Jan. 30: LIBOR phase out updates; note on the economy & lenders; Saturday Spotlight: ClosingCorp

Tomorrow when I wake up, I might go running. Or I might win the lottery. The odds are about the same. With all the snow this week, it is hard to tell if the homes without shoveled driveways are owned by people who are elsewhere, lazy, or the house itself is vacant. Despite interest rates near all-time lows, depleted inventory, and bidding wars in many parts of the country, in some parts of the country, there are large numbers of vacant homes. These are primarily located in tourist-centric regions with a high percentage of seasonal vacation homes, but also in towns with higher-than-average rental vacancy rates. Homes that qualify as vacant also include those that were recently sold but not occupied, or vacant houses that are currently for sale. The average vacancy rate for rentals in the U.S. was about 7 percent, while the homeowner vacancy rate was about 1.4 percent, both of which put downward pressure on home prices, per Sundae. Where in the U.S. has the most vacant homes? Ocean City, MD was number one and Avalon, NJ was number two.

Saturday Spotlight: ClosingCorp, providing automated closing cost solutions to clients.

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).

Founded in 2006, San Diego-based ClosingCorp® is the leading provider of residential real estate closing cost data and technology for the mortgage and real estate services industries, that has processed more than 25 million fee quotes. Its innovative, market-leading solutions enable lenders to seamlessly quote and order settlement services as well as quote transfer taxes and recording fees, down to the penny, with a guarantee. All of this improves the borrower experience, mitigates compliance risk, and ultimately shortens processing times.

With more than 35% market share, ClosingCorp has more than 400 clients, including 18 of the top 25 lenders nationwide and 19 of the top 25 wholesale lenders in the U.S. More than 20,000 settlement services providers nationwide are in the ClosingCorp network.

Tell us about what type of volunteer work employees are encouraged to engage in, or charities your company supports, and why.

ClosingCorp is committed to creating social change by helping build homes for deserving families in San Diego. In partnership with Habitat for Humanity, ClosingCorp employees mobilize and participate in volunteer homebuilding projects and inspire and recruit others to join these efforts.

ClosingCorp also partners with North County Lifeline which serves low-income, disadvantaged populations across North San Diego County through donations of goods and services.

As a company of animal lovers, in 2019 the ClosingCorp Loves Pets initiative was launched with the mission to keep all animals, including those in shelters, safe and healthy. As part of this initiative, employees continuously collect new pet supplies and provide shelter supply kits for furry friends awaiting adoption. The initiative also sponsors pet adoptions at industry events, like the Ellie Mae Experience.

Tell us how your company maintains its culture in the office, or in a work-from-home environment if applicable.

Our company culture is one of respect, fun, and encouragement. It’s a casual, flexible, collaborative, and dog-friendly work environment led by Bob Jennings, a well-respected industry leader with a passion for health and fitness.

Before and during the pandemic, the company has held after-work events such as Zoom Trivia or Family Feud. Additionally, the company sponsors their “Movement Challenge”, encouraging employees to take time out of their workday to, well, move! The company believes that finding opportunities to move safely is the best medicine for our minds and our bodies during these challenging times. Movement can take the form of running on trails or walking in your neighborhood (social distancing, of course), getting your yoga mat out and finding a free online yoga class or hopping on the online / group exercise craze (hello, Peloton!)

Fun fact about ClosingCorp 

The company started off as a B2C company providing closing information to home shoppers. It pivoted to B2B in anticipation of industry regulations, like TRID.

(For more information on having your firm, employee growth, and your charitable side featured, contact Chrisman LLC’s Anjelica Nixt.)

Economic climate for lenders

Former Ginnie Mae President and Chairman of JJAM Financial Joe Murin wrote to say that he is concerned that the mortgage industry has been in a “20-year refinance cycle,” to the detriment of its ability to plan for a change in the market. “We’ve gotten too accustomed to this endless refinance cycle, and I worry that some businesses will be unprepared when (not if) the market changes. We’ve seen one default/REO cycle and maybe one, brief purchase cycle since 2001, and it’s had an effect on how we manage our businesses, especially looking ahead.

“We’ve never seen a central banking policy this extreme before, and the industry has really enjoyed the benefits of these historic interest rates. But they’re not sustainable, and I’m not entirely convinced we’re widely prepared for either a purchase market or a new default cycle.

“We’ve been so focused on, first, selling refinance mortgages and then, finding ways to process an avalanche of refinances, that I think we’ll soon find out who has been preparing for the impending purchase cycle. They’re two quite different transactions, both on the marketing side and the operations/production side. And while it’s fantastic that so many have had a chance to thrive over the past two or three years, success in a purchase market only comes with a lot of preparation, solid strategy, and excellent execution. I think there will absolutely be businesses that step to the forefront when rates finally do start to go up. But I worry for those who plan to react or, even worse, aren’t really planning for anything beyond more refinance loans. Have a look at the 10-year Treasury Yield. We won’t have interest rates like this forever without consequences.”

The Urban Institute had some interesting news for household and homeownership growth. The report showed homeownership rates are likely to fall in the next two decades, with the exception of the Hispanic homeownership rate which will rise to above 50% and plateau for most of the next decade. Every other ethnic demographic is expected to see percentage declines as the overall population continues to get older. While percentages will decline, the total number of homeowners will increase. The report says that “the net growth in the number of homeowners between 2020-2040 will come from people of color, especially Hispanics”. The UI estimates that from 2020-2040, there will be a net gain of 6.9 million homeowners. Hispanic homeowners will grow by 4.8 million, Black homeowners will increase by 1.2 million homeowners, other races (mostly Asian) will grow by 2.7 million homeowners, and the total number of non-Hispanic white homeowners will drop by 1.8 million. I encourage you to read the executive summary and full report here. There will be lots of job security in the housing industry for agents and corporations that hire and market intelligently to Hispanic populations!

The New York Fed published a brief examining the pandemic’s effects on Black-owned businesses and found that the geographic correlation between these firms and COVID-19 cases, racial disparities in access to the Paycheck Protection Program, and a weaker financial cushion along with weaker banking relationships contributed to the shuttering of nearly half of Black-owned business amidst the pandemic. There is a “disturbing” positive relationship between COVID incidence and the share of a county’s Black-owned businesses, since areas with higher concentrations of these firms are more likely to be facing larger effects of the pandemic.

Recent research has separately shown an alarming incidence of COVID-19 cases among Blacks, racial disparities in access to federal relief funds, and higher rates of Black business closures. An under-appreciated point, underscored here, is the close ties between the health and economic effects of COVID-19 in specific communities: counties with the highest concentration of COVID-19 are also the areas with the highest concentration of Black businesses and networks.

LIBOR phase out

Most lenders I’ve spoken with have already moved to Treasury index-based adjustable-rate mortgages. Yes, ARMs only make up about 2 percent of current applications, but they are still a product offered by most lenders. And there are trillions of dollars of assets around the world tied to LIBOR, which by the end of this year is not guaranteed to be published. The end of LIBOR matters to financial institutions all over the world, because so many interest rates are pegged to the sunsetting standard. But community financial institutions have a particular reason to care about LIBOR’s end: the syndicated loans that many CFIs hold on their balance sheets, many of which are still pegged to LIBOR. Review those contracts!

Lenders doing ARMs through Freddie Mac or Fannie Mae should review the FHFA guidance.

For an example of what lenders are doing, ReverseVision announced it has updated all documents that reference an index to support both the Constant Maturity Treasury (CMT) and London Interbank Offer Rate (LIBOR) indexes. “ReverseVision will update custom documents and private reverse mortgage program documents upon request free of charge.”

A speech last month delivered by Nathaniel Wuerffel, SVP at the Federal Reserve Bank of New York, was titled “No New LIBOR.”

Last week, on January 21, the CFPB issued its semi-annual report to Congress covering the Bureau’s work from April 1 to September 30, 2020. The report, which is required by Dodd-Frank, addresses, among other things, the effects of the Covid-19 pandemic on consumer credit, significant rules and orders adopted by the Bureau, consumer complaints, and various supervisory and enforcement actions taken by the Bureau. In addition, the report notes the issuance of several significant notices of proposed rulemaking related to remittance transfers, debt collection practices, the transition from LIBOR, and qualified mortgage definitions under TILA. Multiple final rules were also issued concerning HMDA reporting thresholds (of which there were two final rules); remittance transfers; and payday, vehicle, title, and certain high-cost installment loans. Several other rules and initiatives undertaken during the reporting period are also discussed.

Tom Wipf, chair of the Alternative Reference Rates Committee, notes progress has been made on the transition from Libor to the Secured Overnight Financing Rate, with the implementation of a fallback protocol for derivatives contracts and the publication of ICE Benchmark Administration’s guidelines for a smooth transition. He adds that recent regulatory announcements should be taken as “a signal that market participants should immediately stop issuing USD Libor-based instruments and start writing SOFR into new contracts.”

U.S. lenders, and worldwide financial markets, have known for years that LIBOR would be discontinued. Even so, plenty of existing contracts are still pegged to LIBOR. In many instances, says the New York Fed, credit agreements have fallback language, but the provisions aren’t economically appropriate or sufficiently robust. The key distinction is how much input lenders have in determining the new rate. PCBB offers a paper worth a gander: A Smooth Transition from LIBOR to SOFR. Banks need to check their loan agreements, determine which contracts lack sufficiently robust, economically appropriate fallback provisions for LIBOR’s retirement, and amend those agreements.

Pacific Coast Bankers Bank writes, “In June 2020, the Alternative Rates Reference Committee (ARRC) issued refreshed fallback language that CFIs can use, either as part of syndicated loan credit agreements that they’re originating or as an amendment to existing agreements before LIBOR ends. This language essentially says that when LIBOR is no longer a benchmark, a LIBOR-pegged loan will fall back to a variation of SOFR plus a spread adjustment. The adjustment is based on the historical relationship between the two benchmarks and is intended to minimize the economic impact from the change in benchmark basis. The verbiage is highly recommended for institutions to use, even though it isn’t mandated.”

It is recommended that fallback language should be part of any new loan or refinancing currently being done. And as of June 30, 2021, lenders should not originate any additional loans that are indexed to LIBOR.

An abrupt switch from Libor to other benchmarks at the end of this year could lead to major disruption in the pricing of financial products, bank executives say. They warn of legal and systems challenges, as well as obstructions in the flow of funding to businesses.

Ginnie Mae Extends Securitization Deadline for LIBOR Based HECM Loans. Ginnie Mae issued All Participant Memorandum 20-19 (APM 20-19) to extend the deadline for securitization of new LIBOR based home equity conversion mortgage (HECM) loans.

Despite having years of advance notice, some entities are just getting around to addressing any moves. For example, in New York, the Governor suggested LIBOR transition safe harbors in its proposed budget. The budget documents include the language for legislation (see page 233) from companion bills ( S.0297/A.0164) introduced earlier this month to facilitate the transition away from LIBOR. “Most tenors of U.S. Dollar LIBOR are now expected to expire on June 30, 2023, and the legislation would transition any contracts (including adjustable-rate mortgages) without robust fallback options to a recommended index – likely the Secured Overnight Financing Rate (SOFR). The legislation also would provide safe harbors in certain situations when contracts are transitioned from LIBOR to the recommended index. Similar legislation was introduced during the previous Congress, and the New York legislation is viewed as a helpful step to provide certainty should Congress not pass a bill before the discontinuation of LIBOR. Support from the Governor’s office will be helpful in enacting the legislation, whether it is done as part of the budget or separately.”

(Thank you to Ray W. for this oldie but goodie. Rated PG, perhaps.)

On his 74th birthday, a man got a gift certificate from his wife.

The certificate paid for a visit to a medicine man living on a nearby reservation who was rumored to have a wonderful cure for erectile dysfunction.

After being persuaded, he drove to the reservation, handed his ticket to the medicine man, and wondered what he was in for.

The old man slowly produced a potion, handed it to him, and with a grip on his shoulder warned, “This is a powerful medicine and it must be respected. You take only a teaspoonful and then say 1-2-3. When you do that, you will become more manly than you have ever been in your life and you can perform as long as you want.”

The man was delighted. As he walked away, he turned and asked, “How do I stop the medicine from working after I’m satisfied?”

“Your partner must say 1-2-3-4,” he responded. “When she says that, the medicine will not work again until the next full moon.”

He was very eager to see if it worked so he went home, showered, shaved, took a spoonful of the medicine, and then invited his wife to join him in the bedroom.

When she came in, he took off his clothes and cried out, “1-2-3!”

Immediately, he was the most masculine of men.

His wife was excited and began throwing off her clothes and then she asked, “What was the 1-2-3 for?”

And that boys and girls, is why we should never end our sentences with a preposition… because we could end up with a dangling participle.

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, “Lenders and Vendors Going Public: Pros and Cons”.

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(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 2021 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.)