Potential FHLB Merger; What Higher Rates Mean for Banks; State Updates; Fee to Use Libor

People need to use their heads once in a while. Circulating in the e-mail world is a claim: "This is the only time in your life you will see this phenomenon: August, this year, will have 5 Fridays, 5 Saturdays and 5 Sundays. This happens only once every 823 years." Snort. Anyone who can read and has a calendar, and a little common sense, knows that this is incorrect, as every time a month with 31 days (January, March, May, July, August, October, December) has the 1st day of the month on a Friday, this happens. So stay tuned for May 2015 when it will happen again. Speaking of things that are subject to skepticism, even if they're in writing, Al W. forwarded this along about how LOs are #3 on a list of jobs that make a person happy and rich.

Speaking of using your noggin, the GDP of Argentina is about the same as that of Virginia, about $400-500 billion. Traders could use Argentina's missing a debt payment as an excuse to buy US bonds. But instead of a flight to quality which would push our rates lower, the "market" in its infinite wisdom, decided to concentrate on economic data that sparked concern the Federal Reserve could raise interest rates sooner than some have expected. So yes, rates have moved higher, but are still within the range we've been in since before Easter. And we once again have proof that stocks and bonds don't always move in the opposite direction, since bond prices and stock prices have fallen this week. Lots of smarter minds than mine see this as an over-reaction and a buying opportunity for both.

Many banks are preparing for an eventual increase in interest rates (take your pick: a stronger economy or the Fed scaling back security purchases). And so many banks are adding floating rate loans in order to have an increasing income stream when rates do rise. This is probably a good idea given that typical community bank funding structures are positioned for a rising interest rate environment. As bankers know, floating rate loans are typically priced at a spread pegged to a benchmark. Over the years, though, many banks have been shifting from Prime to Libor as they seek to better match funding sources (large banks typically use Libor to price deposits).

I remember when it was correctly called LIBOR (London Interbank Offered Rate) but I guess it is easier to type Libor. It is a global floating interest rate that initially acted primarily as a benchmark for transactions between banks, and especially for commercial loans. Possible manipulation and lawsuits aside, or actually because of them, a new Libor administrator took over from the British Bankers Association (BBA) called the Intercontinental Exchange (ICE). But on July 1 of this year the ICE introduced new licensing arrangements for the use of the index! A usage license is required for any party that uses Libor rates in valuation and pricing activities, including collateral calculations, interest rate fixing, pricing curves, etc., plus any party that uses Libor rates as a reference rate in transactions which could include swaps, mortgages and loans.

This is shocking in its broad reach and seems to require a license for practically every bank, mortgage company, credit union, core provider and servicer in the U.S. ICE indicates licenses cost $16,000 per year - can the local mortgage company or credit union afford that? That may change, however, as Pacific Coast Bankers Bancshares reports that currently the ABA and the ICBA are actively communicating with ICE to help it achieve a better understanding of how U.S. institutions use the index and to have this fee eliminated.

Banks use their deposits to make loans, but US banks are steeling themselves for the possibility of losing as much as $1 trillion in deposits as the Federal Reserve reverses its emergency economic policies and raises interest rates. JPMorgan Chase, the biggest US bank by deposits, has estimated that money funds may withdraw $100 billion in deposits when the Fed stops influencing supply and demand. And you know all those recently minted MBAs in the ranks of Wells, Citi, Bank of America, Bank of New York Mellon and PNC Financial Services are crunching numbers trying to gauge the potential effect of the Fed's exit on institutional or retail depositors who might choose to switch to higher interest accounts or investments. Of course banks love paying roughly 0% on deposits and loaning the money out, thus earning the spread. An outflow of deposits would be a reversal of a five-year trend that has seen significant amounts of extra cash poured into banks thanks to the Fed flooding the financial system with liquidity. Banks might have to pay higher rates on deposits to retain customers - potentially hitting their profits and sparking a price war for client funds.

State Updates

Pennsylvania recently modified provisions regarding powers of attorney in House Bill 1429. The bill requires a power of attorney to be dated, as well as signed by the principal or by another individual on behalf of and at the direction of the principal if the principal is unable to sign. The signature must be acknowledged before a notary public who is not the agent designated in the power of attorney and witnessed by two individuals, each of whom is 18 years of age or older.

Florida recently passed House Bill 413, which enacts provisions regarding consumer collection practices. HB 413 states, "a person may not engage in business in Florida as a consumer collection agency without first registering in accordance with the law, and thereafter maintaining a valid registration." The Financial Services Commission may also adopt rules requiring electronic submission of forms, documents and required fees as well as establish time periods during which a consumer collection agency is barred from registration due to prior criminal convictions of, or guilty or no contest pleas by, an applicant's control persons, regardless of adjudication.

California amended provisions regarding mortgage loan originator education requirements in Senate Bill No. 1459. Under the law, an applicant for a mortgage loan originator license is required to complete at least 20 hours of approved pre-licensing education. Pre-licensing education courses must be reviewed and approved by the NMLSR. Education may be offered either in a classroom, online or by any other approved means. Education requirements approved by the NMLSR for any state other than California are accepted as credit toward completion of pre-licensing education requirements in California.

Rhode Island's Governor, Lincoln Chafee, signed HB 7997 in July, which extends the state's licensing requirements to include companies servicing a loan, directly or indirectly, as a third-party loan servicer. As Buckley Sandler write, "the new law expands the definitions for servicing and third-party loan servicers, establishes for such servicers a $1,100 annual licensing fee, and requires licensed servicers to: (i) maintain at least $100,000 capital; (ii) obtain a bond; (iii) maintain segregated borrower accounts; and (iv) maintain certain records." HB 7997 also establishes prohibited acts and practices for third-party servicers, including, among others: (i) knowingly misapplying loan payments to the outstanding balance of a loan or to escrow accounts; (ii) requiring unnecessary forced placement of insurance; (iii) failing to provide loan payoff information as required; (iv) collecting private mortgage insurance beyond the date required; (v) failing to timely respond to consumer complaints; and (vi) charging excessive or unreasonable fees to provide loan payoff information. The new rules and requirements take effect July 1, 2015.

Connecticut's legislature has passed House Bill 5514 providing for an alternate method of foreclosure. The new bill establishes an additional method of foreclosure that will support the Connecticut real estate market by selling residential properties at market prices, encourage potential purchasers eligible for first-time homebuyer and other special lending programs or who wish to perform due diligence concerning a purchase to purchase a residence in foreclosure, provide a measure of dignity to residential borrowers faced with the prospect of foreclosure, reduce deficiencies by providing a procedure for a market sale instead of a forced auction sale or lender possession of property prior to sale and provide a speedy method of concluding a foreclosure when the borrower and first mortgage lender agree on a sale.

New York has adopted regulations concerning shared appreciation mortgage modification as Title 3 NYCRR Part 83. It permits banks and mortgage servicers to reduce the amount of principal outstanding on a borrower's mortgage in exchange for a share of the future increase in the value of the home. The option is limited to borrowers who are 60 or more days past due on their loan or whose loan is the subject of an active foreclosure action and who are not eligible for existing federal and private foreclosure prevention programs.

Lender Updates

The Federal Home Loan Bank of Des Moines and the Federal Home Loan Bank of Seattle announced that they are discussing a potential merger of the two Banks. A merger would require approval from the Federal Housing Finance Agency, as well as member-owners of FHLB Des Moines and FHLB Seattle. The combined institution would provide funding solutions for more than 1,500 member financial institutions in 13 states, as well as the U.S. territories of American Samoa and Guam and the Commonwealth of the Northern Mariana Islands.

US Bank Mortgage posted its bulletin 14-045 regarding agency conventional overlays.

Due to an improved lending environment and the agencies providing better clarity regarding their expectations, U.S. Bank Home Mortgage will be eliminating all conventional agency credit overlays. "USBHM continues to provide clarity when agencies are silent on a topic or when USBHM chooses to use an alternative process to expedite loan approval." These changes are effective immediately for all new conventional agency loans and current loans in your pipeline. Agency guidelines must be followed.

Kinecta Federal Credit Union reminded clients that it offers a 90% LTV Jumbo Arm program for loan amounts up to $250,000 above agency high-balance limits, min 720 FICO and discounted MI. Conversely, if the borrower wants to avoid MI, we also offer 1st and 2nd combos up to a combined loan amount of $1 million. Also min FICO is 720.

Banc of California now offers Non-Warrantable Condos, Condotels & HomeStyle Renovation loans in all 50 states to its correspondent clients; Non-Warrantable Condos: Fixed Rate and ARMs; Loan amounts to $2.5M, 65LTV; 80LTV to $1.5M.

Affiliated Mortgage Company recently updated its website. Check out its improved site at: AMC.

M&T Bank Correspondent's 2014-20 bulletin included information regarding Homeownership Counseling disclosure forms audit requirement on loan files submitted for purchase with application dates on or after 7/10/14 to ensure compliance with the Dodd-Frank requirement. SONYMA Conventional Plus income limits have changed with most of the State seeing a decrease. VA appraisal fees have been revised applicable to all VA appraisals ordered on or after July 2; Flood insurance minimum deductibles, for new or renewing policies are in effect.

Turning back to the markets, take your pick (Ukraine, Argentina, Israel, Libya, the possibility of the Fed raising rates in the first half of 2015 instead of the second half), volatility has increased. MBS prices got whacked Wednesday and Thursday, and yesterday the 10-yr closed at a yield of 2.56% - still on the low side of the range we've been in since MLK Day.

Today we've seen the Personal Income and Consumption data, along with payroll and unemployment data. Nonfarm Payrolls were +209k for July, slightly lower than expected but the prior month revised higher to 298k, and the unemployment rate inched up to 6.2%; average hourly earnings and workweek were both unchanged as expected. We still have the July final University of Michigan survey coming, as well as July's ISM Manufacturing results - but on a summer Friday, they are unlikely to move rates. In early trading we're down to 2.54% and agency MBS prices are better by about .125.