Market Commentary 8/5/2023

Bonds & Equities Shaken By Fitch Downgrade Of US Credit

This week was filled with noteworthy economic developments. The bond market experienced significant fluctuations following Fitch’s downgrade of the US credit rating from AAA to AA. The latest July Jobs Report, though weaker than expected, provided some relief to the bond market (which experienced a notable climb earlier in the week). Nonetheless, persistent wage growth and a tight job market continue to challenge the Federal Reserve. As a result, inflation remains a concern at the forefront.

Amidst these developments, other factors are contributing to inflationary pressures. These factors include rising commodity prices, geopolitical tensions, and potential labor strikes. While the immediate impact of the Fitch downgrade may be limited, it serves as a vital reminder that addressing long-term spending issues is important for our nation’s prosperity.

The Future Of Rates & The Impact Of Inflation

The path of interest rates remains uncertain. Some potential scenarios range from further rate hikes due to wage inflation to a soft-landing recession narrative. All outcomes necessitate careful navigation of the Fed’s interest rate and QT policies. While we observe signs of falling inflation, wage inflation persists, leaving room for at least one more potential rate hike (if not two) in the future.

On the other hand, the consequences of the Fed’s substantial rate hikes over the past year and QT policies are gradually seeping into the financial system. As interest rates rise, lenders are tightening their loan offerings. Narrowing such loan options could impact economic growth in the coming months. Even so, it is worth noting that the American consumer has demonstrated remarkable resilience, readily accepting higher interest rates and loan payments.

The normalization of mortgage rates on a historical basis is apparent, but when combined with soaring home prices, the overall cost feels steep. As a result, the existing home sale market has experienced a slowdown in activity. At the same time, some market segments have witnessed odd price increases due to a lack of available housing supply. Despite these challenges, the adaptability of consumers underscores their ability to weather economic fluctuations.

Podcast “MPA Talk” Features Damon Germanides

MPA Talk, the podcast for U.S. mortgage professionals by MPA Magazine, featured Insignia co-founder, Damon Germanides, in their latest episode entitled “Serving Up Solutions.” In this episode, host Simon Meadows interviewed Germanides for his perspective as a broker who specializes in complex loans, particularly for those who are self-employed. They discuss how he cut his teeth in the last big financial crisis of 2008, before co-founding Insignia Mortgage in Beverly Hills, California, in 2010. Beginning slowly, the company established relationships with smaller banks and credit unions, to build the business to where it is today. The son of a restaurant owner, Germanides likens the mortgage industry to the restaurant industry in terms of the tough challenges it presents – it’s been his driving force to succeed.

“My dad owned a restaurant for 43 years, an, that business is such an tough business that I used to look at the mortgage business and say, ‘as tough as it is today, man, the restaurant business is, is even tougher’. I’ve picked tough businesses because both of them have their challenges. That was a driving force early in my career, knowing how hard another business was, made me pretty tenacious.

When 2008, 2009 hit, my good analytical skills really started to shine because the business had moved away from the limited information type loans or the no doc loans or whatever. You had to have a complete understanding of the borrower’s financials, which required mortgage professionals to start to learn to read tax returns, understand cash flow, you know, do a sensitivity analysis on revenue and income, understand everything on the borrower’s financials and that, that really fit well with my skillsets.”

Damon Germanides, on why his key skills made him a good fit for the mortgage industry.

Listen to the full episode below, or via your podcast streaming platform of choice.

MPA Talk, July 21, 2023, featuring Damon Germanides, a broker who specializes in complex loans, particularly for those who are self-employed.

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Market Commentary 7/21/2023

Markets Party On As Risk Appetite Grows Amidst Discounting Higher Rates

The investment landscape remains complex, as it has always been. With the constant influx of daily reports and updates, it’s easy to be distracted by market movements and opinions. In the equity markets, big tech companies have led to significant gains for some investors. Conversely,  a more balanced approach has yielded only moderate returns or worse for others. The risk-on trading sentiment seems to be prevailing, even as interest rates rise and the Fed indicates a prolonged period of higher rates.

In the housing market, although new home builders are thriving, existing home sales face challenges in major cities due to limited inventory.  As many banks pull out of the mortgage market and layoffs have become more common, the mortgage world shows it is not immune to its share of challenges. Smaller banks and credit unions step in to fill the gap, providing opportunities for boutique firms like ours to match borrowers with lenders who prioritize community growth, common-sense underwriting, and personalized service.

New Standards On The Horizon: Inflation, Debt, & Consumer Spending

Equities surge and multiple offers continue to be prevalent in the more affordable section of the housing market. We can’t ignore the broader economic concerns of these behaviors becoming almost the standard as they relate to the inflation fight. Unemployment remains ultra-low and the employment pool tight, commodity prices are on the rise, the 2-year Treasury rate is nearing 5%, and consumers continue to spend (even if by way of debt). It is hard to model how the massive Covid-related money spray and multiple Government stimulus programs will affect inflation. However, there is a greater than zero probability that inflation readings show signs of acceleration come the fall. This may be one reason the Fed is expected to raise rates next week and possibly again in September.

While the markets and consumers seem comfortable with the Fed’s rate hikes, we remain cautious. Powell’s warnings about potential pain may not have materialized yet, but we believe it’s essential to monitor the situation closely.

Market Commentary 7/14/2023

Mortgage Rates Rally On Cooling Inflation Readings

The latest CPI data indicates that inflation appears to be moving in a favorable direction. The Producer Price Index (PPI) also experienced a decline, which was well received by both the bond and equity markets (PPI measures production costs). Although another 25 basis point rate hike in July is widely anticipated, further increases in the near term seem unlikely. Nonetheless, given the persistent nature of current inflationary pressures, there is concern that a thriving equity market could spur increased spending… Which would potentially lead to a resurgence in inflation. It is worth noting that speculative areas of the equity market, such as Crypto and AI, have performed exceptionally well. Such positive performance suggests the Fed may believe more action is necessary to curb inflation. While higher rates may not be imminent, it is our belief that the Fed will maintain higher interest rates for an extended period, considering that equities have nearly recovered most of the losses incurred in 2022. Additionally, we expect the Fed to continue with quantitative tightening until a significant crisis emerges.

JP Morgan’s better-than-expected outlook for the second quarter has set the tone for earnings season. Wells Fargo, among other banks, also reported earnings and increased loan loss reserves for its commercial portfolio. In the coming weeks, we predict more write-downs of office loans from regional banks, given their significant exposure to commercial office loans. A 2008 redo appears unlikely even as some parts of the commercial real estate market experience growing stresses.

There is a noticeable uptick in purchase money loan activity, potentially driven by added inventory within certain areas. This observation is based on local market assessment, including discussions with realtors, monitoring real estate websites such as Zillow and the MLS, and the presence of more “for sale” signs in the neighborhood. Pre-approval activity is escalating, with a majority of pre-approvals falling within the $1 million to $3 million price range. In terms of refinances, we are seeing a growing number of requests. The majority of these refinance requests are coming from self-employed borrowers who aim to consolidate higher-interest business debt, credit card debt, or commercial debt through a home loan refinance.

Q2 2023 Transaction Spotlights

Throughout the second quarter of 2023, Insignia Mortgage has solidified California’s Jumbo Loan Experts. Our portfolio of jumbo loan successes this past quarter is a testament to our team’s dedication to surpassing client expectations.

Q2 2023 Transaction Spotlights

$9 Million, 75% LTV, 5.500% APR

The highly qualified borrower was seeking maximum leverage on a new home purchase. His financials were difficult to analyze due to the major expansion of his company over the last year, which affected net income. An additional challenge in closing the transaction was coordinating with a very nervous seller, who was quite worried as the two previous buyers could not obtain financials.

$2.2 Million, 80% LTV, 6.250% APR

Insignia Mortgage was approached by a client looking to close escrow on a property with 2 missing bathrooms. The borrower wanted to complete the remodel of the bathrooms himself. Insignia located a lender willing to close on the unfished property and allow the borrower to complete the remodel himself.

$4.6 Million, 43% LTV, 6.500% APR

The borrower approached Insignia Mortgage for an Owner Occupied Construction Loan after the purchase of a lot. The borrower recently sold his business and is being paid a salary over the next few years by the company. Insignia Mortgage was able to locate a lender that was able to use the client’s balance sheet and income to qualify for the Owner Occupied Construction Loan.

$980K, 43% LTV, 8.500% APR

The borrower required a DSCR loan after being turned down for a bank statement loan on the property. Funds were going to pay off another debt. Insignia Mortgage was able to locate a max LTV lender who was also OK with vesting the property in an LLC and providing cash out.

$3.05 Million, 80% LTV, 8.475% APR

The borrower was looking for maximum leverage on a new home purchase using his business bank statements. Insignia Mortgage located a lender that provided 80% financing and LLC vesting with a closing in under 20 days

$1 Million, 68% LTV, 6.250% APR

Insignia Mortgage canvased the lending marketplace for a sharp pencil 30-year fixed-rate loan for this very qualified borrower. Our hard work paid off as we were able to locate the best-priced option and won the deal for our client.

$2.1 Million, 50% LTV, 8.500% APR

The borrower was looking for a loan program that would not verify income, as she was self-employed and she earned income both domestically and abroad. Given the complexity of her financials, it was decided to utilize a no-income or employment verification loan program.

$1.62 Million, 80% LTV, 5.875% APR

The borrower just moved from New York to California. After renting for a month, he found a condo in Marina Del Rey he wanted to purchase. Insignia Mortgage was able to locate a lender with below-market rates to quickly close the loan with no origination costs.

Market Commentary 7/7/2023

Yields Rise As Strong Wages All But Ensure Fed Rate Hike

The ADP report this Thursday marked a significant week for the bond market, as both Treasury and Mortgage rates exhibited a notable increase. Fortunately, Friday’s employment report met expectations, easing some pressure on bonds. The probability of the Fed raising rates later this month is now nearly 100%, with elevated wage inflation and the strong job market. In addition, bond traders are realizing that interest rates will remain high for an extended period, due to persistent global inflation and forecasts of potential interest rate hikes in other countries (like the UK).

Some argue for the Fed to exercise patience and assess the long-term effects of their rate hikes on the US consumer and the economy. Despite this pushback, there are signs that the rate increases are making an impact. Banks are becoming more cautious with their underwriting box, consumers are exercising caution in their purchases, manufacturing data is declining, and credit card balances are rising as stimulus funds dwindle. One might wonder where we would be if the AI investment theme didn’t re-ignite animal spirits. Additionally, large apartment investment firms are facing challenges as floating rate debt reaches a tipping point, where monthly interest expenses exceed property cash flow. The pain of higher interest rates is gradually spreading beyond the office sector to other real estate asset classes.

An illustrative example demonstrates the risks of buying at very low cap rates:

  • 2021 Investment Environment Net Operating Income: $100,000 Cap Rate: 3.75% Value: $2,667,666
  • 2023 Investment Environment Net Operating Income: $100,000 Cap Rate: 5.75% Value: $1,739,130

This example equates to a loss of almost 35% on the property due to the movement in cap rates. While we don’t anticipate a systemic crisis in commercial real estate, buyers who relied on aggressive assumptions and maximum leverage may face difficulties ahead.

Rate Hikes & Real Estate: What’s Next?

Higher interest rates are influencing the existing housing market, resulting in continually elevated home prices, despite interest rates returning to 7%. This situation may limit what potential buyers can afford. Furthermore, the potential for an increase in housing supply seems plausible if equity markets reverse course in response to ongoing Fed rate hikes. Sellers may choose to sell their homes while existing home market inventory remains tight, rather than waiting for a recession or other negative events. Notably, the Southern California superluxury market is experiencing a swell in inventory as ultra-wealthy individuals are less inclined to expand their home portfolios. It will be intriguing to observe what factors will entice these buyers back into the market. Only time will reveal the answer.

Market Commentary 6/30/2023

Equity Markets Dismiss Central Banks’ Inflation Concerns

The resilience shown by the equity markets and the US economy has surprised many, us included. While we have previously expressed concerns about a possible recession, the economy continues to strengthen. Most forecasters have interpreted the upward revisions to GDP, a tight labor market, and a stabilizing housing market as a sign of two more rate hikes to be added by the Fed. This prediction comes amidst rising worries over the economy picking up the pace again. The latest PCE report has indicated a slowdown in overall inflation. Nonetheless, the report still highlighted persistent service inflation at 4.6%, supporting recent comments from the Fed about the need for higher interest rates in the long run.

A Case For Higher Rates

Real estate investors typically focus on interest rates, construction costs, and cap rates. On the other hand, the equity market is a key indicator of consumer sentiment, risk appetite, and innovation. The recent surges in the tech-heavy Nasdaq index should drive increased demand for home purchases and renovations. Individuals who have seen their equity holdings rebound may be more inclined to invest in a larger and better home. Despite the cooling of the spring buying season, we are witnessing a rise in pre-approvals for new homebuyers. These buyers are willing to accept higher interest rates in a tight existing homes market, likely due to an increase in their financial assets. This so-called wealth effect is what the Fed is trying to curb, but even with substantial rate hikes, its impact has yet to materialize fully. Consequently, we believe that the Fed may veritably raise rates further, with a 6% Fed Funds rate not outside the realm of possibility.

A Case For Lower Rates

Conversely, an argument can be made for maintaining rates at current levels. With consumer spending slowing down, as stimulus measures wind down, and as lenders become more cautious in their underwriting criteria. Each day, higher interest rates have an impact on real estate investors, business owners, and borrowers, as the cost of financing all types of debt has significantly increased. While goods inflation has declined, service inflation may follow suit. Rental prices are also dropping. While the equity markets have experienced a rally, most gains are attributable to a handful of large technology companies. Excluding these companies would leave the overall market relatively flat. Additionally, the 2-10 spread, a measure of the yield curve, is significantly inverted by over 100 basis points. Such inversion is generally seen as a concerning sign and may indicate that financial markets are already facing significant constraints.

Market Commentary 6/23/2023

Rates Fall As Economy Shows Signs Of Slowing

I wanted to share an observation with you regarding the recent rate hike journey initiated by the Federal Reserve. Over the past few weeks, Insignia Mortgage has witnessed a significant upsurge in inquiries for cash-out refinances, bridge loans, and second mortgages. Borrowers are seeking these solutions to address higher interest-rate debt or growing financial obligations. We attribute this rise in inquiries to borrowers experiencing loan adjustments from increased interest carry, coupled with the Fed’s hints of higher rates for a longer duration.

Bank underwriting remains stringent for best rate execution, as evident from the latest senior loan officer survey. The impact of these tightening lending conditions on the residential and commercial real estate markets is yet to fully unfold. So far, the housing sector has shown resilience, while the commercial office market faces more challenges. Looking ahead, we anticipate an intriguing landscape in 2023 and the first half of 2024. Higher interest rates will likely necessitate price adjustments to accommodate the increased cost of capital for leveraged property acquisitions.

The Lending Pool Outlook

While some lenders strive to keep interest rates at 6.000% or below, we acknowledge that the pool of lenders offering moderate rates and flexible underwriting continues to shrink. However, at Insignia Mortgage, we remain committed to diligently exploring the market and identifying lenders capable of closing transactions efficiently. We are seeing a big uptick in the non-QM space as borrowers struggle to qualify for a loan. These non-QM programs are helping as they are less strictly underwritten, but carry a higher rate for the commiserate risk.

Insignia Mortgage Appoints Jay Robertson to Associate Broker 

BEVERLY HILLS, CA – June 22, 2023 

As of June 22, 2023, Insignia Mortgage is thrilled to welcome Jay Robertson to our team of brokers. Jay has over 30 years of experience in the mortgage industry. As the former president of First Capital and Luther Burbank Mortgage in Los Angeles, he has overseen or personally originated over $20 billion in loans in Southern California. 

Jay’s deep knowledge of the industry, combined with his commitment to exceptional customer service, makes him a perfect fit for Insignia Mortgage. We know that his expertise will help us to continue providing our clients with the best possible service and advice.  

In his new role at Insignia Mortgage, Jay will work closely with clients to help them secure the right mortgage for their needs. He will use his extensive network of industry contacts and his in-depth knowledge of the mortgage market to help our clients navigate the complex process of securing a mortgage. 

Damon Germanides, co-founder of Insignia Mortgage commented that “Jay brings such a unique perspective to Insignia Mortgage as he has been both a CEO of a large mortgage company as well as a loan originator. He knows better than most what it takes to win over clients and how to create long-term partnerships with referral partners. His knowledge will be great to our boutique firm.” 

When asked to describe his customer relationship style, Jay stated that “I believe in taking care of my clients.” He is known for being a trusted advisor who always puts his clients’ needs first. “It’s not about the volume of business I do. It’s about arming my clients with the most current information so they can make educated decisions about their future,” he explains. Jay’s honest and expert guidance, backed by decades of experience in real estate finance and luxury residential real estate sales, continues to define his personalized white-glove approach to service.  

About Insignia Mortgage 

At Insignia Mortgage, we understand that what works for one client does not always work for everyone. Especially when your financial picture doesn’t adhere to the strict model that many conforming lenders demand. Even under the most complex circumstances, our team of loan experts can quickly navigate through the process to deliver the most highly competitive loan solutions. We’ve successfully closed some of the largest and most complex transactions in the country for high net-worth clients, many of whom are self-employed and have significant assets but fluctuating incomes; and, for foreign nationals who receive income outside of the United States or are buying in the United States for the first time. 

Market Commentary 6/16/2023

The Fed Delivers A Hawkish Pause

The Federal Reserve’s dot plot strongly suggests that interest rates will continue to rise in increments of 0.25 basis points, with potential hikes in both July and September. This trajectory would bring the Fed Funds terminal rate to 5.75%. However, accurately predicting the impact of further rate hikes on the economy is a difficult task. There are valid arguments both for raising interest rates and for taking a pause.

Despite some concerning economic data, the US equity market has recently experienced significant growth. Even a hawkish Fed has had little influence on cooling off this recent rally. In the face of such data, this rally creates a wealth effect and eases financial conditions. Such does not align with the Fed’s intentions. Additionally, the US consumer remains strong, evidenced by better-than-expected retail sales. The housing sector, particularly in more affordable segments, has seen a surge. Multiple offers are becoming common in spite of mortgage rates hovering around 6.00%, with rates having doubled compared to over a year ago.

The State Of The Economy

Regardless of these small successes, several manufacturing reports indicate a weakening economy. The yield curve has steepened again and weekly jobless claims have risen, all of which support the argument for a pause by the Fed. It’s worth noting that labor is a significant cost for most businesses. With a tight labor market, wages have moderated yet continue to rise. The Fed considers wage inflation and a tight labor market as factors that justify ongoing rate hikes.

The current expensive stock market, fueled by AI mania and investors trying to catch up after anticipating a market downturn, may have a positive effect on residential real estate. Investors recouping losses or utilizing gains to purchase homes can contribute to this result. Nonetheless, mortgage underwriting remains challenging. Banks are not giving money away despite higher interest rates. Our office diligently surveys over 20 lenders daily to find the best execution for prospective borrowers. With almost 20 years of experience in the industry, we can confidently say that these are some of the most challenging times. The main cause of these current challenges is the combination of a tight housing supply, the limited amount of new construction in our primary market, and the overall high cost of coastal housing markets.