The BAN Report: The $765MM MSR Portfolio / Work from Home Study / Green Shoots from Retail Woes? / Mortgage Rates Drop Below 5% / Vin Scully

The $765MM MSR Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 765MM MSR Portfolio” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • $765,774,695 of mortgage servicing rights

  • Portfolio is comprised of mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, as well as loans held and serviced by the seller

  • The seller is a well-capitalized Midwest bank

  • WAC of 3.78%

  • 9,518 loans originated primarily through retail channels

  • Servicing fee of 25 basis points

  • Predominantly mortgage loans in Indiana (60%), Illinois (19.6%), and Kentucky (16%)

  • Potential annual flow relationship of approximately $250MM

For more information, please execute the confidentiality agreement. Potential purchasers will be evaluated based on price, financial strength, reputation, and status with Freddie Mac and Fannie Mae. 

Timeline:

Sale Announcement: Wednesday, August 3, 2022

Bid Date: Tuesday, August 16, 2022

Closing Date: Friday, September 30, 2022

Transfer Date: Monday, October 31, 2022

Work from Home Study

With a grim title (“Work From Home and the Office Real Estate Apocalypse”), three academics researched how work from home was impacting the New York City commercial office center.    

What the researchers found: Analyzing shifting lease revenues, office occupancy, lease renewal rates, lease durations, and market rents during the pandemic, the researchers determined that:

  • In the NYC office market, there was a 32% decline in the values of offices in 2020, and a 28% decline in future values.

  • Higher quality office buildings (those that are built more recently and have more amenities) were somewhat protected against the declines, while lower quality buildings saw dramatic swings in valuation.

  • Extrapolating their estimates to the rest of the country, as hybrid work options continue to take hold and lease revenues continue to decrease, office values could be cut by nearly $500 billion in the next decade.

An interesting insight is physical office occupancy, which is measured from turnstile data provided by Kastle.

In the initial wave of the pandemic, physical office occupancy rates fell to just 20%. Average occupancy recovered to about 30% among the top-10 largest office markets by the end of 2020. It saw several more dips as the pandemic intensified in early 2021.The recovery continued in the second half of 2021 to about 50%, before falling sharply due to the rise of the Omicron variant at the end of 2021. The latest data as of May 2022 show a 50% occupancy rate among the largest 10 office markets. Occupancy rates are lower in several large metros such as New York City and Washington DC highlighted in the other panels of this figure. Occupancy stands at 38.8% in NY MSA, 40.0% in DC, and 34.6% in SF on May 11, 2022. With two years of remote work experience, many employers and employees have formed new habits and expectations, which may permanently affect where work is done.

One would think that actual occupancy and physical occupancy should converge. After all, why wouldn’t firms reduce office space if they aren’t using all of it? The paper noted that the volume of newly signed leases is running about a third of what it was pre-pandemic. However, physical occupancy is likely to get better as more companies put pressure on workers to return. WeWork, which has exclusively Class A space, has seen growth in office occupancy.

The company said its occupancy rate rose to 72 percent during the quarter, and memberships grew 33 percent from a year earlier to 658,000.

“As we head into the second half of the year, we remain confident in our proven ability to execute against our goals of growing revenue, increasing occupancy and continuing to drive towards profitability,” Sandeep Mathrani, WeWork’s chief executive, said in a statement on Thursday.

WeWork can capitalize on a shift to hybrid work, which has become a challenge for companies that usually sign long-term leases on office space, said Vikram Malhotra, a senior equity research analyst at Mizuho Americas, because its offices are in central business districts, and it can serve large and small tenants.

But, the return to office has still been slow and tepid. As I’ve walked throughout Chicago’s Loop and NYC’s Midtown in the past couple weeks, the energy isn’t what it used to be. Shake Shack noted the stalling of the downtown recovery.

Shake Shack Inc. said that the pace of workers returning to offices in cities, including New York, stalled last quarter and hampered the restaurant chain’s growth. 

The weakening of return to office has left the chain “cautious” about the timing of a “full urban recovery,” Shake Shack Chief Executive Officer Randy Garutti said on conference call with analysts. “There is still a long way to go.”

If companies start laying off workers and disproportionately let go of remote workers, perhaps more workers will see the benefit of being visible in an office. But, as of now, the office recovery has trailed the strong recoveries in hotels, travel, restaurants, and concerts.

Green Shoots from Retail Woes?

As retailers shed excessive inventory, retail liquidators have never been busier.

Once upon a time, when parents were scrambling to occupy their children during pandemic lockdowns, bicycles were hard to find. But today, in a giant warehouse in northeastern Pennsylvania, there are shiny new Huffys and Schwinns available at big discounts.

The same goes for patio furniture, garden hoses and portable pizza ovens. There are home spas, Rachael Ray’s nonstick pans and a backyard firepit, which promises to make “memories every day.”

The warehouse is run by Liquidity Services, a company that collects surplus and returned goods from major retailers like Target and Amazon and resells them, often for cents on the dollar. The facility opened last November and is operating at exceptionally high volumes for this time of year.

The warehouse offers a window into a reckoning across the retail industry and the broader economy: After a two-year binge of consumer spending — fueled by government checks and the ease of e-commerce — a nasty hangover is taking hold.

With consumers cutting down on discretionary purchases because of high inflation, retailers are now stuck with more inventory than they need. While overall spending rebounded last month, some major retailers say shoppers are buying less clothing, gardening equipment and electronics and focusing instead on basics like food and gas.

Adding to that glut are all the things people bought during the pandemic — often online — and then returned. In 2021, shoppers returned an average of 16.6 percent of their purchases, up from 10.6 percent in 2020 and more than double the rate in 2019, according to an analysis by the National Retail Federation, a trade group, and Appriss Retail, a software and analytics firm.

Last year’s returns, which retailers are not always able to resell themselves, totaled $761 billion in lost sales. That, the retail federation noted, is more than the annual budget for the U.S. Department of Defense.

This suggests that retailers are taking their lumps, moving excessive inventory, and reducing prices in the process, thus reducing inflation. Consumers are showing restraint by curbing spending on goods, especially on those that have risen dramatically. It is possible that the inflation has moderately already, but it just hasn’t shown up yet in the data.

Mortgage Rates Drop Below 5%

 

While the increase in mortgage rates has been short and dramatic, the decrease has been sharp as well, with mortgage rates dropping to their lowest level since April.

The average rate on a 30-year fixed-rate mortgage is 4.99% this week, down from 5.30% a week earlier, according to a survey by mortgage giant Freddie Mac published Thursday. Though rates remain well above their levels from a year ago, they have fallen swiftly in recent weeks from their 13-year high of 5.81% in June.

Mortgage rates and other measures of the cost of borrowing tend to rise and fall with expectations about the trajectory of the economy. Recently, fears that the U.S. is heading into a downturn have lowered expectations of the pace of rate rises.

Until the past few weeks, rising mortgage rates had been a key factor driving up the cost of home buying this year, adding hundreds of dollars or more to buyers’ monthly payments. That, on top of double-digit home-price growth, has helped drive buyers out of the market in recent months.

Sales of previously owned homes fell for a fifth straight month in June, according to the most recent data from the National Association of Realtors.

The chart below (courtesy of Tommy Esposito at VBC) shows how the Mortgage Affordability Index is at a low not seen since June 2006. Only if prices and/or rates drop can this improve affordability. But, an 82 basis point improvement in rates will certainly help bridge the gap.

 

 

 

 

 

Vin Scully

Let's celebrate the late and great Vin Scully with two of the best sports calls of all time.  For those who communicate for a living, his ability to listen and allow us to hear the sights and sounds was unmatched. And, after a lengthy pause, he nailed the moment with the perfect line.

World Series Game 6, Red Sox @ Mets, 1986

"Little roller up along first.... behind the bag! It gets through Buckner! Here comes Knight and the Mets win it! (90 second pause)
"If one picture is worth a thousand words, you have seen about a million words."

World Series Game 1, A’s @ Dodgers, 1988

“High fly ball into right field. She is gone! (70 second pause)

In a year that has been so improbable, the impossible has happened!”

Two excellent examples of a communicator telling the story and knowing when to keep their mouth closed.

The BAN Report: Inflation Cools / Atypical "Recession" / Mortgage Industry Shakeout / Bank M&A Cools / Gladwell Slams WFH / The $765MM MSR Portfolio

Inflation Cools

Yesterday’s CPI report showed that inflation, while still high, may be easing.   

Prices that consumers pay for a variety of goods and services rose 8.5% in July from a year ago, a slowing pace from the previous month due largely to a drop in gasoline prices.

On a monthly basis, the consumer price index was flat as energy prices broadly declined 4.6% and gasoline fell 7.7%, according to the Bureau of Labor Statistics. That offset a 1.1% monthly gain in food prices and a 0.5% increase in shelter costs.

Economists surveyed by Dow Jones were expecting headline CPI to increase 8.7% on an annual basis and 0.2% monthly.

Excluding volatile food and energy prices, so-called core CPI rose 5.9% annually and 0.3% monthly, compared with respective estimates of 6.1% and 0.5%.

Even with the lower-than-expected numbers, inflation pressures remained strong.

The jump in the food index put the 12-month increase to 10.9%, the fastest pace since May 1979. Butter is up 26.4% over the past year, eggs have surged 38% and coffee is up more than 20%.

Despite the monthly drop in the energy index, electricity prices rose 1.6% and were up 15.2% from a year ago. The energy index rose 32.9% from a year ago.

Used vehicle prices posted a 0.4% monthly decline, while apparel prices also fell, easing 0.1%, and transportation services were off 0.5% as airline fares fell 1.8% for the month and 7.8% from a year ago.

Gas prices, for example, have fallen for 58 consecutive days and are now below $4.

The national average cost of a gallon of regular gasoline now stands at $3.99, according to AAA, after 58 consecutive daily declines. That’s higher than it was a year ago but still well below a peak of nearly $5.02 in mid-June. Energy costs feed into broad measures of inflation, so the drop is also good news for policymakers who have struggled to contain the price increases and for President Biden, who has pledged to lower gas costs.

The national average includes a wide range of prices, from nearly $5 a gallon in Oregon and Nevada to about $3.50 in Texas and Oklahoma. But, broadly speaking, the drop reflects a number of factors: weaker demand, because high costs have kept some drivers off the roads; a sharp decline in global oil prices in recent months; and the fact that a handful of states have suspended taxes on gasoline.

However, the peak inflation narrative may be premature, and there is no evidence that the Fed is going to reverse course anytime soon.

The Cleveland Fed calculates a median consumer-price index and one that trims off the prices that moved the most. This is meant to try to get a sense of how broad-based price rises are—and both rose more than core prices last month. To add to the confusion, both were higher year-over-year in July than in June, even as the month-on-month rate fell back from the extreme reached earlier in the summer.

The Atlanta Fed’s index of “sticky” prices, those that are changed less often and are thought to provide a better guide to what businesses expect, fell. But it still rose at a worryingly high 5.4% annualized in July.

Finally, the New York Fed’s Underlying Inflation Gauge, which incorporates economic data as well as prices to try to get at the inflation trend, hardly dropped at all—putting it in a range of 4.7% to 5.9%.

The Fed will watch the data closely and react accordingly. But, so long as unemployment remains low, they will likely keep raising rates until inflation gets below at least 5%. 

  

Atypical “Recession”

If we are in a recession, then this would be the most unusual one yet. The author compared our current climate to a North Dakota oil town back a decade ago and there are some interesting similarities.

Economists and politicians have spent weeks arguing about whether the United States is in a recession. If it is, the recession is unlike any previous one. Employers added more than half a million jobs in July, and the unemployment rate is at a half-century low.

Typically, in recessions, the problem is that businesses don’t want to hire and consumers don’t want to spend. Right now, businesses want to hire, but can’t find the workers to fill open jobs. Consumers want to spend, but can’t find cars to buy or flights to book.

Recessions, in other words, are about too much supply and too little demand. What the U.S. economy is facing is the opposite. Just like North Dakota in 2010.

The underlying causes are different, of course. Williston was hit by a surge in demand as companies and workers flooded into what had been a small city in the Northern Plains. The United States was hit by a pandemic, which caused a shift in demand and disrupted supply chains around the world. And the comparison goes only so far: Williston’s population roughly doubled from 2010 to 2020. No one expects that to happen to the country as a whole.

Still, whether local or national, the most obvious consequence is the same: inflation. When demand outstrips supply — whether for steel-toe boots in an oil boomtown or for restaurant seats in the aftermath of a pandemic — prices rise. Mr. Flynn recalled going out to eat during the boom and discovering that hamburgers cost $20, a feeling of sticker shock familiar to practically any American these days.

There is also a subtler consequence: uncertainty. No one knows how long the boom will last, or what the economy will look like on the other side of it, which makes it hard for workers, businesses, and governments to adapt. In Williston, companies and governments were reluctant to invest in the apartment buildings, elementary schools, and sewage-treatment plants that the community suddenly needed — but might not need by the time they were complete.

Consumer confidence is at record lows, yet so is unemployment. The culprit is likely inflation, which has a way of making everyone feel less wealthy.

Mortgage Industry Shakeout

As refinance activity and the profits available for mortgage lenders during the last refi boom, the universe of mortgage lenders is likely to shrink. Santander, for example, exited mortgages early this year. The tend of mortgage lending and servicing shifting from banks to non-banks will likely accelerate.

More recently, the largest banks in home loans, JPMorgan Chase, and Wells Fargo, have cut mortgage staffing levels to adjust to the lower volumes. And smaller nonbank providers are reportedly scrambling to sell loan servicing rights or even considering merging or partnering with rivals.

“The sector was as good as it gets” last year, said Wennes, a three-decade banking veteran who served at firms including Union Bank, Wells Fargo and Countrywide.

“We looked at the returns through the cycle, saw where we were headed with higher interest rates, and made the decision to exit,” he said.

While banks used to dominate the American mortgage business, they have played a diminished role since the 2008 financial crisis in which home loans played a central role. Instead, nonbank players like Rocket Mortgage have soaked up market share, less encumbered by regulations that fall more heavily on large banks.

Out of the top ten mortgage providers by loan volume, only three are traditional banks: Wells Fargo, JPMorgan, and Bank of America.

The rest are newer players with names like United Wholesale Mortgage and Freedom Mortgage. Many of the firms took advantage of the pandemic boom to go public.Their shares are now deeply underwater, which could spark consolidation in the sector.  

Complicating matters, banks have to plow money into technology platforms to streamline the document-intensive application process to keep up with customer expectations.

And firms including JPMorgan have said that increasingly onerous capital rules will force it to purge mortgages from its balance sheet, making the business less attractive.

The dynamic could have some banks deciding to offer mortgages via partners, which is what Santander now does; it lists Rocket Mortgage on its website.

“Banks will ultimately need to ask themselves if they consider this a core product they are offering,” Wennes said.

On a call with one of the largest non-bank mortgage originators, the President noted that they can underwrite a mortgage for $5,000, while it costs JP Morgan Chase $12,000. It has become too expensive for many banks to offer mortgages to their clients. Additionally, we are seeing surprising interest in our $765MM MSR pool from mortgage originators that historically have not bought MSRs, but now wish to make up for slower organic growth in their servicing portfolios.

Bank M&A Cools

Bank M&A has slowed in 2022 due to a variety of factors, including depressed stock valuations and higher rates caused by higher inflation.

Only 35 banks decided to sell during the second quarter. That was down from 49 the prior quarter and well below the 66 transactions announced a year earlier, according to a Raymond James analysis.

"Bankers are pretty conservative, but a lot of banks are getting even more conservative now," said Michael Jamesson, a principal at the bank consulting firm Jamesson Associates. "They see a lot of uncertainty out there, and that makes it difficult to make big decisions."

Daniel Goerlich, banking, and capital markets deals leader at PwC, said that aside from prolific acquirers that are highly confident in their dealmaking abilities, more banks are leery about M&A this year.

"There is a general sense of caution about going into spending mode versus cost savings mode" with the specter of recession looming, he said. That noted, even while being more cautious, he said many banks remain interested in potential M&A to expand their geographic footprints, acquire talent, and gain new business lines.

CVB Financial Corp. in Ontario, California, is among them. The $16.8 billion-asset company's CEO, David Brager, said deal talks have "definitely slowed," but "conversations are still there."

He said on the company's earnings call that he remains interested in a deal but would approach one with a healthy level of skepticism.

"Any due diligence that we would do going forward" on a potential target, the possible impacts of an "economic slowdown and the credit quality would be an enormous part," Brager said. "It always is, but it might even be bigger now."

Bank M&A is cyclical and there’s been considerable consolidation in the past few years. Since the financial crisis, we have lost more than half of the banking charters and that trend is not reversing at any point. Some of our clients have asked us to review portfolios of potential acquirers, as they are concerned about increased NPAs due to higher rates.

Gladwell Slams WFH

Author Malcom Gladwell slammed remote work, believing it is harming society in a podcast this week. 

The bestselling author of “Blink” and “The Tipping Point” grew emotional and shed tears as he told the “Diary of a CEO” podcast hosted by Steven Bartlett that people need to come into the office in order to regain a “sense of belonging” and to feel part of something larger than themselves.

“It’s very hard to feel necessary when you’re physically disconnected,” the Canadian writer said.

“As we face the battle that all organizations are facing now in getting people back into the office, it’s really hard to explain this core psychological truth, which is we want you to have a feeling of belonging and to feel necessary.”

“And we want you to join our team,” Gladwell continued. “And if you’re not here it’s really hard to do that.”

“It’s not in your best interest to work at home,” he said. “I know it’s a hassle to come into the office, but if you’re just sitting in your pajamas in your bedroom, is that the work life you want to live?”

“Don’t you want to feel part of something?”

Gladwell added: “I’m really getting very frustrated with the inability of people in positions of leadership to explain this effectively to their employees.”

“If we don’t feel like we’re part of something important, what’s the point?” he said. “If it’s just a paycheck, then it’s like what have you reduced your life to?”

Well said and a provocative point. However, there will not be a major return to the office anytime soon, unless there is strong evidence that remote workers underperform. Perhaps, a recession and job cuts in which remote workers are disproportionately fired could scare workers straight.

The $765MM MSR Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The 765MM MSR Portfolio” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

  • $765,774,695 of mortgage servicing rights

  • Portfolio is comprised of mortgage loans serviced on behalf of Freddie Mac and Fannie Mae, as well as loans held and serviced by the seller

  • The seller is a well-capitalized Midwest bank

  • WAC of 3.78%

  • 9,518 loans originated primarily through retail channels

  • Servicing fee of 25 basis points

  • Predominantly mortgage loans in Indiana (60%), Illinois (19.6%), and Kentucky (16%)

  • Potential annual flow relationship of approximately $250MM

For more information, please execute the confidentiality agreement. Potential purchasers will be evaluated based on price, financial strength, reputation, and status with Freddie Mac and Fannie Mae. 

Timeline:

Sale Announcement: Wednesday, August 3, 2022

Bid Date: Tuesday, August 16, 2022

Closing Date: Friday, September 30, 2022

Transfer Date: Monday, October 31, 2022

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