Let's Talk Loans - Vol. 13

Fresh off the SFVegas conference at the Aria. Invigorated by 20+ face to face conversation (speed dating), speaking at the RMBS 101 panel and several great meals with clients. If you've signed up for this newsletter, we're here to talk about what's trading and trending in the whole loan market. Very specifically this week, talking points regarding the conference. Please share this with a peer, subscribe or like this weekly newsletter!

For those familiar with the formerly named ABS West, normally held in February, COVID pushed this event to July. July in Vegas is not February in Vegas. Anyone who tells you that 110 degrees "isn't so bad because it's a dry heat" is lying to you. Fortunately, we were kept cool at the Aria, reports of an active shooter event on Saturday night proved to be fake news and I would guess attendance is still off from pre-COVID numbers but much more robust than last year. If anyone recalls the Feb 2020 conference, it was packed and was immediately prior to the onset of the pandemic. No correlation there of course.

First off, the general theme or tone of the conference. My take was "wait and see" and the mood was certainly muted. I expected a bit of doom and gloom due to skyrocketing rates, plunging origination volumes, declining issuance forecasts and widening spreads. While there was an element of that, there was also an eagerness that some of this volatility might provide opportunity for deals with a bit more juice in it. The stimulus provided at the onset of COVID averted (maybe delayed?) a recession and threw us into ultra low rates. Still, there was a hesitancy for clients to restart the market, no one wanted to be the first one to jump back in and get their face ripped off. To give context, the majority of my conversations with clients largely surrounded mortgages, HELOCs, and fintechs. It's important to note for many of the community or regional depositories that read this, SFVegas is more "Wall Street" driven than "Main Street". However, I've found over the last decade of attending that what's discussed here can often shape the next 12 months.

I was honored to present again this year for the Structured Finance Association as Susan Hosterman from Fitch and I chatted about RMBS 101. Little did I realize press was in the room (picture below), though I should have been mindful of that. The discussion touched on the tone of the market. Whole loan execution at the depository level is challenging PLS pricing. The rapid rise in rates, concerns of inflation and the rising possibility of a hard landing have caused spreads to widen across nearly all mortgage products. Jumbo 2.0 loans have certainly found their way onto depository balance sheets. These are very "bankable" loans with strong credit characteristics and with coupons in the mid 5's - up sharply from the very low 3's at the start of the year. Concerns amongst RMBS issuers were that the second half of new issuance would be considerably lower than the first half of the year as higher rates slowed down originations. Of specific note was the non QM space. Spreads here have nearly doubled and coupons need to be in the 8% context to make sense today. Non QM lenders are generally non banks, need to originate a loan and sell at a premium to generate gain on sale. We witnessed in the last few weeks the implosion of Sprout and First Guaranty Mortgage. Back to that eagerness I mentioned before - how many more of those players are out there relying on warehouse lines and starting to gasp for air? The challenge being that I doubt depositories will come to the rescue for non QM loans like they did Jumbo 2.0 earlier this year. The depository bid for DSCR loans is shallow and liquidity is poor. While volumes of non QM loans are not at the scale of prime jumbo, there were whispers of some fairly significant inventory floating out there without an easy exit.

Fintechs. On this product there were many diverging opinions. One comment was consistent, coupons need to increase. Talking with several originators, 12 months ago the competition was fierce and rates had ground tighter and tighter. No one wanted to be the first player to raise their rates and give up market share. Not so today. Depository buyers are (finally) demanding higher rates and the market is starting to respond. Several clients (more hedge fund types) were again eager to see if some of the lower credit type originators might finally face a reckoning. Stimulus never allowed 2020 to test the fintech algo with a true recession and perhaps we might see some distress here. Up in credit product is what we have strongly recommended for our depository customers and they remained largely optimistic about this blend of tech and finance. However, a focus on net interest margin is a rapidly growing conversation as rates rise and deposits come into question. A sneak peak below. Mark your calendars for August 24th as we will be joined by KBRA to talk all things fintech and performance. This invitation will formally go out a few weeks before the event but needless to say it is a must attend if you're in this product.

In closing, a word on bank earnings week. JPM, BofA, and Wells all reported strong Q2 loan growth. I think our regional and community depositories had a very robust Q2 when the final numbers shake out. One thing that was missing - any inkling of credit issues. Throughout the conference and as I scour various earnings transcripts, I don't see any immediate signs of distress in the banking industry.

That said, as of the close Thursday, we are now inverted on 2s and 30s. We are deeply inverted on 2s and 10s. The 3 mo treasury now sits at 2.40%. While many quote the 2s and 10s as the ultimate predictor of a recession, it's the 3 mo metric that has never missed. We are inching closer.

Source: Bloomberg