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.

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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MBS Weekly Market Commentary Week Ending 7/29/22

We saw a noticeable drop off in day-over-day TBA hedge supply after GDP data hit the tape. TBA markets hit recent highs this week, but volatility has not subsited. UMBS has been trading in a wide range as the market is still attempting to make sense of the recent data and overall direction of the market. So much for the dog days of summer.

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MBS Weekly Market Commentary Week Ending 7/22/22

PMI was much weaker than expected with services dropping the most while manufacturing held relatively steady as private sector output contracted for the first time in over two years amid muted client demand. The downturn in output signaled a further loss of momentum across the economy of a degree not seen outside of COVID-19 lockdowns since 2009. The recession talks will be a major focus now.

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MBS Weekly Market Commentary Week Ending 7/15/22

The steady, but lighter TBA supply continued with pricing trending lower, gaining back some ground. Fed comments have helped the short end of the curve recover significantly, and better rate sheets should start hitting the screens. Ginnie Mae issuance remains at a better pace, but the late May/early June sell-off that produced a lock flush is adding to more production. Agency production, especially Ginnie Mae, shouldn’t drop off as much as the general population.

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MBS Weekly Market Commentary Week Ending 7/8/22

We saw steady TBA hedge volumes throughout the week with the heavy day on Wednesday. Purchase activity remains busy and some refinance activity is still present in the wake of the move lower. FNCL 5.0s have been in a tight range and reprices have dropped off. Payroll data has caused more volume to hit the market, but also more servicing selling as lenders adjust their hedges with a move into higher rates.

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MBS Weekly Market Commentary Week Ending 7/1/22

Steady day-over-day TBA hedge flows have included a lot of pair offs as lenders lifted their hedges with the commitment of month-end whole loan sales. FNCL 5.0s have exhibited price appreciation, gaining versus previous closing levels. TBA markets moving higher has driven rate sheet improvement and TBA hedge flows will be much lighter due to the Independence Day holiday. Ginnie Mae issuance for June has closed and reflected slight month-over-month drop.

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MBS Weekly Market Commentary Week Ending 6/10/22

We have seen steady day-over-day TBA hedge supply, but some volatility after the ECB announcement. There have been intraday reprices throughout the week as mortgages moved wider and tighter. Rolls closed lower with lighter bank flows not enough to offset real money selling. Spec origination has been busy, highlighted by Class B and G2 custom lists. 15-year pools traded just a touch behind last month’s levels, performing better than 30-years, as investors remain focused on shorter paper. Customer interest is muted ahead of the FOMC next week. Custom pools traded fairly well, mostly holding up to recent clearing levels.

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