Welcome to this week’s episode of Optimal Insights.

In this episode, Jim Glennon and James Cahill deliver the market update, covering the latest jobs report, inflation trends, rate volatility, and shifting expectations for Federal Reserve policy.

The episode then transitions to Mike Vough and Brennan O’Connell for a Market Advantage preview, examining May data across origination volume, mortgage rates, product mix, secondary market execution, MSR values, and investor activity.

The team shares their expert opinions and insights into how these factors are shaping the industry and the broader economic landscape.

Subscribe to Market Advantage:

https://www2.optimalblue.com/market-advantage/

Key Points

• Stronger-than-expected jobs data and its impact on rates and Fed expectations
• Inflation trends, upcoming CPI and PPI reports, and market volatility
• May Market Advantage trends across origination and secondary markets

Chapters

• 00:01 – Welcome and episode overview
• 02:40 – Market update: jobs report and rate reaction
• 09:55 – Inflation outlook and Fed policy expectations
• 16:42 – Market Advantage preview: May origination and rate trends
• 20:52 – Secondary market insights, MSR values, and investor activity
• 26:08 – Closing remarks

Optimal Insights Team:

• Jim Glennon, SVP, Hedging and Trading Operations
• James Cahill, MSF/MSR Account Manager
• Mike Vough, SVP, Corporate Strategy
• Brennan O’Connell, Director of Data Solutions

Production Team:

• Executive Producer: Sara Holtz
• Producers: Matt Gilhooly & Alex Kreuter

Commentary included in the podcast shall not be construed as, nor is Optimal Blue providing, any legal, trading, hedging, or financial advice.

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations at Optimal Blue. Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Let's dive into today's episode.

Welcome everybody. Thanks for being here. We have a great show for you today. We're here to help you focus on what's important, whether you're an originator, a capital markets person, or just someone who's interested in the mortgage industry and some great market commentary. ⁓ we'll James and I will have a market update here in a second. We'll talk about what's been going on with the jobs report and a couple other things that happened over the weekend. And then Mike and Brennan will join for a preview of the market advantage report. So look forward to that every single month.

they'll be on here in a few minutes to talk through that. So stay tuned. Before we get into that, in the way of data, the OBMMI, the conventional 30 year, over 6.5%. Again, we got routed pretty well on Friday, as you all likely know. Stocks and bonds just got hammered on the the heels of the jobs report, which we'll talk about here in a sec. 10-year 4.56 right about this moment.

Potentially gonna hit another record here if that keeps spiking. We hit four point six like a week or two ago and that was the highest we'd seen in like fifteen years. So approaching that level again. So let's get right into the market update. James, welcome. James Cahill, how you doing?

Too bad, Jim. Another another Monday rolls back around, right? They keep coming.

that's right. And this time I missed I was not in the office on Friday. I did sort of casually watch the jobs report from afar, but it looks like sort of par for the course it feels like. I it's I'm a little surprised that we took as bad of a beating as we did, even with some of the reading I've done this morning. But we we saw what did we see? 172,000 jobs. We expected something a little cooler, like eighty thousand.

You know, as we've talked about before, ninety thousand job miss is not enormous in an economy of, you know, a hundred and eighty million or so workers. So I don't know, what do we make of this? And and it seems the market's making of it that we're gonna see a rate hike this year, almost for sure at this point, right?

Yeah, I mean a hundred and seventy-two, right? It's not a absolute gangbuster number, but when you were looking at the expectation of eighty K, it's more than double. So that's a great number compared to what we were expecting. it does, you know, hey, go back twenty-two, twenty-three, twenty-four. It might even be a little lighter on the average, but for twenty twenty-six, this is a great number. Moving in the right direction. We want jobs, we want so it's a it's a good number. The market did

Mm-hmm.

Start to move to it, the kind of logic there is, well, inflation, which we'll talk a little bit more about in a second, but inflation's still creeping up there. The Iran war, gas prices have not been helping that. So the Fed needs to do something about that. The Fed cannot lower rates, though, if the job market is weak. And so if the job market, even if it's not, again,

Absolute blowout. If it's looking healthier, if it's coming back a hundred and seventy two thousand jobs, that's the right direction. That's stability. That gives them some leeway to actually do a rate hike rather than the rate cuts that we were all hoping for six months ago.

Mm-hmm.

and you mentioned inflation. You know, wage growth came in as well. That comes with the Bureau of Labor Statistics report first Friday of the month. That number is still ticking up. So wages are growing. I think three point four was the number you noted. Not quite as high as inflation, at least during the war with Iran, right? Where we've seen basically a one percent boost in inflation that's likely coming from.

from fuel cost, but still healthy wage growth, which is the other component of a healthy job market, right? It's it's the jobs are being created and maintained, but also that ⁓ workers are kind of seeing nominal increase in in wages every year that hopefully keeps up with inflation over time.

Yeah, that would be that number I found it disappoints a little bit for me. Right. Three point four percent is the wage growth. So okay, everyone's gonna get a end of the year raise, three point four percent. That's pretty good. You know, I think you could be happy with that. But if inflation comes in right now, it's three point eight percent, you actually make less money, right? You're able to buy less stuff. So it's a it's a negative raise for the American economy. So hopefully that number keeps creeping up and inflation will

Mm-hmm. Yeah.

cool off a little bit, but I think that it may still tilt the wrong way. But yeah, that was most of last week revolved around those two numbers. The unemployment as well, unemployment rate hitting or staying at 4.3%, right where it was. It's above where the Fed is going to want it, but it's not a terrible number. It's not some 10% unemployment that would really frighten people.

⁓

on the inflation, which we've been kicking around, so this week we'll see more of those numbers. So CPI is set to come out this week. ⁓ unfortunately, it looks like it's gonna land at 4.2%. Expected core inflation, so ripping out gasoline prices, it's gonna be closer to 2.9. these are, you know, that's higher inflation. That is not the right direction. To note, though, if you have been watching average gas prices the way I have.

Over the past two weeks, they've actually come down quite considerably. Right sitting today, we're at an average of four dollars and sixteen cents a gallon. Two weeks ago it was four dollars and fifty-five cents. So it's still it doesn't have the right handle, but it's 40 cents better in the right direction. We'll definitely take that. it's kind of a a hard number for me to get my head too much around. You know, there really is no improvement in the war.

And there's a lot of talk about an improvement coming, but this is, you know, what the fourth month of there's a a resolution coming. So I don't quite know how these are coming down besides, well, are starting to move where they're getting their supply lines from. And it's just we're getting to a new normal, a number that makes a little bit more sense for the interim.

Mm-hmm.

Yeah, I think new normal is is what I'm leaning towards is at first it th we didn't know if oil was gonna go to a hundred dollars a barrel, a hundred fifty, two hundred dollars a barrel. So you kinda have to build in some margin there in your gas prices because your inputs are pretty well unknown. But now that we're one hundred days into this conflict, it is becoming a little more known that it's gonna be status quo for a while, probably or at least around a hundred dollars a barrel. And

Probably no resolution soon. And even when we do see resolution, it's gonna take some time for all this stuff to work itself out, probably through the end of the year in terms of prices and supplies and refining and repairing whatever's been damaged even during during the war.

Agreed. But it will be interesting in this inflation report to see core and the actual number tighten up any. Because if those gas prices have been coming down, that's one of the main drivers right now is food and oil. And so if those oil prices are coming down a little bit, will we actually see a little bit of improvement there or a tightening? this 4.2 might be more 4.1, or maybe it'll be 4.2 and that expected is actually gonna be three. So we might see a tightening there, something just to watch.

Mm-hmm.

So then we will get producer inflation, right? That's coming out Thursday. That's expected to be way up, just again, because of fuel, right?

Yeah. So the the number is gonna be sitting somewhere, it's currently around six percent. It looks like it'll be six point six percent. So that is that's a pretty fierce inflation number. That's not the one you want to see, but it is that number is difficult to deal with because it's all the supply side, right? There's no the Fed can't really lower the interest rate and help ⁓ help that out at all is what can you actually get your hands on. So we'll probably see that number continue to drive.

Mm-hmm.

Maybe a little again, a little relief on it because gas prices have come down just a bit, but producers are probably taking a hammering this summer.

Yeah, and that's a super hot number and eventually will make its way down to consumers, but it does feel like the producers are just eating some of that cost right now as they've done with tariffs in the past and ⁓ other kind of shocks like this. So this doesn't seem to be leading to a rate hike for next week's meeting. So there's a Fed announcement next week, expected to just hold steady, but

Mm-hmm.

The market beatdown that we saw on Friday was likely the realization that we're almost certainly gonna get a hike in the fall, whereas previously it was sort of call it a twenty, thirty percent chance.

at the time of recording, we're nine days out from a ⁓ FOMAC meeting. And in fact, it's actually it's gonna be Walsh's first meeting as the president. So definitely something to watch there. Listen to what he has to say, what the minutes reflect. It's gonna set the tone for you know the foreseeable future as to how we're going to be working in this interest rate environment. He unfortunately he's coming into a tough spot. He would love to come in.

Mm-hmm.

Cut interest rates, work with the administration, make that happen, make everyone on our side pretty happy too. But based on what we're seeing inflation-wise, based on what we're seeing with some job stability, it makes sense to put in a rate hike rather than that rate cut that we're all waiting for. so I it seems, you know, if you check out the CME, you're looking ahead, this July, Aug or June, July, August meetings, we're not projected to see any movement, but come October, November, December.

There's a very good chance, you know, sixty, seventy, eighty percent that we are going to see a rate hike. And so as that adjustment has been swallowed, baked into the market, that's where a lot of this movement over the past couple of days has really been coming from.

Right. Well, we'll have to see. I it feels like that's too far in the future for anybody to know what the heck is gonna happen. like you said, something to watch. And then I gotta bring this up. In the I don't know, kind of the category of bizarre headlines from last week, we saw Bill Pulte, who's currently the head of the FHFA. ⁓

Also the head of Fannie Mae and Freddie Mac was appointed the director of national intelligence.

I don't have much to say about that other than that's a that's that was a strange thing to see. And it's it's apparently going to at least be acting director, I should say, acting director of national intelligence. It's an interesting thing for our industry because he has so much on his plate right now between running the GSEs and and talk of possible release from conservative ship, talks of rates being too high and maybe changing how pricing looks and the stuff going on with credit models and all that. And now he's gonna run.

national intelligence for the, you know, probably largest operation of that kind in the world, maybe outside of China or Russia. Anyway, what do you make of that? Anything that we should be keeping our eye on other than I don't know, hopefully they find someone who has a little less on their plate to take that role over time. But

It's ⁓ he's definitely an interesting pick, I suppose. The argument is, well, he already deals with a lot of very sensitive information, which that's true. You know, that's a transferable skill, I suppose. If anyone at the CIA is interested in me, you know, I'd love to go to Fiji and ⁓ you know, report back to all of you. I I find it interesting just the recurring cast characters we have right now, right? Pulti getting this job tap, and then meanwhile, the first person to speak up saying,

I don't think that's a good idea is Republican Senator Tom Tillis, who of course has been previously was blocking Walsh. he's a lame duck. he's not running again, so he'll be primaried this summer. He'll be gone by January, but still there is some pushback and it's pushback again from familiar characters on this ⁓ on this podcast.

Yeah. Yeah, Tillis, he's he's using his lame duck phase to to at least be vocal about things he doesn't like. And it it's obviously in this administration and probably in others, speaking up is often puts a target on your back, right? So if you ever want to be voted into any sort of office again, you have to be careful what you say and and who you you vote against. But in his case he's essentially retiring as I understand it. So he's speaking his mind and he spoke his mind in this i in this case as well.

As you said, he also blocked Warsh until the criminal charges were dropped against Jerome Powell. So another situation to keep an eye on. And I think you also wanted to mention SpaceX IPO. That's a monster. That is big news, regardless of of whether you're into into space or Tesla or or follow it's just good the the the dollars that they're talking about is just kind of

Crazy.

Yeah, it just, know, on the flip of the bond market, of course, stock market, it's continuing to do pretty well. and so coming this Friday, June twelfth, expected the IPO of SpaceX. It will be the largest IPO in history. A share price is like a hundred and thirty five dollars a share. So the full valuation comes to one point seven seven trillion dollars, which is a shocking number.

Congratulations to them, I suppose. I I suppose I hope they get it's crazy just to think in trillions, you know, the US GDP right now it's thirty-four, thirty-five trillion. But so one company is worth, you know, one sixteenth of what the excuse me, the national debt, not the GDP. But one company is worth the one sixteenth of the national debt is kind of a it's a big thought that someone is in theory producing enough revenue.

Yes.

And is going to be worth this much.

It also, of course, pushes Elon Musk. He's already the wealthiest person in the world. ⁓ this will increase him by about a quarter of a trillion dollars. So he will become the world's first trillionaire. So, in theory, just on Friday, world's first trillionaire, we have one. We did it. Round of applause for all of us. You know, hard work, we got it done. Pushed him through. Team effort.

We did it.

Yeah, it is wild. I mean, it we've talked about it before. We talked about it last week even though there's just the economy of the world, especially of the US, and then the money supply at the same time has grown so significantly over the past seven years that these sort of things are allowed to happen. Like a a trillion dollar valuation for any company didn't exist five years ago. Right? It was it was ⁓ you know, the the big tech companies have risen to those levels fairly recently.

One and then surpassed it by far, doubled it, tripled it. I think you you talk about Microsoft, Apple, Google, these are all NVIDIA, these are all trillion dollar businesses now where that used to be kind of the the pie in the sky. And now we have a human who's gonna be worth a trillion dollars. Just insane. But that's that's the future, right? SpaceX SpaceX is doing a lot of things that we wouldn't have really thought about five, ten years ago either. So

Mm.

Excited to see how that all kind of works out.

All right. What else do we have today, James?

that about covers us. You know, looking ahead, it's just inflation this week, so watch out for that. Again, I'd listen to Warsh has to say. First meeting, it's really gonna set the tone. Otherwise, ⁓ look out for Friday.

Mm-hmm.

That's right. All right. Thanks a lot, James. Great conversation. Talk again soon.

Yeah, thank you very much. Appreciate it.

All right, great conversation. Thanks again, James. We will now hand it over to Brennan and Mike, who will give you the preview of the market advantage report.

Welcome to the market advantage segment for the month of May. Brennan, you wanna kick us off with some of the origination trends?

Yes, thanks, Mike. Welcome folks to another edition. Let's see. month, some headwinds ⁓ on the rate side, macro environment certainly challenging. So mortgage rates moved higher across all major product groups during the month. Our OBMMI 30 year conforming rate. That's the index rate for the CME futures contract. finished the month at six point four four percent, up thirteen bips month over month and more than fifty bips over the past three months.

Still roughly forty bips better than the same time last year. So, you know, something to be to point to, I guess, there. Jumbo rates were up twenty-seven bips to six point seven. FHA increased twenty-one bips to six roughly six and a quarter. VA climbed fifteen bips to just over six percent. The ten year Treasury finished four point four five ⁓ up modestly on the month, the spread widened between

Treasuries and mortgage to to nearly 200 basis points. So mortgages trailed treasuries in a month when we already saw rates moving in the wrong direction from an origination perspective. the lock activity pulled back as you'd expect. Total volume was down nine percent month over month, but again, still up seven percent versus the same time last year. So, you know, it is a relative thing. I think Q Q one was a little bit stronger. We felt maybe a little bit better than we do.

As we get into the early summer months here, given some of the macro trends, but all in all, I think we're still in a better position right now than we were, say, 12 months ago. purchase refi split. Not surprisingly, rates go up, purchase market takes a larger share. So we're up to 81% of total lock volume purchase activity in May. purchase locks declined five percent month over month, but

They're still up 3% year year over year. Refi activity is really where you saw the kind of fall off in lock activity. So ReFi retrenched another 30% on the rate term side month over month, and cash outs were down 13%. how has that impacted product mix and and some of the other categories of lending here? We've seen arm utilization increase. Again, I think folks looking for

alternatives when your sort of vanilla 30 year mortgage options are not as attractive. Folks find different lending outlets. And so I you see ARM utilization up just under eleven percent of total volume in May. non QM up and and actually hit ⁓ just over nine percent. You know, really getting close to that double digit mark in terms of total lock volume.

So that that's our highest that we've seen on record. So it's been a little bit s bumpy in the last few months, but again, ⁓ non QM just kind of continue or continues that secular trend. And I think the the higher rate environment and and maybe more of those know, traditional borrowers backing out leave space for these other maybe more esoteric products. average loan amounts held mostly steady were

We're sitting just under $400,000 for the average loan amount right now. $396,000 still sort of a crazy number to talk about when you when you think about that just being the average, ⁓ $400,000 for the average borrower. rates ticking higher, first-time home buyer percentages coming down across the board. So from an affordability perspective, I think you'd expect this, first-time home buyers are down to forty-four percent.

FHA at sixty-nine percent and VA at ⁓ forty-four percent. Credit quality remaining strong. I think you know, as you'd think basically affordability becoming more challenging, folks that maybe have lower credit scores not able to to take out loans, and so you see pretty strong average credit quality across the board. and the only other item

you know, I think is worth looking at is this pull through rate deteriorating in May. I don't know that I have a a real strong opinion on it, Mike, but maybe that's a good segue into some of the things we're seeing on the capital markets or the secondary side. A any any input on pull through and other broader categories in the space?

Yeah, the the pull through number really stuck out to me as well. It was ⁓ quite quite a drop, especially on the refinance pull through, which could make sense given the the the state of the rate movement we saw throughout the course of the month. So, you know, theoretically, you know, if you were thinking about shopping around and and you know, you you're maybe maybe you have an application kind of like half felled out and rate quoted and all of a sudden rates go up.

it could actually force people onto the sidelines. So you could see folks who, you know, potentially maybe weren't fully vested in refinancing or or being in the market, but that that you know jump in rates that we saw this month forced folks to the sidelines is the is the major trend that I I I'm I'm kind of pontificating about there. in, you know, just building off that to some of the other trends we observed.

Best effort mandatory spread remained unchanged this month for conventional 30-year loans staying at at 39 basis points, which is still a a pretty rich number. ⁓ but but for 15 year products, it actually increased four basis points. And the Gov30 spread actually decreased a basis point to eleven basis points. So st still fairly fairly rich numbers there. So so not much to report on. You know, if we see, some further dislocation in the market because of

some of the the chaos from rates driving up. You could see that number widen out potentially more as investors are effectively paying lenders to take on more of that that hedge risk and securitization risk. on that front, loan sales this month, we had a big swing to the agency cash window. it jumped from 28% of loan sales in April to 32% in May. securitizations were down from 44% to 41%.

And we saw best efforts drop from three to two percent. You know, the big swing here to the cash window make sense by, you know, as the agencies roll out new spec stories or specified stories. There isn't there is an argument to be made that it's more efficient to sell to the cash window because you could sell on a single loan one off basis and still realize a payup versus securitizing a loan and you need a minimum pool amount of a million dollars. It doesn't sound like a lot.

But when you're pulling eighty five thousand dollar loan amounts, it it's a lot, right? It's a lot of loans in that same that same type of coupon that you have to that you have to aggregate. So you we could be seeing things there. And and there's been rumors at conferences and ⁓ on phone calls I take with with lenders that ⁓ the agencies that y people can get better pricing at the cash window than through securitizations as well and asking folks to kind of pick a lane there. So it that it'll be an interesting trend to keep watching.

a loan sale perspective, we saw the share of loans sold to the highest price drop about two percentage points this month, dropping from 79 to 77%, with the third ranked price jumping up one percent and to fourth or lower, jumping up one percent as well. So there was you know some some conjecture there that folks are not looking at price, but looking at some of these softer guidelines based on those moves. Another angle.

That I think could be seen as a positive whenever rates go up is we'd we did see MSRs increase quite materially this month from a valuation perspective, jumping seven basis points to a 1.36 percentage point price or a 5.44 multiple. this makes sense because on average OBMMI was up about 15 basis points throughout the course of the month. this moves lockstep, right? Rates go up, the value of servicing should go up because the prepayment incentive goes down.

And and there is ⁓ a world where that increase in price on MSR could counterbalance some of the move up in rate, right? Because obviously price up, rate down, that relationship was ⁓ important one there. And the last stat here for us is investor count. We saw count hit a recent high of fifteen invest investors bidding on loan sales on average across our clients. Dropped a little bit to fourteen. I I don't really think there's much to to fret about here.

probably something along the lines of the increase in rates maybe taking somebody some folks out of the out of the market, but but generally I think it's still at a at a a a very healthy number from an investor demand perspective.

I think that wraps it up for for ⁓ our main numbers here. Brennan, any c closing thoughts?

No, it was good to see many of you in New York at secondary I guess like po pour some out for New York hosting secondary. Sounds like next year we'll all be in Chicago.

Yeah, it was great seeing everybody. It it seemed like the the vibe at the conference was kind of the same as the previous year, honestly. It seems like folks are getting used to this norm of higher rates now at and that we're in like year four of this. And lot of talk on, you know, non QM, a lot of talk about arms, a lot of talk about AI and whatnot. you know, servicing retention was also a big ⁓ a a big thing that folks talk to me about.

But I'll certainly miss our you know, our annual trip to New York in May. we'll certainly miss know, all the other things around there, our time at Carmines, ⁓ as well. So onwards and upwards to Chicago. I'm looking forward to ⁓ check getting more familiar with that city.

Awesome. Well we appreciate everybody's time. ⁓ and we'll look we'll look forward to the next month.

And that's it for today. Join us next week for another episode of Optimal Insights, where we'll continue to provide you with latest market analysis and insights to help you stay ahead. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.