Sep. 21: Notes on interest rate direction, 30 vs. 15-year loans, & state law changes; a joke for LOs

This week I spent some time in Pittsburgh at the Mortgage Bankers Association of Southwestern Pennsylvania and was chatting with Genworth Mortgage Insurance’s Greg Williams (who covers Western Pennsylvania, West Virginia, and Western New York) about business conditions. Pipelines are full and lenders are looking at good, profitable closing months as we close out the third quarter, thankful for the unexpected low rates. (And don’t forget that mortgage lenders reported a net gain of $1,675 on each loan they originated in the second quarter, up from $285 per loan in the first quarter, per the MBA.) But there are concerns about economic slowing, the role of Freddie and Fannie in upcoming years, sorting out QM/non-QM/ATR lending, and the continuing evolution of the regulatory environment between the CFPB and state regulators. With that in mind, let’s see what the states have been up to recently.

State law news

Sure the future of Freddie and Fannie is, as has been the case since the Hoover Administration, up in the air and subject to thousands of opinions. On top of that, many agencies dropped significant rulemakings at the end of July, including the QM Patch, Ginnie Mae stress testing, the HUD Disparate Impact rule, and the revised FHA Annual Certification. What about states?

The Texas Finance Commission has adopted provisions, effective immediately, regarding licensing requirements for certain licensees. A license for a new residential mortgage loan originator is effective from the date of issuance until December 31. A license must be renewed annually. Once a license is renewed, it is effective for a term of one year, from January 1 until December 31.

Compliance folks know that the Mortgage Industry Standards Maintenance Organization (MISMO) announced the release of its finalized Remote Online Notarization (RON) standards. The RON standards were created to promote consistency in rulemaking among states implementing RON laws.

Rhode Island has enacted the Revised Uniform Fiduciary Access to Digital Assets Act to grant a custodian access to a user’s online accounts, correspondences, and other electronic files, in the event of death or incapacitation, if specified in his or her will, trust, or similar agreement. The Act applies to the following scenarios: an agent or fiduciary acting under a power of attorney or will, a personal representative acting for a decedent, a conservatorship or guardian proceeding, or a trustee acting under a trust.

The revised act gives fiduciaries some authority to manage digital assets, but it also provides privacy protections for the owners of the digital assets and legal protections for the companies who create and store digital assets.

The key revision is that the revised act significantly reduces the power of an executor to access digital assets. For example, an executor no longer has authority over the content of electronic communications (private email or social media) unless the deceased person explicitly consented to disclosure. An executor can get access to other types of digital assets, but now he or she must petition the court and explain why it is necessary for the asset to be disclosed.

If a fiduciary does not have explicit permission to access a digital asset through a will, trust, or similar instrument, custodians can look to terms-of–service agreements to determine whether they must comply with requests for access to a decedent’s account.

Custodians may also request court orders, limit their compliance by providing access only to assets that are reasonably necessary for wrapping up the estate, charge fees to comply with requests for access, and may refuse unduly burdensome requests. Finally, custodians may not provide access to deleted assets or joint accounts.

Illinois has amended its provisions regarding notice of foreclosure effective immediately. Under the previous provision, the failure to send a copy of the notice of foreclosure to the alderman for the ward in which the real estate is located resulted in a dismissal without prejudice of the complaint. Under the new provision, failure to send notice to the alderman shall result in a stay of the foreclosure action on a motion of a party or the court. A stay of the foreclosure action by an order of the court requires the plaintiff to send the notice by certified mail, return receipt requested, or by private carrier that provides proof of delivery. The plaintiff then must provide proof of delivery to the court. The court shall then lift the stay of the foreclosure action.

The state of Illinois has modified its provisions regarding notice of breach under its Personal Information Protection Act. These provisions are effective as of January 1, 2020. Under the amendment, data collectors who suffer a breach of personal information are required to provide the Attorney General with a description of the breach, the number of affected Illinois residents, and a description of any steps taken related to the incident. The notification must be made as quickly as possible, without unreasonable delay, and no later than when the data collector provides notice to consumers of the breach. Upon receiving notification of a breach, the Attorney General is permitted to publish the name of the data collector that suffered the breach, the types of personal information compromised by the breach, and the date of the breach.

Interest rates

Many believe that if you talk long enough about a recession, eventually we’ll see one. Chris Bennett, Principal at Vice Capital Markets, Inc. sent out a note to clients back last Friday the 13th on proverbial blood in the streets in the town of Chicago. (“There’s blood in the streets, it’s up to my ankles…………. Blood in the streets it’s up to my knee” “Peace Frog”, by The Doors.) “I know some folks that follow mortgage rates on news services were feeling like their prices seemed to move more than their services said MBS were changing (I got a couple of messages on it earlier last week), but they may have been looking at 3.5s or 4.0s or a more premium coupon – prices for current-coupon MBS have gotten slapped down hard the previous 7 trading days – Fannie (UMBS) 3.0 dropping 160 basis points and 2.5s tanking a whopping 2.30 points. With the spreads between coupons as tight as they are, that can be .500% or even more in zero-point note rate, again in the span if just over a week. It’s been double a typical month’s worth of total market movement in just 7 trading sessions, a swift move indeed.

“I’m sure people are freaking out a bit and wondering, ‘what the heck happened, just why did treasuries and mortgages get smacked so hard so fast?’ There are a number of news stories one can pick from, but the real reason is a simple and plain one, that has been going on ever since the dawn of trading exchanges: Most of what you see in the markets on any given day is nothing more than flight or fight between buyers and sellers.

“I’ve been a trader for 32 years now, in everything from corn to yen to gold to coffee to our good old-fashioned stocks and bonds, and this statement is true in every single market there is. Do fundamentals matter in the long run? Absolutely! But on any given day what the market for oats or platinum or Mortgage Backed Securities do is just the simple daily fights between bulls and bears trying to squeeze the gonads of the other side to get them to abandon their positions. Economic numbers do matter, but when the market reaction doesn’t fit or there’s not a good explanation for a move people need to make up a reason to report on CNBC or Bloomberg or whatever as part of their job of making sense of things to their viewers.

“Is there anything that truly fundamentally changed in the last week and a half that sent the 10yr yield from 1.43 all the way up to 1.90? Nope, not really. Just like there was nothing that truly fundamentally changed during the month of August that sent that same benchmark 10-yr note yield from 2.02 down to 1.44 last month, most of it in the first 11 trading sessions. Last month buyers were squeezing the hell of out of sellers, and starting last week those buyers took their profits and the sellers squeezed the remaining guys right back. People need to remember where we came from – less than a year ago the 10yr yield was yielding 3.24, and the market had 3 more FOMC hikes baked in. Moving from 3.24 to 1.43 and a shift from expecting 3 tightenings to expecting 3 easings (one of which we already got, the second of which is coming later this month) in less than a year is a HUGE move, and like anything else, nothing just goes straight up or straight down. Countertrend moves like the one we just got are a very normal part of all markets, financial or otherwise.

“Where do we go from here? Well, it all depends on whether this current and expected Fed action is just a fine-tuning like they say it is, or the stock market starts to give way and this is the start of a broader easing cycle back toward the zero-bound. Right now the market believes the Fed’s “fine-tuning” language. And if stocks stay where they are that’ll be the right call. This economic expansion by historical terms is long in the tooth. Not really a whole lot to do with tariffs or politics as much as many might think, but just the natural cycle of human (both consumer and corporate) behavior. If the Europeans and Japanese come to the realization that lending money at negative interest rates is an Alice in Wonderland mushroom-tea induced paradigm and their bond markets start to fall apart some of that contagion will spread to our markets, but for now they’re all happily enjoying their place in Wonderland and helping to keep an anchor on our own yields. As of this moment the market (looking at Dec 2020 Eurodollar futures contracts) expects a de-facto Fed Funds rate (90-day LIBOR actually technically) of 1.65%. Our 10yr yield is at 1.90%. If those future FOMC expectations stay anchored there’s no reason we can’t stay in this broader rate range (call it 1.43-1.93 basis the 10yr treasury yield) for the balance of the year.” Thank you, Chris!

30-year versus 15-year. Flip a coin? I don’t think so.

Anne E. wrote, “The principal benefit of a fifteen-year versus thirty-year mortgage is paying off the mortgage in half the time. Borrowers buying or refinancing a ‘forever home’ should opt for the shortest term possible. Adjusting to retirement is far easier when PITI excludes principal and interest. To quote myself on page 282 of Mortgage Risk: A Blueprint for Smarter Origination, ‘Borrowers may be unaware that prolonged payments thwart the ultimate goal of full repayment.’”

Regarding the comparison between 30-year and 15-year options, Dan Stone of the Mortgage Fee Coach, Inc. sent, “It is useful, but not very accurate. If a borrower searches, and I’ve verified the info, a 30-year fixed conv. conforming loan, bottom rate from the best lenders, is 3.625%. The best I can get looking at all types of lenders is 2.99% and all closing costs paid.

30-year at 3.625% P&I payment = $1,344.16. 15-year at 2.99% P&I payment is $2,001.59. For some people, they can more easily pay $656 more per month. Based on the loans my clients are funding, 5% are choosing a 15-year. Because I can get a 10/1 ARM at 3.25%, 25% of my clients are choosing the 10/1 ARM. We all know the lenders advertising 2.99% is because they want anyone to call to generate a lead, thereby switching them to another loan program that will make money for the lender, not so much the borrower savings.”

Client: I spoke to you three weeks ago. Can we start the refinance?

Me: Yep, but I do need to let you know that rates have gone up. Hopefully it’s temporary. Probably about .25 percent to .375 percent higher than when we last spoke.

Client: So I can’t get the rate you quoted me back at the end of August?

Me: You did not complete an application, nor did you lock your rate in. So, unfortunately no.

Client: What good is a rate quote if you don’t honor it?

Me: Well, let’s see. What good is you wanting to get that rate if you do not give me the information so I can actually get you that rate? You did not give me your information, so I did not pull credit, nor did you give me any of your income or asset info. So how exactly was I supposed to lock in the rate for you?

Client: I want the rate you quoted me.

Me: And I want my son to clean his room. Both of these requests are probably not happening right now.

Client: And I find it incredibly convenient for you now that, according to you, the rate is higher because I did not apply a few weeks ago.

Me: “According to me?” You really think I have that much power that I affect mortgage rates. They are just like stocks – they change every minute of every day.

Client: It just doesn’t seem right.

Me: But if they dropped during that time, that would seem okay, correct?

Client: That is not what happened though.

Me: Correct. And you not applying when I gave you the opportunity is what happened. That has nothing to do with me. That is completely your decision.

Client: Then I am not refinancing.

Me: Uh, okay. If you change your mind you know where to find me.

Moral of the story: everything is my fault.

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Rob Chrisman