Nov. 16: State-level lending changes & trivia; primer on the term “repo” & why it’s good to know the basics

How ‘bout this letter this week from an MLO. “I have been in the industry for 35 years and received a question from a past customer below. I have never heard of this product nor does it make a lot make a sense to me based on the logistics, like running credit reports every month. Have you heard of it, and/or perhaps your readers can shed some light on this. ‘It’s been 7 1/2 years since you assisted my husband and me in purchasing our first home. Thank you for all your help! I have a question regarding a type of loan I have never heard about. My friend has a 30-year, fixed-rate mortgage, but the payments fluctuate if her credit score changes. It’s not due to increases in taxes or insurance. Have you ever heard of such a loan? If it helps, she obtained the mortgage in Arizona. Would refinancing into a different loan product be possible?’” This one “stumped the chump” (aka, me), so if anyone has any information that I can pass along, let me know.

There are all kinds of things going on at the state level. Although LeBron James traded the Buckeye state for the Golden state, he could afford it. That probably isn’t the case for most of us. It turns out Akron, Ohio, has the most affordable housing (median house price divided by median annual household income), with a ratio of 1.83. That figure is 8.2 times cheaper than in Berkeley, California, the city with the least affordable housing, with a ratio of 15.04.


Looking for rental affordability? Move to Cedar Rapids, Iowa, which boasts the lowest median annual gross rent divided by median annual household income. The figure comes to just over 15 percent, 2.7 times lower than in Hialeah, Florida, with 41.25 percent. But if you are looking to buy rental units, don’t go to Little Rock, Arkansas. Its rate of vacant units at 16 percent is over 11 times higher than in Burlington, Vermont and Santa Ana, California, the cities with the lowest at 1.40 percent.


Want to live large on a budget? Laredo, Texas, may be for you, as it has the lowest cost-of-living index. To put that in perspective, the cost of living is 2.5 times lower than in San Francisco. So a $10 burger in San Francisco would only be $4 in Laredo.


Wow, Virginia Beach, Virginia is an amazing place to live! Of the 62 largest U.S. cities, it boasts the highest homeownership rate (64 percent), the lowest share of residents living in poverty (8 percent), and the fewest violent crimes per 1,000 residents (1.38). To put that in perspective, only 30 percent of Miami residents own their homes, nearly 38 percent of Detroit residents live in poverty, and St. Louis recorded 20.8 violent crimes per 1,000 residents.


Did you know San Francisco has the lowest median debt rate per median earnings of the 62 largest cities in the U.S.? The figure sits just below 14 percent, which is six times lower than the nearly 84 percent figure Aurora, CO registered.


The shortest average commute time of the 62 largest U.S, cities belongs to Wichita, Kansas, at just above 18 minutes. Compare that to New York City at almost 41 minutes, which is 2.2 times as much.

The Department of Financial Services (DFS) proposed changes to the Loan Servicing Rule. In response to this proposal, New York MBA and MBA issued a joint letter to New York DFS.

WMBA Members were notified that the extension of fee waivers for of a portion of the MLO renewal fee along with the renewal fee. View the letter from Rick St. Onge, the Acting Director of the Division of Consumer Services from the Department of Financial institutions for details.

DFI spoke at a WAMP meeting regarding DFI’s work toward changing both the Consumer Loan Act and Mortgage Broker Practices Act. DFI filed a CR-101 with the Code Reviser to begin rulemaking under the Consumer Loan Act rules and the Mortgage Broker Practices Act. Click the link to see the dates for upcoming Meetings and Hearings.

On October 10, 2019, the California attorney general issued proposed regulations under the California Consumer Privacy Act (“CCPA”). The proposed regulations focus on the form and content of required notices and disclosures, practices for handling of consumer requests, practices for verifying the identity of the consumer making those requests, practices regarding the personal information of minors, and the offering of financial incentives or price or service differences in exchange for the sale or retention of consumers’ personal information. For details on the proposal, read the full alert at K&L Gates HUB. Written comments to the proposed regulations must be submitted by no later than 5:00 p.m. on December 6, 2019.

Morrison and Foerster posted a Client Alert regarding money transmission licensing developments in Rhode Island and Michigan.

Beginning in January, in cooperation with the Multistate Mortgage Committee (MMC), ComplianceEase® will offer a complementary Pre-Exam Portal “sandbox” a public service to assist all residential mortgage lenders during their preparation for electronic examinations (e-Exams). Once enrolled in the portal, lenders will be able to submit up to one hundred LEF™ (Lending Examination Format) files for validation of proper formatting and evaluation against federal, state and local consumer protection compliance criteria. The Pre-Exam Portal will return complete ComplianceAnalyzer® audit reports, like those the examiner in charge (EIC) will eventually receive. These reports will enable lenders to identify data integrity, mapping and translation issues, as well as view compliance findings before submitting the LEF files for the “live” e-Exam through RegulatorConnect®, the regulators’ e-Exam platform. For more information on the Pre-Exam Portal, contact


Have you ever wondered how your monthly energy bill would stack up versus if you were to live in a different state? It turns out the most energy expensive states by average monthly bill are Connecticut ($373), Wyoming ($363), Alaska ($359), Georgia ($344), Massachusetts ($336), Indiana ($333), Alabama ($333), Maine ($332), Oklahoma ($331), and New Hampshire ($329). The least energy expensive states are Iowa ($286), New York ($284), Tennessee ($283), Illinois ($281), Hawaii ($279), Arkansas ($275), Louisiana ($271), Washington ($265), Colorado ($251), and the District of Columbia ($204).


Hawaii actually has the lowest average monthly consumption of electricity per consumer, 481 kWh, which is 2.9 times lower than in Louisiana, the highest at 1,416 kWh. But that may be because Hawaii maintains the highest cost per kWh at $0.2950. Compare that with Washington, which has the lowest average retail price for electricity, $0.0966 per kWh. Hawaii also has the highest average residential price for natural gas at $38.88 per 1,000 cubic feet. Compare that with the lowest, Montana, at $7.62 per 1,000 cubic feet.


A lot of people in cities don’t think it is worth it to have a car. The District of Columbia has the lowest average monthly motor-fuel consumption per driver, 22.52 gallons, which is 3.3 times lower than in Wyoming, the highest at 74.25 gallons.

What the heck is a “repo,” and why should I care?

After the Fed originally announced a series of ad hoc repurchase (repo) operations in September to ensure that repo rates and money market rates more broadly remain under control, the operations have remained in place. The Fed’s original intervention back in September was to curb surging money market rates that brought back frightful headlines reminiscent of the 2008 financial crisis, when short-term funding markets froze up and wreaked havoc on the financial system. Recent events are a far cry from what occurred during the Great Recession as they have far more to do with the post-crisis regulatory environment and the way in which the Federal Reserve operationally conducts monetary policy.


A repurchase agreement is, in short, a way for an institution to borrow or lend cash for a specific period of time, using financial securities as collateral. One institution sells a security to another, receives cash and agrees to ‘repurchase’ the security at some specific future date. The repo rate is effectively the interest rate the borrower of cash is paying the lender. Because Treasuries are arguably the world’s most liquid and safe financial asset, the healthy functioning of this market is critical to the financial system, as it underpins much of the short-term borrowing and lending that financial institutions do to manage their daily cash flow needs.


When primary dealers sit on more T-bills than they want or need, they lend these securities through overnight repurchase agreements, causing the supply of T-bills to outstrip the supply of cash, pushing the interest rate needed to clear the market up. The elevated repo rates we have seen at points over the past year and a half are consistent with declining reserves and a rapidly growing stock of Treasuries. The biggest driver of repo-related issues of late has been the fundamental change in the mix of Treasury collateral and cash (bank reserves) in the financial system. And what is happening in one short-term funding market often has implications for all money market rates, meaning the Federal Reserve is keenly interested in these developments. If elevated repo rates are putting upward pressure on the effective fed funds rate, then this can threaten the ability of the Fed to keep its main policy rate within its target range.


So what will the Fed do in the near term to keep repo markets operating smoothly? And how will the Fed deal with this issue over the longer run as a part of its operational framework? The Fed has several options that aren’t mutually exclusive: grow the balance sheet, continue performing open market repo operations, or adopt a standing repo facility.


The Fed always wants to ensure key financial markets are operating smoothly, and obviously, the Fed has a vested interest in ensuring it has well-established control over its main policy rate. Since repo rates are driven in part by demand for bank reserves, and since the Federal Reserve ultimately plays the leading role in determining the level of bank reserves in the system, it has a duty to ensure that the supply of reserves is adequate.


When the Fed purchases a security, such as a Treasury security, it gains an asset that is offset by a liability. Since the Federal Reserve is currently keeping the total size of its balance sheet steady, and since non-reserve liabilities like currency in circulation continue to steadily grow, total bank reserves are still outright declining, albeit much more slowly than they were when the balance sheet was shrinking. So the Fed can remove Treasuries and add bank reserves to the system, altering the supply dynamics between the two in a way that should alleviate some of the pressure within repo markets, all else equal. But that is reactive, as it requires the Fed to wait for funding markets to show signs of pressure, and then respond by buying Treasuries/adding reserves.


This has been the Fed’s approach since September: add reserves to the system, as necessary, on a temporary basis through ad hoc open market repo operations, while continuing to allow the private market to operate uninhibited on most normal trading days. Because this would involve repo operations rather than outright purchases, it would not result in a permanent expansion of the Fed’s balance sheet. The drawback is that market participants find themselves repeatedly asking: will the Fed intervene? And if so, by how much and at what price? Once some liquidity is injected into the system, it may be hard to fully remove it, as has been evidenced by recent repo operations. Thus, repo operations that began as ad hoc in nature could eventually become more permanent. The Fed should continue to use ad hoc repo operations to ensure that repo rates and money market rates more broadly remain under control. These open market operations also provide data on the demand for reserves.


The Fed announced no new balance sheet growth at its October 30 meeting, but the Fed’s current policy of replacing maturing mortgage-backed securities (MBS) with Treasuries one-for-one, at a pace of approximately $200 billion per year remains intact, with the Fed’s long-run goal to limit its balance sheet to only Treasuries.

All of this, in a roundabout way, helps borrowers by providing stability to the financial markets and dampening volatility. No borrower will ever ask an MLO about the repo market, but originators should know there’s a lot going on behind the scenes that helps.

Something special for all you football fans (part 5 of 5).

“If lessons are learned in defeat, our team is getting a great education.” – Murray Warmath / Minnesota

“The only qualifications for a lineman are to be big and dumb. To be a back, you only have to be dumb.” – Knute Rockne / Notre Dame

“We live one day at a time and scratch where it itches.” – Darrell Royal / Texas

“We didn’t tackle well today, but we made up for it by not blocking.” – John McKay / USC

“I’ve found that prayers work best when you have big players.” – Knute Rockne / Notre Dame

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Rob Chrisman