Dec. 22: Notes/news on the Flood Bill, current (ugh) lending environment, state laws, and LIBOR phase-out

The latest on politics and the Flood Bill? The bill to extend it through May 31, 2019 had passed the House. It had passed the Senate earlier, so it now goes to President Donald Trump for his signature. His signing it would be good, as there are some areas of the nation which have flood warnings as we start winter.

Forget the whole, “Winter is coming” thing. It’s here, both seasonally and, for many lenders, with business conditions. Staff cuts all done, down to skeleton crews? Expenses down far enough to be competitive? Reduced LO comp and lowered max caps? Shifted underwriting to your investors? Somewhat dire, yes, but the industry is expected to do about $1.5 trillion next year, and it has to be originated somewhere! Don’t forget that owners and managers of mortgage companies, and bank mortgage divisions, are smart, savvy business people.

All of that reminded me of a note from an industry vet in San Diego: “I remember the CFO of a San Jose-based mortgage company telling me in the early 1990’s that as year-end was approaching, he instructed the shipping group to work overtime to ship as many loans as possible. For accounting purposes, gains and losses were recorded when loans were shipped. He did not specify which loans to ship and the company needed to report income to maintain its minimum net worth test for its warehousing agreement covenants. But shipping shipped too many loans with losses and the warehouse lenders provided a one-month waiver as the company shipped the loans with gains in January.”

Industry vet James Johnson sent this note. “Rob: You might find this interesting. Last week I had a very nice Holiday lunch with a group of my mortgage banking buddies. These guys are all very current on what is going on in the biz, and we spent a good part of the day discussing today’s tough market and how this might play out. The next day one of the attendees sent me an email commenting, ‘I did not come away with any comfort on how long it will take for the market cycle to turn favorable.’ I think this is the question just about everybody is asking, so I will give you my opinions.

“With one possible exception (a big drop in rates), there is really nothing that is going to make things better any time soon. House sales are slowing, house prices are not going up like over the past few years and are softening in many markets, homebuilding is likely slowing as well. So, no obvious pick up in volume. Margins are not good right now and will not get better until we see a considerable reduction in capacity, both through failures, consolidations, and eventually people leaving the industry. During our lunch discussion, we all saw this process taking some time to play out.

“My personal opinion is this consolidation trend will accelerate in 2019, but things will not get better until 2020 or more likely 2021. In the meantime, it is only a guess how many casualties we will have. Your comments about owners bleeding capital and having to put personal money back into the business are right on the mark, and we all wonder how long that will continue? I think our consensus was that bleeding capital makes no good business sense, but owners are determined to ride out the storm and will continue to battle the trends. Most of the company owners I talk with are actually pretty realistic about what is going on but are reluctant to make moves to do something about it. That is why I see this whole down market dragging on with a slow bleed. Too many owners will either go under or lose half of their net worth before things stabilize. A sad commentary.”

The Mortgage Collaborative’s COO Rich Swerbinsky has some thoughts on where the residential lending industry will be in 2019, as well as the twenty things most “top of mind” for individual lenders.

State law changes impacting lenders

Things quieted down for state-level changes in December, but many states have residential regulations under consideration heading into 2019.

The Washington Department of Financial Institutions (DFI) has recently issued interim guidance on the use of a trust account when receiving reimbursement for payments to third-party service providers. The DFI plans to implement this guidance through rulemaking in 2019. Through this new guidance, the DFI seeks to clarify the Washington Mortgage Broker Practices Act as it applies to the use of trust accounts.  The DFI provides an interpretation for, but does not amend, the Act. As industry practices have changed over time, the DFI has determined that consumers can be protected, and the regulatory burden lessened, by providing a simplified interpretation.  The DFI’s new guidance states that: 1) funds received by a broker from or on behalf of a borrower for payment to third-party providers prior to closing are considered trust funds; and 2) funds received by a broker from a settlement agent or lender, on or after closing, for reimbursement to the broker solely for payment to third-party service providers, are not trust funds.

The Ohio Legislature has passed SB263, the Notary Public Modernization Act, a bill supported by OMBA. The legislation is on its way to the Governor to be signed into law. The bill will give the ability to consumers to choose to conduct their real estate finance transactions using remote online notarial acts and will modernize the notary function. Notarial acts are a necessary component of the residential loan closing process.  As the industry continues to serve consumers’ needs by using online, mobile and other electronic means, it had become clear that Ohio needed a law in place to support this technology shift. The legislation makes remote online notarizations equivalent to traditional notarizations without risks and unnecessary barriers. The legislation provides appropriate safeguards that ensure that fraud and capacity issues are appropriately addressed by the remote notarization process. The legislation also provides needed reform in the notarization process and raises the professional standards for those performing the notary act.

LIBOR developments

Most lenders have current adjustable-rate products, or servicing, tied to various indices. Including the London Interbank Offered Rate (LIBOR). At the current time the plan is to phase LIBOR out, given past indiscretions regarding fixing, and the Mortgage Bankers Association is watching it. Dan Fichtler reports, “The MBA is spending quite a bit of time on the transition away from LIBOR. On the residential policy side, MBA has a working group on the mortgage-related elements of the transition – this group is our main venue for all of our policy work on the issue. Our main goal (aside from educating our members…see more below) is to serve as a forum for establishing best practices and/or standardization for the industry. This will include discussions around criteria for choosing new benchmarks for future production, operational issues related to servicing legacy loans tied to LIBOR, new consumer and other disclosures, and changes to fallback language in contracts.

“We have also been covering the issue through our policy committees and conferences. Our Secondary & Capital Markets Committee and Community Bank/Credit Union Network have heard from senior officials from the Fed and ICE (the administrator of LIBOR). We have also had panels on the LIBOR transition at our Secondary and Financial Management conferences, with more coming in 2019. These efforts are largely meant to provide information and education to our membership.

“As far as the GSEs, our expectation is that they will be spending more time in 2019 determining: 1) what they will accept in terms of future production; and 2) what benchmark(s) they will use for servicers of legacy loans tied to LIBOR. We hope to work with them on issues like potential changes in the note language and the developments of timelines and implementation instructions (a la the Single Security Playbook, for example).

“Finally, we are encouraging all of our members to identify their LIBOR exposures now…that’s an important proactive step that institutions can take, even if they don’t have answers to questions related to future production and servicing just yet.”

The Swiss Financial Market Supervisory Authority has issued guidance on replacing Libor, warning that moving to alternative reference rates has legal, valuation and operational-readiness risks. FINMA says amending contracts that mature after 2021 “to include practicable fallback clauses could help minimize potential legal risks”.

SIFMA weighed in with some history and where the capital markets are on moving away from LIBOR and toward SOFR. “Another significant change impacting markets is the transition away from the London Interbank Offered Rate (LIBOR) as the standard reference rate. It is estimated $200 trillion of financial contracts and securities ($190 trillion in derivatives; $10 trillion in corporate bonds, mortgages, securitized products, credit card receivables, etc.) are tied to LIBOR, being used by small businesses, corporations, banks, broker- dealers, consumers and investors as a benchmark for short-term interest rates. In response to concerns regarding the reliability and robustness of LIBOR and other reference rates across the globe, the Financial Stability Board (FSB), as established by the G20, and Financial Stability Oversight Council (FSOC) called for the development of alternative risk-free benchmark interest rates supported by liquid, observable markets.

“In the U.S. in 2014, the Board of Governors of the Federal Reserve System and the New York Fed established the Alternative Reference Rates Committee (ARRC), which eventually selected the Secured Overnight Financing Rate (SOFR) as the recommended alternative reference rate for the U.S. LIBOR is based on thinner markets and is not fully transaction based – the most active tenor (three months) posts less than $1 billion transactions per day – and submitted rates typically include expert judgement from market participants when determining the rate. SOFR, however, is based on the overnight repo markets, with over $700 billion of transactions per day. It is fully transaction based and therefore regarded as more robust than LIBOR.

“The ARRC will continue to lead the transition away from LIBOR. Its objectives include, among others: identifying best practices for alternative reference rates and contract robustness; making recommendations for developing an implementation plan for orderly transitions away from LIBOR on a voluntary basis; and working with market participants to encourage the development of sufficient liquidity in futures and swaps markets referencing the new rate. The ARRC’s plan for a smooth transition away from LIBOR is ahead of schedule.”

While the ARC’s work in the U.S. is helpful, bank legal experts are concerned financial regulators in different countries may embrace inconsistent fallbacks to replace Libor. Uncertainty about Libor fallbacks is making it difficult for banks to plan and is prompting calls for a supranational approach. Stay tuned!

(Yes, this is a gal’s joke; I am merely passing it along.)

Looking in the mall for a cotton nightgown, I tried my luck in a store known for its hot lingerie. To my delight, however, I found just what I was looking for.

Waiting in the line to pay, I noticed a young woman behind me holding the same nightgown. This confirmed what I suspected all along, that despite being over 50, I still have a very “with it” attitude.

“I see we have the same taste,” I said proudly to the 20-something behind me.

“Yes,” she replied. “I’m getting this for my grandmother for Christmas.”

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Rob Chrisman