Moody's Talks - Inside Economics - A Tour Around Credit Land

Episode Date: December 29, 2023

John Toohig, head of wholesale trading for Raymond James makes a return appearance on Inside Economics. He last joined us in the wake of the banking crisis this past March, and made the case that the banking system while bowed would not break. He was right.  Join us to hear what John is now saying about the system, loan growth and quality, and what it all means for the Fed and economy.For more on John Toohig, click hereFollow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight. Questions or Comments, please email us at [e-mail]. We would love to hear from you.  To stay informed and follow the insights of Moody's Analytics economists, visit Economic View. Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

Welcome to Inside Economics. I'm Mark Zandi, the chief economist of Moody's Analytics, and I'm joined by my trusty co-host, Chris Duretis. Hey, Chris. Hey, Mark. I'm missing someone today. Yeah, Bruce is not feeling well. I think half the world's not feeling well. Yeah.

There are a lot of people out there not feeling so good. But you're fine, right? You're doing okay. Yeah, I went, I was down for Thanksgiving, right? So, yeah. Oh, that's right. I forgot that. Yeah.

I paid my dues, I think. Somehow I've missed it so far, but I don't know. We'll see how this goes. Yeah, been a little bit lucky. I did make, excuse me, make my way down to Florida. I did the record, record time. You want to guess how long it took me to get from the suburbs of Philly down to Vero Beach? In a quarter.

16 hours, 16 hours. Yeah, good guess. 15, record, record time. Okay. Yeah. Wow. No, no stops.

No traffic. South Carolina wasn't the problem. It typically is. It was, you know, smooth sailing and good weather. And we had four stops along the way. You'd be proud of me. So, and I listened to a bunch of podcasts. I listened to our podcast.

I listened to a couple others. I listened to some tunes. It was good. Really enjoy it. I could be, I think I've said this before. I think I could easily be a truck driver, no problem. Easily. You didn't stop for oranges?

I actually didn't see any oranges. Yeah, it's good. No pecans. No pecans. Yeah, no, just straight through. We made it all the way through. And we've got a guest, John Tuig. John, good to see you, man.

Mark, Chris, thank you for having me back. It's great to be here. Always enjoy the banter. Yeah, and I understand you haven't been able to dodge the illness. Whatever it is, it has worked its way through Memphis. Yeah, it's made its way through the whole. Lone desk. It started with the mothers, with young children.

It's work its way up through the adults. And I think one by one, we've all fallen prey to it. So I hope you have continued success in dodging whatever it is. Why plan to hold up here in Florida for a while? They were the sunshine. Yeah. Well, yeah, you sound a little under the weather. So we'll keep this short, but really appreciate you coming on.

And we were just chatting. You were on back in May, kind of in the, pretty close to the wake in the wake of the SVB, the Silicon Valley Bank crisis. And so it's good to have you back here. Maybe you can just spend a second and a minute and just give us a sense of you and what you do for a living. Sure. Yeah. Head, a whole loan trader here at Raymond James on the loan desk.

Team of about 30 of us, and we cover more of the middle markets. Think of those institutions that are kind of $75 billion in down, mostly depositories, banks, credit unions. So in that conversation we had last May when we were kind of in the throes of the crisis and you would even question if we were going to call it a crisis. And I think that was a fair statement to call what happened with SBB and signature. And at the time, first, Republic hadn't gone down. But, you know, those names and those depositories that have been had a really interesting 2023. I think a lot of us are excited to move into 2024. But the trading of raw mortgages, raw commercial real estate loans, raw automobiles, no Cusips.

just raw credits and what might live on a bank or credit union's balance sheet. Usually, prime, usually performing, although I suspect we may see some subperforming loans kind of sneak into our trading volumes going into 2024. But that's a little bit about the loan desk. Yeah. And I saw you're also president of Raymond James Mortgage Company. What's that all about? Yeah, the mortgage company is a sub of the parent and the holding company, which is, you know, part of just the corporate structure and how we report up into it. It's, you know, exciting and entitled, but in practice, it's no different than just being a sub and whole and co of the overall entity.

So the way I think about what you do is you're an intermediary between financial institutions and you intermediate loans, whole loans, anything from an auto loan to, you do see in commercial industrial loans and commercial real estate? Okay. If you ever watch The Big Short, that's a movie that's a little too real for me. I get flashbacks because we had in the time, and back in 2008, we were delivering a lot of loans into Fannie and Freddie. And, you know, that was a very interesting time to watch. But having to re-underwrite all of the loans, having to understand the credit, when you did your mortgage and you signed all of those documents, we re-review all of those documents, wedding signatures, pieces of paper.

It's not the bond. It's the underlying FICO score, appraisal, note, title, deed, mortgage assignment, and making sure that. It's all kind of properly done documented. We do something similar for autos, do something similar for commercial real estate and, you know, good old fashion credit officers out there kind of nodding their heads. Loan officers out there are kind of nodding their heads. We're very much in their world. You don't re-underwrite because the loan has been made, but you just make sure all the information is right. So that the institution that comes along and wants to buy it feels confident that they know what they're buying.

Correct. I mean, again, they think they're buying a fully double. documented fully performing loan that hasn't missed a payment. It doesn't have something in the underwriting process that was done incorrectly or something that might be missing that might make it a scratch and dent loan, which would trade obviously at a lower price than a full docker fully performing loan? This may be an offer question, but do you have like in a sense in a typical year like the volume of trading that goes on? Like how much in terms of dollars outstanding how much moves from one institution to another institution. I know it can fluctuate a lot

in a year, but in a typical year. I wish I knew the answer to this. I get it asked often. I mean, league tables, you'll see it for M&A. You'll see it for Mutu underwriting. But in Lone Land, since it's not a Q-Sip and it's not easily tracked, I mean, these are still done with contracts, like negotiated documents between one another. There are no league tables to that effect. I can speak to how our desk has performed. And you look at 2022, seeing some 15 billion traded, some 470 transactions done between us. 23, those numbers are down. We'll finish up our last transaction today.

It'll probably be closer to 5 billion transacted. So a pretty considerable drop in our transactions, largely driven by interest rates. Fully performing loans, picking on 30-year fixed rates, as an example, we went from 3.5% coupons in 22 to 7.5% coupons in 23. That means that loan is worth 75 cents on the dollar, 80 cents on the dollar. That's just interest rate risk. It has nothing to do with the credit or the performance alone, but that doesn't necessarily mean a selling institution wants to take a 25 point cut in price

purely because the coupon is dropped. So they elect to hold on to that loan and carry the interest rate risk on their balance sheet. which was a talking point coming right out of SVB and all of the issues with balance sheet management. So trading volumes definitely down. And depending upon the product, it was down heavily for mortgage. It was up a lot for autos. It was up a lot for Helox. Flax.

Flet. Hone equity lines. Yeah. Homeg had a wonderful, wonderful year for HLox this year. So did auto loan trading. Commercial was largely flat down slightly. but we didn't really see a lot of the troubled loans that we thought we might see in 23. That seems to have been pushed off and into 2024.

So the real weakness in the volumes was in the residential mortgage. Hard, hard, hard. Our worst year in a decade trading mortgages, just a really down year for mortgage. Right. And as you say, it goes to kind of the lock-in. The existing homeowners with mortgages, the average coupon, or the average, the average mortgage rates like 3.5%. So here we are sitting at 6.5 to 7. Doesn't make any economic sense to move. Therefore, there's no, there's no loans to trade. And 6.5 is a gift. I mean,

if you remember, just two months ago, we were talking about 8% mortgages, right? So I'll take your 6.5 all day long. The 8% was just the, you know, the gut punch. Yeah. So there were a lot of folks that had FOMO and thought they were going to get their 3 and a quarter of 3.5 back. We just, we never made it all the way back down to that level 6, 6. 6.6. and a half sounds a whole lot better than eight. Well, what I want to do is go almost product by product, loan product by loan product and get a sense of what's going on in your view of where we are and where we're headed.

And we'll play the statistics game a long way. You're going to play, right? Absolutely. We're missing Marissa. So that makes this more difficult because she always leads the way. But we'll make do. But before we do that, let's stay big picture. And when we did chat last time in May, of course, there was still a lot of concern, reasonable amount of concern about a fallout from the failure of Silicon Valley Bank, Signature Bank, First Republic, I think it might have failed by then.

But it was starting to teeter. It was starting to teeter, right. So what do you think? How do you think the system, the banking system navigated through all that? And are you seeing any fallout out there as a result of when we know what happened? But we haven't seen that many other bank failures, certainly not anything anywhere near SME or signature. There's been a couple of tiny ones, yeah.

And teeny ones taken out for other reasons outside of the systematic banking issue. But when we, when we chatted back in May, we were all a little gun shy to make the statement that we were free and clear of this. But we had all kind of nodded our heads. saying that the systems seemed sound. And I think that's proven to be true. I think that that forecast has proven to be right and that those specific instances of those four names that did fail were driven more by unique systems, the unique situations in that institution, SVB, more of a venture capital shop. We talked about it last time somebody yelled fire in the

theater and deposits right out the door. 42 billion dollars later by buy. First Republic is a real tragedy. A great customer who is a wonderful institution, probably the best mortgage, prime credit mortgage originator in the country for jumbo loans. I just couldn't raise capital fast enough and was similar to SVB and a bit of a run on the bank despite the industry's best efforts to recapitalize it. We only just have really seen the end of signature banks, FDISC, loan sale, that was an interesting one to kind of watch is it took them so long to break those four different portfolios into pieces and liquidate those troubled commercial loans

largely surrounding the New York City area. So we're still kind of- Were you part of that, John? Did not bid it, but saw a number of the bids, talked to a number of the bidders. It was interesting to kind of watch and get some of the feedback as to maybe some of the disorganization of that particular process. and then, you know, we had the one crypto bank, and crypto was crypto. I mean, that was Silvergate, right?

Silvergate. Yeah, that again was a unique situation. But by large, we didn't see the deposit outflows. There was that minute when we thought everybody was going to be making a run on the bank. Didn't really happen. Deposits have been weaker, but it hasn't been a flood. We haven't seen lines for people looking for their money. It's largely been as expected.

order. Yeah. Well, of course, I'm curious if you concur, but a big reason why was the response, the government response, right? The FDIC said, hey, to the depositors, whether you're insured or uninsured, we got your back. And that went a long way. And then, of course, the Federal Reserve stepped up and established the bank term funding program to allow banks to borrow against their security holdings at par. Of course, the securities are worth a lot less in the higher rate environment, but they borrow at par to gain the liquidity that they needed. One thing I have noticed, I think you pointed this, may point this out to me in our email exchange prior to this, that the bank term funding program seems to be creeping up. It was kind of stuck around $100 billion for a long

time. And I did go back and look. Last week, it was $131 billion. Now, that's not, I don't know that that's significant in the grand scheme of things, but it's moving up. Do you read anything into that, or is that just... It was part of our kind of pre-call and as we were talking about, hey, what are we going to chat about on this call? I did go back and look, it has ticked up.

It is an interesting statistic. It is cheap funding at the moment compared to maybe other sources. I did also see an announcement kind of hunting for this. Are they going to renew it again next year? And there was talk of them not renewing the program next year. So I know that's also kind of on a lot of people's lips. So I think that was a,

a wildly successful new program. I think a lot of folks were a little nervous at the onset that it could be TARP 2.0 if you're a student of 2008. TARP kind of had a bit of a negative slant. If you had to take TARP, you weren't a going concern, and that could be the kiss of death. That hasn't turned out to be the case this time around. And this program, you know, set to, as you said, give them the relief of the haircut they might experience if they go to the discount window or federal home loan bank. It has been interesting to watch some of the critiques. The federal home loan bank has taken this year on a lender of last reward.

Oh, yeah, absolutely. Oh, okay. You know, the idea that some of these troubled banks tapped them and tapped them pretty hard as they were starting to crash and the view that the federal home loan bank could be misconstrued as a lender of last resort. I think that's a, I think that's an interesting topic. Yeah. Well, is that,

which I know is near to that. I love, I want it because I actually read a couple of papers on this. Yeah, I know you and Lori from the Orbert Institute are, are big on this topic. Yeah, let's come back to that, though,

because I want to complete kind of the conversation around the fallout from SBB and signature in First Republic. Chris, have you noticed any, what would you say the fallout has been? I mean, And we've seen it in underwriting, I guess, right? Because the senior loan officer survey from the Fed says that banks have tightened their underwriting,

maybe a little bit in loan growth. I mean, it feels like loan growth has slowed since March. But I don't know. Have you noticed anything, Chris? No, I would have pointed out the underwriting. Although even there, you're right. I mean, banks were already tightening their underwriting before the crisis, right? And pretty aggressively at the end of 2022.

too. So I don't know if it's pretty incremental, I would say, in terms of the additional fallout. And Mark in that last chat, we sorry, Chris, I didn't mean to step on you. We did talk about kind of the difference between liquidity and credit. And at the beginning of the year, I hadn't felt the tightening of underwriting, Chris, that you're alluding to. I did feel the tightening of liquidity folks running out of cash to kind of make more loans. I have since felt the tightening in credit and the tightening and underwriting and the boosting of provisions to kind of prepare for whatever rainy day may or may not be coming. So that was definitely a second half theme for me of 23. Yeah, the other thing that I've been surprised generally I've been surprised how well we've navigated through the fallout from the from the crisis that.

really has been very much on the margin at least so far. And the other evidence of that is loan quality. Now, I know it's early days and it takes time for problems to materialize and show up in the data. But I was just looking at, and I might give away my statistic, darn, I shouldn't have brought this up. But I was looking at delinquency rates on all commercial bank loans and leases. And it's, you know, we have data through the third quarter of 2023. it's up a little bit, but my gosh, it's really low by historical standards. I think consumer loans is the only kind of product line where we've seen some normalization

back to pre-pendemic. Everywhere else, CNI, commercial industrial, commercial real estate, multifamily, residential mortgage, we still see very low delinquency, nothing of any consequence in terms of credit condition. Do you sense that too in your, John? Hi, chats. I mean, it's very industry specific. So, you know, multifamily versus office versus retail versus industrial versus whatnot.

What we're seeing more of is particularly in office maturity defaults. So maturity default meaning that it's time for that coupon to adjust up or it's time for that loan to be renewed. And the loan can't afford the payment at the adjust up to whatever that new level is. it's able to continue to make the existing payment that it's making. It's not able to refinance due to the absence of valuations, due to the absence of transactions that are kind of happening out there for folks to kind of triangulate what is this building worth still. But it's still able to make its existing cash flows.

And to me, that's good news, is that, okay, I get at whatever particular cap rate it was originated in in 2017 or 2018. it's able to kind of limp along. The question is, if we're kind of prolonged here for a while, when does that turn into, I can't make that payment anymore? That's, you know, some of the themes that we're starting to kind of see and watch and take a peek at. Yeah, we suggest we are going to see some credit. Oh, sorry, go ahead.

Go ahead, Chris. I was going to ask, so is this extended pretend? Or we're just stay and pray, extend and pretend, survive until 25, you know, pick your, pick your cute catchphrase. but falling rates, which we've all kind of enjoyed here in the last month since the last Fed meeting, last couple weeks, certainly helps that particular problem. Right, right. Yeah, so one theory I've heard as to why the banking crisis hasn't, and maybe I heard it on this podcast. I can't remember.

I mean, we were talking about this last week or the week before with one of the other guests. one of the reasons why the fallout may have been less significant than feared was that the non-bank part of the financial system didn't skip a beat, you know, private credit, leverage lending, you know, other sources of capital, non-bank sources of capital came in and continue to provide the credit needed to, you know, keep everything moving forward, giving consumers and business is what they need to spend and invest and keep the economy moving forward. Does that resonate at all? Does that, John, does that resonate with you?

It was something I wrote about not too long ago. We could go down a deep rabbit hole on this, Mark. But I think on the last time we recorded with SVB, I think all of that private credit market was kind of licking their lips. And they were going, ooh, it's finally here, the banking crisis that I've raised all this money for. and the yield that I've been so desperate to have for, you know, since the beginning of COVID, now is my moment. And then what we just described didn't come to pass.

And the banking system was largely sound. And we've made it. So I think probably in that moment, just post-SVB spreads for deals who are at their widest, we've likely seen. And now we sit in a very interesting position where it does appear that a soft landing could be in the cards. It does appear that calamity is going to pass us by. It does appear that we've gotten to the top of the rate cycle and directionally at least it's going to be down and not up. And we might be able to kind of continue to limp through that. So if there was a seller of loans and

they did have an office complex that they knew was a loser and they knew was never going to get back to what it needed to be and they owned it. They'd marked it down to 80 cents on the dollar. who would need to change their price expectations? Right now there's a gap between the bid and the ass, between that seller and that buyer. And let's just say the seller is at 80 and the buyer is at 70. Is it the buyer that has to come up to the seller in pricing to kind of level set their expectations? Or is it the buyer that needs to come down to the seller in reducing their price to make the transaction work? Post SVB, I would have told you the seller has to come down to the buyer.

today I would tell you I believe the buyer has to come up to the seller in price or yield to make a transaction work and that's a little bit more of that rosy forecast that's a little bit of a lot of money on the sidelines ready to be put to work but just can't quite find the deal that's perfect for them and so they're having to kind of grow up to the seller's wishes at the moment a lot of strategic transactions happening not a lot of forced sellers in the market right That's very encouraging then. That sounds very encouraging, right? Yeah, okay.

Okay, so it sounds like the worst of the kind of the downdraft and prices is at hand if it's not already there. I suppose these transactions will consummate at a lower price, so maybe it starts to show up, but kind of the shadow price declines. I mean, what's kind of theoretical, if you had to actually transact, those price declines are over. You'll see some actual price declines when the deals consummate, but the worst of the declines are bad hand. Assuming this persists, assuming the unemployment rate doesn't blow out, which we had a phenomenal jobs number the other day. I believe your word was giddy based on your last. That was my word. Definitely doing a victory lap on your last podcast for that one.

That's for sure, a well-deserved victory lap on that particular one. But I mean, assuming the economy. economy holes. I think that's a fair statement. Yeah, good. Chris, just anything else you want to add there? Any pushback? I mean, that feels pretty good, right? I mean, it does feel good. Yeah. Which makes me nervous. Okay. I don't know. I worry that some of the price discovery is yet out there, right? And maybe that's very specific sector like office. I still think there's more script to be written when it comes to office prices, for example. Transaction volumes are extremely low. I don't know. Let's see.

Let's see how it goes. If rates do come in, right? Certainly we get a second wind here. That could help things, but I'd be a little cautious in some of the sectors, certainly. Right. Okay. Okay. So big picture, bottom line, we navigated through the fallout of SVB.

reasonably gracefully. Here we are today. The banking system, the financial system, you know, seems like it's a pretty good spot. It's certainly enough to keep credit flowing to the degree necessary to keep the economy moving forward. Everyone agree with that statement? John, you agree with that? Yeah, Chris. Okay. Yeah. All right. Good. Before we play the game, though, let's go back to the federal home loan bank. So why are you so focused on the federal Home Loan Bank. What's the nexus between the Federal Loan Bank and your world? Yeah.

I mean, think of mortgages. They'll pledge that mortgage is collateral at the Federal Home Loom Bank. So it's a, I mean, to me, when this first came out, I wasn't a fan of picking on the federal home loan bank. I think they have a very vital purpose that they serve in the plumbing, that is the pledging of assets and the, you know, the receiving of the cost of funds. And if more did that, they'd have kind of more of a natural. hedge on their margins. Not everyone does this, but those that do kind of have a real good feel

what their cost of funds could be and what margins they can earn on that particular asset. But I took some exception at the onset to people saying that this is a lender of last resort and certainly not the intent of the federal Homeland Bank, certainly back in its creation. And maybe it's perverted form today. I mean, everybody in those last few gasps of air for institutions like SVB and First Republic. They were searching and hunting for any source of liquidity they could certainly make. We should maybe have that particular conversation. But in the day-to-day workings, I mean, the federal home loan bank serves a pretty vital process in the banking system, my humble opinion.

Yeah, yeah, no, no, I'm totally with you. I think we're kind of in the minority, John. It feels like everyone's hanging up on the, just so, just to make sure everyone out there understands, the federal loan banks are GSEs, just like Fannie Mae and Freddie Mac, government-sponsored enterprises. So they have, in the case of the federal loan banks, an implicit backstop from the federal government. When I say implicit, it's not written somewhere, but everyone believes it to be true. And I think they actually do have a line of credit into the Treasury. So they're backstopped.

Therefore, they can borrow at a lower rate, close to the treasury rate, and take that and provide those funds to banks that need that liquidity, need those funds in times of stress, particularly in times of stress. And the good times, nobody borrows from them. It's not advantageous. Deposits are generally a much better source of funding. But in times when the system's under stress, depositors are leaving. the banks need the funds, they turn to the federal home loan bank. And it's very high quality lending

in the sense that the federal home loan banks take a lot of collateral, mostly mortgage loans, but can be small business loans, commercial real estate loans, and use that as a basis for making those loans to those institutions. They are not a regulator. They do not, they're not safety and soundness. That's, that's Federal Reserve and FDIC. That's not OCC. That's not the, uh, they're part of what they do. They rely on the safety and soundness regulators to do their job. And the safety and soundness regulator says, hey, SVB is okay to let is fine. Then they, they, under the terms agreed upon, they will lend and provide funding to those institutions. So my sense is that, and I totally agree with you, that when the federal homeland banks were put on the planet back in the

30s, they had two missions. One was to help support the U.S. mortgage market and housing market. They take loans as collateral to provide funds to the banks, residential mortgage loans. But the other, which has become much more critical, is providing liquidity to a stressed banking system. And they can enter in and provide that liquidity much faster than the Federal Reserve Board, which ultimately is the lender of last resort through the discount window or other means. I view them as the lender, the first responder. They're the first responder of liquidity when banks get into trouble. And so I find it almost I get very nervous when people suggest big changes to the system.

Because I have in my mind this image that, you know, the financial system is this very complex, hard to understand, set of plumbing, particularly when it comes to liquidity, and no one really understands what happens if they take, you know, that pipe over here and move it over to this part of the system, whether the, whether the water is going to flow or not, or whether it's all going to, you know, spill out and, you know, flood the economy. So I think it's really, you know, I'm sure there's things that can be done to make the system work better and more effectively. And I think some of the ideas that before pretty good, but you had to be pretty careful in playing around with that plumbing.

Completely agree. Certainly wouldn't recommend any kind of a wholesale change to it and have heard from many of our clients as well, saying, you know, whoever... Oh, yeah, I can imagine. However loudly we can be about this, let's stop bad changes from coming. Yeah.

Chris, would you push back on any of that? Because I'm just curious. I haven't really talked to you about this. Yeah, I probably don't. You would? Oh, yeah, okay. I wouldn't push back on the fact that they are integral to the system today. Okay.

I think that's an accident of history. I don't think if we were to design the system, you know, we would say, oh, we need a federal homeland bank system to make sure that all the plumbing is flowing, as you put it. I think the Fed is certainly capable or would be capable of accommodating that role if we were designed to design the system today. So I wouldn't like you. I wouldn't want that, though. Would you want that?

I mean, would you want the safety and soundness regulator to also be the guy providing liquidity up front? I'm not so sure. Really? The Fed does provide the discount window, right? So they're in a sense competing, right? But that's not, no one turns to the discount window, you know, at least not initially. I mean, even now, I don't know. I didn't look, but what's the discount window's outstanding?

It's barely nothing, right? I mean, so. Because you have other options. I mean, that's always been the case, though, this stigma and the difficulty going to the discount window, you know, very difficult. And it's also short, isn't it short-term money? I mean, as opposed to federal loan banks, they provide short, but they also provide long-term money as well, liquidity. I suppose you could change it so the Fed could do it. But, you know, I'm not sure what problem we're trying to solve here.

Well, I guess that's, that's, I guess, what are we trying to solve? If the issue is we're looking, they are a provider of that short-term liquidity in times of stress, which I thought was the one of the purposes you mentioned there, then I think the Fed is capable, right? Now, in the present state, are they as efficient as quick? Perhaps not, but I don't see any reason why we couldn't adjust that part of the system to be, the Fed couldn't adjust its mechanism or organization be just as effective. Here's just one sort of theory. And I'm not so sure you're right about it's an accidental. You know, it was an accident when it was put. If I go, you go back and look at when the FHOBs were chartered or chartered, it felt like it was, it was about liquidity.

The framers, yeah, I thought, I think so. But for home loan banks, right, for mortgages, right? It was all about, no, but the mortgage. I think that was just a vehicle vessel, because at that point in time, that's all. all the banks did. They really didn't do much anything else. And that was the only on their balance sheets. And they said, okay, let's do that. And by the way, the housing market needs the help anyway. So, you know, you may be right about that, but I'd say I'm not so sure you're right about that. I think, you know, I'd be very interested in a deeper dive into, you know, kind of the merits of that.

But here's the other thing. It's like our next podcast discussion. Yeah. Here's the other thing. I'm just going to throw this out there on from the Urban Institute and let's have a big old chat. Is she, she, does she a critic of a thing? No, I believe she's a. No, I I think she's a big proponent, too. Find a couple of critics. Oh, then she can come on. No, only kidding. That's a good one.

No, but here's the other thing. You know, the federal home loan banks until recently were quiet. No one really, you know, kind of followed them, knew anything much about them, which you could say, well, that doesn't sound right. We want transparency. But when you get Uber transparency, like with the discount window, it doesn't work because, like the discount window, if you go to the window, If you go to the window, your name is going to be everywhere and there's a stigma attached to it. If you go to federal Illinois Bank, that's just part of the business. Normal business, right?

Normal business. Yeah. I think the critique of were some of those last day practices and some of the actions by certain people in, you know, certain posts and those final gas for air, there were some question marks around. should they have still been advancing when they knew this was an institution that may or may not be a going concern? And it brings in the whole lender of last resort. But sure, take a review, obviously do a post-mortem. We had a couple of very large bank failures this year. The federal home loan bank was obviously involved in parts of that.

Could we tweak the system, not do away? Every system can obviously do better, you know, and what improvements could we make to it? Yeah, totally. One suggestion is that for membership into the federal home loan bank system, I believe you have to have 10% of your assets in residential mortgages or qualifying securities. You could, and that's just for entry into the membership. Once you're there, that requirement goes away. You don't need that. So Silvergate, I don't know what their balance sheet look like when they failed, but they may have had no mortgages on the balance sheet. But the proposal would be say you have to maintain it at least 10% forever. And that makes sense to me. I mean, so I'm not saying this system can't be improved. I'm just saying we've got to be really careful about those reforms to make sure that, you know,

we don't pull a pipe from someplace that it really matters without making sure that the water is going to flow, you know, normally. Anyway. That I certainly agree with. But, yeah. But I disagree that we shouldn't examine them. I mean, these are private corporations getting taxpayer subsidies, right? Yeah. We definitely should.

Yeah. Well, the other thing that makes people upset, and I get it. Like one of the federal homeowner banks announced a dividend 9.5%. Okay. Really? Come on now. Please. Now, that was atypical.

I mean, if you look over history, you know, because it goes up and down, depending on circumstance, it's four or five percent ish, which okay, but nine and a half, I don't know. So, you know, maybe the other, one of the other proposals is instead of, right now, 10% of their net income has to go to affordable housing, feels like that should be double that, at least, you know, they don't pay taxes. So it should be, you know, close to the effect of corporate tax rate. I totally on board with that, you know, kind of idea. But anyway, let's play the game, the statistics game. And the game is we each put forward a statistic. The rest of the group tries to figure that out through clues, deductive reasoning questions. And the best stat is one that's not so

hard, one that's not so easy. We get it immediately. One that's not so hard. We never get it. And if it's apropos to the topic at hand or it was recent, all the better. So Chris, I, Marissa's not here. So I think I'm going to turn to you. You first. All right. So it's a pretty light week for economic statistics. Let's just put it out there. A light week for everything. Exactly. Exactly. But two numbers. Here we go. 3.81 percent and 3.86%. Oh, geez. 1.8 1%. A percentage? It is a percentage. Is it an interest rate? It is a rate, yes. 3.81 and 3.86. These are interest rates. Yes.

Oh, it's the 10-year treasury yield. Yes. 3.81 is the 10-year treasury yield as of yesterday. It's 3.86 is today? No. Oh, it was a year ago. It was what it was a year ago. Oh, is it really?

Oh, that's interesting. Yeah. So nothing happened this year, right? So you could have just gone to sleep and woken up the next day and everything is the same, right? Is that the idea? Yeah. Pretty tame year. Yeah.

Yeah, just to emphasize the volatility, right? Yeah. That's really good. Yeah, what do you make of that? I mean, full circle. Anything? It's an interesting ride, right? That's an interesting ride, yeah.

Yeah, I mean, if you go back when the tenure was, it got as high as five, I believe, right? It did. That's high as five percent. There was so much hand-wringing about lots of stuff, including deficits, debt, what that meant, you know, all the bond issuance. What happened to all that? I mean, does this mean that deficit debt don't matter or we're just premature to think that it is? Who's in office, Mark? They matter when one party's in office and they don't matter when the other parties in office. Both parties do the same when it comes to that. Politicians are

politicians. So, John, do you know, go ahead. I think we're back to debating the equilibrium. right, where we were previously. Is it three and a half? Is it four? Remember this whole debate? Is it demographics that are going to keep it down? Is it technology?

Is it the debt? Right. So I think we're back to this. Yeah. Trying to discern what the equilibrium 10 year is. Well, is it a global rate? Is it a U.S.

rate? Yeah, I think the lesson is, given the volatility, no matter what's going on, don't change your forecast. It's going to come back, you know,

sooner than you think, right? Because 4%, Roughly where we've been, four percent. At 3.385 as I stare at it right now. John, do you, if I asked you, what do you think the tenure trade yield is going to be a year from now? What would you say? A year from now.

Yeah, you're back on a year from now. We're having this conversation. I think it's down. It'll be down. Okay. It'll be down. I know. I might disagree with the fact that we're going to have.

I think the market's got six to seven cuts. Yeah. I think we're a little ahead of ourselves on that. I'm more in the three camp, and I don't think it probably happens until June. I think March is a little too aggressive. So I do think rates are down just directionally over the course of the year. Of course, the 10-year year would, at least in theory, already incorporated. Assuming we get steepness, right, as soon you're, you know.

Okay. Okay. Very good. Okay. That was pretty tricky. On your part there, Chris. That was about Chris. Well done.

Yeah. I'm pretty pretty pretty pretty great. John, do you want to go next? I do. I've got one for you. 4.83%. So that's an interest rate. It is.

Okay. 4.83%. Is it a rate on a certain product line? It's a newly created product line. Ooh. In 2023. Is it the bank term funding program? Oh, it is.

Okay. Or the bank term funding program at 4.83%. Compared to the discount window at 5.5. Ah. Interesting. So we're back to our pre-call chatter on why BTFP issuance may be a little higher. It does seem to be a cheaper source at the moment. Well, it's a hard, a little bit difficult to gauge federal home loan bank advances.

Those are the loans that the federal loan banks make similar to the bank term funding program or the discount window. But it feels like that they've come in, right? The banks are using. Yeah, Chicago posts there. Do they? I'm quickly going to it. Forgive me here. 423 for 10 year money, 428.

for two-year money. So, yeah, it definitely has come in quite a bit. Right. Interesting. Interesting. Oh, that's very cool. And you mentioned that there's a debate about whether that will be renewed. Is that, is that come around back in March?

I haven't, yeah, I haven't studied that. I saw the headline literally yesterday, as you and I were kind of bantering over email. So I'm super curious to see if they do renew it, if there's a need. for or the desire to renew it. I do think we can say it's been a success. Yeah. I can't, it feels, I'm having a hard time thinking as long as rates are as high as they are that they don't renew it, right?

I mean, just to provide a safety valve, I would think. I would hope that they would telegraph that many, many months out in advance to allow folks to look around for- To adjust. Yeah, whatever liquidity. Turn to the federal home loan banks, yeah. right right yes exactly uh okay uh i got one for you 4800 s and p ah very good yes indeed it is the s and p 500 yeah that was good you were very quick we hit that

we were i know we were flirting with it we're at 4792 as we speak right oh okay because i think we got we were almost at 4800 uh yeah and what's the record high like 47.99. We're running real close to it. Yeah. I can you pull that up on Bloomberg as we speak. Yeah. So we're very close to the all-time record high in the S&P 500, which the all-time record

high as of this point in time is still, I think the last trading day, 2021 or the first trading day of 2022. Well, you've got a great memory, Mark. It was December 29, 2021, 4793. decimal zero six. Okay. Yeah. And we're at 4790.

Oh, so we're three points. Three points. I think we're going to get it. I think we're going to get it. Here's the interesting thing, though. Do you know what the 10-year treasury yield was back? And John now knows, obviously he knows he could pull these data up instantly. But what the 10-year treasury yield was when the stock market was at its record high?

Well, let's give me two seconds. Okay. I thought so. I can. I think it was like one and a half percent, something like that. On that day, what did I tell you was the 21st? I think you said 29th, didn't you? 29th.

The 10 year was, oh gosh, 150. Yeah, right. It's pretty amazing. And I think. One and a half. Yeah, so we're just under four. It was one and a half. Are we going back to one and a half, Mark, or are we going to stay a little closer to?

I think four, but I guess my point is valuations certainly have gone up, right? Because, you know, well, the other thing I'd say is corporate earnings have been flat. So valuations, I think this is a way to phrase it. Valuations are still about the same as they were two years ago, but interest rates are measurably higher than they were two years ago, which suggests that the market is at least an aggregate overvalued, more, more overvalued than it was two years ago. Does that, does that sound right? Did I say that right? So, you know, stock prices are the same, corporate earnings are the same. So the PE multiple is the same, but interest rates are up a lot.

So that suggests that the market feels more vulnerable than it did two years ago. But somehow it doesn't feel that way to me, right? It doesn't feel that way. I'm not sure. Well, you've been a glass, half full kind of guy for most of the year, though. Oh, that's probably what it is. You've not seen the calamity that everybody else has. Again, I have to give you kudos.

You've had a hell of a 23. Most of your forecasts have been more on than off. Chris, are you listening to this, my friend? I think you need to take a bit of victory. Absolutely. Absolutely. It's well deserved. No, I appreciate that, John. You're very kind. I think it's a little premature. I think the day the Fed cuts interest rates, then I think it's time to say, full-throated, I told you so. When is that, Mark? When is that first cut? I think it's probably Mayish. That would be my sense of it. I mean, I think they wait, they, the Fed waits until it's clear inflation's going back to target. It doesn't have to be a, target, but is clearly headed back to target, no questions that it is. And that probably will take a few months into 2024 before that happens. But I don't know. I wouldn't debate anyone if they

said March or they said June. I wouldn't debate too hard. Would you say, John, did you say? The market has a 104% possibility of a cut by then. And it's somewhere between 85% for the March meeting, 104% for the May meeting. And then another cut come the, the, the June 12th meeting. I'm probably more in that June 12th camp than I am in that May or March. Yeah. I don't think I don't agree. I think to your credit, the economy has surprised everybody. It's held pretty strong. I think Powell has been very transparent in his wishes to kind of work through this and be very data driven and data dependent. It's constantly surprised me over the course of the year how people can be confused by that message and it kind of gets higher for longer. I mean, I think if we have six or seven cuts, that's a, that's a very recessionary signal. He's doing that because he feels like he needs to stimulate the economy. I think two or three cuts over the course of the year is just kind of taking the little bit of the pressure

off and kind of easing us into what we, I think we all hope for is some sort of a soft landing. Yeah. You think the election has, plays any role in front loading some of the cuts here? Are they, that's certainly a narrative that, uh, that, uh, politically, uh, influenced on election years. Um, I, you know, by trying not to be politically influenced, they, by cutting early. That's an interesting. Yeah. Yeah, getting out of the way in October and November.

I like that. I could see that. Okay. Okay. It's a nice way to frame it. I, I really don't want to get in the middle of this political battle. So I just get this out done early. Yeah.

Yeah. Interesting. By the way, Mark, you and Ed Mills from the Raymond James team had a wonderful, healthy debate back in October of 2020. If that's something we can resuscitate for 2024 as we get closer to the election, I think, Ed, and Ray J. We were debating me. We were talking about to have that in conversation, discussion. No, well, forecasts for the election. Yeah, yeah, yeah, yeah.

What we thought the potential outcomes might be. Have you dusted that model off yet? Oh, it's interesting, you ask. Yeah, we've dusted it off. We're working on it right now. And I think we just settled on a day. in January for the webinar. So yeah, I'd like to team up with that again, and let's do it.

Let's plan on that for sure. I think that would be a good one. So let's turn back and again, I don't want to keep you too long because I know you're under the weather. But I do want to talk a little bit about the product lines and how things are going, get a little bit more granular. And maybe the way to do this. And maybe I did this last time I can't remember. but maybe we pick the product line you feel most concerned about in terms of what's going on with credit growth and credit quality.

And then we'll come back and talk about the product line you feel best about, most comfortable with. Does that sound like a good game plan? Sounds like a plan. Okay. So let's go with what's worrying you the most, you know, right now. When you look across the kind of the panoply of different product lines that you're trading in, which, which.

product line is kind of at the top of your list of concerns. And this one's a bit of a layup. I mean, commercial real estate's been in the box, right? I agree with Chris's earlier comments. It's really hard to triangulate a valuation right now. We don't even use the word loan to value anymore. It remains all about cash flow, cash flow, cash flow. So I think as you have seen those handful of strategic sellers for densely urban office

complexes that vacancies are skyrocketing and cash flows are plummeting. Those are the ones that are kind of in the box. And I think we now kind of have a playbook for that. If you've followed bank earnings over the last quarter, third quarter results, you'll see the narrative. You'll see that the commercial real estate book is highlighted. It's shown as what percentage of the commercial real estate book is of the total loan book. It will then drill into the commercial real estate portfolio and say what percentage of that commercial estate portfolio is office compared to the other product types. And then the last slide will be our provisions against not only the office portion of the book, but the totality of the commercial book is four times that of our assets. And we're good.

We're fine. And we're not growing it. And if anything, we're looking to shrink it. And when we do look to shrink it, we circle it with a capital raise, we circle it with a sale lease back, with a sale of an insurance portion of the institution, with some sort of recapitalization transaction to say, boom, I'm out of my problem assets, I'm going into 24, I've solved my problems, I've helped my nimb compression with these legacy terrible assets. And I'm clean and I'm going forward. So I think those conversations that are all a result, of SVB and problems from earlier in the year, we now have a very fully fleshed out plan on how you deal with those particular assets. And we'll start to see a lot more price discovery in 24.

So I find that so that's the worst of it. That feels pretty encouraging, right? Because what you're saying is we're going to have problems, but we know we're going to have problems and we've got a playbook for dealing with the problems. That's what you just said. Yeah, I mean, SVB, what we learned on that was you don't sell the asset, announce the capital raise, and then do this. capital raise. You know, oops, you never get to the, you know, the completion of the process. Now it's all, boom, one big thing together, buyer, seller identified solution brought to the table, investment banking to the rescue transaction accomplished, the restructuring trade, as we've called it, for the really caught fire in Q4 and Q3. Right. And this whole Doom loop, CRE,

doom loop that people worry about that, you know, we get into this kind of self-reinforcing vicious cycle where owners have to sell properties at discounts. It causes prices to fall further. It causes more delinquency default, more sales. And you can kind of get into this slide down in prices and increase in delinquency and default, which could undermine the banking system. That just feels, what is that, what kind of probability you do attach to that? that kind of very dark scenario.

It's low. And again, the economy has surprised us. You know, we, as so long as that unemployment rate holds, which it's been doggedly resilient throughout all of this, I don't see the doom loop coming to be. There will be losses still.

There will be strategic sellers still. But it won't be a 2008 type. What happened to residential mortgages kind of collapse. It'll be strategic selling, organized selling, but it won't be the doom loop that we're looking at. I thought you might, when I asked you, what worries you the most, what loan product worries you the most, you're going to say something around consumer lending, you know, auto or maybe bank card, are those matters of concern?

They are. And we've been talking about the normalization of credit for a while. And we do and are seeing problems with subprime auto. we are in seeing problems with subprime card with certain kind of fintech or personal lending, unsecured lending, I should say. On the bottom end of credit, on the lower end of younger borrowers, I should say, those that didn't quite have the savings. I am curious your thoughts.

I think all of the reserves that we built during COVID probably expire in terms. 24. We've been trying to guess when those dollars ultimately get spent. Oh, you mean the excess saving built up? Excess savings. Yeah, right. So I think we're kind of through our cushions and our buffers. So I do think the bottom end of credit for consumer lending will get worse in 24. I think that's a fair statement. Chris, anything to add there? I'd agree that it gets worse. But I think I think there is quite a bit of buffer still for the top half of the households, right? So bottom half probably are through their pandemic savings, but they have some income build now, so that's helpful.

But there's still quite a bit out there if you think about the upper half of the distribution. So that might provide some cushion going forward here. But I agree that delinquency rates certainly likely to continue upward here until things settle out, but I don't see a calamity on the horizon. What worries me about cards, Mark, if you look back at 2008, card balances were dropping if we were, if we are in a recession, which I'm not saying we are, but if we were in, you know, the doom loop, if you will, card balance is still going up, utilization ratios still going up in cards.

So if we're adding on more debt at the same time where savings are starting to struggle, that's a bad combination. And that worries me now. If we do get that drop in rates, that should help. It should take a little bit of that pressure off because credit card coupons are quite high right now. And tied to what the Fed's doing. As a Fed's doing, right, I mean, once the Fed cuts starts to come in, again, we talked about it in May. Powell can always come to the rescue with rate cuts.

He can fix a lot of the consumer's problems by just dropping rates down. He can fix a lot of banking's problems by dropping rates down. His job has been to kill inflation first. Yeah, one thing we've noticed, we get the credit file data from Equifax, and it's comprehensive and timely. I think we have data through November. We look at the, on bank cards, and we've been looking at the delinquency rate for loans originated at the start of this year.

So 11 months into the year, what is the delinquency rate? And compare that to the delinquency rate on loans originating in the early 2022, 11 months. 11 months in, 2021, 11 months in, same point in their kind of life cycle. Vintage analysis, right? Yeah, vintage analysis. And thank you for that. It made a lot easier to get it. It's vintage analysis.

Here for you. Yeah. Thank you. Thank you. I said it with about 10,000 words, chat GPT could have cut that down to vintage analysis. Thank you. We are starting to see some improvement. I mean, maybe it's just my half glass full, you know, but.

correct me if I'm wrong, Chris, but we are starting to see delinquency rates that are, they're still elevated compared to what it was pre-pandemic, but they are now starting to come in compared to what they were in 2022, maybe even 2021. So some signs of hope there, but early days. Okay. Okay, so what are you least worried about? I think mortgages are the winner this time around. Yeah. Rezi just been a wonderful spot. Maybe a little worried about those borrowers who put loans on back in, you know, 22 right before rates kind of started their climb. But one of my other numbers, my reserve numbers for our quiz today was the today's mortgage rate of the 661, according to Freddie. And that's down from, you know, almost 8 percent just a handful of weeks ago. So you're not going to, you're not going to.

you get to see the three and a half percent rates that we got back in the day, but at six and a half percent, I think that does a couple of things for us. It brings some of those sellers off the sideline, those people who have been loan locked that do need to make a life change, that do need to move. It should free up some of those existing home sales. More construction and units come online. I think that is a tailwind for the housing industry. I don't think we see 20 to 25 percent home value growth coming forward. I think if anything, we have a bit of a bit of affordability problem. It is an overstatement, I should say.

But I just, the economy has been so supported by just very, very low fixed rate, 3% coupon, legacy old loans. It's allowing the consumer to really kind of live beyond their means in other places. And you mentioned home equity lines of credit helox. They, you had a very active year. Presumably that's because people couldn't take cash out via refurb. finance or they can't sell their home and take out cash. So they turn to their helix. Any concern there? Or is it just that there's just so much built up equity in these homes, no big deal?

No. Well, I mean, it depends how you look at it. I think helox probably had their best year they're going to have this year. And I think next year, if rates are down and people do start to do cash out refies again, that'll steal some of the helot thunder that we've enjoyed. I mean, helox were largely used not as a piggy bank, not as a 2008 kind of event where people were sucking cash to stay and make their payments. We really saw it as there wasn't enough inventory and housing out there. They had tremendous equity in. They didn't want to give up their 3% 30 year fixed rate mortgage. And so they went to a $75,000 helock on a second at prime plus one. And that payment didn't crush them, but did allow them to spruce up the house that they were currently in. They weren't using it for

speculation. They weren't using it for any of the knuckleheaded stuff that we were seeing back in 2006 and the run up to 2008. So I think if rates do fall, if we continue to see them drop, that'll take a little bit away from the origination joy that loan officers have been experiencing on HELOCs where we've finally seen HELOC originations rise for the first time in a decade. Yeah. Okay. Last step of loan product, CNI, commercial industrial, there have been some concern that particularly small businesses would be struggling here. And they're obviously consumers of C&I loans to drive their business. Any, are you, you know, there we have seen some, if there's one place where loan growth has gone,

gone kind of soft, it's C&I lending. Are you noticing anything, any credit problems developing there per se or anything to call out? the good news on CNI is it's incredibly short. So whatever problems you have should be relatively brief. And it's actually an asset on our side that we trade, but we very rarely trade because it's often the most sought after paper for someone to have because it's very short. So again, it's not,

I don't have the same worries that I have in the office sector of commercial real estate. There'll be some short-term pain, I'm sure, for certain. businesses that are caught, you know, wrong-footed, particularly if the economy weakens. But, but no, CNI's not one of the ones that's really on my radar. Okay. So I don't want to put words in your mouth or project, but I'm just getting this positive vibe from you. Is that fair? I mean, it feels, you're not effusive, but you're not feeling well.

So, you know, so. Yeah, you know, you're really good at pulling the positive out of me, Mark. I mean, generally speaking, a lot of folks would say, John, you know, God, get him off the, get him off the phone. Really? Too negative. But I find that I'm just nodding my head as you lull me into this sense of security. I need Chris to kind of drag me out of the trance with, uh, some, some cold water on these

conversations. But I mean, generally speaking, I, yeah, I, we're, I don't see, I don't see the cliff. I don't see the crash. Um, and I'm not saying everything's rosy. There are pockets of pain that are out there, but by and large, 2023, was a far better year than I think most of us expected. And I think that carries into 24. Great.

Good. Good. Chris, anything? I mean, I kind of led the witness there a little bit. Snake drummer. Yeah. There you go. There you go.

Open any question, because we're kind of at the end of time. But just anything you want to bring up or anything we missed? No, let's end the year on a podcast. positive note here. Yeah, okay. I'm all for it. I'm a positive note. John, I really want to thank you for taking the time. And again, I know you're not feeling well, but really appreciate you. Are you actually at work?

I see you. I am. Yeah, so I wasn't home the first three days of the week, but I did come in today. I just have the more studio set up here in the office. So a bit more confused to do. No, no, not at all. I mean, if you go outside of the trading floor, which is right out there, you'll find that most of the team is working remotely today as to not get the play.

and dodge whatever this bug is that's working its way through Memphis right now. I would love to say, as I have many times on the webinars that we've been able to do with you, thank you to Moody's Mark. Thank you, Chris. Thank you. We've enjoyed the relationship with you guys. And glad to get to do these, glad to get to do them in person. Chris, thank you for coming to Nashville this year for our conference.

It is a tremendous relationship. We are very appreciative of everything you'll do for us. Well, right back at you. You really enjoy it. And you're great. I really enjoyed chat. with you. Always learn a lot and appreciate it, particularly when you agree with me. You know, it's all good. Absolutely. No, only joking. Only joking. But with that, happy New Year.

To you too, Chris, happy New Year. Happy New Year. Thank you, John. Happy New Year. To our listeners out there, happy New Year. Take care now. Bye-bye.