THE BASIS POINT

LIBOR Drops Most Since Lehman Failure, Overview of Fannie/Freddie Guarantee Fees

 

I walked into a Starbucks with a buy-one-get-one-free coupon for a Grande Latte. I handed it to the girl and she looked over at a little chalkboard that said, “Buy One, Get One Free.”
“They’re already buy-one-get-one-free,” she said, “so I guess they’re both free.”
She handed me my free lattes and I walked out the door.

LIBOR Drops Most Since Lehman Failure
The credit markets are excited, if that is possible, by LIBOR, and suggests that some of the fear is coming out of interest rates. Yesterday the 1-mo LIBOR came in 43 basis points, the largest one-day movement since Lehman Brothers started downward and the credit markets got spooked. (Like the Halloween reference?) Mortgage spreads, which are the interest rate spreads between Treasury securities and mortgage securities) did very well, and most investors improved pricing during the day. I knew that I should have been buying mortgages last week… This morning, on no economic news, the 10-yr is down to 3.81% and mortgage prices are better by anywhere from .125 to .375 in price!

Fannie & Freddie Guarantee Fees
Something tells me that she wouldn’t know anything about “guarantee fees”. A guarantee fee is a small percentage of the loan amount (usually 6-25 basis points) that is paid to the agency that insures the loan against default. In the “old days”, when most companies sold loans directly to Freddie or Fannie, secondary guys would cluster at conferences and compare g-fees. Generally speaking, VA & FHA loans have a g-fee of 6 basis points, Fannie & Freddie’s go up into the mid 20’s. With the government intervention in Fannie & Freddie, the question has come up, “What if their g-fee went down to 6 basis points, or even 0?”

With conventional loans, lenders are usually able to “buy down” the g-fee to 0. But there is a cost to do so, of course, and this is passed on in the price. There is a general consensus that the g-fee has changed, and has flattened out for most lenders/investors. The cost savings, though, have not been pushed down to the borrowers, so perhaps some larger banks are keeping the savings. If everyone’s g-fees were identical, what would that mean to pricing? Any investor’s price is determined by the market, by the g-fee, by the perceived value of the servicing, delivery fees, and by any tax considerations. A flattening of the g-fees will remove that from the pricing equation, and “the market is the market”, thus price differentials will be made up primarily of servicing valuations.

Daily Humor
An older, white haired man walked into a jewelry store one Friday evening with a beautiful young gal at his side. He told the jeweler he was looking for a special ring for his new girlfriend.
The jeweler looked through his stock and brought out a $5,000 ring and showed it to him. The old man said, “I don’t think you understand, I want something very special.”
At that statement, the jeweler went to his special stock and brought another ring over. “Here’s a stunning ring at only $40,000,” the jeweler said.
The young lady’s eyes sparkled and her whole body trembled with excitement.
The old guy seeing this said, “We’ll take it.”
The jeweler asked how payment would be made and the old man stated, by check “I know you need to make sure my check is good, so I’ll write it now and you can call the bank Monday to verify the funds and I’ll pick the ring up Monday afternoon,” he said.
Monday morning, a very teed-off jeweler phoned the old man. “There’s no money in that account.”
“Of course not,” said the old man, “but can you imagine the weekend I had?”

 

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