Let's Talk Loans - Vol. 100
Welcome back to another edition of Let's Talk Loans . The centennial milestone. Thank you for having stuck with me for 100 of these newsletters. I wish I had something more grand in store but the day job has kept me away from the keyboard. There is a lot happening surrounding the market these days and trading activity is up. This newsletter covers talking points surrounding lending products such as: commercial real estate, residential real estate, and consumer lending (auto, unsecured, cards, solar, home improvement). Also, some of the challenges that banks, credit unions and lenders are facing when looking at the balance sheet. I hope you enjoy the banter as it comes from the Raymond James whole loan trading desk.
It's hard to think about the last two weeks and not bring up interest rates. It has been one wild ride. Starting Monday (29th), the 10-year was sitting at 4.17% and the 2-year was 4.39%. Friday happens (2nd), a weak jobs number creates concerns on the health of the economy, and all of sudden we're talking about multiple emergency cuts. Volatility is alive and well, there is a massive bond rally, the stock market tanks, for a moment the yield curve even uninverts, the 2-year plumets to 3.87% and the 10-year to 3.79%. Monday we woke, have another sell off, shook off the hysteria, fight our way back to level and since have seen rates bubble up to 4.0% (10-year) and 4.04% (2-year) as of Thursday night.
Calmer minds seem to have settled in as we get further away from last Friday's shock jobs number but all eyes will be on economic data running up to the September FOMC meeting. A September 25bps rate cut feels certain at this point. I continue to struggle to see a cut in November due to the election, though that's currently priced in and finishes out the year with a third cut for December. This would certainly be welcome news for many of our clients if it proves to be true.
Shifting over to lending. From our friends BankRegData.com and Bill Moreland . Looking at the completion of reporting for Q2 numbers, we see a 1.01% increase in loans and leases. A reminder, this is bank data only. No credit union or non bank activity.
Looking a little deeper as to where this loan growth is occurring. I've written about this previously, but the growth in mortgages is encouraging. This was a product vastly out of favor in 2023 and we've already seen our trading volumes through the first half of the year outpace the entirety of 2023's volumes. Mortgages are often the largest segment of lending for community depositories and when that sector is hurting, so to is the depository bottom line. It's no surprise to readers who follow the desk that HELOCs and 2nd liens continue to have their moment in the sun. Admittedly, a much smaller corner of the lending universe but showing the largest percentage growth. The trade makes sense for the consumer, unlocking trapped home equity, not in the wildly risky way of 2004 but mostly due to loan locked borrowers and a lack of housing supply. I'm not surprised to see C&I and CRE lending down. We continue to hear from customers about increased regulatory pressure and calls to reduce exposure as concerns over performance intensify. Though if speaking to commercial real estate loan officer, there are some very attractive deals to be had - if you have the courage to make them. The absence of competition for CRE deals right now has left a void in the market where smart lenders can pick up attractive spreads on good properties. I expect you see credit card lending start to fall off soon. The charge off numbers are eye popping. Auto lending being down is also a slight surprise to me. I believe this to be a direct relationship to rates, with car prices high, payments are increasingly unaffordable. Eventually that had to take a bite in volumes and we are seeing an uptick in distress on performance (see below). Construction lending being down is no surprise to me. Many community banks have hit concentration limits, they have regulatory pressures, the secondary market for construction lending has been challenging at best and its a relatively small corner of the market.
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Expanding on the commentary above, we get a broader look into lending with the Fed's Household Debt report. For mortgage lenders, carrying forward the good news, at least we did not see origination volumes fall. Steady is the word, with similar origination volumes ($374bn) for the past 4 quarters. HELOC originators continue to reap the benefits of depressed refi volumes with the 9th consecutive quarter of increases.
“The volume of mortgage originations remained low, primarily due to subdued refinancing activity.” said Andrew Haughwout, Director of Household and Public Policy Research at the New York Fed. “Homeowners continued to increase HELOC balances as an alternative way to extract home equity.”
Other corners of consumer lending continue to grow. I struggle to understand why credit is not tightening for credit cards. Cards are now $1.14tn outstanding and grew 1.4% in Q2. The worrisome part to CC's are their performance. 9%+ of credit card balances transitioned into 30 day delinquency. 90+ day DQ is now north of 7%. At some point, you slow this down. Remember, we're still in a relatively strong economy, what happens here when a recession hits us?
Speaking of worsening performance, Autos. A bit of good news, bad news. The good news is the 90+ window is not as elevated as cards. The bad news is that 30+ day transition number is elevated. Cards and autos are leading the way in higher delinquencies. Both HELOCs and mortgages remain at historic lows.
School has officially started back here in Memphis - which means we are soon back to the grind of work travel and conference season. A few that I know are on the schedule and we'd love to meet up with you in person.
Enjoy the last few days of summer! (M24-569760)