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Unlocking the Lock Desk: Policies, Production, & Capital Markets Connections | Nov. 4, 2024
Episode 64th November 2024 • Optimal Insights - Real-Time Data & Capital Markets Insights - Optimal Blue • Optimal Blue
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Welcome to this week’s episode of Optimal Insights. In this episode, our experts share the current state of the capital markets, emphasizing the impact of recent economic indicators and the upcoming election on rate trends.

Jim Glennon leads the discussion with insights from Jeff McCarty, who highlights the uncertain market landscape post-Fed rate cuts and the mixed signals from recent job reports.

Alex Hebner provides a detailed analysis of the economic data, including the disappointing non-farm payroll figures, and their implications for market sentiment.

Additionally, Kimberly Melton and Kevin Foley explore the intricacies of lock desk policies, discussing how loan originators can navigate these systems effectively to enhance their quoting power and streamline processes. This engaging conversation not only sheds light on the evolving market dynamics but also equips listeners with practical strategies to optimize their operations in a fluctuating environment.

Key Takeaways:

  • Market participants should closely monitor the outcome of the upcoming election for its implications on rates.
  • Automation in lock desk processes allows loan officers to quote borrowers more efficiently and accurately.
  • Understanding worst case pricing helps originators navigate the complexities of market fluctuations and hedging practices.
  • Cash-out refinancing remains strong, reflecting consumer reliance on home equity amid rising debt levels.
  • The upcoming Fed announcement is expected to include a quarter-point rate cut, influencing mortgage rates.

Tune in to gain valuable insights to help you stay ahead and maximize your profitability in the ever-evolving mortgage landscape. #OptimizeYourAdvantage #MaximizeProfitability

Hosts and Guests:

Hosts:

  • Jim Glennon, VP of Hedging & Trading Client Services, Optimal Blue
  • Jeff McCarty, Director of Hedging Product, Optimal Blue

Guests:

  • Alex Hebner
  • Kimberly Melton
  • Kevin Foley

Production Team:

  • Executive Producer: Sara Holtz
  • Producer: Matt Gilhooly

The views and opinions expressed in this program are those of the speakers and do not necessarily reflect the views or positions of Optimal Blue, LLC.

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Keywords: Real-time data insights, Capital markets commentary, Mortgage industry, Profitability, Lenders, Investors, Rate fluctuations, Mortgage landscape, Expert advice, Optimal Blue, Secondary marketing automation, Pricing accuracy, Margin protection, Risk management, Originators, Originations

Transcripts

Jim Glennon:

Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize your profitability this week.

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice president of hedging and Trading client services 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. All right, how's it going, everybody? Thanks for being here with us today.

We have Jeff McCarty, director of product Management, and Kevin, Director of Product Management. And we also have Alex Hebner, economic Guru on our desk here in Denver.

And later on we're going to have a special guest, Kim Melton from our client services team. Kim is director of Client Services and also has some great insights into lock desk processes, policies and philosophies.

We'll get into that, into some great content with Kim and Kevin later on. But first, lots going on. We had the NBA conference in town last week. Really good conference, really well attended by all accounts.

I'd say optimistic tone, but I don't know. No real direction. Right, Jeff?

Jeff McCarty:

Yeah. Mike Vough had a good description of the conference.

He said the theme coming out, we always look for themes at these big conferences and he said the theme coming out of it was that there really is no theme right now. Kind of feels like we're in an in between the markets like we've talked about. You know, we had the initial 50 point cut in rates by the Fed.

Rates went down. Now they're building back up. What's going to happen with the election and through the end of the year? What does that mean for mortgage volumes?

Um, so a lot going on that we're just still feeling our way through to figure out, you know, what kind of the long term direction is at this point.

Jim Glennon:

Right. Like, should I be chasing refis? Should I be looking for niche product again? Yeah. Kind of moving a lot of different directions as usual.

I feel like the conferences have kind of always been that way, unless there's a. There's an obvious direction of the market.

Jeff McCarty:

But we're getting to that. You've used this line, you know, the survive until 25 line. I think, you know, a lot of mortgage banks are there at this point.

You know, we've seen an uptick in volume, so that that's helping out some. But again, you know, with this recent run up in rates sort of pulls back some of the optimism.

Jim Glennon:

Yeah, I mean, I think there, you know, we're, we're up to 6.75 on the OBMMI.

Volume is still slightly above where, you know, where it was last year, but some people think that's going to be okay going into 25 because we did seem to hit sort of a bottom in terms of volume, in terms of headcount in the industry.

So any kind of improvement on that is going to bring more profitability given that this is the first year, I think it was second quarter of this year, the first time that lenders were actually profitable. So even a 10, 15% increase next year over this year would be a welcome development.

All right, so again, lots going on, but if I'm a capital markets pro loan officer broker, there's some very specific things I want to be focused on here in the, in the next week or two. So we had some numbers recently, we've got some stuff coming, some big stuff going on this week.

Last Friday's non farm payroll was a disappointment, which is kind of a good thing for rates. Although there's a, there's some nuances to that that I think Alex will get into later. We have the election tomorrow.

That's, you know, all eyes are on that. I think there's a lot of money that's been sitting on the sidelines or a lot of money that's been trying to play one side or the other.

But tomorrow we'll start figuring out where we're actually going to land.

Jeff McCarty:

is it going to go, I think in:

That'll be interesting as it plays out this week.

And then right in the middle of that, potentially in the middle of it, we've got the Fed announcement on Thursday pretty well baked in, expecting it'd be a huge surprise if they didn't drop rates by a quarter again. Alex will get into that more here in a minute.

Jim Glennon:

Yeah, a lot of good things going on otherwise. And again, volume and rate and term volume did plummet because as Kevin has said, we spiked the ball a little bit too early on.

Rates breaking that 7% or 6% barrier. Sorry. Although cash out refis are still pretty strong, which is interesting.

But it kind of plays into a bit of the narrative that we've discussed on this podcast. And other places which is, you know, the American consumer is pretty well tapped out in terms of credit card debt and some other types of debt.

So we are seeing the cash out numbers start to start to be pretty healthy with people taking some of this, the record number of equity out of their homes. All right, let's go check in with Alex. Let's see what's going on.

Jeff McCarty:

All right. Yeah. Alex, thanks for being here.

Alex Hebner:

Thanks for having me, guys.

Jeff McCarty:

Yeah, always good to have your insight. So as we talked about last week, we're right in the middle right now of this insane run of events.

The election and then just a huge number of economic numbers and announcements coming out. So maybe you can just start by reviewing what's happened so far over the past several days.

Alex Hebner:

Yeah. Last week we had a GDP number on Wednesday. That one came in just a little bit below where it was expected. The expectation was around 3%.

We ended up at 2.8%. So a little bit of slackening in the GDP number and growth in the economy.

And then Friday, which arguably is the larger number, definitely the one that's being politicized in the moment, the non farm payrolls number came way under, showing just 12,000 jobs added in October and a revision for August and September that amounted to about 112,000 jobs from those initial releases.

That being said, across the three month span with these revisions and then the 12,000 added, there's still a net number of jobs being added to the economy. But that 12,000 definitely stood out to a lot of people as a potential weakening in the economy.

Jeff McCarty:

You mentioned how some of these numbers are being politicized, but really when we're talking about these numbers and how off they are or even some of the revisions, I mean, we're still talking about tens of thousands of jobs in an economy of millions of people. Right. So maybe just take a step back and talk about what are some of the bigger picture numbers that you know, really we should be focused on here?

Alex Hebner:

Definitely, yeah. The 30,000 foot view. We have one non farm payroll number that, that comes in under expectations, still added several thousand jobs to the economy.

It's kind of, it's kind of a nothing. You know, we're a country of 350 million people. We have 160 million jobs or so in this economy missing by 100,000, you know, you know, do the math.

We're talking about less than 1% here. And so for obvious reasons, we have a week until the election.

There's some politicalization just around a potential weakening in the economy and Then I also hear oftentimes that these numbers always seem to get revised down instead of up. And so there's potential bias in the Bureau of Labor Statistics or something that's going on there.

I would tend to agree that, yeah, if we see ourselves maybe nine times out of ten revising down, maybe there's something with our initial polling that's, that's biasing us on, on the upside.

But yeah, as you said, I think from a 30,000 foot view, had we not had an election next week, this would have been much less of a, a number people would have, would have noticed or taken real note of.

Jeff McCarty:

Yeah, that's a good take.

Alex Hebner:

Sort of a drop in the bucket. Right.

Because it is, we're just talking tens of thousands of jobs and there is some noise around the, the strikes and the hurricanes and all that with the polling. But I do, yeah, it is interesting.

You know, there are some theories that float around out there and you are hearing about them more, I think, because the election is coming up, you know, what is, what's up with all the downward revisions and in a normal year, I think our attention span is so short, we don't look back and realize that 9 out of 10 or so of the numbers were revised down to the point where you're looking at, you know, close to a million jobs and revisions over a 12 month period, which is pretty, that becomes a little bit more material. Right, right.

I mean, yeah, a million in a year, that's, that comes out to what, 1 in 16 if you're 1 in 160. So, yeah, so we're still talking about a few percent here, but I tend to agree.

Yeah, let's, let's, let's, let's go back to Statistics 101 and figure out how to, how to poll a little more accurately.

Yes, but with this, with this release, I mean, the Bureau of Labor Statistics, when you look at their official release, they have a big box on the page that hurricanes in the southeast were majorly contributing to maybe some noise in this particular release.

Helene in particular, they note, was at its most significant D days that they were calling people and doing these interviews where they draw their conclusions on the health of the jobs market in general. So there was definitely some static in there just because of Mother nature this time around.

Jeff McCarty:

All right, so reviewed what's happened the past couple days now. What do we have over the next several days through the end of this week?

Alex Hebner:

Yeah, no, we're speaking Monday morning everywhere, I'm sure. I don't think you can get away from the headlines about the election coming up, go vote, if you haven't already.

Take some time tomorrow to go do that if you're going to vote in person. So obviously the election is the biggest thing going on right now. We're talking about that tomorrow and then on Thursday.

So 48 hours post election, we have an FOMC decision that one is much less hotly debated than the election. That one's just going to be 25 basis point cut. And then leading into next week we start to see inflation numbers again.

So we have CPI and PPI next week, but I think those are all going to be overshadowed by the election and potential, I don't call it fallout from the election, but just continued debate about the election.

I think any news outlet is going to say you're not going to know the results of the election Tuesday night, maybe Wednesday, Thursday is going to be kind of when they are finally able to call it.

Jim Glennon:

Yeah. So we should be watching the market more closely than usual. Right.

It, it does feel like there's a lot of cash sitting on the sidelines trying to decide where to deploy for the, for the future. Right. I mean, both candidates, as we've talked about, probably inflationary. Right.

Both are, are pledging to spend a ton of money, which ultimately ends up in Treasuries, which ultimately ends up in more supply, which means, you know, rates probably go up from here, at least in the short term. And then, you know, there's certain plays that people are, are investing, certain types of businesses, certain energy sectors and so on.

So just, just feels like there's going to be a lot of shifting going on here in the next couple weeks.

Alex Hebner:

Yeah, definitely.

I've seen the playbooks for, for if, if you strongly feel that one candidate or another is going to win here, here's the stock plays that you could potentially make off based on that and that. And that's just really the sectors that those, those candidates favor.

Housing is definitely one that they say the Harris campaign, if you think Harris is going to take the election, that maybe home builders is one you might want to invest in.

And then, and then on the flip side, if you think that Trump is going to win maybe more so in like the energy space and in American manufacturing with his, with his tough stance on China.

Jim Glennon:

Right.

Jeff McCarty:

And then of course it's not just the, you know, the presidential election, obviously there's, there's a lot of other elections going on.

Everybody's, you know, presuming a Republican Congress, but if there's any sort of surprises there that that shakeout that could obviously have an effect. You know Chris Maloney's comment from last week that everybody should be rooting for a divided government. Right.

So watch how the different dynamics of all the other elections play out as well.

Alex Hebner:

Yeah, absolutely. You're gonna have to take it as a whole.

As a whole release who comes out on top is you have to combine that with the results from the other, the lower chamber, the upper chamber and as well as the White House. So to take it all as one and draw your conclusions from there on what is realistically going to get done.

Jeff McCarty:

Great. Thanks Alex, as always for your insight.

Alex Hebner:

Yeah, thank you guys. Appreciate it.

Jim Glennon:

Appreciate it, Alex. All right, as promised, welcome Kim, Director of Client Services. Kim is an industry vet with tons of wisdom to share with us today.

Tons of wisdom about the interaction between lockdesk and originators, brokers, loan officers. And of course we have Kevin, who is also an industry vet and fellow podcaster.

I think between these two we'll have a great segment with some education, some discussion around lockdesk policies and philosophies. So let's get right into it. Kevin and Kim, take it away.

Kim Melton:

Thanks Jim. Appreciate it. So today we're going to talk about lockdesk policies and philosophies.

So I think the biggest takeaway from today is how does a loan originator and your behavior impact your lockdesk policies? So I want to talk about two takeaways that impact these philosophies which are going to be worst case, pricing and product changes.

So the who, what, why and when.

So who loan officers, obviously the ones working through post lock functionality secondary is kind of configuring the policies behind the lock desk and what you can request and when. And then sometimes some branch managers will dabble in the post lock functionality as well. Now what does that entail?

So thinking about lock extensions appraisal comes in light when we need to restructure a loan borrower decides to go out and buy a car. Last night they were feeling good about life and now we have to do a full blown restructure.

DTI might be blown out of the water, but we're going to see what we can do and then why. Hi. So what's important about lockdesk policies?

I think the biggest thing is giving the loan originator yourself the opportunity to have immediate quoting power with a borrower. So right then and there, when you're on the phone with a borrower, you can talk through.

Here's what we can do for you today based on whatever changes might have happened, whether that be I bought a car or my appraisal didn't quite come in where I was hoping it was going to.

The opposite of that in some cases today are we still have loan officers that are emailing their Lockdesk team and they're working through pricing there and that's a much more manual process and can take some more time. So how do we make sure that you have the opportunity to be able to self serve as frequently as possible? And that's what we want to talk about.

Jim Glennon:

Automation.

Kim Melton:

Yep, absolutely. Automation is a big one, Jim. So how so we want to talk about original lock date pricing versus a worst case evaluation. When does that come into play?

When is it best efforts versus a hedge deal? And why does worst case pricing exist? So Kevin, I hope you can come in and talk to us a little bit about hedging and what's important there.

Kevin:

Yeah, it's super interesting.

I've worked with Lockdesk policies a lot and it's always great to give originators some more insight into how they can work with secondary more effectively. So a lot of originators might be thinking why does worst case pricing exist?

It seems like secondary is just out to get me, but it's not really like that. So if a lender is hedging, that's when you might see worst case pricing come into play. Or if they're selling their loans to an investor that hedges.

And when you think about hedging, we'll do a bigger primer on hedging sometime later in the podcast. But just a sort of an introduction is when that rate gets locked on that loan.

You could think about it as a lender taking out or buying a share of stock in that loan. But a lender is not out to play the market. They want to hedge or reduce their risk.

So you could just think about it like buying a share of Apple stock, the lender wants to reduce that risk of Apple stock moving up and down. So they take out a short sale position.

And a short sale position basically just means when the stock goes down you make money and when it goes up you lose money. So they've got one position where if the stock goes up, if Apple stock goes up, they make money.

And then one position, if Apple stock goes up again, they lose money. So 30 days later, let's say what you have is the price of the Apple stock, AKA your loan on day one. And that's how they reduce interest rate risk.

Jim Glennon:

So I mean from that there's a lot to hedging, right? And like you said we'll get into it deeper in a future podcast, but what couple of nuggets should I take from what you just said?

Kevin:

Well, so that's sort of a little bit of a primer on hedging, but how does it impact worst case pricing? Well, there are some times when things don't work out like that.

So if I'm a lender and let's say that loan doesn't close and let's say my short sale position that I took out, I have a loss, well now I have no Apple stock at 30 days so that it's almost like I never bought it. And then I have the short sale position where I lost money. And that's where worst case pricing comes into play.

When things don't work out exactly like we expect them to, there are cases when the lender needs to compensate for that additional risk that they take on so they'll apply worst case pricing and that basically covers, brings them them back whole on the short sale position that they take out on the loan.

Now lenders typically will have this period, let's say after the lock is expired or canceled, 30 to 45 days, something like that, where they'll apply worst case pricing and then after that they'll treat it as a brand new lock.

And they do this because they don't want to over penalize a borrower who let's say they truly walked away for a period of time and they want to bring them back. So there's this worst case pricing period or window after the locks expired or canceled and then it'll go back to current market pricing.

But the problem is, or the thing for some originators to be aware of is you don't want to be trying to take advantage too much of that policy because at the end of the day there was still a loss that the company took.

And so if as the secondary folks are doing their analysis and they're seeing that originators are really trying to right at the margins take advantage of that policy, they might make it more restrictive, they might extend that window from 30 to 45 days.

So it's truly, you know, more about bringing back those borrowers who are, you know, naturally re engaging as opposed for the situations where they are actively engaged, but they're just trying to get, you know, current market pricing.

So a little bit of a long explanation but you know, a bit of a primer on why worst case pricing exists, some of the mechanisms behind it, and then what originators can do to make sure that they're, they're Getting the best deal with their secondary policies.

Jim Glennon:

Yeah, I mean, it just comes down to math, right.

Whether you're dealing with an investor like Citi or dealing with your own lock desk, there's a certain profit margin that needs to be protected to keep the lights on to stay in business. And in certain scenarios, changes need to be made to regain that profit margin.

Kevin:

Yeah, exactly. And similar thing where we see, where we see this pop up is around product changes as well.

So a lender might have a product change fee or they may apply worst case pricing, again with product changes. And it all comes back to the decisions and the math and how that works out on the hedge side.

If they're hedging, the alternative is if you're dealing with an investor's block policy. So let's say you're not hedging the loan, but you're creating a best effort commitment with that investor.

Typically a lender is going to follow that investor's policy and guess what? More often than not, that investor is going to be hedging as well. So the math sort of catches up.

No matter what stage of growth a lender's in, whether early stage, they're smaller lender or bigger lenders, that those same principles are going to apply. And that's again when you might see either worst case pricing or change fees for product.

So if you're an originator, I think the big thing here is to make sure that you've got the right product and pricing fit for the borrower upfront and that's going to minimize the, the amount of times that you might need to change things downstream.

Kim Melton:

Yep, that's a good call, Kevin. I know I might have had a little bit of time originating in my day and I know that I always asked for forgiveness, not for permission.

So I think having some of the background to why policies are in place and what the philosophy is behind it certainly helps loan officers understand, you know, why, why we're moving in a certain direction.

Kevin:

Yeah.

And so Kim, if you had to sort of sum it up and you know, takeaways, just how, how this whole conversation impacts everyone, how would you, how would you characterize that?

Kim Melton:

Yeah, so it's a good point, Kevin.

So I think the biggest thing is, you know, we want to make sure that we're, or as an organization, they are ensuring that there's consistency around your loans, not just your loans, but every originator in their organization and across the client. So, and in turn that's going to reduce risk for the organization from a compliance perspective. So making sure. We're following suit across the board.

I think it also allows the opportunity for companies to build deeper relationships with their best efforts investors. And then lastly, I think it opens the door for more self serve opportunities for originators.

So thinking about about that in an auto accept world, when I request a lock, in some cases today you request a lock and you wait, you wait to get the lock accept email from your lock that's saying hey this is good to go, we're disclosing and you know the loan's on the way.

Whereas if we're maybe not asking for forgiveness in most cases having that auto accept functionality enabled allows you to simply apply the loan program you have in place and it's immediately locked.

And similarly for post lock changes, being able to apply the extension restructure your loan and rather than waiting for someone to go and review it and approve it, it's automatically accepted and you can quote your borrower and disclosures are on their way.

So really just helping you self serve, have the borrower, the client have a more expedited process and overall a better experience for not only the client yourself but also the organization. So you know there's a lot of whys to the current setup in your org and hopefully this helps shed some light on the overall process for your company.

Kevin:

Yeah, I think that's actually a really smart thing to tie it back into.

Very insightful because the more that secondary can trust the behavior of the originators, there are more opportunities for originators in terms of a lot of the things you went over there. Self serve auto accept lock changes immediately. Being able to go back and redisclose to the borrower disclose initially. So all good stuff.

Kim Melton:

Absolutely.

Jim Glennon:

Yeah. It's still amazing to me how many lenders have manual processes across everything that they do and how much time that that takes to get things done.

And obviously shameless plug for optimal blue we automate everything we possibly can. Right.

Everything from the lock process which we've had automated for years and then we've built out now some AI in some really practical places to make some repeatable processes more reliable and much more fast.

Kevin:

Yeah, and certainly a lot more expertise we have in house in terms of understanding and providing guidance on lock policies to lenders.

So certainly if anyone's out there listening and interested in reaching out to ask a question or to better understand why something is the way it is, I got a lot of folks here who can help explain that to you all.

Kim Melton:

Absolutely.

Jim Glennon:

Great segment. Thank you so much Kim and Kevin for being here and having this discussion. More to come.

Kim Melton:

Thanks for having me, Jim.

Kevin:

Thanks.

Jim Glennon:

All right, let's close this thing out. Jeff. Everybody go out and vote if you haven't already.

Jeff McCarty:

Yeah. Another great episode this week. Obviously we will be covering the results, hopefully results of the election next week.

Anything interesting else that comes out of the Fed announcement? You know we're expecting the quarter point drop in rates. We'll see if their announcement any includes any further forward guidance after this month.

Jim Glennon:

Yeah, great discussion today.

We'll cover more detail on hedging in the future and give you some more useful information about capital markets, secondary markets, processes in general. Those are just really good topics that can't get enough air time. So, yeah, thanks again to our crew.

Thank you, Jeff, Alex, Kevin and Kim for being here. That's it for today.

Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Don't forget to follow us on LinkedIn for more updates and access to our latest video episodes.

You can also find each episode on all major podcast platforms. Thank you for tuning in to Optimal Insights.

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