CBO Forecasts Q2 GDP Drop Of -7% (Annualized -28% Decline), Mortgage Delinquencies To Near 30%

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%

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Of course, mortgage delinquencies will explode to near 30%.
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Better Call Jerome! Mortgage Purchase Applications Drop 10.33% WoW Despite Rate Decline As Initial Jobless Claims Hit 6.65 Million

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.

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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.

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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.

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Lenders better call Jerome (Powell) for more QE!

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Mortgage REITs Collapse By More Than 50% Before Slight Rally

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.

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Year-to-date, mortgage REITs are down over 50%.

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The Fidelity and Vanguard bond indices didn’t plunge as far and had a better rebound effect after the bailouts.

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Equity REITs had a plunge and rebound similar to the Dow.

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Mr. Freeze is still around for mortgage REITs.

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Dow Closes Friday Down 915 (Or 4%) As 10-Year Treasury Yield Drop 17 BPS (Fed Announces Reduction In QE)

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.

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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.

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Oddly, the Dow has been fairly predictable .. until The Fed/Congress got involved.

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According to the Elliott Wave, the Dow has broken from the major wave.

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Equity markets are still hypersensitive to coronavirus news and its impact on the economy.

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At least Chilean markets are up!

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The Fed’s Bigger Boat! Is The Fed’s Cure Worse Than the Covid-19 Virus?

Apparently, The Federal Reserve and US Treasury think they need a bigger boat!

(Bloomberg) — The economic debate of the day centers on whether the cure of an economic shutdown is worse than the disease of the virus.  Similarly, we need to ask if the cure of the Federal Reserve getting so deeply into corporate bonds, asset-backed securities, commercial paper, and exchange-traded funds is worse than the disease seizing financial markets. 

In just these past few weeks, the Fed has cut rates by 150 basis points to near zero and run through its entire 2008 crisis handbook. That wasn’t enough to calm markets, though — so the central bank also announced $1 trillion a day in repurchase agreements and unlimited quantitative easing, which includes a hard-to-understand $625 billion of bond buying a week going forward. At this rate, the Fed will own two-thirds of the Treasury market in a year.

But it’s the alphabet soup of new programs that deserve special consideration, as they could have profound long-term consequences for the functioning of the Fed and the allocation of capital in financial markets. Specifically, these are:

CPFF (Commercial Paper Funding Facility) – buying commercial paper from the issuer.

PMCCF (Primary Market Corporate Credit Facility) – buying corporate bonds from the issuer.

TALF (Term Asset-Backed Securities Loan Facility) – funding backstop for asset-backed securities.

SMCCF (Secondary Market Corporate Credit Facility) – buying corporate bonds and bond ETFs in the secondary market.

MSBLP (Main Street Business Lending Program) – Details are to come, but it will lend to eligible small and medium-size businesses, complementing efforts by the Small Business Association.

To put it bluntly, the Fed isn’t allowed to do any of this. The central bank is only allowed to purchase or lend against securities that have government guarantee. This includes Treasury securities, agency mortgage-backed securities and the debt issued by Fannie Mae and Freddie Mac. An argument can be made that can also include municipal securities, but nothing in the laundry list above.

So how can they do this? The Fed will finance a special purpose vehicle (SPV) for each acronym to conduct these operations. The Treasury, using the Exchange Stabilization Fund, will make an equity investment in each SPV and be in a “first loss” position.

What does this mean? In essence, the Treasury, not the Fed, is buying all these securities and backstopping of loans; the Fed is acting as banker and providing financing. The Fed hired BlackRock Inc. to purchase these securities and handle the administration of the SPVs on behalf of the owner, the Treasury.

In other words, the federal government is nationalizing large swaths of the financial markets. The Fed is providing the money to do it. BlackRock will be doing the trades.

Here is part of the mayhem The Fed/Treasury are trying to mitigate. The CitiMortgage Alternative Loan Trust 2007-A4 asset-backed security.

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Yes, the US Treasury curve is now below 0.75% from 10 years in, including negative yields on most Treasury bills.

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The US Treasury actives curve and On/off the run curves are under 1% at 15 years and in.

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Welcome to Amity Island, in a shutdown over the Corona-19 virus.

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Mr Freeze! U.S. Mortgage Rates Slip While Home Sales Head for Deep Freeze (Unemployment Claims Hit All-time High!)

Deep freeze?

(Bloomberg) — U.S. mortgage rates fell for the first time in three weeks. But for would-be homebuyers frozen in fear of an economic meltdown, borrowing costs are no longer a prime concern.

The average rate for a 30-year fixed loan was 3.5%, down from 3.65% last week, Freddie Mac said in a statement Thursday.

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Unemployment claims jumped today to the highest ever.

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Pennsylvania and Ohio lead the nation in unemployment (jobless) claims.

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Did someone say Deep Freeze?

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Mortgage Apps Crash Most Since 2009 (Covid-19 Lockdown Edition)

(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.

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Mortgage rates actually rose last week (yellow line) but will likely decline this week.

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The biggest decline came in mortgage refinancing applications, down 33% WoW.

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Mortgage purchase applications dropped 14.64% WoW.

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Mortgage Bonds Rattle Wall Street Anew With Invesco Joining Pain (Fannie Spread To Gov’t SOARS)

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.

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The Fannie Mae to Gov’t 10 year has exploded indicating a troubled mortgage market.

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Margin calls … they’re ba-ack!

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Housing and COVID-19 (Existing Home Sales Rise 6.5% In February) -30% Likely In March 😩

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).

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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!

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The Morning After! US Treasuries Surge, Mortgage Rate Spread Highest Since Q4 2008

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.

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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.

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This morning before the US equities markets open, Europe is already down around 7% – 8%.

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Here is Fed Chair Jerome Powell wishing us all the best!

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