MBS Weekly Market Commentary Week Ending 7/15/22

Where are Capital Markets people focused other than on rates and bond market volatility? As if managing margins in this environment wasn’t enough, lenders are trying to stay ahead of the curve in terms of cost cutting while keeping origination volume flowing to remain profitable. Let’s look at several items that are top of mind for MCT’s clients.

Anybody who’s been in this business for any length of time has seen cycles come and go, but we are in one of the most dramatic cycles in recent memory. It’s hard, if you’re a lender, to sit there and think, “Oh, you know, we’re coming up on a recession and a recession typically means lower long-term rates.” Some companies don’t have the luxury of waiting out the current rate environment until the recession hits. And even if one does, it may be shallow and not have a huge impact on mortgage rates. What lenders are having to do is continue to cut costs, which unfortunately includes laying people off.

It’s hard to cut costs fast enough in this environment. Adding personnel or decreasing personnel is a cost in itself: finding and hiring talented individuals, training them, and then unfortunately, having to lay a portion of them off.

Thus, lenders continue to look to technology as ways of leveraging their current workforce. Earlier this week, loanDepot came out with a plan for staying alive, and it was viewed by many as drastic. “LD” will be undergoing a series of cutbacks. But loanDepot is no different than many other lenders who are having to deal with this environment that don’t have to publicly announce their plans. It’s just cut, cut, cut, and try to become as efficient as possible. Hopefully, using technology (like we provide here at MCT), many of these lenders can scale up and scale down successfully.

In terms of industry-wide trends and execution avenues, private label securitization (PLS) was “all the rage” last year and the center of discussion about possibilities and revenue enhancements. But PLS has diminished in 2022 to the point that June saw the lowest issuance in a couple of years. The recent demise of First Guaranty Mortgage and Sprout “spooked the herd” and has caused renewed scrutiny of counter-party risk in the secondary markets.

At the company level, lenders who have not reserved enough capital, or those that do not possess sufficient capital reserves, are being scrutinized by warehouse banks, broker dealers, and correspondent investors. Those entities are contractually required to see counter-party (client) retained earnings and income. And whether a lender is publicly held or privately held, revenue has been up and down this year because of the market and because of the volatility.

MCT is also seeing a lot of attention being paid to the best efforts versus mandatory spread volatility, a big hurdle especially for smaller companies.

The market is one thing, but companies continue to try to roll out new products or additional products to try to help every borrower that they can. Products such as renovation, down payment assistance programs (DPAs), community land trusts, housing finance authorities (aka, bond programs), non-Agency/non-QM, and manufactured housing are all being given a good, hard look by nearly every lender. Private investors, usually in the form of depositories, are being sought as a fresh outlet for loan products.

Most of these products are not being hedged by Capital Market staff, as the risk profile can be difficult to gauge. Instead, the risk of the rate locks with these products (typically non-Agency) is passed on to the ultimate investor. In the case of DPA programs and some of the bond programs, those may or may not be included in the hedged pipeline.

The non-QM, non-Agency (such as jumbo), and ARM products tend to be sold on a best-efforts basis directly to either portfolio investors or the non-QM passthrough companies who in turn will have a takeout on the other side with a pension fund or insurance company or somebody who’s interested in non-QM programs. Lenders will try to pass the risk of these on to try to lock in the original margin and then pass the hedging risk onto the end investor and therefore limit the lender’s risk.

Finally, on the agency side of things, Fannie Mae and Freddie Mac continue to have a focus on first-time home buyers, affordable housing, and less of a focus on non-owner and second home lending. Generally speaking, the fees from non-owner and second home lending are used partially to subsidize the the other programs by Fannie Mae and Freddie Mac. We’ll continue to see agency changes going forward as we move through 2022.

This industry is always evolving, or at least changing. Capital Markets is usually at the center of any changes that occur, and with good reason: if there is no investor appetite for a given product, either within a portfolio or from an outside investor, the lender will not offer it. And in the current environment, investors are hungry for safe, increased yield and lenders are trying to satisfy that hunger.

10-Year Treasury Yield Curve

Compare this chart with the mortgage rates chart to see how the 10-year treasury and mortgage rates are correlated. Read more below to learn how mortgage rates are tied to the 10 year treasury yield. View raw data on U.S. Department of the Treasury website.


Mortgage Rates Today

The current MBS daily rates are shown below in this chart for 5/1 Yr ARM, Jumbo 30 Yr, FHA 30 Yr, 15 Yr Fixed, 30 Yr Fixed. Sign up for our MBS Market Commentary to receive daily mortgage news in your inbox.

About the Author

Robbie Chrisman, Head of Content, MCT

Robbie started his mortgage industry career with internships during high school and college at Peoples National Bank in Colorado, and RPM & Bay Equity in the San Francisco Bay Area. After graduating from The University of Texas at Austin with a degree in Finance in 2014, he went to work at SoFi, where he rose to Director, Capital Markets assisting in the creation of SoFi’s residential mortgage division before leaving to work for TMS in Austin, Texas. From there, he went to work for FinTech startup Riivos in San Francisco and now is the Head of Content at Mortgage Capital Trading (MCT) in San Diego.

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Previous Weekly Market Reviews by Mortgage Capital Trading (MCT)

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MBS Weekly Market Commentary Week Ending 1/27/23

Even with the most aggressive pace of rate hikes in over a generation during the past year, recent data suggests that there’s still a path to a “soft landing” for the Federal Reserve. The U.S. economy posted the kind of mild slowdown in the last quarter of 2022 that the Fed wants to see as it attempts to tame inflation without choking off growth. Gross domestic product beat expectations to rise at a 2.9% annualized pace, down from 3.2% in the third quarter and a long way from a recession.

MBS Weekly Market Commentary Week Ending 1/20/23

Have you heard? Inflation was so 2022. All jokes aside, after we learned last week that U.S. inflation cooled for the sixth consecutive month (the consumer price index dropped 0.1% in December compared to the month prior), expectations are now that the Federal Reserve is likely to downshift rate hikes to 25 BPS going forward, beginning at next month’s FOMC meeting.

MBS Weekly Market Commentary Week Ending 1/13/23

Pay attention to the bond market rather than the Fed. That’s what I’m hearing as we learned this week that inflation continued to ease in December, though much focus was also on Wells’ exit from the correspondent space and its ramifications. The headline CPI (-0.1% month-over-month, +6.5% year-over-year) posted the slowest inflation rate in more than a year and core inflation (+5.7% year-over-year), which excludes food and energy, also posted the smallest advance in a year.

MBS Weekly Market Commentary Week Ending 1/6/23

While it’s back to business as usual, it was a fairly quiet week as we settled into the new year. Fast inflation and high interest rates dominated the narrative and upended markets across the world last year. When the dust settled, 10-year Treasuries were 200+ BPS higher than the start of the year, the curve inverted in a bearish fashion faster and farther than ever, implied volume spiked, and mortgage spreads were pushed from stubbornly rich to suddenly cheap. The result was an entire trade-able universe moving out of the money, originations grinding to a halt, and duration becoming a function of illiquid trade flows.

MBS Weekly Market Commentary Week Ending 12/23/22

MCT would like to wish everyone a Merry Christmas and Happy Holidays. Talk to close the year has been dominated by the Federal Reserve’s most aggressive policy tightening in four decades and its impact on the economy, and for us the residential housing market.