Mortgage Mike’s Daily Rate Commentary

Stocks gave up nearly 1,000 points on the Dow to close in the red yesterday afternoon.  This shift lower came as stocks approached a very strong technical point which I don’t believe we will see penetrated in the near term.  Of course, I could totally be wrong.  However, a break above this level would indicate a technical reversal where stocks go from being in a downward trending cycle to being in an upward trending cycle.  Given the dire consequences the Covid-19 restrictions have had on our economy, it seems more likely to me to see stocks suffer vs climb back towards all-time high levels. That would be incredibly irrational.  Although stock investors have proven to take the market to levels that are not easily justified, this move would take that irrational exuberance to an entirely new level.  Therefore, I anticipate a technical pull-back in the near-term for stocks.


Given the current environment, economic reports measuring the strength of the economy before the Covid-19 shut down are relatively worthless.  Since employment reports since the shutdown have all been far more dire than anticipated, all hopes are on US Lawmakers to ensure unemployment benefits are sufficient to keep people’s bills paid and that business owners are provided the economic support to hold on to their employees.  Tomorrow we will hear the latest report on Unemployment Claims, which we anticipate will be over estimates high once again.  This should cause stocks to pull back even further.  We will have to wait and see.


Given that the Fed is controlling the pricing of mortgage bonds, we will maintain a locking bias.

Stocks are pointed higher in premarket trading, making this the second straight day of gains for the stock market.  We had earlier pegged 1800 as the peak for the S&P 500 in this mid-cycle recovery.  This happens to be the point at which half the gains lost in the stock market in this downward trend have been recovered.  This is a standard mid-cycle rally peak and could spell trouble for stocks in the near term.  Generally, we would expect stocks to bounce lower after hitting this level and move down towards the bottom of their trading channel.  In the rare event that stocks break above this critical level, it could mean a cycle reversal where stocks are heading higher longer term.  Given the current economic position of the US, I don’t see that happening.  I see lower stock prices being the more likely outcome.


Talk of additional stimulus is now being discussed by lawmakers, with another $1 trillion or more bill in the works.  This would add additional cash payments to US workers as well as provide additional funds to help stimulate businesses and motivate owners to hold on to their employees through this difficult time.  I continue to believe that all of this is just a fraction of what the US Treasury will need to spend to help keep the US economy from falling off the tracks.  I hope I’m way off, but my initial projection was $10 trillion.  Although a V shaped economic recovery would help dramatically reduce this number, I just don’t see people recovering as quickly as our leaders predict.


We will maintain a locking bias.

Stock investors are celebrating today, as death tolls and new infection rates are slowing in Europe.  Adding to the good news for stock investors, thousands of small business owners are flocking to apply for the massive government loan that will help business owners cover 2.5 months of their payroll.  This is expected to add much needed cash into the hands of the small business community, which will hopefully trickle down into the pockets of workers.  As long as the business owners who accept the loans maintain their payroll at current levels, all or most of the loan will be forgiven.  Once these loans fund, the US economy should feel the positive impact immediately.


Mortgage bonds are currently very stable, which is a clear sign that the Federal Reserve is accomplishing their goal.  My guess is that the Fed will ensure mortgage rates remain stable for some time.  As market rates drift higher, the Fed has purchased adequate mortgage debt to bring rates right back down to where they want them.  There is an old saying, “Don’t fight the Fed.”  We are seeing why.  It seems the Fed is committed to its goals regardless of what it takes.  This is good news for the mortgage world which is craving stability right now.


With the Fed controlling rates, there is very little incentive to float.  We will maintain a locking bias.

The market was shocked to learn that 702,000 jobs were lost in the month of March. Far exceeding the 100,000 – 150,000 estimate the market was anticipating.  The scary part of this insanely high number is that the model that predicts the job gains / losses was taken from the week prior to the massive meltdown, which was a week where there were only 282,000 people who filed for unemployment benefits.  Since the week following the sample data that fed into the report had 3,300,000 people filed for unemployment, the next 6,600,000, and future number expected to continue to climb, report we will receive in May will certainly be by far the worst number ever reported.  Eventually, all of the people filing unemployment claims will roll into the job loss figures.  Expect this number to continue to climb.


Since virtually all economic reports that measure jobs are measuring the market post-Covid-19 meltdown are negative, there is very little to provide incentive for stocks to climb.  With the technical move higher than we experienced last week, recovering the easily predictable 30% – 50% of total loss, stocks now have a clear path to move lower.  I believe sticks will fall below the lows we saw a few weeks ago.  I also believe that the mortgage market will begin to stabilize soon, which will allow mortgage interest rates to fall back below all time lows.  It will just take time for things to play out.


We will maintain a locking bias.

This morning we learned that 6,600,000 new unemployment claims filed in the past week.  Considering that economists predicted 3,300,000 new claims to be filed, this is a very scary number.  Personally, I believe this number was highly understated and that reality is even far worse than the 6.6 million reported.  Therefore, I expect to see massively higher numbers in the near term.  This is an extremely scary situation that I clearly believe will get worse before getting better.


Stocks are climbing higher today, which given the news of the morning doesn’t seem to make sense.  I believe this climb higher is due to optimism that the Fed and Treasury will need to step up and do even more to help the US economy from completely collapsing.  So far, the Treasury Department is set to release $2 trillion to taxpayers and business owners.  As I stated in yesterday’s market update, I believe it will take upwards of $10 trillion to keep the economy afloat.  We will see how long it takes before lawmakers are pushing for further payments to Americans.  As people start to miss house payments and other obligations, that is when I expect lawmakers to act.


We will maintain a locking bias.

Stocks are falling hard in pre-market trading, as what I believe was a technical rally the past week has seemingly come to an end.  Just a few days ago, many were celebrating the remarkable recovery stocks made, stating it was a result of swift action from lawmakers and the Federal Reserve for stepping in to save the US economy.  At the end of the day, the stimulus will be far from sufficient to save American workers and business owners from what is happening, and many are coming to that realization.  The money will be spent quickly, leaving many to wonder how they will make it another month.  I expect that it will take stimulus of about $10 trillion to keep workers and businesses afloat, five times more than the $2 trillion bill that was passed.  Look for additional stimulus proposals to come.  Otherwise, I believe we will see a deep recession that will forever change the world as we know it.


This Friday we will receive an estimate of new job creations or losses from the Bureau of Labor Statistics (BLS) for the month of February.  Although today’s ADP report showed that there were only 27,000 jobs lost, I expect the BLS report to show a more realistic number that shows there were more job losses than ADP reported.  With some expecting the Unemployment Rate to climb as high as 15% over the coming months, I see that number as also overestimating the strength of the US economy.  I personally know of many job cuts that have yet to be announced from prominent companies here in the Salt Lake Valley.  I can only guess that every metropolitan city will be facing the same.


Mortgage bonds remain near all time high prices.  If the mortgage industry can stabilize, we may see mortgage interest rates drop in the near term.  In the meantime, floating remains risky.  Guidelines are tightening each and every day.  Servicing portfolios continue to lose value as consumers refinance early.   Mortgage lender costs are increasing, and consumers who break rate locks continue to hurt the industry.  These forces are adding upward pressure to interest rates.

After mortgage bond prices peaked at all-time highs a couple days ago, they have since backed off, adding upward pressure to mortgage interest rates.  For the first time, I can say that I am actually happy to see mortgage rates pressured higher.  Let me explain.  The past few weeks have brought tremendous volatility to mortgage interest rates.  Without understanding the collective damage caused, many consumers have broken locks in search of lower rates after they have fallen.  Since large mortgage lenders short mortgage bonds on the open market to hedge against rates moving higher, the drop in rates triggered significant margin calls which absorbed the cash large mortgage lenders have to fund home loans.  Without the income from closing a loan to offset the hedge cost, every hedged locked loan that didn’t actually close cost lenders a significant amount of money.  Hopefully, from this large lenders will be able to change the law on what happens when a locked loan doesn’t close.  It just isn’t worth sacrificing our industry to allow consumers to easily and inconsequentially break locks.  My heart goes out to the mortgage lenders who are currently facing margin call issues.  Hopefully they will get some help from the Fed to support their continued existence.


Stocks are currently about even for the day.  However, there has a been a lot of volatility in the stock market already this morning.  With the death count from the Coronavirus expected to climb sharply over the next couple of weeks, it’s hard to believe that stocks have held at current levels.  The market has recovered roughly 50% of its losses, which still means we could be in a downward trend.  I don’t trust the recent run higher and personally believe we will see stocks fall in the near term.  Assuming we are approaching a 15% unemployment rate, there is little to justify current stock prices.


We will maintain a locking bias.

With the infected rate climbing rapidly, and much of the country in seclusion, it’s far too early to say the longer term impact this situation with have on the US and global economies.  However, many are publicly stating that the worst in the stock market is behind us.  Even a risk strategist at JP Morgan feels enough has been done by the Fed and the government stimulus package to justify adding in risk selectively (stocks).  I find this to be a very bold and premature statement to make.  When in truth, most of the hardest hit people haven’t yet missed a mortgage or car payment, nor have they had to make the decision of whether to use their unemployment check to pay for food or to keep the heat on.  As time goes on, and people become more restless, we can expect to see a bit of a revolt.  Whether the targets of this will be against people ignoring the CDC’s ‘stay at home’ suggestions, or it be against our government leaders, I don’t think it will take long before tensions build.  In the end, I see very little for stock investors to celebrate.  I see more price declines coming.


As mortgage bond prices hit their all-time highs, many are wondering why mortgage interest rates aren’t at all time lows.  We have a pop up page when you enter our website that explains a large part of the reason.  However, there is one key component that is coming into play at the moment that has the mortgage industry as we know it on the heels of extinction.


When a consumer chooses to lock in an interest rate, lenders purchasing a hedging investment to help cover losses in the event rates climb before they are able to place the closed loan on the open market.  With rates dropping so quickly, consumers have been breaking locks in search of lower rates.  Although this seems like a wise financial decision to the consumer, there are tremendous hedging fees that are never recouped when a loan closes.  The massive hedges out there have led to investment firms issuing margin calls to cover the losses.  In many cases, these have been in the tens of millions of dollars.  Since most companies don’t have that much money, many are on the verge of going out of business.  This problem shouldn’t be downplayed or understated.  So keep in mind, where a rate is locked, it is important to ensure that loan closes.


With bond prices at all time highs, and lenders not able to offer rates that should correspond to such high bond prices, we will maintain a locking bias.

Mortgage bonds continue to perform well today, fueled by a large losses in the stock market.  I believe the stock market rally that we saw over the past three days was nothing short of a mid-term correction, which is actually a healthy thing to have happen in the midst of a rapid downturn.  It now sets the stage for stocks to continue their downturn in a more healthy and certain pattern.  Since longer term movements never happen in a straight line, we expect for a mid-term correction to regain up to 50% of the losses before taking another drop lower.  Yesterday’s move was a textbook one. Now we will see stocks fall back down to levels that more justify the current state of our economy and corporate performance.


As we have discussed in recent market updates, the mortgage industry is in a dire state.  This is leading to many companies not being able to lock in rates, as well as very aggressive guideline tightening processes hitting us one after another.  With many workers not currently employed and others taking pay cuts, the number of borrowers who are able to qualify for a home loan will be greatly reduced.  Also, even though the bond market is performing well, we will see upward pressure on mortgage interest rates as default risk continues to climb.  This is a tough time in the mortgage industry.  Remember to show grace to your mortgage provider, regardless of what company you are working with.


We will maintain a locking bias.

While the market was anticipating about 1,000,000 new first time claims for unemployment benefits, the report showed 3,280,000.  It amazes me that some of the smartest financial minds could miss this number by such a large amount.  All you have to do is look at how many job gains we have had in the hospitality, entertainment and travel industries to know that this number would be astronomically high.  Some of the strongest job gains of recent years are in industries that are currently being decimated by the current environment.  Since this is only week one, we can expect to see the coming weeks to show growing losses.  This is the most dire state of our economy that this country has ever seen.  The sad news is that it will get worse before it gets better.


The stock market continues to show strength in the face of diversity in what I believe is a short term technical correction.  We can expect to see the stock market recover up to 50% of its losses before taking another dive lower, at least that’s what I believe will happen.  In any market, whether the momentum be improving or falling, a short term correction is considered a healthy move.  In fact, it could help set the market up for a more dramatic fall.


Mortgage bonds remain in a state of serious flux, with rates bouncing across the board.  The challenge we are now seeing is that mortgage loan services are no longer wanting to buy blocks of mortgages.  This is for two primary reasons.  The first being that mortgage loans are being refinanced so quickly that the value of a servicing portfolio is falling like a rock.  Servicers need to hold mortgage loans for a period of time before it is profitable.  Secondly, with defaults expected to climb, this is causing loan servicers to back away from adding to their portfolio.  If this doesn’t improve quickly, we could see a freeze where mortgage lenders are not able to fund many loans.  Be careful and just know that nothing is certain right now.


Given the severity of the mortgage crisis, we will maintain a locking bias.