Friday Wrap: Investors Wait on Congress While Refinances Hit a Government Wall

Government Relief Stalled Until September

The battle on Capitol Hill continues to leave Americans in the dark about what’s next for economic relief. Monday this week, House Majority Leader Steny Hoyer (D) announced that any vote on COVID-19 relief plans would not come until mid-September. At this point, we are now two weeks removed from the expiration of the portions of the CARES Act which provided assistance for millions of Americans affected by the coronavirus. As the weeks add up, a complicated domino effect is starting to unfold across the country.

Over the weekend, President Trump announced four executive actions to give assistance until a bill could be passed. The orders include unemployment assistance, a continued ban on evictions, a payroll tax deferral and an extension of student loan forgiveness. Of those four, only the student loan portion would be able to be enacted without Congressional approval and wouldn’t require state or private sector buy-in. The student loan request directs the Education Department to extend the provision in the CARES Act through the end of the year. Currently, those with student loans can defer payments and won’t accrue interest through Sept. 30.

Wall Street Mostly Ignores the Pandemic

If you look at just the stock market numbers, the United States economy is booming. Led by big tech stocks like Alphabet, Amazon, Facebook and Google, the S&P 500 is back to its pre-coronavirus levels. Those FAANG stocks are worth $7.6 trillion combined and account for more than 20% of the S&P 500’s value. But those major tech companies don’t have storefronts in your hometown, meaning they don’t paint an accurate picture of what’s happening for most American businesses. Also, those big tech stocks have much more market value in the S&P 500, therefore offsetting the abysmal performances by airlines and cruise ship companies.

American Airlines is down 50% for the year and is already preparing to cut service to smaller cities in order to save money, according to a recent report. Right now, airlines are required to keep their current destinations in service through Sept. 30. They are not allowed to layoff any employees until Oct. 1.

Thursday’s unemployment numbers provided a needed boost for the market this week as we finally saw fewer than 1 million Americans filing initial unemployment claims. The total of 963,000 initial claims recorded by the Labor Department are the fewest since mid-March. Continuing claims were also reduced by more than 600,000. One analyst said two weeks of declines in unemployment will likely give fuel to the argument against extending the unemployment insurance benefits. The $600 extra payment ended on July 31. That date also marked the expiration of the expanded unemployment insurance which allowed for self-employed people and independent contractors to collect unemployment benefits.

U.S. Treasury bond yields also ticked upward Thursday in reaction to the better-than-expected unemployment numbers. The 10-year note yield rose by one basis point to 0.684%. This is just a week after it threatened to dip below 0.51%. Generally, markets were flat going into Friday with Friday futures trading down slightly. The 10-year note yield rose to 0.7% early Friday.

Retail sales released Friday morning did little to boost confidence. The report from the Commerce Department showed a monthly rise of just 1.2% in July retail sales, against a 2.3% expected increase. However, when you exclude automobile sales, retail sales rose 1.9% against a 1.2% increase.

China and Trade Wars Still Loom in the Background

The other piece putting pressure on the economy is the United States’ continued battle with China. About six months ago, the two countries reached a “phase one” deal with regard to trade. Granted, the coronavirus pandemic has changed the game for economies worldwide. However, just a few months into the trade deal, China is far behind on its promise for purchasing goods. The chart below from CNBC outlines data from the Peterson Institute for International Economics showing how much China would need to purchase by the end of the year in order to be compliant with the promised purchases outlined in the phase one deal.

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CNBC looked into the study further and found that China is also not following through on the category-specific purchases like manufactured goods and agriculture. President Trump’s economic advisor Larry Kudlow says that the trade deal is not likely to be voided when the two sides meet to review progress this week.

FHFA Puts Brakes on the Refi Boom

The Federal Housing Finance Authority implemented a sweeping change in mortgage lending this week by adding a fee to loan refinances. The Adverse Market Refinance Fee is an additional 50 basis point cost for all conventional loan refinances sold to Fannie Mae and Freddie Mac on Sept. 1 and beyond. This significantly increases the cost for mortgage lenders, which will likely be passed on to borrowers, while simultaneously increasing profit and mitigating losses for the government sponsored enterprises.

A bulletin released by Freddie Mac indicated the reasoning is, “a result of risk management and loss forecasting precipitated by COVID-19 related economic and market uncertainty.”

The decision puts a burden on lenders who have been raking in refinance business thanks to incredibly low interest rates. The Freddie Mac 30-year fixed-rate mortgage average came in at 2.96% this week. Last year, it was 3.6%. This week in 2018, the average was 4.53%. Therefore it’s no surprise that, according to the Mortgage Bankers Association, refinance activity is up more than 65% year-over-year. We will likely see a slowdown in refinance activity in the coming weeks as lenders digest the change.

The good news is that this fee does not apply to purchases, just refinances. And the purchase market is also benefiting from the historically low rates. The MBA reports that July mortgage applications for new homes were up 39% annually. July’s numbers were also up by 1% over June 2020. MBA Chief Economist Joel Kan said the numbers may be slightly skewed considering the pandemic. “Typically, new home purchases peak in April and then decline through the remainder of the year. With the disruption this spring, seasonal patterns are not holding, and hence the seasonal adjustment is likely overstating the increase for this month,” said Kan. “While this is a signal of still strong demand for housing, we remain concerned about supply. Housing starts have not kept up with demand and this could hold back the pace of sales in the coming months.”

As we continue down the path of constricting inventory and low interest rates, home prices also continue to creep up. The latest quarterly report from the National Association of Realtors shows that home prices increased across 96% of the metro areas studied. What’s more, the median home price for a single-family home in Q2 was up 4.2% annually, hitting $291,300.

Contributed by Greg Richardson, MAXEX Managing Director

Greg Richardson

Greg Richardson is Managing Director at MAXEX, LLC, based in Atlanta, GA. He has 30 years of experience in capital markets, including trading, banking asset and portfolio management, mortgage banking secondary marketing and accounting. MAXEX is the only platform in the mortgage industry to offer a centralized clearinghouse that enables buyers and sellers to trade anonymously with multiple counterparties using a single standardized