Market Update – April 8, 2010

Commercial loans are still being made, in spite of the predictions that the default rate on older loans is only expected to increase. According to the MBAA, Wells Fargo was the top US commercial & multifamily originator in 2009. Other originators in the top 10 include PNC Real Estate, Deutsche Bank, CBRE Capital Markets, HFF, Prudential Mortgage Capital Company, Meridian Capital Group, MetLife, Northmarq Capital, and Capmark Financial Group. Based on investor groups, Wells topped the list for commercial banks & savings institutions, HFF for conduits, MetLife for life insurance companies, PNC Real Estate for Fannie Mae’s, CBRE Capital Markets, Inc. for Freddie Mac’s, TIAA-CREF for pension funds, Glacier Real Estate Group for credit companies, and Deutsche Bank Commercial Real Estate for specialty finance.

Huh? Mortgage rates improved, even after the Fed stop buying them last Thursday? Wow! Just think of all the folks who thought that mortgage rates would zoom up relative to Treasury rates! Money managers, pension funds, insurance companies, and servicers were all buyers, and the only selling came from lenders with about $1.5 billion of origination.

With rates going up and now back down somewhat, hedged originators might be feeling a little whipsawed, but since the pipelines aren’t all that big these days perhaps the damage is minimal. (And of course the largest owner of MBS (the Fed) controls its own funding costs and doesn’t have to hedge.) We are past the quarter-end, almost done with the first of the April auctions, and banks are appearing to be stepping into the void left by the Fed. Remember that the Fed was never a traditional buyer of mortgages, so we are back to a more normal market – another good thing. Origination is still expected to be down 40-50% in 2010 as good credit homeowners refinanced in 2009.  They won’t be back to refi again in 2010, so most origination will be purchases as we are already seeing. 

Yesterday we continued to see bonds’ prices improve, and rates drop, after a solid $21 billion 10-yr sale by the Treasury. The yield on the auction was within 2 basis points of where the existing 10-yr was trading, indirect bidder participation was solid and the bid/cover was highest for a 10-year auction since at least 1994 – so maybe 4% is the current magical yield after all. The bond market was helped by Ben Bernanke’s somber statements about the economy not being out of the woods yet and the fact that inflation is not an issue. On Monday the 10-yr hit 4% for the first time since June, but we’ve bounced off that level and are now back down to 3.86%. And today we got our first economic news of the week, with Initial Jobless Claims coming in at 460,000, up 18k from 442,000. The 4-week moving average moved up slightly. After the number mortgage prices are generally better by about .125.