Welcome to this week’s episode of Optimal Insights.

In this episode, our experts discuss the critical intersection of housing policy and market dynamics as the election approaches. They explore how political platforms from both major candidates could influence housing supply and affordability, the current state of the housing market, including recent data on housing starts and permits, and highlight the significant impact of government policies on pricing for borrowers.

Key Takeaways:

• Current economic indicators show stable rates, but refinancing activity has significantly declined.
• Understanding policy impacts on pricing is crucial for navigating the mortgage market effectively.
• Innovative programs like mission score products aim to address underserved communities in housing.
• Education on available incentives and products is essential for originators in the mortgage industry.

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

Hosts and Guests:

Hosts:

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

Guests:

• Alex Hebner, Hedge Account Manager
• Kevin Foley, Director of Product Management

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

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

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

Mentioned in this episode:

Be part of the event that will shape mortgage innovation and help to maximize lenders’ profitability. Don’t miss the inaugural Optimal Blue Summit from February 3–5, 2025, at the Marriott Marquis San Diego Marina. Secure your spot and register today – summit.optimalblue.com

Welcome to Optimal Insights, your weekly source.

For real time rate data and expert.

Capital markets commentary brought to you by Optimal blue.

Let's dive in and help you maximize your profitability this week.

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue.

I'm your host Jim Glennon, vice president of hedging and trading client services at Optimal Blue.

Our clients and industry partners have long relied on optimal blue for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed.

Let's dive into today's episode.

Welcome podcast crew.

Today we have with us, as always, Jeff McCarty, director of product management.

We have Kevin Foley, also director of product management, and Alex Hebner, our resident econ and market expertise.

Welcome everybody.

Today we've got some really good content for you.

We're going to talk to Alex here in a sec about what's going on in the world and potentially some things to look forward to with the election.

Then we're going to continue with the second part of our series on loan products and pricing and how the markets, but also primarily today, we'll talk about how policy is affecting the growth of pricing and just the breadth of the products that we're seeing.

Obviously all eyes on the election for the next few weeks.

As we've been talking about, we'll get really into the weeds and some policy from both of the candidates today.

A good time to talk about policy overall and how that affects pricing because obviously policy and politicians views on policy is top of mind right now.

So a good time to review all of that.

Yeah, a ton going on in the meantime.

We also have a non farm number coming up next week.

We've got the Fed most.

The next Fed meeting ends right after the election.

So we'll get into all that and we'll have a.

We have a rare segment on our podcast next week.

We're gonna have a special guest come and talk with us about what we should be paying attention to as the election gets closer.

That episode drops the first day of the NBA conference next week.

So hopefully we'll see you all there.

All right, just to take a look at some of our data real quick.

I mean, Obmmi, maybe no surprise to anyone.

It's a little bit up.

We're up off the lows.

We're about 6.45 right now for 30 year conventional volume.

Still pretty strong, but certainly below the highs that we saw back in August when we had that little pop.

And we got down to almost 6%.

On average rates past two and a half, three weeks, we've been pretty stable in terms of rates after we bounced off the lows.

So again, unfortunately, it wasn't a continued downward trend in rates, but we are stable at this point in our range.

Yeah, it's had an effect on rate term refis, especially where rates and refis are currently down about 50% month over month, which is obviously a huge, huge number.

All right, let's go over and see what Alex has for us.

Alex, there's a lot to talk about today.

Want to talk a little bit about, you know, as usual, what's going on with the economy, what's going on with rates of, but also want to start some election conversation because that's obviously coming up here in the next couple of weeks.

Welcome, Alex.

Thanks for having me.

Good morning.

Yeah, as you said last week, economic updates, it was a relatively quiet week.

Usually week three of the month is pretty quiet from a general economy outlook.

But we did get housing starts and housing permits.

Both came in right around expectations.

Housing starts nailed the expectation, 1.35 million and permits missed by 20,000, which in the grand scheme of things is completely negligible.

And next week we will get home sales data in addition to more Fed speakers.

But for right now, it's really pretty quiet in the lead up to the election and the early November Federal Reserve meeting.

Housing starts or housing supply in general, though, feels like kind of the next big focus.

Right.

We've gotten through kind of the first Fed rate cut.

You know, we'll be watching closely what happens, but it feels like after we got through that first cut, the conversation around that is dying down a little bit.

So in our industry, it feels like people are keeping a really close eye on housing supply at this point.

Yeah, I think supply is something that if you're in the industry, you should always be keeping.

In the back of mind, rates are the hot button issue and they go up and down.

But for years now, since the great financial crisis, we've had a, a housing shortage in this country.

And to resolve that would completely change the landscape of the mortgage industry.

Right.

Just more houses for people to buy and more affordable houses for people to buy.

Right.

That's also an issue right now where home builders tend to skew a little bit more towards those high end, high margin houses versus lesser expensive houses that could serve underserved communities.

Right.

It depends on who you ask.

But Moody's, for example, they say that in the economy in general, there's about 3 million unit shortage.

And like you said, builders, they prefer to build those higher margin homes which end up on the higher end of the income spectrum.

So it's harder for those that are looking to be a first time home buyer or maybe are lower income looking to get into home ownership.

Right.

So no doubt going to be a huge subject, you know, over the next couple weeks as we decide on the election.

And then whoever, you know, the new administration, it's going to be something they're going to have to address or something they're going to have to tackle or have an answer, some kind of answer for.

Absolutely.

I definitely classified as a bipartisan issue.

It's definitely something that both parties can say there's an issue here and we need to address it.

So since it's a bipartisan issue, I'm sure there'll be, you know, great civil discussion between the two different parties on the topic.

Right.

Of course.

Of course.

No, it's kind of, we're kind of lucky if we even hear about it, even though it's something that I think regardless of where you stand on the political spectrum, it's likely affecting you, especially if you're young and looking to buy for the first time.

Yeah.

So let's get into some of the platform of the two different candidates.

You want to go through what we're seeing so far, what they've described as their platforms.

Yeah, definitely.

I think both are looking to, like I said, just to expand the housing supply.

I think the Republicans are more looking to open up land for home building, whereas the Democrats look to incentivize it via tax incentives.

So I guess I'll just start with the Democrats.

Their proposal, Kamala Harris's proposal, there's really two big tax incentive plans.

One, low income housing tax credit.

That one is more focused on renters, actually, than homeowners.

That one is just looking to address the number of people who are paying 30% or more of their income towards rental housing.

So the cost of just renting a home or renting an apartment, whatever it may be, is weighing more and more heavily on household finances for renters.

And then there's a kind of, it's much like the Community Reinvestment act in that it, this tax incentive, the second tax incentive plan is targeted at homeowners, specifically those in areas that need, like, refurbishment or a little bit more downtrodden.

These are tax credits for current homeowners to help them rebuild their home and not get priced out of an area by fast money.

Wall street, those buying up houses, looking to use them as rental properties.

And then on top of that, there's also a proposal for about $40 billion to put into a number of different proposals.

This money could be used for anything from a lot of overlap with that second tax credit I talked about, with just community refurbishment and keeping home values high, keeping equity for owners high, but also investment into just more modern technologies for home building just to bring down, hopefully, the cost of building.

So all of these involve a much larger tax credit or much larger grant than we've seen in the past, is that right?

Yeah, yeah, yeah.

The Harris proposals really focus on tax credits.

And is that up to $25,000 a borrower?

Yeah.

Additionally, there is a $25,000 proposal for first time homebuyers.

You would get a tax credit if you were to be a first time homebuyer of $25,000, which really helps you put equity into that home.

What about some tax relief for the builders?

Getting back to the supply side?

Yeah.

The second tax proposal plan that I talked about, the neighborhood homes tax credit in there, there's built in tax credits for builders.

Oh, very good.

All right, so what are we seeing on the other side of the aisle?

Yeah, other side of the aisle.

Trump's proposals, those kind of a classic small government approach.

There's definitely proposals out there for cutting into HUD, but to address the supply issues, theirs is much more focused on opening up land for development.

His biggest proposal is opening up federal lands and making those lands ultra cheap to build on with tax incentives for builders.

So they're much more focused on just opening up land with adjacent tax proposals.

By and large, the proposals are very similar, until you get into the nitty gritty details.

So now, knowing what some of these proposals are, what would it actually look like if Trump is in the White House or Harris is in the White House?

What's the likelihood of these plans actually going through?

I think looking at the three branches and how you got to get things aligned to get proposals passed, I think if Trump were to win the election, he would have a greater chance of getting his proposals implemented.

Right now, the House and Senate races are leaning ever so slightly republican, and currently the Congress is republican dominated, so I think he would have a greater chance of getting his proposals passed.

Harris, I think, would have a tougher time with Congress and the judicial branch a little bit more aligned against her, with the Supreme Court being majority republican, conservative leaning right now.

And again, just looking at the polls as of today, looking like the House and Senate races are leaning republican.

Okay.

Very good.

Well, a lot to keep our eyeballs on.

A little plug for next week's podcast.

We're gonna have a special guest on to talk even more about what we can expect to focus on over the next couple weeks before the election.

Thanks a lot, Alex.

Perfect.

Thank you, guys.

Thanks, Alex.

Okay, so somewhat related to, you know, to the election and some of the talk about housing policy, last week, we talked about market forces for specified pools, how that affects pricing and how that affects the complication of loan products that are out there.

So today, as promised, we're going to do segment two, which is we're going to talk about some ways that policy impacts pricing and the amount of products that are out there for our borrowers.

So I think, Jeff, maybe first we give a little bit of a brief history of some of those regulators and how they are responsible for encouraging homeownership and underserved borrowers.

When Fannie and Freddie were put into conservatorship.

And so they, you know, they're sort of in an interesting spot where they almost have dual mandates themselves, much like the fed right there.

They certainly are trying to be profitable as their own entities right there.

You know, they have shareholders that they technically answer to.

They're trying to maximize profits.

But at the same time, they are in conservatorship under the FHFA.

And the FHFA as a government entity, they have their own goals.

They're trying to encourage homeownership for, whether it's first time home buyers or, you know, low income borrowers.

Underserved communities.

Underserved communities.

Right.

So the FHFA is responsible for ensuring that Fannie and Freddie operate in a safe and sound manner.

I read that one off a script.

Want to get that right.

But again, you know, Fannie and Freddie trying to maintain their own set of profitability.

So, you know, we're going to get into a little bit about how that affects policy and, and pricing for borrowers and for these loans as they're sold in the secondary market, Mike.

Right.

And I think another thing to remind folks about, and this might be even more familiar and goes back even before the financial crisis, but also has a big effect on pricing.

That's CRA.

So the Community Reinvestment act, been out there for a long time, but also has an effect, especially if you deal with large banks.

They have some obligations in certain areas of the country where they operate, where they need to provide enhanced pricing, especially for lip and Vlip borrowers, which is basically low income.

The CRA, the Community Reinvestment act is a great thing to bring up because it has been around there a long time, and it's just a good example of how difficult these types of programs or requirements, often coming from the government, are.

Difficult to really, truly incentivize all the way down to the borrower.

So the Community Reinvestment act is targeting underserved markets, but how do you identify those?

At the time a loan officer is trying to educate and get pricing to a borrower, versus when these incentives are actually applied, when the loan is actually sold on the secondary market, or when these loan, a closed loan, is actually exchanging hands.

It's often super difficult to do.

And so we see that with some of these other newer programs that have been coming out as well that have had various degrees of success in encouraging this type of production.

Right.

Much like the specified payups we talked about last week.

Just sometimes you find yourself chasing some of the appetites for these products and some of these positive pricing adjustments between the time you originate the loan and the time you actually lock the loan with the borrower and then the time you close it.

Yeah.

So let's get into a little bit of the history.

I think it's pretty interesting to go back over the past, even just few years, and think about some of the things that the FHFA and Fannie and Freddie have implemented, or in some cases tried to implement it and even walk back.

There's things like people may even forget now, there was a short lived DTI adjustment.

I think it was a hit that was in there for a while.

I think that one was pretty difficult to actually implement.

People had some problems with that, right?

Yeah, it was for high DTI, which, first of all, was kind of backwards, right?

It was making interest rates higher for borrowers with high DTI.

But it was also much like it's difficult on a CRA loan, it is difficult to correctly estimate a borrower's full income at the time that you're locking that loan before it ever gets underwritten.

So it was difficult to establish whether or not that hit should be included in the borrower's lock or not.

Kevin, I think that'll be a theme with some of the.

Any of these income based adjustments.

That's a theme, right?

Yeah, I think that's one of the challenges when you're actually looking to implement one of these income based adjustments is income is something that, you know, in order to really take advantage of that or protect yourself, take advantage of an incentive or protect yourself from a penalty is you really got to get that income dialed in upfront.

And if you're not doing that, then that's going to create more tricky situations down the road.

So from a lender's perspective, if you're trying to take advantage of some of these more granular pricing incentives or protect yourself from the hits, you really have to make sure that your policies are dialed in, that you're educating originators on, you know, what you need to do to verify income upfront, how accurate can you make it?

And then make those decisions around.

When you provide that incentive, you know, down to the borrower level, you're going to want to make sure that your policies are dialed in first, that you've got a level of confidence before you start unleashing those incentives to make sure that you're protecting yourself and ultimately the borrowers in the long run.

So a few more examples out there of things like this.

The agencies have these concepts called low income purchases and very low income purchases.

So lip and vlip for short acronyms.

And they have these targets, again, ultimately coming down from the FHFA about what percentage of loans should hit these thresholds for low income and very low income.

I think low income is defined as less than 80% of the area median income, with the borrowers less than 80% of the area median income, and then very low income, I think is 50%.

Does that sound right?

Sounds right, yeah.

Yeah.

And so, you know, there are, you know, they have targets for the percentage of production that, that hits each of these.

You know, it's something the Fannie and Freddie watch closely with their sellers.

But how do you, as a seller, you know, as an originator, how do you encourage that type of production?

It's super difficult.

Yeah.

And there's, there's definitely an educational aspect to the originators as well.

You know, if you're doing business in a certain MSA or, you know, across multiple msas, having an understanding of where those areas are, that, you know, have that incentive available to you.

That's a very important thing to make sure that you're educated on because to what you're saying, Jeff, not only is there an incentive to originators and to borrowers in a lot of cases, but it's very important in terms of the lender's overall performance.

That's one thing that if you're an originator and you're not doing that today, definitely want to carve out some time to make sure that you understand where those opportunity areas are in your msas.

Yeah.

And so Fannie and Freddie will come to sellers and say, okay, we want to see a certain amount of your production hitting these criteria.

And then the seller kind of comes back and says, all right, well, how do you expect me to do that, right.

Over the past couple of years, I'm just originating any loan I can originate.

Right.

I'm just trying to survive.

I can't be that targeted.

Right.

If my numbers are low, it's not for a lack of effort.

We're trying to originate every single loan that's out there in this market.

Right.

So I think where there ends up being more success is when there is kind of specific pricing hits or specific incentives that help with these types of things.

So one of the things we saw that maybe indirectly helped with this is these huge hits that were huge, maybe too sharp.

Some larger adjustments for non owner occupied loans and second home loans.

Right.

Some bigger loan level price adjustments that were implemented over the past couple of years to decrease the incentive to originate those.

Right.

That's one way to do it.

And then we've had, you know, some other adjustments or some other programs, programs come into play to incentivize the other types of loans.

Right.

So, you know, home ready and home possible.

We've seen a couple of iterations over the past few years of incentivizing those loans, whether it's LLPA waivers or more recently we've had this $2,500 credit directly to borrowers.

Yeah.

And I think if, I'm thinking like an originator right now with all the different things that we're talking about, both in terms of product availability or different spec buckets from last week, the different incentives, pricing incentives related to policy or penalties related to policy.

The biggest, I think the most important thing that originators can do is to educate themselves on what is the lay of the land for the product offering and the pricing incentives at your lender.

And I think that's totally an appropriate thing to talk to your secondary group about if you're having trouble sort of sifting through where are these incentives or what product mix will help me determine the best fit for a borrower.

You know, a totally inappropriate thing to ask for some education from secondary because they're the ones who are crunching these numbers and helping evaluate, passing these incentives on to the borrower.

And they're in a good position to be able to help educate you and help you educate yourself on how to provide the best fit for your borrower.

Yeah, I seen a couple different comments.

In various places, we don't necessarily need more programs or more ways to serve these markets.

I think it is about education.

Right.

You know, making sure loan officers, originators, and then ultimately borrowers are aware of all the programs that are available to them.

Absolutely right.

And then we leave it up to the regulators and the lawmakers to decide if there are new programs that can be introduced.

One last program worth mentioning that actually kind of overlaps with both policy and market based incentives that's come out recently is mission score products.

So both Fannie and Freddie are offering these mission score products.

And these mission score products are interesting.

They look at a variety of criteria to actually score individual loans.

You get a score of zero to three based on, if you hit different types of, it looks at an income dimension, a borrower dimension and a property dimension to exactly what it says, score the loan to figure out if it's serving kind of the right type of borrower property and area.

So it's pretty interesting in that there actually is a market demand for these products.

There is a, as we talked about last week, there's a prepayment story for these loans.

These loans actually do prepay slower than your average loan, but at the same time, it is serving these underserved markets.

It has a nice overlap of everything we've been talking about the past couple of years.

Some people will pay up for a bond just because of the fact that it serves underserved communities and markets, right?

Yeah, exactly.

And so, you know, some of the big criteria here, you know, a first time home buyer is one of the big things they look at for these mission scores.

Low income borrowers, where are they moving from and where are they moving to?

You know, a lot of things get factored into this mission score, but it seems to be having pretty good success so far.

There is a decent payup, but there's some overlap, too, there in terms of payups.

Right, jim?

Yeah.

Not to make it more complicated, you have a pay up for mission score loan, but also by the nature of some of these criteria, you tend to have mission score loans that are smaller loans.

So these low balance payups that we've talked about and that people are generally aware of, those low loan balance payups could be higher than the mission score Payup.

Therefore, you want to shift that borrow into a low loan balance product.

Right.

I mean, that's all pretty complicated, but what do we think moving forward in the next few years, guys?

We think this is getting any simpler?

Probably not.

Yeah, I think just like we talked about last week, it's probably going to get even more granular.

I think.

Certainly technology allows for it to get more granular, but it's definitely, you know, not, not always straightforward, not always easy to implement.

But I think we're getting better and better at it.

But yeah, we get, we're only going to get more granular.

I don't think we're going to streamline any of these any more than we have.

Yeah.

Right.

Our processes and our technology just need to keep getting better and better at identifying these opportunities upfront and fitting the borrower into the exact right piece of granularity.

Yeah, it's important because it is a technology conversation, but it's also important to not forget the human aspect as well.

Again, pound the table.

If you're an originator out there or a secondary group, it's one thing to make sure you have the technology that can help power these incentives and these new product offerings, but it's a whole separate thing to make sure that you're going to be able to take advantage of it with your internal procedures, with your education for originators, you know, with your outreach to borrowers.

So.

Brave new world out there.

Yeah.

Well said.

Absolutely.

All right, great session, guys.

Thank you, Kevin.

Yeah, thanks, Jeff.

Yep.

Thanks, Kevin.

All right, Jeff, let's close this thing out.

Great episode.

Thanks again, guys.

I feel like we made, I feel like we made the discussion around housing policy pretty interesting.

About as interesting it could get.

It obviously affects all of us considerably, so.

Absolutely.

And we'll keep that going next week as we get into more election discussion with our special guest.

And we'll be looking forward as well to the unemployment numbers that are coming out and the conclusion of the Fed meeting, which is that day after the election.

All right, I'd also like to plug our optimal blue summit, which is our client conference coming up February 3 and fifth of next year.

That'll be in San Diego, California.

This is going to be a full user conference, so all the optimal blue products and people will be represented there.

We'll have a ton of sessions built for functions across the capital markets ecosystem.

So we'll have tracks that include AI automation, growing profitability, and even some origination to trading sessions.

And we'll have demos of our newest technology.

Yeah.

Not just focus on our products, you know, a lot of things about what's going on in the industry, much like we talk about on this podcast.

So it's not just going to be focused on OB products, but you know, what's going on within your business across all your different tools.

So yeah, for more information, feel free to reach out to us, or you can also visit Summit dot optimalblue.com.

so thank you, everybody.

Thanks, Jeff.

Thanks Alex.

Thanks Kevin.

Well, 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.

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