The
American Bankers Association is holding its annual Real Estate Lending Conference
on April 8-10 in Baltimore, MD. There are dual tracks for CRE and residential lending,
with multiple sessions addressing business challenges and building market share
and profitability.
Freddie
Mac produced
a column from one of its economists where he married Census data showing
homeownership rates by profession with BLS statistics projecting which profession will see the most
growth. The fastest growing jobs, by and large, have subpar
homeownership rates.
And
a recent article published by Urban
Institute draws from Freddie Mac's newest data that identifies two
indicators of credit risk: probability of default and loss severity given
default. Freddie's new analysis calculates loan severity by various credit
event types and breaks down loss severity into numerous categories. According
to Freddie's analysis, of the loans originated between 1999 and 2004, 2.3%
experienced a credit event whereas in 2007, 12.6% of originated loans
experienced a credit event. In 1999 to 2013, 22% of loans that experienced a
credit event have been rehabilitated, with 11% of these loans having been
modified and are now current. The remaining 78% of these loans are likely to
experience a loss, and of these loans 54% have already been liquidated or have
been foreclosed.
Loans
liquidated from 1999 to 2004 experienced a loss of 23.2 cents for every dollar
remaining at default, compared to a loss of 36-40 cents for every dollar
remaining at default for loans liquidated between 2005 to 2008. Loans with
higher LTVs have a greater chance of liquidating, with 63% of loans with an LTV
of 60 or under are expected to liquidate compared to 81% of loans with LTVs
over 80. Ironically, loss severity for loans with LTVs over 80 is much lower
than for loans with LTVs between 60 and 80; because loans with LTVs over 80
require MI. Loans also originated between 1999 and 2004 experienced greater
home price appreciation and loans with LTVs below 60 had more equity leading to
lower loss severities among these loans. The smallest loan amounts also had
the highest severity. For example, from 1999 to 2004, loans with a balance
of $60,000 or less had a loss severity of 47%, compared to 31.3% for loans with
a balance of $60,000-100,000 and an 18% severity for loans greater than
$100,000.
A
New York Fed report tells
us that mortgage balances, the largest component of household debt, increased
by 0.5%. Mortgage balances shown on consumer credit reports stand at $8.17
trillion, up by $39 billion from their level in the third quarter. Balances on
home equity lines of credit (HELOC) dropped by $2 billion (0.4%) in the third
quarter and now stand at $510 billion. Non-housing debt balances increased by
2.6%. What caught the media's attention, however, were the delinquency rates
(loans that are 90 days or more past due). Overall they were unchanged at 4.3%.
Delinquent mortgage and credit card debt fell, but auto loan delinquencies rose
to 3.5% from 3.1%. The biggest trouble spot remained student loans, which saw
delinquencies reach an alarming 11.3%, up from 11.1% in the third quarter. By
contrast, only 3.1% of mortgage loans were delinquent, though that level is far
higher than before the Great Recession, when mortgage delinquencies were
consistently around 1% to 1.5%.
Once
again the topic of Millennials and their debt is in the news. Student loans are
not dischargeable in bankruptcy, and as a result linger on borrowers' credit
reports longer, creating increasing pools of delinquent debt. But the New York
Fed said the survey also reflected "high inflows" of new delinquency.
Student debt totals rose $31 billion in the quarter to nearly $1.2 trillion.
Sure
enough, Millennials have the lowest net worth of all generations,
significantly lagging behind all other age cohorts, with a median net worth of
$10,400 compared to the second lowest median net worth of $46,700 for 35-44
years old. Those aged between 65-74 years old had the largest median net worth
of $232,100. With low employment opportunities and little room for advancements
in income, Millennials' net worth is near historic lows and has not recovered
since the recession. Likewise, assets have also decreased at a faster rate,
resulting in the overall decline in net worth. Since 2010, the median amount of
debt among Millennials has reduced to $31,100 and the number of Millennials
with mortgage related debt has also declined, which has been evident during the
housing bust. This may be due to limited access to credit and other debt
obligations taking the place of mortgage debt. Installment debt is highest
among Millennials, partly due to student loans. The median value of student
debt for Millennials is $17,200, with the amount of young adults with this type
of debt increasing to 41.7%. Car loans are also included in installment debt,
as 35.3% of Millennials have monthly car payments, whereas the prevalence of
credit card debt has fallen among Millennials. Overall, Millennials'
liabilities have declined since the recession, but so has their net worth.
Once
again our bond (and stock) markets are being determined by what happens
overseas. Remember that the U.S. economy is doing pretty well, and would
suggest higher rates are on the way. But yesterday's bond selloff was
attributed to market speculation that Greece may request a 6-month extension to
its current loan agreement which could ease tensions a bit in the short term.
The Empire Manufacturing Index fell in February and came in slightly light -
probably due to weather. But the NAHB Housing Market Index fell to 55 in
February from 57 in January - mostly due to a fall in the Midwest. By the time
the dust settled Tuesday the 10-yr T-note was worse over .75 in price, closing
at 2.14%, and Agency MBS prices worsened over .5
This
morning we've had the MBA's application numbers (a drop of over 13% with refis
down 16% and purchases down 7%). We've also had Housing Starts and Building
Permits (-2% and -.7% respectively) along with the Producer Price Index - PPI -
(-.8%), and will also see the Industrial Production and Capacity Utilization
twins. Later is the U.S. Fed releasing the Minutes from Jan. 27-28 FOMC
Meeting. After the early news the yield on the 10-yr, which closed Tuesday
at 2.14%, is down to 2.12% and agency MBS prices are better about .125.
Executive
Rate Market Report:
January housing starts declined 2.0%, slightly weaker than -1.7%
expected; the number of units on an annualized basis 1065K. Jan building permits
declined 0.7% against estimates of an increase of 3.6%, to 1053K. Dec starts
1089K, Dec permits 1032K. Construction of single-family homes dropped 6.7% to a
678,000 rate in January from 727,000 the previous month that was the strongest
since March 2008. Work on multi-family homes, such as townhouses and apartment
buildings, climbed 7.5% to an annual rate of 387,000, the most since July.
Yesterday the Feb NAHB housing market index was expected at 58 from 57 in Jan;
the index dropped to 55. Not looking good for single family currently but the
swings from month to month have been quite wide; one month isn’t a trend. Some
thinking the weather didn’t have much impact on the data; we disagree, three
out of the four regions showed declines while the South had gains. The regions
with declines all in cold weather climates that usually see declines in the
winter months. The Feb data a month from now will be more weather affected.
Wholesale prices were expected down 0.5%, as reported down 0.8%. The core (ex food and
energy) expected up 0.1% declined 0.1% (yr/yr +1.6%). Inflation measured by
this PPI data is not a factor for concern even with the Fed poised to begin increasing
interest rates by mid-year, at east that is the consensus now. Prices for
energy goods tumbled 10.3% in January from the prior month, and the gasoline
index sank 24%from December, according to Wednesday’s report. But prices were
broadly weak even outside energy. Food prices fell 1.1% from December, and
prices for services declined 0.2%. Janet Yellen insists the declining prices
due to energy are “transitory effects” but will fade. The Fed has been trying
to talk up inflation now for over three years, to no avail.
Jan industrial production was expected to be up 0.4%, as reported up
0.2%. Factory usage expected at 79.9% was 79.4%; Dec use was revised from 79.7%
to 79.4%. The Institute for Supply Management’s manufacturing index showed
similar results in January. The gauge declined to a one-year low of 53.5 from
December’s 55.1. Manufacturing output, which accounts for about 12% of the
economy, was previously reported as rising 0.3% in December but revised to
unchanged in today’s report.
At 9:30 the DJIA opened -47, NASDAQ -6, S%P -5. The 10 at 9:30 2.12%
down 2 bps, 30 yr MBS price +9 bps from yesterday’s close but down 53 bps from
9:30 yesterday. Yesterday was a huge selling binge in the rate markets as the
Fed approaches its FOMC meeting in March. The current consensus is a rate
increase of 0.25% in June. Feb so far has been good for the DJIA and other
indexes; only two times in history has the DJIA recorded a 1000 point gain in a
month, the DJIA 180 points away. Not as much of a factor though; at these
levels a move like that is a lot less significant than a 1000 point gain at
lower absolute levels as was the case in history. CNBC has to have something to
tout.
This afternoon at 2:00 the minutes from the Jan FOMC will be
released.
Should be a lot to chew on with the rate increase the topic. Prior to the next
FOMC meeting Yellen will testify to Congress next week at both the Senate and
the House. Markets will be looking for clues and focused on Yellen’s present
economic outlook that the fed has consistently over-stated for over 18 months
now.
Markets so far quiet and should remain that way until 2:00 this
afternoon when the FOMC minutes are released. Technicals bearish but approaching near term
oversold on the 10 yr note, possibly a little improvement but will not change
the trend. Greece still there but only getting passing attention now, markets
watching but not reacting to the daily ping pong news of will they or won’t
they escape defaulting. Most current beliefs, at the end of the day Greece will
get a deal worked out. Ukraine, a train wreck but no direct interest in it from
markets.
PRICES @ 10:10 AM
10
yr note: +4/32 (12 bp) 2.13% -1 bp
5
yr note: unch 1.61% unch
2
Yr note: +1/32 (3 bp) 0.61% unch
30
yr bond: +11/32 (34 bp) 2.72% -1 bp
Libor
Rates: 1 mo; 0.173%; 3 mo 0.256%; 6 mo 0.380%; 1 yr 0.672%
30
yr FNMA 3.0 Mar: @9:30 101.06 +9 bp (-53 bp frm 9:30 yesterday)
15
yr FNMA 3.0 Mar: @9:30 104.20 -3 bp (-36 bp frm 9:30 yesterday)
30
yr GNMA 3.0 Mar: @9:30 101.77 -2 bp (-34 bp frm 9:30 yesterday)
Dollar/Yen:
119.29 +0.04 yen
Dollar/Euro:
$1.1362 -$0.0049
Gold:
$1209.00 +$0.40
Crude
Oil: $52.67 -$0.86 (crude consolidating at the $50.00 area)
DJIA:
18,016.05 -39.50
NASDAQ:
4893.16 -6.11
S&P
500: 2094.96 -5.38
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