Let's Talk Loans - Vol. 98

Welcome back to another discussion about banking and lending. Each week we tune in to chat about what's trading and trending in the whole loan market. If you're interested in shop talk from the Raymond James whole loan desk, you've come to the right spot. Please subscribe, like or share this newsletter if you enjoy the discussion!

We're at the midway point in the year. Let's have a state of the state discussion on loan trading. Six months into the calendar year, we're 42% ahead of trading volumes from last year. For those new readers, with rates up sharply in 2023, trading volumes were their worst since 2014. To give you the "why", loans respond to rates in a similar fashion to bonds that rates up drop pricing. Most institutions shy away from a loss trade, few hedged to protect them from the rate move and most chose to simply balance sheet the underwater loans versus selling them. While a 42% increase is encouraging, the first half of 2024 remains 14% below our 10- year trading average. Don't call it a comeback? Where are the winners and losers? Mortgage trading is back. In the first 6 months of the year we are well through the entirety of trading volumes last year. 2023 was a savage year for mortgages. Buyers absolutely fled the industry, no one would pay up for current coupons in fear of prepayments as the market had priced in 6 rate cuts for 2024. Fast forward to today, higher for longer has greatly benefited this product, premiums have returned as rate cuts have been pushed further and further down the calendar. However, the vast majority of what is trading is new purchase money - the refi trade is flat on its face dead. What's replaced that particular corner of the market are 2nd liens, specifically HELOCs. Here we have seen a rise in originations and trading volumes in this space. The only challenge we see in HELOCs is finding enough volume from sellers to make a trade work as lenders pick up on the change in the mortgage environment. Autos for the first 6 months of the year just missed our 10 year best by a meager $30mm. The demand for that short tenor paper amongst credit unions has been exceedingly strong so far in 2024. A quick take on that, we currently have 5 pools out to market on autos - the most of year - and they aren't moving quite as quickly. Have we hit the peak for auto trading right now? Solar trading is really struggling. Only a handful of deals completed and it all circles around rate and prepayment speed. The solar market continues to reset to a higher rate environment and new origination volumes are slow. Commercial trading remains in a weird spot. We are seeing success in new production deals getting issued at attractive yields but lenders are concerned about adding to the existing concentration risk in a product that is out of favor. Seasoned pools are trading mostly at discounts due to lower rates and credit. Trades that are happening in the commercial universe are structured around a merger, capital raise, sale leaseback, or some other "event" to help offset any loss associated with the loans. As you move into more niche products like consumer unsecured or consumer home improvement it is a bit more nuanced. Home improvement lending remains elevated, much like the HELOC trade, as consumers work to improve the home they own vs buy their next property. A lack of housing supply will continue to drive this need. Raw, unsecured, debt consolidation lending has slowed sharply. Trading volumes are up compared to their 10 year average but really only gained traction in the last 5 years. Hope this helps and if you've got questions, shoot them my way.

As HELOCs have been the winner, let's look a little deeper into a report sent out by TransUnion. It's very hard to find any research on this corner of the market, so I strongly encourage you to click the link if you're looking for more. Giving you an idea on the scope and size of the market. With home values haven risen sharply over the last 6 years, we're talking about $20tn of tappable home equity. Even if you have concerns as to the recent growth in property values, there is ample opportunity to go around.

We've had the recent news that HELOANS are now going the GSE route and that leads me to expect a significant growth in closed 2nds. To an extent, you're already seeing that. For 2nd liens, we see two very separate and distinct buy reasons. Main Street depository buyers have loved HELOCs mostly due to their floating nature. Usually prime based, plus a margin, they have been a great offset to all that 30 year fixed rate that has clogged up the balance sheet. That monthly or quarterly floaters is a wonderful hedge to the 2021 3% vintage fixed rate loan. The loan lives on the balance sheet and stays there. A very separate trade, and often more bank driven, is the closed end 2nd. Usually a 15-year fixed rate, fully amortizing loan, roughly 100bps wide to 30-year rates today. Easier to hedge, there is no draw period, Wall Street has liked it because it can be put into a bond. This is also likely why the GSE's focused on HELOANs vs HELOCs. Today, the overwhelming majority has been HELOC originations - again, I expect that changes now that the GSE's are involved.

Further on volumes. Mortgage originators - take a peek at that bottom left hand mortgage refi volume graph. Ouch. Like I said earlier, flat on the floor dead. HELOCs and HELOANs however continue to churn on. If you want to understand the math to the consumer, read this post. While HELOCs and HELOANs are struggling a little under higher rates, it is nowhere as severe as the 1st lien production.

Who is making what? We've seen this for a while in our trading volumes. Credit unions have been strong players in the HELOC universe. You're going to see non depository HELOAN volumes skyrocket now that the GSE's are in place. As non-banks do not have a balance sheet, they can only make a loan that they know they can sell. It is my belief they will be the largest utilizers of this new program. It will be interesting to see how this impacts 2nd lien originations going forward. Will lenders continue to make loans they want to balance sheet for interest income purposes? Or will they be more attracted to making loans, selling them, and booking gain on sale income?

As you may have noticed in many of the above graphs - credit is exemplary. Most of the pools we see trade have an average FICO north of 750. The resulting delinquencies are "at all-time lows." This is a similar trend for 1st lien residential as well. If there is a corner of lending that is bucking the "normalization" credit trends, it's mortgages.

Highlighting my main street vs wall street comments. Securitization volumes and issuers are shown below from JPM and Bloomberg. Rocket, Towd Point, Saluda Grade, JPM, Achieve, Bravo, Vista Point and others have all brought deals. Volumes are nascent, but you can see in the below graph for 2024 that more closed end seconds (CES) have been done thus far in the year.

Lastly and quickly on the rate market. Recent weakening of jobs numbers, coupled with softer inflation, has opened the conversation to a potential September rate cut. WIRP on Bloomberg has us at a 91% chance for a September cut. I remain doubtful but I do have more hope this time than I have had in recent meetings. It is feeling softer out there, truly, for once.

"U.S. inflation eased substantially in June, extending a recent slowdown in price increases that clears a path for the Federal Reserve to cut interest rates by the end of the summer."

"CPI, a measure of goods and services costs across the economy, fell slightly from May, dropping the year-over-year inflation rate to 3%, which was the lowest since June 2023."?

Have a great weekend! M24-544712