LIBOR Replacements; Mortgage Rates and Tax Reform


When I grow up I want a million-dollar house! Tight inventories, costs, and appreciation have created an increase of houses worth seven figures – the number has quadrupled in fifteen years. (Builder reasons? Higher profits & profit margins and building & labor costs, to name a few.) There probably aren’t too many of those that are impacted by the CRA program (Community Reinvestment Act) – bankers should know that regulators are working on “revamping” the program.


Capital Markets – What is Moving Rates Higher?

For anyone anxious about Libor’s replacement, the Fed announced three new reference rates banks can use instead of Libor, as that index is scheduled to be phased out in 2021. The new indices are based on overnight repurchase agreement (repo) transactions that are secured by Treasuries (risk free rates). The indices are known as the Secured Overnight Financing Rate (SOFR), the Triparty General Collateral Rate (TGCR) and the Broad General Collateral Rate (BGCR). SOFR is the broadest measure of overnight Treasury financing transactions and is the recommended alternative to Libor. Meanwhile, TGCR will be based solely on triparty repo data from Bank of New York Mellon and BGCR will be based on triparty repo data from Bank of New York Mellon and General Collateral Finance Repo data from The Depository Trust & Clearing Corporation (DTCC). All rates will be produced by the Fed NY beginning in Q2 2018.

Although rates have jumped this week, volatility in the bond market has been at a 52-year low, according to a Bank of America / Merrill Lynch report. Volatility is generally a sign of stress in the system, and it tends to fall during periods of stronger growth. The drop in bond market volatility has major implications for the mortgage market as well, and helps explain a bit of why mortgage rates are behaving the way they are. While the 10-year has been steadily moving higher over the past few months, mortgage rates have been relatively stable. While mortgage rates do tend to lag Treasuries, something else has been going on, and that something has been low volatility.

“30-year fixed rate mortgages have an embedded option in them, which is the right of the borrower to prepay their mortgage without penalty at any time,” Brent Nyitray, Director of Capital Markets with iServe Residential Lending reminds us. “That right to prepay is worth something, and that value explains the yield differential between government backed mortgage debt and Treasuries. The value of the prepayment option is determined largely by the volatility of the bond market – when volatility rises, the right to prepay is worth more, and when volatility falls, it is worth less. So, when the market is stable, investors bid up mortgage backed securities as the value of that option falls, which translates into tighter MBS spreads and lower mortgage rates.

“In fact, the difference between a 30-year fixed rate mortgage and an adjustable rate mortgage is driven by the value of that prepayment option and risk-shifting between borrower and lender. When volatility is low, the borrower is paying less for that option and 30-year fixed rate mortgages will be more attractive than ARMS. When volatility is high, ARMS will be much cheaper. During periods of low volatility, it makes sense to scoop up that prepay option on the cheap and take out a 30-year fixed rate mortgage. When volatility is high, you will end up getting a much lower initial rate with the ARM. Co-incidentally, the economic backdrop (stronger growth, accelerating inflation, and a Fed raising short term rates) also favors the 30-year fixed over ARMS.” Thanks Brent!

For anyone concerned about a flat yield curve, those fears have been somewhat alleviated recently has long-term rates have gone up while short-term rates have not. The curve is usually measured by comparing risk-free Treasury yields, mostly between the 2-year and 10-year maturities as well as between the 10-year and 30-year. Recently we’ve seen the 2s/10s bearing the brunt of the curve steepening, with 2s/10s 5.1bp steeper on the day, to 57 basis points, with 10s/30s 1 bp steeper to 34 basis points.

The Fed pretty much determines short-term rates, but long-term rates are determined by supply and demand. The bond markets continued Tuesday’s sell-off in the early going after a report revealed that officials in China recommended reducing or pausing purchases of US Treasuries vaguely citing trade tensions as a reason for the pullback. (Where are they going to put their money – bitcoin?) Chinese officials are considering scaling back or stopping their purchases of U.S. bonds in response to trade tensions with the U.S.? This caused investors to become concerned about the potential for less demand in the future. Since mortgage rates are set based on MBS prices, lower demand for MBS drives their prices lower, and that is a negative for mortgage rates.

Is the passage of the tax bill moving rates? Yes. Since tax cuts became likely, and then reality, in mid-December, the 10yr breakeven rate broke higher – and is also a delayed response to good economic data in late 2017. The improving stock market is garnering all the headline press, but the “10-yr breakeven inflation rate,” the key variable in many securitized products valuation frameworks, finally pushed higher and moved above 2% for the first time in almost a year.

But can inflation expectations remain above 2%? Or are the recent spread moves simply a year-end/January effect? Some of this depends on the Federal Reserve. Will the new Fed (under Jerome Powell) assert itself “hawkishly,” in response to the recent move higher in inflation expectations, or be patient and “dovish,” waiting to see the real economic impact of the tax cuts? Many think the latter is more likely and that we remain in a “bad news is good news” world. But that means we may need to see some weak economic data over the near term to convince markets the Fed is still on their side – and weak data doesn’t help borrowers.

But the press is talking about concerns of over-supply in the bond markets as reduced global quantitative easing will lead to upward pressure on yields. Wednesday’s $20 billion 10-year note reopening was met with strong demand, however, and the 10-year note finished unchanged yielding 2.55%, and by the end of the day positive reprices abounded. The Fed also provided some support in the late morning when they purchased $1.44 billion 30-year conventional MBS with 3.5% and 4.0% coupons.

Today’s calendar includes the December Producer Price Index (PPI, which came in at -.1% and core -.1%) and Jobless Claims (+11k to 261k), and the results of a $12 billion 30-yr bond auction at 1PM ET.  At 3:30PM New York Fed President William Dudley, who is a permanent FOMC voter, speaks at the Securities Industry and Financial Markets Association “U.S. Economic Outlook: What’s in Store for 2018” event. With this as a backdrop we start with the 10-year yielding 2.56% and agency MBS prices are roughly unchanged versus Wednesday’s close.

Employment, Business Opportunities, Products, and Promotions

Galton Funding, a non-agency correspondent conduit, is continuing its expansion with the addition of 3 senior sales associates. Brideen Gallagher joined Galton Funding last month as a Business Development Associate and will manage Eastern Region relationships. In the Western Region), Marc Feltman joined Galton Funding last May as a Business Development Associate with Zenon Zorij coming on board last month. “With the addition of Brideen, Marc and Zenon, Galton Funding is well positioned to grow our platform and capitalize on the increasing interest in non-agency programs” says Doug Potolsky, Head of Galton Funding. In 2018, Galton Funding will continue to grow its Correspondent Business Development team, and add to its Credit/Operational team in their newly opened Bloomington, MN office. Interested Correspondent Business Development candidates, please contact Jim Karr – West Regional Manager or Maria D’Anza – East Regional Manager. Interested Credit/Operational candidates for our Bloomington, MN office please view the current job listings in the Careers tab on the Galton Funding portal, and submit your resume/cover letter to Ranae Lacey.

Freedom Mortgage Wholesale is proud to announce the launch of its newly redesigned website, enhanced with their broker clients in mind. “While our new site offers a sleek and intuitive design, we’ve also added some exciting new features based on client feedback that includes an all new broker portal and our very own blog”. Brokers can now experience direct access to their pipeline’s dashboard, forms & disclosures, a specific loan or the Price It tool right from client login. “This launch reveals the powerful combination of our LE 2.0, Loan Registration 2.0, Loan Update Alert system, and improvements, also reflected in our mobile application capabilities, in a way that is streamlined and user-friendly”. See for yourself at!

There’s a lot of movement in the industry with many lenders evaluating their existing subservicers and some are in the process of switching subservicers. Lenders must ensure they’re thoroughly evaluating and monitoring their subservicer from both an operational and loan-level servicing QC perspective. Subsequent QC, LLC (SQC) and Mortgage Quality Management and Research, LLC (MQMR) are gearing up for their annual circuit of audits of the most widely used subservicers. SQC, a servicing risk mitigation and compliance advisory firm, performs annual audits of subservicers and ongoing loan-level servicing QC testing. With hundreds of servicing reviews underneath our belts, see why the top lenders in the industry entrust us with their oversight needs. Contact to learn more or schedule time to meet at the upcoming IMB Conference or Servicing Conference.

GSF Mortgage Corp. is seeking to acquire small to mid-sized lenders who are considering a transition of their firm. As an alternative to a large box lender or regulatory intense bank, GSF will work with the owner on a transition that preserves the culture, staff and legacy of the company. GSF is a direct seller/servicer with Fannie Mae, Freddie Mac and a Ginnie Mae Issuer. We retain the majority of our loan originations and are well capitalized. GSF has access to resources, technology and pricing power of the large lenders, along with the ability to adapt your existing business plan to our platform. As an owner, you can be assured that your teams will be set up for long-term success and growth. All conversations are confidential. Please reach out to me for forwarding to set up an informal discovery call or visit us at the upcoming IMB conference on Jan 22-24. (Please specify

TD Bank has appointed Rick Bechtel as EVP, Head of U.S. Mortgage Banking, and Scott Lindner as National Sales Director, as part of its strategic commitment to growing the mortgage business for 2018. Bechtel will oversee all aspects of the lending business, including product development, P&L management, capital and secondary markets, Customer experience, and leadership of the national sales team. He will be responsible for driving growth and optimizing best-in-class technology, while maintaining the bank’s risk appetite and unique focus on the Customer.

Congrats to Krista Sabol who Indecomm Global Services has brought on as Marketing Director, Mortgage Group, responsible for planning and implementing marketing Indecomm Mortgage Services strategies and programs. “She will manage marketing initiatives for outsourcing services, software as a service (SaaS) technology, and mortgage learning solutions to support the various needs of mortgage industry clients.”


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