Sector Update

April 20, 2020

Last week markets proceeded in a cautiously-optimistic fashion. Coming off a week where the S&P was up 12.1%, it wasn’t surprising that stocks started the week down on Monday. They then hit a weekly high on Tuesday that wasn’t surpassed until Friday morning. The pop on Friday was largely based on a report that Gilead’s Remdesivir drug, in a Chicago trial, showed “rapid recoveries in fever and respiratory symptoms” in patients with COVID-19. The yield curve gave up some steepness as it ended the week 6 bps flatter as yields moved down up to 8 bps in a flattening fashion on maturities between 2- and 10-years. So far this morning, stocks are off slightly, and Treasury yields are +/- 1 bp from their close on Friday.

Oil Prices

There is shock this morning as WTI Crude is at $0.25 per barrel for May delivery. The CME Group has also clarified this morning that futures can trade negative, that’s a reassuring sign. Right now, this appears as some sort of a short-term aberration as June contracts are at $22.25 per barrel. However, demand destruction for oil is very real and storage capacity is disappearing as we speak. According to the U.S. Energy Information Administration, 57% of U.S. working storage capacity is currently utilized. A month ago it stood at 50%.

Mortgage Servicers

An ongoing theme, it might qualify as a saga now, with mortgage servicers continued to play out in headlines last week. There is a large and growing coalition pushing for a temporary liquidity facility to help servicers bridge the gap between making payments to investors and receiving reimbursements from Fannie and Freddie. No one debates there will be stress on servicers, but it depends greatly on who you ask as to the expected severity and the ability for servicers to manage them. On one hand, the servicers say this is basically a catastrophic situation for them. On the other hand, Mark Calabria head of the FHFA who oversees Fannie and Freddie, calls servicers concerns “spin”. Only time will tell, but as it stands right now, the FHFA is standing against a growing chorus of market participants to do something.

SBA PPP Links

SBA: Paycheck Protection Program

Treasury: PPP Loans Frequently Asked Questions

Federal Reserve: Paycheck Protection Program Lending Facility (PPPLF) Term Sheet

Federal Reserve: PPPLF Frequently Asked Questions

OCC: Capital Treatment for Paycheck Protection Program: Interim Final Rule

SBA: PPP Report | Approvals Through 12pm EST 4/16/2020

Regulatory Links

FDIC: The FDIC Announces a 30-Day Grace Period for the Call Report for the First Quarter of 2020

Federal Reserve: Agencies announce changes to the community bank leverage ratio (CBLR)

OCC: Revisions to the FFIEC Call Reports and FFIEC 101 for the March 31, 2020, Report Date

FDIC: Agencies Defer Appraisals and Evaluations for RE Transactions Affected by COVID-19

Notable news from this past week includes:

• Amazon allowed third-party sellers to resume shipping nonessential items.
• Mortgage servicers, with help, continued to push for a liquidity facility.
• SBA 7(a) prepayment speeds were released. Big decline, expect more next month.
• The PPP exhausted its funds on Thursday, there are plans for more in motion.
• The SBA and Treasury provided comments on the PPP so far, the data is more interesting in my opinion.

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Tuesday (4/21): Banks: Balance Sheet Management in the Current Markets (2 CPE)

Thursday (4/23): Credit Unions: Balance Sheet Management in the Current Markets (1 CPE)

Tuesday (5/12): Banks: The End of LIBOR (1 CPE)

Thursday (5/14): Credit Unions: The End of LIBOR (1 CPE)

Food for Thought: Prepay Speeds Did What? Part Two.

• Last week, I commented on sizable increases in Residential MBS (RMBS) prepayments.

• This week let’s look at a subset of Commercial MBS (CMBS) prepayments in SBA 7(a) pools.

• Nationwide social distancing measures were reflected in prepayments as speeds widely declined.

• The CARES Act authorized $17 Billion in P&I relief for existing SBA loans for 6-months.

• It is likely that prepayments will all but slow to a trickle over the coming months for two reasons.
  • First, little/no incentive (ability?) to refinance right now.
  • Second, defaults should remain low, at least until the 6-month debt relief program ends.

• Full commentary is available here.

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (April) | Monthly, 5^th business day

SBA Prepay Commentary (April) | Monthly, 10^th business day

Strategic Insight: Fed Announces $2.3 Trillion of Additional Support to the Economy

This Strategic Insight looks at additional measures the Federal Reserve took on April 9^th and describes them while providing a takeaway for how we think they will affect financial institutions.

Strategic Insight: Potential for Selling Held-to-Maturity Securities for Liquidity Purposes

Based on this guidance from the FDIC, we believe financial institutions that have been negatively impacted by a reduction of liquidity due to COVID-19 may be able to sell securities classified as HTM without tainting a portfolio or jeopardizing the ability to use this classification in the future. However, each bank should check with its financial statement auditor for further clarification.

Strategic Insight: Defending Your Bottom Line – Phase II: Wholesale Borrowings and Leverage

In terms of depositories defending their bottom lines, Phase I of deploying excess cash seems to be winding down. This Strategic Insight addresses different ways to fund leverages (traditional and otherwise) and uses of those proceeds. Notably, the Paycheck Protection Program (PPP) to be operated under the SBA 7(a) umbrella.

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF/Mobile)

Sector Updates