The Congressional Budget Office (CBO) is anticipating a grim second quarter this year as the economy sputters amid coronavirus-related layoffs and business closures, CBO director Phill Swagel said in a blog on Thursday (April 2).
Considering the disruption of daily business combined with a boost from the stimulus package, the CBO’s “very preliminary estimates” point to a drop in gross domestic product (GDP) exceeding 7 percent in Q2 2020.
“If that happened, the decline in the annualized growth rate reported by the Bureau of Economic Analysis would be about four times larger and would exceed 28 percent. Those declines could be much larger, however,” he said.
There were more than 3.3 million new unemployment claims reported on March 26. The Q2 unemployment rate “is expected to exceed 10 percent during the second quarter, in part reflecting the … claims reported on March 26 and the 6.6 million new claims reported this morning [Thursday, April 2].”
The CBO indicated that new claims filed April 2 were 10 times higher than in any single week from 2007-09, during the financial crisis and recession. And unemployment is likely to exceed 10%
Of course, mortgage delinquencies will explode to near 30%.
Better Call Jerome (Powell)!
Yesterday, the Mortgage Bankers Association released their weekly mortgage applications index … and it was dismal for mortgage purchase applications.
Mortgage purchase applications, generally peak each year in mid-April to May, crashed prematurely in late-March by 11.3% WoW.
One reason for the decline is, that in spite of a mortgage rate decline, initial jobless (unemployment) claims hit a historic high of 6.65 million.
Yes, it is hard to shop for a home in a virus lockdown.
Mortgage refinancing applications, on the other hand, soared as the mortgage refinancing threshold has been reached.
Lenders better call Jerome (Powell) for more QE!
Mortgage Real Estate Investment Trusts (MREITs) got clobbered starting February 20th and declined by over 50% before a small rally after the Fed/Congressional bailouts.
Year-to-date, mortgage REITs are down over 50%.
The Fidelity and Vanguard bond indices didn’t plunge as far and had a better rebound effect after the bailouts.
Equity REITs had a plunge and rebound similar to the Dow.
Mr. Freeze is still around for mortgage REITs.
Despite titanic intervention by The Federal Reserve and $2 trillion Congressional spending bill (packed with pork-barrel spending unrelated to the coronavirus), the Dow continued to nosedive.
Or as Buzz Lightyear once said “To infinity … and beyond!” He was referring to government spending and The Fed’s balance sheet.
The Dow has whipsawed over the week, but particularly Friday. When The Fed announced it will reduce Treasury QE from $75BN to $60BN per day, the Dow dropped.
Oddly, the Dow has been fairly predictable .. until The Fed/Congress got involved.
According to the Elliott Wave, the Dow has broken from the major wave.
Equity markets are still hypersensitive to coronavirus news and its impact on the economy.
At least Chilean markets are up!
(Bloomberg) — U.S. loan applications for buying and refinancing homes plunged last week by the most since the global financial crisis, amid coronavirus shutdowns and related financial turmoil that pushed borrowing costs higher.
The Mortgage Bankers Association’s index of applications fell 29.4% in the week ended March 20, the biggest decline since early 2009. Home-purchase applications dropped by 14.6% while refinancing applications plummeted 33.8%.
The average contract rate on a 30-year fixed mortgage increased 8 basis points to a two-month high of 3.82%, despite the Federal Reserve cutting the benchmark interest rate to near zero.
The decline in applications is an early sign suggesting home sales will slow and that refinancings are coming off a spike. That follows other data indicating a precipitous dropoff in business activity this month as stores and schools shutter to prevent the spread of the virus.
Yes, MBA mortgage applications fell the most since 2009 and the financial crisis.
Mortgage rates actually rose last week (yellow line) but will likely decline this week.
The biggest decline came in mortgage refinancing applications, down 33% WoW.
Mortgage purchase applications dropped 14.64% WoW.
Margin calls, the focus of books and movies like Margin Call, The Big Short, etc., during the financial crisis, are back!!
(Bloomberg) — The $16 trillion U.S. mortgage market — epicenter of the last global financial crisis — is suddenly experiencing its worst turmoil in more than a decade, setting off alarms across the financial industry and prompting the Federal Reserve to intervene.
Unlike last time, risky mortgages aren’t the cause. Instead, the coronavirus pandemic is threatening to make good loans go bad — and simultaneously sapping the market’s funding. There are fears that government efforts to shore up borrowers and financing won’t be enough and that mortgage and property investors again face massive losses.
Measures to slow the spread of the deadly disease are slamming the brakes on commerce, threatening to prevent companies from making payments on their leases and commercial mortgages. Companies are also firing employees, who won’t be able to keep up on their own rents and home loans. Mortgage industry veterans warn of a cascade of defaults.
At the same time, holders of mortgage-backed securities are fielding redemption requests from clients, margin calls from jittery counterparties and drops in their valuations, forcing the funds to solicit offers on billions in assets in emergency sales over the weekend. The pain continued Tuesday with Invesco Mortgage Capital Inc., a real estate investment trust that invests in mortgage-backed securities, also saying it’s no longer able to fund margin calls. If forced sales accelerate, bond prices could fall and put pressure on other investors to mark down or sell their holdings too.
Yes, Invesco Mortgage Capital is getting slaughtered, plunging from $18 on February 20th to $2.64 today.
The Fannie Mae to Gov’t 10 year has exploded indicating a troubled mortgage market.
Margin calls … they’re ba-ack!
The US housing and residential mortgage market have benefitted from the dreaded COVID-19 virus … in the sense that the 10-year Treasury yield and contemporaneous mortgage rates (30-year) have fallen since September 2019 (pre-COVID-19 breakout).
But the recent EHS numbers are for February (+6.5% MoM), not March. Expect around a 30% decline in existing home sales for March.
Here is a Washington DC area Realtor in action!
It is the morning after the Fed panicked and lowered its lower bound for The Fed Funds Target rate to … 0%. Here is Fed Chair Jerome Powell calling to The Fed to take evasive action!
The result? US Treasuries yields are falling like a rock. US Treasury 10Y yields are down around 20 basis points this morning.
And unless lenders lower their 30-year mortgage rates, the spread between Bankrate’s 30 year average mortgage rate and the 10 year Treasury yield is at its highest level since Q4 2008, the epicenter of the financial crisis.
This morning before the US equities markets open, Europe is already down around 7% – 8%.
Here is Fed Chair Jerome Powell wishing us all the best!
If you are watching panic at the Bank of Japan, European Central Bank, and Bank of England, you would think that the Spanish Flu from 1918 that killed between 17 and 100 million people was back.
While we watch the DJIA shed another 800 points in the first 30 minutes of trading, mortgage applications for last week skyrocketed as is there was no coronavirus.
Mortgage applications rose 55.43% from the preceding week. Refinancing applications rose 78.585 (NSA) while mortgage purchase applications rose 7.21%, far less than refinancing applications.
Here is a chart of refinancing applications as mortgage rates tumble.
Let’s see what happens with existing home sales in the next report.
Whoomp, there it is!
Boston Fed President Eric Rosengren is joining the “unconstrained rate manipulation squad” by calling for The Fed to purchase more than just Treasuries and Agency MBS.
(Bloomberg) — Federal Reserve Bank of Boston President Eric Rosengren said policy makers should be allowed to buy a broader range of assets if they lack sufficient ammunition to fight off a recession with interest-rate cuts and bond purchases.
With 10-year U.S. Treasury yields notes already at record lows, Rosengren said typical quantitative easing may not work as it did during the 2008 financial crisis. Therefore, the Fed may need the flexibility “enjoyed” by policy makers in Europe and Japan.
For the moment.
Remember, Maiden Lane LLC from 2008? The loan to Maiden Lane LLC loan was extended under the authority of Section 13(3) of the Federal Reserve Act, which permitted the Board, in unusual and exigent circumstances, to authorize Reserve Banks to extend credit to individuals, partnerships, and corporations.
Will The Fed declare unusual and exigent circumstances, like they did with Bear Stearns, JP Morgan Chase and Maiden Lane?
Perhaps The Fed will add stocks, corporate bonds and real estate citing unusual and exigent circumstance.
Fear is driving markets … and Central Banks.
To quote Coates (Common) from the Keanu Reeve’s flick The Street Kings about The Federal Reserve, “We straight nightmares. We the walking, talking exigent circumstances.”
Thanks to Jesse at Jesse’s Cafe Americain for that wonderful Fear photoshop of Fed Chair Powell.