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.
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 here
Follow Mark Zandi @MarkZandi, Cris deRitis @MiddleWayEcon, and Marisa DiNatale on LinkedIn for additional insight.
Mark Zandi: Welcome to Inside Economics. I'm Mark Zandi, the Chief Economist of Moody's Analytics, and I'm joined by my trusted co-host, Cris deRitis. Hey, Cris.
Cris deRitis: Hey, Mark.
Mark Zandi: Hey, John.
Cris deRitis: We're missing someone today?
Mark Zandi: Yeah. Marisa's not feeling well. I think half of the world's not feeling well. There are a lot of people out there not feeling so good. But you're fine, right? You're doing okay?
Cris deRitis: Yeah. I was down for Thanksgiving, right?
Mark Zandi: Oh, that's right. I forgot that. Yeah.
Cris deRitis: I paid my dues, I think.
Mark Zandi: Somehow I've missed it so far, but I don't know. We'll see how this goes.
Cris deRitis: We'll see. We'll see.
Mark Zandi: Yeah, I've been a little bit lucky. I did, excuse me, make my way down to Florida. I did the record time. You want to guess how long it took me to get from the suburbs of Philly down to Vero Beach in a car?
Cris deRitis: 16 hours. 16 hours?
Mark Zandi: Yeah. Good guess. 15. Record. Record time.
Cris deRitis: Okay. Wow.
Mark Zandi: Yeah.
Cris deRitis: No stops.
Mark Zandi: No traffic. South Carolina wasn't the problem it typically is. It was smooth sailing and good weather, and we had four stops along the way. You'd be proud of me 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 enjoyed it. I think I've said this before, I think I could easily be a truck driver. No problem. Easily.
Cris deRitis: You didn't stop for oranges?
Mark Zandi: I actually didn't see any oranges. Yeah, that's good.
Cris deRitis: No pecans?
Mark Zandi: No pecans. Yeah. No, just straight through. We made it all the way through.
Cris deRitis: All right.
Mark Zandi: We've got a guest, John Toohig. John. Good to see you, man.
John Toohig: Mark. Cris, thank you for having me back. It's great to be here. Always enjoy the banter.
Mark Zandi: Yeah, and I understand you haven't been able to dodge the illness, but-
John Toohig: Whatever it is, it has worked its way through Memphis.
Mark Zandi: [inaudible 00:02:10].
John Toohig: Yeah, it's made its way through the Whole Loan desk. It started with the mothers, with young children. It's worked its way up through the adults, and I think one by one, we've all fallen prey to it. I hope you have continued success in dodging whatever it is.
Mark Zandi: Well, I planned a hole up here in Florida for a while.
John Toohig: Stay where the sun's shining.
Mark Zandi: Where the sunshine.
John Toohig: Stay where the sun's shining, Mark.
Mark Zandi: Yeah. Well, yeah, you sound a little under the weather, so we'll keep this short, but really appreciate you coming on. We were just chatting, you were on back in May, kind of pretty close to in the wake of the SVB, the Silicon Valley Bank crisis, and so it's good to have you back here. Maybe you could just spend a second, a minute and just give us a sense of you and what you do for a living?
John Toohig: Sure, yeah. Head 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 and down, mostly deposit depositories, banks, credit unions. In that conversation we had last May when we were kind of in the throes of the crisis, and you had even questioned if we were going to call it a crisis, and I think that was a fair statement to call what happened with SVB and Signature and at the time First Republic hadn't gone down, but those names and those deposit 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 sub-performing loans sneak into our trading volumes going into 2024. But that's a little bit about the loan desk.
Mark Zandi: I saw you're also president of Raymond James Mortgage Company. What's that all about?
John Toohig: Mortgage Company. Yep. The mortgage company is a sub of the parent and the holding company, which is part of just the corporate structure and how we report up into it. It's exciting in title, but in practice it's no different than just being a sub and holding co of the overall entity.
Mark Zandi: The way I think about what you do is you're an intermediary between financial institutions and your intermediate loans, whole loans.
John Toohig: Right. Right.
Mark Zandi: Anything from an auto loan to you do C&I, commercial industrial loans and commercial real estate.
John Toohig: Yep.
Mark Zandi: Okay.
John Toohig: If you ever watch the Big Short, that's a movie that's a little too real for me. I get flashbacks, because in the time and back in 2008, we were delivering a lot of loans into a Fannie and Freddie and 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 ink signatures, pieces of paper. It's not the bond, it's the underlying FICO score, appraisal, note, title, deed, mortgage assignment, and making sure it's all kind of properly documented. I do something similar for autos, do something similar for commercial real estate and good old-fashioned credit officers out there kind nodding their heads. Loan officers out there are kind of nodding their heads. We're very much in their world.
Mark Zandi: You don't re-underwrite, because the loan has been made, but you just make sure all the information's right, so that the institution that comes along and wants to buy it feels confident that they know what they're buying.
John Toohig: Correct. Again, they think they're buying a fully 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. [inaudible 00:05:53]-
Mark Zandi: This may be an unfair question, but do you have a sense in a typical year, like the volume of trading that goes on? In terms of dollars outstanding, how much moves from one institution to another institution? I know it can fluctuate a lot in any year, but in a typical year.
John Toohig: I wish I knew the answer to this, because I get it asked often. League tables, you'll see it for M&A, you'll see it for muni underwriting. But in loan land, since it's not a CUSIP and it's not easily tracked, 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. 2023, those numbers are down. We'll finish up our last transaction today, it'll probably be closer to five 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 the 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 of the loan, but that doesn't necessarily mean a selling institution wants to take a 25 point cut in price purely because the coupon has dropped. They elect to hold onto 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. Trading volume's definitely went down. Depending upon the product, it was down heavily for mortgage. It was up a lot for autos, it was up a lot for HELOCs, flat-
Mark Zandi: Home equity lines.
John Toohig: ... commercial-
Mark Zandi: Home equity lines.
John Toohig: Yeah, home equity had a wonderful, wonderful year, for HELOCs this year, so did auto loan trading. Commercial was largely flat to 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.
Mark Zandi: The real weakness in the volumes was in the residential mortgage.
John Toohig: Mortgage.
Mark Zandi: Makes sense.
John Toohig: Hard, hard, hard.
Mark Zandi: Makes perfect sense.
John Toohig: Our worst year in a decade in trading mortgages, just a really down year for mortgage.
Mark Zandi: As you say, it goes kind of like the lock-in of the existing homeowners with mortgages, the average coupon or the average mortgage rate is like 3.5%. Here we are sitting at 6 1/2 to seven, it doesn't make any economic sense to move, therefore there's no loans to trade.
John Toohig: Right. 6 1/2 is a gift. If you remember just two months ago we were talking about 8% mortgages. I'll take your 6 1/2 all day long. The 8% was just the gut punch. There were a lot of folks that had FOMO and thought they were going to get their 3 1/4, 3 1/2 back. We never made it all the way back down to that level. Six, 6 1/2 sounds a whole lot better than eight.
Mark Zandi: 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.
John Toohig: Sure.
Mark Zandi: We'll play the statistics game along the way. You're going to play, right?
John Toohig: Absolutely.
Mark Zandi: We're missing Marisa, 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. When we did chat last time in May, of course there was still a lot of concern, a reasonable amount of concern about the fallout from the failure of Silicon Valley Bank, Signature Bank. First Republic, I think it might've failed by then.
John Toohig: It hadn't gone down, but it was starting to teeter.
Mark Zandi: It was starting to teeter. Right.
John Toohig: Yep.
Mark Zandi: What do you think, how do you think the system, the banking system navigated through all that? Are you seeing any fallout out there as a result of what we know happened?
John Toohig: We haven't seen that many other bank failures? Certainly not anything anywhere near SVB or Signature.
Mark Zandi: [inaudible 00:10:11].
John Toohig: There's been a couple of tiny ones. Yeah.
Mark Zandi: Teeny ones. Okay.
John Toohig: Teeny ones taken out for other reasons outside of the systematic banking issue. Nut 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 forecast has proven to be right and that those specific instances of those four names that did fail were driven more by unique systems, 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 ran out the door, $42 billion later, bye-bye.
First Republic is a real tragedy, a great customer of ours, a wonderful institution, probably the best prime credit mortgage originator in the country for jumbo loans, 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 Bank's FDIC loan sale. That was an interesting one to watch as 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. We're still-
Mark Zandi: Were you part of that, John? Were you part of that?
John Toohig: Did not bid it, but saw a number of the bids, talked to a number of the bidders. It was interesting to watch and get some of the feedback as to maybe some of the disorganization of that particular process. Then, we had the one crypto bank and crypto was crypto. That was-
Mark Zandi: Silver Gate, right?
John Toohig: Silver Gate, yeah. That again, was a unique situation, but by and 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. It's been ordered.
Mark Zandi: Yeah. Well of course. I'm curious if you concur, but a big reason why was the response, the government response. The FDIC said, "Hey," to the depositors, "whether you're insured or uninsured, we got your back." That went a long way. 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 could borrow at par to gain the liquidity that they needed.
One thing I have noticed, I think you may have pointed 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-
John Toohig: 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? There was talk of them not renewing the program next year. I know that's also kind of on a lot of people's lips. I think that was 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 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. This program is 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 resort.
Mark Zandi: [inaudible 00:14:31].
John Toohig: Oh yeah, absolutely. 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 an interesting topic.
Mark Zandi: Yeah. Well, [inaudible 00:14:51]-
John Toohig: Which I know is near and dear to your heart.
Mark Zandi: I actually read a couple of papers on this.
John Toohig: I see the grin on your face, just really-
Mark Zandi: [inaudible 00:14:58]-
John Toohig: I know you and Lori from the Orbit Institute are big on this topic.
Mark Zandi: Yeah. Let's come back to that though, because I want to complete the conversation around the fallout from SVB and Signature and First Republic. Cris, have you noticed any, what would you say the fallout has been? We've seen it in underwriting, I guess. Because a senior loan officer survey from the Fed says that banks have tightened their underwriting. Maybe a little bit in loan growth. It feels like loan growth has slowed since March, but I don't know, have you noticed anything, Cris?
Cris deRitis: No, I would've pointed out the underwriting, although even there, you're right, banks were already tightening their underwriting even before the crisis and pretty aggressively at the end of 2022. I don't know. It's pretty incremental, I would say in terms of the additional fallout.
John Toohig: Mark, in that last chat we, sorry, Cris, I didn't mean to step on you. We did talk about the difference between liquidity and credit. At the beginning of the year, I hadn't felt the tightening of underwriting, Cris, that you're alluding to. I did feel the tightening of liquidity, folks running out of cash to make more loans. I have since felt the tightening in credit and the tightening in underwriting and the boosting of provisions to prepare for whatever rainy day may or may not be coming. That was definitely a second half theme for me in '23.
Mark Zandi: Yeah. The other thing that I've been surprised, generally, is how well we've navigated through the fallout from the crisis. That really has been very much on the margin, at least so far. 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 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. Yeah, I think consumer loans is the only kind of product line where we've seen some normalization back to pre-pandemic. Everywhere else, C&I, commercial and 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?
John Toohig: In my chats, it's very industry specific, so multifamily versus office versus retail versus industrial versus whatnot. What we're seeing more of is, particularly in office, maturity defaults. 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.
To me that's good news. Is that okay, I get it. At whatever particular cap rate it originated 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 some of the themes that we're starting to see and watch and take a peek at.
Mark Zandi: Yeah. [inaudible 00:18:49] we are going to see some, oh, sorry, go ahead, Cris.
Cris deRitis: I was going to ask, so is this extend and pretend, where we're just...
John Toohig: Stay and pray, extended and pretend, survive until '25, 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 of weeks, certainly helps that particular problem.
Cris deRitis: Right, right.
Mark Zandi: Yeah. 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. Maybe 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. Private credit, leveraged lending, other sources of capital, non-bank sources of capital came in and continued to provide the credit needed to keep everything moving forward, giving consumers and businesses what they need to spend and invest and keep the economy moving forward. Does that resonate at all? John, does that resonate with you?
John Toohig: 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 since the beginning of COVID, now is my moment." Then what we just described didn't come to pass, and the banking system was largely sound and we've made it. I think probably in that moment, just posting SVB, spreads for deals at their widest we've likely seen. 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. We might be able to continue to limp through that. 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 mark 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 ask, between that seller and that buyer, and let's just say the seller's at 80 and the buyer's 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 and reduce their price to make the transaction work? Post-SVB, I would've 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. 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. They're having to 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 now.
Mark Zandi: That's very encouraging then. That sounds very encouraging. Right? Yeah. Okay. Okay. It sounds like the worst of the downdraft in 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. 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 at hand.
John Toohig: 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 [inaudible 00:23:04]-
Mark Zandi: That was my word. Yeah, that was-
John Toohig: 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.
Mark Zandi: Thank you. Thank you.
John Toohig: But assuming the economy holds, I think that's a fair statement.
Mark Zandi: Yeah. Good. Cris, just anything else you want to add there? Any pushback? That feels pretty good, right?
Cris deRitis: It does feel good.
Mark Zandi: Yeah, too good?
Cris deRitis: Makes me nervous.
Mark Zandi: Okay.
Cris deRitis: I don't know. I worry that some of the price discovery is yet out there and maybe that's a 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, certainly we get a second wind here, that could help things, but I'd be a little cautious in some of the sectors, certainly.
Mark Zandi: Right. Okay. Okay. Big picture, bottom line, we navigated through the fallout of SVB reasonably gracefully. Here we are today. The banking system, the financial system seems like it's a pretty good spot, certainly enough to keep credit flowing to the degree necessary to keep the economy moving forward. Everyone agree with that statement?
John Toohig: Sure.
Mark Zandi: John, you agree with that?
John Toohig: Yeah.
Mark Zandi: Yeah, Cris? Okay.
Cris deRitis: Yeah. Yeah.
Mark Zandi: All right, good. Before we play the game though, let's go back to the Federal Home Loan Bank. Why are you so focused on the Federal Home Loan Bank? What's the nexus between the Federal loan bank and your world?
John Toohig: Yeah, think of mortgages. They'll pledge that the mortgage is collateral at the Federal Home Loan Bank. 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 receiving of the cost of funds. 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 of 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 Home Loan Bank. Certainly, back in its creation and maybe it's perverted form today. 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, the Federal Home Loan Bank serves a pretty vital process in the banking system. My humble opinion.
Mark Zandi: Yeah, yeah. No, no, I'm totally with you. I think we're kind of in the minority, John. It feels like everyone is ganging up on them. Just to make sure everyone out there understands, Federal Home Loan Banks are GSEs, just like Fannie Mae and Freddie Mac, government sponsored enterprises. 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. 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.
In the good times, nobody borrows from them. It's not that advantageous. Deposits are generally a much better source of funding, but in times when the systems under stress, depositors are leaving, the banks need the funds, they turn to the Federal Home Loan Bank. It's very high quality lending in the sense that the Federal Home Loan Banks take a lot of collateral, mostly mortgage loans, but it 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're not safety and soundness. That's the Federal Reserve and FDIC, that's not OCC, that's not part of what they do. They rely on the safety and soundness regulators to do their job.
If the safety and soundness regulator says, "Hey, SVB is okay, is fine." Then, under the terms agreed upon, they will lend and provide funding to those institutions. My sense is that, and I totally agree with you, that when the Federal Home Loan Banks were put on the planet, back in the 30s, they had two missions. One was to help support the US mortgage market and housing market. They take loans as collateral to provide funds to the bank's, residential mortgage loans. But the other, which has become much more critical, is providing liquidity to a stressed banking system. 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 first responder. They're the first responder of liquidity when banks get into trouble. I find it almost, I get very nervous when people suggest big changes to the system. I have in my mind, this image that 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 that pipe over here and move it over to this part of the system, whether the water's going to flow or not, or whether it's all going to spill out and flood the economy. 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 were meant before are pretty good, but you have to be pretty careful in playing around with that plumbing.
John Toohig: 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 whoever-
Mark Zandi: Oh yeah, I can imagine.
John Toohig: However loudly we can be about this, let's stop bad changes from coming.
Mark Zandi: Yeah. Cris, would you push back on any of that? Because I'm just curious. I haven't really talked to you about this, the Federal Home Loan Banks.
Cris deRitis: Yeah, I probably you would. Yeah.
Mark Zandi: You would? Okay.
Cris deRitis: I wouldn't push back on the fact that they're integral to the system today. I think that's an accident of history. I don't think if we were to design the system, 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 to design the system today. Like you, I wouldn't [inaudible 00:30:19]-
Mark Zandi: Would we want that though? Would you want that? Would you want the safety and soundness regulator to also be the guy providing liquidity upfront? I'm not so sure.
Cris deRitis: I do.
Mark Zandi: Really?
Cris deRitis: The Fed does provide the discount window, right? It's in that sense, competing. Right?
Mark Zandi: No one turns to the discount window, at least not initially. Even now, I don't know. I didn't look, but what's the discount windows outstanding? It's barely nothing. Right? You have other options. That's always been the case though. The stigma and the difficulty of going to the discount window, very difficult. Isn't it short-term money, as opposed to Federal Home 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 I'm not sure what problem we're trying to solve here.
Cris deRitis: [inaudible 00:31:11]-
Mark Zandi: I guess what are we trying to solve?
Cris deRitis: If the issue is they are a provider of that short-term liquidity in times of stress, which I thought was 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 to be just as effective.
Mark Zandi: Here's just one sort of theory, and I'm not so sure you're right about it's an accident, it was an accident when it was put, if you go back and look at when the FHLBs were chartered, it felt like it was about liquidity. The framers, yeah, I think so.
Cris deRitis: But for Home Loan Banks, right, for mortgages, right. It was all about mortgage housing.
Mark Zandi: No, but that was just a vehicle, a vessel, because at that point in time, that's all the banks did. They really didn't do much else, and that was the only thing on their balance sheet. They said, "Okay, let's do that." By the way, the housing market needs help anyway, so you may be right about that, but I'd say I'm not so sure you're right about that. I think I'd be very interested in a deeper dive into the merits of that. But here's the other thing.
Cris deRitis: It's like our next podcast discussion.
Mark Zandi: Yeah. Here's the other thing. I'm just going to throw this out.
Cris deRitis: Maybe you have to get Lori on from the Urban Institute and let's have a big old chat.
Mark Zandi: Is she a critic of the Federal Home Loan Bank?
Cris deRitis: No, I think she's a big proponent too. Find a couple of critics of.
Mark Zandi: Then, she can come on.
Cris deRitis: There you go.
Mark Zandi: No, I'm only kidding. That's a good one. No, but here's the other thing. The Federal Home Loan Banks until recently were quiet. No one really 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, your name is going to be everywhere, and there's a stigma attached to it. If you go to Federal Home Loan Bank, that's just part of the business.
John Toohig: Normal business, right?
Mark Zandi: Normal business. Yeah.
John Toohig: I think the critique of were some of those last day practices and some of the actions by certain people, certain posts and those final gasps 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. There, sure, take a review, obviously do a postmortem. 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, and what improvements could we make to it?
Mark Zandi: 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. That's just for entry into the membership. Once you're there, that requirement goes away. You don't need that. Silver Gate, I don't know what their balance sheet looked 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-
John Toohig: Keep 10%.
Mark Zandi: ... at least 10% forever, and that makes sense to me. I'm not saying this system can't be improved. I'm just saying we have to be really careful about those reforms and make sure that we don't pull a pipe from someplace that it really matters without making sure that the water is going to flow normally. Anyway.
John Toohig: That's fair.
Cris deRitis: That, I certainly agree with, but I disagree that we shouldn't examine them. These are-
John Toohig: definitely.
Cris deRitis: ... private corporations getting taxpayer subsidies?
John Toohig: Yeah, we definitely should.
Mark Zandi: Yeah. Well, the other thing that makes people upset, and I get it, one of the Federal Home Loan Banks announced a dividend, 9 1/2%. Okay, really? Come on now, please. Now, that was atypical. If you look over history, because it goes up and down, depending on the circumstance, it's four or 5%-ish, which, okay, but 9 1/2, I don't know. Maybe one of the other proposals is instead of right now, 10% of their net income has to go to affordable housing, it feels like that should be double that, at least.
John Toohig: At least.
Mark Zandi: They don't pay taxes, it should be close to the effect of the corporate tax rate. I am totally on board with that kind of idea. But anyway, let's play the game, the statistics game. The game is we each put forward a statistic. The rest of the group tries to figure that out, through clues, deductive reasoning, questions. The best stat is one that's not so easy, we get it immediately. One that's not so hard, we never get it. If it's apropos to the topic at hand or it's recent, all the better. Cris, Marisa's not here, so I think I'm going to turn to you. You first.
Cris deRitis: All right, so this is a pretty light week for economic statistics. Let's just put it out there.
Mark Zandi: I know. It's a light week for everything. Yeah.
Cris deRitis: Exactly, exactly. But two numbers. Here we go. 3.81% and 3.86%.
Mark Zandi: Oh, geez.
John Toohig: 3.81%. A percentage. It is a percentage. Is it an interest rate?
Cris deRitis: It is a rate, yes.
Mark Zandi: 3.81 and 3.86. These are interest rates.
Cris deRitis: Yes.
Mark Zandi: Oh, it's the 10-year treasury yield.
Cris deRitis: Yes. 3.81 is the 10-year treasury yield as of yesterday, 3.86 is?
Mark Zandi: Today? No?
Cris deRitis: That was a year ago?
Mark Zandi: What was a year ago?
Cris deRitis: It was a year ago.
John Toohig: Oh, is it really? Oh, that's interesting.
Mark Zandi: Yeah. Nothing happened this year.
John Toohig: You could have just gone to sleep and woken up the next day and everything's the same, right? Is that the idea?
Cris deRitis: Yeah, pretty tame year.
John Toohig: Yeah.
Cris deRitis: Yeah. Just to emphasize the volatility, right?
John Toohig: Yeah. That's right, Cris.
Mark Zandi: Yeah. What do you make of that?
Cris deRitis: Full circle.
John Toohig: It's an interesting ride, right?
Cris deRitis: Interesting ride. Yeah.
Mark Zandi: Yeah. If you go back when the 10-year was, it got as high as five, I believe.
Cris deRitis: It did.
Mark Zandi: It got as high as 5%. There was so much hand wringing about lots of stuff, including deficits, debt, what that meant, all the bond issuance. What happened to all that? Does this mean that deficits debt doesn't matter or we're just premature to think that it is?
John Toohig: It depends on who's in office. They matter when one party's in office and they don't matter when the other party's in office and both parties do the same when it comes to that. Politicians are politicians.
Mark Zandi: So, John, do you-
John Toohig: I think we're back to... Oh, sorry.
Mark Zandi: No, go ahead, John.
John Toohig: I think we're back to debating the equilibrium. Where we were previously. Is it 3 1/2? 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? I think we're back to this, trying to discern what the equilibrium 10-year is. Is it a global rate? Is it US rate?
Mark Zandi: Yeah. I think the lesson is given that volatility is no matter what's going on, don't change your forecast. It's going to come back sooner than you think. Because 4%, we're back to roughly where we've been, 4%.
Cris deRitis: 3.85 as I stare at it right now.
Mark Zandi: John, if I asked you what do you think the 10-year treasury yield is going to be a year from now? What would you say?
John Toohig: A year from now?
Mark Zandi: Yeah, you're back on a year from now, we're having this conversation.
John Toohig: I think it's down.
Mark Zandi: It'll be down? Okay.
John Toohig: I think it'll be down. I might disagree with the fact that we're going to have, I think the market's got six to seven cuts priced in. 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. I do think rates are down just directionally over the course of the year.
Mark Zandi: Of course, the 10-year would, at least in theory, already incorporate-
John Toohig: Assuming we get steepness, right? Assuming you're-
Mark Zandi: Okay. Okay. Very good. Okay. That was pretty tricky on your part there, Cris.
John Toohig: That was, Cris. Well done.
Cris deRitis: Yeah, I'm around here.
Mark Zandi: John, do you want to go next?
John Toohig: I do. I've got one for you. 4.83%.
Mark Zandi: That's an interest rate.
John Toohig: It is.
Mark Zandi: Okay. 4.83%. Is it a rate on a certain product line?
John Toohig: It's a newly created product line.
Mark Zandi: Oh, newly.
John Toohig: In 2023.
Mark Zandi: Is it the Bank Term Funding Program?
John Toohig: It is.
Mark Zandi: Oh, it is. Okay.
John Toohig: For the Bank Term Funding Program at 4.83%, compared to the discount window at five and a half.
Mark Zandi: Interesting.
John Toohig: 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.
Mark Zandi: Well, it's hard, a little bit difficult to gauge. Federal Home Loan Bank advances. Those are the loans that the Federal Home Loan Banks make, similar to the Bank Term Funding Program or the discount window, but it feels like they've come in. The banks are using-
John Toohig: Yeah, Chicago posts theirs.
Mark Zandi: Oh, do they?
John Toohig: I'm quickly going into it. Forgive me here. 4.23 for 10-year money. 4.28 for 2-year money. It definitely has come in quite a bit.
Mark Zandi: Right. Interesting. Interesting. Oh, that's very cool. You mentioned that there's a debate about whether that will be renewed. Does that come around in March?
John Toohig: I just saw the headline. Yeah, I haven't studied that. I saw the headline literally yesterday as you and I were kind of bantering over email. I'm super curious to see if they do renew it, if there's a need for or the desire to renew it, because I do think we can say it's been a success.
Mark Zandi: Yeah, I'm having a hard time thinking as long as rates are as high as they are, that they don't renew it. Right. Just to provide a safety valve, I would think.
John Toohig: I would telegraph that many, many months out in advance to allow folks to look around for-
Mark Zandi: Right, to adjust.
John Toohig: Yeah, whatever liquidity.
Mark Zandi: Turn to the Federal Home Loan Banks. Yeah.
John Toohig: Right.
Mark Zandi: Right. Yes, exactly. Okay, I got one for you. 4,800.
John Toohig: S&P.
Mark Zandi: Ah, very good. Yes, indeed. It is, the S&P 500. Yeah, that was good. You were very quick.
John Toohig: Did we hit that? I know we were flirting with it. We're at 4792 as we speak right now.
Mark Zandi: Oh, okay. I think we were almost at 4,800 and what's the record high? Like 4799.
John Toohig: I know we're real close to it.
Mark Zandi: Yeah.
John Toohig: Let me pull that up on Bloomberg as we speak.
Mark Zandi: Yeah, so we're very close to the all-time record high on the S&P 500, which the all-time record high as of this point in time is still, I think the last trading day of 2021 or the first trading day of 2022.
John Toohig: You've got a great memory, Mark. It was December 29th, 2021 4793.06.
Mark Zandi: Okay. Yeah.
John Toohig: We're at 4790.5. We're at three points.
Mark Zandi: Three. 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, John, now knows, obviously he knows, he can pull this data up instantly, but what the 10-year treasury yield was when the stock market was at its record high?
John Toohig: Let's, give me two seconds.
Mark Zandi: Okay, I thought so.
John Toohig: I can.
Mark Zandi: I think it was like 1 1/2%, something like that.
John Toohig: On that day. What did I tell you? It was the 21st.
Mark Zandi: I think you said 29th, didn't you?
John Toohig: 29th. The 10-year was, oh gosh, 1.50.
Mark Zandi: Yeah, right. It's pretty amazing. I think-
John Toohig: Around 1 1/2.
Mark Zandi: Yeah. We're-
John Toohig: A hell of a run.
Mark Zandi: ... just under four. It was 1 1/2.
John Toohig: Right. Will we get back to 1 1/2, Mark? Or are we going to stay a little closer to [inaudible 00:44:27]-
Mark Zandi: I think four. But I guess my point is valuations certainly have gone up. Because, well, the other thing I'd say is corporate earnings have been flat. Valuations, I think this is the 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 in aggregate, overvalued, or certainly more overvalued than it was two years ago.
Does that sound right? Did I say that right? Stock prices are the same? Corporate earnings are the same, so the PE multiple is the same, but interest rates are up a lot. 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.
John Toohig: Well, you've been a glass half full kind of guy for most of the year, though.
Mark Zandi: That's probably it.
John Toohig: 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.
Mark Zandi: Cris, are you listening to this, my friend? Are you listening?
John Toohig: I think you need to take a bit of a victory lap.
Cris deRitis: Yeah, yeah, yeah.
Mark Zandi: Absolutely. Absolutely.
John Toohig: It's well deserved.
Mark Zandi: 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."
John Toohig: When is that, Mark? When is that first cut?
Mark Zandi: I think it's probably May-ish. That would be my sense of it. I think they wait, they, the Fed, waits until it's clear inflation's going back to target. It doesn't have to be at target, but is clearly headed back to target. No questions that it is, 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. You say, John, would you say May?
John Toohig: The market has a 104% possibility of a cut by then.
Mark Zandi: Oh, is that right?
John Toohig: Somewhere between 85% for the March meeting, 104% for the May meeting and then another cut come the June 12th meeting. I'm probably more in that June 12th camp than I am in that May or March.
Mark Zandi: Yeah, I don't think I'd argue.
John Toohig: 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 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 kind of get higher for longer.
I think if we have six or seven cuts, 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 has just kind of taken a little bit of the pressure off and kind of easing us into what I think we all hope for as some sort of a soft landing.
Cris deRitis: You think the election has placed any role in frontloading some of the cuts here, where they...
John Toohig: That's certainly a narrative, that the Fed is politically influenced on election years.
Cris deRitis: Well, by trying not to be politically influenced, they...
John Toohig: By cutting early, that's an interesting concept. [inaudible 00:47:58] getting out of the way in October and November.
Cris deRitis: Yeah, I like that.
John Toohig: I could see that. Okay. Okay.
Mark Zandi: That's a nice way to frame it. I really don't want to get in the middle of this political battle, so I just get this done early. Get it done early. Yeah. Interesting.
John Toohig: 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 Jay, we'd love to have that In conversation discussion. [inaudible 00:48:28]. Forecasts for the election, what we thought the potential outcomes might be. Have you dusted that model off yet? Or no?
Mark Zandi: 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 date in January for the webinar. Yeah, I'd like to team up with that again and let's do it. Let's plan on that, for sure.
John Toohig: I think that would be a good one.
Mark Zandi: Let's turn back, and again, I don't want to keep you too long. 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. 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?
John Toohig: Sounds like a plan.
Mark Zandi: Okay. Let's go with what's worrying you the most right now. When you look across the kind of panoply of different product lines that you're trading in, which product line is kind of at the top of your list of concerns?
John Toohig: This one's a bit of a layup. Commercial real estate's been in the box. I agree with Cris'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 cashflow, cashflow, cashflow. I think as you have seen those handful of strategic sellers for densely urban office complexes that vacancies are skyrocketing and cashflows are plummeting, those are the ones that are kind of in the box. I think we now 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 real estate portfolio is office compared to the other product types? 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. If anything, we're looking to shrink it. When we do look to shrink it, we circle it with a capital raise.
We circle it with a sale leaseback, 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 NIM compression with these legacy terrible assets, and I'm clean and I'm going forward. 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. We'll start to see a lot more price discovery in '24.
Mark Zandi: I find that, so that's the worst of it, that feels pretty encouraging. 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.
John Toohig: Correct. Yeah. SVB, what we learned was that you don't sell the asset, announce the capital raise and then do the capital raise. Oops. You never get to the completion of the process. Now, it's all boom. One big thing together, the buyer, seller identified, a 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.
Mark Zandi: Right. This whole doom loop, CRE doom loop that people worry about that 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 distressed 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 kind of probability do you attach to that kind of very dark scenario?
John Toohig: It's low. Again, the economy has surprised us. So as 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 collapsed. It'll be strategic selling, organized selling, but it won't be the doom loop that we're looking at.
Mark Zandi: I thought you might, when I asked you what worries you the most, what loan product worries you the most, you were going to say something around consumer lending auto or maybe bank card. Are those matters of concern?
John Toohig: They are. We've been talking about the normalization of credit for a while, and we do and are seeing problems with subprime auto. We are seeing problems with subprime card, with certain kinds 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'm curious about your thoughts. I think all of the reserves that we built during COVID probably expire in 2024. We've been trying to guess when those dollars ultimately get spent.
Mark Zandi: Oh, you mean the excess savings, built up.
John Toohig: Excess savings.
Mark Zandi: Yeah, right.
John Toohig: I think we're kind of through our cushions and our buffers. I do think the bottom end of credit for consumer lending will get worse in '24. I think that's a fair statement.
Mark Zandi: Cris, anything to add there?
Cris deRitis: I'd agree that it gets worse, but I think there is quite a bit of buffer still for the top half of the households. The bottom half probably are through their pandemic savings, but they have some income built now, so that's helpful. But there's still quite a bit out there if you think about the upper half of the distribution. That might provide some cushion going forward here. But I agree that delinquency rates are certainly likely to continue upward here until things settle out, but I don't see a calamity on the horizon.
John Toohig: What worries me about cards, Mark, if you look back at 2008, card balances were dropping. If we are in a recession, which I'm not saying we are, but if we were in the doom loop, if you will. Card balances are still going up, utilization ratios are still going up in cards. If we're adding on more debt at the same time where savings are starting to struggle, that's a bad combination. 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.
Mark Zandi: And tied to what the Fed's doing, right? Once the fed cuts-
John Toohig: As cuts start 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 and fix a lot of banking's problems by dropping rates down. His job has been to kill inflation first.
Mark Zandi: 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 bank cards, and we've been looking at the delinquency rate for loans originated at the start of this year. 11 months into the year, what is the delinquency rate? Compare that to the delinquency rate on loans originating in the early 2022, 11 months in, 2021, 11 months in, same point in their life cycle.
John Toohig: Vintage analysis, right?
Mark Zandi: Yeah, vintage analysis. Thank you for that. That made it a lot easier as vintage analysis.
John Toohig: Here for you, Mark. Here for you.
Mark Zandi: Yeah. Thank you. Thank you. I said it in about 10,000 words. ChatGPT could have cut that down to vintage analysis. Thank you. We are starting to see some improvement. Maybe it's just my half glass full, but correct me if I'm wrong, Cris, 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. Some signs of hope there, but early days. Okay. Okay. What are you least worried about?
John Toohig: I think mortgages are the winner this time around. Resi, just in a wonderful spot. Maybe a little worried about those borrowers who put loans back in '22, right before rates started their climb. But one of my other numbers, one of my reserve numbers for our quiz today was today's mortgage rate of 6.61, according to Freddie. That's down from almost 8% just a handful of weeks ago. You're not going to get to see the 3 1/2% rates that we got back in the day, but at 6 1/2%, 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% home value growth coming forward. I think if anything, we have a bit of an affordability problem. A bit is an overstatement right now, understatement I should say. But 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.
Mark Zandi: You mentioned home equity lines of credit, HELOCs, they had a very active year. Presumably, that's because people couldn't take cash out via refinance, or they can't sell their home and take out cash, so they turn to their HELOCs. Any concerns there? Or is it just that there's just so much built up equity in these homes, no big deal?
John Toohig: No. Well, it depends how you look at it. I think HELOCs probably had their best year they're going to have this year. I think next year if rates are down and people do start to do cash out refis again, that'll steal some of the HELOC thunder that we've enjoyed. HELOCs 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 HELOC on a second at prime plus one.
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. 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.
Mark Zandi: Yeah. Okay. Last loan product, C&I, commercial industrial, there've been some concerns that particularly small businesses would be struggling here and obviously consumers have C&I loans to drive their business. If there's one place where loan growth has gone soft, it's C&I lending. Are you noticing anything, any credit problems developing there per se or anything to call out?
John Toohig: The good news on C&I is it's incredibly short. 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. Again, 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 wrong-footed, particularly if the economy weakens. But no, C&I is not one of the ones that's really on my radar.
Mark Zandi: Okay. 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? It feels, you're not effusive, but you're not feeling well.
John Toohig: Yeah, you're really good at pulling the positive out of me, Mark. Generally speaking, a lot of folks would say, "John, God, get him off the phone. He's too negative."
Mark Zandi: Really? Okay.
John Toohig: But I find that I'm just nodding my head as you lull me into this sense of security. I need Cris to drag me out of the trance with some cold water on these conversations. But generally speaking, yeah, I don't see the cliff. I don't see the crash. 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. I think that carries into '24.
Mark Zandi: Great. Good. Good. Cris, anything? I kind of led the witness there a little bit, but-
John Toohig: Snake charmer.
Mark Zandi: Yeah, there you go. There you go. Open-ended question, because kind of at the end of time, but just anything you want to bring up or anything we missed?
Cris deRitis: No, let's end the year on a positive note here.
Mark Zandi: Yeah. Okay. I'm all for it. On a positive note. John, I really want to thank you for taking the time. Again, I know you're not feeling well, but I really appreciate you. Are you actually at work? I see Raymond.
John Toohig: Yeah. I was at home the first three days of the week, but I did come in today. I just have the more studio setup here in the office. A bit more conducive.
Mark Zandi: Oh, I'm sorry to drag you in.
John Toohig: No, No, not at all. If you go outside of the trading floor, which is right out there, you'll find that most of the teams are working remotely today so as to not get the plague 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, Cris. Thank you. We've enjoyed the relationship with you guys and are glad to get to do these. Glad to get to do them in person. Cris, thank you for coming to Nashville this year for our conference. It is a tremendous relationship. We are very appreciative of everything you all do for us.
Mark Zandi: Well, right back at you. Really enjoyed it and you're great. I really enjoyed chatting with you. Always learn a lot and appreciate it, particularly when you agree with me. It's all good.
John Toohig: Absolutely.
Mark Zandi: No, only joking. Only joking. But with that, Happy New Year. To you too, Cris, Happy New Year.
Cris deRitis: Happy New Year. Thank you, John.
John Toohig: Happy New Year.
Mark Zandi: To our listeners out there, Happy New Year. Take care now. Bye-bye.