Good Afternoon on this Tuesday,

If you want to know what the economic  implications are of the country shutting down, Chase reported Q1’s earnings this morning. Profits declined 69%.

MBS are getting the snot beaten out of them over the past two days. Down 50bps yesterday and another 15 bps today. It would be easy to look at the equity markets and connect the dots that the Dow is up 500 points so mortgages must be on sale, but I think that assumption would be only partially correct. I think it is more that The Fed has pulled back on the amount of  mortgage bonds it is willing to buy this week and with that, there are not enough buyers currently. I am assuming the Fed has a reason for this although they have not yet communicated it. Hopefully, since we did not see the benefit in rates of the recent huge move up in prices of mortgage bonds that we don’t bear the brunt of the movement in the other direction. The 10-yr is pretty stable at .74%.

The bigger issue currently is that FHFA has still not provided any relief to servicers who are required to offer forbearances. Allow me to mention that forbearances have now increased to over 4% of outstanding government backed loans. Once again, may I suggest to only request a forbearance when necessary? The repercussions once the forbearance period is over are ominous. The stakes are getting higher and Mark Calabria, FHFA director who is charge of Fannie Mae and Freddie Mac, seems disinterested. It is unconscionable that the attitude is to allow some servicers to fail in order to send more market share to his cronies. How many jobs will be lost just by this action? To stress this point, during 2020 and 2021, the $11.5 trillion MBS sector could be forced to absorb 5% to 6% charge-off rates across GSE and prime jumbo exposures and well into double digits for FHA/VA/USDA and the scant few below-prime residential loans outstanding. Assume that the banks hold the best quality prime loans in credit terms, then comes the GSEs, then the FHA market. That still gives us $200-250 billion in prospective loan repurchase costs for the GSEs over the next two years. If loan loss rates go higher into double digits, then all bets are off and even the very liquid, well capitalized money center banks will suffer.

So that’s the most important stuff today.
Please be safe and healthy, make today great!