Good & Bad News About Rates

Valentine's Day is Sunday, and in the world of romance, one single rule applies: make the woman happy. Do something she likes and you get points. Do something she dislikes and points are subtracted. You don't get any points for doing something she expects. Sorry, that's the way the game is played. Here is the last part of a guide to the points system:

COMMUNICATION

When she wants to talk about a problem:

You listen, displaying a concerned expression...... 0

You listen, for over 30 minutes....................+5

You listen for more than 30 minutes without looking at the TV..................................+100

She realizes this is because you have fallen asleep....-200

 

YOUR PHYSIQUE

You develop a noticeable pot belly.............-15

You develop a noticeable pot belly & exercise to get rid of it...............................+10

You develop a noticeable pot belly and resort to loose jeans and baggy Hawaiian shirts.......-30

You say, "It doesn't matter, you have one too."......-800

 

What's this? Fifty five thousand residents in one mile-high building? Doesn't Tokyo have earthquakes? Let's hope not everyone wants hot water at the same time!

Everyone makes mistakes, right? The issue is admitting them. The CFPB who caught some folks' attention yesterday with this announcement: "Today we published a notice in the Federal Register to correct a typo regarding tolerances for property taxes and certain other property-related costs that was found in the "Supplementary Information" to the TILA-RESPA Integrated Disclosure rule. Learn more at: https://federalregister.gov/a/2016-02630."

 Turning to banking news, the Financial Stability Board (FSB) is based in Basel and its global regulators quietly set the tone for the biggest banks in the world. It has been toiling away on new guidelines on how to prevent banks from becoming "too big to fail." Each designated country generates its own implementation process, but the result looks a lot like what the gatekeepers in Basel had recommended. FSB regulators still want the largest banks to raise $1.19 trillion by 2022 in debt instruments. These banks should maintain sizable cushions able to absorb losses when a financial crisis is looming on the horizon. Regulators remember too vividly what happened in 2008, when taxpayers were obliged by their government to bail out banks. In the future, the cost of the banks' failure would be supported by its investors, not the general public.

 Eight U.S. banks are affected by the new guidelines: JPMorgan, Wells Fargo, Bank of America, Citigroup, Goldman Sachs, Morgan Stanley, BNY Mellon, and State Street. These banks will all have to issue debt that could be used to defray losses in times of crisis. These debt instruments will cover losses when a bank's equity is wiped out and regulators will avoid a potential panic caused by a domino effect. So-called Total Loss Absorbing Capital (TLAC) of the banks will need to equal 16% of their assets in 2019 and 18% by 2022. The FSB recommendations are designed to make the banking industry safer.

 But will it affect the dynamics of lending for every institution? Sure it will. New types of debts will command higher interest rates - let's hope those don't include agency MBS. Banks will find them more expensive, so they will be inclined to lend less. Anyone working in a bank knows that banks today have better cushions in reserve and more commercial loans outstanding than they had before the financial crisis. Consider that the avalanche of debt coming from the big 8 may reduce the money available for community banks who are also trying to raise capital. This could create high transaction costs although the new standards are designed to make sure the largest banks have enough capital to absorb losses if the bank fails in order to protect against further contagion in the broader financial system.

 Banks continue to merge and/or acquire other banks - they want to be big for regulatory and efficiency reasons, but not so big they fall under the purview of the CFPB or are thought of as "too big to fail." Just in the last week it was announced that Horizon Bank ($2.6B, IN) will acquire Farmers State Bank ($148mm, IN) for about $22.5mm in cash and stock. In the Volunteer State Commercial Bank ($839mm) will acquire the bankrupt holding company of National Bank of Tennessee for $5.1mm. And South Dakota's TCF National Bank ($20.7B) will close 33 branches inside Jewel-Osco stores in and around Chicago and replace those offices with enhanced ATMs.

 The FDIC released its "Bank Data Guide" - a quick reference tool for many of the structural, financial and economic products that are available on the FDIC's web site.

 Banks know plenty about the OCC. Are you uncertain about how much due diligence you should be doing as a part of vendor management?  Worried you're not doing enough, or perhaps too much? A few years ago the OCC issued guidelines on exactly that: OCC Bulletin 2013-29 Third-Party Relationships.  Even if you're not a bank, there's some good stuff in there.

 Speaking of vendors, let us take a random stroll through what some of them have been up to lately.

 A while back we learned that all Calyx Point users can now access products and pricing sheets for Mid America programs, regardless of whether they have registered to broker loans with Mid America. Calyx said that its subsidiary, LoanScoreCard, provided the product and pricing engine that enabled the integration and the new search capabilities. "This integration is a win/win for Calyx customers and Mid America," said Dennis Boggs, VP of Business Development. "It gives our customers access to Mid America's expansive and highly competitive loan programs while at the same time exposing Mid America's products and pricing to Calyx's extensive user base."

 Ellie Mae launched its Ellie Mae Pro consulting partner program designed to accelerate the adoption of Ellie Mae's Encompass all-in-one mortgage management solution. The Ellie Mae Pro Consulting Partners program offers consulting firms the opportunity to provide a broad range of high-quality services by partnering with Ellie Mae and their customers on Encompass implementations. Through Ellie Mae Pro, with 3 levels to choose from, consulting partners will be offered training and certification opportunities, along with deeper access to Ellie Mae resources, all designed to ensure customers receive exceptional consulting services.

 Private Eyes Inc., provider of income verifications for lenders and background checks for employers worldwide, formed a strategic partnership with FormFree Holdings Corporation, the leading provider of automated asset verifications in the mortgage industry. Private Eyes will be a reseller of FormFree's AccountChek automated asset verification solution, the first and only patented verification of deposits and assets (VODA) solution accepted by the government-sponsored enterprises (GSEs). When borrowers apply for loans, AccountChek verifies the borrower's financial statements electronically with the borrower's banks, without anyone having to produce paper copies of bank statements.

 Provider of a one-stop, bundled, home equity and mortgage-settlement solution to credit unions in the U.S., MemberClose, in conjunction with LoanLogics, have created an automated portfolio review service designed to meet the needs of credit unions. "The aim of this partnership is to ensure that credit unions have the technology they need to serve their members and comply with regulations. In addition, it means that credit unions of any size have access to the same technology as the largest mortgage lenders which levels the playing field," said Brian K. Fitzpatrick, president and CEO of LoanLogics. "Increasingly, credit unions are recognizing that they need to proactively monitor their mortgage loan portfolios." 

 Turning to capital markets news, owners and CEOs of successful lenders know that capital markets' staffs don't take undue risks. Last week the FDIC issued FIL-10-2016 announcing the release of updated videos on interest rate risk. The new videos are intended to provide directors, management, and staff of financial institutions with a better understanding of interest rate risk and how to manage it. The FDIC previously released an interest rate video made specifically for directors, and a series of more technical videos tailored to management and staff responsible for interest rate risk management. The FDIC's updated videos (i) reflect recent industry data and expand on relevant topics; (ii) emphasize the FDIC's expectation that institutions prudently manage interest rate risk; and (iii) address industry trends, board and management responsibilities, types of interest rate risk, various risk measurement systems, key modeling assumptions, internal controls, and independent review.

 Turning to the bond market, since some LOs are licking their chops over refis whereas most investors are dreading having their MBS portfolio potentially prepay, the long end of the yield curve, which includes 30- and 15-year mortgages, rallied a little on Wednesday. In fact the 30-year Treasury bond yield touched a fresh nine-month low of 2.52%. Capital market's staffs are dealing with margin calls due to the huge rally in MBS and on the flip side holding their pipelines while originators trying to renegotiate loans. Yes, at some point recent borrowers overcome the hassle cost of refinancing and investors see an increase in early pay-offs.

 The big news, although it wasn't, was Fed Chair Janet Yellen's testimony before the House Financial Services Committee. She said that "financial conditions in the United States have recently become less supportive of growth, with declines in broad measures of equity prices, higher borrowing rates for riskier borrowers, and a further appreciation of the dollar. These developments, if they prove persistent, could weigh on the outlook for economic activity and the labor market, although declines in longer-term interest rates and oil prices provide some offset."

 This morning the drama continues. We have negative central bank rates and bad bank headlines coming into this morning as the Riksbank dropped its rate further into negative territory and SocGen put up bad earnings/guidance. The combination of those two events, coupled w/very fragile sentiment, extreme risk aversion, and Yellen's testimony (which, as noted above, wasn't sufficiently dovish or concerned about financial market volatility) are weighing very hard on equities today and helping fixed-income securities.

 Today we are through last year's low in 10-yr yields and at this clip it won't be long before we break the 2012 low. We've already had Initial Jobless Claims for the week ending 2/6 (-16k to 269k) - and that's about it for scheduled news - not that it matters in this environment. We do have a $15 billion 30-year auction coming up later. We closed the 10-year Wednesday at 1.70% and we're down to this morning at 1.60%, or lower, with agency MBS prices better by .250-.375.