July | 2016 | Jonathan Burdick

Brexit to have Lasting Impact According to Freddie Mac

The Brexit decision continues to reverberate and Freddie Mac, in its current issue of Outlook sees it as both a plus and a minus for the U.S., and not necessarily a short-lived one. The company’s economists predict it will raise global risks while keeping domestic mortgage rates near historic lows. That, in turn, will raise mortgage originations.

Brexit aside for the moment, for the second time in as many months Freddie Mac raised its estimate for the first quarter 2016 Gross Domestic Product (GDP). Its initial estimate of 0.5 percent growth had previously been revised to 0.8 percent and now to 1.1 percent. Upward revisions to growth in exports and nonresidential fixed investment were primary drivers of the revisions and the report says this newest figure suggests the start of 2016 was not as bad as originally thought.

The expectation for the second quarter is growth of 2.0 percent with consumer spending being instrumental. That factor had a growth of 1.1 percent in April then normalized in May at 0.4 percent. Retail sales continue to be strong, growing by 0.5 percent in May. However, building materials sales have declined for three straight months which signals a slowdown in residential investment.

Going forward, Brexit is expected to have a major impact on domestic production. A slowdown in global growth, especially in Europe will dampen demand for U.S. exports as will an expected increase in the value of the U.S. dollar as foreign investors seek a financial safe haven. The price of riskier assets will also fall somewhat, raising capital costs and delaying investment

All-in-all, Freddie Mac sees the impact of Brexit shaving 10 basis points off of the GDP from the second quarter of 2016 through the end of next year. After the upward revision to Q1 this will mean this year’s GDP outlook will be unchanged at 1.9 percent and the 10 basis point reduction will shave the 2017 GDP down to 2.2 percent.

The Federal Open Market Committee (FOMC) backed away from raising the fed funds target rate as they were expected to do at their June meeting after a very weak May jobs report. After the results of the Brexit vote on June 24 Freddie Mac anticipates the FOMC “will likely continue to express caution before easing monetary accommodation.”

The Monday after the United Kingdom vote 10-year Treasury rates fell below 1.5 percent for the first time since July 2012 and Freddie’s Primary Mortgage Markets Survey put the 30-year fixed-rate mortgage (FRM) at 3.41 percent this past week, the lowest since May 2, 2013.

In light of this, the company has lowered its 10-year Treasury rate forecast by 40 basis points to 1.8 percent this year and 2.3 percent in 2017. The outlook for the 30-year FRM has accordingly been reduced by 30 basis points for 2016 to 3.6 percent and by 50 basis points in 2017, to 4.0 percent.

Reference Jann Swanson

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Fannie/Freddie Joint Venture Creeps Forward

The Federal Housing Finance Agency (FHFA) has released an update on the progress made toward the Single Security that is expected to replace those currently issued by Fannie Mae and Freddie Mac (the GSEs). The update covers:

The milestones that the GSEs and their joint venture Common Securitization Solutions (CSS), which is also charged with developing and implementing the Common Securitization Platform (CSP), must achieve to complete the project and FHFA’s expectations about when that will happen.
The final Single Security features and disclosures, including how privacy risks related to loan-level disclosures will be addressed; and
How the GSEs and FHFA review potential changes in Fannie Mae and Freddie Mac programs, policies, and practices to help ensure the continuation of the current close similarity of the prepayment rates of the GSEs’ mortgage-backed securities (MBS.)

The GSEs and CSS are current preparing for two releases of the platform. Release one will allow Freddie Mac to begin using three platform modules – Data Acceptance, Issuance Support, and Bond Administration – to perform activities related to its current single-class, fixed-rate securities (Participation Certificates (PCs) and Giant PCs) and certain activities related to the underlying mortgage loans such as tracking unpaid principal balances.

Release two will allow both GSEs to use those same modules plus a fourth, the Disclosure module, to perform activities related to their current fixed-rate securities, both single- and multi-class; to issue Single Securities, including commingled resecuritizations; and to perform activities related to the underlying loans. It will also allow them to use the CSP to issue and administer certain non-TBA mortgage securities, including Fannie Mae securities backed by adjustable-rate mortgages.

FHFA’s 2016 Conservatorship Scorecard calls for the implementation of Release one this year and Release two in 2018.

Included in the Update are the various phases of testing that will be required for the two releases and the planned issuance of final Single Security features and disclosures to the market. It also provides information on the ongoing alignment of the GSEs’ programs, policies, and practices and how they will be implemented to further support the Single Security initiative.

This table presents the timeline developed by FHFA showing key achievements to date as well as upcoming milestones with targeted completion dates. FHFA says it expects to announce the intended launch date for the Single Security in order to provide stakeholders at least 12 months’ advance notice.

“This Update reflects our ongoing commitment to transparency. It also reflects the outstanding public and industry input and support we have already received and that we look forward to continuing to have as we move toward the goal of launching the CSP,” said FHFA Director Melvin L. Watt. “The CSP and the Single Security are ambitious projects that we are confident should improve the overall efficiency and liquidity of the mortgage market and result in tremendous savings to taxpayers.”