V-Shaped Recovery? US Pending Home Sales Rise 44.3% MoM in May, But Decline -10.4% YoY

According to the National Association of Realtors, pending US home sales rose 44.3% MoM in May.

The looks like a big V-shaped recovery to me.

Although YoY pending home sales declined -10.4%, it is a massive improvement over April’s -34.6% YoY reading.

Consumer sentiment looks similar to pending home sales YoY.

Could this be households escaping big cities? Just in time of the start of fall classes!

Fed’s Muriburiland: Fed Keeps Pumping Air Into Asset Prices (S&P 500, Commercial Real Estate)

“In the field of monetary and credit policy, precautionary action to prevent inflationary excesses is bound to have some onerous effects— if it did not, it would be ineffective and futile. Those who have the task of making such policy don’t expect you to applaud. The Federal Reserve, as one writer put it after the recent increase in the discount rate, is in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

William McChesney Martin, Speech to Investment Bankers Association of New York, October 1955

Perhaps The Fed removes the punch bowl in Muriburi Land, but The Fed certainly didn’t remove the punch bowl in the USA. The S&P 500 index and commercial real estate have both exploded with the perpetual punch bowl.

“We’re not even thinking about thinking about the consequences of our actions.”

Jerome Powell, Chairman, Federal Reserve

Apparently, Chairman Powell lives in financial Muriburiland.

Thanks to Jesse at Jesse’s Cafe Americain for the quotes!

U.S. May Existing-Home Sales Fell 9.7% to 3.91m Rate – Lowest Since 2010 (Inventory Low, Median Prices High)

The Covid-19 epidemic is taking its toll on existing home sales. US existing home sales declined 9.7% in May to the lowest level since October 2010.

Inventory of existing home sales remain low despite historic low interest rates while the median price of existing home sales continues to soar.

During the housing bubble, both inventories and home prices rose together. But the reverse has happened since 2012.

Even The Federal Reserve can’t fight a virus. Although The Fed can create asset bubbles.

There is no escaping The Federal Reserve and their bubble-making powers!

Fed Will Begin Buying Broad Portfolio of U.S. Corporate Bonds (Will Munis, Stocks and Residential Real Estate Be Next??)

Well, it was only a matter of time with foreign central banks buying corporate bonds … and stocks.

(Bloomberg) — The Federal Reserve said Monday that it will begin buying individual corporate bonds under its Secondary Market Corporate Credit Facility, an emergency lending program that to date has purchased only exchange-traded funds.

The central bank also added a twist to its buying strategy, saying it would follow a diversified market index of U.S. corporate bonds created expressly for the facility.

“This index is made up of all the bonds in the secondary market that have been issued by U.S. companies that satisfy the facility’s minimum rating, maximum maturity and other criteria,” the Fed said in a statement. “This indexing approach will complement the facility’s current purchases of exchange-traded funds.”

The SMCCF is one of nine emergency lending programs announced by the Fed since mid-March aimed at limiting the damage to the U.S. economy by the coronavirus pandemic. With a capacity of $250 billion it has so far invested about $5.5 billion in ETFs that purchase corporate bonds.

The Federal Reserve announced Monday it will begin purchases of individual corporate bonds.

The move comes nearly three months after first unveiling the Secondary Market Corporate Credit facility and one month after it began buying corporate-credit ETFs through the program.

The central bank will “create a corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds,” according to a press release. (Like Fed Chair Jerome Powell’s portfolio?)

The Fed’s late-March announcement of its move into corporate bond purchases set a floor for risk assets and helped valuations rebound from their pandemic-induced lows.

Speaking of setting floors on risk assets, does that apply to ETF or residential housing too? How about municipal bonds debt like Chicago’s??

Fed Chair Jerome Powell channeling Thurston The Great Magician!

US New Home Sales Decline 6.2% YoY In April Despite Near-Record Low Mortgage Rates (Case-Shiller Home Price Index STILL Rising)

According to the US Census Bureau, sales of new homes fell 6.2% YoY in April.

No, it does not look like new home sales from the housing bubble burst of the ALT-A, private label MBS years.

Yes, near record low mortgage rates are helping to mitigate the horrid effects of the COVID-19 fiasco.

Home prices in March, according to the lagged Case-Shiller national home price index rose 4.4% YoY. COVID-19 epicenters Seattle and New York City both managed to see YoY gains in home prices in March. (Phoenix AZ is leading the nation in YoY home price growth at 8.2%, nearly twice the national average).

So far the COVID-19 epidemic does not look like the notorious housing bubble burst of the second half of the 2000-2010 decade of The Big Short frame. But the CMBX BBB- index of commercial mortgage-backed securities is getting crushed by retail, hotel and office losses.

Although this has nothing to do with real estate, this Bloomberg headline grabbed my attention: “Macron Pledges $9 Billion in Stimulus to Help French Carmakers.” Hey Macron, how about telling Renault, Citroën and Peugeot to make cars that buyers in US want to buy!

Worst Property Debt Crash in Years Looms for Workout Specialists (Fitch Says 26% of CMBS Borrowers Asked About Payment Relief)

First it was on-line shopping spearheaded by Amazon that helped crush physical retail space. Then the knock-out punch was the government shutdown of the the US economy.

(Bloomberg) — Emptied out malls and hotels across the U.S. have triggered an unprecedented surge in requests for payment relief on commercial mortgage-backed securities, an early sign of a pandemic-induced real estate crisis.

Borrowers with mortgages representing almost $150 billion in CMBS, accounting for 26% of the outstanding debt, have asked about suspending payments in recent weeks, according to Fitch Ratings. Following the last financial crisis, delinquencies and foreclosures on the debt peaked at 9% in July 2011.

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Special servicers — firms assigned to handle vulnerable CMBS loans — are bracing for the worst crash of their careers. They’re staffing up following years of downsizing to handle a wave of defaults, modification requests and other workouts, including potential foreclosures.

cmbs rate by vintage

“Everything is happening at once,” said James Shevlin, president of CWCapital, a unit of private equity firm Fortress Investment Group and one of the largest special servicers. “It’s kind of exciting times. I mean, this is what you live for.”

No Relief

A surge in residential foreclosures helped ignite the last financial crisis. Now, commercial real estate is getting hit because the economic shutdown has shuttered stores and put travel on ice.

Not all of the borrowers who have requested forbearance will be delinquent or enter foreclosure, but Fitch estimates that the $584 billion industry could near the 2011 peak as soon as the third quarter of this year.

There’s no government relief plan for commercial real estate. Bankers usually have leeway to negotiate payment plans on commercial property, but options for borrowers and lenders are limited for CMBS.

Debt transferred to special servicers from master servicers, mostly banks that handle routine payment collections, is already swelling. Unpaid principal in workouts jumped to $22 billion in April, up 56% from a month earlier, according to the data firm Trepp.

Make Money

Special servicers make money by charging fees based on the unpaid principal on the loans they manage. Most are units of larger finance companies. Midland Financial, named as special servicer on approximately $200 billion of CMBS debt, is a unit of PNC Financial Services Group Inc., a Pittsburgh-based bank.

Rialto Capital, owned by private equity firm Stone Point Capital, was a named special servicer on about $100 billionof CMBS loans. LNR Partners, which finished 2019 with the largest active special-servicer portfolio, is owned by Starwood Property Trust, a real estate firm founded by Barry Sternlicht.

Sternlicht said during a conference call on Monday that special servicers don’t “get paid a ton money” for granting forbearance.

“Where the servicer begins to make a lot of money is when the loans default,” he said. “They have to work them out and they ultimately have to resolve the loan and sell it or take back the asset.”

Hardball

Like debt collectors in any industry, special servicers often play hardball, demanding personal guarantees, coverage of legal costs and complete repayment of deferred installments, according to Ann Hambly, chief executive officer of 1st Service Solutions, which works for about 250 borrowers who’ve sought debt relief in the current crisis.

“They’re at the mercy of this handful of special servicers that are run by hedge funds and, arguably, have an ulterior motive,” said Hambly, who started working for loan servicers in 1985 before switching sides to represent borrowers.

But fears about self-dealing are exaggerated, according to Fitch’s Adam Fox, whose research after the 2008 crisis concluded most special servicers abide by their obligations to protect the interests of bondholders.

“There were some concerns that servicers were pillaging the trust and picking up assets on the cheap,” he said. “We just didn’t find it.”

Troubled Hotels

Hotels, which have closed across the U.S. as travelers stay home, have been the fastest to run into trouble during the pandemic. More than 20% of CMBS lodging loans were as much as 30 days late in April, up from 1.5% in March, according to CRE Finance Council, an industry trade group. Retail debt has also seen a surge of late payments in the last 30 days.

Special servicers are trying to mobilize after years of downsizing. The seven largest firms employed 385 people at the end of 2019, less than half their headcount at the peak of the last crisis, according to Fitch.

Miami-based LNR, where headcount ended last year down 40% from its 2013 level, is calling back veterans from other duties at Starwood and looking at resumes.

CWCapital, which reduced staff by almost 75% from its 2011 peak, is drafting Fortress workers from other duties and recruiting new talent, while relying on technology upgrades to help manage the incoming wave more efficiently.

“It’s going to be a very different crisis,” said Shevlin, who has been in the industry for more than 20 years.

Ya think?

cmbxbbb-

We will see shortly if this is a phantom punch or not.

phantompunch

Mr. Blues? MBA Mortgage Purchase Applications Rise +3.21% WoW

With all the bad news out there thanks to the Covid-19 such as crude crashing to around $10 per barrel, it is always good to get some good economic news. No more Mr. Blues … for at least the mortgage market for last week.

MBA mortgage purchase applications rising 3.21% WoW.

mbastatsup

The US is still on lockdown, but at least MBA mortgage purchase application rose last week 3.21% WoW.

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The MBA applications index is a survey, so 7+7 doesn’t necessarily equal 14. 

Let’s see what the little Fed book has to say about interest rates this week.

littlefedbook

Washington REIT Fell 8.8% As JPMC Analyst Forecasts Office Occupancy To Fall 300 BPS Through 2021

Back to The Great Recession … at least for the moment.

(Bloomberg) — Washington REIT fell as much as 8.8% after JPMorgan cut its price target and funds from operations estimate due to the Covid-19 pandemic.

WRE PT cut to $22 from $25; 2020 and 2021 FFO/share lowered by about 8% and 14%, respectively.

Analyst Anthony Paolone said he expects, apartment NOI to come down 2-3% in 2020 and another 1% in 2021, and retail NOI to fall by about one-third in 2Q 2020 before improving somewhat.

Expects apartment and retail non-payments to impact FFO immediately, but office non-payments will take longer to show up.

Assumes WRE will tap its ATM program in 2021 for about $100m in order to keep leverage in check.

Maintained underweight rating.

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And this was AFTER WRE had a negative FFO surprise on Feb 13.

washffo

WRE’s EPS doesn’t look too grand even before the COVID-19 struck.

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Builder Confidence Plunges To ALT-A/Subprime Virus Levels Of 2007 (30)

The Wuhan virus is sweeping the globe (albeit slowing down in the USA), and is having a similar effect on the economy like the ALT-A/Subprime virus of 2007.

This virus has led to a lockdown of commerce, while the ALT-A/subprime crisis of 2007 did not lead to social distancing and government-mandate closures. Same result, although this virus is worse than Big Short virus.

builderconf

Builder confidence is only at 30.

Federal Reserve To Provide Up To $2.3 Trillion In Loans To Support The Economy (Fed Seizes Control of Entire U.S. Bond Market)

The Fed Seizes Control of Entire U.S. Bond Market!

The Federal Reserve on Thursday took additional actions to provide up to $2.3 trillion in loans to support the economy.This funding will assist households and employers of all sizes and bolster the ability of state and local governments to deliver critical services during the coronavirus pandemic.

“Our country’s highest priority must be to address this public health crisis, providing care for the ill and limiting the further spread of the virus,” said Federal Reserve Board Chair Jerome H. Powell. “The Fed’s role is to provide as much relief and stability as we can during this period of constrained economic activity, and our actions today will help ensure that the eventual recovery is as vigorous as possible.”

The Federal Reserve’s role is guided by its mandate from Congress to promote maximum employment and stable prices, along with its responsibilities to promote the stability of the financial system. In support of these goals, the Federal Reserve is using its full range of authorities to provide powerful support for the flow of credit in the economy.

The actions the Federal Reserve is taking today to support employers of all sizes and communities across the country will:

  • Bolster the effectiveness of the Small Business Administration’s Paycheck Protection Program (PPP) by supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their workers on the payroll. The Paycheck Protection Program Liquidity Facility (PPPLF) will extend credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value;
  • Ensure credit flows to small and mid-sized businesses with the purchase of up to $600 billion in loans through the Main Street Lending Program. The Department of the Treasury, using funding from the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) will provide $75 billion in equity to the facility;
  • Increase the flow of credit to households and businesses through capital markets, by expanding the size and scope of the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) as well as the Term Asset-Backed Securities Loan Facility (TALF). These three programs will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury; and
  • Help state and local governments manage cash flow stresses caused by the coronavirus pandemic by establishing a Municipal Liquidity Facility that will offer up to $500 billion in lending to states and municipalities. The Treasury will provide $35 billion of credit protection to the Federal Reserve for the Municipal Liquidity Facility using funds appropriated by the CARES Act.

In addition, on April 9, 2020, the Federal Reserve announced additional measures to support the economy amounting to as much as $2.3 trillion in liquidity. Among their actions, the Term Asset-Backed Securities Loan Facility (TALF) will now include legacy commercial mortgage-backed securities (CMBS) as eligible collateral. Eligible CMBS securities must have been issued prior to March 23, 2020, while securities related to other asset classes are only eligible if they were issued after this date.

TALF Specifics for CRE

The TALF term sheet specifies the following for the commercial and multifamily real estate loan/securities markets:
The underlying credit exposures for CMBS must be to real property located in the United States or one of its territories;
CMBS securities related to single-asset single-borrower (SASB) and commercial real estate collateralized loan obligations (CRE CLOs) are not eligible at this time.

TALF provides three-year loans to investors of CMBS and other eligible collateral. Haircuts and other terms can be found on the Fed’s website.

Mortgage REITs were pleased by the news!!

mtgrey

But remember the old proverb, “There’s many a slip ‘twixt the cup and the lip.” Or “Don’t count your chickens before they hatch.”