Call Me Non-QM
Non-qualified mortgages, a housing loan given to borrowers who possess inadequate financial records that make them ineligible for conventional mortgages, are beginning to turn heads in global markets. This year, lenders have combined approximately $18 billion worth of non-QMs into bonds and sold to investors, representing a 44% jump from 2018.
While this is a small sliver of the $10 trillion mortgage-bond market, it is creating some consternation because the delinquency rate in some of these bonds is about as high as 5%, according to Barclays data.
No, the market is not about to collapse and create 2008 all over again. However, the fault lines are forming and developing risks at a time when investors are desperate for yields in a cooling economy. Typically, you would not see the originations of these loans so late in the business cycle. Plus, the fundamentals of the housing market do not show any signals that it is ready for the dramatic jump in the non-QM bond market.
Soon, a temporary rule that allows Fannie Mae and Freddie Mac to acquire home loans that do not meet qualified-mortgage standards is scheduled to expire in two years. Why is this important? This will allow more debt to be bundled into non-QM bonds. Experts say that nearly $200 billion of home loans acquired by the two state-owned agencies every year would be classified as non-QM.
It is estimated that there are roughly $27 billion in outstanding bonds supported by non-QMs. To put this into perspective, bonds backed by loans to non-prime borrowers were just under $2 trillion at the height of the housing bubble.
File this away for future reference.
An Uber Descent
This past trading week, Uber shares cratered as bad as Sen. Kamala Harris’ (D-CA) polling numbers. There were a couple of explanations for why the ride-sharing company witnessed its stock plunge to an all-time low of $26 a share.
The first is that its post-initial public offering (IPO) lockup expired, allowing investors and employees to unload stock six months after hitting the stock exchange. This post-IPO lockup period made roughly 90% of Uber stock available for sale. The most prominent transaction was executed by Goldman Sachs, selling two million shares on behalf of an unidentified holder at a 4% discount.
The other is that it continues to bleed red ink; Uber’s third-quarter report found a $1.07 billion loss.
Despite the steep decline, you should not expect investors to hit the sell button all at once. The main problem for stockholders is that more than 500 million shares that were purchased prior to the IPO are below the price they initially paid. Put simply: Their investments are underwater. So, traders may want to sit on it and hope that a miracle happens.
Is this the beginning of the end? Not yet. It is typical for stockholders to shed shares after the post-IPO lockup period. For instance, Beyond Meat, the darling of the 2019 class of IPOs, experienced its stock slip 19% when 48 million shares became eligible to trade on October 29. Facebook shares, on the other hand, rose nearly 13% after their lockup expired.
Uber’s situation is unique from the plant-based meat company and the social media juggernaut. These two companies’ financials are far sounder than Uber’s. There are two primary concerns among investors: Uber keeps losing billions of dollars, and it is still spending billions of dollars. In an IPO market where investors are beginning to be fed up with money-losing firms, it is going to be bad news for future companies that go public – except Saudi Aramco.
Apple Doesn’t Fall Far from the Tree
The San Francisco Bay Area is suffering from a serious housing and homelessness crisis. Critics blame the titans of tech for creating this mess, while anyone with an elementary understanding of economics will look to development restrictions, NIMBYism, and the Federal Reserve as the chief culprits.
Whatever the case, Apple announced that it plans to invest $2.5 billion of its own money into a diverse array of housing and homelessness initiatives, including affordable housing projects, mortgage assistance, and aid for the homeless. The company will establish two separate $1 billion funds: one for public housing development and the other to help first-time homebuyers. The iPhone producer will also make $300 million worth of its land in San Jose available for affordable housing, launch a $150 million affordable housing fund, and donate $50 million to local homeless organizations.
That is a lot, and Apple should be commended for its civic engagement. But you know who is not happy about it? Sen. Bernie Sanders (I-VT). He stated in a press release:
“Apple’s announcement that it is entering the real estate lending business is an effort to distract from the fact that it has helped create California’s housing crisis. We cannot rely on corporate tax evaders to solve California’s housing crisis.”
Doesn’t he care about the poor?
Even if Apple were the cause of the state’s housing crisis, the company is trying to do the right thing by voluntarily allocating billions of its own money to a cause that it finds worthwhile. Why does it seem plausible that the senator would be happy if he took that $2.5 billion by force instead? But corporations and rich people are damned if they do and damned if they don’t: If they donate to philanthropic endeavors, then they are doing it for tax breaks or to bribe the people; if they don’t donate, then they are greedy entities that hate the impecunious.
There is no pleasing a socialist.
Surprisingly, all three of these stories are interconnected by one demographic: millennials. The non-QM is more likely to target millennial homebuyers who have been kicked out of the real estate market in major cities. A recent report found that millennial investors purchased many bad performing stocks, including Uber. Their one true love, Apple, is getting slammed by their other crush, Sen. Sanders. No wonder millennials are shrieking “Okay, boomer” as they are the target of ridicule yet again.
Read more from Andrew Moran.