Daily Mortgage News & Commentary

July 16: Letters on the CPI & housing, a recession & servicing values; a fine financial joke; Saturday Spotlight: Change Wholesale

Be careful when you see attention-grabbing, sensationalist headlines! Chinese not paying their mortgages? It’s a result of the government and developers not completing their units. ATTOM reports that foreclosure filings are up 153 percent from last year. But ATTOM makes it clear in the article. “It’s important to note that many of the foreclosure starts we’re seeing today, in fact, much of the overall foreclosure activity we’re seeing right now, is on loans that were either already in foreclosure or were more than 120 days delinquent prior to the pandemic… Many of these loans were protected by the government’s foreclosure moratorium, or they would have already been foreclosed on two years ago. There’s very little delinquency or default activity that’s truly new in the numbers we’re tracking.” ATTOM, a leading curator of real estate data nationwide for land and property data, released its Midyear 2022 U.S. Foreclosure Market Report, which shows there were a total of 164,581 U.S. properties with foreclosure filings (default notices, scheduled auctions or bank repossessions) in the first six months of 2022. That figure is up 153 percent from the same time period a year ago but down just one percent from the same time period two years ago.

Saturday Spotlight: Change Wholesale

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A mission-based company focused on closing the wealth gap through home ownership.

What is Change Wholesale doing to help close the wealth gap?

A home is often the largest and most beneficial investment a person will make in their lifetime. One of the main reasons many Americans have fallen behind the wealth gap is due to the difficulties they face when purchasing a home. To help close the wealth gap, Change Wholesale focuses on providing innovative home financing solutions that meet the diverse needs of Americans, including low- or moderate-income communities, Blacks, and Latinos.

What does it mean to be America’s largest CDFI?

Change Wholesale is America’s largest CDFI by origination volume. This means Change Wholesale has successfully helped more of America’s homebuyers access the flexible financing needed to purchase their first or second home, investment property, or vacation getaway. We’re thankful for our CDFI designation and extremely proud of our ability to help secure home financing for prime borrowers with unique needs.

How do Change Wholesale’s partnerships benefit underserved prime borrowers?

Change Wholesale has strategic partnerships with brands, banks, and other financial institutions to help expand home ownership to underserved individuals and communities. Partnering with organizations like Netflix, Bank of America Merrill Lynch, and East West Bank expands our reach and allows us to bring fair financing solutions to more of America’s prime borrowers.

Can you tell us about your Community Advisory Board (CAB)?

Our CAB is comprised of community members that represent all of our target markets, including low- or moderate-income individuals, low- or moderate-income communities, African Americans, and Latino Americans. Our CAB serves as an intimate focus group that provides us with insightful feedback on how to best serve their communities.

(For more information on having your firm’s extracurricular activities, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)

Economic conditions: a primer

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Remember when gasoline was $3 or $4 a gallon? Like, last year? Inflation is affecting lots of things in the energy business, but fossil fuels more so than renewables. Did you know that German electricity costs 6-8 times what it does in the United States? How competitive can a German manufacturer be? The cost difference between burning coal or gas and running solar and wind is actually widening. For instance, it’s $27.80 cheaper to produce a megawatt-hour of electricity by onshore wind over coal, and $28.30 cheaper to produce it with solar over coal, a savings that grew from $19.10 and $11.40 respectively three years ago. Gas, too, is much more expensive to use for electricity generation than renewables than it was three years ago: Onshore wind’s value over gas grew from $10.20 a megawatt-hour three years ago to $35 a megawatt-hour this year, and solar’s value over gas jumped from $2.50 three years ago to $35.50 now.

Chris Maloney from Bank of Oklahoma scribes, “The latest CPI reading came in at 8.6% (annualized), which makes it a fine time to revisit a pet peeve of mine: since the Bureau of Labor Statistics considers housing an ‘investment’ good rather than a ‘consumption’ item, it measures home price changes within CPI in a kind-of, sort-of manner referred to as ‘owner’s equivalent rent.’ OER attempts to capture price changes by asking homeowners what they think their home’s potential rental price would be. The S&P U.S. National Home Price Index, on the other hand, measures the same thing by collecting the prices that homes are selling for.

“During times of out-sized price changes in housing, such as seen over the past few years, the use of OER means CPI fails to accurately account for home price appreciation, which is certainly not helpful when the FOMC is attempting to determine if its current stance of monetary policy is appropriate. In fact, I would argue that had home prices been calculated in CPI using actual home prices, it would have given a warning signal in late 2020 that inflation was already a problem. I am not saying the CPI is useless or dishonest in any manner; I am saying it is deeply flawed as pertains to home prices. This leaves monetary policy at risk, considering that shelter makes up almost 33% of CPI (see here, Table 1, page 8) with rent accounting for about 7.3% and owners’ equivalent rent about 23.8%.

“What I have done here is to adjust CPI using actual home prices (using the S&P national index) in place of OER and rental prices (using Zillow’s rent index) in place of CPI rent. This methodology I am using is also admittedly flawed, yet all inflation gauges are flawed as their chosen methodology reflects the opinions and humors of whoever creates it. I just believe that looking at actual home prices would make the CPI less flawed than it is now.

“So what does this adjusted CPI index show? Starting with February 2015 it shows that most of the time using OER and CPI rent doesn’t really make much of a difference. From February 2015 through September 2020 the adjusted CPI (annualized) averaged about 0.4% higher in each monthly report than the actual CPI in use. I would label that ‘close enough for government work’ and not lose any sleep over it, as any inflation gauge only offers, at best, a vague idea of what prices are doing. However, beginning in October 2020 the difference between the two CPIs hit 1.3%, and that difference has increased to over 4% every month since June 2021. That is something to lose sleep over.”

BOK’s Maloney’s note went on. “Had the Federal Reserve been using actual home prices, by late 2020 the adjusted CPI would have been warning that inflation was becoming a serious problem, with the gauge rising to 3.3% by the time Santa Claus made his rounds (the CPI as it is instead showed inflation at 1.4% in December 2020.) The central bank only began to raise rates fifteen months later in March 2022. By then, again using actual home prices, adjusted CPI had been over 10% since July 2021. As of April (the most recent data we have to use) the adjusted CPI is at 12.9%. That’s 4.6% above reported CPI.

“In the March 21 speech referred to above Powell also added that, ‘ultimate responsibility for price stability rests with the Federal Reserve’ and to be blunt the central bank has failed miserably in that endeavor. Because of this, I was shocked when Powell was renominated. If he was running our favorite sports team with the same level of success as he has had in running monetary policy, we’d be screaming for him to be replaced. The Federal Reserve gets a failing grade of F for its performance in the QE4 Era. Using adjusted CPI to account for actual home prices, I would drop that grade to F-.” Thank you, Chris!

Brent Nyitray wrote, “If we hit a recession, you know what is going to take a hit? Servicing values. The first shoe to drop will be rising delinquency rates, and then the second will be falling long-term rates as markets anticipate the Fed taking its foot off the brakes. I suspect this was the issue with First Guarantee and its backer PIMCO. While FGMC dabbled in the jumbo and NQM space, it was known primarily for being the home for low quality FHA loans. Since there are no LLPAs in GNMA securitization, the gain on sale margins for a low FICO FHA can be huge. But there is a catch.

“GNMA servicing rules are exceptionally harsh regarding advances and modifications. I suspect PIMCO pulled the plug on FG because they could see what was coming for that servicing book if the economy rolls over. For them, it was an unbounded liability given that lenders never fully recover servicing advances on GNMA loans. Also, I am hearing rumblings that loan mods are going to be problematic this time around due to the various CFPB rules that never anticipated a rapid increase in rates.” Thank you, Brent!

At some point those predicting a recession will be right, just as predicting an economic expansion will eventually be correct. Economies function in cycles, regardless of administration or foreign policy. And the “old” definition of a recession being two quarters of negative GDP, while simple and easy to understand, is stale and not accurate. And an inverted yield curve does not always predict a recession. Let’s take a look.

Inflation remains too strong for everyone’s liking, including the Fed’s. The Fed thinks that there is significant underlying momentum in the domestic economy due to advances in household spending and business fixed investment combined with the further tightening of labor market conditions. Fiscal policy is intended to act as a natural drag on the economy while the supply chain issues get worked out, and a few members noted that there were signs that the pandemic-related strains on labor supply were easing.

The National Bureau of Economic Research (NBER) has the responsibility of determining when a recession begins and when it ends. More specifically, it is the Business Cycle Dating Committee within the NBER that decides. Forget “a recession occurs any time you have two consecutive quarters of negative Gross Domestic Product (GDP) growth,” or an inverted yield curve. According to the NBER, “A recession is a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in production, employment, real income, and other indicators like real GDP, industrial production, and wholesale-retail sales. A recession begins when the economy reaches a peak of activity and ends when the economy reaches its trough.”

Know that the NBER looks at multiple factors when determining whether or not we are in a recession. But because “a recession is a broad contraction of the economy, not confined to one sector, the committee emphasizes economy-wide measures of economic activity. The committee believes that domestic production and employment are the primary conceptual measures of economic activity… the two most reliable comprehensive estimates of aggregate domestic production are normally the quarterly estimate of real Gross Domestic Product and the quarterly estimate of real Gross Domestic Income, both produced by the Bureau of Economic Analysis.”

And looking at employment, NBER’s Business Cycle Dating Committee views the payroll employment measure, which is based on a large survey of employers, as the most reliable comprehensive estimate of employment.

Loan officers should know that there is no single way to predict how and when a recession will occur since economists assess several metrics to determine whether a recession is imminent or is already taking place. NBER aside, according to many economists there are some generally accepted predictors that when they occur together may point to a possible recession. Leading economic indicators (the ISM Purchasing Managers Index, the Conference Board Leading Economic Index, and the OECD Composite Leading Indicator) are watched, as is the Treasury yield curve.

Officially published data series from various government agencies that represent key sectors of the economy, such as housing stats and capital goods new orders data published by the U.S. Census, are also monitored. Changes in these data may slightly lead or move simultaneously with the onset of recession, in part because they are used to calculate the components of GDP, which will ultimately be used to define when a recession begins. Last are lagging indicators that can be used to confirm an economy’s shift into recession after it has begun, such as a rise in unemployment rates.

From Nevada, Keith sent, “Can you give me the official Fed reasoning why another 1% rate hike will help solve inflation? Credit card debt has climbed steeply, an indicator that the population is feeling the pinch. Mortgages would hit the 6 percentages, and essentially destroy the housing market because of affordability. The equity drawdown will no longer be attractive except to those in dire need. Increasing supply and material costs will impact future hirings.

“Everyone will continue to see the net value of their paychecks diminish. People have to live so they will continue to buy food, gas, and pay their energy bills. It doesn’t reduce the amount of money in the economy. It just means people are buying less items with the same money. It will have zero effect on inflation. In fact, it will propel us more quickly into a recession.

“Tell me again how much Yellen and Powell get paid. If you were as competent as them, Rob, you’d be out of a job. And it ain’t Putin to blame, Joe.”

Every morning, the CEO of a large bank in Manhattan walks to the corner for a shoeshine. He sits in an armchair, examines the Wall Street Journal and the shoe shiner buffs his shoes to a mirror shine.

One morning the shoe shiner asks the CEO: “What do you think about the situation in the stock market?”

The man answered arrogantly, “Why are you so interested in that topic?”

The shoe guy replies, “I have millions in your bank,” he says, “and I’m considering investing some of the money in the capital market.”

“What’s your name?” asked the executive.

“John H. Smith,” was the reply.

The CEO arrives at the bank and asks the Manager of the Customer Department, “Do we have a client named John H. Smith?”

“We certainly do,” answers the Customer Service Manager. “He is a high-net-worth customer with $12.6 million dollars in his account.”

The executive comes out, approaches the shoe shiner, and says, “Mr. Smith, I would like to invite you next Monday to be the guest of honor at our board meeting and tell us the story of your life. I am sure we could learn something from your life’s experience.”

At the board meeting, the CEO introduces him to the board members. “We all know Mr. Smith, from the corner shoeshine stand, but Mr. Smith is also an esteemed customer. I invited him here to tell us the story of his life. I am sure we can all learn from him.”

Mr. Smith began his story. “I came to this country fifty years ago as a young immigrant from Europe with an unpronounceable name. I got off the ship without a penny. The first thing I did was change my name to Smith. I was hungry and exhausted. I started wandering around looking for a job but to no avail. Fortunately, I found a coin on the sidewalk. I bought an apple. I had two options, eat the apple and quench my hunger, or start a business. I sold the apple for 25 cents and bought two apples with the money. I also sold them and continued in business.

“When I started accumulating a few dollars, I was able to buy a set of used brushes and shoe polish and started polishing shoes. I didn’t spend a penny on entertainment or clothing, I just bought bread and some cheese to survive. I saved penny by penny and after a while, I bought a new set of shoe brushes and polishes in different shades and expanded my clientele. I lived like a monk and saved penny by penny.

“After a while, I was able to buy an armchair so my clients could sit comfortably while I shined their shoes, and that brought me more clients. I did not spend a penny on the joys of life. I kept saving every cent. A few years ago, when the previous shoe shiner on the corner decided to retire, I had already saved enough money to buy his shoeshine location at this great place.

“Finally, 6 months ago, my sister, who ran a brothel in New Orleans, passed away and left me $12.6 million dollars.”

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 titled, “The All-Cash Phenomenon.” The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).

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(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is 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 2022 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.)