Let's Talk Loans - Vol. 58

Welcome back to an Independence Day edition of Let's Talk Loans. The intent here is for lenders, investors, and bankers to talk about what's trending and trading in the whole loan market. The loan market is opaque to many, certainly what's trading day to day but also I comment on what trends we see in lending. These are discussions that bubble up to the top of what the desk over the course of the week. I hope you find it helpful. Please subscribe or share with your peers.

The economy is showing resiliency . GDP was expected to rise 1.3% and posted a 2.0% boost. Employment. Jobless claims were expected to be 265k and came in well below expectations at 239k - showing continued strength. Consumer spending . Personal consumption was expected to be 3.8% and came in at a thumping 4.2% - the highest in 2 years. Personal income was up .4% vs the survey of .3%. New home sales crushed it. Property values might actually be going up? Impossible! We're at the halfway mark for 2023 and some economists felt we might be talking recession by now. Not so. Rates have responded and are up sharply. Question for you, which comes first - 4.50% 2 year or 5.0% 2 year?

All of this fuels the possibility for another two rate hikes. At least the market is starting to buy into the possibility of this reality for the next 6 months. Are we ready to talk about a soft landing yet? Or is that too soon?

I do want to highlight a quiet little post from the FDIC, NCUA and OCC that came out this week. Similar to missives at the onset of the COVID crisis, work with your borrowers. Try to extend. Try to restructure. Don't just ask for the keys. Avoid owning the dirt.

"The agencies noted that short-term modifications — which suspend, extend or defer repayment terms — can be an effective way to address issues before more significant accommodations are needed."

Note that this is an update to 2009 policies coming out of the great financial crisis. You can find the link to the Fed here . I find the timing interesting. I've said we are in the early innings - seems the regulators agree and are telling you to be prepared.

"The statement urges banks to engage with troubled commercial real estate borrowers early and have policies in place for dealing with accommodations in a safe and sound manner."?

You passed! A 100%! Flying colors! So what was this test? The top banks endured a "stress test." If the economy hits the wall, hard recession (think 2008 or 1929), could the top banks keep lending? CET1 (Common Equity Tier Ratio) - has to stay above 4.5%. The 23 largest US lenders are put through the meat grinder and we're trying to determine if they have enough of a capital cushion to absorb whatever losses may arise. So what hypothetical doomsday scenario did we throw at them this year? Unemployment at 10%. Commercial real estate dropping 40% - triple, what we experienced in '08. Per Bloomberg :

"The Fed projected that the hypothetical calamities would cause banks to lose $541 billion, including $100 billion in losses from commercial real estate and residential mortgages."

“The large projected decline in commercial real estate prices, combined with the substantial increase in office vacancies, contributes to projected loss rates on office properties that are roughly triple the levels reached during the 2008 financial crisis,”

The good news to this is that the industry showed it has adequate capital to absorb a big shock. Will that be enough to get over regulation from coming their direction? Chatter right now is that 20% higher capital levels are coming to depositories 100bn in assets or higher. Are they still needed?

Let's spend a moment on auto lending. There have been a rash of banks exiting the business lately. Rumors of another large regional turning off originations as of June 30th (watch the news wires for confirm). Citizens and Mechanics have called in quits in 2023. Even Ally, one of the largest originators is cutting back (NOT exiting) originations (per American Banker ). Why are credit unions surging right now and banks pulling back? For starters, autos are 100% risk weighted for banks. Very capital thirsty. Credit unions don't have the same regulations there. CECL isn't helping either, reserves are higher, crimping margins and making profitability all the more difficult. Volumes are returning back to normal, but supply chain is still a nagging issue. Worries of performance have also caused several to tighten in credit. Profitability in a rising rate environment, particularly one this aggressive, presents a real challenge for auto lenders. As an aside - mark your calendar - July 19th at 11am eastern - we will be hosting a joint 穆迪分析 and Raymond James webinar on auto lending with Michael Brisson .

Home values. Case Shiller came in this week and while the headline shows a proper annual decline, the first since 2012, the more recent numbers point to a rebound. Remarkable when you think about it. In the face of 7% coupons...we're still seeing a strong housing market.

Have a wonderful, hopefully extra-long, holiday weekend!

m22-232057