Welcome to the first episode of Optimal Insights.

In this episode, our experts discuss the recent developments in interest rates and their impact on market trends. The episode highlights a significant drop in mortgage rates, approaching 6%, which has sparked an increase in lock volumes, defying typical seasonal patterns. The team also explores the Federal Reserve's recent decision to cut interest rates by 50 basis points, shifting its focus from inflation control to supporting economic growth and employment.

Key Takeaways:

• The Federal Reserve recently cut interest rates by 50 basis points, signaling a shift from focusing on controlling inflation to supporting economic growth.
• Recent data shows that mortgage rates have dropped significantly, with some rates now approaching 6%, leading to increased refinancing activity.
• The importance of the Federal Reserve's dual mandate of managing inflation and employment, noting a recent shift towards focusing on employment data.
• The Optimal Blue Mortgage Market Index (OBMMI) is a valuable tool for tracking daily locked interest rates, providing insights into current mortgage market trends.
• Despite the typical seasonality in the mortgage market, recent trends show increasing lock volumes in the fall, contrary to the expected decline.
• The significance of monitoring economic indicators like the PCE inflation measure and unemployment reports to understand potential impacts on interest rates.

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

Guests:

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

Production Team:

• Executive Producer: Sara Holtz
• Producer: Matt Gilhooly

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

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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

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 OB for trusted insights and commentary, and these podcasts are an evolution of our commitment to keeping the industry informed.

So this podcast is for.

It's for originators, it's for capital markets experts, it's for anybody really in the mortgage industry, or even anyone who's curious about what goes on in the mortgage industry, and also how the outside market affects us, how we can be more successful, how we can be smarter consumers of data and information.

To be more successful in our industry, let's dive into today's episode.

This is our inaugural episode of Optimal Insights.

We're really excited to get this one off the ground.

Many of you have joined us for our webinars over the past five years.

Many of you have also downloaded our market update every week.

So we're excited to get into it here.

I'd like to introduce my co host, Jeff McCarty.

He is director of product management.

We also have Kevin Foley, who is also director of product management.

And we have Alex Hebner, who is a hedge account manager here in Denver, on our desk.

Yeah, super excited.

First podcast, we're ready to do this.

So as we go forward with this podcast, we're going to have lots of great guests on from our PPE, from our trade desk.

Really want to get into the markets in detail and how that affects your business, how that affects the mortgage industry at a pretty great level so that we can really start to learn to digest some of the economic news a little bit better and really make that actionable for your business.

Beautiful.

Thanks, Jeff.

Yeah, we're excited to get into this one.

We're going to talk today a little bit about what's going on in the market last week, what you should look for this coming week, get into a little bit of data conversation.

We're going to talk pretty in depth about the Fed because we think that's a really important topic right now and kind of always, you know, when we're talking interest rates.

So to kick it off, hopefully you've been generally watching the market and you've generally been watching economic indicators.

So we'll give you a little feel for some of the ones to really keep an eye on today.

So last Friday we saw PCE, which is personal consumption expenditures.

So that's the Fed's favorite inflation measure, right?

There's a bunch of different inflation measures, CPI, PPI, but PCE is the one that the Fed keeps a close eye on.

It came in at 2.2, which is extremely close to the Fed's mandate or the Fed's target of 2%.

And we'll talk more later about the dual mandate of the Fed.

But generally speaking, a number that is above 2% means that inflation is a little bit hot.

A number below 2% is going to be kind of a contraction or going to be closer to less than optimal on the downside.

So 2.2 is right about where we'd want to be, considering that last year those numbers were up in the sevens, eights and nines.

We were all feeling it at the supermarket and for insurance.

And just across the board, prices were going up way too fast for the Fed's liking.

So what some of that means if we continue to see inflation numbers come in closer and closer to that 2% target are hovering around there.

The Fed has already shifted their focus.

They've rotated towards focusing on unemployment because those numbers have started to come in soften the last four, five, six months.

The dual mandate.

Again, we'll get into it a little bit more later.

The Fed is tasked with managing inflation and managing optimal employment.

So right now they're going to be focused a little bit more on employment, it seems.

And as luck would have it, this Friday is the unemployment report.

So that's another one we all watch really closely as folks in the mortgage industry and on capital markets desks.

Right.

We're seeing those numbers, those non farm payroll numbers over the past six months start to go lower.

We're adding jobs to the economy, but we're adding smaller and smaller numbers of jobs to the economy.

So this Friday we'll be looking for a number that comes in.

The consensus is around 140,000 jobs.

But that's another one where we can say if we see a number that's higher than that, we may see rates go up a little bit because we may have a job market that's not quite as weak as what we were hoping for, expecting, again hoping for in the mortgage industry.

But if we come in below that, we come in at 100 or 50,000 or even something closer to zero or negative, you may see rates spike, because thats going to mean that the Fed needs to focus even more on the job market.

Rates fall.

Yeah, right.

Which is the dark side of the mortgage industry.

We're kind of rooting for low job numbers so the Fed can stimulate the economy more by lowering interest rates.

Little messed up that we root for that in the mortgage industry.

Root for people to lose their jobs a little bit.

Yeah, it's the odd little dichotomy, right?

Like we're rooting for a terrible.

Like we're rooting for a recession, essentially, which doesn't make you, like, betting with the house kind of.

Okay.

We've talked a little bit about some of economic data and some of the things that we should be looking at out in the market.

Let's switch gears a little bit.

At optimal blue, we obviously, we accumulate and curate a ton of data.

Jeff and Kevin, could you guys talk a little bit about the kind of data that we have and what can be done with it and what we can glean from it?

Yeah, we just talked about some general market indicators, inflation and employment rates.

But I think obviously for us in this industry, the elephant in the room for the past few years has been how high rates are.

And I obviously how low volume has been because of those high interest rates.

So, Kevin, maybe you can talk to us about some tools that are available in the PPE that display some of that information.

Kevin?

Yeah, it's a great question.

And the good news is we are seeing some relief in terms of where rates are at.

One of the ways that I like to keep track of what rates are doing on a given day is using our optimal blue mortgage market index.

With OBMMI.

It's really a representation of the average interest rate that's locked within optimal blue on a given day.

So we package it up and put that out daily.

It's actually publicly available.

So you don't need to be an optimal blue client to be able to access it or use it.

You can find it on our website.

You can also find it within our OB mobile app for iOS and Android.

We've got some cool fancy charts and graphs that are going to be available with that.

There's some other cool stuff in the apps behind the login if you are a PPE customer, but it's a nice way to keep track of what rates are doing on a given day and what those trends are.

Yeah, the website and the app, they both have some pretty good tools as far as you know, how far back you can look at the data and breaking it down into some sub characteristics, conventional versus Govi, even some FicO and LTV bands that are pretty interesting to see how how things are changing over time.

Yeah, for sure.

And, you know, it gets.

Gets pretty granular and, you know, there's.

While there's lots of places to, you know, go and take a look and see what rates are doing.

One thing that I find pretty cool about OBMMI that's kind of a differentiator is its actual locked interest rates.

So it's not, you know, survey based or rate sheet based.

It's more representative of what you're actually seeing on loans that are being locked, which is pretty cool.

And it's daily.

Right?

And it's daily.

Yup.

Packaged up daily.

And I guess to kind of get into the headline of what we're seeing.

So today, happy to report, OBMMI is getting pretty close to 6%.

So we're at 6.059 today.

And believe it or not, we've made some great progress in the last 90 days.

So we were within 90 days over 7%.

So it's a full 100 basis point drop in interest rates.

So pretty exciting stuff.

Yeah.

I think we've had some questions from our clients asking about even what would happen if they started originating loans in the low four s.

Obviously, those are pretty well below parental.

Even those lower interest rates are starting to come back up, which is super exciting to see.

Yeah, absolutely.

And we definitely are seeing quite a bit of volume in the fives.

Certainly not uncommon at all to see interest rates in the fives.

In fact, if we look at on the Govi side of things, fHa va, USDA obmmi indices are all below 6%.

So pretty cool stuff there.

Yeah.

So then from there, how are those low interest rates affecting volume at this point?

Well, so it's actually pretty interesting.

It's a unique story that's happening this year.

So normally what we see throughout the year is we see block volume peak in the spring, and then it slowly starts to decrease throughout the summer and the fall, and we're actually seeing the opposite this year thanks to some of that help from interest rates, where we've actually, we kind of had our peak in the spring, and then our lock volume has steadily proceeded up, and September is actually on track to be our biggest lock volume month in the last two years.

But right now, things are.

Things are looking up.

Yeah.

Yeah.

But exciting to see.

Going into the normal slow season, things are picking back up for sure.

We've talked a lot about this on the desk, and we talk a lot to clients about it.

Right.

And we'll weave a lot of these client conversations into this podcast.

And if you look back, like just this morning we were on our morning stand up and we were talking about where rates are right now.

And looking back to what the highs were on the OBMMI, and the high was about 7.8 on a conventional 30.

And now we're getting close to a five handle.

So we're seeing almost a 200 basis point drop just since.

Almost exactly this time last year was when the highs hit.

Just kind of amazing.

It's a little bit like osmosis, right?

We didn't see huge pickup in volume this spring, when it's typically a higher volume season, and rates were quite a bit lower than that, than the 7.8 number.

But we get to this a little bit of a tipping point here in early August where we start actually seeing that number come down.

And I think the OBMMI is such a leading indicator.

That's always what has struck me.

As you said, Kevin, there's tons of places you can look at where interest rates are, but a lot of that is loans that have been closed or loans that are being sold.

Not necessarily that very first touch point where a borrower actually takes a quote and locks that loan.

Yeah, absolutely.

It's really great news from interest rate perspective, looking at where things are going, seeing how volume is trending.

Component of what we're seeing with volume is some other good news.

Within the data is the purchase versus refi breakdown.

Right around this time last year, we're actually seeing our lowest percentage of refis overall.

So it's around 15% of overall volume.

So about 85% purchase, 15% refi.

But because we are seeing interest rates drop over the last 90 days or so, particularly, we've seen that purchase percentage creep upwards.

So in August, it was more of a 75 25 split, 75% purchase, 25% refi, and then in September, we're actually looking at 70% purchase, 30% refi.

So a good chunk of the folks who were originating or who took out mortgages over the last two years, when you had rates in the sevens or even in the very high sixes, are now eligible to lower their interest rate.

So those folks who are out there that saying that's out there, marry the house, state the rates.

So they're already starting to see some gains in that because the house is long term, but the rates, as soon as rates go down, you're able to take advantage of what those new market rates are.

Right on.

Let's go.

Like Jim said, two points in a year potentially for some, some clients.

So that's a lot of savings already.

Yeah, that's huge.

That math checks out, right?

You're seeing volume also double what it was around this time last year.

So that all matches up nicely.

Great, great opportunity for customers now to focus on their recapture strategy.

So, you know, making sure that you've got your, your list of loans that you've originated in the past two years, what your strategy is to go after those borrowers and make sure that you're keeping them in mind and they're keeping you in mind as rates are dropping and that they're aware of the opportunity out there.

Thank you so much, Jeff and Kevin.

That was a really good overview of some of the data that we have and some of the things that can be used for.

Let's switch gears again a little bit.

We foretold this earlier on, we wanted to talk a little bit more about the Fed.

A week and a half ago, the Fed cut 50 basis points.

And that always prompts the question, what does that mean?

This is the first cut in many years.

So I want to get a little bit deeper into that.

So Alex, what did happen a week and a half ago?

What did it mean and how does it affect us?

Yeah, as you said, a week and a half ago, September 18, we got a cut from the Federal Reserve of 50 basis points, as you said.

Essentially what that does is it brings down borrowing costs throughout the, the american economy and abroad in many ways as well, just because of the US's importance to the global economy.

But what we're seeing in the mortgage industry and what you guys have been touching on the past several minutes is that mortgage rates are able to come down and the Federal Reserve's benchmark rate, that plays a very large part in what you see on your rate sheets or if you're a borrower, what you're receiving from your originator.

What the Fed decided to do was they cut 50 basis points.

They've decided it's time to pivot from attacking inflation in the economy to protecting the economic growth that we've seen in the post Covid years.

But pretty quickly, the economy adapted and we saw strong economic activity as well as job growth.

Unemployment has remained steadily low beyond those initial temporary layoffs that really affected certain industries more than others.

A lot of people were able to transition to working from home.

As you touched on at the very beginning of the podcast, where most people really feel that pain was at the grocery store, how much do your eggs cost?

How much are those vegetables in the stand?

So what the Federal Reserve did is they raised interest rates.

What that essentially does is it pulls money out of the economy.

It makes it more attractive for you to leave money in a bank account accruing interest than it is to go and spend it today, because what, inflation is an excess of dollars, chasing a limited number of goods.

And so if you're able to pull some dollars out of the economy, that's going to tamp down on inflation.

And so the Fed targets 2% inflation, as you were saying, the 2.2% that we saw in PCE is getting very close to the 2%.

They ideally like to see that 2% sustained, but they've also said that there's a willingness to run a little bit above 2% for a little while if.

It means we get that soft landing that everybody's been talking about.

Right, right.

And so far, it seems that they've been able to pull it off.

Jobs remain strong, and we are approaching that 2% line in the sandheen, so to say.

So what they're doing is the reason they're cutting rates is to protect the job market, because they just don't want to see things swing back too far the other way.

There's not enough money in the economy creating jobs, capital investment, and they don't want to see businesses begin to pull back on spending in that direction.

Right.

Because they've been restrictive for so long, and that lags.

Right.

I've heard that when inflation started and they started raising rates, the Fed, it took a really long time, obviously, for that to catch up and for prices to actually start to plateau.

The same could be true.

Right.

When they cut rates, if they're looking to stimulate the economy a little bit.

We might not see the effects of it till when?

Christmas or mid next year?

Yeah.

Potentially longer.

Yeah.

The lead times, the fastest is really like a quarter, but a lot of times it can be six to eight months before you see the effects of the Federal Reserve leading out into the general economy.

The first rate hikes were in January of 22, and inflation peaked in June, July of 22 before beginning to come down, just teetering down slowly but surely.

So, yeah, there is time.

It's going to take time to see this 50 basis point cut.

And I, the cuts that are still to come in the general economy.

But as we were talking about with the soft landing, they might have time to spare.

There's not mass unemployment right now.

There's no lines or unemployment lines or anything.

So they have six to eight months to speed the economy up a little bit without.

Yeah, time is on their side, thankfully.

By the way, do we know if the price of eggs have stabilized?

Can we stop talking about the eggs?

Might be a bad example.

There was a.

That's all we talk about.

I feel like that is the example.

Economy wide.

Uh, the, the chickens had to be cold.

There was a chicken flu or something, so.

But, yeah, vegetables.

Across the store.

Across the store.

Everyone likes to talk about dairy, though.

Yeah.

So what, you know, you mentioned looking forward, like, what should we be watching out for the rest of the year?

What are the expectations of cuts?

How could that affect mortgage rates?

Or maybe how has it affected mortgage rates already?

As you guys have already talked about, we've seen 200 basis points in the past 18 months or so in better rates coming from a seven to almost a five handle now.

And so we've already seen the expectation of lower rates bleed into the mortgage rates that you're seeing out on the street for the rest of the year.

Right now, the general consensus is for another point or so, 75 base points to point and a quarter somewhere in there.

This cut was kind of, I don't want to say out of the blue, but it was anywhere between 25 and 50 basis points.

And so it swung back and forth quite a bit.

But come to the week of the cut, the market really settled on 50 basis points.

Not everyone on the Federal Reserve agreed with that, per se.

Michelle Bowman, actually, she's the Kansas City president.

She published a dissenting opinion very quickly after this FOMC meeting, stating that she thought 25 basis points was more appropriate.

She said, I don't want to declare victory over inflation quite yet.

She's very hawkish on that.

There's hawks and doves on the Federal Reserve.

Sure.

And she's generally the hawkishesthenne of the Fed governors.

Yeah, there's two or three of them that are generally pretty hawkish.

So the ones that see inflation as more of a threat than unemployment.

Yeah.

The doves on the other side thinking that full employment is more important than fighting inflation, given all else equal.

They all understand that inflation and unemployment are both bad things to have in the economy and so they swing back and forth.

But, yeah, she published that opinion very quickly and that was actually the first dissenting opinion that's been published over the past 16 federal Reserve meetings.

So the Fed, the board has been fully unified fighting inflation for the past 18 months.

Yeah, that's wild.

So that's super unusual for anyone to decide.

It's usually unanimous.

They all get in a room and they say, this is what we're going to say.

But Bowman sometimes is like, no, yeah, yeah.

Speaking in modern terms over the past few years.

Yes.

Yeah.

So that takes us back two years at least.

All right.

So as we're getting into the end of the year, we've had this half point cut.

We're expecting, as you mentioned, three quarters to a point cut through the end of the year.

What are some good tools to look at to see what expectations are for the next several months?

Yeah.

If you want to keep an eye on it.

What we use here on the Denver trading desk and across all our desks, I believe, is it's called the CME Fedwatch tool.

That's the Chicago Mercantile Exchange Fedwatch tool.

They publish numbers related to futures contracts on sofa, which is a pretty good metric to track where market participants think that rates will be on a given date.

And so this tool has all the Fed meetings plotted out for, I believe they have up through another year and a half down the line with the dates and where the market expects rates to be.

I wouldn't give too much credence to those that are like 18 months out.

There's a lot that can happen.

There's always those dark horse events that can pop out of the blue.

But the next two or three meetings, you can get a much better idea of where rates are going to be.

Again, like right now, the next one in November, it's looking between 25 and 50.

Again, it swings back and forth.

I haven't checked it this morning, but like I said, 25 to 50 basis points are expected in November and an additional cut of some form in December as well to round out the year.

And then some potentially other.

As a good hedger that focuses on neutrality at all times, I can't condone this, but I think there's also some betting tools out there that actually end up being pretty good prediction markets, right?

Yeah.

Yeah.

It's not just the folks on Wall street who can throw their hat in the ring.

There's lots of tools out there to if you have a strong opinion on where the Fed is going to go, you can put your money where your mouth is for sure.

But those are becoming pretty liquid and decent predictors at this point.

Like you look at a line for a sporting event to even just estimate the competitiveness of a game, even if you're not betting on it, these lines are becoming pretty good predictors of what might happen.

Yeah.

And the Fed doesn't want to, they don't want to be the tail that wags the dog, but a lot of times they don't want to catch the market off guard.

So if the market says it's going to do something, the market can kind of tell the Fed what to do in a way if they have a strong enough opinion, if enough people are in one boat.

Yeah.

Follow the money.

If you want to know where the market's going to go or you want to know who's going to win the game, always follow the money.

The money is smarter than the collective mindset of the people.

Good stuff, guys.

Thank you.

Thank you for having me.

Appreciate it.

All right.

That was a great segment.

Thank you so much, Alex, for that insight on the Fed and what we should be watching out for, what will weave a lot of these conversations into the podcast going forward.

Yeah, first episode done.

That was fun.

That was great.

So coming weeks, we'll be getting into more detail on some of these topics.

Obviously, next week we're going to really focus on the employment numbers on Friday, reviewing what happened and how that affected the market.

And then from there, we're really going to get into a bunch of different topics.

So getting a little bit more into rates, how are treasuries and mortgage rates related?

How do all these macro events ultimately trickle down to the secondary and primary markets for mortgages?

And then thinking about things, how you can use that information to help grow your business or run your business more efficiently.

Great.

Yeah.

Join us to stay up to date and to get a little bit of education along the way.

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.

Don't forget to follow us on LinkedIn for more updates and for access to our latest video episodes.

You can also find each episode on all major podcast platforms.

Thanks again to our group here.

Thanks, Alex.

Thank you, Kevin.

Thanks, Jeff.

We'd love to hear from you.

Our email address here is podcast optimalblue.com.

thanks again, everybody.

Please join us again next Monday.