Daily Mortgage News & Commentary

Apr. 25: LIBOR to SOFR transition update; Deep dive on U.S. debt; What do bored stunt performers do?

Big day today! Laundry day! Growing up, especially in college, and being a guy, one learns that socks and underwear are washed after wearing once, maybe twice if you’re not doing much, t-shirts after 2-3 times, regular shirts after 3-4 wearings. Gym shorts or pants? They never get dirty, and can go weeks. All of this has gone out the window, and I received this text from a friend. “Rob, what do you hear as being acceptable for washing sweats? My wife says a month is long enough. I am thinking two at the minimum. It’s not like I am doing much. Things are getting contentious.” Tough call. I hope it doesn’t lead to fighting, like someone opening up the Cap’n Crunch bag the wrong way, which can practically lead to a butter knife fight in the kitchen.

For people who enjoy statistics, good or bad, and follow population trends, here you go. Unfortunately, the COVID-19 death toll has passed 52,000, about a quarter of the world’s reported deaths from it. Nearly 8,000 U.S. citizens die every day anyway, but COVID-19 is now the leading cause. Despite the official Census taking place once every 10 years, the Census Bureau releases annual population estimates, the most recent of which say the nation’s population growth continues to slow. While the overall population is still growing at an average growth rate of 0.66 percent annually over the last decade, the rate of growth has slowed every year since 2015, and is off from the 0.97 percent annual growth from 2000 to 2009. Four states have actually lost population since the 2010 Census: Vermont (-1,748), Connecticut (-8,860), West Virginia (-60,871) and Illinois (-159,751). The three states with the most growth were Texas (3,849,790), Florida (2,673,173) and California (2,257,704). The District of Columbia had the highest percentage change (17.3 percent), followed by Utah, Texas and Colorado.

In the early 1970s there was a FRAM oil filter ad in which the grizzled mechanic’s tag line was, “You can pay me now, or pay me later.” Whether it is a home loan in forbearance, or the trillions that the U.S. Government and the U.S. Federal Reserve have advanced to help our economy, a) we have little choice, and b) someone will have to pay. Of course lenders are not only caught up in large-scale measures, but also in Agency, investor, state-level, and regulator changes – all the while handling trillions of dollars of locks. Amazing!

Jeff Reeves, CEO of Canopy Mortgage, wrote, “I found the FHFA’s announcement offensive. Dave Stevens eloquently laid this out. Fannie and Freddie are acting as if they aren’t owned by the same federal government that hastily pushed the CARES Act. How kind of the FHFA (overseer of Freddie Mac and Fannie Mae) to only charge me 700 bps if my buyer loses his job after I fund his loan, and then asks for forbearance in line with the Act. I don’t blame the agencies. I blame the FHFA. It’s like FHFA is self-medicating itself (or trying to medicate the uninformed public) into believing that they’re actually doing something to help, when in reality, they are acting in direct opposition to the spirit of the Act that their parents hastily pushed through. The agencies are owned by the Federal Government and they’re sabotaging the mandate of their parents, and in the process, in the words of David Stevens, are ‘screwing the rest of us.’”

In the meantime, there’s LIBOR!

Turmoil from the coronavirus pandemic has led the UK Financial Conduct Authority to modify some requirements, but the regulator has not wavered in its determination to end Libor use after 2021. Most firms expect the regulator to stand by that position, but some market participants say a deadline shift is unavoidable.

A “masterclass” for navigating the LIBOR transition? Yes there is. There is certainly work being done on scrapping LIBOR contracts.

Fannie Mae has updated certain Uniform Mortgage Data Program (UMDP) datasets, including the DU® Specification MISMO V3.4, Uniform Closing Dataset, and Uniform Loan Delivery Dataset to support future use of SOFR-indexed ARMs. Read more information in the Announcement.

The Fannie Mae Selling Guide Announcement 2020-02 includes additional details about the Secured Overnight Financing Rate (SOFR) ARM products we will begin to accept as of Aug. 3; property tax and escrow clarifications; and other miscellaneous updates.

The Fannie Mae Selling Guide and Standard ARM Plan Matrix have been updated to include information about the SOFR index, new ARM Plan numbers, and individual plan specifications. Also, new Fannie Mae/Freddie Mac uniform Multistate and Texas Home Equity SOFR ARM notes and riders are now available. Refer to the “News & Update Archive” on the Legal Documents page for a complete list.

Wells Fargo Funding posted key dates for LIBOR transition to SOFR. As of April 14, 2020, Wells Fargo Funding no longer accepted 180-day or greater locks for LIBOR ARMs. “LIBOR ARMs Closed on and after June 1, 2020, must include a Note and rider containing the new fallback language as published by Fannie Mae and Freddie Mac. * Loans without the new fallback language are ineligible for purchase. Note: Loans with documents incorporating the new fallback language prior to June 1 are eligible for purchase. The last day to deliver LIBOR ARMs to Wells Fargo Funding for purchase is October 1, 2020. Lock periods must align with last delivery date. October 15, 2020 is the last day Wells Fargo Funding will purchase a LIBOR ARM. Wells anticipates accepting Locks for SOFR ARMs in the 4Q of 2020. (*Fallback language provides direction for the replacement index when a loan’s current index is no longer available. As a reminder, its Non-Conforming program was suspended after April 3, 2020.)

Due to the retirement of the LIBOR Index, First Community Mortgage suspended Conforming ARMs effective April 3rd. The ARM Program will be reactivated later in 2020 when the GSEs release the new SOFR-based ARM programs.

In preparation for the upcoming discontinuance of the LIBOR index, AmeriHome announced the retirement of GSE and Non-Agency LIBOR ARM products effective April 1, 2020.

The PRMG Product Update 20-28 includes profile updates for all Agency LIBOR ARMs, FHA Standard and High Balance and its Ruby Jumbo product.

Redwood Trust will no longer accept locks on its Select and Choice ARM product lines with a LIBOR Index. Oh… wait… I guess that isn’t all RT isn’t doing.

Pay me now, or pay me later

Yes, something needed to be done regarding the U.S. economy’s downward move, no one will argue with that. But it isn’t cheap. Robbie Chrisman wrote, “Lenders, and everyone, should know that with the multi-trillion-dollar fiscal measures the government has enacted in response to the coronavirus pandemic, at some point our nation will have to deal with the resulting build-up of government debt. The last time the government debt-to-GDP ratio was such a pressing concern was after World War II, and like then, this time around will require tax and spending changes necessary to stabilize/reduce the debt-to-GDP ratio of the federal government in coming years.

 

“The social distancing and shutdown measures taken to combat the coronavirus pandemic will likely cause U.S. GDP to contract at an annualized rate in excess of 20 percent in Q2, and the unemployment rate is expected to rise to more than 15 percent by early summer. The CARES act and other pieces of legislation will push the budget deficit of the federal government from about $1 trillion in fiscal year (FY) 2019 to more than $3 trillion in FY 2020 with another expected $1.9 trillion after that in FY 2021. As a percent of GDP, the federal budget deficit will likely balloon to about 17 percent by the end of this year.

“Before the economy declined, the most recent Congressional Budget Office (CBO) 10-year budget projection in early March forecasted that the debt-to-GDP ratio of the federal government would rise to 98 percent in FY 2030 from less than 80 percent in FY 2019, but educated estimates now have the debt-to-GDP ratio jumping to more than 100 percent by FY 2021 and continuing to climb thereafter.

 

“Policymakers have limited control over macroeconomic variables like the real rate of economic growth, inflation, and interest rates, particularly in the short-run. What remains directly in Congress’ control are non-interest spending and tax revenues. Though, any attempt to slash the budget deficit in the near term via reduced government spending and/or higher revenues could risk throwing the economy back into recession.

 

“There are two main categories of non-interest spending by the federal government. First, mandatory spending, as the name implies, is mandated by law and includes Social Security and healthcare spending programs, such as Medicare and Medicaid. Mandatory spending was equivalent to about 13% of GDP in FY 2019.

 

“Discretionary spending is appropriated each year by an act of Congress during the annual budget process. Defense spending accounts for roughly one-half of this category of spending, with the other half including all the many programs that the government funds every year, such as transportation, education, and law enforcement. Discretionary spending was equivalent to 6.3% of GDP in FY 2019.

“In addition to reducing spending, Congress would need to increase revenues to stabilize the debt-to-GDP ratio, raising taxes to above and beyond the scheduled increase that is occurred to take place in FY 2026, when several portions of the 2017 Tax Cuts and Jobs Act are slated to expire.

 

“Most actions are politically impossible in practice, at least at this time. Discretionary spending simply cannot be whittled down to nothing. Senior citizens likely would not accept the cuts in Social Security and Medicare that would be required, and most American would balk at raising tax rates to all-time highs needed to produce the revenue required to return the debt ratio to its 2019 level.

“But there are some factors that could help that we have not considered in this report. First, interest rates have fallen to multi-decade lows, and they may not rise as much as the CBO forecasts in coming years. Lower interest rates would lead to lower deficits, everything else equal. Second, real GDP growth and/or inflation may be higher that CBO projections in coming years, which would also help to stabilize the debt ratio or bring it lower.”

Robbie’s note went on. “With servicing values contracting further than estimates, the question now is whether servicing hurdles will impede a housing recovery. The CARES Act instructs mortgage servicers to grant forbearance of up to 180 days or more to most borrowers who are out of work through no fault of their own due to the coronavirus pandemic, which should alleviate household financial stress but may in turn stress the housing finance system.

 

“The Mortgage Bankers Association’s reports show that the share of mortgage loans in forbearance continues to grow. While the concept temporarily stopping financial obligations is straightforward, execution for the financial sector is a bit more complicated. Typically in forbearance, banks extend 0 percent credit to a homebuyer, but then sell that mortgage to another firm which restructures the incoming payments, packages them into mortgage-backed securities (MBS) and sells the MBS to investors. The process generally frees up bank balance sheets, encourages more lending and makes homeownership more affordable. While the extension of forbearance mitigates the threat of widespread delinquencies, it raises the risk to servicers that act as the middlemen between lenders and investors. Servicers of federally backed mortgages (about 70 percent of all mortgages) are still expected to pay MBS holders despite not receiving monthly payments from borrowers, leading to a liquidity crunch. That lack of cash, in turn, could choke off credit creation and make it more difficult for housing to help lead the recovery. This is why a housing finance coalition has requested a liquidity facility beyond the additional flexibility granted to servicers already announced by the Fed.

 

“Treasury Secretary Steven Mnuchin did offer reassurances on the stability of the U.S. mortgage market amid the coronavirus pandemic and the squeeze it has put on mortgage servicers, saying, ‘We’re going to make sure that the market functions properly.’ Mnuchin said a Financial Stability Oversight Council task force had specifically studied the issue of mortgage servicer liquidity. The industry is seeking a backstop to the funding advances thrust upon it by the CARES Act through lending facilities that can be orchestrated or backed by the Federal Reserve, FHFA, Ginnie Mae, or another party.

“Without a sizeable and low-cost lending solution, many of the servicing institutions that are supposed to aid borrowers during this time may not be able to serve that purpose. The issue could be especially acute for nonbank servicers, which don’t have deposits or other sources of liquidity that banks do. Access to a more stable funding source would help to alleviate the pressure in the market being created by margin calls and subsequent liquidation of underlying collateral.”

What do bored stuntman/stuntwomen do? They have time to work on stunts together separately. Definitely entertaining. Besides, you have nothing else going on, so give it 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, “Loan Officers: Now More Important Than Ever”. If you have the inclination, make a comment on what I have written, or on other comments so that folks can learn what’s going on out there from the other readers.

Rob

(Market data provided in partnership with MBS Live. For free job postings and to view candidate resumes visit LenderNews. This newsletter is designed for sophisticated mortgage professionals only. There are no paid endorsements by me. For up-to-date mortgage news visit Mortgage News Daily. For archived commentaries, or to subscribe, go to www.robchrisman.com. Copyright 2020 Chrisman LLC. All rights reserved. Occasional paid job & product listings do appear. This report or any portion hereof may not be reprinted, sold, or redistributed without the written consent of Rob Chrisman.)