Sixth recession red flag raised, despite strong jobs report

Sixth recession red flag raised, despite strong jobs report
What a crazy day for my economic model! On the same day, the Bureau of Labor Statistics (BLS) revealed that we’ve recovered all the jobs lost to COVID-19 and I am raising my sixth recession red flag.

When I wrote the America is back recovery model on April 7, 2020, and then retired it on Dec. 9, 2020, I knew one data line would lag the most: jobs! I have talked about how job openings would move toward 10 million and that we should get all the jobs we lost to COVID-19 back by September 2022. Well, I was off by two months: Today, the BLS reported that 528,000 jobs were created with positive revisions of 28,000, which gave us just enough to pass the February 2020 levels. From BLS:  Total nonfarm payroll employment rose by 528,000 in July, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Job growth was widespread, led by gains in leisure and hospitality, professional and business services, and health care. Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic levels.

Feb 2020: 152,504,000July 2022: 152,536,000

The big job numbers we have seen recently are tied to the decline in the job openings data, which lags also, but we do see a decrease in this data line as it appears for now that the job openings data has peaked in this cycle. It recently went from 11.3 million to 10.7 million, and the recent peak was near 11.9 million.We have seen increases in jobless claims and slighter increases in continuing claims. However, nothing too drastic yet. Again, at this stage of the economic cycle you should focus on the rate of change data.A tighter labor market is a good thing; this means people with less educational backgrounds can get employed since we have many jobs that don’t require a college education. The unemployment rate did tick up for those with less than a high school diploma in this report.

Here is a breakdown of the unemployment rate and educational attainment for those 25 years and older:

—Less than a high school diploma: 5.9%.—High school graduate and no college: 3.6%—Some college or associate degree: 2.8%—Bachelor’s degree and higher: 2.0%Below is a breakdown of the jobs created. Every sector created jobs; even the government created jobs. All this was just working our way back from the losses to COVID-19, which I knew would take a bit longer than some people would have thought with the economic data we had in 2021.Now that we have regained all the jobs lost to COVID-19, what is next?

Hopefully, people know that we weren’t in a recession in the first six months of the year. When you’re in a recession, you don’t create jobs, have positive industrial production data, or positive consumer data in GDP. We had some funky trade and inventory data that tilted the GDP negatively, but the traditional data lines that go negative in a recession are just not there yet.

Even so, because some of the more current data is trending negatively,  I am raising my sixth recession red flag today. Allow me to present my case.

Recession red flag watch

Where are we in the economic cycle? I’ve already raised five of my six recession red flags, but until they are all up, I don’t use the word recession.

Let’s review those red flags in order, as my model is based on an economic progression model:

1. The unemployment rate falls down to a level where we start to talk about Federal Reserve rate hikes because the economy doesn’t need as much stimulus for employment gains.  For this recovery, the unemployment rate getting to 4% is the level where I raised my first recession red flag. This just means that the recovery is more mature than the earlier stages of the unemployment rate falling. Today it’s currently at 3.5%.

2. The Federal Reserve starts to raise rates. The Federal Reserve started Its rate hike process this year, to start fighting inflation and has been more aggressive recently. This shows that the expansion is longer and that the Federal Reserve is in a mood to tighten policy rather than make it more accommodative.

3. The inverted yield curve. This is more of a market-driven bond yield red flag. I had been on an inverted yield curve watch since Thanksgiving of 2021. This is when the two-year yield and 10-year yield slap high fives and say hi to each other. It’s another progression red flag, reflecting that we are in a more mature stage of the economy. Traditionally you see an inverted yield curve before every recession.

4. Find the overheating economic sector where demand can’t be sustained. Once that demand comes back to normal, people will be laid off. We see this in the durable goods data. A few companies are laying people off or putting into place a hiring freeze.5.  New home sales, housing starts, and permits fall into a recession. Once mortgage rates rise, the new home sales sector does get hit harder than the existing home sales market. The homebuilder confidence index is falling noticeably, and while we never had the housing build-up in credit and sales that we saw in 2005, the builders will slow housing production down with higher rates. I raised my fifth recession red flag in June.

Today, I am raising the last recession red flag, which considers the Leading Economic Index (LEI). This week I presented my six recession red flag model to the Committee For Economic Development of The Conference Board (CED) — the committee that created the leading economic index. “Since its inception in 1942, CED has addressed national priorities to promote sustained economic growth and development to benefit all Americans. CED’s work in those first few years led to great policy accomplishments. One is the Marshall Plan, the economic development program that helped rebuild Europe and maintain peace, the Bretton Woods Agreement that established the new global financial system, and the World Bank and International Monetary Fund.” 

6. Leading economic index declines four to six months before a recession. Historically, the LEI fades into every recession, outside a one-time huge economic shock like COVID-19. To raise this flag I needed four to six months of decline, which we saw recently. However, knowing the components of this data line, I know this data line has legs to keep going lower.

As you can see, the LEI doesn’t have a good history of reversing course when the downtrend is in place. We have had times in the mid-1990s when we saw a slowdown but didn’t get a recession.

With that in mind, how might this reverse? Well, the two easy answers are this:

1. Rates fall to get the housing sector back in line. 2. Growth rate of inflation falls, the Fed stops hiking rates and reverses course, as they did in 2018.

Most Americans are working, and job openings are still high enough that people can find work if they need to. However, if you’re asking me how we could see a reversal after all six flags are up, this is it.

So how do I square raising the last recession red flag when we had such a strong job report today? Well, the model isn’t designed to work during a recession. It’s intended to show the progression of an expansion into a recession.  As you can see below, this data line fell in 2006, and we were still creating jobs in 2006 and 2007.

During the housing bubble, we had a clear over-investment, and that was in the housing market, so the recession red flag model was evident before the recession. Only three of my recession red flags were up before the COVID-19 crisis; in fact, we were still in expansionary mode if COVID-19 hadn’t occurred.

I can’t describe it any other way: things have been crazy since April 2020. All of us that track economic data have had to adjust to the highest velocity of data movement in our lifetime and have had to make COVID-19 adjustments all the time.

At some point in the future, things will get back to normal. I’ve presented you with my data lines to show we weren’t in a recession the first six months of the year, but the economic data is getting softer and softer. I will be looking for weaker data lines getting to the point where we actually see real recessionary data, which means jobs are being lost monthly, production data falls and companies make adjustments to their business model with greater force.

I’ll take each data point one day at a time and try to make sense of it. Remember, economics done right should be very boring, and always, be the detective, not the troll.
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Banking agencies get deluge of feedback on CRA proposal

Banking agencies get deluge of feedback on CRA proposal
Stakeholders on all sides of the issues sounded off on the proposed changes to the federal redlining statute in comments to the banking agencies marshaling the changes.

Some of the nearly 360 comments came in late on Thursday, a day before the deadline imposed by the Office of the Comptroller of the Currency, the Federal Reserve and the Federal Deposit Insurance Corporation. Those agencies oversee banks, and are tasked with ensuring banks do not redline, by enforcing the Community Reinvestment Act.

In the days before the deadline, trade associations preparing their comments were still “deep in the weeds,” scrambling to get their members to agree on details big and small.

In theory, agencies have to read the comments and respond publicly, especially to issues raised by multiple commenters. The agencies don’t have to heed criticisms, however.

Much of the feedback that trade associations, fair housing groups and community advocacy groups submitted had common threads. Numerous organizations criticized the agencies for not proposing to grade banks based on data about their minority lending.

The nearly 50-year old statute curiously never included language about race, although it was intended to address redlining. The National Community Reinvestment Coalition has argued that putting race in the implementation of the law would not violate the constitution.

“But regulators are wary of going anywhere near that line,” said Jesse Van Tol, CEO of NCRC.

“Above all, we are extremely disappointed to see the lack of the explicit consideration of lending by race in a lender’s CRA rating,” wrote the St. Louis Equal Housing and Community Reinvestment Alliance.

Some think that the proposed rule already addresses concerns that including race more explicitly would draw a legal challenge. The National Housing Conference, a trade association that represents mortgage lenders, was one of the few industry stakeholders that suggested the banking agencies push the boundaries a bit more.

“NHC recommends that the CRA regulation develop a process for collecting and reporting baseline data on investment and lending to people of all races,” wrote David Dworkin, the National Housing Confeence’s CEO. “This same data reporting should be used in assessing performance and establishing performance context in CRA evaluations as well.”

While the regulators did not propose using data on race in community reinvestment exams, the banking agencies floated the idea of giving community development credit for special purpose credit programs. Among commenters, there was broad support for that idea, including from the Urban Institute, fair housing groups, and numerous trade associations, including the Mortgage Bankers Association and the Housing Policy Council.

In its letter, the MBA said it was supportive of the banking agencies giving credit for special purpose credit programs.

The Housing Policy Council, which represents large bank and nonbank mortgage lenders and servicers, recommended that the agencies consider special purpose credit programs “favorably” in community reinvestment exams.

“Such a specific positive reference to SPCPs in the rule would likely encourage more banks to utilize SPCPs – a result that would benefit more LMI borrowers and neighborhoods,” wrote Ed DeMarco, president of the Housing Policy Council. Doing so would dovetail with other efforts by regulators to encourage mortgage lenders to make targeted lending programs.

The Housing Policy Council also suggested some tweaks to how CRA credit is given for loan purchases from Ginnie Mae pools, to avoid discouraging lender participation in programs backed by those securities. The trade association recommended that the banking agencies allow a loan purchased from a Ginnie Mae pool to qualify as a loan to a low- or moderate-income borrower, as long as the borrower was low- or moderate-income at the time of origination.

The MBA also recommended the banking agencies weigh retail and community development tests equally in CRA exams, rather than the proposed weights of 60% and 40%, respectively.

Multiple commenters, including HPC and MBA, asked the banking agencies to allow more time to adjust to the revisions. The proposal would give banks a year to implement the changes.

Comments received by the agencies were not limited to those representing banks who, in theory, must pass CRA exams in order to be allowed by the regulators to grow larger. (That rarely, if ever, happens.)

Those representing nonbanks also took the opportunity to weigh in, amid the proliferation of CRA-like requirements for nonbanks at the state level. The expansion of those regulations stems, in part, from support from top Federal Reserve officials.

In 2021, Fed Chair Jerome Powell said he supported subjecting nonbanks to CRA requirements, saying, “Like activities should have like regulation.”

The Community Home Lenders Association, which represents small and mid-size nonbank mortgage lenders, in its letter to the banking agencies, said that CRA requirements for nonbanks were “inappropriate.”

The CHLA pointed out that most loans that nonbanks make are backed by federal agencies, and subject to their underwriting guidelines, loan pricing and upfront fees for borrowers. Nonbanks make up the greater share of Federal Housing Administration mortgages, which are the mortgage of choice for first-time homebuyers and borrowers of color.

The trade group also argued that nonbanks, which are not subject to the federal CRA, continue to outperform banks when it comes to minority borrowing. Their letter cites findings from the Urban Institute, that for nonbank originations, median credit scores are consistently lower, and median debt-to-income ratios are consistently higher than those of banks.

But the Urban Institute also found that, whether subject to the CRA or not, mortgage lenders overall are not keeping up with even current levels of homeownership in majority-minority areas.

In its letter to the banking agencies, the Urban Institute found that predominantly minority neighborhoods have a 10% homeownership share, but receive only 8.1% of mortgages and 5.9% of bank loans.

“In all cases, overall lending is lower than the current homeowner share, and nonbanks consistently outperform banks,” the Urban Institute wrote.
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Why is now the time for lenders to modernize their appraisal processes

Why is now the time for lenders to modernize their appraisal processes
With tech solutions and automation dominating more and more of the mortgage experience, the appraisal process can feel a bit dated, often causing significant slowdowns. HousingWire recently spoke with Erin Reed, vice president of originations, valuations and operations at ServiceLink about approaching appraisal modernization in an innovative way while addressing logistical challenges along the way. 

HousingWire: Why should lenders consider appraisal modernization and how can it benefit borrowers?

Erin Reed: Lenders are looking for a solution that improves the overall cycle time while maintaining the quality of a traditional appraisal report. It becomes even more important in a highly competitive lending environment, as everyone is trying to give borrowers the fastest and best experience while maintaining process integrity. Borrowers have lots of options and high expectations for service in today’s market — leveraging these new options is one way for lenders to set themselves apart.

Providing appraisers with more product options designed to increase efficiency helps to create more capacity, which will become essential when volumes increase again. Tasks like scheduling, property inspection and driving comps adds a great deal of time to the process. 

Appraisal modernization assists with those tasks to create additional market capacity. 

Appraisal modernization will help to absorb fluctuations and volume within the market and maintain a set of standards beyond what we’ve been able to do historically. In today’s market, borrowers increasingly expect a digital experience built for efficiency, transparency and accessibility.

HW: What are some of the biggest challenges to implementing modern appraisal solutions?

Logistics and adoption are two main hurdles commonly discussed amongst industry participants. First, we need to ensure that property inspections are completed quickly and thoroughly and that the data is presented to the appraiser in an efficient manner. 

More importantly, appraiser adoption is critical to ensure the appraisers are comfortable with these new processes. Transparency regarding the data sources will be key to making sure that the product is accepted in the market – not just by the lenders and the consumers, but also by the appraiser community itself. 

At ServiceLink, we partner closely with our appraiser panel to ensure they’re comfortable adapting to industry changes.

HW: How can appraisal modernization enhance the valuation process?

ER: Appraisal modernization will allow more appraisers to focus on what they do best: providing valuations. The need to schedule property visits and perform onsite inspections will now be supported by an alternative workforce. This optimization is expected to make appraisers even more efficient by eliminating the time associated with administrative tasks like scheduling and performing the onsite inspection itself. 

In addition, the data collection process has been standardized, so the same set of details are collected for each property. These consistent results will help all constituents across the lending spectrum with a number of functions. These factors should decrease overall turn time while maintaining the integrity of the appraisal process.

HW: What is ServiceLink doing to modernize the appraisal process for lenders?

ER: ServiceLink has offered hybrid appraisals for almost 15 years. This affords us the opportunity to leverage our existing infrastructure to continue this evolution through modernization. 

In addition, ServiceLink’s industry-leading platforms, technology and workflows have been leveraged to manage the modernization workflow seamlessly. ServiceLink has not just been looking forward to modernization; we’ve been involved in its evolution. 

We’re looking forward to pushing appraisal modernization beyond the requirements set forth by GSEs and continue to focus on digitizing previously manual touchpoints of the process.

To learn more about what ServiceLink is doing to modernize the appraisal process for lenders, visit
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Guild still eyeing acquisitions as profits falter in Q2 2022

Guild still eyeing acquisitions as profits falter in Q2 2022
Guild Mortgage’s second-quarter earnings suggest that a high share of purchase loans won’t necessarily be enough to protect lenders from the most challenging and volatile mortgage market in years. They’ll have to cut costs and grab opportunities as they emerge.

The nonbank lender reported a $58.3 million net income from April to June, a 72% decrease from $208 million in the first quarter. Virtually all mortgage lenders have posted significant decreases in profits in the second quarter from last quarter, owing to a sharp increase in mortgage rates and challenges in the secondary market.

Guild’s net income from originations declined 60% from the previous quarter to $25.6 million from April to June. The second-quarter profits at Guild mainly came from servicing, with $63.9 million in profits recorded. Still, that was down 72% from the first quarter.

“Much of the sequence of declines in revenue and income can be tied to lower origination volumes and margins, consistent with broader industry trends,” Mary Ann McGarry, Guild’s CEO, said during a call with analysts on Thursday. 

Guild, a purchase-focused lender with a distributed retail model, reported $5.7 billion in-house originations in the second quarter, down 6% from the previous quarter. Purchase originations were $4.78 billion in the second quarter, 84% of the mix. Purchase business increased 20.7% from the first quarter’s $3.96 billion.

The gain-on-sale margin on pull-through adjusted locked volume increased from 3.34% in the first quarter to 3.57% in the second quarter, but it was down from 4.54% in the first half of 2021. 

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“Looking ahead, we expect gain-on-sale margins to stabilize in the second half of this year, assuming excess capacity continues to contract, thereby driving more favorable pricing dynamics over time,” Terry Schmidt, Guild’s president, told analysts.

She added, “Having said that, a sustainable step up and gain-on-sale margins will depend upon market rate and spread trends as well as broader inventory levels.”

Guild’s revenues declined 40% quarter over quarter, to $287.5 million. Total expenses increased from $203.6 million in the first quarter to $209.1 million in the second quarter, up 3%. But it went down 30% from the first half of 2021 to the first half of 2022, to $412.7 million.  

“We have realized approximately $40 million of annualized expense savings through the first half of the year, which is primarily the result of staff reductions and their associated total compensations,” Amber Kramer, Guild’s CFO, said during the conference call. 

The executive added, “We maintain the flexibility to continue to invest for growth and implement further cost savings as needed.”  

Guild had $249 million in cash and $1.6 billion of unutilized loan funding capacity as of June 30, 2022. The liquidity, according to executives, may support mergers and acquisitions and a $20 million share repurchase program approved by the board in May. In the second quarter, the company repurchased $1.4 million in shares, with $18.6 million still available.

On the servicing side, adjustments in the fair value of the mortgage servicing rights (MSR), which brought in $184.6 million in net revenues in the first quarter, contributed $21 million to profits in the second quarter. Loan servicing and other fees increased 3% quarter over quarter, to $54.6 million. 

Guild ended the second quarter with $75.8 billion in unpaid principal balance, up 4% quarter over quarter.  

Guild’s share were trading on Friday afternoon at $12.46, up 4.47% from the previous day.
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Endpoint launches scalable digital closing platform

Endpoint launches scalable digital closing platform
Endpoint, a startup funded by First American, launched new proprietary solutions tailored for those looking for a scalable digital closing platform. Read on for more.

US employment back at pre-pandemic level

US employment back at pre-pandemic level
Amid fears and talk of a recession, job growth in the U.S. remained strong in July, with nonfarm payroll employment rising by 528,000 jobs from the month prior, according to data released Friday by the Bureau of Labor Statistics.

After this latest job gain, the unemployment rate fell to 3.5%. Both total nonfarm employment and the unemployment rate have returned to their February 2020 pre-pandemic level.

“Despite the negative reading on second quarter GDP, this is not a picture of an economy in recession,” Mike Fratantoni, the chief economist at the Mortgage Bankers Association, said in a statement. “And even though initial claims for unemployment insurance have increased modestly in recent weeks, these data show that the pace of hiring, spurred by more than 10 million job openings, continues to exceed any increase in layoffs.”

Construction gained 32,000 jobs in July, with residential building gaining 2,900 jobs and residential specialty trade contractors gaining 11,200 jobs. Employment in the construction sector is now 82,000 jobs higher than in February 2020.

“While the housing sector slows, the construction industry has faced a skilled labor shortage for many years and will continue to try and fill empty positions. The best way to attract and retain workers is to pay more,” Odeta Kushi, the deputy chief economist at First American, said in a statement. “Residential building employment is up 7.5% compared to pre-pandemic, while nonresidential building employment remains 4.7% below.”

The real estate, rental and leasing services sector gained 1,400 jobs in July. This increase is solely attributable to the rental and leasing services sector, as employment in real estate remained relatively unchanged from the month prior.

Creating a path to success in today’s purchase market

Meeting the needs of a new generation of homebuyers while managing the ebbs and flows of a volatile housing market is a major endeavor for any mortgage lender. So, what should lenders be doing to thrive in the face of a post-pandemic housing market rife with new hurdles?

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“Home sales are running below the pre-pandemic numbers seen in early 2020 and slightly below the 2019 annual total. Mortgage rates appear to be settling down over the past month at below 6%, with the past week dipping to 4.99%, but they are well above the 3.6% to 3.9% rates in the months before the pandemic. In other words, home sales are more impacted by mortgage rate changes than jobs,” Lawrence Yun, the chief economist at the National Association of Realtors, said in a statement.

Despite this Yun remains hopeful due to the recent decline in mortgage rates.

“But the recently stabilizing mortgage rates suggest home sales will also soon stabilize and are likely to make steady gains in 2023,” he said.

The lion’s share of the job growth in May came from gains in the leisure and hospitality sector (up 96,000 jobs), the professional and business services sector (up 89,000 jobs), and in the health care sector (up 70,000 jobs).

One industry that has fared poorly is mortgage – mortgage banking companies shed 9,300 workers in June, according to the BLS. As of June 30, “real estate credit” companies employed 274,700 workers in June, down from 284,000 a month prior. A year ago there were nearly 300,000 workers at mortgage banking firms. Just 900 workers at mortgage brokerage companies were laid off in June, according to the BLS figures.
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Morreale Real Estate Services updates portal

Morreale Real Estate Services updates portal
Illinois-based Morreale Real Estate Services launched a remodeled MSite client and transferee portal for its clients and partners. Read on for more.

Stewart Title boosts Ohio, Indiana team

Stewart Title boosts Ohio, Indiana team
Stewart Title strengthened its presence in Ohio and Indiana by boosting its team. It added an agency sales manager and an agency sales representative. Read on for more.