In this bonus episode of Optimal Insights, the team provides an immediate market update following significant developments that emerged after the release of the regular podcast episode. With Treasury yields reaching multi-year highs and mortgage rates climbing to levels not seen in well over a year, the discussion focuses on what is driving the latest market volatility and how mortgage professionals should think about the current rate environment.

The team examines the fundamental factors contributing to higher rates, including ongoing inflation pressures, global geopolitical uncertainty, elevated energy costs, and concerns surrounding U.S. debt issuance. They discuss why many traditional downward pressures on rates remain absent and what that means for lenders and capital markets participants moving forward.

The conversation also explores practical hedging considerations as higher note rates enter lender pipelines. The speakers share perspectives on benchmark coupon selection, liquidity challenges in higher coupons, widening bid-offer spreads, and the importance of aligning hedge strategies with actual pipeline composition rather than anticipating future production.

The episode concludes with a discussion of a recent FHFA-related announcement regarding the simplification of Fannie Mae and Freddie Mac loan-level pricing adjustments. The speakers examine questions surrounding the potential treatment of VantageScore and FICO models within a unified pricing framework, the implications for mortgage pricing, and the broader market reaction to limited public details released thus far.

Chapters

• 00:00 – Bonus Market Update and Current Rate Environment
• 03:15 – Hedging Strategy and Pipeline Management Considerations
• 09:30 – FHFA Announcement and LLPA Pricing Discussion

Optimal Insights Team

• Jim Glennon, Senior Vice President, Hedging & Trading Operations
• Alex Hebner, Hedge Account Manager
• James Cahill, MSF/MSR Account Manager

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.

All right, welcome everybody. We've got Jim,

James, and Alex here. ~ just dropping a real quick bonus episode for everybody.

It is September 29th, so you're likely watching this either today or tomorrow,

Wednesday the 30th. Just have a few things to touch on that have happened since

we published our podcast, actually earlier this morning that we taped yesterday.

So just want to talk with you about really three things that two topics

With three subjects surrounding them.

So one is just rates hitting new highs again today.

A lot of volatility around that.

So we've got a little bit of a little bit of commentary and just not advice

on how to make any predictions necessarily,

but just ~ ~ how to think about these recent rate moves.

Surrounding that, there's also some dynamics around mortgage pricing

and and secondary marketing pricing.

Secondary market pricing that we want to

touch on with you. And then ~ ~ unrelated to that,

but off on a tangent, ~ you may have seen another post on X,

formerly known as Twitter, about GSE LPAs.

So about ~ pricing for Fannie Mae and Freddie Mac.

It was posted by, as usual, ~ Bill Poulty.

So we'll touch on that here in a moment as well.

So welcome, James and Alex. Thanks for being here on short notice

to talk through this with us.

Thanks for having us back.

Absolutely.

So, I mean, first, you know, even since we started recording this,

we're getting a little bit of what we call on the trade desk a a dead cat bounce.

It's I guess it's kind of a dark analogy,

but it it kind of relates to ~ these instances where

you see a market sell-off within a sell-off like we're seeing today.

We've been seeing the bond market sell off really since early September,

meaning rates have been going up.

And but some days today like today where you see a really violent sell-off earlier

midday, the market bounces back,

rates go down a little bit towards the end of the day.

We kind of call that a dead cap bounce because it it's

not necessarily anything positive,

it's just sort of a little bit of a an opposite reaction of what happened earlier

in the day, right? Seeing that now,

but still like earlier today,

we hit a 22-year high

on the 30 year treasury.

Right, we hit over five percent,

five and a half percent. We've recently hit a high on the 10-year treasury,

which we haven't seen since 2007.

That was ~ right now we're close to five point three.

Again, these are all kind of dark numbers.

~ seeing mortgage rates over a hundred basis points higher than where they were

a year ago. So kind of a little bit of groundhog's day,

but still reaching new highs.

each day at this point and what should we be doing that about that?

How should we be thinking about it?

Why is it happening? ~ ~ maybe starting with just a reminder of

why this is happening. Right. And you you guys have spoken quite a bit about it.

And the I don't think do you really think the tune there has changed

or the reasons have shifted at all?

Are we still looking at some very fundamental reasons that rates just keep climbing?

the way I see it is there's just very few downward pressures on rates right now.

In fact there's ~ almost none that anyone can point to on why rates should be lower.

~ despite what the the executive might be saying,

you know, at any given time on on Twitter or X.

~ ~ it looking at the economic numbers in addition to the

the geopolitical global backdrop that we talk about week in,

week out, ~ there's there's really just a lot of pressures to the upside

on rates across the board. It's not just the mortgage industry,

it's it's global rates.

Yeah.

I would say there's,

~ ~ there's two big market pressures right now.

It's the war, it's the cost of oil,

it's pushing inflation up. And if inflation is up,

you have to be willing to raise rates to try and choke that out.

And second, as we've raised rates,

the US debt it looks more and more and more of a problem,

right? How are we going to grow our way out of this?

How are we going to defeat $40 trillion in debt,

a trillion dollars in debt payments every single year?

Right now the answer is by issuing more debt and at a higher rate.

And so if you have to do that,

you have to pay more later. Well then I want I want a higher assurance

on the payments you're giving me.

So you have to push rates up. It's ~ you know the

And that cycle feeds on itself.

Yeah, the the market is acting exactly as it should,

really.

Right. So t supply and demand pressures.

Obviously, there's nothing we can do about that to find lower rates

or to pressure rates lower. I think just to take a moment to talk to

the like the hedgers out there in the world and and originators,

you know, we're so far,

we seem to be in a new trend, a newish trend of rates rising again.

You gotta be a little bit careful how you hedge that risk,

right? There's still

Some high coupons we haven't seen in a while.

Talking about ~ TBA is at seven,

seven and a half, eight. Hard to just jump into trading those.

So that's certainly something you should be talking to your hedge advisor about

if you are thinking about hedging with higher,

higher coupons to hedge some of those newer higher note rates that

are coming into your pipeline.

Right now, even the 7% is a little bit iffy.

7.5%, definitely not seeing that on the screen.

8% not seeing that at all.

Still hedging with a lot of six and six and a halves,

right? Maybe do you guys seeing any sevens really in your pipelines yet?

I'm seeing them come into the pipeline.

~ the pain point is is getting a good TVA level to to hedge those.

So, ~ ~ we're utilizing cross hedges where we can.

~ B OK. ~ Bank of Vocal Home actually shot out a note across the desks today that

just just giving their two cents on where those are right now.

And so, you know, as of the end of September nine twenty nine,

~ they're seeing on their side the pricing that they see is is still extremely wide,

especially on the jumbo side. Be especially wary of that jumbo ~

~ ~ seven, seven and a half. ~ I definitely wouldn't touch the seven and

a half in the jumbo space right now.

~ they were saying they're seeing like a point spread on that.

And that's just there's no price there,

there's no market. So

It's not working.

yep.

Yeah.

As like as the market's ~ ~ rocketed up,

right? The six and a half is the par rate right now.

So people are going to be originating sevens.

But you don't necessarily want to be ahead of time hedging what your position

is going to be in a month or two months.

You want to hedge what you have right now.

So if you still have on a lot of five and a halves,

six, six and a halves is what you have position-wise in your pipeline.

That is where you need to be looking.

People have been asking, Hey, should I move up to the six and a halves?

I'm looking, I'm like, well, 75% of your pipeline is sitting in the six.

So you shouldn't necessarily step up to that next coupon.

It's not going to hedge, you know,

in a perfect correlation with your 6% pipeline.

~ I say generally my side,

you look at about 30, 40%. Once your pipeline starts getting there,

that's when you start looking at switching your benchmark.

So you don't want to do it too early.

You could expose yourself to the wrong side of this.

Right. So don't chase or don't preemptively move your benchmark up.

Also don't trade the higher coupons necessarily very early and and watch

the spreads and talk to your broker dealers and talk to your hedge advisor.

Like the bid offer spreads right now are just nasty.

I wouldn't be doing a ton of trading anywhere ~ just because of that.

But it does look like the liquidity is hanging in at the lower coupons

all the way down to probably four four and a half.

~ because you still have like the builder forward.

buy downs that have been pretty liquid since the beginning of

the rate escalation back up in,

~ ~ back in 2023. So that's the message to the hedgers.

Again, stay in touch, watch the spreads,

don't blindly trade. It's ~ ~ conventional trading wisdom,

but we haven't had to use some of this in a while because we haven't had this,

I don't think we've I haven't seen this fast of an escalation in quite a bit.

So we're ~ ~ retraining some old muscles here.

Then we're ~ ~ we're seeing volume actually hang in there a little bit so far.

We'll see if if this is prolonged,

how well that works out. I think the purchase industry,

the purchase segment of the business is still fairly healthy with just

the housing market somehow remaining resilient through all this.

I still see a decent volume there that sort of ~ doesn't have a choice,

right? If you're buying a home,

you kind of have to get a loan no matter where rates go until they

get completely out of your range in terms of affordability.

So still seeing activity there.

We'll just it'll just remain to be seen if this.

This realm of call it seven and a quarter.

So we're about seven point three on the OBMMI.

So that's the average conventional 30 year fix that's being locked right

now is seven and a quarter, seven point three,

which is higher than we've seen it in ~ in ~ a year and a half.

So if it does stay there, it does feel like the fourth quarter is gonna

be a little bit light in terms of volume because that's seasonally that's typically

when volume dries up and then with rates being where they are,

versus, you know, we were in the close to the fives last year,

probably seeing that same thing.

So

More to come there, just wanna make sure y'all know that we're all seeing

it and we're all kind of dealing with it and we'll we will keep keep an

eye on it for you and with you.

~ anything else on rates for today,

gentlemen?

All right. So

Yeah.

in addition to that, many of you may follow Bill Poulty on Twitter,

or you've seen some articles ~ by now,

or now known as X. He posted yesterday.

This is the only reason I'm on X,

by the way. I'm not really a social media person,

but I I have to follow and I want to follow anything that might relate back

to mortgage rates. ~ so we did get an announcement from Bill Poulty yesterday.

Basically saying, and I'll just read it.

So we are simplifying mortgage pricing following feedback from lenders

and consumers. Instead of two separate pricing grids,

which makes zero sense. Fanny and Freddie are hereby moving to one pricing grid with

vantage score joining the existing FICO classic pricing grid.

And then it shows a screenshot of a grid that is a typical kind of what we've

all seen in the mortgage industry is the FICO score or the sorry credit score

by LTB grid.

for LLPAs for loan level price adjustments and at the top it says Fannie

Mae Freddie Mac and it says vantage score 4.0 slash classic FICO base grid purchase

purchase money loans so that's all the detail that's given ~

I am a a little disappointed with sort of the lack of detail coming from

FHFA FHFA leadership there.

So we kind of have to do our own

Speculation at this point. because there's really been no guidance directly from

the GSEs. So I I guess I'm not sure what the point of this announcement

is at this point, other than to say something's coming.

~ and it it on its face, it's got the market a little bit spooked.

You can tell from I don't know if you guys checked this out,

but I I mean FICO's stock got hammered pretty good today,

just on speculation. And so what I would,

you know, what the speculation is,

at least out in the market, is

presumably the obvious possible outcome that's inferred in this post.

So I I think the big question to me is are is

the vantage score model going to be treated exactly the same as identical

to FICO for purposes of mortgage pricing?

Because this post doesn't suggest otherwise.

So we know that from industry color and some

analysis of to statistics that vantage score scores the same exact borrower

~ 10 to 30 points higher than than FICO.

I think the average in the study I read is that Vantage score is

on average 13 points higher than FICO,

which is enough to reach ~ a higher pricing bucket.

So for folks not in the mortgage industry,

that means you get a better rate.

Right? but it's the same borrower,

right? That that's the thing to remember.

It's the same borrower, but a better rate just for using

a different scoring model. So that's to me,

that's a bit of that's a valuation problem for the capital markets folks like

us to figure out. Right. It's again the the the model that's used obviously doesn't

affect the borrower's ability to repay.

So it's not going to affect the pers performance of that loan.

Right. So I guess I I wouldn't be surprised if at some point

When this comes out officially when we get all the details,

that I wouldn't be surprised if that gets addressed somehow,

~ a footnote that says, if you're using vantage score,

subtract 10 points or something like that.

or subtract 20 points, which was the previous incarnation of

the vantage score pricing grids that were released just earlier this month,

just 20 days ago on the 9th of September,

to kind of level that playing field.

Otherwise, this is on paper kind of an obvious but arbitrary advantage.

For vantage score. Are you guys reading it the same way?

~ ~ feeling the situation the same way?

Yeah, it's an interesting start,

right? The two numbers are not necessarily the same.

They do exactly as you're leading to.

They're pricing one borrower better by vantage.

So it's it's leaning that if I was going in to go get my mortgage,

I would want them to use the vantage score for me.

And if I was an L O, I'd be looking to try and use that for everyone to score them

a little bit higher to get a better L LPA on them so that they have better pricing

on their end.

it the idea that Fannie and Freddie are going to be combining LLPA grids already

kind of leaves me with the question of what's the brand picture of having

two of these guys, anyways. so you second that to,

okay, well, what would make sense here is having two grids,

a vantage and a FICO. You know,

if we're trying to streamline down to one and then we're going to split

out to two again, we've really defeated the work here.

So it seems that they're going to have to have one singular grid both sides

and it probably will vantage vantage score.

I think that the stock market has a ~

~ ~ they're jumping the gun, but it's a

Yeah.

goo it's a good assumption.

It's a well th I think they are jumping the gun.

I think it's a to me it's

a possibly incorrect assumption.

Because to me it it it doesn't make sense that suddenly,

even though we know that vantage the vantage score model scores

the same exact borrower higher,

doesn't make sense to me that that loan would be valued the same,

th that that borrower's ability to repay is suddenly better.

Because of the model that's used.

I feel like this is dangerous,

right? We're making if again,

if the it turns out to be true and that for pricing purposes,

FICO and Advantage will be treated exactly the same.

To me, there's a there's a capital markets and there's a valuation problem there

that we don't know the answer to because we there's no there's no track record yet.

~ but I see why the market kind of it caught that inference in the in

the tweet that the the

The X post makes it sound like that's exactly what's about to happen.

To me, it just seems ~ ~ insane to make that jump right now.

~ especially given what was announced two or three weeks ago,

which was a totally different situation,

which was the 20-point shift in the grid based on that kind of average difference

in score.

I don't know. Do you have take on this,

Alex? Again, we're we're speculating at this point.

That all all all anybody has, I believe,

unless anything changes after we record this,

is everybody just has this post.

But it's ~ ~ to me, it's ~ ~ almost irresponsible.

It is irresponsible to post this without any sort of detail.

But go ahead, Alex. Do you have a a feel for maybe how this could go again?

We're speculating at this point.

No different take than you guys have on what's been released so far.

I I am interested in seeing what's to come and and if they're gonna simplify

and streamline a lot of other LPA grids.

But ~ the the the market,

as you said, that this is gonna create an inefficiency in the market.

It's gonna create a a a wedge for lower.

credit borrowers to, as James said,

you know, get a better rate at a cheaper price.

And ~ the market will find a way to tease that out,

you know, whether it's a field provided that says which credit score was used

or you know, ~ ~ which credit model was used.

That that to me seems like the most straightforward thing.

And I think something the industry was already moving towards adopting anyways was,

you know, having a field right next to,

you know, the credit score saying which model was used.

and and I could see that being continuing to be the case moving forward,

even if, you know, the agencies are going to ~ simplify and streamline things.

That's a good point. So you're saying since the cat is already out of the

bag in the industry, that it's known that the two models

are not basically calibrated the same or using the same data.

Therefore, they give different results for the same borrower.

The market knows that. So they're not necessarily going they may not

use the GSE grids as the as guidance for how they're ultimately gonna price

and buy alone. They're gonna use reality and say,

I want to know what model you used,

and I'm gonna use my own assumptions to figure out what that's worth to me.

And ~ ~ do the calibration on their own.

Yeah. That's ~ ~ that's ~ ~ where the market has gone with things like specified

pools like we've talked about on here,

right? That there's just more and more granularity to how loans are are valued.

that we probably do get to that point where the GSC guidance means a l less

and less each each loan sale or each year.

Yeah. That or yeah, just some formula that'll say the ~ ~ the FICO equivalent score,

the vantage equivalent score, it'll it'll tease itself out.

But more to more to come. More

Right, an equation that says

to come. All we have is a screenshot and ~ one tweet,

so we'll see.

Right. because we get we're getting questions about that already.

And certainly we had questions when we saw the tweet.

~ ~ super exciting, but we need more detail from the FHFA,

from the GSCs, from Bill Poulty,

honestly, ~ about what all this actually means to the industry and

to the borrower and to the, ~ ~ American home buyer.

All right, anything else on this gentleman?

That's all I got for right now,

I think.

call to desk with questions. We will talk about this again on the next podcast.

Thanks, everybody. Thanks, gentlemen.

Thank you.

Thanks for