be insufficient.’

June’s Employment Reports Show Job Gains

Both the ADP and BLS employment reports showed job gains in June. First in on Wednesday was the ADP Employment Report, which revealed that there was a gain of 2.37 million jobs in the private sector. While this was less than the expected 3 million job gains for June, May’s figure was revised higher from 2.76 million job losses to 3.065 million job gains.

Hospitality industry workers saw the biggest gain, with 961,000 hires, which makes sense as more states began re-opening. Small businesses overall also added 937,000 jobs. 

The more-closely anticipated Bureau of Labor Statistics report came out on Thursday, a day earlier than usual due to the market closures on Friday, and it showed that there were 4.8 million job gains in June. This was much stronger than the 2.9 million expected.

There are two reports within the Jobs Report, and there is a fundamental difference between them. The Business Survey is where the headline job number comes from and it’s based predominately on modeling.

The Household Survey, where the Unemployment Rate comes from, is done by actual phone calls to 60,000 homes. It also has a job loss or creation component, meaning it may be more reflective of actual job numbers – and it came in slightly higher than the headline number, showing 4.94 million job gains.

The Unemployment Rate decreased from 13.3% to 11.1%, which was stronger than expectations of 12.3%. What explains the decrease? While there were 4.94 million job gains, 1.7 million people entered the labor force, which is why we saw the unemployment rate decrease.

It’s important to note that there has been a misclassification error where people were classified as absent from work for other reasons and not marked as unemployed on temporary layoff when they should have been. Without this error, the unemployment rate would have been 1% higher or 12.1%.

The all in U6 Unemployment Rate, which includes total unemployed, plus all persons marginally attached to the labor force, plus total employed part time for economic reasons, decreased from 21.2% to 18%.

Average hourly earnings decreased from 6.7% to 5%, while average weekly earnings decreased from 7.7% to 5.3%. Part of the reason for the weekly decrease was a decline in hours worked of .2.

Initial Jobless Claims Remain High

Another 1.427 million people filed for unemployment benefits for the first time during the week ending June 27. While this figure was in line with expectations, it is still staggering to think about. California (+279K), Georgia (+115K) and Texas (+96K) reported the largest gains.

Continuing claims, which measure people continuing to receive benefits, have been persistent and were little changed at 19.29 million.

When we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the real-time unemployment rate is around 15%. And when we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be about 3% higher or closer to 18% without it. This figure correlates more closely with the all in U6 number as noted above.

Pending Home Sales Sets Record

Pending Home Sales, which measures signed contracts on existing homes, bounced back strongly in May, rising 44.3%. This was the highest month-over-month gain on record. But, before we start celebrating, keep in mind that April’s reading fell by 22% and March saw a decline of 21%.

In addition, for perspective, the index level of 99.6 compares with 111.4 in February and 108.9 in January. So, although recovery is underway, sales are still down 5.1% year over year.

The National Association of REALTORS’ chief economist, Lawrence Yun, said, “This has been a spectacular recovery for contract signings, and goes to show the resiliency of American consumers and their evergreen desire for homeownership.” He also noted that, “This bounce back also speaks to how the housing sector could lead the way for a broader economic recovery.”

A Quick Note Regarding Home Appreciation

The Case-Shiller Home Price Index, which is considered the “gold standard” for appreciation, was released for April. Of its various indexes, two are especially important to note.

First, the National Index, which covers all nine U.S. Census divisions, reported a 4.7% annual gain in April, which was an increase from 4.6% in March. Meanwhile, the 20-city Index increased from 3.9% in March to 4% in April on a year-over-year basis. Phoenix, Seattle and Minneapolis reported the highest year-over-year gains.

What to Look for This Week

After the fireworks from last week, this week’s calendar is relatively quiet. The main highlight will be the latest weekly jobless claims figures when they’re reported on Thursday. We’ll also get a read on wholesale inflation for June via the Producer Price Index on Friday. And there will be a 10-year and 30-year Treasury Auction that could impact the markets, depending on participation.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities continue to add stability to the markets. Mortgage Bonds are trading in a range between support at the 25-day Moving Average and overhead resistance at 104.281. Bonds did test this resistance level last Tuesday but were pushed lower. However, they held their own in the face of the strong Jobs report from the BLS on Thursday and did not react negatively. 

Mortgage Rates Remain Flat, Housing Demand is High and Forbearance is not Forgiveness

Weekly Update – 6/25/2020

After the Great Recession, it took more than ten years for purchase demand to rebound to pre-recession levels, but in this crisis, it took less than ten weeks. The rebound in purchase demand partly reflects deferred sales as well as continued interest from prospective buyers looking to take advantage of the low mortgage rate environment.

A Word on Forbearance

Black Knight Financial Services, a data and analytics solutions firm serving the mortgage and title insurance industries, announced that forbearance requests are up 79,000 from last week. This erases roughly half of the improvement seen since the peak of these requests about three weeks ago and have been increasing every day for the past five business days. Currently, 4.68 million homeowners are in forbearance, representing approximately 8.8% of all active mortgages.

As a reminder, forbearance does not equal forgiveness. If you believe that you need forbearance, please contact your mortgage servicer (the name on your mortgage statement) and have a frank and honest discussion with them. Some folks believe that they’ll just tack on the missed payments to the end of the loan. Maybe. Be sure you understand what you are obligating yourself to before you decide. In some instances, the mortgage servicer or holder of your note will expect to be paid in full when you are ready to come out of forbearance. That could mean three months (or more), plus your current month’s payment, which could be several thousand dollars. And if you are thinking that you’ll just refinance into another loan, most lenders require 12 on time payments. If you’ve been in forbearance, your payments were not made on time. This might make refinancing difficult, if not impossible. Forbearance is an incredibly powerful tool and for those that truly need it, it can be a lifesaver. Just be sure you have something in writing and you are clear about your obligations before you choose this option.

Unemployment Claims on the Uptick

More people filed for unemployment than expected during the week ending June 20, with first-time filers totaling another 1.48 million people. This was higher than estimates and still reflects an estimated 16% unemployment rate.

The housing sector was also in the news, with sales of existing homes declining slightly more than expected from April to May. New Home Sales, meanwhile, increased 16.6% in May, though April’s figure was revised lower. There is an easy explanation for the difference between the two reports, as detailed below.

Inventory remains tight for both new and existing homes, which should be supportive of home prices.

Speaking of home prices, the FHFA (Federal Housing Finance Agency) released their House Price Index, which measures home price appreciation on single-family homes with conforming loan amounts. Home prices rose 0.2% in April and 5.5% year over year, down from 5.9% in the previous report.

Lastly, the final reading for first quarter GDP came in at the third worst reading ever, with second quarter’s reading expected to be much worse. There was some positive news, though, as orders for Durable Goods (which reflects new orders placed with domestic manufacturers for delivery of factory hard goods) were up 15.8% in May, which was much stronger than the 0.0% expected and also higher than the prior month’s -17.2% reading. And the Fed’s favorite inflation measure, Personal Consumption Expenditures, showed that inflation remained tame in May.

The Latest on Unemployment 

Another 1.48 million people filed for unemployment benefits for the first time during the week ending June 20, which was 100,000 more people than anticipated. California (+287K), Georgia (+124K) and New York (+90K) saw the largest gains.

Continuing claims, which measure people continuing to receive benefits, decreased by only 77,000 to 19.5 million people. This figure is backwards looking, so when we add the following two weeks of initial claims, there are roughly 22.5 million individuals receiving benefits. Note that this does not include anyone who returned to work within the last week.

If we factor in a similar number of people who returned to work from the previous week’s report, we estimate the unemployment rate to be around 16%. Although there has been a slight improvement in weekly claims, 1.48 million is still a huge number of people who have lost their jobs and are new filers for benefits.

The Skinny on May Home Sales

Existing Home Sales decreased by 9.7% from April to May, slightly worse than the 8.8% decline that was expected. Sales were also 26.6% lower when compared to May of last year.

Inventory remained tight with only 1.55 million units for sale in May. While this was 18.8% lower year over year, the number was 6.2% above the levels seen in April. At the current pace of sales, this represents a 4.8-month supply, below the 6-month level that’s considered normal. Low inventory should be supportive of prices, especially with demand remaining strong as evidenced by purchase application volume.

The median home price was reported at $284,600, up 2.3% year over year. Single family sales were down 9.4% from April to May. Condos, however, saw a much bigger drop of 12.8% and a whopping 41% decline from a year ago, confirming that people are looking for standalone homes. First time home buyers made up 34% of home sales.

Lawrence Yun, NAR’s chief economist, explained, “Sales completed in May reflect contract signings in March and April – during the strictest times of the pandemic lock down and hence the cyclical low point. Home sales will surely rise in the upcoming months with the economy reopening and could even surpass one-year-ago figures in the second half of the year.”

Meanwhile, sales of new homes rose 16.6% in May, much higher than the 1.6% increase that was expected. Sales were also up 12.7% when compared to May of last year. It should be noted that April’s sales figure was revised lower from 623,000 to 580,000, but even without the revision sales in May were up 8.5%.

Inventory of new homes on the market also remains tight, decreasing from 325,000 to 318,000, while the median new home price increased 4.9% to $317,900.

You may be wondering why sales of existing homes were down significantly while sales of new homes had a nice rebound. The answer is partly due to what each report is measuring. As noted above, May’s Existing Home Sales report measured closings in May, meaning those buyers were home shopping in March and April – the worst time for the pandemic. 

May’s New Home Sales report, on the other hand, measures contracts that were signed in May by people out shopping for homes throughout that month. The increase in states opening in May plus the high demand for housing helps explain the difference between the two reports.

The Scoop on GDP

The final or third look at first quarter GDP was reported at -5%, which was unchanged from the second reading and the third worst reading ever. Remember this is for the first quarter. The second quarter of 2020 will likely be much worse, with economists forecasting a much bigger GDP drop of around 30%.

Meanwhile, the International Monetary Fund projected global growth to be -4.9% in

2020, which is a drop of 2% from their previous forecast in April. Though the IMF projects a rebound of 5.4% in 2021, that will not recoup the loss that’s expected in 2020 because the recovery will be starting from a lower level.

The IMF said that $10.7 trillion in fiscal measures have been announced worldwide to fight the pandemic. As a result, global public debt is expected to reach an all-time high, exceeding 101% of GDP in 2020-21. That’s 19 percentage points above a year ago. This increase in global debt slows down the velocity of money and has a downward pressure on rates.

A Quick Update on Inflation

Personal Consumption Expenditures, the Fed’s favored measure of inflation, showed that inflation remains tame, as headline inflation increased 0.1% in May and fell from 0.6% to 0.5% year over year. The Core rate, which strips out volatile food and energy prices, also increased 0.1% in May and remained at 1.0% year over year.

Also of note, personal incomes fell 4.2% in May. Spending, meanwhile, increased by 8.2%, which was likely due to more states opening and the availability of places for people to spend money.

What to Look for This Week

The holiday-shortened week is jam packed with a wide range of reports. Housing news kicks off the week with May’s Pending Home Sales on Monday and the Case-Shiller Home Price Index for April on Tuesday. We’ll also get a read on June manufacturing numbers via the Chicago PMI on Tuesday and the ISM Index on Wednesday.

It’s also a busy week for the labor sector, as the ADP Employment numbers for June will be released Wednesday, while the latest weekly Initial Jobless Claims will be reported as usual on Thursday. The Bureau of Labor Statistics Jobs Report for June will also be delivered Thursday instead of its usual Friday release, as all markets will be closed on Friday in observance of the Independence Day holiday.

Technical Picture

The Fed continues to stabilize the markets with their ongoing purchases of Mortgage Backed Securities. After trading in a tight range between support at their 25-day Moving Average and resistance at their 50-day Moving Average, Mortgage Bonds were finally able to break free and move convincingly above their 50-day. Meanwhile, the 10-year Treasury broke beneath its 50-day Moving Average, with additional room to improve

Mortgage Rates Drop, Reaching Another All-Time Low

While the rebound in the economy is uneven, one segment that is exhibiting strength is the housing market. Purchase demand activity is up over twenty percent from a year ago, the highest since January 2009. Mortgage rates have hit another record low due to declining inflationary pressures, putting many homebuyers in the buying mood. However, it will be difficult to sustain the momentum in demand as unsold inventory was at near record lows coming into the pandemic and it has only dropped since then.

Week of June 15th, 2020 in Review

The number of people filing for unemployment for the first time remains in the millions, with another 1.5 million individuals filing claims during the week ending June 13. While this was a decline from the previous week’s initial jobless claims, the figure did exceed estimates, and points to an estimated staggering 16% unemployment rate currently.

The housing sector saw some positive news, however, as the NAHB Housing Market Index confirmed that confidence among home builders has been on the rise in June. All three components of the index, including current sales conditions, future expectations and prospective buyer traffic saw improvement when compared to the readings in May.

Meanwhile, Housing Starts were up 4.3% in May, though this was much less than the 22% expected. Building Permits, on the other hand, were 14% higher, beating estimates of a 10% gain. Low home loan rates have helped the demand for housing, and the high number of building permits could lead to stronger readings in Housing Starts this summer. However, there is an important caveat to keep in mind, as noted below.

Retail Sales were also on the rebound in May, while manufacturing in both the New York and Philadelphia regions have seen big improvements in June. The Cass Freight Index, which measures freight activity, also showed some improvement in May. However, the uptick was less than anticipated due in part to the reopening schedule unfolding slower than anticipated. Cass Freight forecasts a return to 2019 freight activity levels in 2021.

Lastly, the Fed was in the news again, announcing that they would be buying corporate bonds on top of the exchange-traded funds they are already buying. The Fed will begin buying a broad and diversified portfolio of corporate bonds to support market liquidity and the availability of credit for large employers. The program will allow for the purchase of up to $750 billion worth of corporate credit with maturities of 5 years or less.

Fed Chair Jerome Powell testified on Capitol Hill that the program fulfills a pledge the Fed made previously, and he noted that the program is not an effort to take over the market. He reiterated that the Fed will adjust their bond buying based on market conditions.

Unemployment Figures Still Staggering

Another 1.5 million people filed for unemployment benefits for the first time during the week ending June 13. Though this was a decline from the previous week, the number of claims filed was 300,000 higher than estimates. California (+243K), Georgia (+131K) and New York (+96K) saw the biggest gains.

Continuing claims, which measure people who continue to receive benefits, decreased by only 62,000 to 20.5 million. This figure is backwards looking, so when we add the following two weeks of initial claims, there are roughly 23.5 million people receiving benefits.

In addition, when we factor in the amount of new and continuing claims and the number of people in the labor force, we estimate that the unemployment rate is currently 16%. And when we try to estimate how many new jobs the Paycheck Protection Program has temporarily created; we think that the unemployment rate could be closer to 19% without it.

Builder Confidence Rebounds in June

Builder confidence has been on the rebound in June, per the NAHB Housing Market Index. This real-time read on builder confidence increased by the largest one-month increase ever, rising 21 points from 37 in May to 58 in June (after plunging all the way to 30 in April).

There was improvement from May to June in all three components of the survey. Current sales conditions jumped 21 points to 63, future expectations were up by 22 points to 68 and prospective buyer traffic almost doubled from 22 to 43. Keep in mind that 50 is the baseline, with readings above 50 signaling expansion and below 50 contraction. So, while this was a good rebound, it’s still well below the numbers we were seeing just a few months ago before the pandemic, which were in the high 70’s. And prospective buyer traffic is still below the baseline reading and in contraction.

The NAHB noted the urban to suburban move being made by many, saying, “Builders report increasing demand for families seeking single family homes in inner and outer suburbs that feature lower density neighborhoods.”

The limited inventory of existing homes certainly helps the demand for new homes, as does low home loan rates. But there is a caveat, as the NAHB explained, “Elevated unemployment and the risk of new, local virus outbreaks remain a risk to the housing market.”

Construction Off to Slower “Start” Than Expected

Housing Starts were up only 4.3% in May, which was much less than the 22%

expected. They were also down 23% when compared to May of last year. Starts for single family homes were flat and saw no gain.

Building Permits, on the other hand, shot up 14%, which was better than the 10% increase expected (though they are still down 9% when compared to last May). Permits for single family homes were up 12%.

Many people thought Housing Starts would rebound sooner, but builders were not purchasing land because they thought that demand for housing would return more slowly. In addition, available labor and material costs were an issue. But with Building Permits on the rise, Housing Starts may really rebound in June and moving forward. Again, as noted above, low home loan rates will help with demand, but continued high unemployment and potential future outbreaks of the virus will also be a limiting factor.

Retail Sales and Manufacturing on the Upswing

Retail Sales in May were up 17.7% after falling 14.7% in April – more than double the expected 8% gain. Clothing and accessories stores reported a whopping 188% gain, while furniture stores (+89.7%) and sporting goods, hobby, musical instruments and bookstores (+88.2%) also saw big improvements. We will see how these figures continue to change and hopefully improve as states continue to reopen.  

Manufacturing in the New York region also saw a big improvement, as the Empire State Index rose from -48.5 to flat in June. The Philadelphia Fed Index was another positive sign for manufacturing in that region, with June’s reading reported at 27.5, greatly exceeding expectations of -22.7. 

Family Hack of the Week

Summer vacation plans have changed for many people this year, especially trips that involved long flights. If you’re considering a road or day trip, our friends at Real Simple offer these tips to help your family travel safely.

Before heading out, check for local, state and regional updates, as states and localities are in different phases of re-opening. Be prepared as well in case things change during longer trips.

Pack a kit for all members of your family, including gloves, hand sanitizer and masks (which are required in some places). Also, bring plenty of drinks, snacks and meals to limit any unnecessary stops. Experts recommend wearing gloves when pumping gas and throwing them away as soon as you’re done.

Choose outdoor activities and restaurants with outdoor seating, as they are great and safer options for your family to spend time together and also enjoy the summer weather.

If you’ll be staying overnight somewhere, don’t be shy about using antibacterial wipes on high-traffic surfaces like light switches, door handles, bathroom sinks and remote controls. And once you get home, disinfect anything you brought with you, including suitcase, coolers, backpacks and purses.

These tips will help your family enjoy outings safely this summer! 

What to Look for This Week

More housing news is on the way, as we’ll get the scoop on May’s Existing Home Sales on Monday and New Home Sales on Tuesday. The FHFA Home Price Index for April follows on Wednesday.

The end of the week is equally busy, with the revised reading for first quarter GDP, May Durable Goods Orders and the latest weekly Initial Jobless Claims all being reported Thursday. Friday brings the Fed’s favorite inflation reading, Personal Consumption Expenditures, along with Personal Income and Spending for May and Consumer Sentiment for June.

Technical Picture

The Fed continues to stabilize the markets with their ongoing purchases of Mortgage Backed Securities. Mortgage Bonds spent much of last week trading in a tight range between support at their 25-day moving average and resistance at their 50-day moving average. While the 50-day has proved to be a tough ceiling for Bonds to break above, this narrow range means a breakout one way or the other is coming. 

Weekly Update – 6/15/2020

Mortgage Rates Remain Relatively Flat

June 11, 2020

The rebound in homebuyer demand continued this week, driven by mortgage rates that hover near record lows. This turnaround in demand, particularly by those who have higher incomes than the typical household, also reflects deferred sales from the Spring.

Week of June 8th, 2020 in Review

Unemployment remains a sobering reality for millions of people across the country, as another 1.5 million people filed claims for the first time during the week ending June 6. While this was a decline from the previous week, it does point to a staggering 16.7% unemployment rate, when considering the number of new claims, continuing claims and the amount of people in the labor force.

The Fed held their regularly scheduled Federal Open Market Committee meeting and as expected kept the benchmark Fed Funds Rate at zero. The Fed noted that they expect very little inflation this year, which is typically a good sign for home loan rates, but they also had some sobering forecasts for GDP and unemployment, as noted below.

Right on cue, the Consumer and Producer Price Indexes for May confirmed inflation remains tame due to the lack of pricing pressure.

According to the Bureau of Economic Research, the US economy was already declining and we were already in a recession towards the end of February, before the pandemic began. While COVID-19 has accelerated the decline, this could also hopefully mean we will come out of this downturn faster as well.

Lastly, on a positive note, small businesses were feeling more optimistic about the future in May, per the National Federation of Independent Business small business optimism index, which increased from 90.9 to 94.4. Plans to hire, capital spending and plans to increase inventory all rose, as did those who expect a better economy and higher sales. NFIB’s Chief Economist Bill Dunkelberg said, “It’s still uncertain when consumers will feel comfortable returning to small businesses and begin spending again, but owners are taking the necessary precautions to reopen safely.”

Initial Jobless Claims Remain in the Millions

Another 1.5 million individuals filed for unemployment benefits for the first time during the week ending June 6, which was in line with estimates. California (+258K), Georgia (+134K) and Florida (+110K) once again posted the largest gains.

Continuing claims, which measure people continuing to receive benefits, decreased by 339,000 to 20.9 million. This figure is backwards looking, so when we add the following two weeks of initial claims, there are now roughly 25 million individuals receiving benefits.

When we factor in the number of new claims, continuing claims and the amount of people in the labor force, we estimate there to be a 16.7% unemployment rate currently. This figure is close to the Bureau of Labor Statistics number that was reported in the May Jobs report released on June 5 when taking the misclassification into account. Remember that the BLS unemployment rate was reported at 13.3%. However, without the misclassification error, they said that the unemployment rate would have been 3% higher, or 16.3%.

In addition, when we try to estimate how many new jobs the Paycheck Protection Program has temporarily created, we think that the unemployment rate could be closer to 20% without it.

The Fed Sings a Sobering Tune

Fed members held their two-day Federal Open Market Committee meeting Tuesday and Wednesday and left the benchmark Fed Funds Rate unchanged at zero. The Fed also said that they expect the Fed Funds Rate to remain at zero through 2022, with Fed Chairman Jerome Powell saying, “We’re not even thinking about raising rates.”

The Fed also noted that they will continue to purchase Mortgage Backed Securities and Treasuries at current levels, meaning they don’t plan to taper those purchases any further.

However, the Fed’s forecasts were a bit eye-opening and led to a sell-off in stocks on Thursday. They projected a decline of 6.5% in GDP this year, followed by a 5% gain in 2021 and 3.5% gain in 2022. Note that if GDP does drop as predicted in 2020, we really need to see an 8% gain to make it all back.

The Fed’s unemployment rate forecasts were also somber, calling for 10% in 2020, 7% in 2021 and 5% in 2022 … meaning that unemployment may stick around longer than many expect.

Lastly, the Fed predicts there to be no inflation in 2020, around 1.5% in 2021 and less than 2% in 2022. While this points to a slow economy, it is a good sign for lower home loan rates because inflation reduces the value of fixed investments. This includes the Mortgage Bonds to which home loan rates are tied.

Speaking of Inflation

Inflation on the consumer level came in at -0.1% in the month of May per the Consumer Price Index while the year over year reading decreased from 0.3% to 0.1%. Core inflation, which strips out food and energy prices, dropped by 0.1% from April to May and from 1.4% to 1.2% when compared to May of last year. Again, this data speaks to a soft economy with no pricing pressure.

Within the report, it’s interesting to note that rents of a primary residence dropped from 3.7% to 3.5%, showing that there is less demand and a lack of pricing pressure for rents. This makes sense with people moving out of city living and into the suburbs, which data in the HousingWire survey noted below also confirms.

Meanwhile, the Producer Price Index (PPI), which measures wholesale inflation, was up 0.4% in May, higher than the expected 0.1% estimate. On an annual basis, PPI came in at -0.8%, which was better than the expected -1.1% loss. The 12-month reading in negative territory again speaks to the lack of inflation we’ve been seeing. Core PPI, which strips out food and energy prices, did decrease by 0.1% from April to May and from 0.6% to 0.3% annually, which was in line with estimates.

Of Note in Housing…

CoreLogic’s Home Equity Report for the first quarter of 2020 shows that homeowners gained 6.5% in equity the past year. What’s more, the average homeowner has gained $106,000 since the first quarter of 2010. Negative equity has also significantly improved, down from 26% in 2010 to 3% in 2020.

In addition, a HousingWire article showed that 26.1% of renters surveyed with leases expiring in the next six months said they are likely to renew their lease, 35.9% are likely not to renew and 38% are somewhat likely or not sure at the moment.

Renters who pay more than $1,750 a month are the least likely to renew at just 18.7%, while 41.6% said they are not likely to renew. This data speaks to the shift from city life to the suburbs that people are considering, and it may continue to fuel demand for housing.

Family Hack of the Week

This year, Father’s Day is June 21. While the types of celebrations that are possible may vary widely around the country with differing stages of stay at home orders in place, these ideas from Good Housekeeping can make for a perfect celebration anywhere.

Start the day off right by cooking a hearty brunch for dad with all his favorites. And you can never go wrong with baking your dad’s favorite dessert for later in the day.

Plan a family game or movie night where everyone steps away from their phones and screens and enjoys fun time together. Drive-in movies have also become popular in many cities and can provide a fun and safe night out.

If your dad loves to learn new things, consider signing him up for an online class. Many universities offer free or low-cost classes or consider sites like MasterClass that provide classes from some of the most successful people in sports, writing, the arts and more.

For the travel-loving dad, consider a day of virtual “travel” via free online tours of museums and other famous sites all around the world.

Lastly, if your dad is missing his favorite sports team, many past games are available to stream. Create a marathon of winning games from his favorite teams that he can enjoy.

What to Look for This Week

This week brings a look at data across a wide spectrum of the economy. In the housing sector, the National Association of Home Builders Housing Market Index for June releases Tuesday, followed by May’s Housing Starts and Building Permits Wednesday. Tuesday also brings Retail Sales data for May. We’ll get an update on manufacturing in the New York region with the Empire State Index for June on Monday, followed by the Philadelphia Fed Index on Thursday. Last, but certainly not least, the latest weekly Initial Jobless Claims remains critical to monitor when it releases as usual on Thursday.

Technical Picture

The Fed’s ongoing purchases of Mortgage Backed Securities continue to stabilize the markets and, as noted above, they are planning to continue these purchases at current levels. Mortgage Bonds were able to shift direction and rebound last week, breaking above both their 25-day and 50-day Moving Averages. They ended the week trading just support at the 50-day Moving Average.

Mortgage Market Update – 4/13/2020

In the very near term we will continue to see inconsistency in mortgage rate behavior—at times on a moment-by-moment basis. Some of the big lenders have pulled back altogether by eliminating certain products from their portfolio (i.e., Wells Fargo is no longer offering cash out refinances on jumbo loans and many banks are setting the minimum FICO score at 680 or higher, ours included). Those moves are significant and tell a much bigger story about what is happening in the mortgage market right now.

Traditionally, when we see stocks suffer, bonds rally and that tends to lead to lower mortgage rates. That’s not happening now, in part, because of the concerns over the solvency of the mortgage loan servicing industry. If you haven’t read this article, I re-published from the one of the mortgage market gurus, Barry Habib and his son, Dan, I would strongly recommend that you do. They break down the market break-down in a way that makes what is happening easy to understand.

To be sure, things are a long way from normal, but at least lenders moved rates in logical directions based on market movement. Our bank is among those making the right moves for not only their business but also the industry and ultimately, you.

I want to share a few things with you that I picked up from some of my colleagues and the good folks over at Mortgage News Daily. Please consider these as you work to navigate the mortgage market as a homeowner or potential buyer (and feel free to share this with anyone you think my benefit or be interested in this content):

  • Mortgage rates are not tied to the Federal Funds Rates and when the Fed moved the rate to 0%, that doesn’t mean you can get a 0% mortgage. The two are not tied together. In some instances, mortgage rates have actually gone up when the Fed lowered their rate.
  • If you have a home equity line of credit (HELOC) or an adjustable rate mortgage (ARM), your interest rate could be impacted by the Fed lowering their rate to 0% but there are factors that will limit how much. These loans are mostly tied to the Prime Rate, which as of today is 3.25% Check your statements to see if there has been any change to your rate.
  • The low rates you see on TV or the internet are typically for one extremely specific situation—usually those with low loan amounts, high credit scores and a high percentage of equity in the property. And many times these low rates are quoted with at least 0.50 points, meaning you pay for the rate being quoted.
  • If you have any risk factors in your credit profile such as; lower FICO score (above 740 is preferred), higher loan-to-value ratio (anything above 60%), loan values above $510,400 or $765,500 in “high-cost” areas (like the SF Bay Area), your rates will be higher than what you see being quoted as the lowest rates on the TV or web. The banks use these and many other variables to develop a risk profile for you and rates are based on this risk.
  • If your specific situation is far outside of the rock-bottom rate cookie-cutter scenarios that the spaceship-themed and single-word lenders flash about in glitzy advertising, there may not be a loan program for you—today. This could change as the market settles down but that may be months away. Patience will be key because as I said before, I and many others in the business believe that rates will remain historically low for a while.
  • Some lenders, including my bank, will not allow you to lock a loan until you’ve reached a certain milestone in the loan process. This is being done to make the costs associated with the rates being offered more predictable for the bank because of complex finance arrangements called “hedges” that provide insurance to the bank for the rates that you’ve locked. Barry Habib did a great job of breaking this down. I encourage you to read that article.
  • A word on forbearance. Many see this as a “free ride”. Like many things in life, very few are actually “free”. Forbearance for those that are struggling financially due to job cuts, furloughs or reduced hours can be a lifesaver. Often though, forbearance comes with significant strings, varies from lender to lender and can cause more damage than good. Please DO NOT get a new mortgage with the intention of immediately seeking forbearance. This is the mortgage market’s biggest fear and nothing will contribute more to the crippling it. Moreover, you may be doing considerable damage to your credit and creating unnecessary roadblocks to future refinances or home purchases for yourself.
  • If you need forbearance (and you just might), I strongly advise you to speak with the bank or business to whom you make your monthly payments, in order to fully understand your options. Knowing how you will get yourself out of forbearance BEFORE you go in, may save you thousands of dollars. Making an informed decision with a full understanding of the details of your forbearance is the best way to move forward. Again, if you need it, seek it but do so cautiously and with complete information.

Family Hack of the Week (Courtesy of MBS Highway)

With many schools now officially closed for the remainder of the spring and stay at home orders in effect throughout much of the country, it is understandable if kids are feeling a bit antsy. If you’re looking for some fun, online activities to do with your kids, here are two free resources for cooking together.

Every weekday at 1 pm ET, Delish’s editorial director Joanna Saltz and her kids will be cooking together on Instagram live. And no need to worry if you can’t join them live, as the videos will be saved on their Instagram feed for 24 hours. Visit @delish on Instagram to learn more, and this article to find out what they’ll be cooking each week.  

https://www.delish.com/food-news/g31786555/delish-instagram-live-kids-cooking-class/

Jamie Oliver’s young son, Buddy, also has a series of cooking videos on Jamie’s YouTube channel with some great options for cooking with kids. Check out the playlist here

https://www.youtube.com/playlist?list=PLcpoB2VESJme7lSxXEcXyVtFPsMI78lcL. And for more “Get Kids Cooking” options, visit https://www.jamieoliver.com/features/category/get-kids-cooking/.

Special Report on Mortgage Rates from Barry Habib

Barry Habib, one of the most respected figures in the mortgage industry has been on a mad campaign to get through to the Fed regarding it’s unrestrained purchases of Mortgage Backed Securities. Late last week, he and his son, Dan, put out this piece on where the mortgage market is today. If you have not read it, I would highly recommend that you do. You will be smarter for it. Promise.

So, did the Fed listen? Here’s what they bought last week:

3/23/2020 – $30,169,000,000
3/24/2020 – $36,416,000,000
3/25/2020 – $39,876,000,000
3/26/2020 – $35,804,000,000
3/27/2020 – $41,042,000,000

It appears as if they did head the warning that purchases of MBS would exacerbate the situation, as they only purchased $21 Billion today (3/30/2020) instead of the planned $40 Billion. It would better if they stopped buying altogether for a while so that we can clear the volume already in the system. It’s a delicately balanced system and when you go tinkering with one part of it, other parts tend to get a little wonky.

As counter intuitive as it may seem, we need mortgage backed securities to get worse for a while so that the whole system gets better. If not and the Fed keeps buying in an unrestrained manner, we may be looking at mortgage banking bailout to save some of the key players.

Take a look at this video from Barry Habib. He does an amazing job of explaining what’s happened over the last few weeks.

CNBC’s Steve Liesman Discusses the Fed’s Purchases on Mortgage Rates.

Liesman echoes much of what Barry says above in this video.

Can’t I Just Skip My Mortgage Payment If I Fall On Hard Times?

I can’t tell you how many times over the last few days that I’ve seen people in real estate posting that you can skip your mortgage payment due to hardship. Please STOP saying this because it is seriously irresponsible. Take a look at this post below for some basics. Above all, if you or your clients find yourself or themselves in a spot where you can’t make your payment, please, please, please call the number on your mortgage statement and discuss it with them FIRST! You may have options but if you act without facts, you will be doing more damage than good.

What You Need To Know About Forbearance

Eventually, You Will Have To Pay!

IF YOU ARE AT ALL INTERESTED IN MORTGAGE RATES, PLEASE READ THIS:

Photo by Markus Spiske on Unsplash

Mortgage Crisis and Fed Unintended Consequences

March 26, 2020

Credit: Barry and Dan Habib – MBS Highway

The Coronavirus Meltdown

The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison.  The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.

Here’s How The Mortgage Market Works

Let’s begin with the mortgage process.  A borrower goes to a Mortgage Originator to obtain a mortgage.  Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan.  The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan.  This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc.  While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA).  The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker.  That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public.  This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts. 

The Servicer’s role is very critical.  In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front.  The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year.  Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years.  The longer that loan remains on the books, the more money that Servicer makes.  In many cases, the Servicer might want to use leverage to increase their level of income.  Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.

Servicer Dilemma

As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly.  This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period.  This servicing runoff creates losses for that Mortgage Lender who is servicing the loan.  The more loans in a Mortgage Lender’s portfolio, the greater the loss.  Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio.  But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates.  This gives them additional income to help overcome the losses in their servicing portfolio.

But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses.  This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner.  And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower.  Under normal circumstances, the Servicer has plenty of cushion to account for this.  But an extreme level of delinquency puts the Servicer in an unmanageable position.

“I’m From The Government And I’m Here To Help”

In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals.  This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it.  Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor.  However, it is unclear as to how long it will take for Servicers to access this facility. 

But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor.  This means that the Servicer must hold onto the asset itself, which ties up their available credit.  And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant.  This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.

Mark To Market

This week – Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%.  This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing.  Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth.  Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend. 

Unintended Consequences

The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk.  Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender.  Mortgage rates are based on the trading of Mortgage Backed Securities (MBS).  As Mortgage Backed Securities rise in price, interest rates improve and move lower.  A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes.  The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes. 

If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised.  And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities.  Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.

Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline.  On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits.  However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing.  This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.

But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly.  This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses.  These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future.  But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call.  The recent amount that these Lenders are paying in margin calls are staggering.  They run in the tens of millions of Dollars.  All this on top of the aforementioned stresses that Lenders are having to endure.  So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite.  The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up.  And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.

Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero.  Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate.  This dramatically increased hedging losses from loans that didn’t end up closing.

Even Stephen King Could Not Have Scripted This

It’s been said that the Stock market will do the most damage, to the most people, at the worst time.  And the current mortgage market is experiencing the most perfect storm.  Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.

Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed.  And those loans that are about to close require that employment be verified.  As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.

What Needs To Be Done Now

Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times.  But the Fed and our Government needs to stop making it more difficult.  The Fed must temporarily slow MBS purchases to allow pipelines to clear.  Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable.  And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.

We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

Credit: Barry and Dan Habib – MBS Highway

NMLS# 1466899

IF YOU ARE AT ALL INTERESTED IN MORTGAGE RATES, PLEASE READ THIS:

Mortgage Crisis and Fed Unintended Consequences

March 26, 2020

The Coronavirus Meltdown

The current Coronavirus crisis is having a critical impact on the Mortgage Industry, which could potentially make the 2008 financial crisis pale in comparison.  The pressing issue centers around capital that’s required by Mortgage Lenders to be able to function and meet covenants that are required for them to continue to lend.

Here’s How The Mortgage Market Works

Let’s begin with the mortgage process.  A borrower goes to a Mortgage Originator to obtain a mortgage.  Once closed, the loan is handled by a Servicer, which may or may not be the same company that originated the loan.  The borrower submits payments to the Servicer, however, the Servicer does not own the loan, they are simply maintaining the loan.  This means collecting payments and forwarding them to the investor, paying taxes and insurance, answering questions, etc.  While they maintain or “service” the loan, the asset itself is sold to an aggregator or directly to a government agency like Fannie Mae (FNMA), Freddie Mac (FHLMC), or Ginnie Mae (GNMA).  The loan then gets placed inside a large bundle, which is put in the hands of an Investment Banker.  That Investment Banker converts those loans into a Mortgage Backed Security (MBS) that can be sold to the public.  This shows up in different investments like Mutual Funds, Insurance Plans, and Retirement Accounts. 

The Servicer’s role is very critical.  In order to obtain the right to service loans, the Servicer will typically pay 1% of the loan amount up front.  The Servicer then receives a monthly payment or “strip” equal to about 30 basis points (bp) per year.  Because they paid about 1% to obtain the servicing rights and receive roughly 30bp in annual income, the breakeven period is approximately 3 years.  The longer that loan remains on the books, the more money that Servicer makes.  In many cases, the Servicer might want to use leverage to increase their level of income.  Therefore, they may often finance half of the cost of acquiring the loan and pay the rest in cash.

Servicer Dilemma

As you can imagine, when interest rates drop dramatically, there is an increased incentive for many people to refinance their loans more rapidly.  This causes the loans that a Servicer had on their books to pay off sooner…often before that 3-year breakeven period.  This servicing runoff creates losses for that Mortgage Lender who is servicing the loan.  The more loans in a Mortgage Lender’s portfolio, the greater the loss.  Servicing runoff, or even the anticipation of it, can adversely impact the market valuation of a servicing portfolio.  But at the same time, Lenders typically experience an increase in new loan activity because of the decline in interest rates.  This gives them additional income to help overcome the losses in their servicing portfolio.

But the Coronavirus has caused a virtual shutdown of the US economy, which has created an unprecedented amount of job losses.  This adds a new risk to the servicer because borrowers may have difficulty paying their mortgage in a timely manner.  And although the Servicer does not own the asset, they have the responsibility to make the payment to the investor, even if they have not yet received it from the borrower.  Under normal circumstances, the Servicer has plenty of cushion to account for this.  But an extreme level of delinquency puts the Servicer in an unmanageable position.

“I’m From The Government And I’m Here To Help”

In the Government’s effort to help those who have lost their jobs because of the Coronavirus shutdown, they have granted forbearance of mortgage payments for affected individuals.  This presents an enormous obstacle for Servicers who are obligated to forward the mortgage payment to the investor, even though they have not yet received it.  Fortunately, there is a new facility set up to help Mortgage Servicers bridge the gap to the investor.  However, it is unclear as to how long it will take for Servicers to access this facility. 

But what has not been yet contemplated is the fact that a borrower who does not make their very first mortgage payment causes that loan to be ineligible to be sold to an investor.  This means that the Servicer must hold onto the asset itself, which ties up their available credit.  And with so many new loans being originated of late, the amount of transactions that will not qualify for sale is significant.  This restricts the Lender’s ability to clear their pipeline and get reimbursed with cash so they can now fund new transactions.

Mark To Market

This week – Due to accelerated prepayments and the uncertainty of repayment, the value of servicing was slashed in half from 1% to 0.5%.  This drastic decrease in value prompted margin calls for the many Servicers who financed their acquisition of servicing.  Additionally, the decreased value of a Lender’s servicing portfolio reduces the Lender’s overall net worth.  Since the amount a lender can lend is based on a multiple of their net worth, the decrease in value of their servicing portfolio asset, along with the cash paid for margin calls, reduces their capacity to lend. 

Unintended Consequences

The Fed’s desire to bring mortgage rates down isn’t just damaging servicing portfolios because of prepayments, it’s also wreaking chaos in Lenders’ ability to hedge their risk.  Let’s look at what happens when a borrower locks in their mortgage rate with a Mortgage Lender.  Mortgage rates are based on the trading of Mortgage Backed Securities (MBS).  As Mortgage Backed Securities rise in price, interest rates improve and move lower.  A locked rate on a mortgage is nothing more than a Lender promising to hold an interest rate, for a period of time, or until the transaction closes.  The Lender is at risk for any MBS price changes in the marketplace between the time they agreed to grant the lock and the time that the loan closes. 

If rates were to rise because MBS prices declined, the Lender would be obligated to buy down the borrower’s mortgage rate to the level they were promised.  And since the Lender doesn’t want to be in a position of gambling, they hedge their locked loans by shorting Mortgage Backed Securities.  Therefore, should MBS drop in price, causing rates to rise, the Lender’s cost to buy down the borrower’s rate is offset by the Lender’s gains of their short positions in MBS.

Now think about what happens when MBS prices rise or improve, causing mortgage rates to decline.  On paper the Lender should be able to close the mortgage loan at a better price than promised to the borrower, giving the Lender additional profits.  However, the Lender’s losses on their short position negate any additional profits from the improvement in MBS pricing.  This hedging system works well to deliver the borrower what was promised, while removing market risk from the Lender.

But in an effort to reduce mortgage rates, the Fed has been purchasing an incredible amount of Mortgage Backed Securities, causing their price to rise dramatically and swiftly.  This, in turn, causes the Lenders’ hedged short positions of MBS to show huge losses.  These losses appear to be offset on paper by the potential market gains on the loans that the lender hopes to close in the future.  But the Broker Dealer will not wait on the possibility of future loans closing and demands an immediate margin call.  The recent amount that these Lenders are paying in margin calls are staggering.  They run in the tens of millions of Dollars.  All this on top of the aforementioned stresses that Lenders are having to endure.  So, while the Fed believes they are stimulating lending, their actions are resulting in the exact opposite.  The market for Government Loans, Jumbo Loans, and loans that don’t fit ideal parameters, have all but dried up.  And many Lenders have no choice but to slow their intake of transactions by throttling mortgage rates higher and by reducing the term that they are willing to guarantee a rate lock.

Furthering the Fed’s unintended consequences was the announcement to cut interest rates on the Fed Funds Rate by 1% to virtually zero.  Because the Fed’s communication failed to educate the general public that the Fed Funds Rate is very different than mortgage rates, it prompted borrowers in process to break their locks and try to jump ship to a lower rate.  This dramatically increased hedging losses from loans that didn’t end up closing.

Even Stephen King Could Not Have Scripted This

It’s been said that the Stock market will do the most damage, to the most people, at the worst time.  And the current mortgage market is experiencing the most perfect storm.  Just when volume levels were at the highest in history, servicing runoff at its peak, and pipelines hedged more than ever, the Coronavirus arrived.

Lenders need to clear their pipelines, but social distancing is making it more difficult for transactions to be processed.  And those loans that are about to close require that employment be verified.  As you can imagine, with millions of individuals losing their jobs, those mortgages are unable to fund, leaving lenders with more hedging losses and no income to offset it.

What Needs To Be Done Now

Fortunately, there are many smart people in the Mortgage Industry who are doing everything they can to navigate through these perilous times.  But the Fed and our Government needs to stop making it more difficult.  The Fed must temporarily slow MBS purchases to allow pipelines to clear.  Lawmakers need to allow for first payment defaults, due to forbearance, to be saleable.  And finally, the Fed must more clearly communicate that Mortgage Rates and the Fed Funds Rate are not the same.

We have faith that the effects of the Coronavirus will subside and that things will become more normalized in the upcoming months.

NMLS# 1466899

650-207-4364 cell