To conclude the 2022 Western Secondary Market Conference this week, Andrew Rhodes took part in a Capital Markets panel along with David Battany of Guild Mortgage, Mike Quinn of PennyMac, and moderator Rob Chrisman of the Chrisman Commentary. The panel touched on many topics, some of which I will recount for you here.
Panelists stressed the importance of the Capital Markets department not as a profit center, but as a conduit to set a price to the field. Yes, the ability to make a gain on sale exists through delivery, specified pools, and other functions, but the purpose of a well run department is to maintain neutrality, manage pull through, and protect margin. Basis risk is as prevalent as it has been in a long time, making both cross hedging and using Treasury options to hedge inadvisable.
Let’s make no bones about it, we are in a tough environment. Rates were artificially low over the past couple of years due to the Fed’s actions, and there has been a big displacement in the market with the Fed’s presence waning. Even with elevated fixed rates, a flat or inverted yield curve means that creating a market-driven ARM product with appropriate pricing has proven a challenge outside of bank portfolios.
Little liquidity exists in the 5.5 coupon and nothing is priced above the 6.0 coupon. There is more liquidity in the 3.5 coupon at 94 than the 5.5 coupon at 103, and this lack of premium has made no-cost loans hard to originate. Normally with a premium coupon, the investor believes they will have an above market coupon for years. In this environment, that’s hard to say. The par coupon issue has borrowers paying more points than they are expecting, which has led to higher fallout. A rising rate environment doesn’t necessarily translate to better pull through. On the bright side, the 5.0 coupon can fit up to a 6.125% note rate, so there is some flexibility to cover positions.
The mandatory versus best efforts spread is tight right now, and even with spec opportunities, it is often hard to put spec pricing into ratesheets. Best efforts delivery dominates the non-Agency space, making it critical to constantly evaluate the health of your investors. The PLS market has been especially unpredictable, making hedging hard and best efforts deliveries more appealing. Fortunately, investors aren’t picky about the delivery method, they just want the loans. The non-QM space has been described as a mile wide, but an inch deep. Risk based pricing means granularity has increased over time. More dynamic pricing on the front end can help with things like CRA pickup.
You don’t need to know where rates are headed, but understanding the forces driving the market is important. Slight differences make a big difference to gain on sale. Strong analytics and a robust best execution analysis are always paramount, but especially so in the current market. Having multiple outlets will help you to get the best price on your loan. MCT offers the most receptive loan sale platform in the industry when it comes to adding new investors.
There is no question that margin pressures exist for all companies in the current environment, and the hedge exists as a vehicle to protect margin. Maintain the discipline of your daily hedge. MCT exists to help you manage your interest rate position. We offer a best in class hedge advisory, trading platform, and unrivaled customer service. Support matters. Your needs matter. Call us to talk about liquidity, premium pricing issues, GSE buybacks, or anything else related to the secondary market.