Mortgage Rates Edging Higher So Far This Week Jun 16 2020 By Matthew Graham

Mortgage rates moved higher for the 3rd straight business day.  That said, last Friday is better described as being a “2nd consecutive day of all-time lows.”  Even yesterday, the average lender was able to quote rates under 3% for top tier conventional 30yr fixed scenarios.  Today’s upward pressure was a bit more noticeable as markets cheered a Retail Sales report that was much stronger than expected.  In general, stronger data is good for stocks and bad for bonds (and when bonds are weaker, rates move higher).

There’s a particular concern to be aware of in the world of mortgage rates–especially for those who are counting on additional improvements.  Simply put, the underlying bond market hasn’t really been making  a case for additional improvement.  If anything, the case is for gradually higher rates.  It’s only because mortgage rates were late to the low rate party (relative to Treasuries) that they’ve been able to hit all-time lows so recently.  Treasuries, meanwhile, are already sounding the alarm by trending slightly higher in yield for at least 6 weeks.

None of the above means that rates can’t or won’t hit another all-time low in the near or distant future–just that the prevailing trends make it decreasingly likely for the time being.  A significant deterioration in economic data or the coronavirus outlook could change things. Conversely a significant improvement in either of those factors could serve to accelerate a rising rate trend.

Mortgage Rates Slightly Higher, But Still Near All-Time Lows Jun 15 2020 BY: MATTHEW GRAHAM

Mortgage rates were slightly higher today for the average lender.  Additionally, some lenders bumped rates a bit in the middle of the day in response to weakness in the bond market.  That weakness is increasingly tied to broad movement playing out across markets as they respond to coronavirus implications. 

With several states seeing rising numbers of cases, stocks and rates (via the bond market) moved lower in unison in pre-market trading.  This is what allowed mortgage rates to begin the day relatively close to last week’s all-time lows.  As the day progressed, thetrend shifted toward modestly higher rates and higher stock prices (i.e. risk tolerance improved after investors began the day cautiously).

The Federal Reserve announced a start to its corporate bond buying program.  While this has no direct bearing on mortgage bonds or mortgage rates, it fueled the same trading sentiment that had investors moving out of bonds and into stocks as risk tolerance improved.

Although we can see a clear connection between coronavirus news (and well as Fed policy changes) and logical outcomes in the market, we can’t know how that news will evolve in the near term.  In short, there’s no way to predict the future for rates, unfortunately!  What we CAN say is that when rates have poked around all-time lows for a few days, they haven’t tended to improve upon those levels significantly without moving in the other direction for at least a week or two.  To be sure, the average lender doesn’t have a ton of incentive to drop rates very quickly given that top tier scenarios are increasingly seeing rates under 3%

Just When You Thought We Were Done Talking About All-Time Lows Jun 12 2020


Mortgage rates plunged well into new all-time lows this week, which is a striking turn of events given the vastlydifferent outlook at the end of last week.

Specifically, a series of strong economic reports led to significant losses in the bond market (bond losses = higher rates) and gains in stocks. The unspoken warning was that rates had been too complacent in the face of a potential economic rebound.  

Now this week, markets are singing a different tune. Recently strong economic data was great to see, but with coronavirus numbers spiking in several states, the sustainability of the economic improvement is in question.

Sentiment shifted on both sides of the market with stocks giving signals that their recent gains may have been a bit too euphoric. The result was the biggest sell-off since March. 

Conversely, the bond market had its best week since March, and again, when the bond market is doing well, rates are falling.  The 10yr Treasury yield moved all the way back into the range it had so abruptly departed last week.

The news was even better for mortgage rates, which hit new all-time lows by Thursday afternoon.  Considering the chart above shows gradual upward movement in 10yr Treasury yields over the past few months, how is it that mortgage rates continue hitting record lows?

Simply put, mortgages never improved as quickly as Treasuries on the way down.  So even if Treasury yields remain flat to slightly higher, mortgage rates have some room left to close some of this gap.

The mortgage market received another vote of confidence this week from the Fed.  Although the Fed was already buying huge amounts of Treasuries and mortgage-backed bonds, they were doing so on an “emergency” basis.  That meant the amount had been changing every week (and generally declining).  The fewer bonds purchased by the Fed, the worse it could be for rates.

With this week’s announcement, the Fed officially committed to buy at least as much as they have been buying, thus providing certainty about demand in the bond market.  This move wasn’t necessarily unexpected, but the confirmation was worth something–especially for the mortgage bond market which tends to play second fiddle to Treasuries as far as the Fed is concerned. 

In separate news, the Fed also released a quarterly update to its economic forecasts.  They now see the Fed Funds Rate remaining at 0% through 2022.  At first glance, some mortgage shoppers might think this has a bearing on mortgage rates, but it is almost completely unrelated.

The Fed Funds Rate applies to overnight loans between large financial institutions.  Mortgage rates are based on mortgage-backed bonds which tend to have life spans measured in years instead of hours.  The low Fed Funds Rate will keep the shortest-term rates near 0%, but longer-term rates will continue to fluctuate based on the economic outlook, inflation, and the supply/demand equation (which is greatly benefited by the Fed’s bond buying commitment).  

As for the road ahead, everyone would like to know if we’ll continue deeper into all-time low mortgage rates.  After all, the answer to that question looked very different last week.  

Notably, the x-factor was a shift in the coronavirus narrative.  As states gradually reopen, it’s safe to assume that markets will continue to take major cues from covid-19 numbers and the resulting impact on the economy.  The better it goes, the more upward pressure we might see on rates.  The worse it goes, the greater the possibility of a return to all-time lows.

There is an important caveat here.  The benefit of waiting to lock a rate for those in a position to do so is arguably too small to take the risk.  Each time we hit all-time lows, the incremental improvements get smaller and smaller, and the risks increase for a bigger-picture bounce.

Market Reality Check


June 12, 2020 — Aside from actual figures, facts and data, optimism and pessimism, ebullience and fear are key drivers of how investors place their bets. Of course, in a time of programmatic trading, a cynic might note that its how machines are placing their bets, even though they should have no emotional component to their decision-making.

In recent weeks, stock values have reflected views from both sides of the camp; first, as the coronavirus pandemic took hold, the view was that the end of the apocalypse was nigh, and selling everything and stuffing dollars in mattresses was all the rage. A few short weeks later (and after unprecedented Fed intervention and trillions of fiscal support from the federal government) markets seemed to be acting as though there was no health or economic calamity to be seen.

A dose of reality hit the market this week, as rising concerns about new incidence of infection in places where social restrictions has been eased began to seep in, exacerbated perhaps by widespread protests in the wake of the killing of George Floyd, and with renewed concern about the prospects for another widespread outbreak in the coming fall. To this resurgent worry came a fairly dour outlook from the Federal Reserve, who completed a two-day meeting this week.

Without any reference to some of the “green shoots” that investors have been focused on (and are a contributing factor in the stock rally in recent weeks), in the statement that closed the meeting the Fed said that “The ongoing public health crisis will weigh heavily on economic activity, employment, and inflation in the near term, and poses considerable risks to the economic outlook over the medium term.” 

Unlike the March meeting, where the practice was skipped, this meeting featured a new release of the Summary of Economic Projections from Fed members. Before the outbreak there was discussion that this means of displaying member thinking about the prospects for growth, unemployment, inflation and the likely path of monetary policy over time would be discontinued, as it had arguably outlived its usefulness as a communication tool. It appears that with the pandemic distorting markets gain that the release may continue to have value in helping convey the central bank’s collective thinking and its implication on future policy moves.

The SEP revealed a set of member thoughts that, at a minimum, could be described as concerned. As to be expected, the near-term outlook for this year was quite dark, with a projected 6.5% decline in GDP growth, an unemployment rate expected to average 9.3% and inflation retreating smartly. With this set of beliefs, the federal funds rate would unsurprisingly remain pegged near zero.

However, in the member’s views, the future appeared quite dim as well, as least from their expectation to continue and emergency-level interest rate stance for at least two and a half more years, if not beyond. This view was held despite expecting a relatively robust 5% increase in GDP in 2021, and another 3.5% gain in 20202. Over that time, the median rate for unemployment next year was expected to be a still-high 6.5% and 5.5% in 2022, with no long-run expectation to return to the 50-year-best 3.5% the U.S. enjoyed as recently as February. Inflation would of course be this year but expected to close in on the Fed’s preferred 2 percent rate for core PCE over the next two years. As such, even as overall conditions were expected to improve measurably from today’s terrible levels, Fed members didn’t feel confident enough in their outlooks to expect to be lifting interest rates at all. Of the three-year period comprising 51 separate data points, there were only two — in 2022 — that expected any change to short-term rates at all.

From this, the Fed does not appear to be expecting any kind of “V” shaped recovery. In a comment in his post-meeting press conference, Fed Chair Jay Powell was clear: “We have to be honest that it’s a long road.” 

Adding a dim Fed outlook to a series of increasing worries took the wind out of the stock market, which dropped a bit on Wednesday after the meeting closed but fell precipitously on Thursday before finding its feet again on Friday. As far as bond yields were concerned, the more pessimistic outlook chopped off the spike in yields that had accompanied some better news last week, including a surprisingly-strong hiring report and diminishing unemployment claims. Already trending down, the influential yield for the 10-year U.S. Treasury shed another 10 basis points or so, closing the week nearly a 20 basis points below where it began. The early-week drift down helped curtail our expected increase in mortgage rates for the week, and the late-week decline should help set the stage for next week’s move.

Aside from the Fed meeting, which was the big market-moving event of the week, there was a little bit of economic data for investors to consider, including several pieces of inflation data. The twin reports covering Producer and Consumer Price Indexes for May were released, and although inflation was soft for the month, it certainly still exists. The overall headline figure for Producer prices rose by 0.4%, breaking a three-month string of declines. Propping up costs were often transient items such as food and energy, and so the core measure which excludes them was unchanged for the month. Over the last year, overall producer prices are declining at a 0.8% clip, while “core” PPI managed to hold onto a meager 0.2% increase.

As measured by the CPI, consumer prices told much the same tale. Helped by a fifth consecutive monthly decline in energy costs (likely ending soon), the overall Consumer Price Index declined by 0.1%, it’s third straight fall. That modest fall belies surging prices for food, which popped 1.5% in April (an 18% annual clip) and rose another 0.7% in May. Supply-chain issues for foods still persist and sales are few and far between at grocers at the moment, but the situation is likely to continue to gradually improve, and as it does, price pressures may ease a bit. That said, upstream costs for personal safety and such at manufacturing plants and in factories and fields don’t just disappear, and these will likely keep upward pressure on prices for some time. That’s the bad news; the good news is that CPI-measured inflation is just 0.2% over the last year, and prices as measured at the “core” declined by 0.1% in May and are in a cooling pattern too, running at just an 1.2% annual rate in May (down from as high as 2.4% as recently as February). 

Prices of imported goods broke a three-month string of declines in May, rising a full 1%. That bump came due to a resurgence in oil prices, which not only recovered from a mid-April spike to below zero but have climbed back to about pre-pandemic levels. Outside of that influence, import costs rose a meager 0.1% for the month. The aggregate cost of goods leaving the U.S. for other shores also kicked higher, rising 0.5% and also ending a trifecta of declines. Even with a the upturn, there’s no inflation to be found in either inbound or outbound goods, though, as import prices in May were some 6% lower than at this time a year ago, a decline matched by export costs, too.

Inventory levels at the nation’s wholesaling firms expanded by 0.3% in April. Even with upstream production and delivery issues that were rampant during the month, new goods continued to trickle in. However, with retail establishments everywhere shut down by choice or government mandate, orders for goods cratered for a second month, dropping 16.9% overall. That slump in demand saw the ratio of inventory on hand relative to sales balloon to 1.65 months, the highest-ever reading in the series. With lots of goods available and slack demand from retailers continuing, this suggests that new orders to manufacturers will likely to be slow to improve, and that in turn will contribute to what is expected to be an already slow recovery.

The news on the labor front continues its very gradual improvement. In the week ending June 6, 1.542 million new claims for unemployment assistance were filed across the U.S., the lowest number since mid-March and less than 25% of the peak. That’s good news, but with the slow rate of decline it may be a month or more before we get back to a level that matches the pre-pandemic weekly record in the mid-600,000 range. Declining initial claims means that fewer folks are still losing jobs; as well, some of the current elevation may be from backlogs still being worked through for folks who lost employment months ago. Encouraging, too, is the slow fall of folks receiving continuing support, a sign that at least some formerly laid-off are returning to work.

While people looking to buy houses have been in the market for much of the spring despite challenges, homeowners really haven’t much paid attention to opportunities to refinance. That was, at least until the week ending June 5; overall applications for new mortgages rose 9.3%, according to the Mortgage Bankers Association, where a two-month string of rising applications for purchase-money mortgages (+5.3% in the latest week) was finally joined by an pick up in applications for refinancing, which posted an 11.4% jump. Mortgage rates haven’t really moved around much of late, and certainly underwriting standards haven’t loosened appreciably, but perhaps the news that rates were again holding near all-time lows finally got some notice by homeowners.

Consumer moods continued a modest rebound in early June. According to the University of Michigan survey, Consumer Sentiment gained 6.6 points from its final May value, landing at 78.9 in the preliminary review. Current conditions were gauged a bit more favorably and rose by 5.5 points to 87.8, while expectations for the future improved a bit more with a 7.2-point rise leaving the outlook component at 73.1 for the interim period. All measures were near record highs just a few months back, and we’ll need months and months of steady improvement to get us back there. Still, it’s a start. 

While there’s no scheduled market-moving event for next week, we will get some clues as to how manufacturing is doing in a couple regions of the country, and will also get some sense of what’s happening in the new home market. We’ll also see if consumer spent some of their stimulus funds in May as things began re-opening; it would be hard for retail sales not to rebound at least a little after April’s unprecedented decline. We’ll also get a look at a couple of other items, too, and it would be hard not to consider any improvement anywhere to be relative “green shoots”, but even those only start to fill in the economic hole caused by the pandemic. 

With investors a bit more chastened this week, and influential yields re-settling, mortgage rates are poised to settle back, too. We think that by the time next Thursday morning rolls around, the average offered rate for a conforming 30-year FRM as reported by Freddie Mac will retreat by six basis points, or perhaps even a tick more. Anything more than six would set a new record low. Refinance, anyone?

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

by Tyler DurdenSat, 05/23/2020

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

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

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

Hertz Files for Bankruptcy

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Strange Spring Slips Into Summer


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

by Tyler DurdenThu, 05/21/2020

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

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

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

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

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

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

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

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

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

Jessica MentonUSA TODAY

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

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

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

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

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

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

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

House keys on top of mortgage loan documents.

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

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

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

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

Existing Home Sales Continue Collapse To 9-Year Lows

by Tyler DurdenThu, 05/21/2020

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

Source: Bloomberg

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

Source: Bloomberg

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

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

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

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

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