Jan. 11: What the California MBA is watching; the jobs numbers hit mortgage rates; food & inflation; secondary deals

Did you hear the latest? Facebook founder and CEO and convicted embezzler Mark Zuckerberg was found dead hanging in his cell this morning! I made that up… But how do you know? Any consumer of factual information should be very interested in Facebook restoring “free expression.” Similar to X, Meta is getting rid of fact-checkers, which the company says have been too politically biased, and will replace them with “Community Notes.” Meta will also “simplify its content policies and eliminate restrictions on topics like immigration and gender.” Over the last few years Meta has gone from banning Trump on its platform in the aftermath of Jan. 6 to Zuckerberg flying down to Mar-a-Lago in November to meet with the President-elect. Zuckerberg is even donating $1M to Trump's inaugural fund and blamed the Biden Administration for increased censorship that has prompted a trend towards increased regulation around the world. The move prompted Andy Borowitz to write, “The decision by Facebook’s parent company Meta to eliminate fact-checking was “long overdue,” the former congressman George Santos said. ‘For far too long, Facebook has been a haven for people hell-bent on spreading facts,’ said Santos, who said he was making his statement from the International Space Station. ‘I commend Facebook’s decision, and I know that my fellow Beatles agree with me,’ he added. Praising Meta chief Mark Zuckerberg for ‘freeing Facebook from the tyranny of accuracy,’ he declared, ‘I say this as a citizen, a patriot, and the NHL’s all-time scoring leader.’”

Inflation and food, food being something all of us need

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Inflation has been in the news for some years now, influencing the Federal Reserve’s actions as well as actions of consumers. And actual, and the psychology of, inflation impacts mortgage rates.

If I go to the store and find out that Quaker Oats is more money than I want to spend, I may go with the store brand. Private-label brands (defined as the unbranded or store-branded alternatives to name-brand grocery items) have had a great couple of years, as inflationary pressure has nudged consumers toward ditching the name-branded stuff. Prior to the pandemic, the average branded product cost 18 percent more than the supermarket’s private-label brand, while today that price difference is up to 23 percent more. In some categories, the name brands are being thoroughly routed: Based on volume share, generic brands have 60 percent of the cooking oil business, 55 percent of the mixed vegetable cart share, 47 percent of the cupcake business, 46 percent of broth, and even 41 percent of cream cheese.

Speaking of food, have you noticed a change in gas stations, and change that perhaps lenders can learn from? Gas stations have begun to retool their offerings, following the playbooks of regional brands like Wawa and Buc-ee’s and ramping up their food business amid tighter margins on the gas side of the business. Casey’s, which is a gas station staple in the Midwest known for its pizza offerings, made $312 million in gross profit last quarter selling gasoline while earning $620 million in gross profit on its food and beverage business, which is almost $200 million more than straightforward pizza restaurant Domino’s made. Part of that is because the margin on the gasoline business is only about 10 percent while Casey’s profit margin on food is 59 percent! As more cars go electric, the opportunity to make more money on the grill than at the pump increases, as those EVs might need to take a couple minutes more to get the desired charge, time that could be spent housing a hoagie. Inside sales have been rising steadily for two decades.

 The job numbers & rates

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MBA SVP and Chief Economist Mike Fratantoni’s reaction to the U.S. Bureau of Labor Statistics report on employment conditions in December is good for lenders to know.

“The job market strengthened in December, with payrolls increasing by 256,000 for the month and capping a year of faster-than-expected job gains. The unemployment rate decreased to 4.1%, and wage growth decreased slightly to 3.9%. The job gains were predominantly in retail trade, health care, leisure and hospitality, and government sectors, while the manufacturing sector continued to contract.

“In recent months, there had been increases in the share of workers who were unemployed for longer spells. Although other data continue to report that hiring rates remain quite low, in December, the number of long-term unemployed individuals decreased. The December employment report shows a picture of a strong job market. While the FOMC had indicated that they could slow the pace of rate cuts as we enter 2025, these data make at least a pause in cuts much more likely, which will push mortgage rates higher in the near term.”

National Association of REALTORS® Chief Economist Lawrence Yun had a slightly different take. "The job market is strong. A net additional 256,000 workers were hired in December, bringing the total for the year to 2.2 million more jobs. The unemployment rate notched lower to 4.1%. The wage growth rate of 3.9% is outpacing inflation at 2.7%. All this positive news is, however, temporarily bad news for interest rates.

“Good economic data do not have to be associated with higher interest rates. More production and higher productivity can bring down inflation and interest rates. However, higher rates now are due to lingering inflation, which has not been fully contained. The oversupply in the apartment sector implies that inflation will be much calmer in the future. But until then, mortgage rates will stick near the current elevated rates. In the meantime, consumers are looking for inventory, and more choices have led to gains in home sales in many markets."

As California goes, so goes the nation?

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The Los Angeles fires remind the nation of the insurance cost issues that many areas have. Put another way: there is no reason for homeowner’s premiums around the nation to drop. Depending on whether you measure volume or units, California accounts for 15-20 percent of the overall residential lending business, so, in general, it’s good to know the issues that the California MBA is watching.

“Last year, much of our advocacy work focused on several core issues, including the insurance crisis: California MBA engaged in a proactive campaign to highlight the urgency of this crisis and push for reforms, which are occurring through Insurance Commissioner Lara’s Sustainable Insurance Strategy. We engaged with the Legislature to oppose policies that would have delayed solutions and worked with coalition partners to showcase the importance of restoring a competitive insurance market for California’s communities as soon as possible.

“AI and rules surrounding the use of automated decision-making tools: We are pleased that AB 2930 (Bauer-Kahan) stalled in the Senate. This was after the bill was scaled back to remove financial transactions including mortgage and housing from the bill following significant engagement by California MBA and other industry trade groups.

Residential and commercial real estate reform bills: California MBA was engaged in shaping several bills that took effect and will impact our industry. These include AB 3108 (Jones-Sawyer), which now adds certain acts by a mortgage broker or originator to the list of mortgage fraud offences, AB 2424 (Schiavo), which now establishes a new 45-day waiting period before a foreclosure sale can occur in certain circumstances. (California MBA opposed the original version of AB 2424 but was able to remove opposition when the bill was amended to address association concerns.)

“AB 3100 (Low), which requires mortgages originated on or after January 1, 2027, to contain provisions that allow for assumption in the case of separation or divorce, if both spouses are listed as co-borrowers on the loan and the borrower to assume the loan qualifies. Amendments were adopted to address California MBA concerns and clarify that the lender determines if the assuming borrower would qualify.

“Two more bills were passed that California MBA opposed, but you should be aware of for implementation and compliance purposes. SB 1286 (Min), which now expands the Rosenthal Fair Debt Collection Practices Act to cover commercial debt resulting from a covered commercial credit transaction of $500K or less. SB 1286 was amended to clarify that the $500K threshold is based on the total aggregate maximum at time of origination and amendments clarified that the measure applies to obligations entered into, renewed, sold, or assigned on or after July 1, 2025. California MBA opposed the bill because the author rejected requested amendments to lower the maximum allowable threshold to $100K.

“SB 1103 (Menjivar) which creates new mandates on commercial leases including notice and document translation requirements and restrictions on cost recovery for qualified commercial tenants. SB 1103 was opposed by California MBA and industry trade groups because the measure introduces significant legal risks for property owners by allowing tenants to rescind leases for non-compliance.” Thank you, California MBA.

Secondary markets drive primary markets

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There’s no use in lenders manufacturing a product if no one will buy it or there’s no room in a portfolio somewhere for it. What’s happening out there?

On September 10, Freddie Mac announced the pricing of its second Seasoned Credit Risk Transfer Trust (SCRT) offering of 2024. The securitization is approximately $658 million including both guaranteed senior and non-guaranteed subordinate securities backed by a pool of seasoned re-performing loans (RPLs). The SCRT program is a fundamental part of Freddie Mac's seasoned loan offerings which reduce liquid assets in its mortgage-related investments portfolio and shed credit and market risk via economically reasonable transactions. Freddie Mac Seasoned Credit Risk Transfer Trust, Series 2024-2 includes approximately $625 million in guaranteed senior certificates and $33 million in non-guaranteed mezzanine and subordinate certificates. The transaction is expected to settle on September 13, 2024. The underlying collateral consists of 3,762 seasoned fixed-, step-, and adjustable-rate RPLs, and includes both loans that were modified to assist borrowers at risk of foreclosure and loans that were never modified. All of the Mortgage Loans are current as of the Cut-Off Date. To date, Freddie Mac has sold over $10.3 billion of Non-Performing Loans (NPLs) and securitized approximately $78.6 billion of RPLs consisting of over $30.4 billion of fully guaranteed PCs, $35.5 billion of SCRT senior/sub securities, and $12.7 billion of Seasoned Loans Structured Transaction (SLST) securities. Additional information about the company's seasoned loan offerings can be found at http://www.freddiemac.com/seasonedloanofferings/.

Fannie Mae markets its sales of reperforming loans as part of the company's ongoing effort to reduce the size of its retained mortgage portfolio. The sale consisted of approximately 8,721 loans, having an unpaid principal balance of approximately $1.429 billion, and is available for purchase by qualified bidders. Bids were due on October 29, 2024. Interested bidders for future sales can register here. Reperforming loans are loans that have been or are currently delinquent but are back making their payments for a period of time. The terms of Fannie Mae's reperforming loan sale require the buyer to offer loss mitigation options to any borrower who may re-default within five years following the closing of the reperforming loan sale. All purchasers are required to honor any approved or in-process loss mitigation efforts at the time of sale, including forbearance arrangements and loan modifications. In addition, purchasers must offer delinquent borrowers a waterfall of loss mitigation options, including loan modifications, which may include principal forgiveness, prior to initiating foreclosure on any loan.

Fannie Mae announced that it has executed its seventh Credit Insurance Risk Transfer (CIRT) transaction of the year. CIRT 2024-L4 transferred $338.6 million of mortgage credit risk to private insurers and reinsurers. The covered loan pool for CIRT 2024-L4 consists of approximately 23,500 single-family mortgage loans with an outstanding unpaid principal balance (UPB) of approximately $7.9 billion. Additionally, the covered pool collateral has loan-to-value (LTV) ratios of 60.01 percent to 80.00 percent and was acquired between September 2023 and December 2023. The loans included in this transaction are fixed-rate, generally 30-year term, fully amortizing mortgages and were underwritten using rigorous credit standards and enhanced risk controls. With CIRT 2024-L4, which became effective September 1, 2024, Fannie Mae will retain risk for the first 170 basis points of loss on the $7.9 billion covered loan pool. If the $133.9 million retention layer is exhausted, 26 insurers and reinsurers will cover the next 430 basis points of loss on the pool, up to a maximum coverage of $338.6 million. Since inception to date, Fannie Mae has acquired approximately $28.1 billion of insurance coverage on $935 billion of single-family loans through the CIRT program, measured at the time of issuance for both post-acquisition (bulk) and front-end transactions. To promote transparency and to help insurers and reinsurers evaluate the CIRT program, Fannie Mae provides ongoing, robust disclosure data, as well as access to news, resources, and analytics through its credit risk transfer webpages. 

Fannie Mae announced a sale of non-performing loans as part of the company's ongoing effort to reduce the size of its retained mortgage portfolio, including the company's twenty-fifth Community Impact Pool (CIP). CIPs are typically smaller pools of loans that are geographically focused and marketed to encourage participation by non-profit organizations, minority- and women-owned businesses (MWOBs), and smaller investors. The one large pool includes approximately 1,766 deeply delinquent loans totaling $296.7 million in unpaid principal balance (UPB), and the CIP includes approximately 29 loans totaling $7.2 million in UPB. The CIP consists of loans geographically located in the New York area. All pools are available for purchase by qualified bidders. Interested bidders are invited to register for future announcements, training and other information here. 

John was in the fertilized egg business. He had several hundred young layers (hens), called 'pullets,' and ten roosters to fertilize the eggs. He kept records, and any rooster not performing went into the soup pot and was replaced. This took a lot of time, so he bought some tiny bells and attached them to his roosters. Each bell had a different tone, so he could tell from a distance which rooster was performing. Now, he could sit on the porch and fill out an efficiency report by just listening to the bells.

John's favorite rooster, old Butch, was a very fine specimen, but this morning he noticed old Butch's bell hadn't rung at all! When he went to investigate, he saw the other roosters were busy chasing pullets, bells-a-ringing, but the pullets, hearing the roosters coming, would run for cover. To John's amazement, old Butch had his bell in his beak, so it couldn't ring. He'd sneak up on a pullet, do his job and walk on to the next one.

John was so proud of old Butch, he entered him in the Saint Lawrence County Fair and he became an overnight sensation among the judges.

The result was the judges not only awarded old Butch the "No Bell Piece Prize," but they also awarded him the "Pulletsurprise" as well.

Clearly old Butch was a politician in the making. Who else but a politician could figure out how to win two of the most coveted awards on our planet by being the best at sneaking up on the unsuspecting populace and screwing them when they weren't paying attention.

Vote carefully, the bells are not always audible.

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