Friday Wrap: Analysis of News and Events for the Week

Forbearance Claims Rise as Unemployment Goes Beyond 26 Million

Unemployment claims have reached more than 26 million over the last five weeks as the COVID-19 pandemic keeps businesses shuttered. Thursday, the Labor Department reported another 4.4 million Americans made initial unemployment claims. The total number of jobs lost is now greater than the number gained after the Great Recession. Investors are trying to find the silver lining as the number of claims does drop week-over-week, indicating potential that job loss has slowed.

Some areas are being hit harder than others as a few states have started initial phases of allowing some businesses to reopen. The chart below from CNBC gives you a really good idea of which parts of the country are suffering most right now, economically speaking.

Finding a treatment for coronavirus COVID-19 is the true market mover right now. The Dow dropped sharply on Thursday amid reports that Gilead Science’s drug, remdesivir, may not be as effective as previously reported. The latest report caused the Dow to lose its 400-point gain and nearly go negative. Gilead’s stock was halted in trading due to volatility, and the company disputed the report by the Financial Times. Gilead’s response allowed a little breathing room for the markets as the Dow, S&P 500 and Nasdaq stabilized slightly.

On Thursday evening, the House passed a $484 billion plan to once again help boost small businesses, after the original plan ran out of funding quickly. President Trump is expected to sign the bill Friday morning.

The new package includes the following:

  • $310 billion in new funds for the Paycheck Protection Program, which gives small firms loans that could be forgiven if they use them on wages, benefits, rent and utilities. Within that pool, $60 billion will specifically go to small lenders, a priority Democrats pushed for after they blocked a $250 billion funding bill earlier this month.
  • $60 billion for Small Business Administration disaster assistance loans and grants.
  • $75 billion in grants to hospitals overwhelmed by a rush of Covid-19 patients.
  • $25 billion to bolster coronavirus testing, a core piece of any plan to restart the U.S. economy.

Dow futures were up slightly Friday morning, while the 10-year Treasury note yield dipped below 0.6%, trading a 0.599% early Friday.

The Issue of Oil

The headline of the week went to the oil industry as, for the first time ever, we saw negative prices on an oil contract. While the issue of negative prices on a contract is clearly a problem, as CNBC reported, it was not nearly as bad as the headline would lead you to believe.

“Futures contracts are tied to a specific delivery date,” writes Pippa Stevens. “Toward the end of a contract’s expiration date, the price typically converges with the physical price of oil as the final buyers of these contracts are entities like refineries or airlines that are going to take actual physical delivery of the oil.”

As the contract nears its end, traders start buying up the next month’s contract. Monday’s crash, therefore, was quickly alleviated as the May delivery contract expired on Tuesday. Thursday morning, West Texas Intermediate crude rallied. Futures contracts were up 30% to $18 dollars per barrel.

That being said, the negative price crash, although not as bad as a headline, was also not a good thing. The momentous occasion is visually astounding. The chart put together by MarketWatch shows the nominal price of oil over the last 150 years.

Forebearances Rise, Purchases Flounder

Refinances continue to be king with low interest rates holding fairly steady at 3.33% this week according to Freddie Mac’s average for a 30-year fixed-rate mortgage. That is good news for thousands of Americans who are able to save money in the long-term or take out some much-needed cash from the equity of their home. 

The problem is, as the refi pipeline starts to dry up, the home purchase pool isn’t exactly being filled. That means the typically busy Spring buying season may come grinding to a screeching halt as we enter May. 

Weekly data from the Mortgage Bankers Association shows some positive news as purchase applications were up 2% week-over-week. However, year-over-year, purchase applications are down 31%. Refinance applications were down week-over-week, but refis are up an astounding 225% year-over-year. 

“The pandemic-related economic stoppage has caused some buyers and sellers to delay their decisions until there are signs of a turnaround,” said Joel Kan, the MBAs associate vice president of economic and industry forecasting. “This has resulted in reduced buyer traffic, less inventory and March existing-homes sales falling to their slowest annual pace in nearly a year.”

It is no surprise that the number of loans in forbearance has grown significantly. The MBA’s latest Forbearance and Call Volume Survey shows that “the total number of loans now in forbearance jumped from 3.74% of servicers’ portfolio volume in the prior week to 5.95% as of April 12.

Ginnie Mae loans led the way in the report with 2.37% more loans in forbearance week-over-week with the largest overall share of the forbearance load at 8.26%. Loans backed by Ginnie Mae include VA, FHA and USDA loans. The share of Freddie Mac and Fannie Mae loans in forbearance also grew, increasing to 4.64%. Black Knight’s data shows that the number of borrowers in a forbearance plan exceeds 3.4 million.

The Federal Housing Finance Authority is now allowing servicers to limit the number of payments they have to make if the borrower cannot make their mortgage payment. This is to assist mortgage servicers with loans that have gone into a forbearance plan and were sold into Fannie and Freddie mortgage-backed securities. Instead of giving them cash to cover the missed payments, the FHFA says servicers will only have to advance payment for up to four months of missed borrower mortgage payments.

FHFA Director Mark Calabria said in a statement, “The four-month servicer advance obligation limit for loans in forbearance provides stability and clarity to the $5 trillion Enterprise-backed housing finance market. Mortgage servicers can now plan for exactly how long they will need to advance principal and interest payments on loans for which borrowers have not made their monthly payment.”

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.