Solano Real Estate Scene: March Madness in jumbo

It is Wednesday as I write this and I am working out of my makeshift home office. I am thinking about how difficult it is to write about something today that could be totally irrelevant or wrong by Saturday when this is published. March Madness has been a roller coaster ride of upset after upset in the equity, bond and mortgage-backed securities markets, just like every year in the country’s beloved NCAA tournament. Sixty-four teams and 750 players and their coaches have been practicing and dreaming about making it to the Final Four for their entire lives. This year they are not crying because they won the championship or lost on a last-minute buzzer beater, they are crying because their dream was destroyed in one day because of one viral bug. I will not write one word about the stock market to avoid jinxing Tuesday’s 2,000-point jump up after millions of us that will only have Social Security and our IRAs and 401(k)s for retirement lost 35% of our pension funds in three weeks of March sadness, stress and fear. Mortgage markets have been slammed with Americans refinancing for several months and when the Fed cut the overnight lending rate to zero, even more people jumped on the refi-mania bandwagon only to find mortgage rates going up on most loans and changing radically day to day for a couple of weeks. Here are two reasons for rates not plummeting when the benchmark 10-year yield dropped from more than 2% to way below 1%: 1. Supply and demand. Mortgage applications in the first quarter are up 3% or 400% over the first quarter in 2019 and staffing in the industry is only up 5% to 10%. It’s hard to keep up during a refi rush and a shelter-at-home shutdown. 2. Investor fear, liquidity and uncertainty about the recession, the death toll and the possible depression. The Fed has stepped up with $500 billion to purchase treasury bonds and $200 billion for mortgage-backed securities. This liquidity has calmed the conforming Freddie and Fannie market liquidity issues but jumbo and non-QM loans are distressed. Think about it, folks. Pretend you are an institutional investor, billionaire or a pension plan and a banker says to you, “Please invest $10 billion in this pool of jumbo residential mortgage loans and on the A-paper jumbo 30-year mortgages with an average FICO score of 719 and an average loan-to-value of 83%. You will get a 3% rate of return, three times the 10-year treasury, which is around 1% today.” The investor remembers 2008, but knows that every one of these mortgage loans have been fully documented with tax returns and proof of income and 719 is a pretty great credit score, but now wonders, what about the 20% of these borrowers who might be unemployed next month and fall behind on the mortgage, and how many will die? What if mortgage rates drop to 2%? How many of these loans will pay off early in the next six months to a year after I paid a huge premium to buy this $10 billion pool of loans? I think the pension plan or insurance company looking for long-term yield might be scared. Non-QM loans are even scarier because many of these loans are to good people who cannot get the best mortgage rates because of one thing or another. Proof of income shortage or a negative credit event maybe, but this $10 billion in loans will get you a 5% rate of return and then adjustable after five years with a favorable margin over treasuries for the final 25 years. This pool has an average FICO score of 677 and an average loan-to-value ratio of 82%. Solid and safe, says the Wall Street banker. Thirty percent of the borrowers are small-business owners, 20% work in hospitality and travel and because many of these non-QM loan products allow qualifying based on 12 to 24 months of bank statements, 15% of the loans are restaurant owners who live on thin margins. Investors who buy mortgages were bitten in 2008 and have been cautious since the crash, but now more than ever as we fear for our lives. The billionaire investor might say something like this to the Wall Street MBS broker: “No thanks. I think I will buy some more guns and armed guards and buy a bigger safe for the cash at my house.”