Sector Update

August 17, 2020

For the second week in a row, economic data was largely better than expected and Treasury yields increased in a steeper fashion. The S&P 500 also broke above all-time highs twice but failed to close above. Record 10- and 30-year Treasury auctions helped propel longer maturities higher than their shorter counterparts. The 2-10 spread closed 12 bps higher at a level of 56, a level not seen since mid-June.

Fannie/Freddie Announce Refinancing Fee

Last week, on August 12th, both Fannie Mae and Freddie Mac announced a new 50bps ‘adverse market fee’ that will apply to substantially all refinancing transactions. The 50bps fee will be implemented, according to the Enterprises, due to increased risk and anticipated higher costs related to COVID-19 and will be effective on September 1st, 2020. This doesn’t appear to be a big impediment to elevated levels of refinance activity, many estimate the impact equivalent to an 1/8 increase in mortgage rates. The fee was met with strong pushback from the mortgage industry as well as the White House.

This Morning

Markets are within a tight range from Friday’s close. The Dow is down 0.3%, the S&P is up 0.4% and the NASDAQ is up 0.7%. The Treasury curve’s slope is currently 3 bps tighter at 53 bps from Friday’s close of 56 bps. From a yield perspective, Treasury bills are unchanged, 2- to 10-year maturities are 1-4 bps lower, and long bonds are down 3-4 bps.

Food for Thought – Primary/Secondary Spread Still Elevated

Last week we looked at examples of prepay protection on mortgage pools continuing to attract investor interest. This week, we take a step back and consider why these prepay protections are found valuable to many investors. If we consider a 5-year history of the Primary/Secondary spread (the difference between current mortgage rates and par priced MBS) and 30-year mortgage rates you will notice a couple things. First, the P/S spread is unusually high and secondly, mortgage rates are unusually low.

The P/S is elevated for reasons including increased risk, increased costs, and refi capacity by lenders. That being said, it is possible for rates to remain relatively unchanged and we could see mortgage rates drop further and pressure the P/S spread back towards a more normal level. To be sure, few things are “normal” in this market environment but for large refinancing businesses, keeping your pipelines going, even if that means cutting rates and sacrificing a little profit, remains preferable to the alternative.

This brings us full circle; investors are attracted to loan characteristics that help insulate them against refinances in the event mortgage rates continue to decline and the P/S spread narrows. Loan balance pools are the most prominent. We know, the lower a loan balance the greater the rate incentive must be for a refinance to make economic sense. So even if mortgage rates decline further, many loan balance pools would still be out of the money to refinance.

Spread Commentary – MBS Wider, Others Tighter or Unchanged

(Click links below for more details)

What We’re Reading

Market Today | Daily

Weekly Recap | Weekly, Friday

Brokered Deposit Rate Indications | Weekly, Monday

Investment Alternatives Matrix | Weekly, Tuesday

MBS Prepay Commentary (August) | Monthly, 5th business day

SBA Prepay Commentary (August) | Monthly, 10th business day


Freddie Mac: Mortgage Rates Move Up

“Even with this week’s uptick, very low rates are providing a significant boost to the housing market that continues to hold up well during this time of uncertainty.”

WSJ: Retail Spending in July Topped Pre-Pandemic Levels

“After accounting for seasonal factors, sales were 1.7% higher compared to February, the month before the pandemic shut down much of the economy.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

SBA: 8/13 SBA Announces New Reduced 504 Loan Debenture Rates

Fannie Mae: 8/12 Lender Letter LL-2020-12 – New Adverse Market Refinance Fee

Federal Reserve: 8/11 Federal Reserve announces revised pricing for its Municipal Liquidity Facility

Federal Reserve: 8/10 Individual large bank capital requirements, effective October 1

OCC: 8/7 OCC Reduces September 2020 Assessments in Response to COVID-19

Federal Reserve: 8/6 Details of new 24x7x365 interbank settlement service to support instant payments

FHFA: 8/6 Multi-Fam Prop. Owners in Forbearance Required to Inform of Eviction Suspension and Tenant Protections

FDIC: 8/3 Additional Loan Accommodations Related to COVID-19 Event (FIL-74-2020)

FHFA: 7/31 Temporary Policy Allowing Purchase of Qualified Loans in Forbearance Extended

FDIC: 7/30 Proposed Revisions to the Call Report and the FFIEC 101 Report (FIL-73-2020)

Federal Reserve: 7/29 Federal Reserve issues FOMC statement

Federal Reserve: 7/28 FRB extends through 12/31 lending facilities scheduled to expire on or around 9/30

Federal Reserve: 7/17 FRB modifies MSLP to provide greater access to credit for nonprofit organizations

FDIC: 7/10 Consolidated Reports of Condition and Income for 2Q 2020 (FIL-69-2020)

FHFA: 7/9 FHFA Extends COVID-Related Loan Processing Flexibilities for FN/FH Through August

FDIC: 7/1 FFIEC Joint Statement on Managing the LIBOR Transition (FIL-68-2020)

Federal Reserve: 7/1 Minutes of the Federal Open Market Committee, June 9-10, 2020

LIBOR Transition Links

ARRC 8/7: ARRC Releases the SOFR Starter Kit

ARRC 7/8: ARRC Releases a Tool to Help Firms Move Internal Systems and Processes away from LIBOR

ARRC 6/30: Further Details Regarding Its Recommendation of Spread Adjustments for Cash Products

ARRC 6/30: Recommended Fallback Language for Private Student Loans

ARRC 6/30: Updated Recommended Hardwired Fallback Language for Syndicated Loans

ARRC 6/5: ARRC Welcomes CFPB’s Updated Consumer Handbook and Proposed Rule Facilitating Transition Away from LIBOR

ARRC 5/28: ARRC Welcomes FNMA and FHLMC’s LIBOR Transition Playbook

ARRC 5/27: ARRC Announces Best Practices for Completing Transition From LIBOR

ARRC 4/17: ARRC Announces Its Key Objectives for 2020

ARRC: 4/8:  ARRC Announces Recommendation of a Spread Adjustment Methodology for Cash Products

ARRC: Link to all ARRC Announcements

ARRC: Link to all ARRC Publications

ARRC: Link to ARRC Fallback Contract Language

Fannie Mae: LIBOR Transition Webpage

Freddie Mac: LIBOR Transition Webpage

The information included herein has been obtained from sources deemed reliable, but it is not in any way guaranteed, and it, together with any opinions expressed, is subject to change at any time. Any and all details offered in this publication are preliminary and are therefore subject to change at any time. This has been prepared for general information purposes only and does not consider the specific investment objectives, financial situation and particular needs of any individual or institution. This information is, by its very nature, incomplete and specifically lacks information critical to making final investment decisions. Investors should seek financial advice as to the appropriateness of investing in any securities or investment strategies mentioned or recommended. The accuracy of the financial projections is dependent on the occurrence of future events which cannot be assured; therefore, the actual results achieved during the projection period may vary from the projections. The firm may have positions, long or short, in any or all securities mentioned. Member FINRA/SIPC.
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