Wall Street Finally Gets a Win, Mortgage Industry Faces New Challenge
A week of much-needed wins buoyed Wall Street this week as the $2 trillion stimulus package from Congress was finally sent to the House of Representatives with a vote expected Friday afternoon or evening. House Speaker Nancy Pelosi gave confidence to investors saying the bill will be passed “with strong bipartisan support.”
Here are a few quick highlights of what’s in the bill:
- Create a $500 billion pool of taxpayer money to make loans, loan guarantees or investments to or in businesses, states and municipalities damaged by the crisis.
- Ban companies that take government loans from buying back stock until a year after the loan is paid back.
- Give one-time direct payments of up to $1,200 for individuals and $2,400 for couples, with $500 added for every child, based on 2019 tax returns for those who filed them and 2018 information if they have not. The benefit would start to phase out above $75,000 in income for individuals and $150,000 for couples, going away completely at the $99,000 and $198,000 thresholds, respectively.
- Give $25 billion in grants to airlines and $4 billion to cargo carriers to be used exclusively to pay employee wages, salaries and benefits, and set aside another $25 billion and $4 billion, respectively, for loans and loan guarantees.
- Give $350 billion in loans for small businesses to cover salary, wages and benefits, worth 250% of an employer’s monthly payroll, with a maximum loan of $10 million.
- Include a tax credit for retaining employees, worth up to 50% of wages paid during the crisis, for businesses forced to suspend operations or that have seen gross receipts fall by 50% from the previous year.
Wall Street roared to life on news of the stimulus, posting its best three-day stretch since 1931. This was all in spite of the latest data from the Labor Department shows more than 3,000,000 people applied for unemployment benefits last week. The previous record high was 695,000 set back in 1982. However, Friday morning’s futures put a damper on the week, showing a loss of 650 points at the open. This should be expected after a big run up for three days. One thing for certain is volatility will remain for some time until we get more clarity on the virus.
Federal Reserve Chairman Jerome Powell appeared on NBC’s “Today” show on Thursday morning and called what we are seeing a “unique situation.” Powell continued, saying “People need to understand, this is not a typical downturn. At a certain point, we will get the spread of the virus under control. At that time, confidence will return, businesses will open again, people will come back to work. So you may well see a significant rise in unemployment, a significant decline in economic activity. But there can also be a good rebound on the other side of that.”
So how did equities manage such a strong gain despite literally the worst employment data the country has seen? It’s actually fairly simple: Investors were expecting it. Charles Schwab’s vice president of trading and derivatives says essentially, the markets are playing chess. “The markets and the economy don’t run in parallel. The market’s running way ahead of the economy. The markets don’t care about what’s happening today, the market cares about what’s happening six months from now.”
So the negative headline you see today was already priced into the market in the days prior, allowing for some positive sentiment to creep into the market on the news of the potential passing of the stimulus bill. Keep in mind, the positive swing hinges on the third piece of the trifecta which is the virus itself. Unless there is an end in sight, like a potential vaccine or treatment, markets will remain volatile.
The 10-year Treasury note yield was little changed on Thursday, closing at 0.81%. Through all the equity hoopla, the 10-year Treasury note has been meandering in a relatively tight range the last few days with .75% the central point. Government bonds did see negative yields this week with the 3-month and 2-year notes both dropping below 0%. The 2-year is still perilously close to the negative mark, sitting at 0.273%. Meanwhile the 3-month note remains in negative territory at -0.043%.
Mortgage Applications Fall as Servicers Bear Brunt
As relief will start to pour in for Americans and their businesses, the mortgage industry is seeing an interesting battle play out. The Fed buying unlimited agency mortgage backed securities (MBS) has helped push MBS prices to historic highs, though volatile. Mortgage companies on the other hand are now balancing capacity limitations, increased hedging costs and a mortgage servicing market that is in a bit of chaos as borrowers who have lost their jobs will not be able to make their mortgage payments. The servicing market is effectively going through a repricing event that has those economic values and liquidity much lower. This all has an impact on a mortgage rate that a borrower will see on any given day.
The Non-QM market effectively shut down this week as many investors stopped producing rate sheets and funding loans. Mortgage companies have now shuttered these programs and are looking everywhere to sell these loans. Problem is there are no buyers at the rates that were originated. Anything that is sold will be done so at price much lower than par.
And as the federal government starts to offer mortgage payment deferment for Americans, servicers are feeling the strain. This week, Fannie Mae and Freddie Mac announced a plan that would allow borrowers to defer payments for two months and just simply add those months to the end of their mortgage terms. Many banks have followed suit allowing multiple month deferrals for borrowers.
Contributed by Greg Richardson, MAXEX Managing Director
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 contract.