In this episode of Optimal Insights, James Cahill, Alex Hebner, and Kevin Foley share the latest economic updates, covering mortgage rates, Fed rate cut probabilities, and unemployment trends. Then Jim Glennon and Vimi Vasudeva discuss key takeaways from the IMN MSR Conference, including MSR market dynamics, PennyMac’s push for recapture valuation standardization, and creative home equity products like HEI and HELOCs for seniors.

• Mortgage rates remain high, but volume is strong
• Fed rate cut probabilities fluctuate amid data uncertainty
• MSR market shifts toward strategic bulk bids
• PennyMac pushes CFPB for recapture valuation standardization
• Innovative home equity solutions for seniors and investors

Optimal Insights Team:

• Jim Glennon, Vice President of Hedging and Trading Client Services
• Alex Hebner, Hedge Account Manager, Optimal Blue
• James Cahill, MSF/MSR Account Manager
• Kevin Foley, Director of Product Management, Optimal Blue
• Vimi Vasudeva, Managing Director of Hedging and Trading Client Services

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

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

Mentioned in this episode:

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Penny Mac recently approached the CFPB looking to standardize how recapture is considered in the MSR valuation. So as it currently stands, only one of the big four auditors actually allows

for the value of recapture in the fair value of the MSR asset, which creates a very unequal playing

Welcome to Optimal Insights. 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. Hey, welcome everybody. Welcome. is Thanksgiving week. In the interest of keeping you informed, we're going to have a really good podcast again today. A lot going on. It is a short week.

due to the market holiday, but still lots to talk about regarding the Fed rates. We had an unemployment number last week. So we'll get a market update in here in a second. And also we're going to meet with Vimi. Vimi's back and she was at the IMN Mortgage Servicing Rights Conference. So the IMN is, it stands for Information Management Network, but they host a lot of really good industry conferences around things related to real estate and structured finance. So MSR is a big one for them.

Tons of folks at that one and a lot of heavy hitters in the mortgage space. So Vimi has come back with some just highlights of what that looks like. So we'll talk to her in a second. first, a little bit of data. OBMMI is still pretty stagnant as we know, right? Rates are just stubbornly high. Long-term rates are remaining above 6 % in the mortgage world anyway. We're about 6.2 in mortgages, over 4 % on the 10-year. Just still a lot of debt.

out there. We've talked a lot about government debt, our own national debt, as well as other countries, especially throughout NATO, spending more on defense. Now you've got AI borrowing. We've talked a little bit about that. All of these trillions of dollars you hear that are being invested in AI, a lot of that comes from issuing again, more debt. So just not seeing any end to the spike in the amount of debt that's put out there. So you're going to continue to see long-term rates probably stay.

fairly high unless there's some sort of outside force that comes into the market. But we're still seeing great volume in mortgages. 6.2 is low relative to last couple of years. So seeing some good activity, not just in purchases, but in refis. So here we're approaching the holidays. We'd normally see a pretty painful low in volume. We're seeing really good volume right now. So anyway, let's transition over to, I'm actually going to hand it over today to Alex and James to talk about what's going on in the market.

Yeah, so coming right over for the econ update today. I'm joined with Alex and Kevin. So what do we want to start with, guys?

start with the basics. you know, we finally got a little bit of data out the government after the government shut down. We got a Dawn Farm payroll from September, which, know, we weren't ascribing too much I would say. It came in at 119,000, which was really right where we left things, you know, coming out of the summer. In fact, that's a pretty strong report some of the numbers we saw in May and June, which were in

five digit range, we're back up in the six digits. So, as of the beginning of the government shutdown back in September, which again, this was quite aged, but ⁓ it seems that employment was in a steady spot headed into the late fall here.

we've missed the opportunity of having some data come through, but overall, I would agree, Alex, it seems like it's, you know, mildly weakening, but, you know, still overall fairly stable. And I think all eyes turned to what's going to happen in a few weeks at the next Fed which we've seen a huge yo-yo of probabilities for December rate cut, whether

it started about a month ago at 90 plus percent down to about a one in three chance in the last couple of weeks. And then we saw some comments from New York president last week that tip things back up. And now we're back in the 70 percent range or so.

It's definitely been an interesting ride there flipping all around. seemed that most of the Fed governors were the minutes were coming out there speaking, saying, Hey, we're kind of skeptical of this rate cut, especially over the past few weeks with the government shutdown. We don't, we can't see the data. don't really want to go ahead blind jump into it, but now we've got some numbers coming out and the Fed is still divided, but there's a couple of comments saying, Hey, well with the Solof and the equity market, maybe we can let another quarter point go.

So it's definitely flipped.

so in my mind, at least it felt like if not December, then probably January or there would be another good chance in January. really, you know, with these things, it's a matter month or so or whether things happen. Now, this is not to say it would definitely be in January, but I think we'd have a lot of the same, you know, conversations, 30 days. The one thing that I find interesting is

Historically speaking, it's been the Fed chairman who has an outsized voice in terms of influencing for a rate cut and then ultimately influencing the bond market. And it seems like whether this is intentional or not, that we're seeing more folks on the FOMC board come out and publicly state their own opinions. And I find this pretty interesting.

I wonder a little bit if Stephen Myron influenced this with his more outspoken of where the Fed funds rate should be. But I think it's a healthy thing to see more folks who are in charge of monetary policy give their open and honest feedback, whether that's in favor of rate cuts or not. been heartened to see more of that certainly over the last month or two.

Absolutely, I think we can all agree it's better for it to not be a black box organization and then just simply be making pronouncements every 90 days or so. I'm with you, I think, you know, really what caught a lot of Fed Governor's attention in those minutes was they started to raise the flag again on where's inflation at and as you stated, Kevin, you know, we don't know where inflation's quite at. We also don't know quite where the unemployment picture is.

And so I think more than anything, those amendments were kind of flagging, even though they were from before the government shut down, we really just don't have the data to maybe see another cut come into effect.

Yeah. listen, I'd be much more comfortable with a fed organization that's disagreeing, know, FOMC board that's pretty frequently than, than one who is in lockstep, know, 90, 95 % plus at the time, right? It just, I think there's, there's a lot of traps if everyone's thinking, you know, through it in the same way, if there's not a sort of divergence of viewpoints within the FOMC.

think there's a strong argument that it's a good thing to have those differing opinions. And just to check in on the labor market a little bit more in detail, one of my favorite metrics that I've been tracking, especially during the government shutdown is the new Chicago Fed churn numbers. a real time unemployment calculation estimate based on

trajectories or vectors that they're seeing in publicly available and in some non publicly available data sources. And it's showing lot of it's not showing anything different know, outside of what we're sort of picking up on with the trickle of data that is coming in. So the latest unemployment rate forecast for November 4.4 4%. So hovering between that 4.4 you know, overall, again, maybe a little bit of deterioration, but also

holding fairly steady.

Yeah, it feels like there's really been more of a boiling the frog situation in regards to unemployment rate this year. You we began the year south of 4%. Now we're approaching 4.5. 4.4 was the number that came with the September jobs report. So that Chicago number seems in line with the data that we do have from the government sources.

Well, it's a good conversation about what's been happening so far. So is there anything you guys are looking at looking forward? Anything that we should be expecting the next two weeks before December?

Yeah, I'm looking forward to the PPI number that's going to come out this Wednesday. It's heavily delayed, much like the job support that we got last week, but it'll be at last.

a good last look at the pre-government shutdown inflation picture. think it would maybe, you know, prove or disprove, you know, some of those comments that we're seeing from the minutes in regards to the inflation picture. So I'm looking forward to that one. But other than that, I think this week's going to be pretty quiet from a date release front and, you know, come Monday will be in December. We can really start looking forward to some of the new data that we're going to be getting. November numbers have been delayed at this point, but we will be getting them around mid December.

Yeah, I think the only number that I'm really looking forward to this week is the number of servings of Thanksgiving dinner. I can fit in between Thursday and to when those leftovers go bad. So we'll see. I'll report back though in case anyone wants to place any bets.

What's your favorite item before we leave? Both of you.

So I've been, I've been working over the last several years on making a pecan pie that has, just enough, that it still holds together, chemically speaking. see how much I can, I can put in that. I'm going to try something a little bit different this year. I'm going to go with a bourbon whip. Apparently you can, you can get a bit more bourbon in the whipped cream as opposed to in the pie itself. So.

That's going to be something that I'm working on. I really, I love Thanksgiving. I love really, you know, the turkey, the roasted root vegetables, the mashed potatoes. I'm a Thanksgiving guy. What about you, Alex?

I'm biased towards the latter half of the meal as well. I'm a big cheesecake guy. ⁓ But I'm always, I'm always big fan of the whip mashed potatoes as well for the main servings. No, looking forward to it. And ⁓ from all of us here on the podcast, you know, we wish you guys a happy Thanksgiving and we'll talk to you in December.

Sounds good. James, not getting out of here without telling ⁓ your favorite Thanksgiving dish though.

I'd go stuffing. The more butter they fit into it, the better.

there we go. There we go. Another another optimizer food optimizer like myself.

All right,

⁓ well Alex, I think you gave a great sign off, we'll talk to everyone in a few weeks.

Awesome.

Thank you.

Cool.

Thanks everyone.

Okay, welcome back Vimi. How are you doing today?

Doing well, Jim. Thanks. How are you?

Doing great, doing great. Thanks for being here again. So I kind of foretold it earlier in the intro, but we wanted to talk a little bit about a conference that you recently attended on behalf of OB. You were at the IMN conference, What is the information management network about?

Yeah, it's a really interesting practice. It's a company that's really dedicated to hosting conferences across the, I wouldn't say just even specifically mortgage industry, but different like asset-backed securities as well. But they host many different conferences at different the year. And of course, the ones that we typically attend are dedicated to mortgage servicing rights. And they really do, they get all of the key players in the industry out there.

good from a networking perspective and it's great from a knowledge sharing perspective more importantly.

Sure. Yeah, I guess not everybody in our industry would be aware of it. As you said, it's not the MBA. It's not a mortgage specific entity. They kind of revolve around things like structured finance and real estate. So they get a bit broader than that. But it is a huge conference as far as I understand. So it does tend to bring in some heavy hitters from our industry and also from the MBA. So the MBA was present there. I think the economist, it was Mike, Mike Fratt-Antoni.

gave kind of the intro there. So any conference is going to have a good econ speaker. So what did he have to say? Just where are we in the economy with rates right

Yeah, Mike was actually part of the opening session, which I have to say was a banger of a session. Of course, if Mike is going to be there, it will be. mean, we know that from personal experience as well. He's attended our summits in the past. alongside him were many panelists, a couple of whom were actually are actually optimal blue clients, including VIN Center from rate who we've had on the podcast previously.

Sure.

Erin Wade from Onity and a few others. But of course, it's really nice to see our clients up there representing. specifically to your question, Mike certainly came with some very foretelling data from the NBA. what I thought was interesting was his forecast on the unemployment situation. So he said that the unemployment rate will likely be up to four point seven by early next year.

So this is interesting for service service to think about because there's obviously a tight correlation between unemployment and delinquencies. And so with this take in unemployment, we would expect to see about a half percentage point rise in delinquencies. And then of course, a slower housing market environment, we would expect some of those delinquencies to actually go further down the line or further down the path into potential default.

So I think it's important for our audience to remember that it is more expensive to service a non-performing loan versus a performing loan. And I think that ⁓ servicing owners really need to start thinking about this and planning for this potential. And they can do this by a variety of ways. But I think one of the easiest ways is to really monitor the data, right? Service servers have access to so much data. So they can look at credit scores, for example.

or look at changes in payment dates from borrowers. If you see a borrower that typically pays on the fifth of the month and now they're starting to pay on the 13th, is that a sign that this borrower could be seeing some sort of financial stress? Could they be going delinquent?

Right. So flags to maybe predict a future delinquency or a slow payer, right? That's going to start being late. Like you said, then that starts costing money. Cause even though you're charging fees, you're having to engage in collection activities and hopefully you don't get to this point where you may end up in legal action. Then that starts to make the, like you said, the servicing component of the valuable loan less, which ultimately drags back into mortgage pricing, right? The prices that the borrowers actually see if folks are not as

If that mortgage asset becomes a little bit less attractive, that value is going to, that component is going to start to drop. But then at the same time, right, if we're at 4.7, I don't know, something we talk about obviously in our market update is, that then mean rates are going to be lower because then the Fed's going to be forced to act a little bit quicker? Cause 4.7 is well above where I think the Fed would like to see unemployment. So more on that if we start realizing Mike's numbers there.

Yes, very much agree. So obviously lower rates better for our industry, but when you're looking at surfacing, the lower rates are going to decrease the value of that MSR asset, right? Just because of the likelihood of prepayments. So it all comes back to overall mortgage pricing.

Right.

Absolutely.

Yes. Well, let's get a little more granular on MSRs, shall we? I that was the name of the conference that was, you know, the players who were there were kind of getting that primer of what's going on in the economy, what industry experts think, and then that feeds into more granular detail on what's going on with MSRs. So what is the state of the MSR market? What do the brokers think? What did the other players at the conference think about this, maybe this coming year?

Yeah, I think what was interesting to know is that there really has been a shift in the character of supply. And I think that's something that we've noted and talked about in the past as well. But there has been a significant drop off from the boom years of 2022, 2023. You know, back then, we had noted that originators had to sell their servicing in order to raise funds, right? In fact, we track that at Optimal Blue. We're constantly looking at that.

percentage of servicing that our clients are retaining versus when you look at that, what this means is that it seems like right now we're at a point where the amount of bulk bids in the market are actually decreasing in terms of frequency. So higher volume, to be clear, but less frequent. And I think that's because right now it's a little bit more about being strategic than

Okay.

having this be a necessity like it was in the years when lenders were very strapped for cash. It was a necessity not so much a strategic choice.

So is it because the bulk packages of servicing are larger or is it because the servicers who are exchanging packages are the larger servicers? back, like you said, in 22, 23, was some of the smaller IMBs who retained servicing were finding themselves with portfolios because they had seen bigger volume than they'd ever had before and especially more retained volume because of just the dynamics of

during COVID, A lot of the aggregator investors were paying a lot, very little for servicing for a period of time. There's a folks were probably retaining more than they actually wanted to, but they had to do it to survive or just to not be kind of picked off by some of the servicing buyers at that time.

Yeah, I think that is such a good point. And I think actually, Jim, if we even look back prior to the COVID years, let's say maybe, gosh, five or six years ago at this point, one of the interesting things is how technology has changed and how that's actually changed the landscape of the bulk market. Because back then, without being as advanced as it is now, a lot of the smaller lenders, they actually didn't have access to the aggregator relationships as they do now.

the introduction of technology and APIs, it has become so much easier for lenders to sell directly to the correspondence. In fact, we at Optimal Blue, we have an API that makes this process so seamless for our clients, right? So it's just not, if lenders are able to sell to aggregators on a more frequent basis, it just means that there's gonna be less supply in the bulk market.

Right, so is that mainly like co-issue type stuff like Fannie Mae's SMP, Freddie co-issue just where it's been a more approachable scenario, right? Where lenders can open up that co-issue arrangement along with retaining some servicing, selling some servicing, whole loan. They're able to have kind of all three of those execution options open to them in a very flexible way.

Yeah, that's exactly what makes it so easy and makes it so logical to take advantage of that. Right. then, so if we've got these co-issue partners in place with the agencies and there's all the technology to support that. And if aggregators are buying more servicing, it's less likely that they and other large lenders will be contributing as much to the bulk market, given their emphasis on recapture. Which we have talked about many times on this podcast and it's

Right.

Still a hot topic, of course, as it should be, given the likely decline in rates, given the passing of the trigger leads bill, which you and I discussed the last time I was on the podcast. And one thing I don't think we've covered for our audience is how Penny Mac recently approached the CFPB looking to standardize how recapture is considered in the MSR valuation. So as it currently stands, only one of the big four auditors actually allows

for the value of recapture in the fair value of the MSR asset, which creates a very unequal playing field, right?

we've been hearing

that a lot on the desk too, as well, right? There are some investors of MSRs out there, and I think many of us know who those are, or investors in whole loan who have been particularly aggressive in their bids or their ability to buy loans or even to price loans to borrowers. And a big portion of that is they're building in a value for future recapture. They're basically saying this

servicing right, this loan is worth more to me today because I can refinance it if rates go down a half point or a full point in the future. And many of the auditing firms you're saying weren't allowing folks to put that value on their books, thus making that asset look like it's worth less than it probably is. But now Penny Mac has gone to the CFPB to maybe set a standard there and say, this is going to become an industry reality. So the auditing firms need to kind of get on board.

Yeah, exactly. think the hope is that the CFPB agrees, of course, and then all four of the auditors will be following the same protocol, which ensures an even playing field in the space, which I think ultimately we talk about this a lot, but it does help homeowners. A competition out there, healthy competition helps homeowners, which is what we're all in the business of doing.

Yeah. So you can put a higher value on your MSR. You can put a better price out to a borrower by, ⁓ know, 15 to 30 basis points is from what I understand, right? Which is a pretty significant improvement, whether it's to lower your rate an eighth of a point or to lower your fees by 30, 40 basis points. So like you said, it's not even playing field now, depending on who you're audited by that dictates whether or not you can apply that additional value.

to your servicing book and then along to your borrower. So yeah, this would be, this would go a long way to leveling that out. And I think it would, like you said, it would, just increased competition.

Yeah, so definitely something for us to keep an eye on.

All right, good. So that's a huge highlight of this conference. So why don't we end on another highlight? What was your other kind of favorite thing that maybe doesn't typically come up with this or other conferences? What was something that was a little bit new to you?

so there was one session that was dedicated specifically to the home equity space. And there's we know there's been an uptick in volume in the home equity space, you know, obviously, the traditional seconds and he logs have become popular with rates where with rates where they And with homeowners sitting on on trillions of untapped equity. There's been one so a couple of things that I thought were interesting was that there's actually been more securitization specifically in the

equity investment space, so HDI. This is a way for homeowners to access a portion of their home's equity without taking out a loan with monthly payments. So a lender provides a homeowner with a lump sum of cash and in return the homeowner gives up a percentage of their home's future value.

Yes. Yeah, we did. So we talked about that last week with, with James and Alex and it was, yeah, kind of smelled a little bit like a reverse mortgage, but something I hadn't been aware was out there, which, you said, you basically, you get the cash today or access to the cash. In fact, the one we were looking at was like a credit card and you could swipe and it would immediately pull from this line of credit that you have on your home. But instead of paying interest, you were actually giving up a portion of your ownership of the home so that when you sold it down the road, you would then need.

to give those proceeds to the lean holder, which I thought was an interesting concept. I'm not sure if it's dirty or not, honestly. we're just kind of in the early stages of learning about some of these new, I don't know, creative home equity vehicles.

Yeah.

Creative is a good word for it, yes. Another creative home equity vehicle that I had not heard of yet was a specific product that's dedicated to seniors. So the CEO of Longbridge was a panelist on this specific session I mentioned dedicated to Helox. And he mentioned that the average age of a home buyer right now is 59, which quite honestly surprised me, even though.

it probably shouldn't have given ⁓ all the affordability challenges and how we know the average age of, right? So.

True.

The first time home buyer I think is almost 40 at this point, average age. that, yeah, I guess it doesn't surprise me. You buy, you're on your two and a half-ish house and you're probably almost 60. Yeah, that's wild.

Yeah, so I guess a third of all homeowners in the US right now are aged 65 or older, and there's trillions of equities tied to these borrowers. So this company is really focused on serving what they refer to as older Americans. That's not my term. So anyone who's in that age group listening, do not take offense to that term. But you you don't really hear about about this segment of the group in the industry. And so I think that's why they wanted to launch a product like the HELOC for Seniors.

Mm-hmm. ⁓

which allows borrowers to borrow against a portion of their home with a commitment that as long as they meet the terms and conditions of the loan, no matter what home prices do, they can preserve the remaining portion of that equity to give to their kids, for example, or for senior living or for any other necessity. the reason I bring this up specifically is because over the last year, we've talked a lot about how

Mm-hmm.

originators are getting creative with their products. And we've seen this most so in the popularity of the non QM mortgage. And of course that was talked about at this conference as well. But I just thought it was interesting that this specific firm was focused on another kind of untapped borrower, not traditional borrower.

Yeah, more creativity. You know, I suppose, you know, maybe the industry thinks more that the baby boomers are going to sell their homes and move into either with family or, you know, retirement communities, things like this. But I think a lot of folks are looking to remain in their home and pass down that equity to their families. That's great that folks are getting more creative on how people can tap that equity while they can use it and then, but still preserving for their loved ones.

Yeah, yeah, I thought it was really great. that was the second highlight. Of course, there many highlights, but we don't have time for that today. But I'm glad that we were able to at least touch upon a couple of them. So thank you for the time.

Same. Thank you, Vimi. This is a great conversation as always. Thanks again for representing Optimal Blue at the IMN MSR conference and we'll talk to you again soon.

Yeah, thanks, Jim. Talk soon.

Thanks, Vivi.

Okay, let's wrap this one up. What another great episode. Thank you, James. Thank you, Alex. Thanks so much, Vimi for talking to us about the IMN. And 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. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning in to Optimal Insights.