Welcome to this week’s episode of Optimal Insights. In this episode, Jim Glennon, James Cahill, and Alex Hebner discuss recent developments in mortgage markets, including rate movements, inflation trends, and Treasury activity. They explore how geopolitical events and economic indicators such as consumer sentiment and the unemployment report are influencing market expectations. The episode also features a historical deep dive into the evolution of U.S. housing finance, covering key milestones that shaped today’s mortgage and capital markets.

Key Points:

• Mortgage rates and Treasury yields show modest movement amid ongoing inflation pressures
• Labor market data and consumer sentiment remain key indicators for near-term rate direction
• The U.S. housing finance system evolved through major milestones, from early land grants to modern securitization

Chapters:

• 00:00 – Market Overview and Rate Trends
• 07:00 – Inflation, Sentiment, and Unemployment Outlook
• 10:45 – History of U.S. Housing Finance

Optimal Insights Team:

• Jim Glennon, SVP, Hedging and Trading Operations
• James Cahill, MSF/MSR Account Manager
• Alex Hebner, Hedge Account Manager

Production Team:

• Executive Producer: Sara Holtz
• Producer: 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. Thanks for listening in today, as always. We are at the end of June. Hard to believe. It's almost July. We've got a great show for you today. We are here, just making sure that you know what to watch as an originator, a capital markets person, or just someone who's interested in the mortgage industry and some great market commentary. So tune in for a couple good segments today. We're gonna start out with a market update. not a ton going on after the sort of the wave that

Followed the Kevin Walsh's first press conference as the head of the the Fed, but we've got a couple of numbers to talk about and a couple of numbers coming up later this week, but really important one on on Thursday, which will be the the unemployment report. And then after market update, we're gonna do what I think is a pretty cool segment. in recognition of our nation's two hundred and fiftieth birthday, we're gonna do a little bit of a history of housing finance in the US.

Our team's done some great research on this and just super excited to get some cool facts out there and kind of go back hundreds of years, even before our nation became independent 250 years ago, there was there was housing finance that came along with with the settlers. We were gonna highlight the Road to Housing Act as well, but as you may know, that act has been kind of stalled again. The the signing was canceled last week by the president.

the president is in it's insisting that there be some basically it insisting that the voter ID law get attached to the signing of the the Road to Housing Act. So debatable where the Road Road to Housing Act goes from here. Some think the president will veto it, some think he will just sort of ignore it for the ten day period that it takes for it to become law without the president signing it. So if you hadn't

Been keeping up with that. That's what's going on with the Road to Housing Act. Super interesting.

Super interesting bill, by the way, if you haven't read up on it. We've talked about it on this podcast a bit. It's sort of been overshadowed by a lot of things going on geopolitically, and just, I mean, there's a lot going on in our country too, as you as you know. But an interesting thing nonetheless, and almost certainly will be passed in some in its current form here in the next month or so. All right. We'll get to the market update here in a sec, but first, just in the way of data, the OBMMI has

Ticked down a little bit finally. We're seeing six point four on the OBMMI. That's 30-year conventional fix. That's the average rate that that borrowers are locking in right now. The 10-year treasury also ticked down 4.4. So still seeing exact almost exactly two-point spread there. But just a little bit of relief there with potentially the war teetering to an end. just some better numbers out there with, you know, depending on how you look at inflation. So

Started to see a little bit of relief in rates, but not nearly what we were seeing in the beginning of this year. So let's talk a little bit more about that. Let's let's bring in James and Alex. Welcome, gentlemen. Thank you for being here as always.

Thanks for having us, Jim.

For having us.

So what what did we see? Let's see. Last week we got some inflation numbers on the tail of the Fed meeting and some of the market reaction to the Fed meeting. Elevated, I would say, in terms of just what we'd want to see from inflation in a normal environment, but with where oil still is, gasoline prices still a bit el elevated. Saw some numbers with a three or four handle, depending on how you look at them.

What do we take from that? Like what what did what the numbers look like last week and what should we glean from them?

Saw it as a continuation of of the elevated rates that we've seen on the back of geopolitics, as you're kind of saying here, Jim. the numbers for the PCE metric came in around 4.1% unadjusted. Your core number came in at 3.8%. sorry, 3.4% unadjusted, with the the core numbers peeled out. you know, it's something like in the medium term, I don't see a lot of

Upside or downside, unless there's a change in the geopolitical situation right now. we saw a continuation of hostilities kind of peak over the weekend. they're really confined to the weekend, you know. a truce of sorts was called Sunday night into Monday morning. this seems to be a pretty common.

Mm-hmm.

tactic that is being utilized by both sides right now you know to to kind of vent frustrations and you know perceived slights under this memorandum of understanding. but as of this morning we seem to be back to under this memorandum of understanding the 60-day ceasefire despite those those attacks by both sides one on a ship in the strait another on some

I believe was a base in Bahrain on the US side and then the US has done a few airstrikes on Kashmirland and along the coast of of Iran. so all that being said, on on that front, I think this number was entirely expected by the market and what it's really kind of doing is is solidifying that we're going to be getting a rate cut or rather a rate hike in September, it looks like.

Mm-hmm.

All right. Otherwise consumer sentiment was finalized last week, came up off of like all time lows, but still I don't know, somewhat decent reading considering what's going on in the w you know, what people are paying at the pump or at the grocery store.

Yeah, it came in at forty-nine point five. it was off the low of about forty-four. So that's a pretty decent final tick back up. Definitely, you know, we've been seeing the war slowing down a bit. Some resolution might be coming our way. There's hope that gas prices can come down. So, with that, that is likely what pushed this number back up. Forty-nine point five, it is certainly far from the best number.

Mm-hmm.

that we could see in consumer sentiment. But nice to know that we're not actually going to hit the all-time low. Things are not as bad as University of Michigan has seen in its 75 years of this report.

Right.

All right. So yeah, like we said, not a ton went on last week, kind of recovering from some of the activity that happened after the the Fed meeting and Warsh's first press conference. Just a lot to be seen there in terms of how he follows through on his

His insistence that the Fed is going to focus on price stability and they're going to do so with minimal transparency. So that's again going to be this new regime. It's going to take a little getting used to for for us, I think, that like to watch the market and and try to anticipate what the Fed's going to do. So there won't be dull press conferences going forward, most likely, at least the next couple. And then big number coming out this week, unemployment report. At least historically, this was always a big one for interest rates. We'd get

You know, you you get a miss on the higher the low side. It would push rates at least for that day in one direction or another. And then we'd but we'd usually end up kind of close to where we started. Nonetheless, we all like to look out for it. We get up you know, we're all up early watching that number on the West Coast comes out at five thirty in the morning. But we'll be watching it this Thursday, which is an odd day because of the the market holiday. There's a market holiday on Friday because of Independence Day.

Because independence day is on fr on Saturday. And the market closes early as well on Thursday, the same day as the unemployment report comes out. That's always a little bit of a a mess in terms of trying to trade. So likely folks won't be doing much trading that day, at least not in the the hedging world. You're likely not going to be selling loans that day. But nonetheless we'll have that big number and then we'll only have a short period of time to react to it in terms of the market. So what do we expect in there, Alex?

we're expecting unemployment rate to remain unchanged. It's been elevated here in the first year of Trump's second term. It's right now right around 4.3%. it's not expected to to change with this reading. so so really it's kind of a steady as she goes picture, steady as she has been going. again, we're still in this this slow to hire, slow to fire situation. you know, you'll see some headline layoffs in big tech companies and such as they as they restructure.

Mm-hmm.

But I I wouldn't really expect anything out of the normal from an unemployment report out of this one. I'd expect, you know, the gains that we're going to see are going to be in healthcare and then logistics, warehousing, et cetera. and beyond that, I I I really don't think it'll shock the world. one thing I do want to keep in mind as we're talking about this is with the unemployment on Thursday. It's a half day, as you were saying, into Friday, and then we'll be coming back.

Yeah.

on Monday, July sixth. we have class A settling on Thursday. So just something keep in mind. I think that class A could sneak up on a lot of people. Make sure you're rolling your positions and and getting out of those before the long weekend.

Six.

Good call. Yeah, and it's summer it's fully summer vacation, so liquidity can be an issue just for by that fact. Good heads up there. So yeah, unemployment report, it's a big one, but yeah, likely not gonna set the world on fire. I think the non farm number is supposed to be a modest hundred and fourteen thousand jobs, which is again modest. It's kinda, you know, as long as that number doesn't come in negative or come in at three hundred thousand on the high side, yeah, you probably won't see a ton of activity from it.

Or if the unemployment report ticks up unexpectedly, but it's it feels like this number's been so stable f throughout this year that we're unlikely to get any sort of surprise.

All right. Let's get right into the history lesson here. Super excited to do this. Again, you know, Independence Day coming up this weekend. We've got our 250th anniversary as a as a country. 250th birthday, if you will. so we thought we did think we were gonna be talking about the Road to Housing Act. Again, that signing was canceled. So not a ton to talk about there, other than it is, it's it's past both chambers. So

As soon as the president signs it or doesn't sign it and it kind of comes into law, great. If it gets vetoed, I believe there may be enough votes to override the veto. I've I've been reading recently. So one way or another it becomes law here in the next month. So read up on that or go check out one of our older podcasts to check out the facts of that. but looking into history, James has done a ton of cool research on this, and it turns out that.

American housing finance goes back even further than seventeen seventy-six, in fact, over a hundred years before that, to back when we started colonizing this country and bringing people over from Europe and other places to to colonize it and yeah, you want to start it there, James? So roughly sixteen twenty you're thinking that's when the first kind of semblance of a of a home loan was was sort of envisioned in this country.

Yeah, so you know, it it takes us a while to get to what you might recognize as a mortgage, but evolution is kind of a a strange process always, right? So in about 1620, the colonial authority of Virginia was offering land grants. So if you were willing to come to the United States to work as a farmer for a certain amount of time, you know, you're growing tobacco to send back to the English colonies.

or excuse me, the English mainland, they were willing to grant you a square amount of land. So for a set period of time for a certain labor and cash, you were going to get a land grant. this is squint your eyes. you're signing a contract saying I owe you effectively this amount of money, I am going to pay it over this amount of time, and in exchange I will earn this land.

So you can squint your eyes and look at that as kind of the genesis of the housing market in the United States. this model, just stepping through famous American history, this model lasts through the majority of the colonial period and it starts to create the indentured servitude model. So you could come to the United States to be effectively an apprentice under another farmer, a cobbler, any type of

merchant worker. They generally signed a seven-year contract, though there was a lot of people who got underpaid, it stretched a little longer. So that is an iffy seven years. But it was generally a seven year contract. And in exchange for doing that service, you would again earn a sect, a plot of land that was promised to you by whoever was contracting. that model

Interesting. So working it off. Working off your what you o'd.

Yeah, working off debt. That model lasts roughly until the revolutionary period. So 1776, 250 years ago, the birth of this country. famously, the Declaration of Independence is signed with the words that the inalienable rights are life, liberty, and the pursuit of happiness. what I had found in the research of this is actually those words were paraphrased. It's an English philosopher, his name was John Locke, and he argued.

That the inalienable rights were life, liberty, and in fact property, which is fun for this discussion. And it's always an interesting item that they decided to change that up, a pursuit of happiness rather than a promise to land in the United States.

Mm.

For the early American period, that revolutionary period, generally wealthy individuals were the primary sources of capital. They would give short-term loans with high interest rates to borrowers, again, a growing merchant and pre-industrial class of workers.

Later in this century, more formal means became available with the creation of state chartered banks. So these banks would offer loans that were secured by the real estate, which you know that's starting to sound a little bit more f familiar. That's a collateralized obligation. but these mortgages were not standardized. So the term, the rate, the payment schedule, it could vary very much state to state.

Yeah.

Ам бенк тобанк, содержано рел структур форт.

Right, but it's still it smells like a bank now, or it smells like a mortgage and it's done by these state chartered banks. So that's probably like early eighteen hundreds, getting into the mid eighteen hundreds when we really see the banking system in general start to grow, right? And that that idea to start to spread throughout the US. But it's they're starting to lend actual money on paper for a given period of time for you to buy whatever it is, a land, a farm, a house, in a city. That's awesome.

I I think you know, in researching this story, you can kind of view the birth of the American housing market really follows two tracks. It's following the standardization and creation of banks and different lending institutions in the United States as all of them start to crop up. And it's also following regulation, how the government slowly becomes more and more involved in this and there creates a more and more standardized practice.

Mm-hmm.

so jumping to you know the next perhaps most famous period from your history class, 1860s, the post-Civil War Reconstruction era. So in 1862, Abraham Lincoln signs what is known as the Homestead Act. this act allots 160 acres to anyone who could pay a filing fee. So this encourages many Americans to start moving.

Right.

West and taking on this property. This is really the birth of the railroad boom, the birth of westward expansion in the United States can be tracked back to this moment.

Wow.

This period also sees the birth of the Savings and Loans Association, which became pivotal in providing financing for mortgages. So as more Americans became homeowners, homeowners, the money continued creating loans. As more Americans became homeowners and borrowing money, the lending institutions needed to keep creating loans. They needed to get their money back more quickly.

So during the 1870s, the US actually brought over a European idea, the mortgage backed security. One of the first firms to leverage this in the United States was known as the US Mortgage Company. And one of the founders was James Pierpont Morgan, also known as JP Morgan.

Mm-hmm. Interesting. Yeah, the mortgage backed security is that old. That's that's I did not know that. I thought that was more of a thing that was invented by the you know, later on with the New Deal and and the the agencies, right? But this that's super interesting.

Mm-hmm.

And it

Yeah, it I mean, it's kind of an incredible idea that it would come from the eighteen seventies. It actually was a French idea, so it's a little bit older than that, in fact. and that's a you know, look at this story that is a classic American story. It's the melting pot taking ideas from different places and cultures and creating something you know, new and exciting. So and of course a a great American character to show up is JP Morgan. It's phenomenal that it's

Mm-hmm.

You know, he was on the board. They they pulled this idea and they brought mortgage back securities. The backbone of the secondary mortgage market is born right here in America.

generally, these mortgages were then sold on to wealthy landholders in Europe to recoup the finances. So if you look at it, these mortgage-backed securities are you know US properties, US savings loan institutions, securitizing them and then selling them to someone else to actually recognize those earnings. That is the secondary mortgage market. It's the first time that you could see it burgeoning.

Of course, you know, no story of American banking and housing can even be touched on without going through the nineteen twenties and nineteen thirties, the Great Depression. This is really the moment where it all begins.

Yes.

So savings and loans are going to become central to the housing market. They're start to offer fixed loans with regular payment schedules. This replaced what was generally a balloon payment, now normally used in commercial real estate, but surprising to me was the main way to pay back prior. So these fixed-term loans, of course, made homeownership much more accessible. And during this industrializing period,

We are seeing a a burgeoning middle class, people who can actually take on these loans and pay them slowly over time. So it becomes more and more of a a compounding effect.

The the big moment of course

Right. At this point we have

At this point, we have central banking, right? JP Morgan, I believe, was one of the sort of founders of the Federal Reserve, or at least came, you know, was amongst the group of bankers, wealthy bankers that came up with the idea for the Fed. So our banking system is here. We have central banking. not maybe not exactly what the Fed looks like today, but we have the Fed. We've gone through the industrial revolution. So we have cities now, we have

like you said, we have this working class that's starting to to build up at least enough wealth to own homes. So this is where we we really it sounds like we really start to see a need for the federal government to come in or someone to come in and standardize what these loans look like to make it better, easier for people, for families to own homes.

Yes. And you know, as the money was flowing and the times were good, the need for that wasn't quite recognized as quickly. But come the nineteen thirties, the collapse, the Great Depression, mass unemployment, mass defaulting, the housing market effectively collapsed. So in this moment, it becomes recognized that there needs to be a

Mm-hmm.

More regulation, something protecting this market so that this doesn't become overinflated and happen again. So FDR and the New Deal, that excitement, that energy actually starts the creation of the Federal Home Loan Bank Act of 1932. This establishes the network of regional banks specifically to provide liquidity to savings and loans institutions so that they could lend even in the event of these types of shocks.

And of course, by nineteen thirty-four, we see the birth of the FHA and the federal insurance mortgage of the FHA and the federally insured mortgage. This dramatically reduces risk to lenders and brings us one step closer to the modern secondary market.

Mm-hmm.

Right. And then of course we have I mean, where everything kind of starts in my mind, where our our economy really becomes a world power and expands at an exponential rate. We have the aftermath of World War Two, right? That's like I feel like we're still in that era right now. But the table was set by the New Deal, right? The G S E's being created. Now we have we had this major world war that we

took part in and then there's a ton of reconstruction that comes on the the heels of that, but also just a ton of economic activity that happened at home during the war and then coming out of the war, right? Like that's when people really it felt it feels like home ownership really became more ubiquitous in the US.

Yes, between the creation of Fannie Mae in the nineteen thirties and early nineteen forties, there's much more liquidity in the market. The return of the American soldiers from World War II using the GI Bill, which allowed them to lock in very low interest rate loans, minimal down payments. This is more and more people actually taking on loans, creating a housing market.

And by the nineteen fifties, the thirty-year fixed rate mortgage becomes the standard product in the United States.

So taking it through close to the the modern market, the 1970s is when the secondary mortgage market really is in full swing. lenders are now selling mortgages to investors all over the United States, all over the world. This effectively creates a tradable security through mortgage securitization. With the Fannie Mae and government insurance, the the G Fee, this is a much more structured market.

notably, the 1970s also has a a lot of progress on eliminating discrimination in the housing market. The 1975 Home Mortgage Disclosure Act forced lenders to disclose details about loan applications, approvals, and rejections, and this has set the foundation for later efforts to resolve biases in the housing market. Of course, 1970s and redlining.

this disclosure kind of showed a lot of the bad practices, but it is it's one of the steps in trying to steer the ship in the right direction.

Mm-hmm.

Yeah. I mean that was necessary regulation. I mean I would even just call it more about people's rights, right? sorry, go ahead, James.

through the two thousands and you know I

No. Yeah, absolutely. I mean, it it's a it's a correction to something that, you know, regulation is is a core theme of this story, right? And more and more as people started to realize the world that they were living in, more and more the regulation became important to try and rectify these mistakes.

I don't know how many people listening really need a a review of 2000s through 2008. I I think there's probably even if you didn't live it, you know it really well. But you know, of course the 2000s were a massive increase in the economy. The mortgage market grew extremely quickly. it really seemed like this would never stop until, of course, August of 2007. It very suddenly did.

the important, you know, legislation, the important regulation, the important moments. I would come to TARP, harp, and hamp. All of these were critical in triaging the bleeding. And I would argue the most important element to come out of the great financial crisis was the Dodd-Frank Wall Street Reform Act. This, of course, established the Consumer Financial Protection Bureau, which was tasked with seeking or overseeing.

Mm-hmm.

Mortgage lending practices ensuring transparency for borrowers.

Yeah, such a setback. The the the great financial crisis. I I lived through it in the industry. Many did, many lived through part of it and ended up moving to another industry. Cause yeah, we saw such a ramp up in our industry in terms of independent mortgage banks getting into the business and growing huge. Then you had Wall Street coming in, introducing all of these

very creative securities and insurance policies and derivatives and to the point where you had so much money tied up in this thing that yeah, it almost took the whole world economy down. And it took, you know, three or four years to recover from it at least. That was just to get your your your levels back in your four one K, right? The the stock market took that big of a hit 'cause there was so much just cash that had to get sucked out of the out of the economy to fix that problem.

And I I think we all at least have read read about it in history books at this point or listened to a podcast or two on it. But yeah, that's a huge setback for our industry. It's weird to think about where we might be had we not experienced that setback and we had evolved during that period of I'd call it ten years. It was really from like seven to to past two thousand fifteen to kind of mend those wounds. And we're still there still is almost no like private label security liquidity right now.

Right. We're still just selling most loans through the the Jenny Mae and and Fanny and Freddie. It's still it's taken this long just for non QM to become roughly ten percent of the market, whereas back then it was close to fifty. Anyway, yeah, I think like you said, you can't talk about the history of American housing finance without highlighting the the the GFC, as we've come to call it.

Yeah. And it, you know, looking back the nineteen thirties, you have the Great Depression, the the collapse. It leads to the birth of a couple of government institutions tasked with trying to make sure that this does not happen again. And it is, the a period of the money was flowing so fast. In hindsight, someone maybe could have seen this coming. You could take that exact, you know, paragraph.

change 1930 to 2006, 2007, say, yes, okay, well the the great financial collapse, it led to a couple of government institutions being born. There was money was flowing very quickly. It was, you know, people didn't necessarily see that there may have been some writing on the wall. It's, you know, as we talked about the previous podcast, Alan Greenspan, you know, rest in peace, but this is really what

tarnished at the end of his career was he did not necessarily see this coming. He believed that the banks would be able to regulate themselves a little bit more than they did. He didn't think the money would travel so quickly. so it's always just an interesting in hindsight.

Mm-hmm.

Sure. We are a boom and bust economy and that was one of the biggest busts we've ever seen. Not since the Great Depression had we seen something like that. And we we hope that we learn from it. We probably have, but we'll see what happens here in the next ten to twenty years, I suppose.

well that takes us, you know, mostly through the teens was the recovery from 2008. the market starts to move again. Of course, 2020 COVID really stopped everyone, shut us all back inside. Since then, we've seen a period of massive lending, we've seen a period of large inflation and now high rates. And that really brings us to where we are today. you know, I as I've kind of

said throughout this, the market has really evolved over the past 250 years, the history of the United States. the story can be viewed very much the lens of regulation, institutional investors, and of course the changing borrower base. But none of this story would actually be possible without those original lines in our declaration. That is our fundamental right to life, liberty and the pursuit of happiness in this case.

Brilliant. Way to call it back. That's that's awesome. Yeah, we I think I I I believe we're very fortunate in this country to have the sort of housing finance system that we do have, even if it has its faults, its flaws. It's had, you know, a bumpy history at times, but in almost any other country, it's exceedingly difficult to own land, to own a home. It's typical, more typical that you have.

a s much smaller subgroup of landlords that own all the property in the country and the rest of us are are renters. So it is the the the home ownership rate in this country continues to be, I think, an example for the rest of the world. And is it's very rare in other countries for the middle class to be able to own homes. I know it's harder today than it's been in a long time because of where costs are, but it's still far more expensive in other countries to own property. So you know, a tip of the hat to to

three hundred plus years of history of of figuring out how to make that possible and especially in the last eighty years. So yeah, appreciate you doing that research, James. Really good history lesson. I I I learned a lot from it.

No, you know, I I loved getting to dive through that. It's interesting and everyone kinda knows the the high beats, right? Of course, the nineteen thirties, two thousand eight. But it's interesting to go all the way back, right? Seventeen seventy six and we have, it's a lot of it kind of as you said, right? It's there's a lot of large property owners who are maybe renting out, but this something better was born as our democracy grew.

Right. I mean that was one of the reasons we left, you know, England and other places, right? Was to find a spot where people could actually stake their own claim. And that's why we moved west, as you said earlier, you know, kind of in those middle years post-Civil War. Just really really interesting stuff and and yeah, a big part of our history as a nation. So all right. Well before we wrap it up, what are you gentlemen doing for doing for the fourth? And you know, you're gonna try to

Enter a hot dog eating contest or anything, or what's what what's your what's your plan this weekend, Alex?

won't be headed down to Coney Island, no. I might my plans are really just around watching some fireworks shows and I think going to a barbecue. But I I won't be starting any challenges or seeing how many I can put down. No.

Very good. Yeah, it's that's probably smart. That's no good comes of overdosing on nitrates, to celebrate your celebrate your country's country's independence. How about you, James?

Yeah.

He's

I'm right outside of Washington DC, so I generally go down to the National Mall and they put on a pretty decent show. And I hear that this year will be bit more than decent. So looking forward to seeing it.

Yeah, that sounds amazing. I'm sure that New York and DC will put on an amazing show. We we I'm in Colorado, we don't really do big fireworks anymore. It's just too dry out here, too much fire danger. So we'll probably just head up to the mountains to escape the the heat here and spend a little time with with family. So but also barbecue. Still gotta get a hot dog in there and some burgers. So good. Well

Enjoy the fourth, you two, be safe. Everybody out there, do the same. Thanks for listening today. And that's all we got. Thanks, gentlemen.

Thanks everyone.

Thank you, Jim.