Sector Update

August 31, 2020

After taking a week off, Treasury yields increased for a third week out of the last four and the yield curve steepened substantially. The 2-10 spread closed 10 bps higher at 59 bps. Previously, I’ve written we haven’t seen it break above 50 bps for a meaningful amount of time. However, it looks like we could be on an up trend now as markets search for a new level. It makes sense as the Fed is holding down shorter rates while their policy stance change aims to be more inflationary.

Also, new this week, we added a Vining Sparks Interest Rate Products section under Sector Commentary.

Another Fannie/Freddie Refinancing Fee Update

Last week, the FHFA directed Fannie and Freddie to delay the implementation of the previously-announced “Adverse Market Refinance Fee” until December 1, 2020. They also announced loans with balances below $125,000 or made through other “affordable refinance products” would be exempt from the fee.

From 8/24 Sector 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

Food for Thought – Taking Gains – Current and Anticipated Needs Change

Most portfolio managers, especially those at depositories, find themselves with ample cashflow and liquidity. Naturally, much focus is placed on purchasing investments. Part of managing a portfolio also includes considering strategic sales of positions. It’s not uncommon to see 2-5% gains in MBS purchased last year through March(ish) of this year. In Municipal positions, including ones that have been pre-refunded (effectively called), it is possible to see gains of 7-10%.

To say much has changed since purchases made even earlier this year, is an understatement. Since April, the Fed has become deeply entrenched in the mortgage market, Treasury yields have dropped approximately 140 bps, and earnings for 2020 and 2021 are less clear. The point is some investments may be ripe to harvest gains from as that may better suit your current and anticipated needs. If you’d like help evaluating or discussing the pros and cons of taking gains, please don’t hesitate to reach out.

Sector Commentary

(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: Coronavirus Has Left Banks With Lots of Cash and Little to Do With It

“The FDIC said the 4,624 community banks in its data actually posted an aggregate increase in net income of $202.5 million.”

Vining Sparks: Coronavirus Chartbooks

PDF/Mobile: Coronavirus Chartbook (PDF)

Regulatory Links

Federal Reserve: 8/27 Announces approval of updates to its Statement on Longer-Run Goals and Monetary Policy Strategy

Fannie Mae: 8/27 Updated Eight Lender Letters

Fannie Mae: 8/27 Suspension of Foreclosures and Evictions on Single-Family Mortgages Through Year-End

FDIC: 8/26 Agencies Issue Three Final Rules (CBLR, CECL, and Eligible Retained Income)

FDIC: 8/25 Quarterly Banking Profile Released (2Q 2020)

FHFA: 8/25 Adverse Market Refinance Fee Implementation now December 1

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 8/27: Recommended Hardwired Fallback Language for Bilateral Business Loans

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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