Primer On The Impact Of A Short-Term Rate Increase

"I remember the words to every song from the 1970s, but I forgot why I walked into this room..." Memory is a funny thing. But remember when it was an unwritten rule that men made more money than women? Unfortunately it is still often the case but women's salaries are heading in the direction of reaching levels similar to their male counterparts. According to the U.S. Census Bureau, between 2000 and 2015, the share of married couples where the wife earned at least $30,000 more than husband increased from 6 to 9 percent and married couples where the husband earned at least $30,000 more than the wife dropped from 38 to 35 percent. Husbands and wives whose earnings were within $4,999 of each other also increased from 24 percent in 2000 to 25 percent in 2015.

CMPS Institute is hosting a webinar this week that may be useful as you finalize your 2016 strategic plans and technology initiatives. "We've compiled some very interesting data through our 15-city Top Producer Roundtable tour this year, and our 10 years of studying the habits of over 7,000 loan originators," writes Gibran Nicholas, CEO of CMPS. "The main problem we've discovered is the dismal and lackluster adoption of most corporate initiatives, with 20% - 30% adoption rates considered normal.  The right implementation strategy can have a whopping 9x greater impact on ROI vs. the wrong implementation strategy." The webinar will take place this Thursday, Dec. 10 at 1pm Eastern and is called, Three Ways to Increase Adoption of Your 2016 Initiatives. Topics include: (1) How to align your initiatives with the emotional drivers of each individual on your team; (2) The three characteristics of all human habits, and how to leverage them for behavioral change; and, (3) How to create metrics and accountability around three keystone sales and operational habits.

Lenders Compliance Group is hosting a free webinar on the impact of TRID on Real Estate Brokers. It is entitled "TRID Challenges: Guidance for Real Estate Professionals," and will be held on December 15^th at 2PM EST. The webinar will be conducted by Jonathan Foxx, Managing Director, and Neil Garfinkel, Director/Legal & Regulatory Compliance. Jonathan says that "TRID necessitates a shift in how real estate professionals serve their clients. While most of the implementation of the changes falls on lenders, realty firms must become familiar with the impact of the TRID rules in order to ensure timely closings, among other things. In this webinar for real estate agents, we will provide important facts and tips that will enhance the clients' home purchase experience." Slides and hand-outs are available for attendees.

There's a lot going on in the capital markets. For example, Greystone closed its first Freddie Mac Fast-Track Co-Op Early Rate Lock loan to refinance Rego Park Gardens, a 527 cooperative apartment building located in Queens, NY. The loan was in the amount of $9,500,000 and included a 15-year term with a 30-year amortization. The company also provided a $30,605,700 FHA-insured loan for a construction of luxury apartment complex in the Ascension parish of Prairieville, Louisiana. The property will have 272 market-rate units that will be built on 23.3 acres. The loan has a low, fixed interest rate during the initial construction period followed by a 40-year term with straight amortization.

The Mortgage Bankers Association has made a big splash in proposing swapping risk exposure for lower feesand is seeking explicit 2016 targets for this kind of "up-front" risk-sharing. It is debatable whether or not smaller lenders can participate in risk sharing, but it definitely appears to have momentum. "From our view, the upfront approach is preferred because Fannie and Freddie have so little capital and that amount of capital is declining over time," Mike Fratantoni, chief economist of the mortgage-bankers group, said in an interview. "The system may be better off if the risk is dispersed before it gets to the GSEs, particularly if they are aggregating risk and then distributing it later."

To start let us take a look at short term rates, or the short end of the yield curve. The 2-yr ended Friday with a yield of .947%. A year ago it was .510%, so it has nearly doubled. As a proxy for the longer end, the 10-yr ended Friday at 2.28% versus being at exactly the same yield a year ago! So the spread between the two yields has gone from 1.80% to 1.33%, and although banks have been chafing under the pressure of years of low interest rates in the last year short term rates have moved sharply higher on a relative basis.

Depository banks, some of whom offer warehouse lines to mortgage banks, are in the business of maturity transformation: they pay depositors a short term rate, loan it out at longer term rates, and book the difference. In other words they fund long-term loans with short term liabilities. Thus any spread compression, like we are seeing between short and longer term rates, can pressure earnings. And what banks earn on their assets (loans and securities) falls relative to the cost of their liabilities (deposits) squeezing net interest margins. So any investors, or banks, thinking that net interest margins would see a boost when the Fed raises its interest rate target will not be pleased. Spreads are moving against banks. So logically one would expect any kind of portfolio lending product to have its rate moved higher if the bank wants to maintain its spread income. So we could see banks possibly putting slightly higher rates on its loan products in order to preserve spread income, or reducing margins in order to compete. Pick your poison.

What about warehouse banks? Most of these are caught in a similar dilemma in that they are using depositor's money (borrowing) to lend out to mortgage banks. So they can keep pricing the same and see margins suffer, or pass the increase along to their clients and run the risk of losing some business.

In terms of the bond market, up some, down some, so go rates. The experts are thinking there's about an 80% chance that the Fed jacks up short-term rates next week, but it is more of a coin toss what it will do to 15-year and 30-year mortgages rates. There is definitely a school of thought that thinks an increase in short term rates may slow things down, in which case long-term rates may actually decline over time! But if the economy takes an increase in overnight borrowing costs in stride, yes, mortgage rates may slide higher over time. My cat Myrtle is betting on the first option.

Yesterday the thinking is that, especially with the price of oil dropping, the economy may slow. And thus bond prices rallied and rates fell. The Washington Post reported on Friday that a majority of the FOMC preferred to hike rates at the September meeting but that Fed Chair Yellen campaigned to maintain zero interest-rate policy until global risks took some time to play out.

Don't look for much news today aside from an October JOLTS job openings number and a $24 billion 3-year note auction. The 10-year ended Monday at 2.23% and this morning it is 2.21% with agency MBS prices better .125.