In this episode of Optimal Insights, the team reviews the latest mortgage market developments before diving into September Market Advantage data. The market update examines the recent fixed-income selloff, Treasury yields, upcoming inflation reports and the interest-rate environment, along with geopolitical developments that could influence energy markets and inflation.

The September Market Advantage discussion highlights how higher mortgage rates and seasonal purchase trends affected lock activity and product mix. The speakers examine the continued strength of non-QM lending, growing use of second-lien products, increased adjustable-rate mortgage activity and changes in average loan size. The conversation also covers secondary marketing trends, including mandatory spreads, loan-sale execution, mortgage servicing rights, specified-pool eligibility and shifts in hedge composition.

A key theme throughout the episode is how mortgage market participants are adapting to a challenging rate environment, including increased activity in non-QM and home equity products and an ongoing focus on execution as margins remain tight.

Optimal Insights Team:

• Alex Hebner, Hedge Account Manager

• James Cahill, MSF/MSR Account Manager

• Mike Vough, SVP, Corporate Strategy

• Brennan O'Connell, Director of Data Solutions

Production Team:

• Executive Producer: Sara Holtz

• Producers: Matt Gilhooly & Alex Kreuter

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

Mentioned in this episode:

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Welcome to Optimal Insights. I'm your host,

Jim Glennon, Senior Vice President of Hedging and Trading Operations

at Optimal Blue. Our clients and industry partners have long relied

on Optimal Blue for trusted insights and commentary.

And these podcasts are an evolution of our commitment to keeping

the industry informed. Let's dive into today's episode.

Good morning, everyone. Coming at you a little later in the week today,

after the Indigenous People's Day holiday this past Monday.

It's myself here hosting with James Cahill.

We got a

Great show for you here today.

we'll lead in with some market updates,

followed by the Market Advanta report recap with Mike Vaux and Brendan O'Connell.

we're just here to make sure that you know what to watch as an originator,

cap markets person, or just someone interested in the mortgage industry

and looking for some market commentary more generally.

before we get into today's market update,

a few housekeeping items.

we want to make sure that everyone is aware of our summit taking place

in early February, February 1st,

2nd, 3rd in Scottsdale, Arizona.

right now we have a drawing going for $500 if you register for

the summit before October 16th.

And keep in mind that early bird pricing,

right now there's a a little bit of a discount on signing up for the summit,

and that ends Halloween, October 31st.

So if it's something that you are able to make your way out to,

we'd love to see you there. so much great market commentary and market knowledge

can be gained at these summits,

and we're really excited to to continue this tradition that we've we've begun here.

This is this is year three, and we're very excited for it.

Looking at the data front, the OBMMI as of loans locked Monday and Friday,

we're looking still right around seven and three-eighths for the average lock.

seven three eight eight was the number quoted this morning and your tenure

US Treasury is it's backed off a little bit over the course of last week,

but it's still pretty high at five two three as of recording around noon

one PM Eastern time on Tuesday the thirteenth.

with that being said, we'll jump into it here.

James, welcome.

good morning, Alex. thanks for having me on.

Absolutely. Absolutely. We'll we'll begin where we always do,

looking at last week, setting ourselves up for the coming week.

I was out a little bit and we kind of were talking about this before

the the pod began, but rates kind of eased a little bit to to close

out the weekend to the the long holiday weekend is is that right?

Yeah, so we've we've definitely seen the market selling off pretty hard over

the month of September and into October.

Last week, first week of October.

There was no major economic data to come out,

but it seems the market finally found a little bit of a floor,

felt it had sold off too hard at five point three seven five,

as you were saying. We've taken it more to five and a quarter.

you know, it's it's hard to say that there's actual true floors around these

quarters or

true mental rates, but there is always a consensus that there's something that

happens there. And I would agree,

we've pulled back five and a quarter floats,

sounds like a nice round number.

it's hard to justify how much the market's really sold off recently.

So a little bit of a rally back at the end of last week pulled us up.

It makes some sense going into some of the inflation data that we'll have this week

that we'll talk about. ~

Yeah, yeah, that

that sell off we saw in late September was was steep and

and oftentimes you'll you'll see these these bounce back a little

bit before you know you know finding a consolidation range,

I believe is what they call it generally.

Yeah. And so at as we go in, we now have only about seventeen days until

the next Fed meeting. So they'll meet at the end of October.

It it looks, you know, more and more like we will see one more rate cut this year

in the December meeting. we might see as many as two next year.

But we're almost certainly looking at a pause.

The reason for the pause this time around is that we're only three weeks away from

the November midterms. Generally speaking,

the Fed does not like to make moves around the midterms.

It doesn't want to be viewed as political.

I think especially this time around.

The Fed will not want to be viewed as interfering in any way.

So we're almost certainly looking at a pause,

which I think does lead into a little bit of that rate expectation.

Does the five and a quarter make more sense or above if we have more time

at this lower rate in the short term?

It makes sense that it can stay a little bit lower,

be dragged down by the near-term rate on the curve.

Definitely, definitely. If we still have the federal funds rate expected

for the next sixty days to to be at its current level,

it it makes sense. And and I think that that pullback that we've seen

in rates is the market digesting that it's unlikely for that federal funds rate

to be changing until December,

which is the final meeting for the year.

and and as you said, the futures right now,

if you're looking out towards June,

I I wouldn't, you know, look at the futures too far beyond June.

There's just too much intervening time and too much data that we don't yet have.

But you know, looking

at the first half of twenty twenty seven we are currently expecting

an additional two hikes, which would leave us seventy five basis points higher than

than we currently are. one hike into the year,

two sometime in the first half of next year.

looking at the geopolitical situation,

I think all eyes are really still on energy markets and and how those then feed into

driving inflationary pressures.

it's the Middle East, you know,

the the US is not directly engaged in in combat operations right now.

we've we've been outside of the the time and place for

the memorandum of understanding now for for well over a month.

but with that being said,

Trump has indicated that there won't be direct conflict between the

US and Iran until sometime after the midterm elections.

but both sides do seem to be gearing up for for additional direct hostilities.

we now have I I know we have at least two aircraft carriers,

if not three, in the region, which is which is more than was in

the region during the conflict as it involved in the the late spring

and throughout the summer.

There are some eyes on the Russia-Ukraine front as well.

There's been a a a spew of news headlines there as well.

One being the US making a direct purchase of of Russian diesel to

to try and alleviate some of those domestic prices that we're seeing on diesel.

Keep in mind that diesel price is is well far and above the the price

of the the gasoline that's likely going to your car unless you you happen

to drive a diesel.

And and and that's been a big pain point,

especially in the the logistics and and transportation industries.

where the that that de that deal still needs to pass through Congress.

and then in addition to that, we saw headlines around some sort

of energy ceasefire in that active conflict that's going on between Ukraine

and Russia. both sides it doesn't really seem appear that that they were

privy to those those conversations.

I I believe that there have been continued strikes against energy infrastructure

in in the Ukraine and Russia since that announcement by Trump.

Moving on to this week, so we'll have two key inflation measures coming out.

The first is Wednesday, tomorrow,

we're going to be seeing CPI. CPI is expected at 3.6%.

It's 2.5% when you strip it down to core.

This is an increase from the last release around 3.5%

So it's not a huge jump, it's not a major step up,

but it is an increase in inflation.

As we said, the Federal Reserve is very likely to pause on an interest rate hike

this time around, which is maybe not the best sign for inflation.

It gives it a little bit more of an opportunity to keep creeping,

especially if gas prices do stay high.

So this number is a little bit of a bellwether of what might be coming over

the next 60 days. We may continue to see CPI creeping up.

Thursday we'll see PPI. this is also expected to increase.

It's going to be sitting at about 5.5% year over year,

unless there is some extra upward pressure that pushes it.

So two important inflation measures that will come out.

It's definitely something to watch.

if they come out worse than expected,

the market could return to selling off as it becomes a little bit more

of a question of could the Fed hike rates sooner?

could they even just do a couple basis points rather than a full quarter?

Just something to try and get in action early.

So these are definitely numbers to be watching this time around.

just

keeping your eye that they're not higher than the expectation.

Definitely, definitely. I think it would take a a real knockout to

the high end number to reverse the expectations on that that October FOMC meeting.

but like you said, you know, if if if it's too high and there's sixty days

of of lag time before we get the next hike,

we could see rates continue to to drift higher,

especially on those rates that aren't being determined the longer end of the curve.

you know, we we see inflation metrics above and beyond the expectations.

We could see that 10 year

pop back to the range that it was about a week ago.

the one other thing just to keep an eye on geopolitically,

gave you kind of an update just a moment ago on what was going on last week

in the Middle East. and and just keep an eye on continuing developments in Yemen,

the civil war that's going on there between the Houthis

and the internationally recognized government of Yemen,

which is backed by Saudi Arabia.

the Houthis dropped a number of munitions on Saudi Arabian airports over

the weekend, and Saudi Arabia has

indicated they will be stepping up their involvement as retaliation for this.

one thing that I want, you know,

listeners to keep in mind is that over the summer,

Saudi Arabia, Turkey, and Pakistan unveiled a defense agreement wherein they they

pledged to support each other in their conflicts.

so Saudi Arabia gets more involved in this conflict,

keep an eye on other participants being dragged in,

namely Turkey and Pakistan.

just as as this defense cooperation agreement is is tested and and

see see more entrance drawn into the conflict.

for the time being though, this this conflict does definitely remain to

be a a Yemeni issue, regional for sure.

with the the one shipping channel at the Baalba Mindab.

the the real thing that, you know,

international folks are are keeping an eye on,

because if that waterway to were to be closed,

it would produce

similar effects to the the Strait of Hormuz being closed back in the spring.

So just something to keep an eye on,

not necessarily saying that it will deep into that sort of crisis,

but just something to keep an eye on in the realm of geopolitics.

And finally, this isn't too market related,

but as we transition to the next segment,

we just wanted to keep folks' eyes on something a little bit closer to

us here in the mortgage industry.

Optimal Blue has acquired Ushirpa

It's a front end CRM platform.

for more information, you can go to our media releases section,

search it on Google, and I know it's it's out there on LinkedIn as well

if you want more details. got anything else for today,

James?

No, yeah, I'm excited about the announcement with Ushapa.

I'm looking forward to working and meeting some of these individuals as well.

it's a dynamic been a dynamic summer.

It's definitely coming into exciting October.

And everyone, you're three weeks away from the midterm election,

so double check your voter registration where your polling places are.

Absolutely. Couldn't have said it better myself.

And it does sneak up on us. Keep it in mind it is it is already mid October,

which is scary to think about.

The year has flown by.

Yeah.

all that being said, we'll sign off from here and we'll hand it over

to Mike and Brennan with the Market Advantage report.

Thanks, James.

Thank you, Alex.

Welcome to the September market advantage.

little bit of a bloodbath in the fixed income market over the last couple of weeks,

with the 10-year treasury as of recording a little bit under 5.3 which

has just been brutal for all of our folks out there in the mortgage industry.

We've seen volumes down, we've seen some

deterioration of spec pricing over that same period of time that I know

has been keeping people up at night.

but but some interesting stats have come out this past month that

are that Brendan's gonna cover here in a second.

especially on the non-QM side.

Brendan, I don't know if you wanna jump right in here now.

So ~ as discussed, mortgage rates move moved higher across all product groups.

in particular, our OBMI thirty year conforming rate ended September seven

and three eighths. It was up n nearly seven point four percent,

up sixty seven VIPs during the month.

A lot of that sort of in the back half of the month,

as you suggested. We're up

90 basis points over the last quarter and it's basically a full percentage point

higher than where we were at the same time in September of 2025.

Jumbo FHA VA rates end of the month at 7.36,

7.10, and 7.08 respectively. So everybody looking at seven handles here,

unfortunately. not surprisingly September lock activity softened

With the rise in mortgage rates and and typical seasonal decline

on the purchase side, total volumes declined two percent month over month,

21% over the past three months.

And unfortunately we're down 26% year over year,

given that the basically a full full point difference from where

we were in September of twenty twenty five,

from a rate perspective. purchase volume comparatively resilient,

just declined less than a percent month over month.

it was down 20% over the past three months,

but that's sort of expected given the seasonality.

purchase representing really the lion's share of origination activity.

Now we're at eighty eighty-two percent purchase,

eighteen percent refi, refi activity slowing to a crawl,

cash out volumes declined eight percent month over month,

twenty-three percent year over year,

rate term refi.

fell thirteen percent from August and eighty two percent from the same time

in twenty twenty five. the silver lining,

non QM lending. So not only

did non QM lending grow as a percentage

of OB's market but it actually was up month over month.

So not just relative to to some of the other

lower performing products, but non-QM share was up nearly 10% month over month,

r reached twelve and a half percent of total production,

total lock volume as we're seeing through the system.

So that share now is up a full percentage point month over month,

up three and a half percentage points over the past three months

and roughly five percentage points higher.

So if you go back to the same time in

twenty twenty five, we were at kind of like mid single digits in terms

of non-QM share. So almost doubling.

investor and DSCR loans represented about a third of the non-QM activity.

Bank statement loans accounted for 30% and other expanded guideline programs

or non-QM programs made up the remaining 37%.

in terms of production mix, sort of like the the other

remaining portions of the market.

Conforming share declined to forty six percent of the market.

FHA represented eighteen percent of production down.

It was it was comfortably into the twenties several months back.

And now we're below 20% and VA accounted for 11%.

punchline is don't don't sleep on non-QM here.

another point

We're we're just starting to pull in more second lean data.

It's not factoring into this month's market advantage report.

It'll it'll get in there in future months,

but up to ten percent or nearly ten percent of the locks that we're seeing come

through our system now are related to home equity lines of credit

or closed end seconds. So really I think w what's happening,

originators are getting creative.

the second liens, right? You've got lock in activity,

lock in effects still in play,

a lot of loans that are out there at two and three percent.

So there's those homes have in many cases have a lot of equity in They're

not gonna do a cash out refi given the rate environment.

So these equity focused programs like closed in seconds and HELOCs are great.

And we're gonna see a lot of, I think,

originators in that space. And then in the IQM space,

right, again, folks getting creative with you know,

potentially more opportunity out there for

different types of borrowers, borrowers that are maybe making investment property

decisions that are not gonna necessarily be as impacted by the rate environment.

And so you see, I think a very opportunistic originator class

now finding what little opportunity there is out there in the non QM space

and and pushing that forward. So ha haven't seen any deterioration

in credit quality there. I don't,

you know, think that the natural response from the market is going to

be well is this is this, you know,

collateral

Something that we need to worry about from a delinquency

and default perspective going forward.

I we're not seeing that yet. I mean,

the credit profile still looks good,

very good, Average loan size picked up in September.

So I think that a lot of that's due to the shift that we saw in terms

of production conforming, basically all agency production down,

and then this kind of non-conforming non-QM strip was up,

and then typically larger loans.

And so

the average loan size picked up back nearly $400,000 per loan.

It was up at $397. It was down in the kind of like mid 380s in August.

arms, not surprisingly, rose in a difficult rate environment.

So we saw a recent high, the highest we've seen in the last several years,

14% of total lock volume were adjustable rates in September.

with that, Mike, I want to kick it over to you to tell the

the secondary marketing story.

Yeah. And before I before I go to s secondary marketing side,

on on the non-QM and HELOC side,

it it's I think the general trend to kinda think about here is what what

can lenders do when rates are up so high.

And so you you look at some of these products like non QM,

maybe even business purpose loans,

you think of the amount of equity that's out there.

The stat I always go back to is that the US housing stock is generally valued about

at about forty-four trillion dollars.

There's about fourteen trillion out there of outstanding mortgage debt,

which means there's about thirty trillion of tappable equity out there.

So there there's a lot of opportunity there.

You think of ways to make that home that maybe you're not that happy with.

Maybe you want to add on a second bed a second or third bedroom.

Maybe you want to make a basement more livable.

Like there there are ways to kind of like

Grow into that home that you're in today.

If you feel rate trapped, then maybe there's maybe there's some plays there.

But but with that, I'll pivot to the secondary side.

You know, one of the things that we see when the market becomes a little

bit more volatile like it is today is that you typically see that that best effort

mandatory spread expand because investors want to pass off that risk

of hedging to lenders. But we saw mixed results this month.

We saw the conventional 30 year staying flat month over month at 26 basis points.

We saw

the Goving 30 actually dropped quite materially from 16 basis points to 10.

But we saw the conventional 15 jump about three basis points to 40 basis points

of a mandatory secondary spread.

So that's that's all very interesting trends for us to watch there.

I think if we see some more market volatility,

we should expect that to expand in future months.

On the the loan sales side, we saw the share of loans sold

via mortgage-backed security.

jumped four percent from forty-three to forty-seven percent.

two months ago this is only forty percent of loan sales.

So a couple a couple of thoughts here.

One of them being that you're seeing some maybe some aggregator bids drop back.

Maybe you're seeing larger lenders who predominantly do securitizations take more

market share as well. That 47% is the highest since beginning the year January 2026.

We saw cash window execution decrease three percent

to 29%. And we saw that bulk loan sale to aggregators decrease 2% to 20% as well,

which is interesting. We saw loan sales that are sold to the highest price increase

again this month. it's now up to 78%,

up 1% compared to last month. And then we saw a smattering of changes across

the board. We saw the loan sold at the second rank price increase

one 100 basis points to 14%.

And then we saw the fourth or lower ranked price decrease from 7% to 5%,

basically showing that loan sales are going to that higher price right

now when margins are tight, people are scratching for every basis point

and are putting some of those softer eligibility requirements to the side.

An area that was really interesting to me here as well was what we saw

on the MSR side. So we saw mortgage servicing rights increase,

but but quite minimally.

We saw it increase one basis point to 1.39 points on average,

which is a 5.56 multiple on a 25 basis point strip of servicing.

But OBMMI over the course of the month was actually up 32 basis points on average,

right? Brendan mentioned that it was more towards the back half of

the month that things really shot up.

But if you look on a per day basis,

we were up 32 basis points on average this month.

Typically, with that, you'd expect a larger servicing.

jump there, but you could be seeing some of that natural kind of like ceiling come

into effect on servicing rates where you know it becomes difficult

to increase more as you get closer to that six multiple.

It'll be interesting to see this next month,

but right now we saw that muted kind of servicing price change.

The next one that I I think was interesting is that we saw an investor count again

stay flat at 13 for the next three months.

And then we saw the percentage of loans increase that are spec eligible.

And that's that's just slightly.

It went from 80% of the loans in the pipelines,

which is crazy, to 80.3. the largest share came from loans that were originated

in New York, Florida, or Texas increasing month over month from 4.5 to almost 5%.

While we saw some loans decrease in that 450K tier from

8.3 to 8.17. So almost all of our

Our decrease coming from that that portion there.

This is interesting because the rumors and gossip you hear from our trading desk

is spec payups have been just decimated over the last month or so.

So as rates rise, that prepayment incentive across,

you know, different states or across different UPB tiers kind

of vanishes or normalizes, right?

If you've got a six percent loan,

that's not refining at all.

And so why pay up more for the six percent four fifty versus the seven percent four

fifty? So as that happens, that price incentive that folks may might pass into

the rate sheet or expect to get the loan sale decreases and and that's been

a big stressor for mortgage hedgers the last the last month or so.

On the pipeline and trade composition front,

we're starting to see the UM36.

become more predominant as a hedge.

The UM35.5 was the predominant hedge for the last couple months

and then accounted for 50% of the hedges across our client base with compared

to 62% last month. And we've seen that UM36 take almost equivalent market share

at a shade under 50%. And so this is interesting.

We're seeing that the hedges start to shift from five and a half to six.

But in terms of where that slots from a loan perspective,

we're only seeing twenty-five percent of production in the five and

a half and thirty-one percent in the six,

and then and then about twenty-twenty five percent in the six and a half coupon.

So the expectation here is that if rates day,

we should start to see more of that shift out of the five and a half into

the six and into the six and a half going to the next month.

The the last point I wanted to make here was on the the servicing retained side

as well. We saw a slight decrease this month,

which I think makes sense given the

price staticness there on servicing.

So the loans sold, servicing retained just dropped from 57 to 56%.

So as that MSR change, and I stumbled over my words a second ago,

didn't change as much as rates moved up,

you could have seen lenders start to look at other avenues to get more cash today

as it's a little bit more difficult from a profitability standpoint.

Brendan, any any last tidbits for the audience here?

probably hoping to see everybody at MBA annual coming up here in

the next couple days and weeks,

but anything else on your side?

Yeah,

hopefully we celebrate some relief in the tenure by the time we all

get together in Chicago.

All right. See you guys next month.

Have a good one.

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

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