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[ad_1] On Thursday, the Bureau of Labor Statistics (BLS) reported that Consumer Price Index (CPI) inflation came in hotter than expected, and people are scared that the Federal Reserve will now be more aggressive with their rate hikes. Personally, I believe the Fed knows that rental inflation data can lag so at this point of the rate hike cycle, they won’t act in a more aggressive fashion. Here’s why. The extra heat of this report was primarily due to how hot shelter inflation has been coming in on the data line. I recently discussed how shelter inflation has legs in 2022 but should change in 2023 on the CPI reports. The way BLS accounts for shelter inflation has a noticeable lag to more recent data. From BLS: The Consumer Price Index for All Urban Consumers (CPI-U) rose 0.4 percent in September on a seasonally adjusted basis after rising 0.1 percent in August, the U.S. Bureau of Labor Statistics reported today. Over the last 12 months, the all items index increased 8.2 percent before seasonal adjustment. Increases in the shelter, food, and medical care indexes were the largest of many contributors to the monthly seasonally adjusted all items increase. Headline inflation has been dropping recently from its peak, which is primarily due to the decline in oil and gas prices, as you can see in the chart below. Shelter inflation has recently given core inflation the legs to stay firm and head higher. This is why we have some divergence between core inflation and headline inflation. Core Inflation excludes energy and food prices because they can be very volatile. Shelter inflation is roughly 43% of the component of core CPI, so it’s a big deal. In the previous expansion, it was very steady, with no real break away with shelter inflation. Shelter inflation never hit 4% in the previous expansion. However, as we can see, like everything else post-COVID-19, things are different on the inflation side of the equation. The very brief pullback in shelter inflation was not only reversed but it was reversed in a historical fashion.  This should not surprise anyone because housing inflation has been the main story since 2020. Rent inflation is cooling down but it will not show up on the CPI data line until the middle of next year. Last month on CNBC, I talked about this topic and how the growth rate will cool, but it’s a 2023 story. “Core inflation could stick over 2% faster and longer in this expansion because shelter inflation should pick up. If we do really see wage growth at the bottom end, landlords will ask for more rent.” – Logan Mohtashami During the summer of 2020, when shelter inflation was falling and people were saying cities are dead and rent inflation is going to fall more, I was in the camp that shelter inflation was already growing and had the potential to really grow. A lot of Americans had already gotten their jobs back and the rest were getting checks, so shelter inflation had the potential to go higher. Back in the summer of 2020, the data line was still heading lower, but that data line lagged the current reality. It’s the exact case now as rent inflation is cooling down, but it won’t show up in the CPI data until late My quote to The Washington Post early in 2021: “Core inflation could stick over 2% faster and longer in this expansion because shelter inflation should pick up. If we do really see wage growth at the bottom end, landlords will ask for more rent.” Just as the S&P CoreLogic Case Shiller Home Price data lags the current market, shelter inflation lags on the CPI. Shelter inflation is not that complicated to understand. Rental vacancy data has been falling for decades, and rent inflation has been growing. Just like home prices, we got caught in a bad place with supply so shelter inflation blasted off. As you can see below, rent inflation took off like home prices did. Having shelter inflation go negative is rare because most Americans are always working and paying their rent on time. However, rent inflation since 2020 has been historic and it has been savagely unhealthy regarding housing inflation. However, looking to the future, this data line should be cooling down, especially in the second half of 2023, when the comps will be hard to work from. More multifamily construction is coming online which means we will have more supply of rental units. The best way to deal with inflation is more supply. Even as wage inflation has been taking off, more supply will always cool down inflation. Super high rent growth can’t be super hot forever because wages simply can’t keep pace with the double-digit rent growth we have seen in certain parts of the U.S. Eventually, hotter inflation data kills demand; we see this with the massive home-price gains we have seen in the U.S. post-2020; once rates broke over 4% and headed higher, demand got impacted. Of course, homeowners who have a fixed payment and refinanced recently have increased their wages without the pain of rent inflation hitting them. This is why some people refer to a fixed mortgage payment as a hedge against inflation. Imagine all those homeowners who refinanced to mortgage rates below 4% — they’re not dealing with high rent inflation, but their wages are growing faster. Almost 65% of all Americans have mortgage rates 4% and below, so that is a significant portion of the country. And of course, more than 40% of homes in the U.S. don’t have a mortgage to deal with at all. While inflation is still a problem and shelter inflation is in the driver’s seat on the CPI reports, I believe, for the most part, people understand that the CPI shelter data lags — it is not as hot as it looks in the data right now. However, we do need to wait until mid-2023 and toward the end

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[ad_1] In the reflection, a mortgage executive sees faint images of the savings and loan crisis of the 1980s and 1990s. The financial chaos that sparked the savings and loan crisis of the 1980s, leading to a government bailout, now haunts the independent mortgage banking market this Halloween season — and beyond. Independent mortgage banks (IMBs) account for nearly 74% of agency mortgage originations, which is the bulk of the market, according to a recent report by the Urban Institute’s Housing Finance Policy Center (HFPC). In 1980, some 4,000 savings and loan institutions (S&Ls or thrifts) accounted for about half of the nation’s $960 billion in outstanding home mortgages at that time. The federal agency set up in the late 1980s to oversee and dispose of the assets of failed thrifts, the Resolution Trust Corp. (RTC), closed 747 S&Ls with assets of more than $407 billion.  One market expert sees a similar fate ahead for IMBs, absent an RTC, predicting that over the next two years more than one-fifth of the nonbank lenders now operating nationwide will merge or otherwise disappear.  The pressure cooker prompting that dire prediction is being heated by persistent inflation and rising interest rates. Mortgage origination volume this year is projected to decline drastically, by $2 trillion to $2.1 trillion compared with 2021, according to estimates by Fannie Mae, Freddie Mac and the Mortgage Bankers Association (MBA). Most of that decline will be on the refinance side, with the MBA estimating that the refi share of originations will drop from 62% last year to 33% this year and 27% in 2023. Rate locks on rate-term refinancings in August were down 93% from a year ago and cash-out refis were down 78%, according to Black Knight. “Many [IMBs] expanded operations during an unsustainable refi boom and now face painful adjustments,” said Richard Koss, chief of research at New York-based mortgage-data analytics firm Recursion. John Toohig, head of whole-loan trading at Raymond James in Memphis, explained that the mortgage market has essentially been cut in half from last year’s volume. “So, there’s fewer loans to go around, fewer loans being sold at premiums, so mortgage companies are likely in for consolidation,” he said. Storm Brewing Tom Capasse is managing partner and co-founder of New York-based Waterfall Asset Management, a global alternative investment manager with some $11 billion in assets under management. The firm specializes in asset-backed credit, whole loans and private equity. There likely will be 40 to 50 deals done this year. The primary deals are large IMB’s buying smaller IMBs.  Garth Graham, senior partner at stratmor group Capasse sees the headwinds facing the independent mortgage banking industry over the next couple years as being near hurricane-force in their impact. He points out that in 2021, 85% of the U.S. mortgage market was ripe for refinancing, but today closer to 10%.  “There’s roughly 4,400 independent mortgage banks in the United States, and we estimate that probably half two-thirds today are breaking even at best,” he added. “[Origination] volumes have fallen 50% to 60%, but margins have fallen 75%. “You’re going to have a lot of fallout,” Capasse added. “We think that this period of restructuring that’s occurring in industry is probably an 18-month to two-year process, and at least one-fifth of the industry will probably merge or go away.” There are many economic variables that can yet affect the future course of events in the industry, for better or worse, including Capasse’s dire projections for the IMB market. Still, signs of the stress facing the market have surfaced already this year — with the Chapter 11 bankruptcy filing by First Guaranty Mortgage Corp; the failure of Sprout Mortgage; a dozen channel exits; and the many mergers and acquisitions completed or in motion. Garth Graham, senior partner and manager of mergers and acquisitions activities for the STRATMOR Group, a Colorado-based mortgage advisory firm, said for all of 2021, there was a total of 29 merger and acquisition deals that involved at least one IMB. So far in 2022, he added, “there are over 25 already, and the pace is picking up.” “There likely will be 40 to 50 deals done this year,” Graham said. “The primary deals are large IMB’s buying smaller IMBs.” Graham explained that if a smaller IMB’s loan volume is cut in half, it’s hard for that lender to cut its corporate expenses in half to remain profitable. “Meanwhile,” he added, “a large buyer might be able to load that same [mortgage] production [via an acquisition] and not take on any [additional] corporate expenses.” “Lenders that turn all their attention to refinances when that business skyrockets enjoy huge profits,” Graham said. “But the tide always eventually turns, and when it does, many of those lenders struggle to stay afloat. “We’re seeing a lot of that this year, and it will certainly continue in 2023.  … Over 50% of IMB’s lost money in Q2, and that number will go up in Q3.” Graham said there are now many buyers who are active in the IMB space, and “the lender who does not want to risk their company or put capital into their company during this downturn should (and is) considering an exit.” “We get calls every day on that basis,” he added.   Past is Present Rising interest rates, inflation and risky loans made to chase higher returns all contributed to the rolling S&L industry crisis in the 1980s. Texas was ground zero for the S&L industry implosion, with more than 40% of thrift failures in 1988 — the peak year for the crisis — occurring in the Lone Star State. This looks a lot like that [the S&L crisis], though there won’t be any RTC, but it smells a lot like what happened back in those days, when savings and loans got restructured or went out of business. Tom Capasse, managing partner of Waterfall Asset Management “Emblematic of the excesses that took place, in 1987 the FSLIC [the now-defunct Federal Savings and Loan Insurance Corp.] decided it was cheaper to actually burn some unfinished condos that a bankrupt Texas S&L had financed rather than try to sell them,” states the Federal Reserve synopsis of