Let's Talk Loans - Vol. 38

Welcome back to another edition of Let's Talk Loans. I'd like to say thank you to the recent bump in readership. Up to around 3,300 subscribers of this newsletter and I'm humbled by the feedback it's generated. The purpose of the newsletter is to cover what thoughts and discussions come across the whole loan trading desk here at Raymond James . This week will be a heavy mortgage discussion coming on the heels of a fantastic webinar with Freddie Mac 's deputy chief economist Leonard Kiefer . If you enjoy the content, please like, subscribe or share with one of your peers.

Let's kick off the discussion with a few of the talking points coming out of this weeks presentation by Len. First off, if you're not following him on LinkedIn go do that now. Particularly if you're in the mortgage business, as his visuals and posts are top notch. Let's start off with rates. We've seen a nice little comeback off the late October / early November highs. A few weeks back I asked if that 7.08% was the peak and we are now down about 100bps into the low 6%s. The graph on the right shows just how epic the mortgage rate move was in 2022. Important to also note what that move represented. In the 70s and 80s mortgage rates were much higher, meaning a 2% change in rates were a much lower overall percentage change to the consumer. The shock of a 3%+ change today is a doubling of coupons and we've seen the resulting drop in originations as a result.

For those mortgage lenders looking for hope as to the refi market, Len didn't give it. We discussed something that presents a real challenge for those lenders hooked on what really drove originations in 2020 and 2021. It wasn't uncommon for a borrower to refi their loan twice or even three times in that window of time as rates plummeted. The fact is though that 2 out of 3 mortgages are sitting at a 4% coupon or below. We're at 6% today. Rates need to fall at least another 100bps before we see any meaningful pick up in the refi index.

If you recall mid last year we got a head fake with some of the economic numbers and rates took a dip. (Side comment - Today's jobs number feels oddly similar.) New listings that summer spiked but overall, 2022 was a real bruiser in terms of supply. That lack of supply is one of the reasons in our discussion that might bolster home values. Sellers can afford their mortgage if they don't get the price they want on their home and they choose to just let it ride vs list it. The quote below has probably never been more true.

“I hate my house, but I love my mortgage”

Easily the best visual I've seen illustrating just how bad builders got destroyed in the great financial crisis. The undersupply of building new homes has been severe for over a decade. So while we have seen some strong prints very recently in new housing supply coming online, the hole that we are digging out of is vast. This was the housing problem we had before COVID. This is the housing problem have after COVID. This will take several years of current production levels to cure, right at the time builders are getting concerned due to higher rates and probably paring back again.

So I tried to get the "scoop" from Len on his forecast for home values on the call but unfortunately they are about to refresh their forecasts and he didn't want to front run his own news release. Admirable but disappointing. With the backdrop of what we've talked about above (lack of supply, lack of construction, stubbornly high rates) the conversation was a bit more positive to the flattening vs falling of home values in 2023. Yes, home values have likely peaked. Yes, home values will come down but they remain elevated compared to the run we've seen since 2020. Certain areas will likely perform worse that saw a higher runup during COVID.

Loved this graph in particular. Note the HELOC and Closed End Second (CES) graphs lines. This is an area of mortgages that DID see growth in 2022. We saw a 500% increase in our trading volumes for HELOCs and transacted on over a billion dollars of the product this year. Further, our structured products desk printed one of the first new issue securitizations in the HELOC ABS market seen in nearly a decade. In the absence of the refi market, HELOCs present an opportunity for mortgage lenders at this time. Much of this is focused on improving the property and the home the borrower is living in without taking out a new higher coupon mortgage.

Quickly on this weeks Fed news and today's jobs number. The market rallied strongly on Chair Powell's relatively relaxed tone as to what he perceived as the dislocation of expectations.

"I'm not going to try to persuade people to have a different forecast, but our forecast is that it will take some time and some patience, and that we'll need to keep rates higher for longer."

Somewhere today he's smiling as the jobs number came in incredibly strong and over DOUBLE the forecast. Jobs and wages have been the one item of focus that hasn't seen weakening and today posting is ripping through the markets. Post Fed meeting the market saw rates fall and was dovish. Post today's jobs meeting the market has taken all of that back and then some. As of this writing the 2 year is up 17bps in yield and the 10 year is near 15bps. Broad strength, particularly in leisure and hospitality, show that Powell still has reason to keep rates high if indeed employment is a driver of inflation. The pivot hopeful will be disappointed with this news.

Lastly, Memphis was slammed by an ice storm this week. Hat tip on a photo from Craig Demoss . Ice is pretty...until you have to drive on it.

#mortgage #mortgages #banking #banks #creditunions #market #rates #economy #fed

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