| You will see a new Key Indicator in this week’s Economic Update while another that has been tracked for years has disappeared. The Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York, is increasingly being used as an index to reset the interest rate for adjustable rate mortgages (ARMs) and the GSE’s Fannie Mae and Freddie Mac recently indicated a preference for acquiring loans using it.
Eliminated is the Cost of Funds Index or COFI. The COFI, a product of the San Francisco-based 11th District Federal Home Loan Bank (FHLBank) was once the principal ARM index in the three states covered by the District–California, Nevada, and Arizona–and was widely used elsewhere in the country, but its influence is long gone. The FHLBank says that, while 200 savings and loan banks once contributed data to the index, that number is down to nine so the bank will abandon it soon.
While there are several indices currently used to reset ARMs, the Secured Overnight Financing Rate (SOFR), an index based on the cost of borrowing cash overnight using Treasury securities as collateral, was developed to replace the London Inter-Bank Offered Rate or LIBOR. That index, the most widely used for both ARMs and adjustable rate student loans, is also going away after some of its participating banks were caught in a nasty rate rigging scandal.
As of now it appears that SOFR will become the primary index for much US lending.
As context, on June 2 the SOFR rate was 0.07% and the LIBOR US 1-month rate (a common ARM index) was 0.17875%. This 10-basis point spread has been typical since 2018 when the Federal Reserve named it the LIBOR replacement.
Builders Respond to Pandemic
New home builders are cutting prices and making concessions to keep sales moving along during the pandemic crisis. The National Association of Home Builders (NAHB) has been surveying its members and found about 22% of those who responded had reduced prices in April to bolster sales or keep contracts from being cancelled. By May they found that 52% were offering concessions or incentives to customers. Among the most frequent were providing upgrades at reduced or no cost and paying closing costs or fees.
NAHB said similar surveys in May 2007 and March 2008 found about the same percentage of builders offering concessions as now, but slightly more than 70% were cutting prices. The discounts were a bit more generous as well, averaging about 7.5% across those two surveys compared to 5% in the current crisis.
Rates are still extremely low, so if you’re thinking about a refi, buying and/or selling, give us a call. |
