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Moody's Talks - Inside Economics
Banks, Bonds, and Beige Book
John Toohig, head of Whole Loan Trading at Raymond James, joins Mark, Cris and Marisa to discuss the fallout of the banking crisis on lending standards, credit growth and the economy. The fallout so far seems manageable, but...
For more on John Toohig, click here or follow him on LinkedIn or Twitter.
If you would like to learn more about upcoming Moody’s Analytics & Raymond James in Conversation events click here
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my two trustee co-hosts, Cris deRitis, Cris is the deputy chief economist, and Marisa DiNatale, Marisa keeps the trains on the tracks. So, good to have you both. How are you guys doing?
Marisa DiNatale: Hey, Mark. Good, how are you?
Cris deRitis: Doing well. Doing well.
Mark Zandi: Everything's okay? You guys are back up and running. I know you were under the weather there for a little bit, but you're feeling better? You kicked COVID?
Cris deRitis: I'm back at 100%.
Mark Zandi: Okay.
Cris deRitis: Marisa?
Marisa DiNatale: I wouldn't say I'm 100%, I'm still not feeling great, I'm a little congested as you can probably hear, but-
Mark Zandi: No, you sound good to me.
Marisa DiNatale: Oh, good. Okay, good.
Mark Zandi: Yeah. You look marvelous.
Marisa DiNatale: I have my Kleenex at the ready.
Mark Zandi: Okay, perfect. Good. It's early morning for you though, so.
Marisa DiNatale: That's true. That's true.
Mark Zandi: Very early. Yeah, thanks for doing this so early.
Marisa DiNatale: Yeah. You're traveling, Mark?
Mark Zandi: No, I was in New York for a couple of days, I made it back home last night. And I was at a Moody's credit risk conference, boy, what a lugubrious bunch of folks. So I do this informal survey and I say, "Do you know what? Who out there thinks that we're going to have a recession in the next 12 to 18 months? Raise your hand." A hundred people in that room, I'd say 95 think we're going into recession in the next 12 to 18 months. But these are all risk managers, so maybe a little bit more pessimistic.
Marisa DiNatale: They're aid to be more pessimistic.
Mark Zandi: Yeah, I think so. But it made me very nervous. I tried to cheer them up, but impossible.
Cris deRitis: It's tough. That's tough.
Mark Zandi: Tough, yeah. It wasn't going to work. And we've got a guest, John Toohig. Good to have you, John.
John Toohig: Welcome. No, I think the number of Google searches for lugubrious just went up. For a 7:30 word vomit on me there, Mark, that's a strong one. I wasn't ready for that, so.
Mark Zandi: Do you know what? I've got these Zandiisms, and that's on the list, lugubrious.
John Toohig: Okay.
Cris deRitis: Mark loves his words.
Mark Zandi: I love my words.
John Toohig: Man, that was a strong one right out of the gate, so good morning everybody.
Mark Zandi: Hopefully I used it right.
John Toohig: Have your Webster dictionary and your coffee for this particular presentation today.
Mark Zandi: Maybe ChatGPT.
John Toohig: Absolutely. There you go. Maybe this all just is ChatGPT, maybe it's not really us, maybe it's just bots.
Mark Zandi: It could be.
John Toohig: There you go, yeah.
Mark Zandi: And the listener can quickly discern that we have a good relationship with John.
John Toohig: Absolutely.
Mark Zandi: Yeah. John is at Raymond James. And John, I don't even know, what's your title?
John Toohig: Managing director/head of whole loan trading here at Raymond James.
Mark Zandi: Cool. That's a great title.
John Toohig: Thank you. Thank you.
Mark Zandi: Yeah. And we've been doing these, would you call them webinars? Are they webinars?
John Toohig: Well, webinars, podcasts. If you remember when COVID happened and everything in-person kind of went away, we all pivoted to online media. So when we didn't know what Zoom was, when we were still trying to figure out how to use our webcam, and everything had gone from audio to video. So I don't know, is it a podcast? Is it a vid? Is it a vad? Yes, the answer is, it's online content. And to your point, you just did your conference here the other day. I just got back from Atlanta, Raymond James had their annual conference. Again, it was nice to be back in person, but still doing a lot of the digital content as well.
And Moody's has been wonderful, we've really enjoyed the in conversation webinars that we've been doing with a number of your speakers and yourself, mortgages, autos, commercial loans, yourself on kind of economic, Ms. deRitis on overall economic items, unsecured lending, credit cards. Pretty much anything across the lending and banking sector is what you and I have been doing over these last... it's three, four years now, Mark, it's not like it's been just yesterday. We've been at this for a while now, it's nice.
Mark Zandi: I know. They're really easy, a lot of fun, and of course you make them really interesting. And you have a really interesting set of clients, they tend to be smaller banks and credit unions, smaller financial institutions.
John Toohig: Yeah. The more regional and community guys are who we deal with that $75 billion in asset and down kind of institution. We love the Wells Fargos, and the JP Morgans, and the Goldmans of the world, but we're more the middle markets. So this regional banking crisis has been very real for us. This lack of liquidity that's out there has been very real, something we've been feeling for several months. So when you reached out and said, "Hey, this might be a timely topic-"
Mark Zandi: Absolutely, this is after [inaudible 00:05:00].
John Toohig: After Silicon Valley and Signature and everything, it was... We were in LA on March the 8th right when that news came out and it went through like wildfire. We had a conference in Beverly Hills, and I remember it was a Wednesday and that Monday they were going concerned that Wednesday they were talking about doing the capital raise, they had sold the bonds, and then by Friday it was over. And I was like, "Whoa, what just happened?"
Mark Zandi: Middle of the day over, and FDIC never does that, they wait for [inaudible 00:05:36].
John Toohig: And didn't have a buyer for it. That was remarkable that we went through the weekend and, "Who's going to buy the loans? Who's going to buy the bonds? We don't know."
Mark Zandi: Which means they must have been really terrified by the deposit outflows that were occurring through the system for them to do that.
John Toohig: When you yell, "Fire in the theater," Mark and people start running for the door, and $42 billion starts running for the door, you don't have a whole lot of options.
Mark Zandi: Yeah, really amazing. And you're hailing from Memphis, Tennessee.
John Toohig: Memphis, Tennessee, and celebrating the Grizzlies' win last night. I was in the Forum, it was rocking as we took it to LeBron, and we're really just thrilled to get game 2 back. We lost Ja Morant-
Mark Zandi: I saw that.
John Toohig: ... if you're a basketball fan, a really gnarly fall on that wrist, he's got some soft tissue injuries there. But Xavier Tillman and Tyus took us to the victory. So now it's back to LA, and we're hopeful we can win one on the road and get the home court advantage back.
Mark Zandi: Well, of course we're Sixers fans, John, so enough of the [inaudible 00:06:39].
John Toohig: We'll see you in the finals, my friend. We'll see you in the finals. I look forward to-
Mark Zandi: Fingers crossed, I'd go for that, yeah.
John Toohig: I look forward to seeing you there, and Go Grizz, that's all I can say about it.
Mark Zandi: Yeah, I saw the game on Monday night, the Sixers play... Gee, who did they beat? Who'd they play? I can't even remember.
John Toohig: It's the East, I'm more worried about the West, but...
Mark Zandi: Oh, oh, the Brooklyn Nets, yeah.
John Toohig: That's right. You should handle that.
Mark Zandi: I'm already looking past them.
John Toohig: You're 2 and 0 already, you've got game three tonight against the Nets, you're going to handle that easy, yeah.
Mark Zandi: I hope so. I hope you're right. And as we were saying, a lot of your clients are smaller financial institutions, obviously kind of ground zero for the problems in the banking system. And you do whole loan trading. Do you want to explain that just a little bit, because that's really critical to the conversation?
John Toohig: Yeah, so anything that's not in a bond, that would be on the balance sheet, so the mortgages, the mortgage book, the commercial real estate book, the auto book, credit card book, ELOCs, unsecured lending, solar lending, personal lending. People monitor and have been talking so much about the securities book lately and the unrealized losses and everything that go with it. Bonds are 20% of the balance sheet, loans are usually 60% of the balance sheet, if not more. And yes, we've had this influx of cash, and so the securities book has grown over the last two, three years because of COVID. All the stimulus that's been thrown at us.
But the bond book or the loan book has its similar challenges too, it's more illiquid, it's more difficult to trade, we're talking about raw collateral here, we're talking about the actual note mortgage on your home, we're talking about the car you drive to work, we're talking about the office building that you're in right now. And pools of those loans, depositories manage that risk on their portfolio is kind of what we make a market and trade. So $50 million of prime jumbo residential mortgages, a bucket of a couple of pools of commercial real estate loans, maybe they're office, maybe they're retail, maybe they're multifamily.
A pool of solar loans, particularly out in California, all of the solar panels that are appearing on houses these days, there's a market for that, future cash flow. I'll try to liken it to somebody who's familiar with the bond market and they're familiar with RMBS, just chop the S off. It's the same cash flow, it's the same collateral. It doesn't have the full faith and credit of the United States government behind it.
Mark Zandi: Residential mortgage-backed security, but not the security.
John Toohig: Take the security off.
Mark Zandi: Yeah, right.
John Toohig: Residential mortgage backed. And so you're looking at buying the raw credit risk. You have to underwrite it, you have to understand the under value, you have to understand the borrower's position, you have to send in their credit and their income stream. But it's the same kind of underlying cash flow.
Mark Zandi: So this may be an unfair question, but I'm just so curious, if you take a typical year, what would be the annual trading volume for bond?
John Toohig: Well, last year was anything but typical for us, we did about $15 billion in loan sales in about 475 trades. Now a bond trade's T+2, you settle in two days. A loan trade takes about 45 days to close. It's not unlike buying your house, so you've got a buyer and a seller, you've got a contract, documents have to be signed, diligence has to be done. It's a little bit more like an investment banking function than it is more of just a go to Bloomberg, enter in a CUSIP, and boom you're done, or a stock order.
So volumes here in the last two years have been very elevated because there's so much cash in the system and institutions were trying to put money to work, and almost racing to put money to work because all these deposits come in and they're trying to spend it. Now the opposite is true, trading volumes have really slowed down, depositories are struggling for cash, almost even starting to try to hoard cash and struggling with rising deposit costs, alternative funds of the Bank Term Funding Program, the discount window, brokered CDs, alternative forms of liquidity. So no question, trading volumes are down compared to what we saw in '22 and '21.
Mark Zandi: So here we are mid-April, we're about a month past the Silicon Valley Bank failure and the banking crisis. I'm calling it a crisis, for lack of a better term.
John Toohig: That's fair, yeah.
Mark Zandi: Probably given that the government had to step in and backstop everything, that feels like a crisis to me.
John Toohig: Two of the largest bank failures in the history of the United States, Mark, I think that qualifies.
Mark Zandi: It qualifies. Okay.
John Toohig: Yeah.
Mark Zandi: So since that event or events, has trading volume really fallen off?
John Toohig: It was a little bit of hands off the wheel, and going back to March 8th, kind of what we were talking about at the conference, it's more just shock and awe, "How could this happen? How could this happen so quickly?" It was really kind of remarkable watch. And there was a lot of phone calls coming in saying, "Hey, if I had to sell, what could I sell and where could I sell it?" But the problems persisted for a while, it's been pretty well documented. Rates have risen so quickly and we have the unrealized losses that you have in the bond portfolio.
And one of the things I like to point out on SVB, it wasn't a credit issue, it was a liquidity issue, the bonds they had were underwater, deposits flew out the door, they couldn't raise cash fast enough. They went to the Federal Home Loan Bank, they went to the discount window, it couldn't come together quick enough. By and large, they were mortgage-backs and treasuries that were on the balance sheet, and it wasn't like it was the subprime crisis of 2008 all over again, we haven't felt credit at all be the issue, and that's pretty consistent with our customers and pretty consistent throughout.
It's just when you double rates in a year, things were at discounts, and so there was that minute of everybody racing around and looking around and saying, "Oh gosh, what if the spotlight hits me and what do I do?" And so a lot of phone calls were had with customers and a lot of conversations focusing around, "Hey, are these massive deposit outflows happening? Are there lines out the door with people at the ATM trying to pull dollars out?"
And I remember sitting there that Monday morning after SVB crashed and I looked around the room at my trading firm, I said, "Guys, did you go to your bank this weekend? Did you take out $10,000? Did you take out $5,000? Did you need some money under your mattress? Did you move money to Bank of America or Goldman or the too-big-to-fail shops?" And no, there were the handful of institutions on the West Coast that seemed to be with the uninsured deposits, and that became a story and a headline for a minute. But largely it wasn't for those more what I would call rural institutions that didn't have the word west in their name. It seemed like every bank that had the word west in it was under scrutiny there for a minute.
Mark Zandi: And that's absolutely true. Banks had nothing to do with anything because if they had West in it in their name, they were getting nailed, yeah.
John Toohig: Yeah. It was almost like a couple of years ago if you had the word Bitcoin or something, or .com way back in the day, you've got nothing go up now if you [inaudible 00:14:13] goes down. But anyway, it seems to have subsided. It feels less volatile, it feels safer today. And we haven't had a closure in a couple of weeks now. I know there's a couple of names in the box that we're looking at. First Republic, Western Alliance had some good earnings numbers the other day. It feels like, Mark, we're almost to the other side of this, I'm hoping.
Mark Zandi: Yeah. And in terms of your trading activity, is that stable, or is that coming back, or-
John Toohig: It's coming back. Yeah, no-
Mark Zandi: Coming back. Okay.
John Toohig: ... it has felt more vibrant. What we have experienced for better or worse loans you don't have to mark to market, so let's put that out there, whereas in bonds, you can do this whole held to maturity versus available sale kind of game and gimmick and accounting. Loans, you don't have that experience. So most of these institutions still own these loan books at par, even though they're probably worth 85 to 95 cents on the dollar today, not because of credit, purely because of rate. And we haven't had a lot of people be forced sellers, no gun to the head saying, "You need to go raise cash, you need to go raise cash right now." So we don't feel any of that urgency.
But those institutions that were saying, "I won't sell anything unless it's par or better," they've come off that a little bit. They've been willing to say, "Well, show me a bid at 97. Show me a bid at 95 cents on the dollar, even though we're still a good ways away from that level." And that's because they do want to shore up some cash. They do want to be able to go to their regulator and say, "Hey, I've got a contingency plan for this." They're dusting that playbook off right now.
Mark Zandi: Well, let me ask you about the banking system, and I do want to get into different loan types, and get your sense of what's going on, more granularity there, but from a 30,000-foot level, do you think the banking system broadly is in good shape, okay shape, or did what happened here more just idiosyncratic related to a few banks that are kind of out on the tail of the distribution that just got caught and it's not symptomatic of something broader in the system? Or do you think the system is more troubled, and this is symptomatic of a broader set of issues?
John Toohig: No, I think the banking system's pretty sound. We have some issues, we do. We have some liquidity problems right now, but it's not credit. So broad strokes, SVB was a little bit more of venture capital, some very wealthy individuals, a lot of deposits running out the door, a shareholder letter that spooked some people and boom. We can even talk about maybe the mismanagement of how they did the attempt of the capital raise versus the bond sale. So there's that. Silvergate was more of a crypto story. And Signature, I almost felt like that was an afterthought, SVB happened on Friday, and then New York said on Sunday, "By the way, we're going to close them too." Third-largest bank failure in the country feels like an afterthought. Whoa.
But most other institutions don't have that challenge. And we've talked about First Republic a little bit, they're a billionaires' bank. Okay, maybe that could happen, but it's been remarkable to me to see how the banking community has rallied around that brand that is First Republic and has really tried to work very hard to save them, and it's a wonderful bank. But beyond that, everyday America Main Street Lending doesn't have the run happening on them from a deposit standpoint, I don't think that others do.
And yeah, there were some small deposit outflows, less than 2%, that seems to have stabilized a little bit. Yes, there was some immediate hits to this new Bank Term Funding Program, the discount window, federal home loan advances, that's all happening, but that's subsided since the crisis. But by and large, credit is sound. Yes, deposit costs are going up, yes, funding costs are going up, but they're well capitalized and I think in pretty good shape.
Mark Zandi: Hey Cris, are you saying what John is about... my interpretation of what John just said is this is the SVB, Signature, Silvergate are kind of idiosyncratic, they've got their own specific issues. There may be a couple other 3, 4, 5 out there that might be problematic, but they're small, no big deal. I'm putting words in John's mouth, I added that.
John Toohig: Largely, I agree with you, yeah.
Mark Zandi: Yeah, okay. And then the system broadly is on solid financial ground. What's your sense of that, Cris?
Cris deRitis: Yeah, I'd agree with that. I think we've largely dealt with the liquidity issues as well. At least there are facilities out there that if more problems should crop up related to that, I think we could [inaudible 00:19:14] through. I've said it before, I'll say it again, I do worry about credit coming... I know there are no credit issues today, there are relatively few, but I'm seeing into the future that we are going to get more losses, more delinquencies. I think there's lots of capital in the system today still that we could manage through, so I'm not anticipating crisis, but I wouldn't want to discount that there will be additional trouble ahead, there may be additional bank failures as we start to go through the actual credit cycle part of this.
Mark Zandi: Yeah. Marisa, anything to add there? Any pushback? Would you want to take the other side of this?
Marisa DiNatale: No, I agree. I agree. I mean-
Mark Zandi: It would be scary to do that, yes.
Marisa DiNatale: We're going under. No, and the Treasury and the Fed has implicitly sort of backstopped all these deposits, so that really adds just, I think, to the confidence in the banking system if something else were to go awry, so that certainly helped.
John Toohig: Yeah, I would echo what Cris said, he's right in that most of our customers are not worried about credit right now. Maybe on the bottom end of subprime auto, maybe on the bottom end of credit card, maybe on the bottom end of personal loans, unsecured personal loans, you're starting to see some signs of cracks there in credit. Mortgage, I think is rock solid. I worried... Mark, you and I have talked about commercial real estate, we've talked about office in particular as really not a place I want to be.
But the upper end of credit, FICO is sound. It's the lower end of income, it's younger borrowers that are getting hit a little bit more by inflation, struggling to keep up with their payments. I've listened to many of your episodes here. I really enjoyed the conversation with Mike Brisson and the gentleman from Cox.
Mark Zandi: He's good. He's really good.
John Toohig: I'm a huge Mike fan, he does a great job and great command of his numbers too. I enjoy [inaudible 00:21:23].
Mark Zandi: You're sucking up now, John. Don't-
John Toohig: I enjoyed the banter between you two last week. It's always fun to watch you two try to pass zingers at one another.
Mark Zandi: And the sad thing, he's a lot more right than I am.
John Toohig: No, no, no, no, it was great commentary. But the auto sector has been an interesting space to watch and see how that's shaped up. I was looking through your numbers game last week, and if I had been on that panel last week for the auto conversation, my number would've been 17%, and that is the number of new vehicles whose payments are over $1,000 a month.
Mark Zandi: Oh, interesting.
John Toohig: The new auto loans and the value of those new auto loans have gone so high coupled with higher rates. Imagine the average consumer floating a $1,000 a month.
Mark Zandi: That's really high. I would have never got that.
John Toohig: I would carry that note for a little while. That stings, and Mike kind of danced a little [inaudible 00:22:26].
Mark Zandi: That used to be the typical rental payment.
John Toohig: Right, yeah.
Mark Zandi: Used to be. Used to.
John Toohig: Those are challenges for that particular sector that could be, coming to Cris' comment, if we do see unemployment tick up, which has been stubbornly low, and if we do start to see performance spin out a little bit, he's right, there's some pain coming, but it's not here yet.
Mark Zandi: Just to make it clear for the listener because not everyone is in this world as regularly as we are.
John Toohig: It's very nichey, yes.
Mark Zandi: Yeah. Yeah. Credit versus liquidity. Credit meaning-
John Toohig: Thank you.
Mark Zandi: ... delinquency default.
John Toohig: Thank you. Thank you.
Mark Zandi: Somebody's not repaying their loan, that's credit.
John Toohig: Correct.
Mark Zandi: And what we're observing here is that so far delinquency and defaults are low, they're rising and concerns are it's going to rise a lot more, but right now they're low. Liquidity is about getting, very simply, the cash that you need to make a loan and to operate. And of course, banks need continual funding, continual liquidity, and if that gets cut off for whatever reason... and of course, deposits are a key source of liquidity for banks, particularly smaller institutions... then that becomes quickly a problem for them. And it's existential very quickly, meaning they can literally fail, go out of business. So liquidity as John as you've been saying is the issue today, credit may be the issue for down the road.
John Toohig: Can we latch onto that one? Because as I've watched the talking heads on TV and the media as they pushed it, and they keep saying, "Credit is tightening, credit is tightening." We don't feel that, we feel liquidity tighten. So these higher rates, deposit outflows, higher cost of funds, we've been at such a low interest rate environment, such a low cost of funds for depositories for so long where it was literally a handful of basis points, maybe your cost of funds was 50, 25 basis points over the last couple of years. Once you run out of those deposits and you have to go to the Federal Home Loan Bank, it's 4.5, 5%, 450 basis points, 500 basis points as your cost of funds, or brokered CDs. It's expensive.
And so as these institutions quickly realize, "Oh gosh, it's not cheap sources of funding," they have to raise rates, that's why we start talking about auto loans at 9.5%, mortgages at 6.5%, unsecured loans, credit cards in the high teens. Commercial real estate hasn't figured out where cap rates are yet, they're still really struggling right now for what's an appropriate loan rate. That's what I'm talking that our customers are really feeling right now is they're not pulling back because they're worried about credit, they're pulling back because they're worried they can't fund it. And that's going to be the part that'll be interesting to watch in earnings over time. So I take exception to someone who says it's credit that's causing them, I think it's cash and having to fund these loans. That's the challenge for them today.
Mark Zandi: Or maybe just the way we're thinking about it. It's the cash today, but it's also the, "Can these guys pay me back in the future," affecting my underwriting today.
John Toohig: Sure.
Mark Zandi: I was going to ask about the government response before we talk about the fallout of all this on the economy underwriting and on loan growth and on the economy. Obviously the government backstopped the entire system, stepped in, insured all of the depositors in these failed institutions, those below the deposit insurance limit of 250K, those above, and then of course the Fed stepped in with a credit facility to help with that liquidity issue that we just talked about.
What is your sense of that? Was that appropriate for them to do? There's a lot of debate obviously around that because the deposit insurance limit's there because you want depositors with lots of cash in these banks to be very careful about where they put their money to discipline the banks so that the banks don't take a lot of risk. And by insuring everybody, you're creating this potential moral hazard. So that's the concern and the debate. Do you have a perspective on that? Where did you land land on that?
John Toohig: So I live in a sales world, Mark, so in trading we're always kind of-
Mark Zandi: Backstop me, please, baby. Don't [inaudible 00:26:57].
John Toohig: The hustle is real over here, Mark. So I have incredible respect for the interim SVB CEO, who not two weeks after the implied or otherwise deposit guarantee, was out there saying, "We are the only bank in the country that has not the implied, the guarantee, of the backstop. So please bring your money into SVB as we work to recapitalize this institution."
Mark Zandi: Good point.
John Toohig: That is selling 101. I loved that. I was really fired up to see this guy have the chutzpah to be able to just do this in this particular market. So is it implied? It's almost like what we talk about for the GSEs, is it the implied guarantee of the United States and the taxpayer dollars compared to... Look, most of us... my mother, she puts her money in her bank. She doesn't know what the bank is doing from an investment banking standpoint, from a wealth management standpoint, from a lending standpoint. All she wants to know is her money is safe. All she wants to know is she can still write checks. And yes, she still writes checks, that's still a thing for her. She's not using Venmo, she's not using PayPal. She's got a credit card, but she just wants to know when she goes to the branch, and yes-
Mark Zandi: Do you know what, John? just to interrupt, Cris is still writing checks. He writes checks for his crypto accounts.
John Toohig: There you go. There you go. I hope he's still got balance there, right? Yeah, it's just-
Mark Zandi: Vintage Bitcoin.
John Toohig: But she just wants to know her money's safe, Mark, and she wants to know that she can get her money. And so at that very, very basic level, I do think that depositors should have that guarantee and should feel safe that their cash is there. And let's be honest, it is cash, it should be something that they can get out, and it should be something that's liquid. How about that?
Mark Zandi: Sounds fair. So let's talk a little bit about the fallout from all this. We're four weeks in and everyone's trying to get a sense of... and the system is stabilized, obviously. The government backstopped, deposit outflows have stopped, but we're seeing less use of the various credit facilities. So it feels like it's moving in the right direction. But there is likely going to be a fallout. One of the principle links between what's happened to the banking system and the economy runs through underwriting, will banks tighten up on their underwriting, make it more difficult to get a loan? Or if you get a loan, you under higher interest rates, more onerous terms? And what that means for loan growth and credit growth, and ultimately that drives business decisions around hiring and investment and consumer decisions around spending and economic activity. And maybe I'll go to Marisa first, to you, I don't know, did you catch the minutes from the FOMC meeting yesterday? Did you have a chance to take a look at that?
Marisa DiNatale: I didn't, no.
Mark Zandi: You didn't? Cris, did you take a look at that at all?
Cris deRitis: Yes-
Mark Zandi: Maybe I'm the only who took a look.
Cris deRitis: ... a little bit.
Mark Zandi: A little bit. They spent, obviously, a lot of... I should have mentioned the Beige Book that the Fed puts together... That wasn't from the FOMC minutes, I apologize. It was the Beige Book that came out yesterday. Sorry about that.
Cris deRitis: I looked at both.
Mark Zandi: My bad. My bad. That the Fed District banks provided an assessment of what's going on in their economies that they're in, and of course, this Beige Book was done after the banking crisis and a lot of the focus was on underwriting standards. What are the banks doing with underwriting? Did you take a look at that, Cris, that Beige Book?
Cris deRitis: I did.
Mark Zandi: And did you get a sense... Okay, hopefully I'm not taking your statistic or anything like that.
Marisa DiNatale: I know what you're going to say, yeah.
Cris deRitis: You are? [inaudible 00:31:04].
John Toohig: I already stole two of his statistics in the pre-call, he's scrambling as it is.
Cris deRitis: So let me throw you a statistic now. Nine.
Mark Zandi: Yeah, what's your interpretation of that?
Cris deRitis: My number is nine.
Mark Zandi: The number is nine. The number is...
John Toohig: The number is nine.
Cris deRitis: What is the...
John Toohig: Oh. Oh really, the number is nine?
Cris deRitis: Encapsulate the summary.
Marisa DiNatale: Nine out of the regional Fed banks said that they were tightening, or that they were seeing tighter lending standards in their districts.
Cris deRitis: No, that was more ambiguous, it was several said that they were seeing some tightening, San Francisco in particular, as you can imagine-
Marisa DiNatale: Makes sense.
Cris deRitis: ... is the most.
John Toohig: They've got two of them on their hands right now, so they need that, yeah.
Cris deRitis: Yes, exactly.
Mark Zandi: Is nine that we put a number together to try to quantify the thrust of the Beige Book because it's qualitative, and we want to put a number on it. So we go in and we kind of distill directionally what they're saying. And is nine the number we came up with to describe that?
Cris deRitis: No.
Mark Zandi: No?
Cris deRitis: That's a good guess, but...
Mark Zandi: Good guess, okay.
Cris deRitis: Do you give up.
Mark Zandi: What is nine? Then what is nine?
Cris deRitis: So Marisa was close, it's nine out of 12 districts reported little or no change in economic activity.
Mark Zandi: Oh.
Cris deRitis: Right. So if you're trying to get gauge what happened in the immediate aftermath, they're not really seeing much of it. At least [inaudible 00:32:34].
Mark Zandi: They're not seeing an impact or they're seeing modest impact, except San Francisco, yeah.
Cris deRitis: Yeah. There were three... Actually, San Francisco also was included in that nine in terms of little or no change to economic activity, they're seeing more on the lending standards, some tightening. There were three districts that said that things are shaky, that their economic activity declined slightly. Do you want to guess those three? Redeem yourself.
Mark Zandi: That's a really... Okay, this'll be fun.
Cris deRitis: I know.
Mark Zandi: We each can say one. Marisa, do you want to go first?
Marisa DiNatale: New York?
Cris deRitis: Nope.
Mark Zandi: John?
John Toohig: I'll go with Marisa, New York.
Mark Zandi: No, he-
Marisa DiNatale: No, you already said that was wrong.
Cris deRitis: It's still no.
Mark Zandi: Still no. I'd say change.
John Toohig: San Francisco would be my next.
Mark Zandi: No, not that one. I'm going to go with Philly.
Cris deRitis: Yes, there you go.
John Toohig: I should have, that was a layup, I should have known that. Be with Mark, yep.
Mark Zandi: Yeah. And there's two more-
Marisa DiNatale: How about Atlanta?
Cris deRitis: No, Atlanta's doing well.
John Toohig: Trying to pick the ones that are... It can't be Dallas. Dallas has got to be on fire right now. No, Dallas is doing great right now.
Mark Zandi: Richmond?
Cris deRitis: Richmond, very good.
Mark Zandi: Yeah, okay.
Cris deRitis: All right.
Mark Zandi: Do you see how you do this, John? This is how you do it.
John Toohig: You've got to wade right through it, yeah.
Mark Zandi: Yeah, yeah.
Cris deRitis: Last one will be impressive.
Mark Zandi: The last one I-
Marisa DiNatale: St. Louis.
Cris deRitis: Ooh, Kansas City.
John Toohig: Yeah, I was going to go there because it's probably got a little bit more of the farm associated with that. That makes sense.
Mark Zandi: I'll have to say though, I don't spend a lot of time on the Beige Book generally, but I didn't spend more time on this one because of getting a read on the underwriting, and banks are tightening their underwriting in response to what's going on, but I was surprised at how modest it felt like the tightening was. It didn't feel like these guys are battening down their hatches.
John Toohig: No, Mark, that's what we're feeling on the boots on the ground. Customers-
Mark Zandi: Is that right?
John Toohig: ... not worried about credit at all. We're still seeing risk on right now. Again, funding they're worried about and finding enough yield, they're worried about. They're worried about margin. They're worried about margin compression and they know their funding costs are going up. We probably hit peak rates, I think that's true, and now they know that deposit cost, which is a lag, is going to start coming up and they know margins are going to start getting pinched. And if Cris is right, and I tend to agree with him that we're seeing loss provisions go up because charge-offs, probably going to... what I think a lot of economists have been saying, normalize, we're getting away from the stimulus and we're getting back towards kind of 2018 vintage as opposed to '20 and '21. So they're expecting higher losses or more normal losses, I should say, and rising cost of funds, which is crimping margin.
Mark Zandi: So this seems to suggest the key link between what is going on in the banking system and the real economy is not playing out as significantly as one might have feared just a couple of three weeks ago. Is that right, Cris? Is that your sense of it?
Cris deRitis: At least not yet. And I guess the other kind of key point out in the Beige Book that stood out to me is that tourism is reported strong across the districts. So again, the immediate consumer impact doesn't seem to be there. If people were really worried about, "Can I get money out of the bank?" they would probably be more conservative in terms of that tourism.
John Toohig: Which along those lines, Cris, on commercial real estate, that's one of the sectors that's kind of hot, leisure and hospitality.
Cris deRitis: Yeah, that's right.
John Toohig: That's an area in CRE that's done well, it was also one that got hammered during COVID, right? Mark, when we had this conversation early 2021 and lockdowns were pervasive and you were also starting to see hirings and better job growth in that sector compared to tech, banking.
Cris deRitis: There's also no new supply, we're not building anymore hotels or very few, compared to... We are building apartments, right?
John Toohig: We're not building office complexes, or if we are, we're struggling. That's real, yeah.
Mark Zandi: Yeah. So we were expecting the banking crisis to shave 3, 4, 5 tenths percent off of real GDP growth in the coming year. The key link again is through tighter underwriting, less credit availability that impacts business, investment, hiring, and consumer spending. But it's still way too early to think one thing or another. But so far at least it doesn't feel like it's going to come in any worse than that, the downside risks here seem less significant than they did a few weeks ago. That's my sense of it.
John Toohig: I think that's fair.
Mark Zandi: That's fair? Okay.
John Toohig: Yeah.
Cris deRitis: Barring some other shock [inaudible 00:37:46].
Mark Zandi: Something else going on, yeah. Right, okay. Okay. I want to come back and kind of go through each of the lending types and talk about that, what's going on with each of those lending types? But before we do that, let's play the statistics game. And just to remind the listener, the game is that we each put up a statistic, the rest of the group tries to figure that out through questions, clues, deductive reasoning. The best statistic is one that's not so easy that we get it immediately, not so hard that we never get it. And if it's apropos to the conversation at hand or relates to a recent release, all the better. And it is tradition on the podcast, John, to go to Marisa first, she's the first player in the statistics game. Marisa, you're up.
Marisa DiNatale: So the first [inaudible 00:38:38] I picked [inaudible 00:38:40] came out last week, but it's really good and I kind of want to use it. Maybe I'll come back to it, okay. But I'll play by the rules.
Mark Zandi: It's okay.
John Toohig: It's fair.
Mark Zandi: It's okay. Fire away.
John Toohig: We'll grant an exception.
Mark Zandi: Do you really want to use it? Are you sure we didn't use it on the podcast? You listened? You've listened?
Marisa DiNatale: Actually, no, but I doubt that you did.
Mark Zandi: Okay, fair enough. Okay.
Marisa DiNatale: All right. Hang on.
Mark Zandi: Oh.
Marisa DiNatale: Okay. The statistic is 3.24% in March.
Mark Zandi: 3.24... Is it related to CPI, Consumer Price Index?
Marisa DiNatale: No.
Mark Zandi: Okay. Was it a government statistic?
Marisa DiNatale: No.
Mark Zandi: Oh. It comes from a trade group?
Marisa DiNatale: No.
Mark Zandi: Oh my god. Is it a financial-
Marisa DiNatale: John might know.
Mark Zandi: ... financial market measure?
Marisa DiNatale: Adjacent. Yeah.
Cris deRitis: Is it an interest rate?
Marisa DiNatale: No.
Mark Zandi: Okay. Is it commodity price?
Marisa DiNatale: No.
Mark Zandi: It's adjacent. Is it-
Marisa DiNatale: We wee just talking about. It's related to [inaudible 00:39:46] we were just talking about. That John was just talking about
John Toohig: Is it loan related?
Marisa DiNatale: Yes.
John Toohig: Oh, delinquency?
Marisa DiNatale: Oh, it's not an interest rate on a loan? Okay.
John Toohig: Delinquency or charge-off rate?
Marisa DiNatale: It is a delinquency rate on-
Mark Zandi: Mortgages.
John Toohig: Office delinquencies?
Marisa DiNatale: What was that, John?
John Toohig: Office delinquencies?
Marisa DiNatale: Yes. It's the Moody's CMBS delinquency track, and that is the delinquency rate for offices... March. And out of all segments, so industrial, warehousing, hotels, multifamily. It's the only delinquency rate that rose last month, and it's been on the up and up for most of the past year. And it's now just about at its peak of where it was right in the middle of the pandemic. That said, it's still very low historically, it's 3.24%, if you look at [inaudible 00:40:46].
John Toohig: I would take the over going further, yeah.
Marisa DiNatale: Yes, yes, it seems to be headed that way.
Mark Zandi: And CMBS is-
Marisa DiNatale: Commercial mortgage-backed securities.
Mark Zandi: Commercial mortgage-backed securities, so securitized commercial real estate mortgage loans. So office-related mortgage loans securitized, that's the delinquency rate that is on that as of March. Interesting. But you had another one, another statistic.
Marisa DiNatale: I did, yeah.
Mark Zandi: Okay. Fire away.
Marisa DiNatale: This is an easy one, and this one came out this week. It's 2.9%.
Mark Zandi: And this came out last week, you said?
Marisa DiNatale: This week. This week.
Mark Zandi: Oh, this week?
Marisa DiNatale: Yeah. Yep.
Mark Zandi: Nothing came out this week as far as I can tell.
Marisa DiNatale: So this should be easy.
Mark Zandi: Yeah, that's true. That's true.
John Toohig: It should be easy, but I've been on the road this week and haven't been paying attention to my economic [inaudible 00:41:36].
Mark Zandi: Is it a government statistic?
Marisa DiNatale: Yeah.
Mark Zandi: Oh, it is.
Cris deRitis: From the Philly Fed?
John Toohig: 2.9%.
Mark Zandi: Cris, any ideas?
Cris deRitis: I said Philly Fed but [inaudible 00:41:50].
Marisa DiNatale: No, it's the Philly Fed.
Cris deRitis: It's not.
Mark Zandi: It's not the Philly Fed.
Cris deRitis: Not the Philly Fed. What did we get? We've got construction, I don't think it's-
Marisa DiNatale: Now you guys are mind the data releases of the week.
Mark Zandi: Yeah, well... We shouldn't be doing that?
Marisa DiNatale: Where are you going to find it?
Mark Zandi: Oh, that's right.
John Toohig: If I were to do a quick Google search, might it have been retail sales?
Marisa DiNatale: There you go, John, yes. It's year-over-year retail sales in March.
Mark Zandi: Oh, year over year?
Marisa DiNatale: Yeah, year over year, they were down 1% on the month. This is the third time in the past four months that retail sales have fallen on a monthly basis. And the growth on a year-over-year basis is now the weakest it's been since June of 2020.
John Toohig: Implying the consumer is weakening a little bit, Marisa?
Marisa DiNatale: I would say they're sign the consumer maybe weakening a little bit. And I should say this is headline sales, this includes autos and it includes gas, and we know that gas prices are down from where they were a year ago. But even if you strip out... sales are compared to where they were last year, so.
Mark Zandi: Yeah, of course that goes back to Cris' observation about tourism, that also reflects a shifting in consumer preference from goods-
Marisa DiNatale: From goods to services, yeah.
Mark Zandi: ... to services. So hard to know... That's the hard thing about the consumers, it's this big elephant, it depends on which part of the elephant you touch, you get this whole different perspective of what's going on. But that's an interesting one. But that was last week, Marisa, that wasn't this week, right? Wasn't that the last-
Marisa DiNatale: Wasn't it Monday?
Mark Zandi: No, that what that was a head fake. That was really-
Marisa DiNatale: Oh, god. All right,, I'm all messed up. I [inaudible 00:43:35] at the beginning of the week too. I've been under... I'm all messed up.
Cris deRitis: Fake news.
Mark Zandi: Fake news. Fake news. That's why I didn't get it, by the way, because...
Marisa DiNatale: That's why.
Mark Zandi: That's the big news.
Cris deRitis: That's the big news.
John Toohig: Here's Cris, over the top. Thank you, sir.
Mark Zandi: All right, John, do you want to go next? Do you want to go next?
John Toohig: I would love to go next.
Mark Zandi: Fire away.
John Toohig: 71.8 billion.
Mark Zandi: I know what that is. Should I tell you? Should I put you out of your misery immediately?
John Toohig: Hopefully, you're the one with the command of the math. Let's go.
Mark Zandi: The Bank Term Funding Program, BTP... Is it Bank Term-
John Toohig: BTFP.
Mark Zandi: BTFP. Yeah, do you want to explain, John?
John Toohig: That's the new kind of liquidity facility post-SVB that was released to give similar to what the Federal Home Loan Bank would be or some of the other advances, but has no haircut. So if you're pledging assets and those assets are worth 80 cents on the dollar, you get the full 100% takeout as opposed to the haircut. And follow-up question, Mark, that number will be released today, so this is last week's number, was that number up or down?
Mark Zandi: From the week before?
John Toohig: Correct.
Mark Zandi: Down, baby.
Marisa DiNatale: Down.
Mark Zandi: It was... I'm speaking from memory... 79 billion, maybe.
John Toohig: That's it, on the screws. Well done.
Mark Zandi: Really?
John Toohig: Two for two, you are. Yes.
Mark Zandi: Okay, there you go. Well, obviously I'm following that very carefully.
John Toohig: I would imagine we all are in banking land, right? But I think that also implies some easing in the crisis that we've seen is that we're not rushing to some of those panic places. And there was some discussion around a lot of our bankers that when Q2 hit as opposed to Q1 hitting, there would be a surge in that because they didn't want to report it in their Q1 numbers. They wanted to have it in their Q2 numbers as they kind of went over that April date. But I don't see that, I don't feel that right now as I stare at the information.
Mark Zandi: A lot of good Fed data, I think does it come out tomorrow, John, the-
John Toohig: I think it's at the end of today. I think it's [inaudible 00:45:48] on Thursdays is what it's been doing. I think that's right.
Mark Zandi: Yeah. And then of course we get the Fed's H8 eight release, which is the balance sheet of the banking system, assets, liabilities. I think that comes out Friday, I believe, and that's for this past Wednesday, so that's another really good one. So that was a good statistic, but of course I'm looking at that like a laser beam.
John Toohig: Well, do you want me to give you a harder one? Can I give you a tough one-
Mark Zandi: Yeah, yeah, yeah, feel free.
John Toohig: ... which is near and dear to my heart. 81.4%-
Mark Zandi: Ooh. Is this a price [inaudible 00:46:23]?
John Toohig: ... up from 70.2%.
Mark Zandi: Is it a price increase?
John Toohig: It is not.
Mark Zandi: Is it some kind of haircut on some kind of loan? No? Okay.
John Toohig: Sticking with the funding theme.
Mark Zandi: The funding theme. Oh, really? Oh, is it Federal Home Loan Bank advances?
John Toohig: No, sir.
Mark Zandi: No.
Marisa DiNatale: It's the-
Mark Zandi: By the way, John, just as a sidebar, I wrote a piece called In Defenses of the Federal Home Loan Banks, I highly recommend it. Cris takes great umbrage with it, but...
John Toohig: Well, I will side with Cris then likely in the conversation. But I'm going to read it, and I look forward to our next discussion where we can take it apart.
Mark Zandi: It's well reasoned though, just-
John Toohig: Of course, naturally. Always, yes.
Mark Zandi: Naturally.
John Toohig: Yes.
Mark Zandi: Okay. Back to funding. 81.4%. What were you going to say, Marisa? You had something you were saying.
Marisa DiNatale: No, no, no, no. It's a percentage. It's not a-
John Toohig: True.
Marisa DiNatale: Right, okay. It's a-
Mark Zandi: It's a percent increase.
John Toohig: Well it went from 70.2 to 81.4. And I'll give you one other... that's year over year.
Mark Zandi: Okay. so it went from 70 to 81, the year-over-year growth rate accelerated, is that what you're saying?
John Toohig: Correct. Well, accelerated is one way to look at it, yes.
Mark Zandi: Oh geez, man, this is...
Cris deRitis: Oh, wow. Yeah.
John Toohig: And you said the harder the better. I gave you too easy of one in the first time, so I'm going to give a bit more of an obscure number for this one.
Mark Zandi: This came out this week?
John Toohig: No, so it's Q4's number.
Mark Zandi: Oh, okay.
John Toohig: Q1's number has not been released yet.
Mark Zandi: Okay. It's the money market mutual fund growth?
John Toohig: No.
Mark Zandi: Nope? Okay, that goes to funding.
Marisa DiNatale: Is it a government statistic?
John Toohig: Yes, I would think it's a government statistic, yep. How about this? It's even more focused, it's a banking statistic.
Mark Zandi: A banking statistic.
Marisa DiNatale: Is it the Federal Senior Loan Officer survey?
John Toohig: Nope. Nope.
Mark Zandi: It's related to funding, so is it a bank liability?
John Toohig: Okay, you're getting closer.
Mark Zandi: So is it deposit account?
John Toohig: There, we're getting closer.
Mark Zandi: Okay. So some deposit account has increased quite dramatically year over year through the fourth quarter-
John Toohig: Of '21 to '22.
Mark Zandi: Because all deposits are declining, so what could have been increasing? That's interesting.
John Toohig: Come on, you almost said it right there.
Mark Zandi: Do you know what? Cris, what would that be? It's got to be some money... No, I said money markets, so that can't be a money... No, it's a banking liability.
Marisa DiNatale: Oh, is it some-
Mark Zandi: CD. Some kind of CD? Small-time... Oh, go ahead, Marisa.
Marisa DiNatale: Is it like loss provisions or something?
John Toohig: No.
Mark Zandi: No, no, no, he's saying it's a bank liability. It's some funding source, it's a deposit account-
Cris deRitis: Time deposits. Savings accounts.
Mark Zandi: Savings accounts? Not savings accounts.
Cris deRitis: Time deposits.
Mark Zandi: Small time [inaudible 00:49:33].
John Toohig: It is the loan-to-share ratio for credit unions, what they call loan-to-deposit ratio, what credit unions call... So credit unions have gone from a 70% loan-to-share ratio to an 81.4% loan to... implying that those deposits have been flying up, that those loans have been lent, and they are running out of cash.
Mark Zandi: That was a really good one, actually, a really good one because I couldn't think of any deposit account that actually went up, I was barking up the wrong tree.
John Toohig: It increased, but it increased in a bad way, right?
Mark Zandi: Yeah, yeah, yeah. Okay, Cris, you're up.
Cris deRitis: Oh, I gave you the nine, but if you want another one, I'll give you an easy one because we've gone through a bunch of this.
Mark Zandi: Okay-
Marisa DiNatale: He's given us like five.
Mark Zandi: Oh yeah, in fact he's been watched out.
John Toohig: And don't forget the pre-call too, we knocked him out of a couple of [inaudible 00:50:32].
Mark Zandi: Okay. I've got one. And I'll have to admit, this has been a tough week, a really tough week.
John Toohig: It's a little thin.
Mark Zandi: Little thin. 940,000.
Cris deRitis: That's got to be the multifamily construction-
Marisa DiNatale: Stats.
John Toohig: Wow. Wow.
Mark Zandi: Yeah. John, it's not as impressive as it sounds, but yeah, we talk about this every Monday.
John Toohig: The smile on Cris' face is pretty impressive right now.
Mark Zandi: Yeah, that's pretty good, Cris. So that 940,000, I'm rounding, I think it was a little higher than that, that's the number of multifamily units in the pipeline going to completion, record number. It keeps on rising, keeps on going up month after month. That's a lot of units.
John Toohig: Does that worry you at all? Is that a good thing?
Mark Zandi: Okay. It depends on your perspective. If your perspective is inflation, I'd say bring it on, baby because we need more rental units, we need declining rents because the rents are driving the cost of housing services. So that's my immediate take.
John Toohig: So I'm going to take it from the lending side, and we're talking about construction now, right? So we started building that particular multifamily unit, and the person who did that construction loan 18 months ago was in a very different interest rate environment and a very different cap rate environment than where he is today. And now that he's looking for permanent financing in a much more frightening world, how do you feel about the lending side of that particular piece of the conversation? And I would say the bid and the ask on that is Grand Canyon wide right now.
Mark Zandi: Yeah, I'm totally with you. If I'm a multifamily developer, I'm pretty nervous about this.
John Toohig: That's right.
Mark Zandi: If I'm a bank lender that's extended a mortgage loan into the multifamily space, I should be a little nervous about this because it means higher vacancy, weak rents, and that might create some difficulty. I also worry because of the tightening in underwriting for multifamily mortgage lending, which is clear from the Senior Loan Officer Survey and other anecdotes that we may see some real pullback in multifamily construction. That'll take some time because you've got all this stuff in the pipeline, but if you look out towards the end of this year, and certainly by this time next year, I suspect we're going to see much less multifamily construction, which is not... we need as many housing units as we can possibly get given the affordable shortage. So in immediate near term trying to get inflation in, I'm saying I want lower rents because that translates into lower measured inflation but [inaudible 00:53:20].
John Toohig: Shelter and housing, right.
Mark Zandi: Well, John, let's-
Cris deRitis: It's not as bad though as the other CRE, you have Fannie and Freddie.
Mark Zandi: True.
John Toohig: Oh no, no, multifamily is the good one in commercial real estate, that's the poster child. And Mark, you and I have talked about this a long time, Cris, you and I have talked about this a long time, we had a housing crisis. Prior to COVID, we have a housing crisis. Post-COVID, builders were really the ones that got savaged back in the Great Financial Crisis. We didn't build enough homes in the 2010s, we are struggling to catch up. We need more housing, no question. It's just right now financing that is an interesting piece of the puzzle in the near term.
Mark Zandi: So John, you have a window into what's going on with all these different types of lending activities because of the trading and hold-ons that you do. If you rank order all the different types of lending, is office the thing you're most worried about? That's office, mortgage [inaudible 00:54:20]?
John Toohig: Office and subprime auto and subprime card. We've wondered about this for a while. What happens to young people today and in this inflationary environment that we're in come July or August when we turn student loan payments back on? $300 a month is the average student loan payment, we haven't been making that for two-plus years. Inflation has risen. We've seen the percentage of consumer debt coming out of the wallet of the consumer and continue to rise. Have those young people already spent that $300 elsewhere on foods and goods and car payments? And so when we turn that number back on and we have to prioritize the payments at the consumer level. Does that pinch cards even more? Does that pinch autos even more? Does that pinch mortgage? Again, looking at that consumer number.
So on the lower end of income, on the younger end of age, and on the lower end of credit, am I probably worried in the consumer book, in the commercial book? I'm more worried about office. I'm a little worried about construction, like what we just talked about with multifamily, but with other products as well, it's a similar conversation, we were in a very different interest rate environment 18 months ago. So those are the parts of the sector that worry me.
Mark Zandi: And going to the other end, which loan types are you most comfortable with and least concerned about?
John Toohig: Yeah, mortgages are, I think, in a great spot.
Mark Zandi: I see, yeah.
John Toohig: How many of us have a 3%, 30-year fixed rate loan or less? So what we call forever loans has been a real boom for the economy and that 3% payment is exceedingly efficient, almost too efficient, and it's not causing Americans to want to move. People are staying put because they don't want to lose their loan. And so what we've seen because of that is HELOCs really take off this year, record volumes in HELOCs.
Mark Zandi: Home equity loans, yeah.
John Toohig: Home equity loans of credit, correct. Because you don't want to sell your house and you want to improve it. So there's two schools of thought. "I love my mortgage but I hate my house, so I'm going to take out a HELOC to spruce up and make my house better." The other side of the argument is, "I love that house, but I want to date the rate. I want to go out and get a 6.5% cash out or a 6.5% purchase loan," excuse me, "and buy the home I want. But I'm really praying to god I have to refi in two years to get that payment down."
So there's this kind of war going on in mortgage. But delinquencies are very low and have been very low. Maybe on the subprime part of credit, maybe the lower end of that. But mortgage has been so tight for so long, I think mortgage is in a really good spot.
Mark Zandi: Even with the house price declines that are kind of in train?
John Toohig: Well, you and I have chatted about this before, what? Since COVID home values are up 40%?
Mark Zandi: Mm-hmm.
John Toohig: So if I'm worried, I'm worried about those loans that were probably made oh, March of '22 and on, right before the Fed kind of put their foot on our throat and raised rates. So those are the ones, particularly those in the Zoom towns or those areas where people bid up homes, those are probably the ones... That's a pretty tiny window compared to the overall mortgage book that's out there because we really refi'd half of the $13 trillion mortgage market over the last three years. Quicken and United Wholesale almost put themselves out of business by refi'ng every loan there is out there. So prepayment speeds on mortgages have been historically low, 3 and 4% CPRs just because of people wanting to stay in the houses that they're already in.
Mark Zandi: Yeah. Yeah. Marisa, I saw you put down your headset there. Were you going to say something? Do you have a different perspective than John on any of that, or is that pretty consistent with your views of credit quality across lending types?
Marisa DiNatale: Yeah, if we look at the data from Equifax that we get, we see the problem areas are subprime [inaudible 00:58:46] among younger borrowers and their consumer installment loans. But that's a very small share of total debt outstanding, so it's not enough to worry about in terms of a major economic impact if those continue to go. And the delinquency rates on those [inaudible 00:59:05] are now higher than they were... 2019 prior to the pandemic. Yeah, and mortgage is the best of the bunch, for sure.
Mark Zandi: Cris, anything, any pushback there? It seems like we're all kind of in the same place.
Cris deRitis: Yeah, no [inaudible 00:59:24]. What's that?
Mark Zandi: Which means we're wrong, probably.
John Toohig: That's right. We've all got to go oppo now. We all got to say the world's about to crash down on its head and the consumer is about to completely hit a wall.
Cris deRitis: There you go. Yes, absolutely.
Mark Zandi: Yeah. Maybe we're all thinking the same thing.
John Toohig: It's group think.
Mark Zandi: Yeah. But no pushback, Cris, or any granularity there? No?
Cris deRitis: No. Marisa has this great chart for credit cards based on that data by vintage, and it's just shocking how bad the credit cards originated in 2021 and 2022 are behaving. The delinquency rates are well above any other previous vintage at the same-
John Toohig: That's a leading indicator, right, Cris? That's a part of the consumer that I think we've been talking around that is worrisome.
Cris deRitis: Exactly. So I think there's plenty to worry about. But I would agree with the ordering, resi mortgage, we have lots of equity we'd have to destroy before defaults really picked up.
Mark Zandi: Okay. Well, I think we're coming to time, but before we end, John, I'd like to kind of get you on the record and go back to where the conversation began, probability of recession. And I'm going to go around the horn here because we haven't done this in a bit. Let me ask it this way, and we've innovated on this question a little bit more recently, and you can answer this any way you want obviously, but what probability of recession would you put on recession beginning at some point this year in 2023 in the remaining eight, nine months? And what probability would you put on recession conditional on no recession in '23, beginning in 2024? I know that's a mouthful, but you get what I'm saying?
John Toohig: I do, yeah.
Mark Zandi: Okay.
John Toohig: I think the probability of 23 is low, I'll say 40%. I think the probability of a soft recession is in '24, and it really kind of... you and I have talked about this a lot, I think we've got one more rate hike coming, I think it's May. I do think we're higher for longer. I think Hal is serious about keeping it here and killing inflation. I think he knows that if the banking sector cracks, he can always drop rates if he has to. If he has to choose between the banking sector and inflation, right now he's picking inflation, and I think he's been just razor clear on that, even though the market is desperate for a pivot, he's not giving it to us.
So I think we get another quarter point hike. I think we're higher for longer. I think inflation's a little stickier than we want it to be, so it goes down, but it doesn't go down as much as we hope. And I don't have a firm number on that, I'm a trader, I'm not economist. But that's kind of the feel for me. So I think a low probability of a recession this year, but likely one in the early part of '24.
Mark Zandi: So over 50% in 2024.
John Toohig: That's fair.
Mark Zandi: Yeah. Yeah. Because inflation is stickier and the Fed may need to raise rates even more later in the year, something like that.
John Toohig: God, I hope not, but yes. Every time Powell gets up on stage, I just want to grab the shepherd's hook and just pull him off and just say, "Please, please stop."
Mark Zandi: Well, that's his intent though, John, right?
John Toohig: No, he's been consistent though.
Mark Zandi: He wants you to be upset. He's got you in his sights.
John Toohig: I'm mad
Mark Zandi: Guys like you. He's getting what he wants. Victory.
John Toohig: He's winning, yes.
Mark Zandi: Yeah, for sure. Okay, very good. My views are very similar to yours, but I'll come back to that in a second. So Marisa, what are your probabilities now for-
Marisa DiNatale: I'm at 45% for 2023, and about 55% for next year.
Mark Zandi: Okay. Okay. Very good. And same kind of logic as John articulated?
Marisa DiNatale: Yeah. Barring some... it's always unforeseen, right? It seems like it is... Barring some unforeseen shock this year, the economy seems very, very solid. We seem to have gone through this banking crisis fine, so I don't see a recession this year. I think the bigger risk is beginning of next year when rates have been high for a significant period of time and things [inaudible 01:03:36] for a while.
Mark Zandi: Although I find it so fascinating that you characterized 40, 45% as low, that feels pretty damn high to me.
John Toohig: Well, I mean, if we do have a recession though, this will be the most pontificated and forecasted recession in the history of ever, right?
Mark Zandi: Absolutely.
John Toohig: We have been talking about the inversion and the yield curve for how long, and that if we miss on this, we have good company at that.
Marisa DiNatale: And how many people predicted or said we were in recession or would be in 2022, right? If you would go back then, there were so many people that thought a recession would happen last year.
John Toohig: Well, Mark, we were in a technical recession for a minute there. You and I had that conversation for-
Marisa DiNatale: Mark bristles that.
Mark Zandi: I'm not going there.
John Toohig: Technical. That's why I said it with-
Cris deRitis: Wait for the revisions.
John Toohig: ... all reverence when I made that statement. I knew I'd get the grin that I'm looking at right now.
Mark Zandi: How in the world do you create 500,000 jobs a month and call it anything close to recession? I don't know.
John Toohig: You don't.
Mark Zandi: I don't know. Yeah, right. Anyway, Cris, where are you on these probabilities?
Cris deRitis: Unchanged, 45% this year, consistent with Marisa, conditional on no recession this year, 65% chance.
Mark Zandi: That's a change, Cris. That's a change. You were at 67%.
John Toohig: Oh.
Mark Zandi: Yeah.
Cris deRitis: Well [inaudible 01:04:57].
John Toohig: Glass half full kind of guy, right? Yeah.
Cris deRitis: So 67% was the full 18 months, right?
Mark Zandi: Oh, okay. Okay, fair enough.
Cris deRitis: [Inaudible 01:05:09].
So John's or, recession either this year or next year, is 70%, right?
Mark Zandi: Okay. Got it. Got it. Got it. Yeah.
Cris deRitis: Which I think is yours too, Mark.
Mark Zandi: It is. It is, yeah.
Cris deRitis: So that's above the two-thirds threshold.
John Toohig: I've used your slow session terminology a few times in my conversations, Mark, where-
Mark Zandi: Actually, that's Cris', I don't want to take credit. He actually is paying for the URL.
Cris deRitis: We're team here. We're a team.
John Toohig: Mark, we have the TM on that? What do we got? We've got...
Mark Zandi: We've tried or I think we got denied or I don't know-
Cris deRitis: Red tape.
Mark Zandi: Did we get denied, Cris?
Cris deRitis: It's not worth it.
Mark Zandi: Not worth it. Okay, yeah. Okay, that's very helpful. I lied, I have one more question, and you may not have an answer to it, but I asked everyone this question because I'm confused by it. So you mentioned the treasury yield curve being inverted, that's screaming recession, right? But if you look at the corporate bond market and look at spreads, the difference between corporate bond yields and treasury yields is very... I wouldn't say narrow, it isn't small, but it isn't wide, it's near historical norms. No sign of recession there.
And then if you look at the equity market, the stock market, clearly it fell a lot in early 2022. In my view, that's just a reflection of a normalization of rates rising, the Fed starting to raise rates and normalize rates, price earnings multiples came in. But over the past year, pretty much now I think it's been a year since stock prices have basically gone sideways, they've not gone up, they've not gone down. The S&P 500 is still sitting at, I think, 4,100, 4,150 kind of at the top end of the range of the past year. That's not saying recession. And of course I should have said the corporate bond market's not saying recession. So do you have a theory as to how to square those things? Do you have any sense of that?
John Toohig: Well, so the two-year right now, 4.16, as I stare at the screens, the tenure at 3.53, so we're 62 apart on twos and tens, and that's come down quite a bit, we were at around 100 there for a hot minute. You and I will disagree on this particular topic, but I think the market just kind of factors in there's going to be a bailout. We don't let things fail anymore. We'll throw money at it. We just threw $5 trillion at COVID. If there is a challenge [inaudible 01:07:45] we just guarantee deposits. I think we're banking on the bailout and-
Mark Zandi: Oh, that is interesting, I hadn't thought that one. So you're saying maybe we go into recession, but ultimately policymakers step in and say, "We're not allowing [inaudible 01:07:59]."
John Toohig: Or the Fed will cut. I think if he has to choose right now, he's choosing to fight inflation. But if we have something that truly is systematic, he always has in his back pocket that he can eliminate unrealized losses by cutting rates. And we've got a pivot indirectly whenever SVB happened and the two and the 10-year plummeted, the two-year was over 5%, it's only back up to 4.17. The 10-year was what? 4.5%? 4.25, I think is where it peaked out at. And now here we are back at 3.53. And those drops have eliminated, or at least reduced, some of those unrealized losses in the banking sector. So I worry about that long term is just throwing money at it, it's been our solution for the last several crises.
Mark Zandi: Of course it was with this banking crisis as well, we didn't tolerate any pain. Yeah, interesting. That's a great and interesting take. Yeah, very interesting take. Okay, well that was very... I really appreciate it, John. Thanks for coming on. We learned a lot. I learned a lot, and I really appreciate you taking the time. Anything I missed? Anything I should have asked you that I didn't ask you?
John Toohig: No, I mean-
Mark Zandi: Other than will the Grizzlies win the NBA Championship? I didn't ask you that, but I...
John Toohig: We can go in. I'm hopeful and prayerful Ja is okay. I think if he's back, we've got a chance. I hate that-
Mark Zandi: Got a shot.
John Toohig: ... we lost Brandon Clark and Steven Adams. We've got the injury bug kind of nipping us. But hey, look, if it's the Sixers and the Grizz, you and I are attending that game, we're going to make that happen.
Mark Zandi: You're on. You're on.
John Toohig: Let's go.
Mark Zandi: Yeah, you're on.
John Toohig: I want to just thank you, Mark, we've had a great relationship over these last couple of years and I really appreciate everything Moody's has done. The partnership with Raymond James and Moody's been fantastic. Cris, you've been fantastic in our calls. Marisa, and great to meet you.
Marisa DiNatale: Nice to meet you, finally.
John Toohig: We have interacted in the past, but I've enjoyed the conversations, it's been great to do this and everything else that we've had going on for these last several years.
Mark Zandi: Right back at you, John. Really appreciate the friendship and the relationship with Raymond James. So thank you very much. And with that, dear listener, we're going to call this a podcast. Take care now.
