Daily Mortgage News & Commentary

Apr. 11: Refunds from auto insurance companies? Trends in eating & drinking & travel; One mortgage explanation

The coronavirus has turned us all into dogs. We roam the house all day looking for food. We’re told “no” if we get too close to strangers. And we get really excited about car rides. Interestingly, mortgage worker productivity not only has not suffered, but many are reporting that their staffs are actually being more fruitful at home. But there is still a lot of time to do non-mortgage stuff on your computer, as well as watch some fun videos that are making the rounds. With thousands of high-priced entertainers staying home, they have time to be creative. For example, here’s the cast of Hamilton singing to a little girl via Zoom. Thanks to Lori Brewer who sent along this great video of the Houston Ballet, “ballet-ing” in place. Gal Gadot and several pals (without make up & having bad hair days) singing “Imagine.” And this week was Steph Curry giving encouragement via FaceTime to ICU nurses. We’re apart, but together.

Let’s face it: people for centuries will be studying what we’re going through. Not only in the financial markets, but also how eating and drinking habits changed, exercise, behavior, etc., etc., etc. So let’s take a temporary break from mortgage news for a few paragraphs, because Lord knows we’ve had enough in the last 3-4 weeks, and see what we, and our clients, are encountering. Certainly millions are trying to erase watching “Tiger King” from their memories by cleansing with The Crown, The Marvelous Mrs. Maisel, or anything that has a cast with teeth.

Yes, there is a surplus of chicken wings in the United States. After all, no one ate them while watching NCAA basketball last month. And from Colorado, STRATMOR’s Lisa Springer pointed out that Denver-ites have been howling at the moon at 8PM together, separately.

Like me, most people were dealing with the quarantine by focusing on personal advancement, goal achievement, self-improvement, and fitness. Yeah, right. We’re eating constantly and washing it down with alcohol to deal with the stress: in a recent survey 28 percent of adults said they were eating more due to the self-quarantine, compared to just 11 percent who said less. Among Millennials, that’s 33 percent eating more and 11 percent less. Fully 25 percent of Millennials are drinking more, compared to 16 percent of adults overall.

What are we buying? Early into this, besides toilet paper which has mostly returned to shelves as you’d expect, most people bought rice, beans and basics. They’ve returned to buy things like garlic, butter, and spices since the basics can be pretty boring. In the United States processed food is exploding in popularity right now, with frozen dinners selling as quickly as some basics. Conagra Brands (think Slim Jims, Birds Eye, Chef Boyardee and other processed foods) saw a 5 percent decline in sales in the quarter ending in late February as consumers continued to shift to fresher ingredients. But since then shipments are up 50 percent amid a surge in demand for the kind of cuisine that mostly advertises on Peppa Pig. Campbell Soup sales are up 59 percent, Prego Pasta sauce is up 52 percent, and goldfish crackers are up 23 percent.

In time for Easter, and reminiscent of what happened during the California Gold Rush, the price of eggs has exploded in the past several weeks, with the prices for grocers averaging $3.01 per dozen at the end of last week compared to the $0.94 per dozen they were selling for at the beginning of March. Supermarkets are ordering anywhere from four to six times their typical amount, but a key issue is that last year the egg producers lost money and actually shrank their flock. It takes up to five months to raise a hen to an age where you can get eggs, so there’s not a lot of incentive for farmers to react.

“Across the Pond,” the Netherlands is a major exporter of potatoes, producing some 4 million tons annually and exporting about a quarter of those. However, all the restaurants of Europe that serve them have closed down since the middle of March, and the country is facing a tater glut the likes of which has been unseen in ages. Growers have a stock of 1.5 million tons of potatoes, and about two-thirds of them won’t be sold. A Dutch farmer who normally sells potatoes at around 18-euro cents per kilogram now has to sell for 0.01 euro to a dairy farmer.

France’s 30,000 independent bakeries have been deemed essential because apparently baguettes are essential. The French consume an estimated 10 billion baguettes per year, and now not only are the boulangers open, they’re even allowed to stay open seven days a week. (Typically, French labor law requires businesses to close one day a week to give employees rest.)

Back over here, the dairy industry is urging its farmers to start dumping milk down the drain amid major disruptions in the supply chain. The closure of schools and restaurants means that the wholesale market has collapsed while the grocery market has been thirstier than ever for milk. This is bad for the companies that process milk, butter and cheese, and the trucking companies that connect farmers and processors are facing staffing shortfalls. This is a problem in dairy, especially, because milk can’t be frozen or siloed. So even though retail milk purchases were up 53 percent in the week ending March 21, butter was up 127 percent and cheese was up 84 percent, it’s not like factories can just convert overnight from commercial production to grocery. That’s why retail prices for milk can be up 11.2 percent year over year while farmers also have to dump.

Air travel worldwide has plummeted. It’s almost rare to hear a plane overhead these days, and certainly freeway noise has dropped. On a recent Tuesday the Transportation Security Administration (your friends at the TSA) screened 97,130 people, down 95 percent from a year ago and also includes pilots, flight attendants and people who work within the security perimeter. We don’t have screening numbers that go far enough back to contextualize that number, but the last time the country averaged 97,000 passengers per day was in 1954.

Bloomberg reports that in March, 81 percent of 13 million housing units had paid their rent by the fifth of the month. In April, with many reeling from the economic reverberations of the coronavirus shut downs, that figure fell to 69 percent of renters who were paid up by the fifth of the month. It’s not just individual renters: 2,600 commercial real estate borrowers have contacted mortgage servicers about debt relief on $49 billion in loans, and about 75 percent of those were from hotels and retail real estate.

Good news? Several car insurance companies will be refunding some premiums to customers given how little they’re driving now. Allstate pays out slightly more than $1 billion per month in auto insurance claims around the U.S., and modeling suggests those claims are down by 85 percent due to the reduction in accidents. With driving down 35 percent to 50 percent, Allstate announced that it’ll refund 15 percent of premiums paid by its customers in April and May, a total of about $600 million across the two months. American Family, a smaller insurer that operates in 19 states, said it’ll kick back $50 per car, a total of about $200 million. Overall, 28 percent of miles driven are by people going to work.

Okay, back to mortgages…

Much of the market activity has been unpredictable, but understandable after the fact, in residential lending. I received this note from Ralph LoVuolo Sr. (website Mortgage Godfather) addressed to borrowers. “What does the Corona Virus mean for you and a (potential) mortgage? As most of you know, in reaction to the many state governments having closed all but certain necessary businesses there has been disruption in the financial markets, and for this discussion, the mortgage market. So even though the US government, through the Federal Reserve Bank (The Fed) has been driving down interest rates, mortgage rates have not moved in sync. In fact, mortgage rates bumped up significantly in mid-March and have recently been drifting back down. So why can’t I, or my prospective buyers, get a zero percent loan?

“The Fed Funds rate (the overnight lending rate that banks lend to each other and the rate certain banks can borrow from the Fed) did drop to zero on March 15, 2020, (not the first time this has been done) but this is not the mortgage rate. Most often, 30-year mortgage rates are based on the 10-year T-Bill rate which had been around 0.70% recently, which is down from +/- 2.5% a year ago. That should be good news but the disruption in the general financial markets has counteracted much of this potential benefit.

“In a stable financial world, the 30-year mortgage rate has a risk premium of 1.50% – 2.00% above the 10-year T-Bill. Risk premiums on Qualified government backed loans (Fannie Mae, Freddie Mac, FHA, VA, USDA) are now running 2.70% – 2.90% above the 30-year T-Bond index, and jumbo loans are running over 3.00% above the 30-year T-Bond index. With all this said, however, at the present time, this still means that you are likely to get a mortgage rate under 4.00% on an owner-occupied property, qualified government backed loan.

“Two of the issues driving this higher risk premium are lenders being overwhelmed with loan applications (so lenders are dropping rates more slowly) and disruption in the secondary market for mortgage loans. The secondary market is the market that trades mortgage loans and mortgage servicing once loans are closed. If you have had a mortgage before, you may have noticed that your servicer changes every so often. This is often related to a trade but not necessarily as servicing and loan ownership may be different entities. But this has been an active market that has helped to keep rates lower.

“With the market disruptions, there has been a flight to quality, meaning more sellers of residential mortgages than buyers in the secondary mortgage market, and these unexpected rate fluctuations have caused additional stresses for many mortgage companies. In order to help bring stability to the overall financial markets, the Fed has been buying larger than usual amounts of mortgage loans. Ordinarily this would work. But they seem to have bought more than necessary and that is keeping the mortgage rates somewhat lower on the qualified government loans vs. the private loan market but the risk premium is still wide across the board.

“The private market includes jumbo loans, prime (good quality) loans above $510,400 to $765,600 depending upon the property location, and Non-QM loans (loans that are outside of the government loan guidelines, often made on small investor properties or to self-employed borrowers).

“The private market has two main funding sources: the securitized market (pools of mortgage loans) where slices of cash flows are sold to a variety of investors, and portfolio lenders that hold the whole loans directly. The Non-QM securitized market has slowed substantially and in some geographical markets, stopped completely, and it has significantly reduced the amount of jumbo fixed-rate lending.

“Remaining in the jumbo market are the portfolio lenders, who typically favor loans that are adjustable rate loans (ARMs) vs Fixed Rate Loans (FRMs) hence rates are now higher for FRMs in that market vs. the government loans. Additionally, all qualified mortgage buyers also seem to be tightening their underwriting guidelines to stay on the positive side of the risk premium.

“Finally, the bright side is that as we emerge from this virus crisis the financial market risk premium should come down and there may be some excellent financing opportunities. My advice is to get prepared and see what your options may be.” Thank you, Ralph!

Us taxpayers are receiving another economic stimulus. It is indeed a very exciting program, and I’ll explain it by using a Q&A format:

Q: What is an Economic Stimulus?

A: It is money that the federal government will send to taxpayers.

Q: Where will the government get this money?

A: From taxpayers.

Q: Is the government simply giving me back my own money, then?

A: No, only a smidgen of it.

Q: What is the purpose of this payment?

A: The plan is for you to use the money to purchase a high definition television set, a new iPad, or a new SUV, thus stimulating the economy.

Q: Isn’t that stimulating the economy of China?

A: Shut up.

Below is some helpful advice on how to best help the U.S. economy with your stimulus check. Use it wisely:

If you spend the stimulus money at Walmart, the money will go to China or Sri Lanka.

If you spend it on gasoline, the money will go to the Canada, Mexico, Saudi Arabia, or Russia.

If you purchase a computer, it goes to India, Taiwan, or China.

If you purchase fruits and vegetables, it will go to Mexico, Honduras, and Guatemala.

If you buy an efficient car, it will go to Japan or Korea.

If you purchase useless stuff, it goes to Taiwan.

If you pay your credit card off or buy stock, it will go to management bonuses and they will hide it offshore.

Instead, keep the money in America by:

(1) Spending it at a yard sale, or

(2) Going to a ballgame, or

(3) Spending it on prostitutes, or

(4) Beer, or

(5) Tattoos

(These are the only American businesses still operating in the U.S.)

CONCLUSION: Go to a ballgame with a tattooed prostitute that you met at a yard sale and drink beer all day.

No need to thank me, I’m just glad I could be of help.

(Thank you to Spencer D. for this one!)

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Drinking from a Firehose is Not a Long Term Business Model” If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is designed for sophisticated mortgage professionals only. There are no paid endorsements by me. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2020 Chrisman LLC. All rights reserved. Occasional paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)