Friday Wrap: Analysis of News and Events for the Week

Fed Outlines $2.3 Trillion Plan, Mortgage Servicers Battle for Liquidity

The Federal Reserve made another move this week to try and bring stability and certainty to the market and help accelerate the United States economy. On Thursday the Fed announced details about its $600 billion Main Street business lending plan which would help get money to small and mid-size businesses and local municipalities as the COVID-19 pandemic continues to wreak havoc on bottom lines. Altogether the Fed has detailed out nine lending programs that would total $2.3 trillion in assistance.

One big piece of the plan is supporting the Paycheck Protection Program. The PPP is an attempt to give loans to small businesses they can use to keep employees on their payroll. The Fed’s Paycheck Protection Program Liquidity Facility would help supply cash to participating financial institutions by providing financing backed by PPP loans to small businesses. The loans would be taken as collateral at face value.

The Main Street Lending Program would give loans to small and mid-sized businesses with the Treasury Department supplying $75 billion in liquidity through the CARES Act. In addition to that, they would also create the Municipal Liquidity Facility that would provide up to $500 billion in lending to states and municipalities with the Treasury offering up to $35 billion in credit protection through the CARES Act.

The Term Asset-Backed Securities Loan Facility (TALF), which was created by the Fed during the 2008 crisis, also got a boost with this plan as the flow of credit to households and businesses through capital markets will be increased. TALF along with the Primary and Secondary Market Corporate Credit Facilities (PMCCF and SMCCF) will now support up to $850 billion in credit backed by $85 billion in credit protection provided by the Treasury.

The surprise for many was the next step the Fed announced with TALF which is expanding the range of assets that are being allowed as collateral. TALF will remain at $100 billion and continue to support lending for student, auto and credit card loans.

TALF-eligible collateral can now include:

  • Triple-A rated outstanding commercial mortgage-backed securities
  • Triple-A rated newly issued collateralized loan obligations

Mortgage Bankers Association President and CEO Robert Broeksmit released a statement praising the Fed’s actions.

“MBA applauds the Federal Reserve for announcing its intent to include outstanding private-label CMBS AAA securities in its Term Asset-Backed Securities Loan Facility (TALF) program, which was re-established on March 23 to provide more liquidity to securities markets.

“This decision protects borrowers by stabilizing commercial mortgage markets more broadly and helps ensure lenders can continue to finance properties – particularly in small and mid-sized markets across the country, where numerous small businesses employ millions of Americans.

“MBA looks forward to continuing to work with all policymakers and stakeholders, including Congress and the administration, to help borrowers, lenders, and mortgage servicers during the pandemic.”

The market got a much-needed boost from the Fed’s announcement which came after the Labor Department’s report that more than six million more Americans filed initial unemployment claims. That means over the last three weeks, 16 million Americans have gone to their local government offices to file their first claim for unemployment. Part of the relief bill passed last week by Congress allowed independent contractors and self-employed people to also apply for the unemployment benefits. The chart below gives you a visual on just how staggering the job losses are compared to reports in previous years.

While news of relief helped offset the dire situation of employment, the markets will remain volatile until we receive much more clarity on the breadth and depth of the virus and its broader impact on the economy. This week’s volatility was to the upside as equites ruled the markets sending stocks higher with the S&P 500 index up 13%. The Nasdaq and Dow also put together double-digit victories this week, rising by 10.6% and 12% respectively. The markets are closed on Friday in observance of Good Friday.

Agreement on Oil Can’t Boost Price

This week OPEC and its allies agreed to cut production by 10 million barrels per day in May and June in an effort to boost prices on oil and gasoline. The production cuts will continue with 8 million fewer barrels in July through the end of the year and 6 million starting Jan. 2021 continuing into April 2022.

The final details of this are not set quite yet and Russia and Saudi Arabia, neither of which is part of OPEC+, have agreed to cut their own production. It has been requested that the United States cut its production by 5 million barrels per day.

Mexico stands as the one OPEC+ outlier on the deal and in fact plans to stay on course with its plan to increase production. Despite experts saying that the recent oil deposit discoveries within Mexico will likely not be profitable with current prices, Petroleos Mexicanos still plans to nearly double its drilling to 423 wells this year. No changes to its production goal of 1.87 million barrels a day have been made.

The country’s argument is that it has been greatly underproducing oil over the last ten years and should not be asked to cut more. Also, the country’s oil-price hedge has just started to pay off for them so it’s clear why they would not want to be part of the production slash proposed by OPEC+.

The agreement was not enough to boost prices as the fears of the coronavirus’ effect on demand run deep. Both U.S. West Texas Intermediate and Brent Crude fell on the day, dropping 9.29% and 4.14%, respectively.

The Battle for Liquidity

In the background of all the economic stimulus talk is a lot of chatter about mortgage servicing. There is a war of words between Federal Housing Finance Authority chair Mark Calabria and those in the housing industry about creating a source of liquidity to assist in servicing loans. Calabria, in an interview with HousingWire, said the FHFA has a plan just not what the housing industry may be calling for.

“The yes is we continue to monitor Fannie and Freddie servicers,” Calabria said. “We are, at this point, comfortable with our ability to deal with any servicers that may be distressed so that we can either turn them into subservicers or transfer their servicing to other parties. And we believe at this point, given the number on uptake of forbearance, we’ve seen that we can transfer servicing in a way that’s not too disruptive.

“So, the yes is we have contingency plans and procedures put in place were this distress to happen,” Calabria continued. “So that’s the yes part. The no part is, do we have a liquidity facility that we will be providing via Fannie and Freddie? The answer’s no. We don’t have the resources at Fannie and Freddie to do that.”

Calabria used the Mortgage Bankers Association data to further his point. The MBA surveyed mortgage servicers over the last few weeks and showed that just 1.69% of loans have gone into forbearance. Calabria noted that they don’t have any indication or expectation that we will reach 20% of Fannie and Freddie loans in forbearance. He also mentioned that he has been in discussions with larger, nonbank servicers expressing the ability to take on the capacity of smaller servicers should that need arise.

MBA CEO and President Robert Broeksmit pushed back against Calabria, saying “The FHFA Director’s recent statements send a troubling message to borrowers, lenders, and the mortgage market. Servicers are required to offer borrowers widespread forbearance under a plan devised and approved first by FHFA and then codified by the CARES Act.

“Fannie Mae and Freddie Mac are contractually obligated for the payments to investors,” Broeksmit continued. “Since Fannie Mae and Freddie Mac will eventually reimburse mortgage servicers for the payments they must advance during forbearance, Director Calabria should advocate for the creation of a liquidity facility at the Fed to ensure the stability of the housing finance market.”

Meanwhile, mortgage rates continue to stay low giving people incentive to refinance and purchase. Freddie Mac’s 30-year fixed-rate mortgage average on a 30-year loan remained unchanged at 3.3%. Analysts with Freddie Mac’s Economic & Housing Research group predict that mortgage rates will not only stay low but move lower as 2020 progresses.

It will be interesting to see how and if lenders are able to reintroduce loan products into the market to take advantage of the low rates. According to the MBA’s Mortgage Credit Availability Index, in March mortgage credit decreased to its lowest availability since June 2015. “There was a reduction in the availability of loans with lower credit scores and higher LTV ratios, and the largest pullback came from the jumbo and non-QM space,” said MBA associate vice president of economic and industry forecasting, Joel Kan. “This month’s release highlights the large retreat from jumbo and non-QM investors due to a sharp drop in liquidity. Lenders are making credit criteria changes to account for the increased likelihood of forbearance and defaults, as well as higher costs.”

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 contract.