[PULSE] The shift from LIBOR to SOFR is on the horizon – Are you ready?

Whether it’s the side of the road we drive on, our preferred system of measurement or how we define “football,” America always seems to distinguish itself from Britain.

Sapan Bafna,
Guest Author

Despite this, American lenders unanimously adopted the London Inter-bank Offered Rate (LIBOR) index for U.S. adjustable-rate mortgages (ARMs). And after nearly 40 years, LIBOR has become the most commonly used benchmark rate in the world, covering an estimated $300 trillion in assets across the globe.

Effective January 3, 2022, the mortgage industry will cease using the long-standing LIBOR and, instead, adopt the new Secured Overnight Funding Rate (SOFR). With billions of dollars in ARM assets tied to the LIBOR index, this will have huge implications for the mortgage industry – and the consumers it serves. 

LIBOR, explained

Each weekday, at approximately 11 a.m. Greenwich Mean Time, about 11 to 16 large banks (known as panel banks), report the rate at which they believe they can borrow a “reasonable” amount of dollars from each other in the London Inter-bank market. Then, by 11:45 a.m., the average rate is calculated and published.

This methodology underscores the unreliability of the approach, as it’s based largely on estimates – versus data – made by a small, elite group of banks. Concerns about LIBOR intensified following the 2008 financial crisis. Reports began surfacing that some banks were falsely inflating or deflating their interbank rates to manipulate the market to their benefit and increase profit. This became known as the LIBOR scandal.

News of the scandal, paired with the exponential growth in financial markets, created an immediate need to update the methodology. And in 2014, the Federal Reserve commissioned the Alternative Reference Rate Committee (ARRC) to recommend a benchmark interest rate to replace LIBOR.

SOFR, identified

In June 2017, the ARRC selected SOFR as the preferred alternative to LIBOR, noting the stability of the repurchase market (on which SOFR is based) as the main benefit.

SOFR is a “near risk-free” rate because the underlying repurchase transactions are secured by U.S. Treasuries, whereas LIBOR is based on unsecured transactions. Additionally, SOFR is not calculated based on sample size or future forecast by a small, elite group of banks. Instead, the calculation considers underlying daily transactions, which currently cover over $800 billion. This reduces the chances of potential manipulation, as no panel banks or judges are required.

In April 2018, the Federal Reserve Bank of New York began publication of SOFR and by August 2018, Barclays became the first bank to issue commercial paper tied to the rate, selling approximately $525 million of short-term debt. 

Making the change

The switch from LIBOR to SOFR isn’t as simple as swapping one methodology for the other. In the mortgage sector, legacy, non-agency residential mortgage-backed securities are the most susceptible to manipulation, since most reference LIBOR.

Residential mortgage-backed securities is a shrinking market, particularly as ARM originations are at all-time lows after subprime mortgage clampdowns. Still, about $1.2 trillion of U.S. mortgage debt is linked to the LIBOR rate, making it the largest segment of consumer debt impacted by the transition.

Why does this matter? For starters, an ARM note contains provisions that allow changes to the interest rate and monthly payments, based on the index or benchmark rate. It also has specifications surrounding when and how much the rates can change over the life of the mortgage.

Thus, the first step is to change the index listed in the ARM note from LIBOR to SOFR.

While the newly issued securitized products and most outstanding agency mortgage-backed securities have a fallback clause detailing the process of handling the transition from LIBOR to SOFR, most old notes will go through a manual review. For legal and compliance experts, there are many pending questions surrounding logistics. For instance:

  • How do we update the index in preexisting contracts with no fallback language? Most of these were private or portfolio loans, and many have custom provisions in the ARM note and riders.
  • Will a notice to the borrower regarding the index change suffice, or is an amendment needed?
  • Will new contracts require borrower acknowledgment to avoid complaints that they’ve not been notified of the change?

To help with the transition, the Federal Housing Finance Agency has provided specific actions and their due dates to Fannie Mae and Freddie Mac. For instance:

  • New language will be required for single-family uniform ARM instruments closed on or after June 1, 2020
  • To be eligible for acquisition, all LIBOR-based, single-family and multifamily ARMs must have loan application dates on or before September 30, 2020

Acquisitions of single-family and multifamily LIBOR ARMs will cease on or before December 31, 2020

Tips for implementation

Like any big change, the transition from LIBOR to SOFR will require a well-thought-out strategy. Here are some tips to help ensure a smooth process:

  • Organize a planning phase for servicers to conduct a full audit of existing ARM loans, including detailed data and document analysis.
  • Discuss your strategy with legal and compliance (and get it approved).
  • Decide how you’ll notify clients, e.g., a borrower notice of index change or legally binding amendment.
  • Partner with a vendor who provides software systems that can help with the transition process. Look for system capabilities such as optical character recognition (to help automate document reviews), data extraction and audit features, electronic signature capabilities and print and secure shipments to borrowers. Monitor loans at each change cycle to confirm the index changes in the servicing system are accurate.
  • Train customer service teams on the new system, as well as how to respond to borrower queries regarding the transition. Organizations can also send notifications to borrowers via mail or set up temporary call support functions to help with the change.

The big picture

As January 3, 2022, inches closer, it’s more important than ever for the mortgage world to prepare for the transition from LIBOR to SOFR.

The time to plan and implement transition processes is now. By moving to an actual traded rate such as SOFR, mortgage servicers can effectively ensure that rates are no longer susceptible to falsification – and usher in a new era for the financial world.

The post [PULSE] The shift from LIBOR to SOFR is on the horizon – Are you ready? appeared first on HousingWire.

Source: HousingWire Magazine

Chase reorganizes staff to handle mortgage application boom

JPMorgan Chase & Co. is shifting half of its home-equity staff to mortgages to keep up with demand, according to Bloomberg.

“More and more customers are buying and refinancing their homes with Chase,” Chase spokeswoman Amy Bonitatibus said to HousingWire. “As such, we’re shifting resources to handle the increased volume and continue to close loans fast and on-time. This week, we increased our on-time closing guarantee to $2,500.”

According to Bloomberg, Chase is planning to hold off on marketing for HELOCs, as home-equity lines of credit have been less popular among Americans and the banks that offer them.

This decision was made in anticipation of a surge in demand for home loans, as the housing market is looking at a strong spring, and coronavirus fears are driving mortgage rates lower.

Just this week, the Mortgage Bankers Association indicates mortgage applications increased by 1.5% from the previous week. The MBA also reports the Refinance Index is 152% higher than the same week one year ago.

As homebuying season has commenced earlier this year and mortgage rates are hitting record lows, the housing market has heated up early.

In fact, January’s new home sales spiked 18.6% from 2019, according to the Census Bureau and the Department of Housing and Urban Development. Sales of new homes jumped to an annualized rate of 764,000 last month.

According to Census data, January’s pace increased from December, which was upwardly revised from 694,000 to 708,000.

The post Chase reorganizes staff to handle mortgage application boom appeared first on HousingWire.

Source: HousingWire Magazine

Citigroup expands virus restrictions, curbs meeting travel

The bank added Italy to the list of countries off-limits to employees after restricting travel to and from Asia for the last several weeks.
Source: American Banker

Fed chairman tries to calm coronavirus jitters

Federal Reserve Chairman Jerome Powell on Friday afternoon issued a rare inter-meeting statement hinting at rate cuts as he tried to calm jitters about the global spread of coronavirus.

“The fundamentals of the U.S. economy remain strong,” Powell said. “However, the coronavirus poses evolving risks to economic activity. The Federal Reserve is closely monitoring developments and their implications for the economic outlook. We will use our tools and act as appropriate to support the economy.”

Powell issued the statement two hours before the close of trading on Wall Street. It was enough to erase a portion of the worst stock retreat since 2008. It’s rare for the Fed to comment on issues outside of their scheduled meetings or speeches.

As a result of the stock selloff, the 10-year U.S. Treasury yield plunged to a record low on Friday, after falling 30 basis points during the week, as investors looked for safe havens.

The increase in competition for bonds is a signal that mortgage rates, which track Treasury yields, could be heading to record lows.

Mortgage rates would need to tumble 15 basis points to set an all-time low. The rate this week fell to 3.45%, matching a three-year low set earlier in February, according to Freddie Mac. The lowest rate ever recorded was 3.31% in November 2012.

Michael Feroli, chief U.S. economist at JPMorgan Chase, told Bloomberg News that Powell’s statement indicates an interest-rate cut is “squarely on the table” at the Fed’s March 17-18 meeting.

“I think this is a step in the right direction to help calm some of the concerns,” he said. “This is important in that they’re saying they’re not going to be stubborn here.”

The Fed doesn’t have much gunpowder left after three quarter-point cuts last year. Rate cuts are intended to bolster bad economies, and the Fed has already used up some of its firepower to support a slowing expansion. The current Fed rate target range is 1.5% to 1.75%.

What the Fed didn’t do, however, was give in to repeated demands from President Donald Trump to slash rates to below zero. Fed governors withstood a torrent of presidential name-calling – the tweeted insults included “boneheads” and “clueless.”

If the Fed had slashed its rate to zero or below, there would be little Powell could offer now, in the face of a global crisis, to support the U.S. economy.

The post Fed chairman tries to calm coronavirus jitters appeared first on HousingWire.

Source: HousingWire Magazine

Bankers come to grips with coronavirus impact

With health organizations warning of a global outbreak, banks are starting to assess the risks to their bottom lines.
Source: American Banker

Calabria now expects Fannie Mae and Freddie Mac IPOs in 2021

It looks like those waiting with bated breath for the looming public offering of the government’s shares in Fannie Mae and Freddie Mac will have to wait until next year, at least.

Federal Housing Finance Agency Director Mark Calabria told members of the Credit Union National Association this week that he now expects the offering of stock in Fannie and Freddie to take place in 2021.

Calabria reiterated his previous sentiments that publicly offering stock in the government-sponsored enterprises will only happen when the companies have a sufficient financial base.

In recent years, the government has made several changes to the GSEs’ operating rules, allowing them to rebuild some capital. In 2017, the FHFA announced it would allow Fannie and Freddie to hold $3 billion to “cover other fluctuations in income in the normal course of each Enterprise’s business.”

Later that year, the GSEs officially withheld some of their profit and rebuilt a very small portion of their capital reserves.

Then, last year, the government allowed the GSEs to retain up to $45 billion in combined capital as they move towards exiting conservatorship.

Those moves have helped, according to Calabria, but they aren’t enough.

“Fannie and Freddie own or guarantee a combined $5.5 trillion in single and multifamily mortgages. That is nearly half of America’s residential mortgage market. But when I walked in the door at FHFA, they were limited to just $6 billion in allowable capital reserves. This put their combined leverage ratio at nearly a thousand to one,” Calabria said in his speech to the CUNA members.

“The danger this poses to taxpayers and our entire housing system cannot be overstated. Imagine if any of your credit unions operated at a thousand to one leverage. That would probably keep you up at night too,” Calabria continued.

It was that reason that the Department of the Treasury and the FHFA allowed Fannie and Freddie to keep up to $45 billion total in their reserves.

“As a result, their combined leverage ratio has greatly improved. Since I came into office, we have nearly quadrupled capital at the Enterprises. But it still stands at nearly two hundred and forty to one – roughly 20 times the average leverage of the institutions represented here today,” Calabria said.

“This is far less capital than Fannie and Freddie need to survive even a modest downturn,” Calabria added. “But we are moving in the right direction. And we will continue building on this foundation this year.”

Another step in increasing the GSEs’ capital will come via the FHFA’s capital rule. In 2018, the FHFA proposed a rule to implement new capital requirements for Fannie and Freddie.

But last year, the FHFA announced that it planned to do away with the 2018 rule and propose new capital rules, which Calabria states are coming later this year.

“FHFA’s capital rule will be a critical mile marker in our effort. It must be in place before Fannie and Freddie can go to the market to raise capital,” Calabria said. “I expect we will have re-proposed the capital rule very soon. Our goal is to publish the final rule by the end of 2020.”

If proposing the new capital rule happens as expected, that means there will likely be an offering of Fannie and Freddie stock in 2021, Calabria said.

“Based on this timeline, 2021 is the most likely target for an external capital raise by the Enterprises,” Calabria said, but added that the public offering is “process dependent, not calendar dependent.”

That means that it may not happen in 2021 after all, but Calabria’s current expectation is that the offering will happen next year.

But raising the GSEs’ capital isn’t just about preparing them for an offering, it’s also about making sure they can withstand an economic downturn, should one happen, Calabria said.

“The economy is strong today. But my job is to hope for the best and prepare for the worst,” Calabria said. “The question I ask myself every day is: Are Fannie and Freddie ready for a stressed housing market? Are they strong enough to support the market, in order for you to continue supporting your members?”

“Right now, the answer is no. In their current financial condition, Fannie and Freddie would fail in a downturn,” Calabria said.

“The lack of capital at Fannie and Freddie jeopardizes their important mission. It puts taxpayers at risk of absorbing their losses, as we saw with the bailouts after the last crisis. And it threatens every sector of our housing system, including credit unions,” Calabria continued. “This point is key: If Fannie and Freddie fail again, liquidity in the mortgage market will be impacted. This would hurt America’s credit unions and the communities you serve.”

The post Calabria now expects Fannie Mae and Freddie Mac IPOs in 2021 appeared first on HousingWire.

Source: HousingWire Magazine

Warren queries large banks on their coronavirus planning

The Massachusetts senator and presidential candidate sent a letter to CEOs of five of the largest U.S. banks asking about their response to the outbreak.
Source: American Banker

The gig economy’s impact on housing, and why California’s AB5 Bill is missing the point

When I started my business six years ago, I was able to leverage many alternative income streams as “side hustles” to make ends meet.

Kristin Messerli,
Columnist

I rented a room on Airbnb, was a virtual assistant, offered web design services (which I learned from YouTube), among other on-demand tasks I could scrounge up from the internet. While I may have been pretty terrible at design and organization, these jobs were readily available to me from my laptop. 

With the rise of technology, Millennials entered the workforce with access to non-traditional sources of employment, which has continued to become increasingly mainstream.

Today, 34% of the entire workforce has at least one “side hustle,” and one in three millennials are considered freelancers. After a decade of nearly 20% growth in self-employed “gig workers,” much of today’s workforce has evolved to expect more flexibility and alternative sources of income. 

While it’s clear that the future of our workforce is at least in part gig-based, policymakers, lenders, and freelancers themselves do not seem prepared to accommodate this shift.

The Fight for the Right to “Gig”

The nature of the gig economy leaves workers at risk in ways traditional employment does not. Freelancers and gig workers are often unprepared for a sudden loss of work or illness, and 40% say they are unprepared for retirement

As a startup, I understand the value of employing a workforce I don’t have to commit to. I have freelancers for every job I need, and the moment I don’t need it, I can simply stop the engagement. Freelance work was designed to support someone through multiple employers or sources of income. However, for those who rely heavily on gig income or a particular source of gig income, the unpredictability can be devastating, and they are completely unprotected from its instability.

Advocates against gig employment justifiably argue that employers take advantage of a freelance workforce by preventing them from accessing employment rights and benefits through maintaining a contractor relationship. They may even use the contractor status to squeeze more hours from their workers at lower wages with limited tax implications. 

In a BBC interview with the director of “Sorry I Missed You,” a film about the perils of a gig-based economy, Ken Loach states, “All the power is with the employer, and they’ve found new ways to exploit their employees.” He argues that gig workers are glorified as “self-employed owners,” when in fact they are simply “drivers with no rights.”

That’s why California recently published the AB5 bill, popularly known as the “gig worker bill,” which tightens restrictions on how much work is permitted as an independent contractor before requiring businesses to hire them as a W-2 employee. 

The Problem of an Evolving Workforce

Protecting gig workers is not a black-and-white issue, and it is nuanced with the evolution of the modern approach to work. 

The gig economy launched with the rise of availability of alternative work through the internet, and it gained popularity out of necessity in the recession.

However, as freelance work continued to grow and technology advanced to make this easier, millennials who entered the job market during this time of growth, often found it preferable or a valuable source of added income. Today, 31% of millennials say they work extra gig hours to boost their savings (down payment maybe?).  

One survey of gig workers found that millennials who chose to work in the gig economy did so because the advantages for flexibility outweighed the disadvantages, not because they had a lack of employment options. 

California’s gig worker bill supporters advocate that greedy corporations don’t want to pay for employee benefits. While I’m certain this is true, the 21st-century workforce doesn’t always value stability over flexibility. 

In the midst of adopting gig-based work, the expectation has become that workers have control over when and how they work. This flexibility results in opportunities to pursue other ventures or life priorities (i.e. childcare, etc.). In a state filled with gig workers trying to make ends meet while they pursue their dreams of performing on the big screen or building the next Uber, this bill seems to crush them. 

While some will justifiably argue that employers have simply found a new way to exploit their employees, others feel society should shift away from expecting employers or any one employer in a worker’s life to be responsible for other aspects of their wellbeing. 

As one gig worker explained, “I’ve found the total cultural embrace of ‘full-time’ employment to be a vector for voluminous abuse. It’s specifically because we draw income from one company that they have the leverage to abuse us.” 

Another stated, “The fact that US companies are responsible for the quality of life of their employees is totally hilarious in a modern world where you don’t work for the same company for your entire career.” 

Today’s workforce is changing the way they think about work, and ignoring that shift won’t help anyone. In this case, the bill is an archaic solution to a modern problem, and the result may be costly for California residents. 

The Financial Profile of Gig Workers

Another big issue in the gig economy is financial instability and its impact on long-term financial planning, including home buying. 

Gig workers are burdened with a complex financial profile and often unable to qualify for traditional mortgages. Lenders have been slow to adopt methods to qualify self-employed borrowers despite the rapid growth in the gig economy. 

Fannie Mae’s survey of 3,000 lenders found that 95% said it would be difficult to qualify gig income under current guidelines.

However, both Fannie Mae and Freddie Mac have begun pilot programs to automate underwriting for self-employed borrowers using LoanBeam’s technology, which streamlines the income verification process.

To be clear, I do not think it’s safe to lend to someone with casual or occasional gig income. However, for someone with multiple sources of consistent gig income or supplementary gig income, which can likely be scaled in a time of need, this seems like a less risky profile for lenders and a qualifiable one with today’s technology.

 Embracing the Shift

The gig economy isn’t slowing down, and young people who are born into it are less likely to be willing to sacrifice flexibility for traditional employment. 

Today’s employers must learn how to adapt and manage multigenerational teams with differing values and expectations in the workplace, and gig workers must adapt to the lack of protections available to them in a traditional workforce. 

As an industry, we should continue to educate borrowers on the process and accessibility of homeownership with self-employed income, and support stable growth in the gig economy. 

The post The gig economy’s impact on housing, and why California’s AB5 Bill is missing the point appeared first on HousingWire.

Source: HousingWire Magazine

JPMorgan shifts scores of workers to mortgages to handle boom

Demand for home loans has been strong in recent months and is expected to increase coronavirus fears push rates lower.
Source: American Banker

Wells in N.Y. state of mind, coronavirus, election 2020: Top stories of the week

How New York became Wells Fargo’s new center of power; banks walk fine line in preparing for a coronavirus outbreak in U.S.; bankers on Bernie’s electoral chances and whether a Sanders presidency would pose a threat; and more from this week’s most-read stories.
Source: American Banker