I’ve gotta hand it to those writers who put out listings for real estate agents. Maybe if I had a bunch of money I could live in a “secluded retreat” or an “enchanted villa.” I have never lived in a place described as a “retreat,” having stunning or remarkable views or panoramic vistas in a “gorgeous natural setting.” No luxury living, nor a delightful “chalet.” No soaring ceilings in the spacious great room or mudroom, filled with “warm ambiance.” Prestigious enclave? Nope. Has a house ever brought me conveniences and lifestyle? No. I’ve never lived in a house with casual banquette dining, nor in a “one-of-a-kind cottage.” Sure those are the terms real estate agents use to sell houses. They are generally an optimistic lot, but homebuilders, who create these structures, saw their optimism slip slightly to start 2020. But is still high. Low interest rates are making home-buying more affordable, despite the price premium for new construction due (in part) to permit costs. Builders are also starting to pivot more to entry-level homes after a decade of building mostly move-up product. We need it. And look at those housing start numbers from this morning below! 

Lender Products and Services

Brokers should know that American Financial Resources, Inc. (AFR) announced another addition to its suite of specialty loan programs: USDA Renovation. Great for clients in designated rural areas, USDA Renovation loans allow eligible borrowers to finance the cost of repairs to improve an existing dwelling at the time of purchase, all with up to 100% financing on the “as-improved” value (plus guarantee fee, if financed). This means eligible home buyers can purchase and improve a home beyond what is already permitted by the USDA Repair Escrow. In addition to unique products and services, AFR also provides its business partners with industry-leading technology, professional expertise and continuous educational opportunities. For more information on becoming an AFR partner, email sales@afrwholesale.com or call 1-800-375-6071.

Spring EQ Wholesale, the industry's premier second lien lender, offers 95% combo, 100% CLTV stand-alone and pays Lender Paid Compensation (LPC) up to $10,000. Available equity is at historic highs, and Spring EQ is excited to announce a series of three fast paced educational webinars for its partners. 2nd mortgage Home Equity lending is often misunderstood; and has come in and out of favor for years. Originators refer them to other companies, as they think they are not worth the effort and worst of all, they let their past clients find ways of borrowing without giving trusted advice. You can sign up for the webinar here. Remember that Spring EQ currently offers fixed rates that are comparable to wholesale HELOC lender's rates, creating a fiscally responsible, budget friendly way for clients with needs to tap their available equity. Please contact your Account Executive or visit Spring EQ Wholesale here. 

LIBOR Transition, Probably to SOFR: You Can’t Ignore It

At this point nearly everyone know that the publication of LIBOR is not guaranteed beyond 2021. And we’re already in 2020. Yes, most lenders are already using Treasury securities for an index, and are waiting for the Agencies to provide firm documentation guidance (see below). For some basic information, this primer is a good place to start to learn about an overview of the LIBOR transition, as well as an actionable checklist, with a focus on the proposed US alternative reference rate, Secured Overnight Financing Rate (SOFR). And here’s a good summary as well. 

The senior management of lenders and servicers cannot ignore this, nor rely on vendors to tell them what to do. The question is not only is your company knowingly putting borrowers into adjustable rate mortgages tied to an index that is expected to cease being published, but what are your policies and procedures in dealing with your servicing portfolio that contains loans tied to LIBOR?

Owners and CEOs were reminded of this when a wide variety of institutions received a letter from the New York Department of Financial Services requesting them to provide the Department with their company’s LIBOR transition plan. NY is requesting information on governance, operational risk, communications with borrowers, and so on – check out the link above. Each NYDFS-regulated institution must submit the institution’s plan for addressing the transition away from Libor-based credit, derivative, and securities exposures. The NYDFS letter has spurred additional focus by financial institutions in the issue, and not only by those regulated by NYDFS. Buckley wrote a full special alert.

We can all assume that other states and other regulators will follow suit. Questions will be asked during regulator audit exams. ARRC is a helpful resource with its implementation checklist. Lenders and other financial institutions are basing their transition on this document, especially if lenders are wondering how to even start the process. It helps you catalog LIBOR exposure, assets and liabilities, and helps you bucket your exposure on maturity. ARRC published its White Paper in July, with Freddie and Fannie rumored to play a large role in it.

And this isn’t confined to the forward lending business. The switch impacts reverse lenders, as well as their clients, and once again it is important for senior management to be ahead of the curve.

Recall that both Fannie Mae and Freddie Mac published information about the LIBOR-SOFR transition, including additional information about the structure of SOFR-based Adjustable-Rate mortgage offering and how it compares with LIBOR-based hybrid ARMs. Here is the Fannie Mae SOFR information webpage. Click to view the Freddie Mac publication. Freddie priced a new offering of Structured Pass-Through Certificates (K Certificates), which includes a class of floating rate bonds indexed to the Secured Overnight Financing Rate (SOFR). The $765 million in K Certificates (K-F73 Certificates) settled last month.

Banks are looking into whether artificial intelligence can smooth migration from Libor to another benchmark for existing contracts. AI could be useful for the switch, but much of the analysis still has to be done by humans. Yet here’s a story on how regional banks face a bumpy road away from Libor. Lenders fear replacement could notch outsize drops at times of economic stress. And the U.S. Commodity Futures Trading Commission aims to make it easier to convert Libor swaps contracts to the Secured Overnight Financing Rate.

But the argument that the Secured Overnight Financing Rate should be the exclusive replacement for US dollar Libor is increasingly called into question. "I believe, as many do, that there is no reason why Libor, having been a singular rate, should be replaced by a singular rate," says J. Christopher Giancarlo, former chairman of the Commodity Futures Trading Commission.

If you want to do what the “Big Boys” are doing, large global banks are transitioning away from Libor the quickest because of their access to resources, regulators and experience, according to researchers at Cadwalader, Wickersham & Taft and Sia Partners. The law firm's survey of 75 financial firms found that while US regional banks haven't made as much progress, they plan to specifically budget for the transition during the coming year.

Banks are preparing to transition from Libor to another interest-rate benchmark, but completing the shift by the end of 2021 will be a challenge, particularly regarding altering legacy contracts. Fiona Maxwell writes, "They may face the huge task of identifying thousands of investors to make changes to the provisions of existing contracts; if they don't, these may fall into noncompliance."

It may not be a slam dunk. Slow progress in updating software for using an alternative reference rate could cause UK banks to miss an October 2020 deadline for ending use of Libor in contracts. The deadline is an industry goal, not a regulatory deadline, but the Financial Conduct Authority says banks that miss it "will face a lot of questions from us as to how they are managing the risks."

And so the FSB plans more scrutiny regarding Libor switch. A Financial Stability Board report on benchmark reform recommends financial and nonfinancial firms make "significant and sustained efforts" to switch away from Libor by the end of 2021. "Given the degree of risk arising from the continued reliance on Libor, regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches," the report states.

Swaps firms get CFTC no-action relief during Libor switch. Three separate divisions of the Commodity Futures Trading Commission have issued letters stating no-action relief until Dec. 2021 for swaps firms transitioning from Libor. The relief covers rules that include uncleared swap margin and swap clearing requirements. And a Financial Stability Board report on benchmark reform recommends financial and nonfinancial firms make "significant and sustained efforts" to switch away from Libor by the end of 2021. "Given the degree of risk arising from the continued reliance on Libor, regulated firms should expect increasing scrutiny of their transition efforts as the end of 2021 approaches," the report states.

Lastly, the first options on futures contracts based on the Secured Overnight Financing Rate have been listed by CME Group. The first trade involved December options on three-month SOFR futures.

Capital Markets

To keep things in perspective, knowing that jobs and housing drive the economy, last week we learned that the U.S. economy added 145,000 jobs in December to finish out the year and unemployment remained near 50-year lows at 3.5%. But we’ve seen unimpressive wage growth for a long time: hourly earnings increased slightly during the month and for the prior twelve months rose by the smallest amount since July 2018. Most of the jobs created were in retail trade, leisure and hospitality, and health care. For the year, the economy averaged +176,000 jobs per month, well below 2018's monthly average of 223,000. The labor market remains tight, but given the categories of jobs being created, there is little upward pressure on wages or inflation. From the Fed's point of view, the data should not provide motivation for changes to the current monetary policy. Barring a significant widening in December's trade report, the recent contraction in the trade gap should provide a nice boost to Q4 GDP. It remains to be seen, however, if the decline in imports during November was due to imports pulling forward demand ahead of the potential tariffs that ultimately did not go into effect. This could potentially lead to a reversal as import activity returns to normal given the Phase 1 trade deal.

Yesterday U.S. Treasuries pulled back (MBS barely moved, equity indices hit new all-time highs and the 10-year yield is once again trading back above 1.80 percent) with most of the price action coming early in the day due to stronger than expected data. The December Retail Sales report showed a larger than expected increase in sales excluding autos, surging past expectations in December following an upwardly revised increase in November, as consumers continue to be a focal point of growth for the U.S. economy. Initial claims registered lower than expected, and the Philadelphia Fed Survey increased well beyond expectations for January, jumping to its highest level since August. The Senate voted 90-10 in favor of the U.S.-Mexico-Canada Agreement, good for our economy.

Today’s economic calendar is already underway with December Housing Starts (up almost 17 percent, a 15-year high) and December Building Permits (dropping almost 4 percent). Rounding out the week in a bit will be December Industrial Production and Capacity Utilization, JOLTS job openings for November, as well as the preliminary January Michigan Consumer Sentiment figures. There are two Fed speakers: Philadelphia’s Harker in the morning and closing with Fed Governor Quarles in the afternoon. In between, the Desk will conduct a UMBS15 FedTrade operation targeting up to $203 million 2.5 percent. We begin the day with Agency MBS prices worse a few ticks and the 10-year yielding 1.83 percent.

Jobs

Newfi Lending, delivering great service, technology, and its own proprietary Non-QM suite of products continues to grow and innovate in 2020 positioning itself as a leader in the industry. “Newfi also offers a full set of competitive agency and government products, along with 5 different jumbo options that include a 40-year IO. In a market rally, when loan officers step away from Non-QM to refocus on refinances, Newfi is nimble and able to pivot quickly, making it a perfect fit for AEs who are looking for a lender with exceptional product diversity. Newfi is committed to providing excellent customer service with dedicated inside pipeline sales support allowing the AEs to focus on relationship development with brokers and building the Newfi brand. With leading edge technology, a simple easy to use broker portal and the on-going launch of unique new programs, Newfi is excited to continue to bring even more value to their partners by being a one stop lender. To learn more about career opportunities at Newfi reach out to Wendy Licis. Come grow with us!”

A well-known household name with a spectacular reputation of consumer trust is looking for Call Center Loan Officers (federal registration) for its St. Petersburg, Florida location. Warm leads are generated internally from existing consumer relationships across multiple states within their area of operation. Candidates should be familiar with Encompass and both conventional and government originations and demonstrate superior customer communication skills that reinforce the company’s commitment to an on-going relationship across multiple product lines. Excellent compensation including base plus incentive and benefits. Interested parties should send their resumes to Chrisman LLC’s Anjelica Nixt.