In this episode, the Optimal Insights team dives into the economic turbulence surrounding the ongoing government shutdown, trade tensions with China, and emerging concerns in the banking sector. With limited data releases due to the shutdown, the team discusses the implications for mortgage rates, the upcoming Fed meeting, and CPI projections. They also explore the strategic importance of rare earth minerals, the impact of subprime auto loans, and the broader credit environment.

Key Topics Covered:

• Government shutdown effects on federal workers and military pay
• CPI projections and Fed policy expectations
• Trade war developments and rare earth mineral supply chain strategy
• Banking system jitters and subprime auto loan concerns
• Mortgage rate trends and volume increases

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

Optimal Insights Team:

• Jim Glennon, Vice President of Hedging and Trading Client Services
• Jeff McCarty, Vice President of Hedging and Trading Product
• Alex Hebner, Hedge Account Manager
• James Cahill, MSR Account Manager

Optimal Blue Production Team:

• Executive Producer: Sara Holtz
• Producers: 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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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. Hello, good afternoon, everybody. It is October 20th. It's fall. the first day of the MBA conference out in Las Vegas. I hope everybody's having...

safe and productive trip out there. We're going talk about a lot today. We're going to do a segment just on the market. What's going on right now? We're entering week four of the government shutdown and there's not a ton of data coming out as a result, the Fed still has a meeting next week. So we'll talk about what that could look like. Meanwhile, a lot of this uncertainty between government shutdown, global tensions, trade war, we're getting lower rates.

in the mortgage industry. The OBMMI is approaching six, very close to around six and an eighth right now. And the 10 year treasury is below 4%. So that's kind of a critical level we've been watching there as well. So 6 % on the OBMMI, 4 % on the 10 years. It's really where we want to be less than that, right? keep up this little bit of a volume rally we have. Definitely stay in volume, stay elevated.

We're about 20, 30, even 40 % over last year, depending on the day. And if you recall last year was a pretty good rally as well, right around this time of the year. So again, seeing good volume there, you hate to root for global tension and issues affect the labor sector, but we're getting the benefit of it here with interest rates. So yeah, let's check in with the gang here and see what's going on in the market.

Okay. As promised, we've got the crew here to talk a little about what's going on in the world and in the market. Although there is very little, if any data coming out during this government shutdown, there's still a Fed meeting next week. There's still a lot going on globally and a lot of speakers coming up. So wanted to just cover some stuff you should be paying attention to over this next week and a half or however long it takes for the government shutdown to end, but also just-

generally what's going to impact rates here in the remainder of this month and going into the holiday season. we start here, Alex? I mean, we're going to enter week four of the government shutdown here in a couple of days, right? So it's getting serious if it's not dire. I don't know. There's been some talk this week, even this morning, that there's some hope that we will come to some sort of agreement this week to reopen the government.

Hey.

We'll believe that, I suppose, when we see it.

Yeah, House economic advisor Hassett got on CNBC this morning and he was saying that he sees the government shutdown ending by the end of this week or maybe early next week. He didn't quite say how he saw that light at the end of the tunnel per kind of just said that the people are going to get sick of this and then that one side or the other is going to capitulate here. You know, him of course claiming that that'll be the Democrats that'll come to the table on it.

Mm-hmm.

You know, but from what I saw the clip and I watched the whole thing, he really didn't give a whole lot of details on how we saw this coming. course, he may have additional information behind closed doors that he wasn't allowed to, you know, say on national cable television. yeah, it's, you know, we're in week three, it'll be four on Wednesday. I think the biggest thing here is what we talked about from the beginning, which was the fact

there are millions of federal workers who aren't receiving a paycheck right now.

⁓ are furloughed throughout the entirety of this year, not known if their job is going to exist tomorrow or next week or next month. this just comes on the back of a year of probably quite a bit of fear around their jobs and pay. I think the number one thing that a lot of people are focusing on is military pay. ⁓ Obviously the military is a massive contingent of federal workers.

Mm-hmm.

there was a bill that failed in the Senate to get them paid during the shutdown period. So coming up this week or next week, depending on how they're paid in the military, that they'll be without a full month to pay. And of course they would get back pay once this all ends. But at the end of the day, people are still out in the economy spending money and they need money to pay their credit card bills and such.

Yeah, we reported last week on the military thing that we thought we were hopeful. I think that that was going to pass and that the military at least would get regular paychecks again, but that did get shot down early last week. So yeah, I've got some friends that work for the federal government and they're already talking about trying to take out a loan because they're at a point now where you go a month or two without a paycheck. That's obviously a huge deal and you have to start looking at ways to float your

You know, your mortgage, your rent, your just general expenses, insurance and all that. yeah, that's, I'm sure a lot, millions of millions of frustrated folks out there that really want this thing to end and people are losing their patience over it. I think everyone involved at the decision makers are certainly aware of that. And hopefully it doesn't hasten a bad result, but hopefully it hastens the result here in the next week or so.

Right, and we were talking a little bit here before we started recording about what could be kind of the deadline here. And Asset was saying that there's this November 1st, early November deadline, and we're kind of going back and forth. And James said that early sign up for next year's health care is the early lock-in period ends in early November. And so all this holdout on health care could be for naught if get past this expiry date.

for the benefits that they're trying to preserve. the ⁓ holding card that's holding everything up here, again, is Obama Affordable Care Act tax credits, what's holding everything up. And if people are missing the sign up window to get their affordable health care,

leverage that the Democrats currently hold will no longer be in existence. And that could just lead everyone to come to the table and getting things funded.

Right. Or at the very least, it becomes another administrative hassle to unravel that or figure that out after the fact and figure out what comes with these deadlines when the government is still shut down.

Yeah, maybe what would happen if you did sign up and your premiums have gone up so significantly and then they managed to work some sort of deal out and now technically they should be lower, right? Would you be able to work your way out of that with any legal action be needed? There's kind of a big question mark there. So it's definitely a second hanging shoe.

All right. Well, something to continue to keep an eye on. It's a lot of uncertainty out there and unfortunately that's good for mortgage rates. We're seeing the 10-year finally dropped below 4%. I mentioned that earlier. The OBMMI, so 30-year fixed conventional is approaching that elusive 6 % mark where we might actually see a five handle here soon. It kind of stinks.

the circumstances that cause these sort of rate moves, but we'll take it for now. think, certainly seeing a big pickup in volume as a result this week going into the MBA we've seen like 30, 40 % increases over last year around the same time. And last year, if you remember around this time, we had a pretty good rally going in rates. we'll take it, but there's all these things that we need to keep an eye on ⁓ as we go into the holiday season.

big one too is the Fed, right? We're going to have a Fed meeting next week. That's not part of the government that's shut down. yeah, expecting a quarter point cut next week. So likely not going to get anything other than that. If we did, we'd certainly see a move in the market.

what went into the fed's logic in terms of the data they're looking at since they are obviously missing some of the, you know, official numbers, employment numbers. talked we were on about, you know, some of the other numbers coming out there. James, you noted a couple of places that are tracking their own employment numbers.

Yeah, the like the Dow published a number that's just around what they see employment at. And so we, you could look at that and use that as a figure for where was employment over September, October. And the one official number that they will have is of course, a CPI. They're, know, the Bureau of Labor Statistics has called in a number of employees off furlough. Come in, we're going to get the CPI number out. It's kind of a critical number. want to get the Fed to be lower.

rate so get the number out. does look projection right now is 3.1 which would be an increase from previously at 2.9. That said I think we've been projecting that 3.1 most of the summer so we could still be you know sitting pretty 2.9 but it does feel you know maybe we've creeped up maybe we've broken that 3 % of threshold I think that that would have kind of a

an effect seeing that that number is out of the twos. It is creeping up and it has actually made it into a new handle would be something that would probably stir a lot of people up.

Yeah, I it's going to be, I don't know, laser focus on that number, I suppose, because there's not a lot else coming out, because anything else that the Fed might use in terms of the labor market would be some sort of survey, like you said, from the Dow or another source that's not the BLS. So there'd be a little bit unorthodox, but they have to bring labor into that discussion somehow, right? And there may be other ways that they can peek into what that market looks like. And anecdotally, it's not good.

right, especially for folks who have just graduated from college, for instance, just continuing to see that kind of drag on the labor market where we're seeing a resilient unemployment number. again, you know, that's explained by the change, the transformation of the actual labor force right now with things like immigration plummeting to negative numbers and just a general, I don't know, slowdown.

in hiring to the point where we probably would have expected zero jobs, maybe even a negative number this time around had we seen a number in October.

All right. So what else does, what else is the Fed watching? mean, we're all acutely aware of the trade war that seems to have been reignited over the past week and a half as well. Right. And this all all relates back to rates and relates to the Fed, right? Cause you've got inflation, which is probably being propped up a little bit at this point by tariffs. And now we're in a pretty interesting standoff with the Chinese again, over what tariffs and what, you know,

price floors are going to look like here going into hopefully some sort of trade agreement with China.

Yeah, last week markets really got roiled by Trump teaming to kind of reignite the trade war. kind of had been lulled over the summer into kind of this, you know, this is where we're at and the numbers were set and we hadn't really heard too much on the trade war front for this, you know, long time listening to the show. We'll know for several months now. really brought it all back with just, you know, a series of tweets. I think it was only one or two equity markets sold off one and half percent, just on fears again of like a reignite trade war.

once again brought around the idea of just completely unsustainable and unrealistic tariffs that would amount to a complete trade embargo. then within 48 hours, he kind of walked him back, said, you she's a good guy. can't wait to see you in South Korea. we'll get through this. But what I do think it highlights is it is a major priority for this administration to secure a rare earth mineral supply chain. We've seen them take stakes in domestic firms, least North American oriented firms, you know,

some with some Canadian ownership, but for the most part with operations in or organized here in the United States. then Trump is meeting with Australian Prime Minister today they are signing a deal as well to secure ⁓ mining deals in Australia. Australia is a key ally of ours in the Pacific theater and having them on our side. ⁓ Not that they, don't think we're swinging over towards an end of the Chinese orbit, but to have those. ⁓

Yeah, that's been a big bargaining chip this last couple of weeks, like you said, just the rare earth minerals, which China has a ton of that and just, you know, it does become more of a national security issue. those metals either become extremely expensive or even that we, you US companies can't get their hands on them.

⁓ the price floors too is kind of, an interesting tactic being that, you know, whenever we talk about this or you hear on the radio, China has all these rare earth minerals, they do, but so do Australia. The United States has a large deposit of these rare earth minerals. And of course, ⁓ a friend of the administration, Greenland has a lot of them as well. But there are other places that you could get these. However, China over the past 20, 30 years has basically competed other firms out of the market.

Mm-hmm.

to price these very, very low to stop other firms from really getting large enough, really having interest in opening the mines. So they've almost killed off a lot of the other competitors at a state level. And so by enforcing a floor, what the administration is doing, saying, Hey, you can't buy these from anyone for lower than this price. That's going to enable again, ⁓ American firms.

Mm-hmm.

firms in South America and Australia to be more competitive and therefore more attractive to American buyers. And thus you should be able to get more resources from a more diversified base.

Yeah, that makes a lot of sense. mean, it's kind of the way oil has been over decades, right? The Middle East was able to pull oil out of the ground at such a low price and put it on the market at such a low price that it didn't make sense to pull oil out of the ground in the US, for instance, until gas was over $354 a gallon, right? Just because of that sort of syndicate that controlled what those prices looked like. It has come to light or maybe

The public is more aware now that China has put sort of an artificial super low price on those minerals so that no one else has really been encouraged to get into that business. So price floors mathematically make sense. So we'll see how that plays out.

I definitely think there's parallels that can be drawn here from the domestic energy production sphere in America in like the 2010s that we saw, like you said, Jim, from $4 gallon gasoline. was a very unstable time throughout the Middle East during that time. global oil prices, essentially a price floor was set by the market. And then what they're doing is instead of setting a price floor by the market, they'll simply just set one themselves. But it's the same game plan of we can build a domestic industry

if the price is right.

I guess meanwhile, another thing that's come up over the past week that folks should definitely keep an eye on, especially in our industry, is we seem to be having maybe another mild panic around the regional banks and the general health of the banking system. You may have seen some of the headlines recently about subprime car loans. A couple of companies went bankrupt recently that were held or at least invested in by

Some of the big investment banks like Jeffries has made the news recently. some people think there's a bubble there. And that's one of the concerns out there is that we're going to maybe an implosion, if you will, some of these, starting with subprime car loans and then so on. There's been some talk about commercial real estate.

There's fraud involved in some of these car loans too. it's still a little bit gray. People are digging deeper into it, but we seem to have shrugged it off over the last few days. But sometimes where there's smoke, there's fire, right? think Jamie Dimon made a euphemism about cockroaches. Like when you see one, there's probably a bunch. anyway, something to watch and it certainly moved the market on a few days over the past two weeks.

back when Silicon Valley bank was suffering about four years ago now, right? Right. So we're doing this every four years. It's good little trend that we have, but back when Silicon Valley bank went belly up, I remember people talking about zombie companies, that there was all this liquidity that came out during COVID. And there were a lot of companies that maybe shouldn't have survived that were able to. And since then we've had this bubbles, probably the wrong word, but credit increase that yeah, glut.

Mm-hmm. Yeah.

Yeah.

people have been much more able to get their hands on credit and much more able to move. Ford was saying that they were going to be lowering. This is about a month ago. might even have talked about it on the podcast, but Ford was going to lower their requirements of FICO score to get loans. So people have been kind of loosening the standards a little bit. There is definitely a conversation for.

You know, Hey, Americans have more credit card debt than ever. The average person has more debt. We've been taking on more credit. can see whenever we've talked about the U S debt states have, you know, $2 trillion, have about 17. The only thing that's beating us companies is the federal government itself. So there's a ton of credit out there that is a risk, but. Yeah, it is.

Mm-hmm.

Is JP Morgan and Wells Fargo the strongest companies in the world? Have they been making bad decisions? That's kind of hard to call out. Seems it might just be handleable.

Yeah. Are they too big to fail too? Yeah. I mean, we came off of the highest savings rate in many decades during COVID. And now, as you said, we haven't talked about it recently very much, but now we are breaking records every day in terms of the amount of that borrowers have taken on in the U.S. So we do see that cycle over history. And some of this sounds familiar, right? You're talking about lowerings of standards, lots of credit out there.

All right. Good discussion, gentlemen. A lot to keep an eye on, even though there's very few releases coming out right now. Watch the Fed next week. Watch, there's Fed speakers this week. Keep your eye on that as well. There's some testimony as well as some interviews on TV. Otherwise, everybody out at the MBA, hope you are having a productive week and we will talk again next week.

Thanks.

Thanks for having us.

Thank you.

Okay, good stuff. Let's wrap this thing up. Thank you, James, Jeff, Alex. Great discussion today. A lot to think about, a lot to pay attention to as we go into the holidays. So 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.