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The BAN Report: Quarterly Banking Profile / Sanction Update / Bank M&A Scrutiny Increases / Baseball Season in Jeopardy / The 13MM Chicago Resi Portfolio / The 2MM Chicago Commercial Portfolio

Quarterly Banking Profile

The FDIC released the Quarterly Banking Profile for the 4th quarter. The Quarterly Banking Profile is the most comprehensive overview of the entire US banking system, as it covers all banks. A few highlights:

Quarterly net income was up 7.4% from Q4 2020, but declined by 8.1% percent from the prior quarter. Reserve releases have propelled bank earnings the past year, but most of this has been exhausted. Negative provision expense was $5.2 billion in the third quarter, but in the fourth quarter it was negative $724.4 million.
Surprisingly, there was no improvement in Net Interest Margin from the prior quarter. At 2.56%, NIM is still only 6 basis points from the record low. But, it should improve in the next couple of quarters as the Fed raises interest rates.
As we saw with the banks that have reported earnings, loan growth was very strong in the fourth quarter, as loan and lease balances grew by 3% from the third quarter. Loan growth was broad across all categories led by loans to non-depository institutions (9.1%) and consumer loans (4.7%). However, C&I loans declined by 5.2% from the prior quarter, which is worth closer inspection.
Community banks grew loans at a about half the rate of the entire industry in the 4th quarter. Of the 4,839 banks, 4,391 are considered by the FDIC to be community banks.
Asset quality continues to be strong as the noncurrent rate stood at 0.89%. We expect to see increases this year in noncurrent loans as rates rise and stimulus support fades.

Overall, the banking industry had a great quarter, showing strong improvement in loan growth. Margin expansion appears to be on the horizon as the Fed finally begins to raise interest rates.

Sanction Update

After Russia’s invasion of Ukraine, the global community has responded decisively with painful economic sanctions, which could crippled Russia’s economy.

The Group of Seven, or G-7, major economies have imposed unprecedented punitive sanctions against the Central Bank of Russia along with widespread measures by the West against the country’s oligarchs and officials, including Russian President Vladimir Putin.

Key Russian banks have been barred from the SWIFT international payments system, preventing them from secure international communication and ostracizing them from much of the global financial system.

Sanctions announced by the U.S. over the weekend also targeted the National Wealth Fund of the Russian Federation and the Ministry of Finance of the Russian Federation.

They also effectively prohibit Western investors from doing business with the central bank and freeze its overseas assets, not least the vast foreign currency reserves the CBR has used as a buffer against the depreciation of local assets.

In the latest crackdown on Moscow, U.S. President Joe Biden announced Tuesday that Russian flights would be banned from U.S. airspace, following similar decisions by the EU and Canada.

French Finance Minister Bruno Le Maire on Tuesday told a French radio station that the aim of the latest round of sanctions was to “cause the collapse of the Russian economy.”

The Russian ruble has plunged since Russia invaded its neighbor last week and hit an all-time low of 109.55 against the dollar on Wednesday morning. Russian stocks have also seen massive sell-offs. The Moscow stock exchange was closed for a third consecutive day on Wednesday as authorities looked to stem the bleeding in local asset prices.

As multi-national companies divest from Russia, they may face painful write-downs.

Impairments from these divestitures, some of them multibillion-dollar holdings, will likely constitute some of the biggest write-downs of the year, said David Trainer, chief executive at New Constructs LLC, an investment-research firm.

“They’re looking at significant losses,” he said.

BP, for instance, plans to take significant noncash charges to reflect foreign-exchange losses it has accumulated since 2013—the year it acquired the 20% Rosneft stake—and the revaluation of its stake as a financial asset instead of as an equity interest on the books, a spokesman said. Under International Financial Reporting Standards, BP can no longer use equity accounting for its stake as it doesn’t meet the criteria for having “significant influence” over Rosneft; two BP directors resigned from Rosneft’s board on Sunday.

BP will assess the fair value of the stake at the end of the first quarter and write down the difference between that amount and the roughly $14 billion value on its books as of Dec. 31, 2021.

“Depending what that fair value is judged to be, it will be part of $14 billion that is written off,” the spokesman said. The company plans to report the charges in May as part of its first-quarter earnings.

Shell said its move to exit its Russian joint ventures is expected to diminish the book value of its Russian assets and lead to impairments. The company said it held about $3 billion in noncurrent assets in these joint ventures at the end of 2021. Shell plans to conduct a thorough impairment analysis, a spokesman said. It is also looking at all available ways to exit, such as an equity sale or transfer.

Fortunately, only the largest companies have investments or operations in Russia, and they have the wherewithal to handle a painful liquidation. Hopefully, China reconsiders its “No Limits” Russia friendship and tries to find a solution. Glory to Ukraine!

Bank M&A Scrutiny Increases

Federal regulators are scrutinizing bank mergers more closely, which is encouraging M&A deals to occur sooner before scrutiny increases further.

Under pressure from President Biden, Federal Reserve regulators last year began looking closer at deals that had already been announced, industry observers say.

The Fed in December approved several deals, including First Citizens BancShares’ $2.2 billion acquisition of CIT Group and Webster Financial’s $5 billion purchase of Sterling Bancorp, but only after monthslong delays. Staffing shortages within the regulatory agencies have also contributed to the delays, bankers said.

Meanwhile, the Justice Department's Antitrust Division is considering revising its bank merger guidelines to "to guard against the accumulation of market power" and the Federal Deposit Insurance Corp. appears poised to impose its own crackdown out of concern that industry consolidation may be harming consumers.

Martin Gruenberg, the acting chief of the FDIC, said in early February that the agency would pursue reforms of bank-merger policy in concert with other regulators. “In light of the significant implications of bank mergers for competition, safety and soundness, financial stability, and meeting the financial services needs of communities, a careful interagency review of the bank merger process is warranted,” he said.

Some lawmakers in Congress are amplifying the president’s message. House Financial Services Committee Chair Maxine Waters, D-Calif., in December called on leaders of the Fed, FDIC and the Office of the Comptroller of the Currency to impose a moratorium on deals that would create banks with more than $100 billion of assets.

Earlier this week, TD announced it was buying First Horizon, which will create a $614 billion institution. TD would become the 6th largest bank operating in 22 states. A pause on large M&A could be in the works, especially with all these large deals being announced recently.

Baseball Season in Jeopardy

Major League Baseball canceled the first two series of the 2022 season earlier this week, as both sides appear far apart in reaching a collective bargaining agreement.

These are the first games canceled or postponed because of a work stoppage since the 1994-95 players’ strike, which resulted in the loss of more than 900 games, including the 1994 World Series. That remains the longest work stoppage in baseball history, followed by this one.

Since the last labor agreement was struck in 2016, players have been vocal about problems they have seen in the game and its economic structure. While the owners of the 30 M.L.B. clubs believe players have a fair system without a hard salary cap, players have been seeking a series of changes, from improving competition to injecting more spending that is commensurate with rising club revenues to paying younger players more earlier in their careers.

Sensing an urgency to start the season on time, the sides came to Florida to negotiate. But when little progress was made last week, the league’s negotiating team told the union that if there was no agreement by Monday, M.L.B. would begin canceling games. M.L.B. reasoned that a minimum of four weeks of spring training — two weeks shorter than normal — was needed before the regular-season opener to avoid a spike in player injuries.

The current labor negotiations were not expected to be easy. The past two collective bargaining agreements were viewed as having further tilted the balance of power and economics in the owners’ favor. Realizing that significant changes to the system would be tense and full of brinkmanship, the union has spent years building a rainy-day fund for this very fight against M.L.B. owners, who ran an $11 billion-a-year business before the coronavirus pandemic.

Both sides seem fairly far apart and there doesn’t appear this will be settled soon. The best-case scenario probably involves the season starting around May 1, but it certainly could stretch much longer.

The 13MM Chicago Resi Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $13MM Chicago Resi Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

A total outstanding balance of $12,566,260 comprised of 55 loans
The consumer loans are secured predominantly by Single Family Residences (97%)
The portfolio is located predominantly in the Chicago MSA (83%)
The portfolio is comprised of two pools, a performing pool ($7,428,180) and an NPL pool ($5,138,080)
The performing pool has a weighted LTV of 74% and the NPL pool has a weighted LTV of 76%
Each pool is all-or-none and will be sold to a single buyer

Files are scanned and available in a secure deal room and organized by credit, collateral, legal, and correspondence with an Asset Summary Report, financial statements, and collateral information. Based on the information presented, a buyer should be able to complete the vast majority of their due diligence remotely.

Timeline:

Sale announcement: Friday, February 25, 2022
Due diligence materials available online: Tuesday, March 1, 2022
Indicative bid date: Thursday, March 17, 2022
Closing date: Monday, March 28, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The 2MM Chicago Commercial Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $2MM Chicago Commercial Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

A total outstanding balance of $1,966,175 comprised of 11 loans
65.18% of the portfolio is sub-performing with 34.82% performing
93.44% of the portfolio is located in the Chicago MSA
The loans have a weighted average coupon of 3.89%
The portfolio has an LTV of 54.61%
All loans include full personal recourse
The portfolio will be sold in its entirety to a single buyer

Timeline:

Sale announcement: Friday, February 25, 2022
Due diligence materials available online: Tuesday, March 1, 2022
Indicative bid date: Thursday, March 17, 2022
Closing date: Monday, March 28, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The BAN Report: Branch Closures Accelerate / Administration Exams Crypto / Permanently Higher Inflation? / What's Next with Asset Seizures? / The 13MM Chicago Resi Portfolio / The 2MM Chicago Commercial Portfolio

Branch Closures Accelerate

The pandemic finally accelerated the long overdue reduction of bank branches. We believe that this trend will only accelerate, especially given the uptick in bank M&A.

U.S. banks shuttered a net 2,927 branches last year — a mix of about 4,000 closures against 1,000 openings — according to S&P Global. That marked a record and an increase of 38% from 2020, the previous record year, the firm’s data shows.

Banks closed a net 165 branches in January of this year, leaving 80,739 active U.S. branches. That is down from nearly 100,000 in 2009, when the trend began.

Large national and regional banks have led the charge, mostly because they have the largest branch networks and therefore the most cutting to do. Wells Fargo, U.S. Bancorp, Truist Financial and Huntington Bancshares were at the forefront of the trend last year. All recorded more than 200 net closings.

For example, Synovus Financial in Columbus, Georgia, said it plans to close 40 branches in 2022 — about 15% of its physical footprint.

“We're going to continue to optimize our branch network and deploy some of the capital that we're saving there into our digital world to ensure that we're continuing to improve our online account origination,” Kevin Blair, president, and CEO of the $57 billion-asset Synovus, said on a conference call last month.

For a decade, we have argued the banks have moved way too slow to close branches, despite dramatic declines in utilization by consumers. Bank in 2014, for example, banking analyst Kevin St. Pierre suggested that some banks could close as many as half of their branches. For example, he recommend that BMO Harris could cut 40% of its 628-branch network. Today, BMO has 526 branches, so there is certainly room for banks to reduce their branch footprints even further.

Administration Exams Crypto

In an executive order issued this week, the Biden Administration is directing multiple agencies to examine cryptocurrencies.

The measures announced Wednesday will focus on six key areas:

Consumer and investor protection
Financial stability
Illicit activity
U.S. competitiveness on a global stage
Financial inclusion
Responsible innovation

Protecting consumers is an important part of the directive. There have been countless stories of investors falling for crypto scams, or losing huge sums of money through cyberattacks on exchanges or users themselves.

The Biden administration is calling on the Treasury to assess and develop policy recommendations on crypto. It also wants regulators to “ensure sufficient oversight and safeguard against any systemic financial risks posed by digital assets.”

Finally, the Biden administration also wants to explore a digital version of the dollar.

It comes as China has led the charge toward central bank digital currencies, or CBDCs, with more and more people using smartphones to make payments and handle their finances.

Biden isn’t saying whether the U.S. should launch its own digital currency. Rather, he’s calling on the government to place “urgency” on research and development of a potential CBDC.

The Federal Reserve last year began work on exploring the potential issuance of a digital dollar. The central bank released a long-awaited report detailing the pros and cons of such virtual money, but didn’t take a position yet on whether it thinks the U.S. should issue one.

We have been both supportive of the idea of cryptocurrencies and alarmed that its become a massive speculative bubble with little progress in being a true means of payment. It is ironic that cryptocurrency conferences don’t accept any cryptocurrencies as payment!

Permanently Higher Inflation?

Former central banker and economist Charles Goodhart believes the pandemic ushered in a permanent shift towards higher inflation.

“The coronavirus pandemic will mark the dividing line between the deflationary forces of the last 30 to 40 years and the resurgent inflation of the next two decades,” said the 85-year-old economist in an interview. He predicted that inflation in advanced economies will settle at 3% to 4% around the end of 2022 and remain at that level for decades, compared with about 1.5% in the decade before the pandemic.

Mr. Goodhart’s theory about how shifting demographics are squeezing the labor force and pushing up prices has drawn the attention of central bankers in the U.S., Europe, and China—and has kicked off plenty of debate about whether he is right. Major central banks including the Federal Reserve and the European Central Bank have expressed alarm about inflation’s surge and are laying plans to try to squelch it.

His idea is “definitely something that worries central banks,” said Willem Buiter, a former central banker at the Bank of England. If Mr. Goodhart’s theory is correct, he said, “then they’re all behind the curve and should not just be thinking of cutting their balance sheets more rapidly, but doing so and raising rates more rapidly.”

Mr. Goodhart outlined his theory in a book, “The Great Demographic Reversal,” co-written with London-based economist Manoj Pradhan and published in September 2020.

He argued that the low inflation since the 1990s wasn’t so much the result of astute central-bank policies, but rather the addition of hundreds of millions of inexpensive Chinese and Eastern European workers to the globalized economy, a demographic dividend that pushed down wages and the prices of products they exported to rich countries. Together with new female workers and the large baby-boomer generation, the labor force supplying advanced economies more than doubled between 1991 and 2018.

Now, he said, the working-age population has started shrinking across advanced economies for the first time since World War II, and birthrates have declined as well. China’s working-age population is expected to shrink by almost one-fifth over the next 30 years.

As labor becomes more scarce, he maintained, workers will push for higher wages, in turn driving up prices. At the same time, businesses will manufacture and invest more locally to help offset both labor shortages and the nationalist and geopolitical pressures curbing globalized supply chains. That will increase production costs and local workers’ bargaining power. Global savings will fall as older people consume more than they produce, spending, particularly on healthcare. All that will push up interest rates, he predicted.

His thesis seems logical, as globalization and growing workforces seem deflationary, while aging workforces lead to more inflation. There are certainly older workers with flush investment accounts who are either leaving the workforce or demanding higher compensation to stay. Moreover, globalization is clearly on the retreat due to geopolitical issues and increased trade friction.

What’s Next with Asset Seizures?

As governments move to seize assets from Russian oligarchs, what do the governments due with these assets?

Yet sanctions experts say freezing the assets is the simple part. Deciding what to do with them — and who gets the proceeds — is likely to be more challenging and could touch off court battles that drag on for years.

Laws vary by country. And the latest round of sanctions, which go further than any other coordinated global round of sanctions on individuals, create new legal questions that have yet to be answered.

“We’re in uncharted waters,” said Benjamin Maltby, partner at Keystone Law in the U.K. and an expert in yacht and luxury asset law. “The situations we’re seeing now have never really occurred before.”

Legal experts say that generally, the sanctions themselves don’t allow countries to simply take ownership of oligarch’s boats, planes and homes. Under the sanctions announced by the U.S. and Europe, members of the Russian elite who “enriched themselves at the expense of the Russian people” and “aided Putin” in his invasion of Ukraine will have their assets “frozen and their property blocked from use.”

Under U.S. law and most laws in Europe, assets that are frozen remain under the ownership of the oligarch, but they can’t be transferred or sold. Sechin and Mordsahov, for instance, will continue to own their yachts, but they will be secured to the docks by the authorities and prevented from sailing to safer shores.

To actually seize and take ownership of an oligarch’s yacht or villa, government prosecutors have to prove the property was part of a crime. Under U.S. civil forfeiture law, an asset “used to commit a crime” or that “represents the proceeds of illegal activity” may be seized only with a warrant.

Proving seized assets were part of a crime seems difficult, as these oligarchs are generally well-advised. Moreover, administering portfolios of homes and yachts is expensive and potentially burdensome.

The 13MM Chicago Resi Portfolio

A total outstanding balance of $12,566,260 comprised of 55 loans
The consumer loans are secured predominantly by Single Family Residences (97%)
The portfolio is located predominantly in the Chicago MSA (83%)
The portfolio is comprised of two pools, a performing pool ($7,428,180) and an NPL pool ($5,138,080)
The performing pool has a weighted LTV of 74% and the NPL pool has a weighted LTV of 76%
Each pool is all-or-none and will be sold to a single buyer

Timeline:

Sale announcement: Friday, February 25, 2022
Due diligence materials available online: Tuesday, March 1, 2022
Indicative bid date: Thursday, March 17, 2022
Closing date: Monday, March 28, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The 2MM Chicago Commercial Portfolio

A total outstanding balance of $1,966,175 comprised of 11 loans
65.18% of the portfolio is sub-performing with 34.82% performing
93.44% of the portfolio is located in the Chicago MSA
The loans have a weighted average coupon of 3.89%
The portfolio has an LTV of 54.61%
All loans include full personal recourse
The portfolio will be sold in its entirety to a single buyer

Timeline:

Sale announcement: Friday, February 25, 2022
Due diligence materials available online: Tuesday, March 1, 2022
Indicative bid date: Thursday, March 17, 2022
Closing date: Monday, March 28, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

The BAN Report: Fed Raises Rates / Russian Debt / Crowded Airports / Lethargic Return to Office in Houston / Home Price Gains Exceed Income

Fed Raises Rates

The Federal Reserve finally made a move to raise interest rates this week, moving rates up 25 basis points.

After keeping its benchmark interest rate anchored near zero since the beginning of the Covid pandemic, the policymaking Federal Open Market Committee said it will raise rates by a quarter percentage point, or 25 basis points.

That will bring the rate now into a range of 0.25%-0.5%. The move will correspond with a hike in the prime rate and immediately send financing costs higher for many forms of consumer borrowing and credit. Fed officials indicated the rate increases will come with slower economic growth this year.

Along with the rate hikes, the committee also penciled in increases at each of the six remaining meetings this year, pointing to a consensus funds rate of 1.9% by year’s end. That is a full percentage point higher than indicated in December. The committee sees three more hikes in 2023 then none the following year.

The rate rise was approved with only one dissent. St. Louis Fed President James Bullard wanted a 50 basis point increase.

The committee last raised rates in December 2018, then had to backtrack the following July and begin cutting.

Last week, the White House warned of “substantially” higher inflation in the next few months, as the Russian invasion of Ukraine is adding gas to the fire. While there are some worries about a recession around the corner, we expect that the Fed will have to raise rates faster and more frequently than anticipation as inflation continues to be high. Some have argued that the Fed would not raise rates as aggressively in an election year, but we think they won’t have the option. Moreover, inflation is politically unpopular and contributes to an 11-year low in consumer confidence despite high economic growth.

Russian Debt

Crippled by sanctions, Russia’s bondholders are on their toes seeing if Russia will default on its sovereign debt. Russia owes about $40 billion in debt denominated in US dollars and euros.

At issue is a $117 million interest payment, which Russia was due to make Wednesday on two U.S. dollar-denominated bonds issued several years ago.

As of Wednesday evening in the United States, it was not clear what had happened. Earlier in the day, Russian Finance Minister Anton Siluanov told the RIA Novosti news agency that the payments in the U.S. dollars might not reach foreign bondholders because the government’s foreign currency accounts were frozen by U.S. sanctions.

Russia would then attempt to pay in rubles, rather than dollars as required by the terms of the two government bonds, Siluanov told Tass, another state-owned Russian news outlet, earlier this week. But if the government of President Vladimir Putin fails to deliver the required dollars within a 30-day grace period, the country would officially be in default, according to Fitch, the credit-rating agency.

The looming default underscores Moscow’s pariah status in the wake of its Feb. 24 invasion of Ukraine. Russian financial markets have been shuttered for nearly three weeks. Foreign corporations have exited the country. And now some of Russia’s government bonds — just last month widely traded global assets — are selling for just 12 cents on the dollar.

As of today, Russia said it did make its debt payments, but the funds have not yet been received. According to recent reports, Citigroup has the money but they have not yet distributed it to investors. OFAC has allowed US persons to receive interest payments on Russian debt, but that exemption runs out on May 25. A default by Russia would be the largest sovereign debt default in history.

Crowded Airports

Despite higher ticket prices, demand for travel has rebounded faster than the airlines have anticipated.

After the wave of Omicron variant-driven Covid-19 infections slowed travel bookings at the start of 2022, airline executives said demand has rebounded more quickly than they anticipated. As a result, carriers said they expect to be able to absorb higher jet fuel costs by paring back flying capacity and passing the costs along to customers.

“We’re seeing an increase in demand that is really unparalleled,” Delta Air Lines Inc. President Glen Hauenstein said at an investor conference Tuesday. “That surge couldn’t come at a better time.”

Major U.S. airlines said Tuesday that their revenues in the first quarter of 2022 will likely be at the high end of what they had expected at the start of the year, or better. Airline shares jumped Tuesday: American, and United Airlines Holdings Inc. gained more than 9%. Delta rose 8.7% and Southwest Airlines Co., which reiterated its expectation that it will post profits after the first quarter, rose 4.9%.

Delta won’t have trouble recapturing the additional $15 to $20 each way for the average ticket that it needs to make up for the higher fuel costs—an amount the airline believes its customers will be willing to shoulder, Mr. Hauenstein said.

“We are very, very confident of our ability to recapture over 100% of the fuel price run up in the second quarter and through probably the end of the summer,” he said Tuesday.

According to the data from TSA, daily traveler counts are running around 90% of 2019 numbers. But, due to cuts in flight capacity, the airlines will struggle to keep up with another unexpected change in demand.

Lethargic Return to Office in Houston

Houston, TX, has one of the highest rates of companies bringing their workers back, yet many workers are still working remotely.

Houston has set the standard for bringing workers back to the office during Covid-19. About 85% of its businesses have employees at their desks or have plans to do so, one of the highest rates in the nation, according to firms that track the return-to-office trend.

But Houston office floors are barely half full. While the number of workers showing up at their desks has been steadily rising, the office crowds are far smaller than those showing up at restaurants, basketball games and other traditional gathering spots.

A big reason is that most Houston companies have implemented hybrid strategies, combining office and remote work. As this policy has played out, the average worker is showing up at the office about 10.7 days a month, compared with 17 before the pandemic, according to an analysis from Central Houston Inc., which represents downtown landlords, businesses and residents.

Central Houston’s chief executive, Kristopher Larson, suggests that Houston’s return-to-office rate will hit a “glass ceiling” limiting the post-pandemic return.

The Lone Star State offers an early glimpse into what the return-to-office movement might look like across the U.S. this year, as Covid-19 infection rates plummet and more companies enact back-to-work plans but offices remain well below capacity.

“It’s hard to imagine, when you look at office workers who can do their jobs remotely, that those numbers are going to get above 60% to 65% nationwide,” said Brian Kropp, chief of human-resources research for advisory and research firm Gartner. “This is just the remote hybrid future. We have kind of arrived.”

That future has enormous implications for the value of commercial property, the health of business districts and city tax revenues derived from real-estate owners. Thousands of restaurants, bars, stores, barbers and other small businesses throughout the country also depend heavily on commuters and office workers.

It is still unclear if workers are in the office for only two to three days a week what exactly that would mean for office-space demand. Some real-estate owners suggest any retreat in interest will be minimal, especially if companies need more space to spread employees farther apart for health considerations. But others note that many of the companies that have signed leases during the pandemic have opted for less space because they have adopted hybrid work strategies.

Nationwide the return-to-office rate has steadily risen since the Omicron variant peaked earlier this year. The 10-city average was 41% last week, up from 28% the second week of January, according to Kastle.

During the second quarter, we believe companies will gain a better understanding of their true office needs. With a tight labor market, it isn’t pragmatic for many companies to terminate employees who do not wish to return. If companies need less office space than projected, then expect some softness in the office market.

Home Price Gains Exceed Income

For the first time in history, the typical US home appreciated more than the average worker income in 2021.

Zillow Group Inc.’s home value index, which estimates the value of the typical U.S. home, rose 19.6% in 2021 to $321,634, an increase of $52,667 from 2020. That figure was slightly higher than what the median U.S. full-time worker earned, which was about $50,000 last year before taxes, according to Census Bureau data cited by Zillow.

That marked the first time that the annual nationwide dollar growth for the typical home value exceeded the inflation-adjusted median pretax income, according to a Zillow analysis, which goes back to 2000.

Home values surged last year as low mortgage-interest rates stoked buyer demand and the number of homes on the market remained unusually low. Remote work enabled some households to move from high-cost housing markets to less expensive ones, where they were able to outbid local buyers. Investor purchases of single-family homes also increased.

The surge in home prices last year has been a boon to homeowners but has made it more difficult for first-time home buyers to enter the housing market.

“The people who are winning the housing bids, typically, are folks who have higher incomes or have the equity from their previous home that they’re able to put forward,” said Nicole Bachaud, an economist at Zillow. “That’s definitely a big challenge, I think, when we consider first-time buyers, renters, people who don’t already own a home and aren’t really benefiting from that equity.”

Collectively, U.S. homeowners with mortgages gained more than $3.2 trillion in equity in 2021 compared with a year earlier, according to housing-data provider CoreLogic.

The difference between wages and the change in home values was especially wide in California, where home prices are among the highest in the nation, according to the Zillow analysis of 38 metro areas. In San Diego, for example, the typical home gained about $160,000 in value last year, while the typical worker earned about $55,000, Zillow said.

The difference is more dramatic when you look at household net worth. For most homeowners, their home is their primary asset. Increases like we have seen significantly boost household net worth. Of course, increases like this are not sustainable, but it does support the bullish case that the American consumer has cash and a wealth effect to fuel increased consumer spending.

The BAN Report: War Worsens Inflation / Housing Market Cools Slightly / Bond Market Woes / Permanent Daylight Savings Time? / CSC Bats 1.000

War Worsens Inflation

While the trade between US and Russia as well as Ukraine is somewhat limited, Russia’s invasion of Ukraine is making inflation worse. Food and farming costs are expected to rise at higher rates, for example.

Even though only a fraction of the food eaten in the United States is imported, with much of that coming from Mexico and Canada, the ripple effects of the conflict in Ukraine will conspire to further drive up food prices and keep them high into next year, analysts say. And because Russia is a main producer of fertilizer and other agricultural chemicals, the conflict is likely to have an impact what is grown this year on American soil.

Guebert has seen the effects firsthand. His fertilizer cost was $510 a ton last year, he said. This year, it’s $1,508. He has no choice but to pay it to meet his target crop yields, he said, and while the price he is paid for his grain will rise, too, “prices will reach a point where no one can afford to purchase them.”

Wheat futures are up 29 percent since Feb. 25, with corn up 15 percent since that date, soybeans up 6 percent and other commodity grains dragged along with them.

Higher oil prices, even if you drive electric, have a way of impacting everything.

The headlines about high oil and gas prices seem far away from products like plastic wrap or lawn fertilizer. In reality, though, these everyday items need hydrocarbons to get made, and all across the supply chain, the struggle is on over who will bear the burden of higher costs.

“Oil trickles down to everything,” said Josh Lee, the financial chief for chemical distributor CJ Chemicals LLC.

Oil prices are surging again this week with major benchmarks topping $110 a barrel, and natural gas is rising too, especially in Europe and Asia where prospects for a cutoff of Russian supplies have spooked markets.

Now the war in Ukraine is adding further complications. Mr. Lee of CJ Chemicals said the Howell, Mich.-based company has half a million pounds of diammonium phosphate waiting to leave Russia. The compound is used in fertilizer and animal feed. Mr. Lee said he doesn’t currently plan to order anything more from the country.

“We’ve been scrambling,” Mr. Lee said. “We were able to find product out of Morocco.”

Jordan Katz, president of film and plastic sheet maker Grafix Plastics, said costlier oil and natural gas would likely lead to price increases for some of the materials the Maple Heights, Ohio, company buys. Polymer producers typically use natural gas to power their equipment, and use oil derivatives as their raw materials, he said.

With gas reaching $6 / gallon in some places, demand for EVs is picking up.

More than two-thirds of Americans surveyed by consumer-tracker Piplsay said in a report last week that they are nervous about rising fuel prices, and 49% said the running cost of a gasoline-powered vehicle isn’t affordable. Nearly half of those surveyed said EVs could provide a viable alternative to internal-combustion-engine cars, Piplsay found.

Shoppers considering an EV purchase said gas prices were the most important factor followed by the environment, according to Edmunds. Customers not interested in buying an EV remained concerned about high EV prices, limited charging infrastructure and the vehicles’ range capacity, Edmunds said. EVs are also in short supply, with some buyers having to wait a year or two for delivery.

The Fed is talking tough on inflation with possible 50-basis point hikes around the corner, but it will be a while before the Fed’s actions take a toll. We continue to believe that the Fed will raise rates faster than anticipated as there is no end in sight currently to high single-digit inflation.

Housing Market Cools Slightly

New home sales dropped in February for the second consecutive month.

Purchases of new single-family homes decreased 2% to a 772,000 annualized pace following a downwardly revised 788,000 in January, government data showed Wednesday. The median estimate in a Bloomberg survey of economists called for a 810,000 rate.

The drop in sales suggests buyers are shying away from the market amid high home prices and rising mortgage rates as the Federal Reserve tightens policy. A recent report showed a measure of homebuilders’ sales expectations for the next six months slumped in March to the lowest since June 2020 amid growing concerns over the combination of rising construction costs and higher interest rates.

“We recognize that interest rates are rising and inflation is a legitimate threat,” Stuart Miller, executive chairman of Lennar Corp., said on an earnings call last week. Still, the homebuilder reported better-than-expected quarterly orders and raised its forecasts on expectations that demand will continue to outweigh supply.

The average rate on the 30-year fixed rate hit 4% for the first time in 3 years.

The rate on 30-year fixed-rate mortgages averaged 4.16 percent for the week through Thursday, the first time it exceeded 4 percent since May 2019, according to Freddie Mac. That was up from 3.85 percent a week earlier and 3.09 percent a year ago.

The 30-year got as low as 2.65% in January 2021. At 2.65%, the monthly payment on a $500,000 mortgage is $2,015. At 4.16%, it jumps to $2,433 – a 21% increase in the monthly payment. Nevertheless, there is no evidence yet that the housing market is heading south. Zillow remains optimistic.

Annual home value growth is likely to continue accelerating through the spring, peaking at 22% in May, before gradually slowing through February 2023. More than 6.4 million total existing homes are expected to sell in 2022.

Monthly home value growth is also expected to continue accelerating in coming months, rising to 1.8% in March and 2% in both April and May before slowing somewhat. By the end of February 2023, the typical U.S. home is expected to be worth almost $400,000. The robust long-term outlook is driven by our expectations for tight market conditions to persist, with demand for housing exceeding the supply of available homes.

Others like Ian Shepherdson of Pantheon Macroeconomics are predicting a 25% drop in existing home sales by this summer. We think the housing market will soften somewhat, but there is still tight inventory. So, there won’t be 20 offers on a house in Austin (up 45.4% in the past year), but only ten instead. Unless there is an increase in sellers, the housing market will stay robust for a while.

Bond Market Woes

So much for the safe have of bonds. The bond market is experiencing its biggest drawdown since 1990.

The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $2.6 trillion, worse than about $2 trillion in 2008.

While there were signs the brutal selloff was easing on Wednesday, rising inflationary pressure around the world is fueling concerns about the ability of the global economy to weather any sustained period of higher financing costs. For investors, it means the allure of holding debt -- even safe government bonds -- is diminishing given how sensitive valuations are to interest rates, a measure referred to as duration.

“The safe haven attributes of Treasuries have been undermined when one adds duration risk to the equation,” said Winson Phoon, head of fixed income research at Maybank Securities Pte. Ltd.

That’s a blow to money managers accustomed to years of consistent gains, backstopped by loose monetary policy. The slump also poses a particular threat to the expanding elderly population in many major economies, given retirees are often heavily reliant on fixed-income investments.

Despite being roughly 30% bigger than the stock market, the bond market never gets the headlines. But, higher rates, increased credit costs, and inflation are not good news for bond investors today.

Permanent Daylight Savings Time?

Earlier this month, the United States Senate unanimously approved permanent Daylight Savings Time, beginning in November of next year.

"You'll see it's an eclectic collection of members of the United States Senate in favor of what we've just done here in the Senate, and that's to pass a bill to make Daylight Savings Time permanent," said Rubio in remarks on the Senate floor. "Just this past weekend, we all went through that biannual ritual of changing the clock back and forth and the disruption that comes with it. And one has to ask themselves after a while why do we keep doing it?"

"If we can get this passed, we don't have to keep doing this stupidity anymore," added Rubio.

Sen. Roy Blunt, a Missouri Republican, expressed support for the bill after being told it had passed.

"I just think the extra hour at the end of the day consistently is better than having it dark when kids go to school and dark when kids get home," he said.

Sleep experts though believe that standard time should be permanent, as it is more aligned with our internal clocks.

Our internal clocks are connected to the sun, which aligns more closely with permanent standard time, says Muhammad Adeel Rishi, a pulmonologist and sleep physician at Indiana University. When the clocks spring forward, our internal clocks don’t change but are forced to follow society’s clock rather than the sun. DST is like permanent social jet lag.

Dr. Rishi is one of the authors of a 2020 position statement from the American Academy of Sleep Medicine, a professional society, supporting making standard time—not daylight-saving time—permanent.

“Of the three choices—permanent daylight-saving time, permanent standard time or where we are now, which is switching between the two—I think permanent DST is the worst solution,” says Phyllis Zee, professor of neurology and director of the Center for Circadian and Sleep Medicine at Northwestern University Feinberg School of Medicine.

Back in the 1970s, we tried permanent daylight savings time, in a bid to reduce energy consumption.

However, America tried this before — and the country hated it. In the early 1970s, America was facing an energy crisis so the government tried an experiment. Congress passed a law to make daylight saving time permanent year round, but just for two years. The thinking was more sunlight in the evening would reduce the nation's energy consumption.

It didn't work, said David Prerau, one of the nation's foremost experts on the issue.

"It became very unpopular very quickly," he told NPR.

Americans do not like changing their clocks, but they disliked even more going to work and school in the dark for months — the price the nation had to pay for more sunlight in winter evenings.

In towns like Williston, ND, sunrise wouldn’t happen in the winter until 9:46 AM under permanent daylight savings time. My personal view is the current system works well, especially since daylight savings time is now 8 months a year.

CSC Bats 1.000

Since December of 2021, Clark Street Capital has completed a total of 6 loan sale offerings with an aggregate UPB of $167MM. Every single asset (all 168 loans) has sold at pricing that met or exceeded the seller’s expectations!

There is no better time to sell loans and there is no better loan sale advisor than Clark Street Capital!

The BAN Report: Covid Population Shifts / 2021 Was a Very Good Year / FDIC Tackles Climate Change / Communities Fight Investors / The 8MM Performing Commercial Portfolio

COVID Population Shifts

The US Census Bureau released its population estimates for 2021, which showed how many people fled larger cities during the pandemic. The New York City metro area saw some of the largest population declines.

The Big Apple’s population has been hollowed out during the COVID-19 pandemic — with Manhattan suffering the biggest population decline among all US counties, according to grim census data released Thursday.

New York County saw its population plunge by 110,958 or 6.9% between July 2020 and July 2021 — coinciding with the coronavirus pandemic.

New York City accounted for four of the top US counties with population losses.

Hudson County in neighboring New Jersey also landed in the top 10, which means the NY metropolitan region accounted for five of the top 10 counties with population losses.

The data shows that growth was heaviest in Texas and the Southwest.

Five of the top 10 largest-gaining counties in 2021, were in Texas. Collin, Fort Bend, Williamson, Denton, and Montgomery counties gained a combined 145,663 residents.
Sixty-three percent of metro areas had positive net domestic migration. Seeing the largest net domestic migration gains were Phoenix-Mesa-Chandler, AZ (66,850), Dallas-Fort Worth-Arlington, TX (54,319), and Tampa-St. Petersburg-Clearwater, FL (42,089).

The Census Bureau observed a shift away from larger cities.

“The patterns we’ve observed in domestic migration shifted in 2021,” said Dr. Christine Hartley, assistant division chief for estimates and projections in the Census Bureau’s Population Division. “Even though over time we’ve seen a higher number of counties with natural decrease and net international migration continuing to decline, in the past year, the contribution of domestic migration counteracted these trends so there were actually more counties growing than losing population.”

In many cases, there was a shift from larger, more populous counties to medium and smaller ones.

It seems as if people left larger cities with strict COVID protocols for either smaller cities, or cities in the south and west with looser COVID restrictions. Nine of the ten fastest growing counties in the past year were in less restrictive states, while nine of the ten counties with the biggest declines were in areas with stricter protocols. Time will tell if these were temporary shifts or more lasting ones. Many of the cities that experienced rapid growth saw such rapid increases in home prices that affordability advantages have disappeared.

2021 Was a Very Good Year

2021 was the most profitable year for American corporations since 1950, according to data published this week by the Commerce Department.

Profits surged 35% last year, according to data published on Wednesday by the Commerce Department, driven by strong household demand, which was underwritten by government cash transfers during the pandemic. In all four quarters of the year, the overall profit margin stayed above 13%, a level reached in just one other three-month period during the past 70 years.

That’s partly down to the sunny outlook for business investment, and household demand that shows few signs of fading even though it’s no longer being propped up by fiscal stimulus, says Robert King, director of research at the Jerome Levy Forecasting Center in Mount Kisco, N.Y. The latest Fed data suggest that Americans accumulated some $4.2 trillion in extra savings since the end of 2019.

The story for 2022 is “a shift from direct government support for profits to the private-sector profit sources,” King says. Workers stand to benefit, too, because “strong profits lead firms to hire more, and in the current instance where there is not an enormous labor supply, there are still prospects for very strong wage growth.”

While we believe the interest rate hikes will be more aggressive than anticipated, the US economy seems to be well-positioned to manage them. But, the shift from an environment with excess stimulus and low interest rates to essentially negative stimulus will create problems in the credit markets.

FDIC Tackles Climate Change

The FDIC has now joined the OCC in publishing guidance on climate-related risks.

The Federal Deposit Insurance Corp. has outlined steps large banks should take to gauge their climate-related financial risks.

The agency, which is moving quickly on the Biden administration’s priorities for financial regulation now that it’s led by Democrat Martin Gruenberg, also said more guidance is in the works.

The FDIC’s 17-page outline resembles guidance that the Office of the Comptroller of the Currency sent out in December. Both apply to banks with more than $100 billion of assets and touch on governance, strategic planning, risk management and scenario analysis.

The outline, while comprehensive, lacks specifics or examples. While it’s easy to identify the industries that could be negatively impacted by increased regulation or shifts in demand, forecasting the impact of climate change seems pretty difficult. Moreover, some of the areas that are seeing the fastest growth are most vulnerable to climate change. For those of you who have insight on what this means, please share with us.

Communities Fight Investors

Many communities are fighting the rise in corporate-owned homes for rent, passing laws at the local level to limit rentals.

Like hundreds of communities across the United States, Hamilton’s neighborhood had become the target of large companies amassing empires of suburban homes for rent. Since the Great Recession, when millions of Americans lost their homes to foreclosure, these companies have been expanding their portfolios of tens of thousands of single-family houses, a disproportionate number of them located in majority-Black neighborhoods like Potters Glen.

The rise of investor purchases has spawned complaints that the companies, flush with Wall Street money, are pricing out first-time home buyers and renting to tenants who have not been properly screened. In Potters Glen, one house owned by Invitation Homes, a $24 billion company created by a Wall Street firm, drew several reports of illegal drugs and gunfire, according to police reports and neighbors.

Using the same legal authority that allows homeowners associations to punish people who fail to cut their grass, the Potters Glen board erected a hurdle for investors: a new rule required any new home buyer to wait two years before renting it out.

As investors have targeted the American suburbs, faraway companies have begun to take over entire blocks. Last year, investors bought nearly 1 in 7 homes sold in the nation’s top metropolitan areas — the most in two decades of record-keeping, according to a Washington Post analysis of data from realty company Redfin.

In Charlotte and elsewhere, according to The Post’s analysis, investors have purchased a disproportionate number of homes in neighborhoods where a majority of residents are Black. Last year, 30 percent of home sales in majority Black neighborhoods across the nation were to investors, compared with 12 percent in other Zip codes, The Post’s analysis shows.

In Charlotte and surrounding Mecklenburg County, landlords backed by Wall Street own roughly 11,500 houses — more than 4 percent of single family homes, according to an analysis last year by the University of North Carolina at Charlotte Urban Institute. Most of the houses are in the starter home price range, “likely putting the most pressure on the lower end of the market,” said the institute’s Ely Portillo.

The economics for single-family rentals generally only work at the lower end of the price range, as the spreads between rents and values widen the higher the price. Expect these fights between corporate owners and local homeowners to accelerate throughout communities across the US.

The 8MM Performing Commercial Portfolio

Clark Street Capital’s Bank Asset Network (“BAN”) proudly presents: “The $8MM Performing Commercial Portfolio.” This exclusively offered portfolio is offered for sale by one institution (“Seller”). Highlights include:

A total outstanding balance of $7,625,000 comprised of two loans
The loans are secured by first mortgages on two retail buildings, located in Chicago, IL and Bakersfield, CA
The Chicago loan is eligible for Community Reinvestment Act ("CRA") purposes
The portfolio has a weighted average coupon of 4.453%, a weighted average LTV of 72.0% and both loans have prepayment penalties
All loans include full personal guarantees with strong guarantor financial support
The portfolio will trade for a premium and any bids under par will not be entertained

Timeline:

Sale announcement: Thursday, March 31, 2022
Due diligence materials available online: Tuesday, April 5, 2022
Indicative bid date: Tuesday, April 19, 2022
Closing date: Friday, April 29, 2022

Please click here for more information on the portfolio. You will be able to execute the confidentiality agreement electronically.

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