MBS Weekly Market Commentary Week Ending 6/24/22

Volatility, especially for those not utilizing mortgage pipeline hedging, can erode profit margin rapidly. Since the Fed announced a 75 bps rate hike last week, we have seen increased volatility amid markets attempting to come to grips with how to weigh inflation concerns versus recession concerns. As these stagflation worries rage, we saw a large decline in the MBS market leading up to the FOMC meeting and a massive rally in the market this week.

Last month’s increase in the inflation rate to 8.6% (squashing any talk of peak inflation being in the rearview mirror) and Fed’s pivot from an expected 50 bps rate hike to an actual 75 bps rate hike at its June meeting has also increased market expectations for the size of upcoming rate hikes by the FOMC. To simplify things, higher interest rates increase the costs of things like mortgage loans and company borrowing, which slows business growth and translates into less hiring. As the job market weakens, paycheck growth slows and further tamps down spending activity.

Fed policy is meant to influence the demand side of the equation. When fewer people shop for houses because home loans are expensive and the economy feels less secure, a smaller supply might be enough to satiate demand without causing prices to keep rising. But make no mistake: crushing demand is at best unpleasant and often agonizing. To provide some historical context, the Fed pushed interest rates to double-digit levels in the early 1980s to bring down rapid inflation, but that caused back-to-back recessions that pushed the unemployment rate to nearly 11 percent. The economy is humming along right now with the unemployment rate at the  low level of 3.6 percent, but that rate is expected to rise as the Fed continues to tighten policy.

Fed Chair Powell headed to Capitol Hill this week for his semiannual Congressional testimony. He reiterated the Fed’s commitment to reducing inflation and candidly admitted a recession is a possibility. The pace of rate changes will continue to depend on the incoming data and evolving outlook for the economy. That uncertainty is anathema to those tasked with managing margins.

Risk is inherent for anybody involved in the loan sale process, but there are sound ways to mitigate risk in volatile and deteriorating markets. We are seeing higher coupons being originated than what the Fed is purchasing as we have moved toward the 5 and 5.5 as the new market coupons. Newly traded coupons are experiencing abnormally wide bid-offer spreads, especially for GNMA securities. In times like these, stay on top of production and roll out of non-production traded coupons to reduce basis risk exposure.

When it comes to pricing and locking, either discontinue granting or avoid free extensions if you have not already. Limit or discontinue locks outside of market hours, including overnight and weekends. We have seen some clients add in temporary margin to offset the risk of market volatility, and this can typically be programmed in your PPE without having to affect core company margins.

When it comes to originations, non-vanilla product talk was all the rage at the recent Mortgage Bankers Association Secondary Marketing Conference in May. Lenders are looking for secondary market outlets and premium pricing for ARMs, home equity products, non-QM, second homes, and investment properties, and other non-conforming products. Lenders are also looking for extended locks, lock and shop programs, rate buydown products, and construction financing options.

While the next year or two for the mortgage industry are certain to be less enjoyable than the past year or two, market cycles are an expected and manageable part of doing business. Having a scalable and efficient operation is the name of the game. And for secondary marketing heads, being appropriately covered to minimize interest rate exposure is paramount. Keep communication with your trading team a top priority and reach out to your MCT trader with and questions or concerns you may have.

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 12/2/22

ederal Reserve Chair Powell tried to walk the tightrope between stressing that the central bank’s inflation fight is far from over and telegraphing that policymakers could downshift from their rapid pace of tightening as soon as the December 13-14 FOMC meeting. The Fed’s publicly preferred measure of inflation, the PCE Core Price Index, which excludes food and energy, was expected to increase 5% year-over-year, but increased 6% (not exactly a downward trend). And the economy added 263,000 jobs in November, which was better than 200,000 estimates as wage inflation continues to increase; average hourly earnings rose 0.6%, faster than in October. 

MBS Weekly Market Commentary Week Ending 11/18/22

As we enter the holiday season, everyone in the mortgage industry has the same problems: lower volume, lower pricing and gain on sale margins. With less emphasis on growing volume, due to a lack of borrower demand from currently high mortgage rates and a lack of seller demand from being locked into low mortgage rates, a much greater focus for companies in the mortgage industry has been on lowering costs and increasing profitability.

MBS Weekly Market Commentary Week Ending 11/4/22

We were reminded this week that the U.S. labor market is still on solid footing, aiding to speculation that the Federal Reserve will continue its aggressive rate hiking path beyond Wednesday’s 75 BPS rate increase. Today, we learned that October payrolls beat expectations (the headline figure came in at 261k, and there was a positive back month revision of 29k), which further complicates Fed’s job and lowers the odds of the mythical “soft landing.”

MBS Weekly Market Commentary Week Ending 10/28/22

We still seem to be a ways off from the point an actual FOMC voter says “let’s wait and see” when it comes to hiking rates. Until that occurs, bond prices continue to fall and the Fed (and others) will continue to incur paper losses on massive bond holdings accumulated during pandemic rescue efforts.

MBS Weekly Market Commentary Week Ending 10/21/22

We are beginning to see the Fed’s policy moves take hold, with slowing productivity growth, marginal gains in labor force participation, and home builder sentiment continuing to drop as higher interest rate costs price out a large number of prospective buyers.

MBS Weekly Market Commentary Week Ending 10/14/22

The pace of the Fed’s rate hikes and winding down of QE4 have introduced heightened volatility to the bond market. The Fed has raised its benchmark interest rates five times this year, including three consecutive 75 BPS rate hikes, increasing the cost of borrowing money in the hope that more expensive loans will result in less investment, less business expansion, fewer jobs, lower pay, and ultimately less inflation.