Lead Story… 2015 marked the 8th straight year that the market for mortgage-backed securities issued by private financial institutions (as opposed to GSE’s) has been quieter than a book signing for a 3rd-tier reality TV star. The Treasury Department wants to change that and is taking steps to stimulate investor demand. The problem is that private mortgage investors are still feeling stung by the housing crash as Joe Light of the Wall Street Journal points out:
When the housing market imploded, investors found themselves stuck with bonds that weren’t as safe as ratings firms and lenders maintained. Investors also felt mistreated by mortgage servicers, who sometimes modified loans or reached government settlements that investors believed cost them money.
That created mistrust in private mortgage bonds, and the Treasury’s effort was meant to find new terms that could bring trust in the bonds back.
Essentially, Treasury thinks they can solve the problem by creating a “deal agent,” or a firm that would look out for investors’ interest as a bond is administered and enforce the terms of a note. Ideally, this would give institutional investors comfort that they won’t get screwed by modifications and settlements the next time around. However, there is a balancing act that can be difficult to achieve: in order for the private market to function properly, it needs a borrower that is an adequate credit risk but is unable to obtain cheaper financing from a government backed lender or a bank that will hold the note on their books. Even if institutional investors jump back in, that is going to be difficult.
What a Drag: US productivity growth has stalled out and a less skilled American workforce may be partially responsible.
Human Deflation: Low birth rates and an aversion to immigration have left Japan in a situation where it is literally running out of people. See Also: Negative interest rates look likely to become a permanent part of the monetary policy toolkit.
Last One Out, Please Turn Off The Lights: The CMBS market was booming until mid-2015 when it began to encounter headwinds. Things haven’t gotten any better early on in 2016. CMBS lender Redwood actually left the market completely, it’s CEO noting that:
Not a whole lot of room for nuance there. Recent stock and bond market turmoil have caused the once-steady securitization market to fluctuate wildly over the past few weeks and yield spreads over Treasuries have blown out. Wild swings in bond yields make it hard to price loans accordingly. On top of that, new rules that will be instituted at the end of 2016 mandate that issuers keep a portion of the loans that they issue on their own balance sheets which will increase issuers’ cost of capital. Conclusion: borrowers are going to be forced to look elsewhere for debt until the bond markets stabilize.
Bright Spot: The world economy is chaotic, several major economies now have Central Banks setting negative interest rates, housing has major affordability issues and the stock market resembles a roller coaster at an amusement part. Want to know what’s still on fire? Big box warehouse space. Vacancy is tight and construction is booming as retailers gain a larger online presence and need more storage space for inventory.
Flipping Out: House flipping is once again the national pass-time. Nearly 180,000 homes and condos were flipped in 2015, the highest in the past 10 years – spurred on by rising prices, healthy returns being achieved by institutional investors coming out of the downturn and an endless stream of popular TV shows that glamorize the space. A tight market from a supply standpoint is throwing gasoline on the fire:
“Oh my God, there are multiple offers on almost every decent margin profit house that pops on the market,” – Jim Pinson (Chicago Area Flipper)
This competitive bidding dynamic is driving concern that prices are rising too fast for homeowners because of the extreme scarcity of homes for sale, especially on the low end of the market where much of the flipping activity takes place.
“More inexperienced home flippers with a smaller financial cushion could be a sign of an over-speculative market, but the data indicate that flippers in 2015 continued to operate within relatively conservative margins. homes flipped in 2015 were on average purchased at a 26 percent discount below estimated market value and resold by the flipper at a 5 percent premium above estimated market value.” – Daren Blomquist of RealtyTrac
Today, a flipper’s average return on cost is close to 46%. It was only 35% in 2005 when anyone who able to fog a mirror could borrow money and become a flipper. This should give some comfort that we aren’t yet in bubble territory like what we saw in the mid 2000’s when speculators bought houses at market value, using little equity and simply waited for them to go up in value rather than installing upgrades. However, it is a trend that bears watching since inventory is so tight at the low end of the market and little new product is being added by builders.
Crystal Ball: Check out this fascinating info-graphic on housing market projections for 2016 from Builder Magazine.
The Two Keys to Effective Marketing: An energy consultant called EPCM Professional Service Partners based in Long Beach posted an infomercial explaining how the firm helps it’s clients manage their refinery business through routine maintenance to keep them running at peak performance. If you only listen to the audio, it’s probably the most boring thing you’ve ever heard. However, the video version has become an online viral sensation. Why, you ask? I can’t quite figure it out but maybe you will after you watch the video.
Get Off My Lawn: I’ll be the first to admit that I haven’t a clue about Snapchat beyond hearing the fact that high school kids use it to send naked pictures to their significant others, often landing them in hot water. I suppose that makes me old and Snapchat has built a $16 billion dollar company with a business plan predicated on confusing the hell out of anyone who was born before 1990.
Chart of the Day
Whiskey Tango Foxtrot
Going to Leave a Mark: In today’s video of the day, large catamaran + big Hawaiian swell + rocky shoreline = epic FAIL.
Too High on Your Own Supply: I’m increasingly a fan of the way that Indonesia handles criminal justice. Last year, after El Chapo Guzman escaped from a Mexican prison by bribing guards, the Southeast Asian nation proposed using crocodiles to guard death row prisons, primarily because crocodiles don’t respond well to bribes. Last week, Indonesia proposed a brilliant new plan to execute convicted drug dealers by force-feeding them their own supply killing two birds with one stone, (literally).
Bottom of the Barrel: A lot of my friends love The Oscars, an awards show where the most self celebratory people on earth pat themselves on the back, tells each other how great they are and bloviate about politics. I far prefer the Razzie Awards – given annually to the worst films of the year in different categories. Spoiler: Fifty Shades of Grey got a lot of attention this year.
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