April 2021

The BAN Report: Re-Opening Update / Big Four Bank Earnings / Housing Shortage / $12.3 Trillion Matters / Worst Boss Ever-4/29/21

Re-Opening Update

While US GDP grew by 6.4% in the first quarter, the full re-opening of the US economy picks up steam. New York City announced a full re-opening by July 1.

New York City is aiming for a full reopening on July 1, Mayor Bill de Blasio said Thursday, suggesting a total removal of COVID-19 restrictions that have been in place for well more than a year by early summer.

“Our plan is to fully reopen New York City on July 1. We are ready for stores to open, for businesses to open, offices, theaters, full strength,” the mayor said on MSNBC.

De Blasio is expected to elaborate further on the plan later in the day. It’s not clear if additional COVID requirements — like proof of vaccinations — would apply to his plan to bring restaurants, gyms, shops, hair salons and arenas back at full capacity.

The mayor has also said indoor masking will remain the norm for some time — a statement he reiterated Thursday as it relates to the full reopening.

“I want people to be smart about, you know, basic – the rules we’ve learned, you know, use the masks indoors when it makes sense, wash your hands, all the basics,” de Blasio said. “But what we can say with assurance now is we’re giving COVID no room to run anymore in New York City. We now have the confidence that we can pull all these pieces together and get life back really in many ways to where it was, where people can enjoy an amazing summer.”

New York State also announced that all indoor and outdoor curfews for bars and restaurants will be lifted by the end of the month. Las Vegas saw its best March since February 2013.

Las Vegas is bouncing back to pre-coronavirus pandemic levels, with new economic reports showing increases in airport passengers and tourism, and a big jump in a key index showing that casinos statewide took in $1 billion in winnings last month for the first time since February 2020.

“I don’t believe anyone imagined this level of gaming win,” Michael Lawton, senior Nevada Gaming Control Board analyst, said of a Tuesday report showing 452 full-scale casinos in the state reported house winnings at the highest total since February 2013.

The cruise lines have gotten approval from the CDC to start sailings by mid-July.

Cruise operators could restart sailings out of the U.S. by mid-July, the Centers for Disease Control and Prevention said, paving the way to resume operations that have been suspended for longer than a year due to the Covid-19 pandemic.

The CDC, in a letter to cruise-industry leaders Wednesday evening, also said cruise ships can proceed to passenger sailings without test cruises if they attest that 98% of crew members and 95% of passengers are fully vaccinated. The move was a result of twice-weekly meetings with cruise representatives over the past month, the agency said.

The CDC also relaxed its rules for fully vaccinated Americans.

The Centers for Disease Control and Prevention took a major step on Tuesday toward coaxing Americans into a post-pandemic world, relaxing the rules on mask wearing outdoors as coronavirus cases recede and people increasingly chafe against restrictions.

The mask guidance is modest and carefully written: Americans who are fully vaccinated against the coronavirus no longer need to wear a mask outdoors while walking, running, hiking or biking alone, or when in small gatherings, including with members of their own households. Masks are still necessary in crowded outdoor venues like sports stadiums, the C.D.C. said.

The CDC ruling opens the door up for outdoor concerts and sporting events this summer. In Massachusetts, for example, new rules announced by the Governor will allow large venues at 100% by August 1, thus allowing the Boston Marathon, full capacity at Fenway, and full crowds at Gillette Stadium. By the second half of this summer, Americans can enjoy a world that looks more like 2019 than 2020.

Big Four Bank Earnings

Banks reported robust earnings this month, buoyed by strong trading and releases of loan loss reserves.

Bank of America

Bank of America beat expectations for the first quarter.

The bank posted a first-quarter profit of $8.1 billion, or 86 cents a share, exceeding the 66 cents a share expected by analysts surveyed by Refinitiv. The company produced $22.9 billion in revenue, edging out the $22.1 billion estimate.

“While low interest rates continued to challenge revenue, credit costs improved and we believe that progress in the health crisis and the economy point to an accelerating recovery,” CEO Brian Moynihan said in the release.

Like other banking rivals, Bank of America saw a large benefit from the improving U.S. economic outlook in recent months: It released $2.7 billion in reserves for loan losses in the quarter. Last year, the firm set aside $11.3 billion for credit losses, when the industry believed that a wave of defaults tied to the coronavirus pandemic was coming.

Instead, government stimulus programs appear to have prevented most of the feared losses, and banks have begun to release more of their reserves this quarter.

Expenses were higher than expected and loan growth was not great, but overall a good quarter.

JP Morgan Chase

JP Morgan Chase had a great quarter, exceeding expectations on earnings even without the $5.2 billion release from loan loss reserves.

The bank posted first-quarter profit of $14.3 billion, or $4.50 a share including a $1.28 per share benefit from the reserve release, higher than the $3.10 per share expected by analysts surveyed by Refinitiv. Excluding the impact of a $550 million charitable contribution, which lowered earnings by 9 cents, the bank earned an adjusted figure of $4.59, exceeding the $3.10 estimate.

Companywide revenue of $33.12 billion exceeded the $30.52 billion estimate, driven by the firm’s trading operations, which produced about $1.8 billion more revenue than expected.

JPMorgan’s release of $5.2 billion in reserves is the biggest sign yet that the U.S. banking industry is now expecting to have fewer loan losses than it did last year, when it set aside tens of billions for defaults anticipated from the coronavirus pandemic. A year ago, the firm had added $6.8 billion to credit reserves.

“Overall, this was a great quarter for JPMorgan,” said Octavio Marenzi, CEO of consultancy Opimas. “It is now increasingly clear that the bank over-reserved, and that money is now flowing back into its earnings, concealing some of the weakness in consumer banking.”

Wells Fargo

Wells Fargo also had a strong quarter, beating estimates on earnings and revenue.

Wells Fargo results were helped by a net benefit of $1.05 billion from reserve releases. Banks bulked up their credit loss reserves last year as the pandemic pulled the U.S. economy into a sharp recession, but the financial firms have started to release those reserves as the recovery takes shape.

“Our results for the quarter, which included a $1.6 billion pre-tax reduction in the allowance for credit losses, reflected an improving U.S. economy, continued focus on our strategic priorities, and ongoing support for our customers and our communities,” CEO Charlie Scharf said in the earnings release. “Charge-offs are at historic lows and we are making changes to improve our operations and efficiency, but low interest rates and tepid loan demand continued to be a headwind for us in the quarter.”

The bank expects to see its commercial and middle market loan portfolio to grow later in the year as the economic recovery gains steam, chief financial officer Michael Santomassimo said on the earnings call.

“The demand across most commercial client segments has been pretty weak, and it seems to have stabilized over the last couple of months … we do really expect to see that commercial banking demand start to pick up as the economy picks up,” Santomassimo said.

Commercial loan pipelines take time, so it will be another quarter before any uptick in commercial lending is seen by banks.

Citigroup

Citigroup completed the strong quarters for the major banks, beating on both earnings and revenue.

Citigroup on Thursday posted results that beat analysts’ estimates for first-quarter profit with strong investment banking revenue and a bigger-than-expected release of loan-loss reserves.

The firm also said it was shuttering retail banking operations in 13 countries across Asia and parts of Europe to focus more on wealth management outside the U.S., one of the first big strategic moves made by CEO Jane Fraser, who took over in February.

The bank reported profit of $7.94 billion, or $3.62 a share, exceeding the $2.60 estimate of analysts surveyed by Refinitiv. Revenue of $19.3 billion topped the $18.8 billion estimate.

Citigroup said it had released $3.9 billion in loan-loss reserves in the quarter, which resulted in a $2.06 billion gain after $1.75 billion in credit losses in the period. Analysts had expected a $393.4 million provision in the quarter.

The bank posted record revenue from investment banking and equities trading, similar to rival banks that have reported earlier.

The retrenching of retail banks outside of the US is a big move for Citi, which always strived to be the most international of the large banks.    Shrinking bank branches is not limited to the United States.

Overall, the banks reported strong earnings this quarter, although a good portion of the beats was due to reserve releases. The test for banks will be to show meaningful loan growth this year, which will be especially challenging for banks that were most active in PPP as the run-off in PPP will be a tough headwind.

Housing Shortage

Housing prices are surging due primarily to a shortage of housing, thus giving millennials their second housing crisis in twelve years.

A recent bank note from Jefferies said the US was short 2.5 million homes, while Freddie Mac put that estimate higher at a shortage of 3.8 million. There are 40% fewer homes on the market than last year, a Black Knight report found. 

It’s bad news for many aspiring homebuyers — but especially for millennials. It’s just the latest chapter in a long line of bad economic luck.

Daryl Fairweather, the chief economist at Redfin, told Insider it was unfortunate the generation that suffered from the last housing crisis — entering the job force in the middle of a recession — was now facing a different kind of housing crisis.

“Now that they have economically recovered and are looking to buy a home for the first time, we’re faced with this housing shortage,” she said. “They’re already boxed out of the housing market.”

The shortage is a result of several things: contractors underbuilding over the past dozen years, a lumber shortage, and the pandemic. It comes at a time when millennials have reached the peak age for first-time homeownership, according to CoreLogic, and led the housing recovery. But such increased millennial demand has exacerbated the shrinking housing inventory.

“We’ve been underbuilding for years,” Gay Cororaton, the director of housing and commercial research for the National Association of Realtors (NAR), told Insider. She said the US had been about 6.5 million homes short since 2000 and was facing a two-month supply of homes that should look more like a six-month supply.

There have been 20 times fewer homes built in the past decade than in any decade as far back as the 1960s, according to Fairweather. She added that was not enough homes for millennials, who are the biggest generation, to buy.

Another unmentioned cause is the moratoriums on foreclosures and evictions, which are effectively removing distressed inventory from the market. Fundamentally though, the roots of this problem go back to the Great Recession, as we essentially shifted from over-subsidizing home ownership to over-subsidizing rental buildings. Several years ago, I proposed a hypothetical project to a Houston bank.   Two, identical high-rise buildings adjacent to each other in downtown Houston. One was a high-end apartment building. The other was a condo building. The CCO said “we don’t do condos.” I responded, “You proved my point!”

$12.3 Trillion Matters

$12.3 trillion has effectively put the credit default cycle on hold for now.

First, cheap borrowing costs help companies stay alive longer and more easily. That’s a big part of the reason Fitch Ratings just dropped its expected U.S. junk-bond default rate for 2021 to 2%, the lowest since 2017, and doesn’t see it rising much more from that in 2022. About $90 billion of distressed debt was trading as of April 16, down from almost $1 trillion in March 2020, according to data compiled by Bloomberg.

Second, government officials have flooded the global economy with cash at an unprecedented pace. Monetary and fiscal stimulus for just the U.S. could have amounted to $12.3 trillion from February 2020 through March 2021, according to Cornerstone Macro Research data posted on the Wall Street Journal’s Daily Shot.

That’s a lot of money, leaving a lot of cash sitting in savings accounts and looking for assets to buy. Perhaps some investors feel it’s better to invest it with a company that actually makes something or provides real services than, say, a cryptocurrency started as a joke. 

The more important question perhaps isn’t whether this is a bubble that will pop soon but rather what are the consequences of this era of free-flowing cash. It prevents the dissolution of businesses that perhaps shouldn’t exist, creating so-called zombie companies. And it leaves corporations leveraged to old economies, paying back debt incurred in a past era when they perhaps would rather invest in new technologies amid a quickly changing world.

This debt buildup makes central bankers’ jobs both more difficult and easier in the years to come. It makes it harder because any withdrawal of stimulus, or raising of rates, would be exponentially more painful given the amount of corporate leverage. But it also makes it less likely that conditions will require Federal Reserve officials to raise rates all that much going forward. More debt will pressure longer-term growth and inflation. It reduces economic dynamism. 

We are essentially skipping the clean-up phase during a down-cycle. A normal recession leads to the liquidation and closure of businesses, thus opening up opportunities for the healthy ones to benefit from their better business models and healthier balance sheets. It also is going to make higher rates even more painful, so we may have just delayed the inevitable in some cases.

Worst Boss Ever

An investigation of producer Scott Rudin by the New York Times showed what a brutal boss he was to his employees. Scott is one of only 16 people who have won an EGOT, which is winning at least one Emmy, Grammy, Oscar, and Tony.

Former employees said he threw things at walls, at windows, at the ground, and, occasionally, toward subordinates.

In 2018 he sent a glass bowl airborne, shattering it against a conference room wall, according to several people who were there; another time he smashed a computer on an employee’s hand, several ex-employees said. A former assistant, Jonathan Bogush, said he saw Mr. Rudin hurl a plateful of chicken salad into another assistant’s face when he worked there in 2003.

Sometimes frightened assistants hid in the kitchen or a closet to escape his wrath.

Some assistants kept spare phones to replace those that got destroyed when thrown by Mr. Rudin. There were also extra laptops — to replace those he broke — and his contact list was backed up to a master computer nicknamed the Dragon.

His behavior prompted outrage after it was described earlier this month in The Hollywood Reporter. It had also been described, to less effect, in multiple other accounts over the years.

Mr. Rudin offered both an apology and a bit of pushback to the stories being told about him as a boss. “While I believe some of the stories that have been made public recently are not accurate, I am aware of how inappropriate certain of my behaviors have been and the effects of those behaviors on other people,” he said. “I am not proud of these actions.”

“He’s had a bad temper,” said the billionaire David Geffen, who alongside his fellow mogul Barry Diller has been co-producing Mr. Rudin’s recent Broadway shows, “and he clearly needs to do anger management or something like that.”

Somehow this behavior went on for years, and no other executive, colleague, financier mandated anger-management training? Fortunately, Mr. Rudin is finally getting his long overdue comeuppance.

The BAN Report: Let the Good Times Roll / Worker Shortages / Office Return Update / How to Lose $20 Billion in Two Days / Consumer Credit Surges-4/8/21

Let the Good Times Roll

According to the IMF, the US economy will surpass its pre-pandemic size as growth surges in 2021 due to loose money, stimulus, and re-opening euphoria.

President Joe Biden’s $1.9 trillion stimulus package will boost the US economy and drive faster global growth this year, the International Monetary Fund said Tuesday, though it warned that many countries continue to suffer from the pandemic and are at risk of being left behind.

The US economy will surpass its pre-pandemic size as growth reaches 6.4% this year, the IMF said, up 1.3 percentage points from the group’s forecast in January. The rebound will help the global economy expand 6% in 2021, an upgrade of 0.5 percentage points from the IMF’s previous outlook. The estimates are broadly in line with Wall Street’s expectations.

“At $1.9 trillion, the Biden administration’s new fiscal package is expected to deliver a strong boost to growth in the United States in 2021 and provide sizable positive spillovers to trading partners,” the IMF said in a report. Other governments and central banks around the world have also pumped trillions into the global economy.

The IMF said the “unprecedented policy response” to the pandemic means the “recession is likely to leave smaller scars than the 2008 global financial crisis.” The group estimates global output dropped 3.3% in 2020, while the US economy shrunk 3.5%.

How long will this run for? Jamie Dimon suggests it could go well into 2023.

In his annual shareholder letter, the long-time JPMorgan Chase chairman and CEO said he sees strong growth for the world’s biggest economy, thanks to the U.S. government’s response to the coronavirus pandemic that has left many consumers flush with savings.

“I have little doubt that with excess savings, new stimulus savings, huge deficit spending, more QE, a new potential infrastructure bill, a successful vaccine and euphoria around the end of the pandemic, the U.S. economy will likely boom,” Dimon said. “This boom could easily run into 2023 because all the spending could extend well into 2023.”

The biggest risk to the economy is a potential one-two punch of both higher rates as the Fed tames inflation and the eventual wearing off of all the unprecedented stimulus in the past year. A famed investor recently told me “I think it’s all going to end badly – I just don’t know when.” What happens next is open to debate but there is no doubt the economy is growing at a high rate right now. Banks should see a nice pick-up of loan growth as well as borrowing always tends to increase during boom times.

Worker Shortages

As restaurants come back to life with the economy re-opening, worker shortages are a new challenge for restaurant owners. While most are thrilled to eat at a restaurant, be prepared for a leisurely meal.

Ms. Ramos discovered early what the owners of full-service restaurants nationwide are now experiencing: a persistent worker shortage in the face of an upswing in business, as mild weather for outdoor dining spreads across the country, along with the reduced Covid restrictions that came early to South Florida and are now being felt throughout the U.S.

“I don’t think anything like this has ever happened,” said Katie Button, the chef and a co-owner of two restaurants in Asheville, N.C. “Everybody in the world is hiring at the same time.”

A staffing shortage seems counterintuitive in a business that has been devastated by the pandemic, with mass layoffs and an alarming number of permanent closings. 

Restaurateurs say many former employees are choosing not to re-enter the work force at a time when they can make nearly as much or more by collecting unemployment benefits.

“You have some cases where it’s more profitable to not work than to work, and you can’t really fault people for wanting to hold on to that as long as possible,” Mr. Fox said.

We heard of a similar complaint from a manager at a rental-car company near the Fort Lauderdale Airport. The unemployment benefits are often more attractive than coming back to work, and there is not too much pressure to prove someone is looking for work.

Office Return Update

JP Morgan Chase is bringing the vast majority of its workers back to the office, although it will also embrace remote working as well.

In his annual letter to shareholders Wednesday, Mr. Dimon said the bank expects “nearly all” of its bank-branch employees to report back to a physical location full time, as would many in critical operations and trading, among other jobs. A smaller group will work under a hybrid model, Mr. Dimon said, while perhaps 10% of employees in “very specific roles” will work from home every day.

JPMorgan’s stance on remote work is in keeping with other big banks, which have been slow to adopt large-scale hybrid arrangements and permanent work-from-home roles. One big exception is Citigroup Inc., which last month said most employees would only be expected in the office three days a week after coronavirus restrictions are lifted.

Most employees learn their jobs through an apprenticeship model, Mr. Dimon said, a setup that is “almost impossible to replicate in the Zoom world.”

“And remote work virtually eliminates spontaneous learning and creativity because you don’t run into people at the coffee machine, talk with clients in unplanned scenarios, or travel to meet with customers and employees for feedback on your products and services,” he wrote.

This is such a touchy issue for employers, as forcing some workers to come back is going to send them looking for new opportunities.

A year after the pandemic abruptly forced tens of millions of people to start working from home, disrupting family lives and derailing careers, employers are now getting ready to bring workers back to offices. But for some people the prospect of returning to their desks is provoking anxiety, dread and even panic, rather than relief.

Martin Jaakola, a software engineer in Minneapolis, never wants to go back to the office and is willing to quit if the medical device company he works for says he must. “I can’t honestly say that there’s anything about the office that I miss,” Mr. Jaakola, 29, said.

People like Mr. Jaakola say last year proves that people do not need to sit cheek by jowl to be productive. Working at home is superior, they say, because they are not wasting hours in traffic or on crowded trains. Far better to spend that time with family or baking sourdough bread. And they don’t have to worry about getting sick to boot.

If a worker has proven they are productive working remotely, does one really want to rock the boat? Office landlords are certainly hoping that companies bring their workers back soon.

As office vacancies climb to their highest levels in decades with businesses giving up office space and embracing remote work, the real estate industry in many American cities faces a potentially grave threat.

Businesses have discovered during the pandemic that they could function with nearly all of their workers out of the office, an arrangement many intend to continue in some form. That could wallop the big property companies that build and own office buildings — and lead to a sharp pullback in construction, steep drops in office rents, fewer people frequenting restaurants and stores, and potentially perilous declines in the tax revenue of city governments and school districts.

In only a year, the market value of office towers in Manhattan, home to the country’s two largest central business districts, has plummeted 25 percent, according to city projections released on Wednesday, contributing to an estimated $1 billion drop-off in property tax revenue.

Many big employers have already given notice to the owners of some prestigious buildings that they are leaving when their leases end. United Airlines is giving up some 150,000 square feet, or over 17 percent of its space, at Willis Tower in Chicago, the third tallest building in the country and a prized possession of Blackstone, the Wall Street firm. Salesforce is subletting half its space, equivalent to roughly 225,000 square feet, at 350 Mission Street, a San Francisco tower designed by Skidmore, Owings & Merrill and owned by Kilroy Realty.

Downtown Class A office space was considered one of the safest investments in commercial real estate for decades. It’s early, and companies may find they need to bring their workers back to compete with their competitors, if the early returners find higher productivity.

How to Lose $20 Billion in Two Days

The staggering fall of Bill Hwang’s fortune is hard to process. Elon Musk and others have lost larger sums in days, but it’s hard to find a fortune this large that got completely eviscerated in just two trading days.

Before he lost it all—all $20 billion—Bill Hwang was the greatest trader you’d never heard of.

Starting in 2013, he parlayed more than $200 million left over from his shuttered hedge fund into a mind-boggling fortune by betting on stocks. Had he folded his hand in early March and cashed in, Hwang, 57, would have stood out among the world’s billionaires. There are richer men and women, of course, but their money is mostly tied up in businesses, real estate, complex investments, sports teams, and artwork. Hwang’s $20 billion net worth was almost as liquid as a government stimulus check. And then, in two short days, it was gone.

The sudden implosion of Hwang’s Archegos Capital Management in late March is one of the most spectacular failures in modern financial history: No individual has lost so much money so quickly. At its peak, Hwang’s wealth briefly eclipsed $30 billion. It’s also a peculiar one. Unlike the Wall Street stars and Nobel laureates who ran Long-Term Capital Management, which famously blew up in 1998, Hwang was largely unknown outside a small circle: fellow churchgoers and former hedge fund colleagues, as well as a handful of bankers.

That’s why on Friday, March 26, when investors around the world learned that a company called Archegos had defaulted on loans used to build a staggering $100 billion portfolio, the first question was, “Who on earth is Bill Hwang?” Because he was using borrowed money and levering up his bets fivefold, Hwang’s collapse left a trail of destruction. Banks dumped his holdings, savaging stock prices. Credit Suisse Group AG, one of Hwang’s lenders, lost $4.7 billion; several top executives, including the head of investment banking, have been forced out. Nomura Holdings Inc. faces a loss of about $2 billion.

Hwang was hardly living large, driving a Hyundai SUV and deeply religious.    While Credit Suisse tried to negotiate a standstill agreement with the lending group, the larger banks moved quickly to liquidate and escaped with far less damage.

Late that afternoon, without a word to its fellow lenders, Morgan Stanley made a preemptive move. The firm quietly unloaded $5 billion of its Archegos holdings at a discount, mainly to a group of hedge funds. On Friday morning, well before the 9:30 a.m. New York open, Goldman started liquidating $6.6 billion in blocks of Baidu, Tencent Music Entertainment Group, and Vipshop. It soon followed with $3.9 billion of ViacomCBS, Discovery, Farfetch, Iqiyi, and GSX Techedu.

When the smoke finally cleared, Goldman, Deutsche Bank AG, Morgan Stanley, and Wells Fargo had escaped the Archegos fire sale unscathed. There’s no question they moved faster to sell. It’s also possible they had extended less leverage or demanded more margin.

In this case, the first loss here was the best loss. Credit Suisse lost $4.7 billion for example, which is about a year and a half of the firm’s profits. Morgan Stanley kept its mouth shut and dumped its shares to its hedge fund clients.

Morgan Stanley had the consent of Archegos, run by former Tiger Management analyst Bill Hwang, to shop around its stock late Thursday, these people said. The bank offered the shares at a discount, telling the hedge funds that they were part of a margin call that could prevent the collapse of an unnamed client.

But the investment bank had information it didn’t share with the stock buyers: The basket of shares it was selling, comprised of eight or so names including Baidu and Tencent Music, was merely the opening salvo of an unprecedented wave of tens of billions of dollars in sales by Morgan Stanley and other investment banks starting the very next day.

Some of the clients felt betrayed by Morgan Stanley because they didn’t receive that crucial context, according to one of the people familiar with the trades. The hedge funds learned later in press reports that Hwang and his prime brokers convened Thursday night to attempt an orderly unwind of his positions, a difficult task considering the risk that word would get out.

Thursday night, March 25th, was a classic example of prisoner’s dilemma.   Sure, if the banks all held their positions and orderly unwound their positions, the group would have been better off, but there are no way multiple public companies could keep a crisis of this magnitude secret.

Consumer Credit Surges

After a flat January, consumer debt grew at a 7.9% annual rate in February, according to data from the Federal Reserve.

Revolving credit, like credit cards, jumped at a 10.1% rate, reversing last month’s 10.6% decline. That’s only the second month credit card balances had increased since the pandemic began.

T.J. Connelly, head of research at Contingent Macro, said some of the increase was likely due to the severe cold weather in February. Consumers tend to use the credit cards more during emergencies, he said.

Nonrevolving credit, typically auto and student loans, rose 7.3% in February after a 3.3% rise in the prior month. This category of credit is much less volatile. It only fell briefly at the start of the pandemic before returning to steady growth.

The data does not include mortgage loans, which is the largest category of household debt.

Fed Governor Lael Brainard said easy financial conditions engineered by the central bank are clearly supporting the economy.

“If you look at consumer credit – it was really strong there,” Brainard said in an interview with CNBC.

While loan growth is picking up amongst consumers, it’s not due to loosening underwriting standards. In fact, underwriting standards are tightening in the mortgage market, which is dominated by borrowers with strong credit.

Mortgage credit availability, a measure of lenders’ willingness to issue mortgages, is near its lowest level since 2014, according to the Mortgage Bankers Association, or MBA.

The tight lending environment illustrates a growing cleavage in the mortgage market: More home loans are being made than almost ever before, but they are going almost exclusively to borrowers with pristine credit histories and sizable down payments. Borrowers with credit qualifications that fall just outside the stellar category are finding fewer lenders willing to approve their applications. A segment of borrowers who would have qualified for a home loan early last year are now out of luck, deemed too much of a credit risk.

“Because mortgage credit is more difficult to obtain, it is a more competitive environment overall,” said Dr. Lawrence Yun, chief economist at the National Association of Realtors.

About 70% of mortgages issued in 2020 went to borrowers with credit scores of at least 760, up from 61% in 2019, according to the Federal Reserve Bank of New York.

The median credit score of borrowers approved for mortgages reached 786 in the fourth quarter of 2020, up from 770 during the same period in 2019.

While we have several clients who have engaged us to find loan portfolios to buy, banks are far more willing to sacrifice yield than to take on additional credit risk. If your institution has a strong performing portfolio, pricing on the secondary market is very attractive.

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