Margin Call! Mortgage Lenders Are Starting to Go Broke as Loan Volumes Plunge (Fed Chasing Inflation Crushing Mortgage Industry As Mortgage Purchase Applications Are DOWN -41.5% Under Biden While Mortgage Rates Are UP 96%)

Under President Biden, inflation has soared and The Federal Reserve claims that they want to extinguish the inflation fire by tightening monetary policy … resulting in rising mortgage rates. Under Biden, mortgage purchase applications are DOWN -41.5% while mortgage rates are UP 96%.

(Bloomberg) The US mortgage industry is seeing its first lenders go out of business after a sudden spike in lending rates, and the wave of failures that’s coming could be the worst since the housing bubble burst about 15 years ago.

There’s no systemic meltdown coming this time around, because there hasn’t been the same level of lending excesses and because many of the biggest banks pulled back from mortgages after the financial crisis. But market watchers nonetheless expect a string of bankruptcies broad enough to trigger a spike in layoffs in an industry that employs hundreds of thousands of workers, and potentially an increase in some lending rates. More of the business is now controlled by independent lenders, and with mortgage volumes plunging this year, many are struggling to stay afloat.

Please note that mortgage purchase applications are DOWN -41.5% under Biden while mortgage rates are UP 96%.

Margin Calls
Many other lenders have seen the value of their loans drop, said Scott Buchta, head of fixed-income strategy at Brean Capital, an independent investment bank. The Federal Reserve has tightened rates by 2.25 percentage points this year in an effort to tame inflation, and 30-year US mortgage rates have surged above 5% for government-backed loans. That’s close to their highest levels since the financial crisis, from around 3.1% at the end of last year.

That’s beaten down the value of home loans made just a few months ago. A mortgage made in January and not eligible for government backing could have traded in early August somewhere around 85 cents on the dollar. Lenders usually try to make loans worth somewhere around 102 cents to cover their upfront costs.

For a lender whose loans dropped to 85 cents, the losses can be debilitating, even if they aren’t realized yet. On top of that, business is broadly plunging. Overall mortgage application volume has plunged by more than 50% this year, according to the Mortgage Bankers Association. These business conditions are spurring banks that provide lines of credit known as warehouses to make margin calls and cut credit.

“The warehouse lenders in this industry seem to be extremely on top of things in this downturn, unlike in ‘08,” said bankruptcy attorney Mark Power, who is representing creditors in the First Guaranty bankruptcy. “They are making margin calls quickly.”

Banks have emergency funding they can tap in times of crisis, which can often allow them to stay afloat in hard times. But not always: emergency financing from the Federal Reserve is usually only available for solvent institutions with a chance of recovering. In the last downturn, so many banks had so many soured loans and struggling assets of all kinds that hundreds failed. Nonbanks went bust as well.

US Industrial Production Slows Slightly To 3.90% YoY As Capacity Utilization Rises To 80.27% In July (But M2 Money Growth Is Shrinking Awfully Fast And 10Y-2Y Yield Curve SCREAMS Impending Recession!)

Today’s US industrial production and capacity utilization numbers showed a nice “steady as she goes” slow decline from previous months, though still positive at 3.90% YoY.

And it is difficult to argue that the US is in a recession when capacity utilization is at 80.27%.

Notice that industrial production growth falls below 0% during a recession and capacity utilization slumps. We are NOT there … yet.

However, M2 Money growth is shrinking awfully fast.

While the US is technically in default (two consecutive quarters of negative GDP growth), it doesn’t FEEL like a recession with 3.90% YoY industrial production growth and capacity utilization above 80%. During the Covid recession in early 2020, industrial production growth YoY had declined to -17.65% and capacity utilization shrank to 64.53%.

Speaking of a recession SIGNAL, the 10Y-2Y Treasury yield curve is SCREAMING impending recession.

The Empire Strikes Out! Empire State Manufacturing Survey Collapses In August (-31.3), Worst Since Covid Shutdown And Great Recession

The Empire Strikes Out!

The US Empire State Manufacturing Survey General Business Conditions, that is. It just crashed and burned (-31.3) in August, the lowest reading since The Great Covid Shutdown and before that The Great Recession.

The inverted US Treasury yield curve (10Y-2Y) is beginning to make sense.

Jay’s Famous Chili! M1 And M2 Money Velocity Crushed By Covid “Relief” As US Treasury Yield Curve (10Y-2Y) Remains Inverted

The 2020 Covid outbreak led to a massive (and generally awful) reaction. There were economic shutdowns that caused extensive damage (particularly to small firms), but it was the massive overreaction by The Federal government in terms of Covid relief and The Federal Reserve’s expansion of the money supply that caused considerable damage.

One truly horrific chart is that of M1 Money and M1 Money Velocity (M1/GDP). M1 Money surged with Covid driving M1 Money Velocity down to levels never seem before.

The broader measure of money, M2, isn’t as dramatic, but we also see that M2 Money VELOCITY has plunged to levels never seen before.

What does low money velocity indicate? Simply put, The Fed is printing trillions of dollars, but GDP isn’t moving much. But that won’t stop Congress from spending (and using The Fed to buy its debt).

So, here we sit. This morning, the US Treasury yield curve (10Y-2Y) remains inverted. This AM, the curve inverted another -.591 basis points to -42.725, a sign of impending recession.

Yes, we are living through Jay Powell’s famous chili episode where money velocity is near historic lows and we have an inverted yield curve.

BTW, congratulations to Will Zalatoris (aka, Happy Gilmore’s caddy) for his first PGA Tour victory at the FedEx St. Jude Championship!

Winter Is Coming! Mortgage Rates, Gasoline Prices, Food Price Growth Slowing As Money Printing Slows (Just Wait For Winter!)

Politicians like to (falsely) take credit for things, such as Biden bragging about gasoline prices declining. Bear in mind that regular gasoline prices were $2.88 when Biden was inaugurated as President, rose to over $5 a gallon in June and now have declined to $3.98 for which Biden is taking credit. So, regular gasoline prices are still up 34% under Biden. Ouch!

But other rates and prices are dropping too. Bankrate’s 30yr mortgage rate started at , broke the 6% plane on June 21, 2022 only to drop to 5.53% on Friday. CRB’s foodstuffs price index started at 370.58 on Biden’s inauguration as President, rose to 606.71 on May 17, 2022 then retreated to 561.32 on Friday, August 13th. Even headline inflation (CPI YoY) is cooling … slightly.

You can see the recent declines in mortgage rates, gasoline and food prices (pink box) that corresponds to a shrinking of the US M2 Money stock growth. M2 Money is still growing at torrid pace (8.5% YoY) almost back to pre-Covid stimulypto levels of 6.8% YoY. So shrinking M2 Money growth is helping reduce mortgage rates and inflation, food/gasoline prices.

Instead of trying to remove Fed stimulus even more, Biden and Congress passed the “Inflation Reduction Act” which will barely scratch inflation and raises taxes across the board (despite Biden’s promise that no one making under $400,000 will see a cent of increase taxes). And Biden’s preposterous promise ignores the inflation tax which has been severe and still growing at 8.5% YoY. Not 0% as Biden and Harris claimed.

But wait for winter as food, gasoline and heating prices start to soar again.

My favorite dim-witted explanation of inflation belongs to Democrat Representative Pramila Jayapal who recently claimed that “inflation is a theoretical word that economists use.” Like the brilliant Milton Friedman???

US 30Y Mortgage Rate Climbs To 5.54% While 5/1 ARM Rate At 4.20% (134 Basis Point Spread)

Mike Lea and I wrote a paper entitled “Do We Need The 30yr FRM (Fixed-rate Mortgage)”. We argue that millions of Americans would benefit from an adjustable-rate mortgage like the 5/1 ARM for a host of reasons.

One good reason for a 5/1 ARM is the fact that it 134 basis points less expensive than the 30yr fixed-rate mortgage.

Mortgage rates have risen dramatically with the expectation of Fed rate tightening (green line).

Yes, there is a “fear factor” built in the 30r FRM (“OMG! The mortgage market will collapse without the 30yr FRM!!!!) Hogwash. Or malarkey, as Joe Biden likes to say. The mortgage market actually see the US join the rest of the world in having adjustable-rate mortgage being the predominant mortgage product.

US ARM share peaked at 10.8% in June 2022 before retreating to 7.4% as the 30yr mortgage rate retreated.

The 5/1 ARM product can help the affordable housing crisis in the US if we just let markets work. But in Washington DC, the term “free markets” is like the old Dobie Gillis character Maynard G. Krebs and the word “Work.”

US Producer Price Index Cools To 9.8% YoY In July As M2 Money Growth Cools And Recession Probability Increases

Somehow I doubt if Biden, Harris and Jean-Pierre (Biden’s Press Secretary) will go on the talk show circuit talking about the Producer Price Index Final Demand at 9.8% YoY, meaning that inflation is still raging.

But the curious thing about the PPI Final Demand numbers. While lower than June’s reading of 11.3% YoY, it also coincides with declining gasoline prices and declining growth in M2 Money stock. Which is still growing at 5.9% YoY. The probability of recession is rising (even though technically the US is in recession after 2 consecutive quarters of negative GDP growth.

Here is the more striking chart.

So is the US “improving” on prices because of brilliant Biden strategies (I just laughed at my own “bon mot”)? Or are prices (PPI, gasoline) slowing because of declining demand as the US slips into recession?

Lawrence Summers was once again in the news saying that the way to cool inflation is to raises taxes (and cool demand). Only a true Statist would say something like that. Larry, how about Biden and Congress stop spending so much money that is helping to fuel inflation?

One Washington DC types would rest their hopes on cooling inflation by having the US slip into recession AND raises taxes.

Biden looking for a way out.

Jurassic MBS Market! Agency MBS Prices Swoon With Implied Fed Hikes (Duration Risk Increases Too)

Agency mortgage-backed securities (MBS) prices started to degrade as The Federal Reserve started to try to combat inflation caused by Biden’s energy policies and rampant Federal spending. That is, under June when the implied Fed O/N rate (red line) cooled and the 30-year mortgage rate (blue line) has come down a little.

In terms of duration risk, the FNCL 3% MBS duration has risen with anticipated Fed tightening.

So, further Fed tightening will result in greater MBS losses AND rising duration risk.

Hold on to your butts!

Simply Unaffordable! Gap Between Real Home Price Growth (+11.17% YoY) And Real Wage Growth (-2.15% YoY) Near Highest Since 1988 (REAL 30Y Mortgage Rate Is Now -3.23%)

The US housing market is simply unaffordable for millions of Americans. To illustrate the problem, here is a chart of the Case-Shiller National home price index less CPI YoY graphed against Average Hourly Wages less CPI YoY.

The gap between the REAL national home price index YoY and REAL US average hourly earnings YoY is near the largest since 1988. Inflation is making matters far worse since REAL average hourly earnings growth continues to decline.

The only thing positive to say is that REAL home price growth YoY is lower now than at the peak of the 2005 home price bubble that burst catastrophically.

Another “positive” is that the REAL 30-year mortgage rate has fallen to -3.23%. At the peak of the house price bubble in June 2005, the REAL 30-year mortgage rate was +2.58%. THAT is one big difference between the pre-2008 recession and today’s impending recession.

Weekend Update! US Treasury Yield Curve Inversion Worsens Screaming Impending Recession, 30Y Mortgage Rate Rises To 5.6% (5/1 ARM Rate Rises To 4.21%)

Here is your weekend update on Treasury and Mortgage markets.

The current US Treasury 10Y-2Y yield curve just slipped further into reversion at -40.299 basis points, screaming impending recession. Oddly, The Federal Reserve has been leaving its balance sheet of Agency Mortgage-backed Securities (MBS) in tact (green line).

On the mortgage front, Bankrate’s 30-year mortgage rate index rose to 5.60% while the affordability-friendly 5/1 Adjustable Rate Mortgage (ARM) rate rose to 4.21%.