Tag: Federal Reserve

Market Commentary 5/19/2023

Posted on by Damon Germanides

A Tale of Two Housing Markets As Rates Rise 

Even with the rise in interest rates, the limited supply of existing homes for sale is leading to multiple offers on the more affordable properties entering the market. This growth in demand is a key factor behind the surge in builder stocks reaching near all-time highs. New home construction is crucial as many homeowners are hesitant to sell their homes. This situation also highlights the importance of recognizing that real estate markets cannot be generalized. The ultra-high-end existing and new home market, particularly homes priced over $10 million, is not experiencing the same level of activity due to higher interest rates and concerns about the economy. 

Despite potential negative news such as debt ceiling talks and rising interest rates, the stock market remains unfazed, largely driven by the future of AI. A deeper inspection reveals a crowded trade, with eight stocks, including Microsoft, Google, and Meta, accounting for the majority of gains this year. Excluding these eight stocks, the market performance is relatively flat or slightly positive. 

The Federal Reserve remains vigilant as the June possibility of another 0.25 basis point interest rate hike starts to gain traction, although it remains uncertain. It is worth reiterating that inflation is a challenging problem to tackle. While goods and housing inflation are easing, the unemployment rate below 4% continues to exert pressure on wages and services, making a swift return to 2% inflation unlikely. Additionally, inflation remains persistent in most developed countries, with even Japan defying expectations by recording inflation well above 3%. 

The Mortgage Maze 

Quietly, interest rates have climbed back above 3.500% on the 10-year Treasury note. The future of rates will depend on how Congress addresses the debt ceiling and the potential for further flare-ups with regional banks. One thing is certain: obtaining financing for residential and commercial properties is becoming more challenging, requiring more expertise to navigate complex loan scenarios. Moreover, there is a significant divergence in rates among lenders, as illustrated by the discrepancy of 0.5% in the loan scenario priced today, emphasizing the value of a knowledgeable broker. 

In this dynamic market environment, we remain committed to providing our clients with expert guidance and solutions to successfully navigate the ever-evolving lending landscape. 

Market Commentary 5/12/2023

Posted on by Admin

Inflation and Slowing Economy Weighs Heavy on Consumer Confidence

The results of Friday’s University of Michigan Consumer Sentiment Report (UMCSENT) were lower than expected, emphasizing the impact of inflation and a slowing economy on consumer confidence. UMCSENT holds significance as it provides insight into the current sentiment of consumers, and the reading was not favorable. As we have previously mentioned, we believe that tackling inflation is always challenging. Although we anticipate short-term interest rates are approaching their peak, interest rates are not likely to decline as rapidly as some may hope. The Federal Reserve made a critical mistake by allowing inflation to exceed 9%. As a result, they will have to exercise caution in reducing interest rates until there is clear evidence that inflation has been effectively addressed.

In terms of the Consumer Price Index (CPI), overall inflation is showing signs of abatement. Regardless, super-core inflation ( which the Fed closely monitors) remains elevated. The Fed is prepared to accept a rise in unemployment and sustain potential market repercussions to bring down inflation. This strategy hinges on the recognition that inflation disproportionately affects the most vulnerable individuals. Additionally, it is important to consider that other factors continue to exert pressure on the prices of goods and services; like the post-Covid uncertainties in global supply chains and the absence of cheap labor from China. 

Housing Supply, Consumer Sentiment, and Lending Sources

The surge in interest rates has prompted a decline in existing home sales. Borrowers looking to upsize or downsize their homes are hesitant to give up their mortgage rates of around 3% in exchange for new rates of 5% to 6% or higher. This trend has contributed to the rise in stock prices of new home builders. The housing market remains constrained, particularly in larger cities, due to limited supply.

There are concerns surrounding regional banks as deposits flee and smaller banks face  balance sheet challenges. Stronger banks are positioned to acquire weaker ones. While these mini-regional bank crises are not systemic, they are creating a tighter lending environment. Many of these banks were involved in services like commercial office space as well as provided financing options for non-institutional sponsors, construction, and other specialized loans that larger money center banks often refused. We expect to witness further episodes of bank-related issues in the coming months.

At Insignia Mortgage, we are navigating this environment proactively. Our team of professional loan brokers has identified several interesting lending options, including credit unions, boutique banks, and larger private banks that offer excellent terms for the right clients. Here are some highlights:

  • Loans up to $4MM with loan-to-values up to 80%
  • Interest-only products available for high net worth borrowers up to $20 million
  • Bank statement loan programs up to $7.5MM with rates in the low 7s
  • Financing options with as low as 5% down payment for loans up to $1.5MM and 10% down payment for loans up to $2MM
  • Foreign national loans ranging from $2MM to $30MM

We remain committed to finding innovative solutions and serving our clients with exceptional lending opportunities amidst this challenging market landscape.

Market Commentary 5/5/2023

Posted on by Damon Germanides

Equities Surge Amidst Better Than Expected April Jobs Report 

Equities surged on Friday following the release of a better-than-feared April Jobs Report, calming worries of an imminent recession. Troubled regional banks rallied by over 70% in some cases, even as bond yields rose. Nonetheless, any optimism surrounding the regional banks may be short-lived as more bank failures are expected. This is due to the Federal Reserve’s decision to keep short-term interest rates higher for longer, which will put pressure on all but America’s biggest banks to raise deposit rates and scale back lending.

As borrowers realize that a 5%+ short-term U.S. Treasury bill is a much better return than keeping money in their bank, we’re seeing a movement of money out of banks designed to slow economic growth and cool off demand. The question remains: how long of a lag does Fed policy come with? Some on Wall Street believe that inflation and interest rates will fall dramatically within the coming months. We take the more conservative view that it will take a longer time for interest rates to decline and inflation to move back down to 2.00%. We don’t see the need to raise interest rates further, but we are taking the Fed at its word that rates will remain elevated for longer.

State of the Mortgage Market

Despite the challenging market conditions, the mortgage market is functioning well. We’re creating many new relationships with lenders we’ve not pursued doing business with or known of until recently. Here’s a sampling of some interesting products on active deals we’re working on in both the residential and commercial space (yes, Insignia Mortgage does commercial loans too!):

  • Single-family home loans of up to $4MM at 80% loan-to-value with rates in the mid-5s for ARM loans
  • Single-family home loans of up to $30MM at 70% loan-to-value with rates under 5% with a banking relationship
  • Owner-occupied commercial loans of up to $10MM with rates in the mid-5s
  • Multi-family apartment loans of up to $15MM with rates in the mid-5s

Market Commentary 4/28/2023

Posted on by Damon Germanides

Economy Resilient As Fed Week Approaches 

The Fed’s preferred inflation gauge came in as expected. Inflation remains high despite showing signs of moderating, with the Fed planning to raise rates next week (on top of rumors of an additional hike in June). The rationale behind higher short-term interest rates is the economy is performing better than anticipated. Q1 earnings met the projected results, with consumer sentiment and PMI data being positive. Some parts of the country are even experiencing bidding wars on home sales. 

There are signs that indicate the next few months could be challenging. GDP growth is anemic. Some CEOs, including Amazon’s CEO, have spoken about slowing business spending in preparation for a downturn. The rally in the market has been led by a few large companies, as commercial real estate valuations remain uncertain and in decline, which could be problematic for banks. Overall, bank lending standards continue to tighten, creating opportunities for lenders with more expensive terms and rates. 

Supply & Demand, Homeowners & Mortgage Rates 

Housing supply remains a challenge, particularly in cities like Los Angeles. A decade of low rates allowed borrowers to secure manageable mortgage payments. Now that interest rates have doubled, homeowners may be deterred from wanting to sell because of the high mortgage rates relative to recent years, causing a strain on supply and putting a floor on housing values. The possibility of a recession could affect all asset classes at some point, but for now, home buyers must accept higher mortgage payments and prices. 

Next week will be critical, with the FOMC meeting and conference call on Wednesday, followed by the April Jobs Report on Friday. These events could significantly impact the equity and bond markets. 

Market Commentary 4/21/2023

Posted on by Damon Germanides

Mortgage Rates Hold Steady

Markets were calm this week as initial worries over bank earnings and balance sheets were better than anticipated. Bank of America’s CEO, Brian Moynihan, provided comfort to the market with his commentary on the consumer, the state of the banks, and his explanation of why money is moving out of the banking system to higher-yielding and safe instruments such as Treasuries. In short, the outflow of money from banks is what the Fed wants to see. In our highly leveraged economy, money flowing from the banking system will tighten the amount of available credit and require banks to offer more yield to keep depositors. This keeps interest rates on mortgages elevated. As a result, there is less money in the economy, which should slow demand and help cool off inflation. It sounds simple, but the twist comes with timing. Fed policy works with long and variable lags, so any policy initiated many months ago may only now be impacting the economy. That is why many are calling for a pause to rate hikes to see what may come from the jumbo move in short-term rates over the last year. However, betting markets believe the Fed will raise rates another .25 basis points in May as Fed officials continue to advocate for further tightening in its inflation fight. With service inflation remaining sticky and business activity picking up, we too believe the Fed will go for one more hike.

Nevertheless, there are many mixed signals that suggest the economy is cooling. Auto sales and housing have certainly slowed (yet builder stocks are near all-time highs, go figure). While loan defaults across commercial, auto, and consumer credit remain low, default rates are rising, as are spreads. The MOVE index, a measure of bond volatility, is very high, which is never a good sign. Weekly jobless claims point to more layoffs ahead. Let’s not lose sight that a strong sign of a looming recession remains with the inverted yield curve. In addition, banks are limiting the lending box in anticipation of a slowing economy, lack of deposit growth, and in response to the SVB and Signature Bank failures.

Smaller Lenders Are Better

As big banks tighten the lending box on residential mortgages, Insignia Mortgage is locating eager to lend sources like smaller banks and credit unions.  We recently partnered with a local, federally-insured institution, with an old-fashioned way of doing business. This lender looks at each scenario case by case and then makes a decision. Interest rates are in the low 5’s for a 5/1 ARM, and this particular lender will offer a loan amount of up to $4 million dollars at 80% of appraised value. No banking relationship is required. We like these lenders because they are community-oriented and far easier to deal with than the bigger banks. Their interests are aligned with ours and most especially, our clients. Every deal matters to these smaller lenders fighting for market share against the bigger banks.

Market Commentary 4/14/2023

Posted on by Damon Germanides

Fall In Mortgage Rates Welcomed During Spring Home Buying Season 

Markets were generally upbeat this week as several key inflation readings trended lower. Nonetheless, we recommend paying close attention to service inflation. It is proving to be sticky and is the measure being closely monitored by the Fed. Services make up the bulk of business expenses, and the Fed is keen to see this metric fall to a range of 2% to 3% from around 5% per annum. Of additional concern is the rise in oil prices as OPEC cuts production and oil settles above $80 per barrel. The betting markets are over 60% that the Fed will raise short-term rates by another .25 basis points before pausing. Although our feelings are in line with the betting markets on the one-and-done on the Fed rate hikes, they differ from the consensus view that the Fed will pivot by late summer to lower short-term interest rates. Our thinking is that the inflation dragon needs to be slain. Ensuring that inflation is put back in the box will require the Fed to keep interest rates higher for longer. With financial conditions easing again along with the recent rally in the equity and bond markets, the Fed can justify another rate hike. They can do so veiled as an attempt to increase short-term interest rates above the average inflation to the so-called restrictive territory. 

JP Morgan reported earnings this morning and the bank had a very good quarter. Comments from the CEO, Jamie Dimon, soothed markets on the overall state of the economy and the resiliency of the banking sector. For the moment, while the economy is slowing, it is still doing better than feared. The banking crisis seems to have abated, and inflation is coming down slowly. Even so, one must listen to the great Warren Buffet, who is not so sure the banking crisis is over. Dissenting views are just part of what makes this market so tough to dissect. After 30 years of low-interest rates, the move to a higher neutral interest rate is affecting the economy on many levels. It is stressing banks, hitting valuations on apartments and office buildings, and making it much harder for consumers and businesses to qualify for loans. Persistent inflation is impacting consumer spending. The reworking of global supply chains is putting a floor on input costs as the world moves from just-in-time inventory to certainty of inventory in a post-COVID world. All of this and more is what makes the Fed’s job so difficult and why handicapping the direction of interest rates and the economy is a fool’s errand. 

Humanizing the Loan Process

Mortgage applicants have adjusted to the higher rate environment. Higher interest rates mean a lower mortgage for many, so the pre-approval process is crucial. There are lenders out there that will think outside the box and are helping borrowers maximize their loan dollar amounts. Liquid asset depletion, relying more on a recent profit and loss statement, RSU income, to name a few, can add more income to a borrower looking to qualify for a home mortgage. This type of common-sense underwriting is more prevalent with smaller banks and credit unions that look to humanize the loan underwriting process, offer competitive interest rates, and genuinely desire to help borrowers in their community. 

Market Commentary 4/7/2023

Posted on by Damon Germanides

Fed Maintains Rate Hike Path Due To Jobs Report 


An in-line Jobs Report will keep the Federal Reserve on hold until its next meeting in May. As a result, market forecasters predict there will be another .25 bp rate hike to 60%. Wage inflation continues to normalize, which is a welcome sign, while job growth in the private sector has slowed. The unemployment rate fell to 3.500%, which suggests the job market is still too tight, especially with the approximately 10 million jobs left unfulfilled. Viewing the economy based on the jobs picture, the economy is proving to be much more resilient than many had thought. This is despite the almost 500 basis points tightening in such a short period.  

Yet, there are other economic metrics flashing warning signs. This includes a crucial aspect, the de-inverting yield curve. Also, of concern is the senior loan officer survey which confirms our day-to-day view that bank underwriting is tightening up. There has been an increase in consumer debt and an uptick in auto loan defaults. In addition, keep in mind the recent bank failures. They have not only passed the panic phase but will also continue to impact bank underwriting of risk. This remains a very confusing market and we certainly do not have a crystal ball. Nonetheless, the risk of a recession or of a recession already in its early phase remains high. Oil moving up over 80 per barrel does not help those with brighter expectations. 

Some of you are wondering why mortgage rates continue to remain elevated despite the 10-year Treasury falling to around 3.35%. There are several reasons for this, but the most promising is the average spread of Bank Rates for 30-year mortgages moving to nearly 3.33% over the 10-year Treasury. Should that spread tighten to the low of 1.35%, 30-year mortgage rates would be closer to 4.75% -5% rather than the 6.00% to 7.00% many banks are offering. The demand by investors for a bigger spread on mortgage loans is very much affecting the ability of potential borrowers to qualify for home mortgages. This is also why Insignia Mortgage spends a considerable amount of time meeting with various smaller to mid-sized banks who are willing to sharpen their pencil on loan terms, as opposed to seeking large banking relationships on larger jumbo loans. The goal is to partner with a resource that offers commonsense decisions on loan approvals. It is precisely this optionality that makes the mortgage broker model so important in today’s particularly challenging marketplace. 

Market Commentary 3/31/2023

Posted on by Damon Germanides

Slowing Inflation Encourages Market 

While the recent banking crisis appears to be receding, there are still issues to be dealt with. Our belief is this will not become a 2008-type event, but the failure of SVB and Signature Bank has shown how fragile our banking system is as well as how quickly panic can set in. It only took two days for SVB deposit withdrawals to crater the bank. The long-term ramifications of these two bank failures will be felt in the form of more bank regulation and tighter lending standards. 

This Friday’s Core PCE reading, the Fed’s favorite inflation gauge, came in at 0.3% or 3.6% annualized. While this is still far too high, it is encouraging. However, the Fed remains resolute in its battle against inflation. They maintain their higher-for-longer stance on short-term interest rates. Their intention is to continue raising rates while the economy is still growing, and unemployment is low, as they fight inflation. We are not sure if this is the right decision, but history has shown that inflation is difficult to break once it is entrenched in the overall economy. This leads us to think that the Fed will keep short-term interest rates elevated for longer than many on Wall Street anticipate. Should these rates continue to rise beyond Wall Street’s expectations, volatility in the bond and equity markets will likely revive later in the year. 

Most of the news on loan defaults and property impairments is centered around office properties. Single-family residential loans are on solid footing. While valuations on single-family homes have fallen, they have not fallen dramatically. Many homeowners have locked in low long-term mortgage rates, potentially mitigating the need to sell.  This will act as a floor to price declines. Spring activity in housing is encouraging. We believe the worst is behind us, as clients adjust to the higher rate environment. 

Market Commentary 3/17/2023

Posted on by Damon Germanides

Thoughts On Bank Runs, Dropping Rates, And Then Some.

This past week has been quite turbulent for us all. We witnessed two major bank failures with Silicon Valley Bank and Signature Bank, along with several large regional banks, such as First Republic, suffering a massive loss of market value. Internationally, Credit Suisse faced challenges due to fears of contagion spreading to systemically important banks.

Concerns persisted throughout the week despite numerous efforts. These included government guarantees for the depositors of SVB and Signature Bank, an additional big facility to backstop US banks, the injection of $30 billion deposits by a group of large US banks into First Republic, and finally, the National Bank of Switzerland stepping in for Credit Suisse. This crisis of confidence stems from years of a zero-rate lending environment that encouraged banks to purchase longer-dated bonds and Treasuries, as well as to hold longer-dated mortgages and bank-originated loans on their balance sheets in pursuit of higher yields. As the Fed increased rates significantly, the value of these loans decreased, resulting in potential “run on the bank” risks.

It’s crucial to note that the current mark-to-market issue is different from the 2008 crisis. In 2008, the issue was with poorly underwritten mortgages that became worthless when real estate prices stopped rising. Today, banks hold more capital in reserves, which can help cushion the blow to their balance sheets. Although the situation is stressful, it’s likely that the Fed and Treasury will find a way to calm the markets in the coming days. However, there is always the tail risk of an unknown factor creating a more significant problem.

This banking debacle has implications for everyone in the real estate business, including realtors, mortgage bankers and brokers, escrow, and title companies. The decrease in confidence will likely hurt spending, delay house-hunting, and put additional pressure on sellers to lower prices. The drop in interest rates, now below the mid-5% range for most lending products, might provide some relief as banks tighten lending standards. Nonetheless, confidence has been hit hard. We suspect potential buyers to enter the market very cautiously for some time, even after equity and bond markets settle down.

The shrinking yield curve inversion has increased the probability of a recession. Historically, the unwinding of the inversion signals a higher probability of recession. The decisions of the Federal Reserve and European Central Bank regarding interest rates will further impact the global marketplace. How these institutions will balance market stabilization and inflation control remains to be seen.

Mortgage Brokers In The Current Market

Seasoned mortgage brokers are poised to play an essential role amidst the shift in the financial landscape last week. Numerous lesser-known lenders offer competitive rates, common-sense underwriting, and reasonable depository requests (at FDIC limits) as part of their portfolio product offerings. From complex full-doc loans to loans with as little as 5% down up to $1.5 million, and even stated income loans, these products are provided by regulated institutions. They are often priced better than those offered by large mortgage bankers. At Insignia Mortgage, we have experienced a significant uptick in loan requests, as borrowers seek these products without needing to transfer a substantial portion of their personal or business assets.

Market Commentary 3/10/2023

Posted on by Damon Germanides

Treasury Yields Drop As Regional Banks Show Signs of Stress

Treasury yields dropped precipitously on Friday, but for all the wrong reasons. Several California-based regional banks experienced a sharp drop in equity values as customers withdrew money out of fear the banks may become insolvent.  Silicon Valley Bank (SV) was seized as it was forced to liquidate its bond portfolio due to a negative interest rate margin. In basic terms, this means the bank was paying more to depositors than to borrowers. Fear bled over to the First Republic and the Signature Bank as those stocks were down heavily. These episodes are the result of a decades-long easy money cycle that forced banks to buy long-dated bonds as well as lend money at near-zero interest rates. Additional uneasiness surrounds the fact that there’s never just one cockroach in the room – that these banks, unlike the banks of the 2008 Financial Crisis, are heavily regulated. As a result, they were supposed to have ample capital in reserves to protect against stressful scenarios. In the case of SVB, it still failed. Of further concern is the fact that SVB has been the bank to the most coveted part of the economy for the last 10 years. Their technology and their management team were presumed to be world-class. Yesterday I was telling a friend that the last two days were reminiscent of the Bear Sterns collapse. History does not repeat yet it often rhymes.  However, to keep this all in perspective, the big money center banks, or more bluntly, the banks that really matter from a systemic standpoint, maintain abundant capital reserves. So, while the SVB collapse is worrisome, I do not believe we are reliving 2008 all over again.

The Jobs Report came in a bit above expectation and wages grew slower. This takes the .50 basis point hike off the table (especially after today’s negative events in the banking sector). The Fed will most likely go .25 basis point at its next two to three meetings as inflation remains a problem but could change quickly. We assume the Fed funds rate to top off at 5.75% to 6.00% before turning the other way. There is a sense of apprehension in the air now and I think consumers, risk-takers, and business owners will continue to hunker down. Perhaps, the Fed’s work of raising rates to slow the economy and encourage a more cautious spending public is now at play.   Higher interest rates have already slowed real estate activity by making mortgages unattractive. They’ve also lowered commercial real estate values and are hitting equities now in a meaningful way. The pain of a slowing economy is beginning to take hold. 

What are we to do?  Business, real estate, and life have cycles.  Real estate is in an adjustment phase and prices (as we have reiterated) will need to adjust to the new era of higher interest rates. Anecdotally, many brokers I speak to realize that price reductions will lead to buyers returning to the table.  While not great news for sellers, this is the reality of a free marketplace.  The good news is the Fed is nearer to the end of the rate hike cycle than the beginning. Once there is consensus on a rate ceiling, the uncertainty of higher interest rates will dissipate, and activity will resume.  However, waiting for that time will not be without some additional distress, I am afraid.