The U.S. economy continued to make a comeback with 1.8 million new jobs created in July. Unemployment fell again to 10.20%, and the Labor Force Participation Rate rose to 61.40% from 60.20%. Just six months ago, we were writing about the lowest unemployment numbers of all time in the U.S. While this latest jobs report reflects a better-than-expected economic recovery from the March lows, many of the job gains in sectors such as travel, leisure, and restaurant staffing will most likely turn out to be transitory. Many U.S. businesses are operating at far below optimal levels and have probably laid people off again since the July print due to ongoing virus outbreaks across the country.
Many Americans, especially those in more public-facing jobs, may be back to work, but not at pre-COVID pay levels. These issues were probably behind the lukewarm response by Wall Street to the sizable job gains. The bond market remains skeptical as short-term and long-terms rates flattened further. Job creation from this point onward will rely on effective remedies as the economy will probably not be able to march higher under the shadow of fear of more shutdowns. Business and consumer spending will not normalize either. There is still a tremendous amount of uncertainty, but the scientific community is learning more about the virus daily and many potential treatments are just on the horizon.
While Wall Street grapples with forecasts, Main Street is concerned about paying the bills. More stimulus will be needed to bridge the millions of Americans who remain underemployed or out of work. This financial support is still being negotiated. Some clarity on the next round of relief should come in by next week, but not without the usual political bickering and finger-pointing. Should Congress not be able to come to an agreement, the markets could experience much greater volatility. For the moment, markets are assuming more stimulus is a near-certain outcome. However, even under a no-deal scenario, President Trump has stated that relief measures could be extended by executive order, giving Congress more time to come to terms with the Congressionally approved relief package. It is obvious that the Fed’s swift action and Congress’s willingness to open up the coffers helped to protect the country from diving into a deep depression. The trillions of dollars spent to date have been unprecedented and how we pay this back is a discussion for another day.
Both the luxury single-family market end and suburban housing market have been a great asset class to own during the past six months. Low rates have spurred higher-end buyers into the luxury home market and suburban market, and it’s put more money into people’s pockets as refinance rates on many loan products have moved below 3.000%. Loan volume is at record levels and with forbearance and delinquencies tracking lower, banks are lending with more confidence and removing some of the more-restrictive COVID-19 overlays. This is helping our self-employed borrowers gain access to attractive rates and terms on more opaque loan requests. Unless you believe U.S. interest rates will go negative, any improvement in interest rates from these historically low levels will require lenders willing to take less yield to gain more loan volume. We continue to encourage all of our borrowers who have not refinanced within the last six months to review their loan documents to determine if a refinance is worthwhile. In many instances, better terms can be achieved.
It is a twisted tale of two worlds as big tech stocks such as Facebook and Apple surge while unemployment claims nationwide increase over back-to-back weeks. The disconnect between Main Street and Wall Street could not be greater. The issues are compounded by uncertainty over when normalcy will return in the U.S. So many public-facing businesses are struggling (think travel, restaurant, gyms, malls). If you expand that thinking, it’s an even worse conundrum as the business that supports those businesses (think airline parts manufacturers, restaurant suppliers, cleaning companies, retail suppliers) are under great strain. GDP in the second quarter was the worst on record. While everyone expected this number would be awful, the worry now is that with unemployment claims rising the economic rebound could stall. Coronavirus cases are up and there is no clear cut strategy in place to address big issues such as whether schools will reopen, what sort of additional rescue package will Congress agree on, and companies’ actions if the pandemic lasts longer than expected domestically.
However, on the positive side, the U.S. consumer continues to spend money in the e-commerce realm, since brick-and-mortar businesses have been closed. The economy is sure to be impacted in the upcoming quarter as unemployment benefits and bonus COVID-19 benefits taper off. So far, the U.S. government has stepped up in a big way to prevent a major economic depression. It will certainly get more complicated as time goes on, especially with a presidential election looming.
Interest rates have breached the .60% mark on the 10-year U.S. Treasury. There is no inflation and bond traders are not optimistic about the near-term economic recovery. These ultra-low rates make all types of financing attractive as both corporations and consumers refinance massive amounts of debt. Low-interest rates are also helping the housing market by boosting affordability. Lenders are also seeing a tapering off of forbearances and delinquencies on residential mortgages. Certain sectors of the commercial real estate market remain in deep trouble as retail stores and hospitality businesses have been hit hard by the pandemic. The good news is that Insignia Mortgage’s long-standing relationship with our credit unions, banks, and mortgage banks has proved valuable as we continue to fund almost all loans that we pre-approve.
Tech stocks fell in what has been a priced-for-perfection sector as coronavirus cases surge. Tech has led the way as many businesses have used technology for the current stay-at-home economy. However, the huge concentration of value within the FAANG’s (Facebook, Apple, Amazon, Netflix, Google) does create concentration risk. Valuations are for sure stretched in this sector.
June home sales shined and business activity picked up, both welcome signs of better days ahead. Additional stimulus will be needed to sustain the economy until the virus is contained, more effective treatments emerge, or vaccines are available. All of the aforementioned comments continue to weigh on the equity markets. Bond markets continue to trade in a much more somber forecast to equities as the 10-year U.S. Treasury hovers near all-time lows of ~.54%. For the moment, the surge in equities has helped keep consumers and business sentiment alive (better sentiment equals more spending) as the Fed’s do-whatever-is-necessary actions have secured the floor on equity/risk on assets.
The Fed’s massive liquidity injections have also saved the non-QM mortgage market as lenders and investors look for yield. Mortgage debt is easy to understand and the collateral is real. With paltry AAA and government debt yielding well under 1%, more opaque mortgage originations that can generate yields above 3.500% are appealing. Insignia Mortgage is placing loans with several different types of investors from regional California banks and credit unions to mortgage banks. Bridge loans are also making a comeback with investors eager to put money to work. Government-guaranteed loans are priced at historical lows and with new technology streamlining the process, we can close these types of loan transactions in as few as 30 days.
In the U.S. this week, bond yields slid as a rise in coronavirus infections picked up. Weekly unemployment claims moved higher which also pushed bond yields down as economists view higher claims as a sign that the economic recovery may be losing stream. Many states shut down certain public-facing businesses in response. Small businesses are already suffering and more stimulus will be needed in order to avoid mass unemployment.
Banks’ earnings, which are being looked at closely as a sign of things to come, were mixed with those banks with substantial institutional trading departments reported strong earnings while more traditional lenders such as Wells Fargo reported poor to negative earnings. All banks are reserving more for loan loss provisions, however, there is no consensus yet as to whether the worst is behind us. A V-shaped recovery seems like a long shot, but equities continue to trade under that assumption for the moment. Bond yields support a more prolonged recovery.
Despite all this sour news, some hopeful green shoots have emerged as consumer spending has picked up and housing starts surged. In another positive sign of an improving residential mortgage market, Insignia Mortgage has been seeing some options return to the jumbo lending marketplace, including non-QM lenders with loan programs such as self-employed bank statements and one-year tax return options.
It’s a tale of two worlds as money on Wall Street floods into COVID-19-resistant sectors such as technology and biotech while Main Street struggles and many retail and public-facing businesses face hard times and tough decisions. With many cities and states scaling back on the re-opening of the economy as COVID-19 cases surge, it is becoming harder to imagine a V-shape economic recovery. Even amongst the backdrop of all the political bickering, more stimulus out of Washington seems baked-in, especially for the hardest-hit industries such as restaurants, fitness, airlines, and hotels, all of which employ a significant amount of folks, and they may be asked to close their doors again. Some positive news from Pfizer and Gilead on treatments to combat the virus is encouraging, but even if these treatments prove to be effective, getting these treatments out to our citizens and the 4 billion global population will be a herculean task.
With little to no inflation and unemployment rates in the teens, interest rates are going nowhere for a while. It is interesting to see gold run above $1,800 per ounce. With global coordinated central bank stimulus packages in the trillions (and rising), there will be a day of reckoning one day in the future, and inflating dollars to pay a historical debt is one way out of this catastrophe. So it’s not surprising to see the rise in gold as a store of real value. Rising inflation is probably years away, but if and when inflation hits, watch out.
Speaking of hard assets and inflation, residential real estate made a strong comeback after the initial shutdown. Home sales are on the rise and banks are flooded with loan applications. We at Insignia Mortgage are seeing tremendous demand for jumbo mortgage product as non-QM loans return and as our portfolio of lenders continue to work hard to approve loans during this difficult time. We continue to have access to lenders who do not require a banking relationship from customers and who are offering purchase-money loans with as little as 10% down up to $1.5 million, interest-only loans, unrestricted amounts of cash-out, and attractive interest rates, and terms for investment property transactions.
A strong June jobs report pushed equities higher on a shortened trading week. While the economy is still so fragile, back-to-back better-than-expected jobs reports support the premise that quite possibly the worst is behind us on Covid-19. However, new cases have been spiking which is worrisome. The next few weeks will be key as fresh data is released on infection rates, hospitalizations, and deaths.
If you think of the stock market as a voting machine, the rally higher in stocks and less volatility in the bond market is telling us things are really improving. Yet many customer-facing businesses (retail, restaurants, services) are struggling. Meanwhile, the tech sector rallies based on the explosive growth of services that affect the new normal in the work-from-home economy. How these tech services help or the nearly 20 million unemployed find new opportunities is not yet clear, but never underestimate U.S. innovation and resilience. Pfizer released some very promising Covid-19 vaccination data. It is still early but should a treatment(s) become a reality, all markets (stocks and bonds) would breathe a sigh of relief and economic productivity would surge.
With the jobs picture improving, the new and resale housing market has improved as well. Supply remains a big issue, especially in tight markets like California. Interest rates are very attractive and the need for more space at home supports a stable housing market and perhaps even one that moves higher in price in certain pockets.
Local banks and credit unions appear to be picking up the loans the large money center banks simply don’t want to deal with or lack the capacity to close on time. Insignia Mortgage continues to close purchase loans on time and with very attractive rates and terms. Cash-outs without restrictions, interest-only loans, and investment property loans are all readily available through our lending sources.
Major U.S. indexes fell this week as Covid-19 cases surged, putting the economic re-openings at risk. The resurgence of Covid-19 overshadowed what had been positive consumer-related data this week. Consumer spending, which had been on the upswing, slowed down. The notion of a quick recovery is unclear and the rise in infection rates suggest the recovery will be choppy. Should the economy stall, we fully expect there will be more Fed stimulus and lending programs to help individuals and businesses get to the other side.
Home buying and mortgage applications, at least in Southern California, have seen a major uptick. We are encouraged by this activity. Housing has been sheltered from this pandemic and is in a much better place than other real estate sectors, such as commercial properties and retail. Our L.A. office has been receiving a surge in applications as borrowers’ businesses recover and interest rates remain at historical lows. While we don’t expect rates to go too much lower, if equity volatility continues to increase, we may see rates drop.
This week’s trading was much tamer and equities rallied. There was not much price movement from the bond market as interest is already near-zero. The Fed announced it would purchase corporate bonds individually, something they had floated earlier this year. This has been common practice in Europe, but it is still an unprecedented activity by the Fed. Should the markets go south, The Fed will be buying equities. How this ends is anyone guess but by interfering in the markets, the Fed has created an environment where true price discovery on asset prices is becoming more and more difficult. The compression in yields is pushing investors into riskier asset classes. There’s an idea called the “wealth effect” in which a rising stock market would increase consumer spending in a virtuous cycle. With stocks elevated, this thesis may work if the economy can quickly rebound.
Housing starts were up which is a good sign. Home-related buying activities including home improvements has been a bright spot as well this year for the economy in general. As people have been forced to shelter in place, the home has become the central place where many people live, work, and share meals and family time in a way that we have never before been forced to. Home sales also appear to be on the uptick, especially in Southern California where our region is blessed with good weather, plentiful business opportunities, and the amenities of urban life.
Earlier in the week, there were some concerns about how the China-U.S. trading agreement was working and whether this agreement would sour and put additional pressure on the financial markets. Thankfully, China has kept its end of the bargain and that was well-received news Friday morning.
Banks remain very rigid overall, but there are some signs that things are improving on the loan deferment front. Mortgage brokers remain highly valuable in this fragmented market due to our ability to reach out to the lending marketplace on behalf of our clients. We’re seeing multiple loan scenarios offered that yield varying rates and terms from each lender. These resources benefit our clients. At Insignia Mortgage, we are grateful to have long-standing lending relationships with local lenders who are intimate with both self-employed borrowers and California real estate. This has allowed us to place successfully many loans for our clients during this difficult time.
Total Volume of over $417 MM in 2019
Insignia Mortgage principals Chris Furie and Damon Germanides have been named among the nation’s top mortgage producers nationwide in 2019, for the 5th year in a row. The rankings are published by the mortgage industry’s premier publications, The Scotsman Guide and National Mortgage News. Insignia Mortgage was also recognized as a Top 25 brokerage nationwide by AIME, the Association of Independent Mortgage Experts, a trade organization founded in 2017.
Scotsman Guide ranked both producers in the top 6 for the “Top Mortgage Broker” category and 45 and 54 in their “Top Dollar” category, respectively. Chris closed 94 loans in 2019, and Damon closed 107 loans for a combined $417,420,675 funded in 2019 and a loan average of over $2 MM, which has been increasing steadily over the past few years.
National Mortgage News, which ranked the top 400 originators who submitted entries by dollar volume, ranked Chris at #20 and Damon at #21.
As a team, their combined production has been over $3 billion in loans funded since their founding 2012.
Insignia Mortgage is now far and away the top jumbo lender by loan size in the country with an average loan amount of over $2 million per transaction.
Insignia Mortgage has built its reputation by offering a suite of innovative and custom programs at low rates for non-traditional borrowers.
“We are incredibly humbled that our small boutique mortgage brokerage has been nationally recognized as a top 25 broker in the country,” says Damon Germanides, co-founder. As a top broker, Mr. Germanides was also featured in a recent issue of the Scotsman Guide in the article, “Talking Three P’s of 2020 With This Year’s Top Originators. “
Chris Furie, Insignia Mortgage’s co-founder commented, “Despite the COVID-19 pandemic and all the issues it has caused, we’ve been working closely with our lenders to help our clients with refinances and new purchases.”
This year will no doubt be impacted by the current coronavirus crisis, but Insignia Mortgage remains busy and is actively collaborating with lenders and clients to get deals done.
Insignia Mortgage works closely with local lenders to develop lending programs (from $500,000 to $25 million) for those borrowers that do not fit into conventional mortgage programs. Chris and Damon’s unique lending products are designed for foreign borrowers, borrowers with highly complex financial statements and entity structures, and those borrowers who require a no tax return loan, or a loan on an investment property. Later this year, Insignia Mortgage will be rolling out some new innovative products, including reverse mortgage programs.
Stocks sold off hard this week following a strong rally last week which had been ignited by a better than expected May jobs report. Thursday of this week (June 11, 2020) was a risk-off day that shook the equity markets as the market digested sobering comments by the Fed chair regarding the economic recovery combined with regional upticks in Covid-19 infection rates. Yet there is a positive takeaway in yesterday’s brutal pull-back. After a dramatic rise over the past several weeks in stocks, sharp sell-offs washed out speculators and may help prevent a bubble. Lately, there has been a lot of chatter about speculators profiting by betting on de facto bankrupt companies whose prices in some instances have surged more than 100% in a single day.
Friday morning provided some relief to equities with a partial rebound. This is a welcome sign that Thursday’s sell-off was not the beginning of a deep sell-off. Treasury and mortgage rates fell as money moved into the safe haven of government-guaranteed bonds. The Fed’s stimulus operations will continue indefinitely which will keep interest rates very low and will also entice investors into more risky assets such as stocks, high yielding debt, and real estate.
The Fed is committed to propping up the markets as we work through the process of getting our economy back on track. No doubt this will take time but there are some encouraging signs of a nascent economic recovery. However, the economy remains very fragile.
Currently, mortgage rates are low and may go lower. Lenders are slowly gaining the confidence underwriting files a bit more generously. Housing supply is in our main market, Southern California, and buyers are re-entering the market. These are all welcome signs that the worst may be behind us. Continue to expect mortgage rates to be priced favorably, especially on higher loan-to-value loan transactions, but perhaps not quite as well one would expect. Once banks have a better handle on the direction of deferred payment, we believe pricing overall will improve even further. Keep an eye on infection rates, manufacturing data, and consumer confidence. If these data points move favorably, interest rates on mortgages will price sharper in the coming months.