Let's Talk Loans - Vol. 99

Welcome back to another week of Let's Talk Loans. If you enjoy conversations about banking, lending, the economy, fixed income markets, sales and credit you've come to the right spot. This weekly newsletter covers what's trading and trending as seen from the whole loan desk here at Raymond James. If you enjoy the content - please share it with a peer and subscribe (QR code at the end)!

Is our first rate cut truly upon us? We've all eagerly awaited it for over a year now. Will we hear from Powell in July that we should prepare for our first rate cut since 2020? PCE came in "as expected" today - likely squashing any hope of a July cut (not that we had much hope there). I believe signs are much more palatable for the possibility of a cut in the coming meetings. I've been skeptical of the market getting ahead of itself over the past 12 months but this time feels more realistic. I'm not convinced that September is the right date but it is possible now. December still feels the most probable in my mind but I won't be surprised if it happens sooner.

A lot of focus on the yield curve. Quietly, the curve has flattened. 2s and 10s are now only 18bps inverted. We reached 12 bps earlier in the week, the lowest we've seen in 2024. Might we start to see a pivot in the steepness of the curve and the fulcrum happen around the 5-10yr part of the curve? The 10 year rests at 4.20% (as of this writing) might we start to see that hold and the shorter end of the curve drop further to add some steepness?

Mortgages. The good news is the first half of 2024 mortgage originations showed some strength and are up about 4%. The HMDA data for 2023 is out and we have a full picture on who made what production last year. A few quotes from S&P as they study the data.

"Funded mortgage loans fell 37.6% from 2022 to $1.777 trillion in 2023, according to S&P"

"While the majority of mortgage lenders saw steep drop-offs in lending activity, banks lost much of the ground they gained in 2022...no banks in the top 20 posted a year-over-year increase in mortgage lending."

"Banks and thrifts represented seven of the top 20 mortgage lenders in 2023, a slight decline from nine the year before. Additionally, only four of the top 10 spots went to banks, down from six in 2022."

"Notably, a credit union, Navy FCU, made it to No. 19 during 2023"

Specific to credit unions. Mortgage originations have fallen now for 2 consecutive years.

"US credit unions funded $157.27 billion in home mortgages in 2023, down 22.3% from the previous year."

"Navy FCU also cracked into the top 20 mortgage lenders overall, landing at No. 19. Still, Navy FCU's total funded loans fell 21.2% from the prior year"

"All credit unions in the ranking except Three Rivers FCU funded fewer mortgages in 2023 versus 2022, in line with wider economic tightening, and all but two credit unions saw approval rates fall year over year."

A quick chat about CRE. A lot of headlines about the impending doom for anyone who owns any commercial real estate, but are there winners and losers here? Is there something to the fact that the losses taken thus far are mostly concentrated in very large banks, with very concentrated office portfolios, in deeply urban areas? Or are all loans, big and small, community based to tier 1, painted with the same brush? Let me start with recommending you give the following video a listen here. We continue to see the use of modifications to help mask true underlying pain in portfolios. You can see a real differential in performance between owner occupied properties and non owner occupied properties and smaller institutions hold more owner occupied, relationship based loans. Will that lead to better performance over time?

"Instead, a majority of commercial building loans by community banks are for smaller buildings — like those housing doctors and local businesses — that tend to be fully leased. And while there are concerns about financial pressure on apartment building landlords if interest rates remain high, missed payments on those types of mortgages have not risen substantially."

Might Moody's be giving us some good news? Are we at peak delinquency now? A little look into the state of the consumer. A few quotes:

"Auto loan delinquencies were 3.32% or 26 basis points (bps) above Q2 2019 levels , compared with 34 bps above 2019 levels in Q1. Auto loan charge-offs were 1.26% in Q2, down 31 basis points (bps) from Q1, but remained 58 bps above Q2 2019 versus 48 bps above 2019 levels in Q1. Annual loan balances declined 3.1% year over year in Q2."

"Credit card delinquencies were 2.9% or 58 bps above Q2 2019 levels, compared with 56 bps above 2019 levels in Q1. Credit card charge-offs were 4.30% in Q2, up two bps from Q1 and 77 bps above Q2 2019 versus 63 bps above in Q1. Credit card balance growth slowed materially but remains moderate, with balances up 9.1% in Q2 from a year ago."

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