Let's Talk Loans - Vol. 32

Welcome back to another week of Let's Talk Loans. Several meaty subjects to cover this week but we're still dominated by the Fed. A few short thoughts on what's trading. November was the first month as far back as I can see in our records that no residential mortgage traded through the desk (that excludes HELOCs which remain very strong). The bid for the legacy 30 year fixed rate loans is miserable. Consistently seeing 3.25% - 3.50% legacy coupons price in the 78-82 dollar price range and there are few willing sellers at that kind of discount. Even auto loans with coupons from early 2022 are pricing in the 95 context today which is pain few client want to take. Autos trading in the 7% yield context. HELOCs trading in the 9% yield context. Consumer unsecured loans trading at double digit yields. All prime paper and it's incredible to talk about prime credit trading in the single digit yields when not too long ago we were talking about 3%. Commercial real estate is a state of disconnect. Sellers still stubbornly originating 4%-5% coupons and the market wants several percent higher. It remains as strong of a buyers market as I've ever witnessed and is very tough sledding for sellers out there. The gain on sale trade is firmly on the ropes and is taking a pounding with no buyers wanting to pay premiums. If you enjoy the commentary, please share, subscribe or like the post!

Deposits. I've written a lot about the lack of liquidity we are seeing for many of our clients in this rising rate environment. We felt that excess cash start to leave the market around the month of July. We've struggled communicating to many of our clients that their cost of funds isn't 25bps anymore. Sure, there are some sticky, retail based deposits that will be very loyal to some depositories. If you look up today, run out of cash and need to borrow from the FHLB or use brokered CDs those dollars are 4.75%+. That results in lenders being forced to either 1) slow down lending 2) raise rates 3) sell loans at a deep discount. A thoughtful article in the WSJ yesterday that speaks a little to this disconnect today. Nathan Stovall at S&P has been posting on this for some time (many many, articles on this topic which I've shared)

"But things could be changing. The average rate on money-market and savings accounts at the five largest banks nearly tripled in the third quarter from where it was in the second. In an October report, Mr. Stovall wrote that he expected large banks to increase their savings rates more quickly through the end of 2022 and increase even further in 2023 as the Fed continues to raise U.S. interest rates and banks compete more aggressively for customers"

Commercial lenders. If you missed our discussion with Victor Calanog PhD CRE FRICS from 穆迪分析 and our very own Frazer Gieselmann on the commercial real estate market, do make sure you catch the replay. We had a hearty debate as to the strength of the commercial market, cap rates, valuations and what sub industries would win or lose.

Further caution to auto lenders. The Manheim index continues to fall from its early 2022 peaks. This will impact future losses, limiting recoveries, as loans/vehicles are repossessed and taken to auction. One should budget in 2023 for a higher loss expectation based off these numbers.

"The widely watched Manheim Used Vehicle Value Index last month was down 14.2% from a year ago, while unadjusted used-car prices tumbled 12.4% in that span, the automotive auctioneer said Wednesday. The index fell to the lowest level since August 2021 as used-car sales declined 10% in November."

The housing market continues to show early signs of distress. Will it be 2008 all over again? Does a lack of housing supply help prop up a soft landing for housing? What's interesting, you don't yet have a full consensus on the topic.

"Next year's predictions for home prices are unusually varied, economists say. KPMG is calling for prices to fall 20% next year, and Goldman Sachs forecasts a 7.5% drop. The NRA meanwhile, is forecasting a 1.2% increase in existing-home prices, and the MBA sees prices up 0.7% next year"

While home prices are up 45% (per S&P) since January 2020, with the recent spike in mortgage rates how much will housing values drop?

This week we saw another one of Powell's key indicators continue to show strength. Unemployment. Reminding everyone that "good" economic numbers are bad because that means we are further away from cheap money and a Fed cutting of rates. Despite recent headlines, which have been more tech / housing / finance focused, the numbers are still strong. Or perhaps those recent layoffs are just too early to see in the numbers and we will see that creep into the data in the near future.

"U.S. unemployment filings rose slightly last week, a sign the labor market remains tight despite layoffs at some companies and broader economic uncertainty. Initial jobless claims, a proxy for layoffs, rose by 4,000 to a seasonally adjusted 230,000 last week, the Labor Department said Thursday. That was near the 2019 weekly average of around 218,000 when the labor market was also robust"

Next week is Fed watch. The focus comes back to inflationary economic figures. We have PPI this morning continuing to surprise to the upside (bad - higher for longer). The long end of the curve has sold off (price down / rates up) but the short end has stayed flat.

CPI next Tuesday. Then Powell goes on stage Wednesday. All focus will be on his comments. This week we heard confirmation that a 50bps hike is expected for December but the door remained open for a possible 50bps hike in February and further hikes thereafter. Not the news many of us want to hear.

"Most officials in September penciled in rates rising to between 4.5% and 5% next year. That landing zone could rise to between 4.75% and 5.25% in the new projections.

“Stronger demand for labor, stronger demand in the economy than I previously thought, and then somewhat higher underlying inflation suggest a modestly higher path for policy relative to September,”?said New York Fed President John Williams

Should be an interesting week. Happy Holidays! M22-70090