Aug. 1: Letters on iffy government data, forbearance, the Fed; LIBOR transition update; Saturday Spotlight: Capacity

In Scotland, many owners paint their front door red when they pay off their loan or own the house debt-free. Is an all-cash buyer the biggest competitor for a broker or loan officer? A report from Construction Coverage, a building industry information service, shows over 20 percent of California owners don’t have a mortgage. Nationally, 26.4% of owners are mortgage-free. Only five states had fewer: Maryland, lowest at 16.6% then Massachusetts (19.2%), Utah (19.3%), Rhode Island (19.6%) and Colorado (19.7%). These mortgage-free owners often can ignore certain slices of the economic debate, interest rate swings, credit tightening, cheap money, losing their home due to foreclosure, any discussion of forbearance. The article points out that mortgage-free owners are wealthier, live in pricier homes, and usually spend more money every month. And are fertile grounds for cash out refis, right?

Saturday Company Spotlight

This week we highlight Capacity’s focus on the founding, growth, employee mentoring in a work from home environment, entrepreneurship, and charity work. Lenders and vendors do have another side to them other than strictly business.

In 3-5 sentences, describe your company (when was it founded and why, what it does, where, recent growth, and plans for near-term future growth). Capacity was founded in 2017 in St. Louis, Missouri by David Karandish and Chris Sims to help teams do their best work. Capacity is a new kind of helpdesk, powered by artificial intelligence, that automates support for mortgage loan officers and borrowers. Packed with industry-leading artificial intelligence (AI) and machine learning (ML) functionality, the Capacity suite automates support and integrates with critical applications to expedite the loan process. In the current environment, Capacity keeps loan officers engaged and energized despite burnout by automating repetitive tasks in the refinancing process.

Tell us about what type of volunteer work employees are encouraged to engage in, or charities your company supports, and why. Capacity constantly rallies behind community initiatives. In addition, our team members volunteer to teach coding courses at our sister organization, Create a loop. Create a Loop is a non-profit organization dedicated to bringing rigorous and ambitious computer science instruction to students in the Saint Louis Metropolitan area, including students from low income backgrounds, who have little to no access or are otherwise underrepresented in the field of computer science.


What does your company do to help elevate your employees’ growth? Describe any mentoring programs, outside classes or training, in-house training. How does the company help people develop? Capacity encourages collaboration among team members, and we have enabled a virtual coffee program to encourage team members that typically wouldn’t interact on a daily basis to get to know each other. In terms of in-house training, we host weekly sessions for our sales and marketing team to share new details regarding our product, strategic messaging, and direction.


Tell us how your company maintains its culture in the office, or in a work-from-home environment if applicable. Capacity team members have fun “virtual” get-togethers while working from home. We recently did a “Nailed It” party to see who could make the best rainbow cake for pride month. While working remotely, we host regular happy hours via Zoom. And, when in the office, we have Wednesday night work late dinners, and we have a quirky-yet-comfy tradition of wearing slippers.


What things you are most proud of that don’t have to do with sales? We are proud of our mission, which is to help teams do their best work. We love hearing from our customers about how Capacity is streamlining the loan underwriting process, reducing the time needed to close loans, expediting the onboarding process for new loan officers, and creating a better overall customer experience.


Fun fact about Capacity: Our office is located in the Delmar Loop in St. Louis, which was named one of the top 10 greatest streets in America by the American Planning Association. Our team loves working there so much that a majority have done their part in making sure that the small businesses located on the street are still open when we return by trekking out to give them business even while working from home.  

(For more information on having your firm featured, contact Chrisman LLC’s Anjelica Nixt.)

Home Ownership: Faulty Numbers?

This week the Census Bureau reported that the homeownership rate surged to a 13year high

of 68.2% in the second quarter from 65.3% in the first quarter. The information prompted Brean Capital’s John Ryding, Chief Economic Advisor, and Conrad DeQuadros, Senior Economic Advisor, to address this data and current economic data in general.

This secondquarter homeownership report may tell us more about the quality of statistics during the pandemic than anything real about the housing market. Census said it ‘suspended inperson interviews … on March 20th … through the entirety of data collection for the second quarter’ and relied entirely on telephone interviews. The response rate in the second quarter was only 67% compared to 79% in the first quarter of 2020 and the second quarter of 2019. Past procedures would have had followup visits to attempt to determine if a unit was occupied but these did not take place.

In the FAQs that accompanied the report, Census gave thinly veiled warnings that the data could be misleading but in burying the lead in the FAQs the message ‘data users should consider the potential for the suspension of inperson interviews to disproportionately affect the response rates of renters versus homeowners’ and the effects ‘would be a lower estimate of the number of rental households, a higher estimate of the number of homeowner households, and a higher estimate of the homeownership rate.’ Census should have been blunt and said the secondquarter data are nonsensical.

“…The secondquarter observation was an outlier unlike anything seen before… this is nonsensical and says more about the quality of the data than the change in homeownership. Homeownership rates might have risen in the second quarter but by how much? To become a homeowner, one has to actually buy a home. Census reports that the number of owner-occupied homes increased by 4.77 million in the second quarter. This could only occur as a result of building a new home or buying a rented home or an unoccupied home from say a bank portfolio. Census reports that the number of renteroccupied units fell by 2.38 million but also that the vacancy rates on rental units fell to a 36year low of 5.7%. How plausible is it that there were 4.77 million new homeowners in the second quarter? Not in the slightest.

First, how many new homes could have been sold in the second quarter? Census reports that 302,000 new homes were completed during the AprilJune period and that there was a reduction of 23,000 in the inventory of new singlefamily homes for sale. This represents a possible 325,000 new homes that could have been purchased in the second quarter but the first quarter showed 275,000 new homes could have been purchased, so not much of a change in trend there. The National Association of Realtors reports that there were 1.255 million existing homes purchased in the second quarter but this number was 1.068 million in the first quarter. Unfortunately, and perhaps underscoring the poor quality of the housing data, there is virtually no correlation between the change in occupied housing units, existing home sales, housing completions and the change in the inventory of unsold new homes (R2 of 0.07). Such as it is, the regression would have predicted an increase of 200,000 in the number of owner occupiers in the second quarter.

The homeownership data are so far from the sample we cannot even conclude whether the rate even went up. However, we saw numerous stories that simply wrote about the data as if they were telling us something about the real world. All the housing stock report told us was that a lot of people were not around to answer the phone! Not only is it going to take a long time for the world to show some semblance of normality but it might take a while before we can measure what is actually happening with any accuracy using some of the traditional government economic reports.” Thank you, John and Conrad!

The demand is pushing home prices to record highs. “When the pandemic helped tip the U.S. economy into recession, most homeowners and home buyers braced for falling house prices,” says Chief Economist Danielle Hale. “That’s what happened in the last recession. But that’s not what we’re seeing in today’s market. We had a housing shortage already, and the pandemic has created conditions that have only worsened it.” It kind of amazes me that people are comparing this recession to the last one, which was caused by a burst residential real estate bubble. The two aren’t remotely comparable, at least as far as housing is concerned

The Fed

The Fed maintained its stance this week. But know that the Federal Reserve’s Open Market Committee’s actions carry a lot of weight around the world, and Brent Nyitray has some thoughts on one of its possible actions versus market forces. “The Fed is considering the idea of basically controlling the entire yield curve, which means it essentially sets interest rates by diktat. The Fed is reaching into its historical toolbox and returning to the Truman Administration, where the Fed pushed down rates to limit the government’s borrowing costs. Japan has experimented with the same policy. Note that the rest of the world more or less relies on the 10-year US bond yield to determine the correct price of risk, and taking that number out of the hands of the market is playing with fire.

In my opinion, we have a sovereign debt bubble of epic proportions, with negative yields all over the globe. Like all bubbles, this one will probably blow up too once inflation returns. I have no idea what it will look like, but I can almost assure you that politicians, the media, and academia will blame the free market and not a bunch of academics sitting in a room trying to manipulate the price of money the way the Soviets manipulated the price of corn, tractors or gasoline.”


Julian Hebron with The Basis Point sent “2 Underreported Risks: Homeowners Extending & Re-Entering Mortgage Forbearances.” Julian notes, “Yes forbearances are down from 4.3m to 3.9m last 6 weeks, but here are 2 underreported risks to watch: (1) forbearance extensions have spiked from 3.97% on May 31 to 50.23% on July 19, and (2) new data this week show homeowners who had ended forbearance are now reentering forbearance, which cuts them off from refi relief.”

Transition away from LIBOR

Remember that there is no guarantee that LIBOR will be published, and owners and servicers tied to adjustable rate loans (not only home loans) tied to that index are moving away from it. In May the FHFA, therefore Freddie and Fannie and the Federal Home Loan Banks, published its stance on the transition.

Wells Fargo Funding reminded clients that, as announced in April’s Newsflash C20-022, key dates apply to the London Interbank Offered Rate (LIBOR) adjustable-rate mortgage (ARM) transition to Secured Overnight Financing Rate (SOFR): October 1, 2020 (last day to deliver a LIBOR ARM Loan for purchase even if the lock is valid beyond October 1), October 15 (last day Wells Fargo Funding will purchase a LIBOR ARM), and November 16, 2020 (anticipated date to register, lock, and deliver SOFR ARMs).

Across the Pond, the European Commission has proposed that it have authority to specify which alternative reference rate is used in the shift away from Libor. The move is intended to provide legal certainty, as EU rules do not give authorities power to address the switch directly.

The loan market is showing preference for the lag method of calculating interest rates as the phaseout of Libor nears, while the bond market is leaning toward the shift approach. The difference is “not necessarily fatal” but means total alignment is impossible, says Katie Kelly of the International Capital Market Association.

Some derivatives markets participants don’t fully understand the steps that will be taken to shift collateralized derivatives pricing from Libor to the Secured Overnight Financing Rate, said Tom Wipf, head of the Alternative Reference Rates Committee. These gaps in understanding “could be potentially disruptive to the pricing and liquidity of SOFR instruments, potentially leading to unanticipated volatility for the market overall”, he said.

A couple in their nineties are both having problems remembering things. During a checkup, the doctor tells them that they’re physically okay, but they might want to start writing things down to help them remember.

Later that night, while watching TV, the old man gets up from his chair. “Want anything while I’m in the kitchen?” he asks.

Will you get me a bowl of ice cream?”


Don’t you think you should write it down so you can remember it?” she asks.

No, I can remember it.”

Well, I’d like some strawberries on top, too. Maybe you should write it down, so not to forget it?”

He answers, “I can remember that. You want a bowl of ice cream with strawberries.”

I’d also like whipped cream. I’m certain you’ll forget that. Write it down!” she snips.

Irritated, he says, “I don’t need to write it down, I can remember it! Ice cream with strawberries and whipped cream – I got it, for goodness sake!”

Then he toddles into the kitchen. After about 20 minutes, the old man returns from the kitchen and hands his wife a plate of bacon and eggs.

She stares at the plate for a moment.

Where’s my toast?”

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Rob Chrisman