Connect with us


US mortgage executives forecast a $3tn year in 2021



US mortgage volumes could top $3tn this year as rising competition among lenders and an activist Federal Reserve combine to put further downward pressure on borrowing rates, according to industry executives and analysts.

Rates are poised to fall as a scarcity of inventory pushes home prices up, increasing loan sizes and putting the industry on track to approach the $3tn level — which has been topped only in 2003 and 2020.

“It’s going to be a big year,” said Stan Middleman, chief executive of Freedom Mortgage. “The prognosticators are calling for mid-two trillions, I think it’s going to be closer to three.” Freedom is the ninth-largest mortgage lender in the US by volume, according to government data.

The Mortgage Bankers Association is forecasting lending volumes of $2.75tn in 2021, but Chris Whalen of Whalen Global Advisors also thinks that figure is too conservative. “I think we’ll easily do $3tn to $4tn in new loans next year,” he said.

Jay Bray, chief executive of a mortgage lender called Mr Cooper, estimated that, at current rates, there were 800,000 US borrowers who could save at least $200 a month by refinancing their mortgages. While 2020 had been a “staggering” year for the industry — with his firm funding almost $39bn in mortgages in the first three quarters — Mr Bray said 2021 could be almost as good.

US mortgage volumes could top $3tn this year

Mat Ishbia, chief executive of United Wholesale Mortgage, the second-largest of the mortgage lenders, said that his company “is going to do a lot more business this year than we did in 2020”, citing falling rates, millennials leaving cities to buy in the suburbs, and technology investments that had made the company more productive.

Mortgage rates are at all-time lows, which is good for homebuyers. The current average rate for a 30-year fixed-rate mortgage is now under 2.7 per cent, according to Fannie Mae, a full percentage point lower than a year ago.

But rates could fall further because mortgage lending is currently very lucrative by historical standards. One proxy for this profitability is measured by the so-called “primary-secondary spread” — the difference between mortgage rates charged by lenders and the yield on government-insured mortgage-backed securities.

US mortgage brokers set for bumper profits

The bigger the difference, the more money lenders are taking in. The spread now stands at 1.5 percentage points, down from 2 points in the spring of 2020 but well above the historical average of about 1 point. This indicates that lenders have flexibility to lower their rates for homebuyers even if interest rates in general remain where they are.

Mortgage rates “could fall another 30-50 basis points from here, if Treasuries stay stable,” said Walt Schmidt, who leads mortgage strategy at FHN Financial.

Yields on mortgage-backed securities, meanwhile, are being kept down by the Federal Reserve, which in December committed to keep adding $40bn in MBS to its balance sheet every month “until substantial further progress has been made” towards full employment.

Reaching that target has required the Fed to buy more than $100bn in MBS a month — roughly 20 per cent of total issuance — to replace securities on its balance sheet that are being repaid or are maturing.

This means that big mortgage lenders such as Quicken Loans, Mr Cooper and United Wholesale Mortgage could be in line for bumper earnings despite industry competition for borrowers. According to Inside Mortgage Finance, in the first nine months of last year all but one of the top 100 US mortgage lenders increased mortgage volumes year on year.

The government “needs housing to lead the economy out [of recession] and that doesn’t happen unless the Fed buys MBS,” Mr Middleman said.

Map showing declining housing inventory on the US in 2020

Capacity constraints have prevented rates from going lower already, insiders say. Competition among mortgage lenders hoping to hire brokers was “pretty fierce”, said Mr Bray — but improved technology was making each broker more productive. As capacity grows over the next several years, he said, “one of my worries is that [lenders] start engaging in irrational behaviour, people doing business at margins that don’t make any sense”. 

Another component driving high loan volumes in 2021 is house prices, which have been pushed up by tight inventories. US online platform Zillow said property listings on its site were down 34 per cent year on year in the week to December 12 with some states in the US north-east, such as New Hampshire and Vermont, seeing levels of housing stock cut by about 50 per cent from the previous year. In the year to December 2020 property listings fell more than 33 per cent for two-thirds of US states, but housing supply has been falling for much of the second half of last year.

Chart showing increasing US house prices and declining inventory

However, demand for housing remains strong. The number of days properties have stayed on the market has dropped substantially, with vendors accepting an offer three weeks faster than at the same time last year, according to the property group. This has led to prices rapidly increasing in recent months. Median list prices for properties on Zillow have been increasing at double-digit rates year on year since October.

The latest reading of the Case-Shiller US National home price index, which has a two-month lag, shows an 8.4 per cent annual price gain in October, accelerating from the month before. 

“We’re seeing higher loan amounts,” Mr Middleman said. “That’s what will get us to $3tn: the competition to buy homes. There’s not enough homes.” 

Additional reporting by Chris Campbell

Source link

Continue Reading
Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *


Earnings beats: lukewarm reaction shows prices are stretched




Investors are picking over first-quarter results for signs of economic recovery and proof that record market highs can continue. Stock markets have only been this richly valued twice before — in 1929 and 2000. Bulls hope strong corporate earnings and rising inflation can pull prices higher still. But pricing for perfection means even good results can be met with indifference.

L’Oreal illustrated this trend on Friday. The French cosmetics group stated that sales in the first quarter of the year rose 10.2 per cent. This was a better performance than expected. Yet the announcement sent shares down by around 2 per cent. Weak cosmetics sales were seen as a veiled warning that consumers emerging from lockdowns might not spend as freely as hoped.

Online white goods retailer AO World, a big winner from pandemic home upgrades, also offered a positive update this week. In the quarter that marked the end of its financial year, sales were £30m ahead of forecasts. But even upbeat commentary from boss John Roberts could not stop shares slipping 3 per cent.

Banks are not immune. Their stocks have outperformed the market by 7 per cent in Europe and 12 per cent in the US this year. But stellar Wall Street results were not enough to satisfy investors this week.

JPMorgan Chase, the biggest US bank, smashed expectations for the first quarter. Even adjusting for the release of large loan loss reserves, earnings per share beat expectations by 12 per cent because of higher investment banking revenues. Bank of America earnings also rose thanks to the release of loan loss reserves. Yet shares in both banks ended the week down. Goldman Sachs had to pull out its best quarterly performance since 2006 to hold investor interest.

On multiple metrics, stock valuations look steep. On price to book, banks are now back to the pre-crisis levels recorded at the start of 2020. Living up to the expectation implicit in such valuations is becoming increasingly hard.

Lex recommends the FT’s Due Diligence newsletter, a curated briefing on the world of mergers and acquisitions. Click here to sign up.

Source link

Continue Reading


Barclays criticised for underwriting US private prison deal




Barclays has attracted criticism for underwriting a bond offering by the US company CoreCivic to fund the building of two new private prisons, in a new dispute over Wall Street’s relationship with the controversial sector.

The UK-based bank said two years ago that it would stop financing private prison companies, but the commitment did not extend to helping them obtain financing from public and private markets.

About 30 activists and investors, among them managers at AllianceBernstein and Pax World Funds, have signed a letter opposing the $840m fundraising for two new prisons in Alabama, which was due to be priced on Thursday.

The signatories said the bond sale brings financial and reputational risk to those involved and urged “banks and investors to refuse to purchase securities . . . whose purpose is to perpetuate mass incarceration”.

Activists and investors who pay attention to environmental, social and governance issues have sought to cut off companies that profit from a US criminal justice system that disproportionately incarcerates people of colour. As well as raising ethical issues, many also say such financing may be a bad investment because legislators are increasingly calling for an end to the use of private players in the prison system.

While Barclays is not lending to CoreCivic, activists and investors attacked its decision to underwrite the deal, which is split between private placements and public issuance of taxable municipal bonds. The arrangement is “in direct conflict with statements made two years ago” when the bank announced it would no longer finance private prison operators, according to the letter.

Barclays said its commitment to not finance private prisons “remains in place”, adding it had worked alongside representatives from the state of Alabama to finance prisons “that will be leased and operated by the Alabama Department of Corrections for the entire term of the financing”.

CoreCivic said the Alabama facilities will be “managed and operated by the state — not CoreCivic. These are not private prisons. Frankly, we believe it is reckless and irresponsible that activists who claim to represent the interests of incarcerated people are in effect advocating for outdated facilities, less rehabilitation space, and potentially dangerous conditions for correctional staff and inmates alike.”

Barclays’ 2019 commitment to limit its work with private prison companies came as other banks, including Wells Fargo, JPMorgan Chase and Bank of America, also said they would stop financing the sector.

Critics said they were not sure why Barclays is differentiating between lending and underwriting.

“You’ve already taken the stance, the right stance, that private prisons and profiting from a legacy of slavery is bad,” said Renee Morgan, a social justice strategist with asset manager Adasina Social Capital, one of the signatories of the letter. “But then you’re finding this odd loophole in which to give a platform to a company to continue to do business.”

Source link

Continue Reading


Hedge funds post best start to year since before financial crisis




Hedge funds have navigated the GameStop short squeeze and the collapse of family office Archegos Capital to post their best first quarter of performance since before the global financial crisis.

Funds generated returns of just under 1 per cent last month to take gains in the first three months of the year to 4.8 per cent, the best first quarter since 2006, according to data group Eurekahedge. Recent data from HFR, meanwhile, show funds made 6.1 per cent in the first three months of the year, the strongest first-quarter gain since 2000.

Hedge fund managers, who often bet on rising and falling prices of individual securities rather than following broader indices, have profited this year from a rebound in the cheap, beaten-down so-called “value” stocks and areas of the credit market that many of them favour. Some have also been able to profit from bouts of volatility, such as the surge in GameStop shares, which turbocharged some of their holdings and provided opportunities to bet against overpriced stocks.

“We’re going into a market environment that is going to be more fertile for most active trading strategies, whereas for most of the past decade buying and holding the index was the best thing to do,” said Aaron Smith, founder of hedge fund Pecora Capital, whose Liquid Equity Alpha strategy has gained around 10.8 per cent this year.

The gains are a marked contrast to the first three months of 2020, when funds slumped by around 11.6 per cent as the onset of the pandemic sent equity and other risky markets tumbling. However, funds later recovered strongly to post their best year of returns since 2009.

This year, managers have been helped by a tailwind in stocks and, despite high-profile losses at Melvin Capital and family office Archegos Capital, have largely survived short bursts of market volatility.

It’s a “good market for active management”, said Pictet Wealth Management chief investment officer César Perez Ruiz, pointing to a fall in correlations between stocks. When stocks move in tandem, it makes it more difficult for money managers to pick winners and losers.

Among some of the biggest winners is technology specialist Lee Ainslie’s Maverick Capital, which late last year switched into value stocks. Maverick has also profited from a longstanding holding in SoftBank-backed ecommerce firm Coupang, which floated last month, and a timely position in GameStop. It has gained around 36 per cent. New York-based Senvest, which began buying GameStop shares in September, has gained 67 per cent.

Also profiting is Crispin Odey’s Odey European fund, which rose nearly 60 per cent, having lost around 30 per cent last year, according to numbers sent to investors.

Odey’s James Hanbury has gained 7.3 per cent in his LF Brook Absolute Return fund, helped by positions in stocks such as pub group JD Wetherspoon and Wagamama owner The Restaurant Group. Such stocks have been helped by the UK’s progress on the rollout of the coronavirus vaccine, which has raised hopes of an economic rebound.

“We continue to believe that growth and inflation will come through higher than expectations,” wrote Hanbury, whose fund is betting on value and cyclical stocks, in a letter to investors seen by the Financial Times.

Additional reporting by Katie Martin

Source link

Continue Reading