05_15_2020_blog

Market Commentary 5/15/20

In another dismal week of economic data, equity volatility increased while bonds closed the week out the week essentially unchanged. Further adding to the horrible economic news, U.S. and China tensions increased as well as the U.S. is set to impose restrictions against Huawei Technologies.

Fed chairman Powell spooked markets this week with his comments calling for more federal financial support or risk long-term damage to the U.S. economy. Truthfully, no one knows how the economy will re-open and we need to support our citizens with both monetary and fiscal stimulus to avoid small business owners sinking to a point of no return. Federal support along with congressional bipartisanship is needed as businesses many businesses will need the lifeline of the government to be in order to hang on long enough to gradually reopen during the coming months.  

On the residential lending front, we are starting to see a little bit more optimism as some lenders begin to loosen up Covid-19 related guideline overlays. This is welcome news as we are also seeing a slight uptick in new purchase inquiries in what is normally the busiest home-buying season of the year. Some lenders have lowered interest rates and expanded loan-to-value guidelines in a bid to grab market share. Overall, the lending landscape remains tough to navigate, but transactions are closing, and that’s a win in this otherwise challenging moment.

05_08_2020_blog

Market Commentary 5/8/20

The April jobs report was the worst on record with over 20 million of the U.S. workforce currently unemployed. Our hearts go out to each and every person who has lost their job as a result of Covid-19. However, the U.S. equities market is trading up today, so we ask ourselves, “what gives?” Perhaps the market is telling us the worst is behind us. We sure hope so, but we still believe there will be a tough road ahead as our governors and mayors slowly begin to re-open up the economy.

Interest rates remain pegged near zero on U.S. T-Bills and the 10-year U.S. Treasury bond has traded within a tight range over the last couple of weeks as volatility has subsided. However, mortgage rates have untethered from the U.S. Treasury rates as banks have raised interest rates and tightened guidelines, understandably. We expect mortgage rates to trade better if and when the U.S. economy can re-open without significant spikes in Covid-19 infections. 

Commercial lending, including multi-family, so far has been hit the hardest due to so many tenants or renters unable to pay their rent. Despite this, we are starting to see some relief as lenders slowly re-enter the market. Expect several months of payment reserves as part of the loan request, also known as an interest reserve, and reduced loan-to-values and risk-based pricing.

On the residential lending front, there has been no better time in my career to be a mortgage broker. Insignia Mortgage’s many long-term relationships are paying off as we are customizing loans for our clients day in and day out. Our suite of lenders all have different risk appetites, so having optionality and pricing power with different lenders has resulted in our ability to place loans that other large money center banks have declined. 

We continue to offer the loans for the following scenarios with very fair rates and terms:

  • Interest-only purchase loans, refinances, and cash-out loans for primary residences, second homes, and investment properties.
  • Non-occupant co-borrowers.
  • Foreign national loans.
  • Cross-collateralized loans and Asset consumption loans.
  • 1031 exchanges and loan structure with LLC, LP, or corporation as borrowers.
05_01_2020_blog

Market Commentary 5/1/20

Economic pain caused by Covid-19 deepened this week as the unemployment numbers hit 30 million people. Expect next week’s April jobs report to hit 20%. With consumer spending down, and so many people out of work, it was no surprise that Q1 2020 GDP contracted by – 4.80% and will likely be followed up by a much larger drop in Q2 2020. The Fed and the federal government are implementing a “by any means necessary” approach, which is echoed by the European and Japanese central banks and governments as well. These trends continue to backstop our economy. It’s hoped that the approach will boost economic recovery once the U.S. economy is turned on again, as well as support asset prices. We sure hope this is the case but are also aware that consumer and business behavior has changed due to the pandemic and the recovery could take much longer than anticipated. 

Regarding housing and lending, Covid-19 hit the spring buying season hard. However, interest rates remain low and may drop further over time, enticing more buyers into the market. There are also signs that the non-QM market is slowly reviving, which is a positive sign, especially for cities such as Los Angeles which have many self-employed borrowers. Big banks continue to pull back from the marketplace. Our office has received an unprecedented number of requests for financing the past few weeks as borrowers look for alternative financing options. We are happy to report that for the most part, our partner lenders remain committed to pulling out all the stops to help borrowers refinance or purchase homes. In our opinion, there has never been a better time to be a broker with long-term lending relationships and that is proving to be a great benefit for our clients during this very difficult time.

04_17_2020_blog

Market Commentary 4/17/20

The details of reopening our economy are still in flux. State governors are taking the lead and will coordinate their efforts for optimal results in that arena. Equity markets responded positively on Friday to some positive news from our biotech sector on cutting-edge coronavirus treatments. While we are a long way from a normally functioning economy, any and all positive news on how we can start to get back to work is welcomed. Expect April economic data to be horrific. The hope remains in a May re-opening of the economy safely and gradually. Look for a tick up in auto sales both new and used as a signal that we are returning to normalcy.

A national shutdown is a black swan event that is rarely accounted for in investment or lending assumptions. The pandemic has caused great suffering with unemployment expected to hit somewhere between 15% and 30% near-term, with a recovery thereafter. It is no easy task for lenders to navigate an environment where income is on hold, liquid reserves have been hit hard, and appraised values are expected to be lower, not higher in the foreseeable future. This is why lending rates are priced higher than what borrowers are expecting, which seems contradictory in this environment. The link between U.S. government and mortgage spreads has untethered as portfolio lenders (the only lenders in the jumbo mortgage space) demand a higher premium for elevated risk levels.

Portfolio banks are where deals can be done quickly and with certainty and this is where Insignia Mortgage shines. Our lending relationships for residential transactions are fully functional and while guidelines have been pulled back, you can expect reasonable purchase and refinance applications to close. Interest-only loans are still available as are cash-out up to 60% to 70% loan-to-value deals. We anticipate interest rates to gradually move lower as economic activity is ramped up along with the assumption that the virus curve declines as the economy opens.

03_27_2020_blog

Market Commentary 3/27/20

Major fiscal and monetary stimulus out of the U.S. helped to thaw out the mortgage-backed security market which locked up last week in response to unprecedented volatility in global financial markets caused by Covid-19.

The Fed’s response was big and bold as was Congress’s and it helped to soothe the secondary mortgage and corporate bond markets. However, with a third of the U.S. not working, it is unclear how lenders will underwrite loans. 

For the moment, Insignia’s lender partners are being quite flexible in structuring new loans, but this could change over time should U.S. workers be unable to return to work in a few weeks. 

The non-QM mortgage banking sector of the market has been decimated. Those types of loans, which are riskier by nature, are on hold. We imagine that a fair number of lenders who offered these types of loans will go out of business or greatly scale back their loan products.

Thankfully, Insignia Mortgage has spent years building relationships with community banks and local credit unions. For the moment, these federally-regulated lenders are actively lending, albeit a bit more cautiously. Nonetheless, they remain active and willing to provide financing to our borrowers. 

Currently, borrowers should understand that there’s a disconnect between U.S. Treasuries trade and mortgage rates at the moment. Lenders are trying to balance the increased risk associated with this pandemic against loan volume against a backdrop of a very difficult work environment. Don’t be surprised to receive rate quotes higher than what you would imagine given the low rates the U.S. government is borrowing at. 

Insignia-blog-3-20-20

Market Commentary 3/20/20

Mortgage interest rates continue to increase as these instruments diverge from U.S. Treasury in the face of unprecedented uncertainty due to the biological shock to the global economy induced by the coronavirus. Economic data is meaningless at the moment as the sole focus remains on viral infection rates and whether and how quickly the U.S. can flatten the curve on the number of people infected. 

China and South Korea are showing real promise as the number of infections has subsided. Our hope is that the devastation we are witnessing in Italy is not repeated in our big cities here in the U.S. Both California and New York have paused their economies to help suppress the spread of the virus. We prefer to be optimistic that these drastic measures will work, but only time will tell.

With the government and Federal Reserve pumping unprecedented funding at this problem, we believe that our economy will recover and that the probability of the world seeing its first global depression of the 21st-century remains unlikely. However, significant economic pain is assured, and the recovery will not be without cost. We expect to see unemployment rates skyrocket and many businesses fail.

On the mortgage front, we are seeing the more creative loan products put on hold. These are the programs designed to accommodate the self-employed and real estate investors. Our primary bank and credit union lending sources continue to lend and to offer attractive terms, albeit with interest rates a bit higher than the public is expecting due to the intense uncertainty surrounding the mortgage market at the moment. 

03_13_2020_blog

Market Commentary 3/13/20

All global financial markets have experienced max volatility as the novel coronavirus has reached pandemic levels. This has increased the odds of a global recession. U.S. government bonds sold off on Thursday as investors fled to cash. The market rebounded on Friday afternoon as a response to the White House’s declaration of the outbreak as a national disaster. We hope with this announcement can institute responses that will start to get ahead of this disease.

Economic data is not relevant at the moment. However, the U.S. economy was in a good place prior to this pandemic so the hope is that the economy will recover once the virus has abated. In addition to the White House declaring this a national emergency, the Fed and Congress will be pumping in fiscal and monetary stimuli at unprecedented levels to help ease the blow to business and individuals affected by the virus.

On the lending front, our lending sources are operational, have contingency plans in place, and are actively working on both purchase and refinance transactions. Interest rates are at historical lows which is important for those looking to buy a home or refinance debt. It is worth noting that the 10-year Treasury has moved from a low of under .500% to back near 1%. This is actually a positive as rates going to zero would be problematic for our nation’s banks and for the insurance companies which collectively finance our debt. 

03_07_2020_blog

Market Commentary 3/6/20

Coronavirus fears have driven interest rates across the developed world to historic lows. Equity markets have reacted violently to the uncertainty around how this new disease may disrupt global supply chains and affect overall economic activity. 

In response to these concerns, the Federal Reserve stepped in earlier this week with an emergency 50 basis point rate cut. This cut was an attempt to promote confidence throughout the financial system and push down short-term interest rates, which will help corporations and individuals attain lower-cost financing.  

There is no way of knowing what affects this virus will have on the globally interconnected economy and if it will send the world into a recession. What we do know is that it will eventually run its course and that disruption will stop once our scientific community develops remedies to combat the virus. It is important to note while the virus is very contagious, it does not appear to be extremely deadly for most healthy individuals. As a result, travel and leisure businesses will be hit hardest should the virus spread. On the other hand, the U.S. service economy (70% of the U.S. economy) is derived from service) may adjust better than currently being forecasted in the equities market given all the technology tools that permit employees to work remotely. 

In other news, the February jobs report was a good one with a better than expected job creation number, while unemployment remained at 3.500%. However, even a good jobs report didn’t matter as the equity markets shrugged off the good news. 

Government-guaranteed interest rates have touched levels most of us believed we would never witness unless we were in a full-on depression.  The 10-year Treasury ended the week at .78%, which is remarkable, but also a bit scary. While banks lowered interest rates, it is important to note that as rates approach zero, it becomes increasingly difficult for banks to earn a net margin. The result is that mortgage rates remain higher than what some customers believe mortgages should be priced at. Should interest rates remain low, we would expect mortgage rates to continue to slide lower. However, we do expect that rates will move up once a clearer picture on the coronavirus emerges. It is our belief that rates will remain low for quite some time.

02_28_2020_blog

Market Commentary 2/28/20

The fear surrounding the rapidly emerging COVID-19 threat has pushed U.S. Treasury yields to an all-time low. Worldwide equity markets plummeted in the worst week for equities since the 2008 financial crisis. With this biological event creating both supply and demand economic shocks, it is not clear how fiscal stimuli will help soothe the markets, but it appears likely that a coordinated international central bank package may be introduced next week to help stop the bleeding in equities. Furthermore, there are rumors that pharmaceutical companies in Israel and around the globe are racing against the clock to rapidly develop a vaccine and/or other anti-viral therapies.  

From an economic standpoint, the virus has disrupted international supply-chains and hurt travel and leisure businesses. If the virus continues to spread or becomes a pandemic, it will affect consumer and business spending patterns. The virus is having a trickle-down effect on our economy and is hurting stocks as companies scale back earnings guidance/ Economists are lowering growth prospects. Keep in mind, these “black swan” types of events are impossible to handicap and the markets will remain volatile until there is a clearer understanding of the virus.

From an interest rate standpoint, government-guaranteed bond yields are now at historic lows in the U.S and may even go lower as the 10-year U.S. Treasury bond sits at 1.16% and may be headed to under 1.000%. However, mortgage rates are not at all-time lows, yet remain incredibly attractive. Many lenders we are speaking to are instituting a hard floor on interest rates and are not interested in lowering mortgage rates further for the moment. 

Therefore, our posture which for the last many months has been biased toward locking in rates has now changed to floating rates in anticipation of a major internationally coordinated central bank coronavirus stimulus package. Should rates plummet further, banks will be forced to move interest rate floors to stay competitive.

02_21_2020_blog

Market Commentary 2/21/20

The 30-year U.S. Treasury bond hit an all-time low on Friday as investors fled riskier assets and sought the safe haven of U.S. government-guaranteed debt. The causes for concern were weak overseas manufacturing data and ongoing uncertainty in handicapping how the coronavirus (now named “COVID-19”) will affect economic growth in the coming months. Should this virus become more of a problem, interest rates will plunge. For now, no one knows how this virus will evolve, but to date, it appears to not be as deadly as biologically similar infections.

Earlier in the week, bond yields held firm even after hotter than expected PPI and Core PPI inflation readings.   

Home buying season should be a good one with interest rates remaining low for the foreseeable future. Supply and affordability will be the bigger issue, especially in the more expensive coastal markets. Building permits surged but housing starts fell which should put even more pressure on short term supply concerns. 

With rates near historic all-time lows, we continue to believe that locking-in is the right course of action. The wild card is the potential threat that the coronavirus will have on global productivity. For now, that risk is low, but it may change. If the virus becomes an international pandemic, expect the U.S. 10-year Treasury to touch 1% or lower.