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.

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.