MBS Weekly Market Commentary Week Ending 7/29/22

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.

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 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 6/24/22

Hedge supply has settled a bit after price movement was relatively contained with FNCL 5.0s moving within a tight range. Less intraday reprices are occuring and steady supply should continue. Be aware of pool submission cutoffs. Ginnie Mae issuance is pretty much closed for the month and it looks like we’ll end lighter versus May, though there will be some that residual will trickle in from custom issuance.

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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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