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NAHB Sees Lopsided Growth in Housing Starts

July 20,2018
by admin

In another dive into data from the Census Bureau’s Survey of Construction (SOC), the National Association of Home Builders (NAHB) found that one third of the nine census divisions and thus 21 states were responsible for 60 percent of single family housing starts last year. The South Atlantic division encompasses the coastal states stretching from Delaware to Florida plus West Virginia and accounted for 260,000 of the 848,000 starts last year. The West South Central division was in second place and the Mountain division third.

The number of starts in 2017 was up 9 percent from 2016 and four divisions outpaced the national rate; the Pacific division at 17 percent, West North Central at 11 percent, South Atlantic and Mountain divisions at 10 percent each.

Growth decelerated from the 2016 rate in seven out of nine divisions as shown in Figure 2 while it accelerated in both the Pacific and West South Central areas. The East South Central division, fell into a negative growth rate in 2017, likely because of the explosive growth it experienced the previous year.

The analysis by Jing Fu, published in NAHB’s Eye on Housing blog, found that single family starts in 2017 were still well below the average rate pre-recession, that is between 2000 and 2003. The national average of housing starts represents only 63 percent of that earlier level and the average in the nine census divisions range between 46 percent and 93 percent of pre-crash activity. Divisional recoveries relative to their average number of starts between 2000 and 2003 are illustrated in the table below

Mortgage Rates Behind the Curve For 2nd Straight Day

July 20,2018
by admin

Mortgage ratesimproved today but it was largely a byproduct of yesterday’s market movement that didn’t make it onto lenders’ rate sheets at the time. Mortgage lenders set rates based on trading levels in mortgage backed securities or MBS (the bonds that groups of mortgages turn into when they’re traded among financial firms on the secondary market).

None of the esoterica above is too important as long as you understand that there’s moment to moment trading in the bond market providing the primary consideration for mortgage lenders setting rates. If that market moves enough in the middle of the day, lenders may make mid-day adjustments to rate sheets. Yesterday saw almost enough of an improvement for lenders to offer lower rates. As such, today’s morning rate sheets were better than yesterday’s (because it was the first opportunity for most lenders to adjust for yesterday’s strength in bond markets).

Unfortunately, the opposite happened today! Bond markets spent most of the day weakening (i.e. implying a move toward higher rates). Yet again, the move wasn’t quite big enough and it didn’t happen quickly enough for most lenders to adjust rates mid-day. As such, we can expect Monday’s rates to be a bit higher unless the underlying bond market happens to stage a big recovery in European and Asian trading early Monday morning.


Today’s Most Prevalent Rates

  • 30YR FIXED – 4.625-4.75
  • FHA/VA – 4.25-4.5%
  • 15 YEAR FIXED – 4.125%
  • 5 YEAR ARMS – 3.75-4.25% depending on the lender



Ongoing Lock/Float Considerations

  • Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed’s rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.

  • Despite those headwinds, the upward momentum in rates has cooled off heading into the summer months. This could merely be the eye of the storm, or it could end up being the moment where markets began to doubt that prevailing trends would continue.

  • It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won’t die down quickly. Temporary corrections can be explained away, but it will take a big change in economic fundamentals or geopolitical risk for the big picture to change. While that doesn’t necessarily mean rates have to skyrocket, there’s a good chance it means rates will struggle to move much lower than early 2018 lows until more convincing motivation shows up.
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.

MBS RECAP: Just When You Thought The Ceiling Was a Ceiling

July 20,2018
by admin

Undoubtedly, yesterday’s bond trading sent a clear message that a technical ceiling near 2.88% was met with strong defense from traders who bought bonds and pushed yields back down into the recent range. Color all of us shocked, then, that today saw yields promptly rise right back up to that ceiling!

Perhaps even more frustrating was the fact that it would take no small miracle to make solid sense of the move from a technical or fundamental standpoint. Still, I will try…

One of the two explanations I offered for yesterday’s strong buying was that it could have been due to traders cashing out short positions. More simply put, traders who bet on rising rates in the short term (at the last bounce at the bottom of the range last week) could have booked their profits and closed out short bets once the range ceiling got taken out without witnessing a glut of follow-through selling.

Notably, that move coincided with new “flattener” trades (betting on 10yr and 2yr yields getting closer together) because the spread between 10s and 2s looked like it was hitting a ceiling at the time the rally began. Today then, could be most easily explained as a “pain trade” for that flattener. Yes, Trump’s comments in favor of low rates could have served as a catalyst at first, but from there, it is best viewed as a sort of short squeeze (but instead of being short on bonds in general, the squeeze was on those who were short the yield curve–i.e. betting on flattening).

By the end of the day, 10yr yields were back above the unpleasant ceiling that it looked like they’d defended yesterday. MBS, however, are still inside their recent range, having only lost 7/32nds in price to the 16/32nds decline in 10yr Treasury prices (4.8bp increase in yields).

Flood, Volcano, Hurricane, and Disaster News; Lender Updates

July 19,2018
by admin

A Small Business Administration analysis found that about 90 percent of the country’s damage costs from natural disasters happen in ZIP codes with less than 20 percent of the country’s population. If you’re in the mood to see what that looks like on a map — or want advice of where not to move — the New York Times has done yeoman’s work in compiling more than a decade of disaster data.


Flood and Disaster News

Let me be blunt – I’m jaded when it comes to Congress and the Administration doing something permanent when it comes to the flood program. It seems like every year or two the issue is punted. The National Flood Insurance Program is scheduled to expire July 31st. While I am sure Congress cares, is it going to do anything about this? Despite the industry’s best efforts, I’d say the odds of Congress, and the President, doing anything permanent about this (other than kicking the can down the road again) are nil.

But the industry can try, and the MBA, NAR, state organizations, and plenty of other special interest groups are asking members to contact their representatives and have Congress extend the program and avoid a lapse of coverage. Find your representatives (House of Representatives and US Senate) and ask them to do something!

Fannie Mae continues to support servicers with borrowers impacted by recent and future disasters, such as hurricanes and wildfires. Fannie Mae published Lender Letter LL-2018-04: Disaster Policy Reminders and Updates, reminding servicers it will reimburse for inspections required to confirm repairs on properties with an insured loss event for both current and delinquent mortgage loans. For properties inspected after the date of this Lender Letter, we will increase the maximum reimbursement limit of insured loss repair inspections from $30 to $60. It will reimburse servicers up to its existing allowable reimbursement limits for the costs to inspect properties impacted by a disaster for both current and delinquent mortgage loans when necessary to determine the extent and nature of the damage. The Fannie Mae Extend Modification for Disaster Relief (Extend Mod) and hazard loss draft proceeds disbursement policies found in Lender Letter-2017-09 remain in effect until further notice.Visit the Assistance in Disasters page for additional information and resources, including previous disaster-related Lender Letters, FAQs, and more

Freddie Mac is reminding Servicers to follow the requirements in Chapter 8404 of the Single-Family Seller/Servicer Guide (Guide) when servicing mortgages affected by eligible disasters. Also, servicers should remember that the following temporary servicing requirements for mortgages impacted by eligible disasters announced in Guide Bulletins 2017-21 and 2017-25 will remain in effect: Property inspection reimbursement, Freddie Mac Extend Modification for Disaster Relief, Changes to requirements for distribution of insurance loss settlements. Review its Industry Letter for complete details.

The Federal Emergency Management Agency (FEMA) issued Hawaii Kilauea Volcanic Eruption and Earthquake (DR-4366) covering the entire island of Hawaii. For Conventional Conforming, Non-Conforming, and Guaranteed Rural Housing (GRH) Loans on properties located in Hawaii county as defined in FEMA DR-4366, Wells Fargo Funding is allowing Sellers to use alternative methods (lava flow maps, other mapping technology, etc.) to determine that no damage to the property has occurred. This applies to FEMA declaration DR-4366 and does not extend to any other FEMA declarations issued for the Hawaiian Islands. Sellers must still comply with Wells Fargo Funding’s representations and warranties, as well as investor requirements. There is no change to the exclusion that Wells Fargo Funding will not purchase loans on properties located in Lava Zones 1 or 2. Follow FHA and VA requirements for FHA and VA Loans on properties located in Hawaii county, as defined in FEMA DR-4366.

MBA and the National Association of Hispanic Real Estate Professionals (NAHREP) are pleased to present a Spanish version of Disaster Recovery: A Resource for Homeowners, a consumer-facing informational guide. The guide outlines homeowner disaster preparedness and steps to recovery including who to communicate with about your mortgage, how to navigate the insurance process, and what forms of aid and disaster loans are generally available. (Stand by for Mandarin, French…)

Practically every investor’s disaster policies and procedures are driven off whether FEMA has declared a particular area a…disaster. And the best link is www.FEMA.com. Floods, fires, volcanoes, or earthquakes, FEMA tracks them. And most lenders & investors have disasters policies that are triggered by FEMA’s declaring a disaster in an area.

For example, counties in Hawaii have been declared by FEMA as Major Disaster Areas for the Incident Period Date of May 03, 2018 and Major Disaster Declaration Date of May 11, 2018. FEMAannounced federal disaster aid with Individual Assistance for 13 additional Indiana counties in the areas affected by Indiana Floods, DR-4363. Additional Counties in Hawaii, Honolulu county and Kauai county, have been declared by FEMA as Major Disaster Areas.

Based on forecasts from the National Oceanic and Atmospheric Administration, CoreLogic has estimated that over seven million homes are at risk of storm surge during the upcoming hurricane season. This is the same forecast number as last year, when NOAA predicted a “near- or above-normal” hurricane season.

Pacific Union Financial is monitoring the impact of severe winter storms and flooding in Massachusetts, severe storms and flooding in Maryland, the impact of wildfires in Oklahoma, and the impact of volcanic eruptions and earthquakes in Hawaii. Lending partners with questions about Pacific Union and natural disasters should submit all questions to servicingcorrsupport@loanpacific.com. A response will be provided within 24 hours. (Only lenders may contact this email address. Do not share this email address with clients.)

PUF is monitoring the impact of severe storms, flooding, landslides, and mudslides in West Virginia. Confirmation that the subject property has not been affected is required and includes borrower written certification of the condition of the property prior to clear to close by Pacific Union. FEMA has included West Virginia in its disaster declarations. Pacific Union requires certifications from Correspondents for properties in the affected county for purchase to occur.

Fifth Third Correspondent posted: the following areas have been declared a federal Disaster Area: severe storming and flooding for the Indiana counties of Carroll, Clark, Dearborn, Elkhart, Floyd, Fulton, Harrison, Jasper, Jefferson, Kosciusko, LaPorte, Lake, Marshall, Ohio, Porter, Pulaski, Spencer, St. Joseph, Starke, Switzerland, Vanderburgh and White. Tornado and severe storm in North Carolina’s Guilford and Rockingham Counties. Correspondent Lenders must adhere to Fifth Third’s Disaster Policy located in Chapter 7, Section C of the Correspondent Seller Guide Underwriting Guide and the disaster policy overlay in the Overlay Chart.

Sun West Mortgage posted an update regarding FEMA’s declaration of disaster for additional counties in Indiana.


Capital Markets

As I mentioned yesterday, rates, up a little, down a little – not much moving them. Lenders are out there working on succeeding in their business models rather than reacting to rates moving. The 10-year closed -3bps to 2.85% as U.S. Treasuries ended Thursday with gains across the curve after three days of consecutive losses. Markets were roiled as President Trump said “I’m not thrilled” about the tightening path of monetary policy in a CNBC interview that will air today. On a more positive note, the low level of initial claims reported yesterday will feed expectations for another month of strong nonfarm payrolls growth.

Today sees no major economic releases of note, and we start with rates little changed from Thursday’s close: 2.85% on the 10-year and agency MBS prices up or down a few ticks based on coupon, maturity, and type.


Lender Products

“Fintech + Your Borrowers = More Leads, More Loans with Zip POS. Originators today know fintech drives competitiveness and relevancy among consumers. By leveraging Zip® as your mobile point-of-sale, you increase prospects, efficiencies, and production. It is the only digital origination tool you can launch in minutes without a cumbersome delay or contract terms. After all, fintech shouldn’t slow you down. We power your pipeline with an expedited pre-qual, automatic verification of assets, digital doc exchange management and deliver an experience that your borrowers will love. And like you, fearless LO, we like to be first. That’s why Zip customers are ahead of the game with access to the new 2019 URLA. Be a hero to your borrowers and gain an edge your competition can’t touch. Get a Zip demo today or join our next webinar.


Employment and Promotions

Better Mortgage Corporation, #NMLS 330511, is seeking experienced mortgage underwriters, processors and closers in New York City and San Francisco. “We are a fast-growing, tech-driven lender looking to disrupt the mortgage industry. We’ve funded over $1B in home loans since our launch in 2016, and we’re just getting started. Come work at an amazing company with great people (4.5/5 on Glassdoor), career opportunities, and highly competitive salaries and benefits! If you’re interested, please apply directly through our careers page or submit a resume to recruiting@better.com.” Better is an Equal Opportunity Employer. All qualified applicants will receive consideration for employment without regard to race, color, religion, sex, national origin or disability.

PrimeLending opened a new branch in Mesa, Arizona, a popular hot-spot for first-time homebuyers looking for an affordable Valley of the Sun neighborhood to settle into. Like the temperatures in the Phoenix-area, signs in the market are pointed up — home values are rebounding to 2006-level highs, there’s an increase in the number of active builders and continued solid job growth. Branch Manager Scott Mendez and the entire Mesa team are perfectly positioned to meet the growing demand of millennial homebuyers looking for financing options to fit their needs. Whether it’s a purchase, new construction or renovation purchase, the new Mesa branch has answered the call with more than 400 loan products, a user-friendly digital experience, streamlined loan processing, and reliable, on-time closings. When you have the products, the people, the process and the personal service, success is simple at PrimeLending. If you’re ready to dominate your local market and scorch the competition, make the move to PrimeLending. Call Sherri White (469.737.5743) to get started.

Center Street Lending is excited to announce that Joe Koroncey has joined its Sales Team as a Relationship Manager. Joe comes to Center Street Lending from New York Community Bank where he was responsible for wholesales sales in San Diego county. With over 16 years of experience in the financial industry, Joe has held account executive positions at Ethos Lending, Provident Bank and New Penn Financial. Joe earned his degree in business and marketing from Arizona State University. Center Street Lending has built a reputation as a premier private money, portfolio lender, providing business-purpose loans through wholesale and retail channels for investments in: fix and flip, fix and rent, buy and rent; buy, tear down and build; new construction, and bridge loans. Contact Joe for more information.

Caliber Home Loans, Inc. is proud to welcome back Rick Elmendorf as a Team Sales Manager and Caliber Military & VA Lending Red Team Lead in Fair Oaks, Virginia. Rick, a nationally ranked Loan Officer in the industry, is one of over 20 retail producers who have returned to Caliber in 2018! Caliber’s leadership and its suite of Portfolio Lending products are some of what he describes as the lender’s “massive competitive advantages.” Loan Consultants interested in joining Rick and the national network of producers can contact Jeremy DeRosa.

MBS Day Ahead: Back in The Range, But Yield Curve Could Protest

July 19,2018
by admin

10yr yields attempted to break above their prevailing range yesterday. As we discussed in the Day Ahead, it takes more than just an intraday move above a ceiling in order to confirm such a break is taking place. Ultimately, yesterday’s theme evolved into a resounding defense of the 2.88+ yield ceiling. More simply put: yields briefly traded near 2.90% and then bounced lower with solid demand underlying the move.

As the top section of the following chart shows, today has seen yields hold right in the middle of the prevailing range. If they remain fairly close to current levels, today will end up being an uneventful “punt” to next week. Bonds will effectively be saying they’re putting off bigger decisions for now. In fact, they’d be putting off the comparatively small decision of breaking outside this narrow range.

The lower section of the chart alludes to the wild card potential for one of the periodic bounces in the yield curve to put upward pressure on 10yr yields. The yield curve (green line in the chart) is the gap between 2 and 10yr yields. The lower than line goes, the higher 2yr yields are compared to 10’s. This is also known as “curve flattening.”

Curve flattening has been a major theme and there’s widespread anticipation of the yield curve hitting zero (aka “inversion”) by the end of the year. As the curve flattens, we’ve seen periodic corrections. Bond traders often make curve trades as opposed to outright trades in individual securities. If today’s triple bottom (3rd day this week where the curve has bounced at the same long-term lows) results in a technical bounce, selling in 10yr yields could be one of the byproducts. Whether that would be enough to take us back to the range ceiling remains to be seen, but it’s certainly a possibility.

2018-7-20 open

Fannie Sees Growth Slowing, Turns Bearish on Housing

July 19,2018
by admin

Fannie Mae’s economists have upgraded their second quarter economic forecast but say that may be about it for the year. In their July forecast, the company’s Economic & Strategic Research (ESR) Group, headed by Doug Duncan, noted that the expansion just celebrated its ninth anniversary “with a bang.” Economic growth in the second quarter may have approached the high in that expansion that occurred almost three years ago.

The outlook for housing has turned bearish. Single-family construction starts were up in May for the fourth time in five months but still lagged the post-crash high of last November. (Fannie Mae’s economists prepared this report before the June data was released wherein housing starts plummeted by more than 12 percent.) Multifamily starts rebounded in May, reversing about half of the prior month’s drop but permits dropped for both single and multifamily construction.

Home sales were mixed. New home sales rose in May, but the increase was driven by sales in the South which were at a decade long high. Homebuyers are increasingly buying homes still in the planning stage, which suggests that building activity has not kept pace with demand. Builders continued to face challenges from shortages of labor and rising building material costs.

Existing home sales fell for the second month and were lower year-over-year for the fourth time in five months. The inventory of available homes has been down year-over-year for three years, impeding sales and driving price increases. Typical marketing time is now 26 days, the shortest since the National Association of Realtors started tracking the number in 2011. Pending home sales, a forward-looking indicator of existing home sales, also dropped for the second month in a row.

Even though interest rates stopped rising and even dipped a bit in May, purchase mortgage application activity was flat and refinance applications continued their decline, falling for the fifth straight month and the eighth time in nine months. May volume was the lowest since December 2000.

The overall bearish activity in housing prompted Fannie Mae to lower its forecast for existing home sales from a slight increase over 2017 to a slight drop and downgrade purchase mortgage originations by $20 billion. They left their forecast for refinancing unchanged at a 26 percent decrease from last year, with an 8 point drop in the refinancing share to 28 percent. Mortgage originations in 2018 are forecast to total $1.69 trillion, an 8 percent decline.

As to the overall economy, the ESR group estimate that GDP growth shot up to 4.2 percent during the second quarter from 2.0 percent in the first. This was due to spending by consumers and the government, inventory investment and more favorable trade. Residential investment, which was a drag on growth in the first quarter appears to have made a modest contribution in the second.

Enjoy it while it lasts. The economists say this growth will not be sustainable and that the GDP will finish out 2018 with 2.8 percent growth, one tenth-point higher than they predicted last month. It will then slow to 2.2 percent in 2019 as fiscal impacts fade.

Trade will be a factor in the slowdown. Canada has already implemented tariffs on $12.5 billion in U.S. goods and there is a back and forth with China involving tariffs on $34 billion in goods on each side. The U.S. has proposed a 10 percent tariff on a list of another $200 billion in Chinese imports. The impact of these actions so far, Fannie Mae’s economists say, have been small but potential retaliation from China “could be devastating for some local economies.”

Even though wages remained flat – up another 0.2 percent – in the June employment report, inflation did increase. The Fed’s preferred indicator, the personal consumption expenditures (PCE) deflator, moved up, also by 0.2 percent, in May for the second straight month. That brings annual growth to 2.3 percent, above the Fed’s target measure of 2.0 percent. The Fed has indicated it would tolerate inflation overshooting its target and there are also concerns about the flattening yield curve, the spread between 2-year and 10-year yields was at about 30 basis points at the time the forecast was written. Despite these contra-indications, the ESR group says it expects the Fed to stay on its monetary normalization track and they changed their rate hike call to two increases in the second half of this year, in September and December, compared with the one hike they anticipated in their June forecast.

Mortgage Rates Back to Flat After Starting Higher

July 19,2018
by admin

Mortgage rateshad a scare today, as they began the day at their highest levels of the month (depending on the lender) only to fall back in line with yesterday (or better!). The reason for the back-and-forth movement has to do with esoteric behind-the-scenes stuff in the bond market. I should be able to make it tangible enough for you, so let’s give it a shot.

Bonds are the backbone for all interest rates. The bonds that underlie mortgages tend to move almost exactly like 10yr Treasury yields. Treasuries are a great case study to follow when it comes to rates because they are abundant, more actively traded, and essentially risk-free. That risk-free part is important because it means Treasuries can be used as a benchmark to assess the value of other bonds that aren’t guaranteed by the full faith and credit of the US government (note: I realize that “full faith and credit of the US government” might not sound like a big deal to everyone, but in the bond world, it’s as risk-free as it gets).

With all of the above in mind, it makes a lot of sense for MBS (the mortgage-backed-securities dictate mortgage rates) to move when the comparable Treasury security moves. That means we don’t necessarily need to be near any important levels in MBS in order to see interesting movement, as long as Treasuries are near interesting levels.

That was the case today as the 10yr Treasury yield (the most widely-accepted benchmark against which MBS are measured) broke above a key short-term ceiling. When yields break such ceilings, it can serve as a sign for traders to keep pushing rates higher or as a sign that they’ve pushed enough and can now buy bonds again, thus bringing rates lower. In today’s case, the ceiling prompted buying. Long story short: rates began the day in higher territory due to lingering weakness from yesterday, but as bonds improved, most lenders offered pricing improvements that brought rates back in line with yesterday morning’s levels.


Today’s Most Prevalent Rates

  • 30YR FIXED – 4.625-4.75
  • FHA/VA – 4.25-4.5%
  • 15 YEAR FIXED – 4.125%
  • 5 YEAR ARMS – 3.75-4.25% depending on the lender



Ongoing Lock/Float Considerations

  • Rates moved higher in a serious way due to several big-picture headwinds, including: the Fed’s rate hike outlook (and general policy tightening), the increased amount of Treasury issuance to pay for the tax bill (higher bond issuance = higher rates), and the possibility that fiscal stimulus results in higher growth/inflation.

  • Despite those headwinds, the upward momentum in rates has cooled off heading into the summer months. This could merely be the eye of the storm, or it could end up being the moment where markets began to doubt that prevailing trends would continue.

  • It makes sense to remain defensive (i.e. generally more lock-biased) because the headwinds mentioned above won’t die down quickly. Temporary corrections can be explained away, but it will take a big change in economic fundamentals or geopolitical risk for the big picture to change. While that doesn’t necessarily mean rates have to skyrocket, there’s a good chance it means rates will struggle to move much lower than early 2018 lows until more convincing motivation shows up.
  • Rates discussed refer to the most frequently-quoted, conforming, conventional 30yr fixed rate for top tier borrowers among average to well-priced lenders. The rates generally assume little-to-no origination or discount except as noted when applicable. Rates appearing on this page are “effective rates” that take day-to-day changes in upfront costs into consideration.

MBS RECAP: Key Technical Ends Up Providing Support

July 19,2018
by admin

If you are an MBS Live member, today’s recap has already been written in this update and in The Huddle. Non-MBS Live members can get a pretty solid idea from the free mortgage rate article HERE.

For those who don’t like to click links, suffice it to say that the upper range boundary that we’ve been paying so much attention to ended up being the key ingredient in today’s movement. Technical ceilings in rates can either serve to motivate follow-through selling when broken, or they can serve as a cue for buyers to get back in the market and push rates back into the range. Today saw the former.

10yr yields were as high as 2.897% just after the Philly Fed data (much stronger than expected). But buyers were waiting and had already made their presence known after overnight highs in the same vicinity. Yields dropped to 2.84+ by the 3pm CME close and have been drifting sideways since then. Fannie 4.0 MBS gained 6/32nds (.19) over the same time, hitting 102-02 (102.06) by 3:30pm.

Libor – Not Exactly an Obituary, But…

July 18,2018
by admin

A group of financial experts is scheduled to meet at on Thursday to make funeral arrangements for Libor. In case you hadn’t heard, the London interbank offered rate, the number that indicates how much one bank needs to borrow from another, is not expected to survive much beyond the end of the decade.

All good, or even not so good, things must come to an end, and Libor has had moments of each, but Matt Phillips, writing in the New York Times, says the problem is that the financial world, going into the meeting at the Federal Reserve of New York, hasn’t figured out what to do if/when Libor breathes its last.

While most of this country has no clue about Libor, few are untouched by it. It is the basis for interest rates on huge corporate loans, private student loans, and for resetting rates on many adjustable rate mortgages. Phillips says it also underpins nearly $200 trillion in derivative contracts. It is, in fact the dominant determinant of interest rates on nearly all adjustable rate financial products. These typically use the formula of Libor + X points, with X determined by the specific contract.

There is more than one Libor, covering different currencies and time periods. The most common one in use is a three-month rate expressed, currently at about 2.44 percent.

If it goes away, what will replace it? The world seems unsure and Phillips says regulators are worried that banks aren’t taking the situation seriously. Unwinding from the benchmark will be a huge task and will require a lot of lead time.

He says that big problem with Libor is how easy it is to manipulate. The Libor survey doesn’t ask a bank what it paid to borrow that day, but “what do you think you would have to pay. With a relatively small number of banks involved it didn’t take long for someone to realize how easily the number could be skewed by a conspiring subset of respondents. “Because bank traders make high-stakes wagers using derivatives whose values are based in part on Libor, they could vastly improve their chances of making money if they could influence the very thing they were betting on,” Phillips writes. This type of thinking resulted in a major scandal in 2008 which costs banks billions in penalties and sent a few traders to jail.

After the dust settled, British regulators had to pressure banks to continue their survey participation. They feared that, if the rate disappeared abruptly it could endanger the whole financial system. As part of a gradual wind-down, the government will not push banks to participate after 2021. However, the ICE Benchmark Administration, the group that produces Libor, has held talks with banks about a voluntary agreement to provide rates so some form of the index could continue beyond 2021. No agreement has been reached.

An industry group sponsored by the Federal Reserve has developed the Secured Overnight Financing Rate, or SOFR in hopes of replacing the Libor. It began to be published in April. The New York meeting is expected to address details such as the language to replace Libor on contracts for financial products

Phillips concludes on a non-hopeful note. “Contracts must be changed. Computer systems must be updated. Customers must be communicated with. Such costly administrative work does not yield bonus-increasing fees, and it is not generally considered glamorous on Wall Street.”

Purchase Share and Interest Rates Creep up, Hit New Ellie Mae Highs

July 18,2018
by admin

The share of closed loans for home purchases ticked up another point in June, to 71 percent. While Ellie Mae has only tracked data since 2011, this represents a new high for those loans in the company’s Origination Insight Report. The purchase share was also up 1 point for FHA loans, at 81 percent and rose 2 points for VA loans and 3 for conventional loans to 77 percent and 69 percent respectively.

The allocation of newly originated loans across product types seems cast in amber. Shares have remained essentially unchanged since March at 66 percent conventional, 20 percent FHA, and 10 percent VA loans.

In June, the 30-year interest rate rose yet again to 4.9 percent, up from 4.84 in May another new high for the Ellie Mae report. The percentage of Adjustable Rate Mortgages (ARMs) rose to 6.9 percent, up from 6.6 percent the previous month.

The time to close all loans rose one day to 42 days. Time to close refinances held at 37 days, and time to close purchases increased to 44 days, up from 43 the month prior.

The closing or pull-through rate rose slightly for all loans types, from 70.2 percent in May to 70.5 percent. Seventy-five percent of loans for home purchase closed successfully, unchanged from May, while refinancing loans had a completion rate of 63.3 percent, down from 65 percent the previous month. Ellie Mae calculates the closing rate from a sample of loan applications initiated 90 days earlier, in this case the March crop.

“While inventories remain tight and interest rates are on the rise, we are still seeing a very robust purchase market with 71 percent of all loans representing home purchases and closing rates at 75 percent on purchase loans,” said Jonathan Corr, president and CEO of Ellie Mae. He added he hoped that closing times would begin to shorten in coming months as more lenders start to employ more high-tech mortgage processes.

Ellie Mae mines data from a sample of approximately 80 percent of all mortgage applications that were initiated on its mortgage management system. The company states its Origination Insight Report is a strong proxy of the underwriting standards employed by lenders across the country.