Outside of 1968 I do not think we have lived through a more wicked first half of the year. I was a kid then but remember the trauma well. The North Koreans captured the USS Pueblo and held the crew as Prisoners of War. The Tet Offensive began. After the government had assured us the tide of the war had turned and we were prevailing, the Tet Offensive shocked us all into the reality that we were far from done in Vietnam. Upheaval on the College Campuses was building nationwide over the war. Martin Luther King and Robert Kennedy were taken from us by assassins. Surprisingly enough, we were on the front edge of a flu pandemic. It took until December of 1968 for all of us to start to pull back together when Apollo 8 circled the Moon and we all focused on the coming Moon landing. Let us hope that our nation can find a rallying point to come together and not apart again.
The last two weeks I presented some optimistic reports that show the economy is starting to improve. I still believe the third quarter will be strong. This week will be a bit less optimistic.
A few weeks ago I noted how many residential home mortgages were in forbearance. Under the CARES Act home owners can request a forbearance on their existing mortgage to postpone payments up to three months. This past week the numbers posted show 6.9% of all Fannie May/Freddie Mac mortgages are now in forbearance. 12.5% of all FHA/VA mortgages are in forbearance. 9.6% of private label mortgages are under a forbearance. 42,000 FHA/VA loans were placed under a forbearance agreement last week alone. Under normal times, the residential mortgage market will list a past due amount under 1%. In the worst of the Great Recession the level hit close to 5%. To see the numbers under forbearance, which would otherwise mean they would likely be in a past due position is breath taking. This is even more concerning knowing that the $600 per week bump in unemployment is to be paid through July 31. There could be some explanation that many have not yet received unemployment for being laid off or furloughed but that number is decreasing as time goes by. The homeowners will have to eventually catch up, the CARES Act puts the delayed payments at the end of the mortgage currently. If the owners are not back to work soon and the forbearance expires we could see a housing market collapse reminiscent of 2007-2010.
Mortgage servicers are required to advance the funds to cover the missed payments, including taxes and insurance. At today’s level that means the servicers have to advance $3.5 Billion in payments along with another $1.4 Billion for the insurance and taxes. They are repaid from the CARES Act through the Federal Government. Between this program and the unemployment funding, there are serious doubts about how long the government can sustain this level of funding.
The banks will be hit hard by any replay of the housing crash. Many are directly exposed with second mortgages behind those mortgages that are in forbearance. They may also be exposed by holding mortgages of various lengths in their credit portfolio. Many banks are taking the fee income they received from the PPP program and plowing it into the Loan Loss Reserve. They are fully expecting that the borrowers who received PPP funding are in trouble. Once the PPP funds are gone, unless they are fully reopened, they may not be able to repay the existing debt on their books, let alone if they failed to follow the PPP guidelines and have to repay the funds they received. Forward thinking banks are now setting up troubled loan staff to begin searching through the credit portfolio for early warning signs.
Lastly, the bankruptcies continue to mount. GNC the vitamin and supplement chain filed last week. They will try to restructure but anticipate over 800 stores will be shed if they do end up reopening at all. While not a bankruptcy, an end of an era occurred last week. The owner of the Segway, shut down production and called the line done. While it was a neat idea and a cool concept, it never caught on. The Segway was meant to be that urban people mover that was supposed to be easy on the environment and allow our streets and highways to become unclogged. It failed at both. The price point was too high, more than that of a good used car. It wasn’t fast enough to really ride on the streets and not safe enough by any means to protect its rider. So it became relegated to shopping mall law enforcement and tours. A motorcycle they were not. I always wanted to see one jump a row of cars, but alas, it was not to be.
Have a Great week, Enjoy the Fourth of July, Fly the Flag, watch or shoot off some fireworks and enjoy a cook out with family and friends.