Sector Update

August 24, 2020

Breaking a two-week trend, Treasury yields drifted lower last week, and the curve flattened. The 2-10 spread closed 7 bps lower at 49 bps, right back at the 50 bps area we can’t seem to move materially higher or lower from for a long period of time. Meanwhile, the S&P 500 hit two new record highs last week.

Fannie/Freddie Refinancing Fee Update

Over the weekend, a WSJ article on Saturday said, “As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions.”.

Background from 8/17 Sector Update

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

Treasurys are within a tight range from Friday’s close and stocks are headed higher. The Dow is up 1.0%, the S&P is up 0.5% and the NASDAQ is up 0.3%. The Treasury curve’s slope is unchanged from Friday’s close of 49 bps. From a yield perspective, Treasury bills are unchanged to 1 bp higher, 2- to 10-year maturities are unchanged to 1 bp higher, and long bonds are unchanged.

Food for Thought – GNMA Buyouts, Don’t Lose Sight of the Main Thing

A Bloomberg article titled Banks Poised for Mortgage Bond Windfall That May Burn Investors caught the attention of some investors last week. Certainly, the article has merit but it’s important to maintain a holistic view of what’s going on with GNMA MBS and not to lose sight of the biggest risk investors face today in premium mortgages.

First, GNMA buyouts aren’t a new thing, there is just the potential for more right now as the current economic environment is expected to increase defaults, especially when government stimulus and forbearance programs end. GNMA responded on June 29th trying to minimize what they probably view as unnecessary buyouts. Link here to their All Participant Memorandum.

Secondly, the main investor concern ought to still be focused on refis. True, buyouts push prepays higher (and can be lumpier) but it’s not the main thing. Consider two examples below and you’ll notice that the buyout component has grown, which is expected in an environment like today, but most prepayments are still borrowers refinancing their loans. In the months ahead, even with an expected uptick in defaults and buyouts, refinances will likely remain the main source of prepayments.

G2 30-Year 3.0% MBS issued in 2019

August 1mo CPR = 44.0 (Buyout component 3.4)

July 1mo CPR = 33.9 the (Buyout component 3.6)

June 1mo CPR = 23.3 the (Buyout component 0.8)

G2 Jumbo 30-Year 3.0% MBS issued in 2019

August 1mo CPR = 64.9 the (Buyout component 4.7)

July 1mo CPR = 48.7 the (Buyout component 3.3)

June 1mo CPR = 41.3 the (Buyout component 0.7)

Spread Commentary – Mixed Results

(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


WSJ: Mortgage Fee Aims to Bolster Fannie, Freddie Finances Ahead of Possible Sale

“As of Friday, the agency was negotiating delaying the fee with industry groups but was opposed to canceling it outright, according to people familiar with the discussions.”

Freddie Mac: Mortgage Rates Inch Up

“Freddie Mac today released the results of its Primary Mortgage Market Survey® (PMMS®), showing that the 30-year fixed-rate mortgage (FRM) averaged 2.99 percent.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

FDIC: 8/20 Webinar: Loan Forgiveness and Other Relative PPP Matters (FIL-77-2020)

Federal Reserve: 8/19 Minutes of the Federal Open Market Committee, July 28-29, 2020

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

LIBOR Transition Links

ARRC 8/18: Transition Resource Guide for ARM and Private Student Loans

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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