Anthony B. Sanders – Course Notes For Financial Markets
2007 marked the last year before the financial crisis and Great Recession. Unfortunately, this is where we are in terms of the US Treasury yield curves (10Y-2Y and 10Y-3Mo).
Commercial and Industrial (C&I) lending YoY has slowed in recent months. And is lower than before The Great Recession and financial crisis.
But like the honey badger, the US economy keeps finding ways to escape … recession.
It was back during the banking crisis of 2008/2009 that led Chris Dodd (D-CT) and Barney Frank (D-MA) to introduce the “Dodd–Frank Wall Street Reform and Consumer Protection Act.” This Act created Elizabeth Warren’s Consumer Financial Protection Bureau (CFPB).
More specifically, Bank of America, Quicken Loans, Wells Fargo, Caliber Home Loans, along with the Mortgage Bankers Association, the American Bankers Association, the National Fair Housing Alliance, and others asked the CFPB to do away with the QM rule’s debt-to-income ratio requirement.
And now, it looks like they’re going to get their wish.
In a letter sent last week to several prominent members of Congress, CFPB Director Kathy Kraninger said the bureau has decided to propose an amendment to the QM Rule that would “move away” from DTI as a factor in mortgage underwriting.
Specifically, Kraninger said the CFPB has decided to shift from the DTI standard and move to an “alternative, such as a pricing threshold (i.e., the difference between the loan’s annual percentage rate and the average prime offer rate for a comparable transaction.”
According to Kraninger, the proposed alternative would be “intended to better ensure that responsible, affordable mortgage credit remains available to consumers.”
The Ability to Repay/Qualified Mortgage rule was enacted by the CFPB after the financial crisis and requires lenders to verify a borrower’s ability to repay the mortgage before lending them money.
This includes a review of a borrower’s debts and assets to ensure they have the ability to repay the loan, with a stipulation that their DTI ratio does not exceed 43%.
But, Fannie Mae and Freddie Mac are not bound to this requirement, a condition known as the QM Patch. Under the QM Patch, loans sold to Fannie or Freddie are allowed to exceed to the 43% DTI ratio.
Some in the mortgage industry, including Federal Housing Finance Agency Director Mark Calabria, believe that the QM Patch gave Fannie and Freddie an unfair advantage because loans sold to them did not have to play by the same rules as loans backed by private capital.
The QM Patch is due to expire in January 2021, and last year the CFPB moved to officially do away with the QM Patch on its stated expiration date.
But, just like the DTI standard, that may not be the case anymore either.
According to Kraninger, the CFPB is also considering extending the deadline for the expiration of the QM Patch, thereby extending the special rules that Fannie and Freddie play by for an undetermined period of time.
Kraninger made the declarations in a letter sent last week to Sen. Mark Warner, D-VA.
In the letter, Kraninger said that the bureau “expects to propose” expiration of the QM Patch rule “for a short period.” However, Kraninger does not define how long that “short period” of time would be for.
Rather, Kraninger states that the GSE Patch would be extended “until the effective date of the proposed alternative or until one or more of the GSEs exit conservatorship, whichever comes first.”
According to Kraninger’s letter, the CFPB expects to issue a new rule on the matter “no later than” May 2020.
An analysis by CoreLogic’s Pete Carroll showed that the QM patch accounted for 16% of all mortgage originations in 2018, comprising $260 billion in loans.
Beyond that, Kraninger also states the bureau is “considering” adding a new parameter to the QM rule that would add a “seasoning” component to the lending rules.
“This approach would create an alternative pathway to QM safe-harbor status for certain mortgages when the borrower has consistently made timely payments for a period.”
It should be noted that none of these rule changes are actually proposed yet, and it is, therefore, possible that some of them may not come to pass. But Kraninger’s wording on the DTI threshold indicates that factor will be much less important going forward.
Kraninger closes her letter by suggesting that legislation could “better accomplish” clarifying the rules on QM loans, although efforts to do so have stalled out in Congress so far.
“While the Bureau is moving forward expeditiously to address the upcoming expiration of the GSE Patch, we recognize that legislation could better accomplish important policy objectives, such as providing clarity on what qualifies as a QM loan, leveling the playing field among lenders, and ensuring consumers continue to have access to credit,” Kraninger wrote.
Fannie and Freddie’s average DTI (debt-to-income) ratio has been trending upwards since the 2008/2009 banking fiasco.
Apparently, we learned nothing from the near banking catastrophe of the subprime / ALT-A crisis.
As The Federal Reserve attempted to “normalize” interest rates by raising The Fed Funds Target rate (upper bound) and shrink their balance sheet, all hell broke loose in the repo market (see whites spikes).
A repurchase agreement, also known as a repo, RP, or sale and repurchase agreement, is a form of short-term borrowing, mainly in government securities (Agency MBS, Treasuries). The dealer sells the underlying security to investors and buys them back shortly afterwards, usually the following day.’
Repo rates historically have been near zero %. But repo rates are now about 20 basis points about the Fed Funds Target Rate (upper bound).
Here are The Fed’s System Open Market (SOM) Holdings of T-bills and Notes/Bonds.
So much for The Fed trying to normalize what Bernanke and Yellen did since 2008.
Fed Chair Jerome “Noddy” Powell. Baby, baby, baby!
The Congressional Budget Office is projecting that the deficit, which has surged during the Trump administration (even though the Federal Budget is controlled by the Democrat-held House of Representatives), will top $1 trillion in the current budget year and remain above $1 trillion over the next decade.
This is a bit of a stretch. The US Federal budget deficit actually hit -$1 trillion in 2009-2011. And is now predicted to hit -$1 trillion again.
Hence, the reason for a new Treasury instrument that is less expensive than the 30-year Treasury bond.
Why is the song Wipeout running through my mind?
The Wall Street Journal notes that in the past 12 months, 40% of all US-listed companies were losing money, the highest level since the late 1990s – or a period also referred to as the Dot Com bubble.
Jay Ritter, a finance professor at the University of Florida, provided The Journal with a chart that shows the percentage of money-losing IPOs hit 81% in 2018, the same level that was also seen in 2000.
2020 should be an interesting year. After all, 2019 was one of the best years for the S&P 500 in history.
Will the bull run continue? Currently, the S&P 500 Price-to-Sales ratio is above the level seen in the Dot.com bubble of 1999.
All measures of the S&P 500 index are growing with cash flow per share growing at 32.03%!
On the other hand, the VIX index is a historically LOW levels.
Are we in a bubble? I call it “The Pepperjack Turducken Slammer Bubble.” It could deflate and ooze at any time.
Can you say Treasury-dazzle or T-Dazzle?
Since March 2009, after a massive intervention by The US Federal Reserve in terms of target rate cuts and assets purchases (QE), the S&P 500 index, the NAREIT Equity index and the NCREIF All-property index have zoomed to all-time highs (note that lack of volatility of the NCREIF commercial property index).
It seems that all assets classes have been “juiced-up” by The Federal Reserve monetary expansion that seems to be permanent. All assets classes can beat it.
And since March 2009, the Treasury actives curve has declined by over 100 bps.
But over the past 30 years, the best performers have not been real estate, but non-real estate companies.
Can you say Treasury Dazzle?
Yes, it is always sunny on Wall Street. Particularly when The Federal Reserve is running interference like the have since 2007.
The Federal Reserve has reversed course on its unwind of their balance sheet. Allegedly temporarily.
While The Fed kept rates at 25 basis points for a long time (since 2007), they finally started raising them under Fed Chair Jerome Powell. And had started lowering them again before an apparent halt.
Yes, the year-end repo skitter led The Fed to inject > $200 billion of temporary funding for the banks.
Jerome Powell leading the discussion of Fed policy.
Yes, the San Francisco Bay Area is quite pricey for housing. A peninsula (restricted area) with thriving technology companies (Facebook, Google, Apple, etc.), restrictive zoning and Uber-expensive construction costs result in a mondo-expensive home prices.
San Francisco requires $309,400 in MINIMUM qualify income to purchase a median sales priced house.
If we go down the peninsula to Los Altos Hills, we see available houses in the $2-40 million dollars range.
Of course, Los Altos Hills is not the median for the SF Bay Area. It is the Bay Area equivalent of Beverly Hills, Bel Air and Westwood in Los Angeles (non-coastal).
Needless to say, Fannie Mae and Freddie Mac do not buy mortgages from lenders in these areas. That is the province of jumbo lenders and securitizers like Redwood Mortgage Investors.
European Central Banks should be renamed “The Robot Monsters” .
New York Times — PARIS — Europe’s economy is struggling to gain traction after years of anemic growth. But the rock-bottom interest rates meant to power a recovery are fueling a property boom that is creating a new set of problems.
Money is so cheap — a 20-year mortgage can be had in Paris or Frankfurt at a rate of less than 1 percent — that borrowers are flocking to buy apartments and houses. And institutional investors, seeing a chance for lucrative returns, are acquiring swaths of residential real estate in cities across Europe.
In some parts of Europe, said Jörg Krämer, the chief economist at Commerzbank in Frankfurt, valuations have already returned to or exceeded levels that preceded the Continent’s debt crisis a decade ago, igniting concerns that the property boom could end badly.
“The risks are real, because negative interest rates in Europe are cemented,” Mr. Krämer said. “What’s important for the economy as a whole is to prevent the emergence of a dangerous new bubble.”
“The dynamics have totally changed in a short period of time,” said Matthias Holzhey, the head of Swiss real estate at UBS and the lead author of an annual report on property price spikes in major global cities. In some parts of Europe, he said, “low rates are pushing real estate valuations into the bubble risk zone.”
Financial authorities are on alert. In September, the European Systemic Risk Board, an arm of the European Central Bank that helps regulate Europe’s financial system, called on 11 countries including Luxembourg, Austria, Denmark and Sweden to pursue regulations and tax measures meant to rein in prices and promote housing affordability and availability.
With European Central Banks rates at zero and below, asset bubbles have formed. Such as in Paris with apartment rent index.
Yes, European Central Banks (Robot Monsters) are helping creates super low mortgage rates that begat real estate bubbles.
