12-12-20-20: LIBOR exit continues; snapshot of resi lending & borrowers; books for the holidays for staff & family

Did you know that 87 percent of gym members don’t even know their gym is closed? Lou Friedmann from Illinois’ Interfirst Mortgage reminded me that today is National Gingerbread House Day. It could be the last thing that Congress agreed upon. Some in the industry fear the income being earned by LOs and by lenders will be a “target on the industry’s back” for regulators and Congress. We’ll see. In the meantime, our biz is the hero, saving millions of homeowners a lot of money every month. (Investors, not so much, as existing MBS pay off early reminding them that it is risky to pay above par.) According to FBX | Informa Financial Intelligence, November 2020 mortgage rate-lock volume was up 83% YoY but down -8% MoM across all channels, while funded volume increased 50% YoY and decreased -4% MoM. Retail lock volume increased 79% YoY and decreased -8% MoM, while funded volume was up 67% YoY and down -4% MoM. No one can argue with these rates!

Support home-grown authors!

For something completely different, looking for a holiday gift for your staff since you’re not spending much on travel and entertainment? Congratulations to anyone who can write a book, and there are several (that I know about) in or close to our biz. And with the reasonable prices, good gifts for your staff. Or for your boss! No, these are not paid ads, and the books are written by folks in our biz, about our biz, or close to it. In no order, we have…

Let’s start off with a gift idea for a family member or someone you know who is interested in pursuing a career in health or who is in the field and ready for a change. Check out my friend Jeff Oxendine’s new book, You Don’t Have to Be a Doctor: Discover, Achieve and Enjoy Your Authentic Health Career. Jeff, CEO of Health Career Connection and a longtime faculty member at UC Berkeley School of Public Health, shares his proven 9 step framework, practical tools, inspiring stories, and hands-on exercises that he has used to help thousands of students and health professionals choose and succeed in the health career that best suits them. While many students enter college on the premed track, only 17% of premed freshman end up in medical school and only 40% of medical school applicants are accepted. Jeff’s book doesn’t dissuade anyone from being a doctor, it provides practical guidance for people to critically assess their options and develop an action plan for success. (Have your college students interested in health pursue internships through Health Career Connection.)

Eric Mitchell is the EVP for Gold Star Mortgage and oversees nationwide business development strategies for its 500+ employees through innovative purchase market strategies proven to revolutionize the way Loan Officers and Realtors partner, generating their unprecedented success and market reach. Eric has written “The Why of Money”. The Amazon page is live and for pre-orders, a 25% discount is available (promo code E87WVZCP); delivery date will be 2nd week of January.

Russ Van Buren’s Falling, inspired by the true events of 9-11.

There’s “Surviving Sosebee: A Lesson Plan On Life” by Mary Lee Gilchrest with First State Bank Mortgage in Kansas. (“I self-published so the book can be purchased from me by emailing me your address. My book is $15.00 with shipping and I enclose a return envelope for payment on the honor system that buyers will send money. My book talks about some that I have been through in my life and refers to my job many times, and the small profit I give the profit to ALZ and lung cancer research as those are the illnesses my mother and mother-in-law suffered with.”)

“My Client the FBI: How a real estate appraiser assisted the FBI before and after the mortgage crisis in cleaning up a broken system.” Written by Donald Gossman, you can read more about it here along with thank you notes from the Feds.

Conquering Shifts is for MLOs as part of a 2021 business plan. Authors Cindy Douglas and Kathleen Heck are offering a 15% discount for books purchased through December 15th.

Michael Rosser and Diane Sanders penned “A History of Mortgage Banking in the West,” a “book that should be read by politicians and business leaders everywhere.” Order here and use promo code ROSS17 to knock 20% off the price.

“Buy Your First Home Today” was written by John Mallett is a good book for LOs to give their clients. “Empower your life, build your wealth, own the home of your dreams.”

Anne Elliott composed “Mortgage Risk: A Blueprint for Smarter Origination.” The book is meant for underwriters, sales managers, LOs and appraisers.

“Hacked. Screwed. Gone.” By Jim Deitch is an “A-Z blueprint to protect your business from accidental & malicious information security threats.”

Jason Myers authored “Becoming the Successful Mortgage Broker.” Jason also wrote “The Successful Mortgage Broker.” “Becoming a millionaire in the mortgage industry doesn’t happen by chance. When you lay the proper foundation, you create the opportunity.”

Demystifying Mandatory” by STRATMOR’s Jennifer Fortier is a good read for anyone starting out in capital markets.

From Texas comes Michael Jones (Georgetown Mortgage) with his tome, “Reset” about a loan officer who is bumping along the bottom and re-ignites his career with some simple process changes and effort.

“The Uncommon Commodity: A Common-Sense Guide for New Managers” was composed by Doug Thorpe. “A collection of many thought-provoking stories, tips, anecdotes, and life hacks to help you grow as a manager.”

Here’s a primer on the capital markets sector from SIFMA…a fundamental overview of U.S. capital markets and financial institutions including an overview of capital markets, role of financial institutions, investment banking, markets & securities, and more.

The state of our biz and our borrowers

Prashant Gopal, U.S. real estate reporter with Bloomberg News, penned a piece titled, “Fed Delivers Biggest Year in History for U.S. Mortgage Industry.”

This week’s Primary Mortgage Market Survey for the week ending December 10 from Freddie Mac showed the 30-year mortgage rate and 15-year mortgage rates holding at their respective lows of 2.71% and 2.26%. Black Knight reported that delinquencies are five times higher than pre-pandemic levels. The number of mortgages in active forbearance fell by just 12K from last Tuesday, meaning that as of December 8, 5.2% (2.75 million) of all mortgages were in active forbearance, including 3.5% of GSE loans, 9.3% of FHA/VA loans, and 5.1% of PLS/portfolio loans. Together, they represent $558 billion in unpaid principal. Despite the weekly improvement, forbearance volumes have now posted the first monthly increase since the onset of the recovery in late May/early June.

The gap between the “haves” and the “have nots” is indeed widening. The richest 10% of households had 71.4% of the wealth in 2007 and 77.1% in 2016, per the MBA’s Research Institute for Housing America (RIHA) new study, The Distribution of Wealth Since the Great Recession. The wealth among U.S. households became increasingly unequal from 2007 through 2016. The bottoming out of home prices through 2012 and the 4.5% drop in the homeownership rate through 2015 both contributed to a decline in the median real household net worth, from $140,000 in 2007 to $97,000 in 2016 – 30% lower than before the financial crisis.

Inequality may have lessened from 2016-2019 because of home-price gains, the rising homeownership rate, the stock market’s rise, and recent policy changes that reduced tax burdens and made it easier to save for retirement. The COVID-19 pandemic has, however, likely offset these changes, and there’s now real risk inequality will increase.

The Great Recession affected the rich as well as the poor, but the rich were less affected. The total net worth of the rich declined by 11%, from $53.5 trillion in 2007 to $47.9 trillion in 2010. The net worth of the middle class declined by 20% and the debts of the poor increased by 60%, leaving them with negative net worth as a group. The wealth of the typical family dropped sharply from 2007 largely due to the sharp drop in homeownership. From 2007 to 2015, the homeownership rate fell by 4.5 percentage points (over 6 million families) and although average real net worth was $45,000 more (7% higher) in 2016 compared to 2007, median real net worth was $43,000 less (30% lower).

From 2013 to 2016 the rich get richer. Total wealth increased very sharply, by $20 trillion, between 2013 and 2016, up 31 percent mostly due to price increases for stocks and for homes. The study found that of the $20 trillion total wealth increase between 2013 and 2016, the rich received $16.9 trillion (85%), middle-wealth households received $3.2 trillion (15%), and the poor were $100 billion closer to having their assets equal to their debts. And as of the 2016 survey, the rich had $67.0 trillion in total net wealth, the middle-wealth households had $20.2 trillion, and the poor were still in the hole with net wealth equal to -$290 billion.

LIBOR phase out

It is widely expected that LIBOR will be discontinued or deemed unsuitable for use by the end of 2021. (And we’re already about two weeks away from the end of 2020!) Banks and other financial institutions should be implementing plans to transition to replacement rates. Decisions regarding an appropriate replacement rate should take into account impacts on the financial condition of the institution, impacts on borrowers, and operational challenges associated with different replacement rates.

Financial institutions have the option of choosing their own new interest-rate benchmarks, including fed funds. Yet, the Alternative Reference Rates Committee (ARRC) has recommended the Secured Overnight Financing Rate (SOFR) as the best option. Any widely used interest-rate benchmark should have three key qualities, according to ARRC: A benchmark needs a reliable administrator with robust, durable production and oversight, the financial world needs to understand what market the rate represents and how it measures that market, and any benchmark must be based on a market that has enough transaction volume and diversity to survive times of stress. It needs to show resiliency over time and prove difficult to manipulate.

SOFR nails all three of these. It broadly measures the cost of overnight cash loans across three parts of the US Treasury repo market. US Treasury securities back the loans. As an idea for size, the US Treasury repo market sees about $1 trillion in daily transactions made by banks, pension funds, corporations, asset managers, insurance companies, and every other contender on a list of thousands of eligible borrowers. Liquidity is critical.

Steve Brown from PCBB reports that one-third of SOFR involves trades that are cleared through the Fixed Income Clearing Corporation; about 2K entities are eligible to trade there. “Around 120 firms lend money and another 40 to 50 borrow in the tri-party segment of the repo market. This is a diverse group much likelier than LIBOR to weather shocks and changes.”

By January 25, 2021, ISDA’s IBOR Fallbacks Protocol to update legacy contracts will go into effect for adhering participants. June 30, 2021 is the ARRC’s recommended date to stop issuance of new LIBOR indexed business loans. December 31, 2021 is currently slated as the last publication date for LIBOR and final stoppage date for all new LIBOR indexed transactions. June 2023 is the publication extension (excluding 1-week and 2-month LIBOR) currently proposed by the ICE Benchmark Administration.

Fannie reminds us that December 1 was the last issue date for MBS pools backed by LIBOR ARMs (loans can be delivered into MBS pools with Dec. 1 issue dates until Dec. 24). Dec. 31 will be the last day Fannie Mae will purchase LIBOR ARMs on a Whole Loan basis. Prior to the product’s retirement, please be sure to create new Browse Prices Templates in PE-Whole Loan to remove LIBOR ARMs from daily pricing reports you pull in order to avoid any errors after January 1st. Review the Browse Prices Export File Specification for the updated export product order.

For an overview, view Fannie’s page for more information about the steps it is taking to help ensure a smooth transition away from LIBOR.

Jennifer Press, a managing director in the Alternative Asset Advisory practice at Duff & Phelps, has some thoughts on how companies should prepare to transition from LIBOR to SOFR. Jen recently led Duff & Phelps’ webinar “LIBOR: Managing the Uncertainty Ahead – Are You Ready?” and discusses how the firm is advising companies in identifying, understanding and remodeling across the range of financial instruments that will be impacted in the transition. Jen also discusses the firm’s findings in a poll from Q3 of over 200 mid-to-large institutions, where Duff & Phelps learned that less than 20% of those polled believed they would be ready for the LIBOR deadline, and can offer her thoughts on how the June 2023 deadline for legacy contracts may aid those organizations. Duff & Phelps found that less than half of the institutions surveyed, which includes banks, corporate entities, hedge funds, PE firms and more, have only just begun to think about the LIBOR transition process, despite it only being about a year away.

Last week the Financial Stability Oversight Council (FSOC) released its 2020 annual report. The report reviews financial market developments, identifies emerging risks, and offers recommendations to enhance financial stability. The group recommends that the Alternative Reference Rates Committee continue to work to facilitate an orderly transition to alternative reference rates following the anticipated cessation of LIBOR at the end of 2021, and encourages federal and state regulators to “determine whether further guidance or regulatory relief is required to encourage market participants to address legacy LIBOR portfolios.”

Need a little break today? Here’s a Christmas video worth a look.

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. The current blog is, “Work Longer and Harder, or Work Smarter”.


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Rob Chrisman