In this week’s episode of Optimal Insights, Jim Glennon and Alex Hebner break down a headline‑driven market week: institutional home‑buyer bans under consideration, a proposed directive for the GSEs to purchase $200B in MBS, and the DOJ’s criminal investigation into Fed Chair Jerome Powell – all against fresh jobs data and a live rate backdrop (OBMMI ~6.04%, 10‑year near 4.18%). Closing out the market update, they analyze affordability proposals (institutional buying, credit‑card rate caps) and labor trends.

Then Jim, Mike Vough, and Kevin Foley outline mortgage trends to watch in 2026: a steepening yield curve and rising ARM share; the “couch‑cushion effect” for deal structuring (insurance, taxes, HELOCs); evolving mortgage spreads; the rise of specified payups; and non‑QM’s continued expansion.

Optimal Insights Team:

1. Jim Glennon, Senior Vice President of Hedging and Trading Operations
2. Alex Hebner, Hedge Account Manager
3. Mike Vough, Senior Vice President, Corporate Strategy
4. Kevin Foley, Director of Product Management

Production Team:

1. Executive Producer: Sara Holtz
2. 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.

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. Hello. Welcome everybody. It is January 12th, Monday, and no shortage of things to talk about today. So we'll get right into it here in a moment.

items that affect the mortgage industry specifically and some trends that we see and you probably see as well and kind of how to handle those and just the best way to approach them to be successful. Before we get to that in the way of data, OBMMI was just above 6%, 6.04 actually, if your account locks on Friday. Although today we've had a bit of a sell-off on the heels of what you may have detected over the weekend, which was some relatively serious

news around the administration and the federal reserve. We'll get to that here in just a second. The 10 year, you know, about 4.18 as of right this moment. So seeing some good volume spikes right now after the holidays and on the heels of what we talked about in our bonus episode on Friday, which was this idea that the GSEs are being instructed to buy some MBS off the market. So look for more activity there. But today, again, we're seeing a sell off.

on some of the news that came from the administration over the weekend, some back and forth between the Fed, the DOJ and the administration. So anyway, let's go check in with Alex and just see what's going on.

Okay. Welcome Alex. Thanks for being here. Happy Monday to you. We have a ton to talk about today. It's hard to decide where to start. maybe sort of quasi chronological order. Some tweets came out last week, some truth social posts that kind of shook the market in one way or the other, got people talking again about what the White House might be thinking in terms of.

homeownership and affordability. I'd say the most recent stuff started out with the announcement about a pending ban on institutional home buyers. Right. That's been kind of a, gets talked about here and there that large corporations, whether they are hedge funds or Blackstone or, you big banks are out there purchasing homes, right. Single family, multifamily homes and renting them out.

or buying them for investment, other investment purposes. And some folks would point at that and say that that's driving up the cost of housing. It's drawing down the supply of housing. Others would say it's typically done in areas where maybe there needs to be some investment or the typical person who lives there can't afford to buy the home. There's also varying opinions on the actual size of this issue, right? I think I've seen somewhere where it's...

3 to 5 % of homes are owned by institutions, but then you can go to some major cities and it could be more like 15, 20%. So maybe it's a bigger issue in those areas. Anyway, certainly affects our industry. Nothing is on paper yet, but it seems like something that'll probably move forward here in the coming months. What do you make of all this institutional ownership talk?

Yeah, they're definitely thrown a lot.

at the wall right now in terms of affordability after some of the more mainstream mortgage related ideas were shot down. it depends on what you qualify as an institutional investor. There's BlackRock papers out there that say the institutional investors, i.e. the major hedge funds, the really big boys, they only own like 0.2 % of the housing stock. As you said, it is hyper-concentrated where they've concentrated these positions, in Sunbelt states across the Southeast and

Southwest US. But I think the bigger thing here is what qualifies as an institutional investor? Obviously, I think we can all agree that a private equity billions, if not maybe a trillion dollars under management, is an institutional investor. But what landlord with 10 units? They definitely probably have an LLC set up for that.

they file taxes through is that an institution and that's when that number of homes that are under institutional ownership Can really expand to like a three or five percent of the total housing stock? again, it's hyper concentrated in some of these metro areas where I think if you know If it was three to five percent evenly spread across the entire United States They probably don't have pricing power to radically increase rents but you know if it's everything in a 20 mile radius around where

Mm-hmm.

you currently live and where your job is, yeah, they're probably going to be exercising some upward pressure on your rents.

Yeah, very good point.

Yeah, and we definitely need more color here on exactly what they meant. Is it just gonna be an institutional buying ban, in which case all these institutions can continue to own there anywhere between one and 5 % of the housing stock? I find it highly unlikely that they're going to put a gun in their face and say, have to sell 500,000 homes. not gonna happen.

Right.

best if this gets implemented. think it's just going to be on a moving forward basis that it'll be whoever is allowed to buy a home can buy a home, whether that's single family homeowners or like I said, maybe if you're a landlord of a certain smaller size, you'll be able to continue to buy homes as well.

Right. So no immediate impact if that is the case, if it's moving forward, probably long-term, maybe it has some effect. Certainly could have an effect on existing homeowner values. If you take some buyers out of the market, but remains to be seen what the plan even is. Okay. You know, the other big announcement, definitely check out our bonus episode. If you haven't, we touched on it big time on Friday. So we'll just mention it here, but on the heels of the

institutional ban announcement. Trump also went to True Social to say that he is, the administration is instructing Fannie and Freddie to go out and buy $200 billion worth of MBS. What does that mean? What is the plan? All that yet to be explained to the markets, but the markets did like it. There was a good rally.

but that has since petered out a little bit and we'll explain why here in a minute when we get to what happened over the weekend with, with Jerome Powell and president Trump and the fed and the DOJ. But real quick, we had an unemployment report Friday. I'd say kind of ho hum, not a lot of, nothing big there, no big surprises. It was a little bit lower than expected, although the unemployment rate dropped a 10th of a percent. So we kind of, I don't know, what do you make of that? Just kind of a.

Average ish report finally coming out on time though, with hopefully better data than we've seen since the government shutdown.

Right, I think it's a good number to see. It was positive and it did bring down the unemployment rate, which I think the big thing to focus on there would be how big are these inflows and outflows that we're seeing, and largely outflows in immigration, where we can add just a handful of jobs, all things considered. It's been about the average across the 12 months, somewhere in the 40 to 50,000 job range, and bring down unemployment by an entire 10th of a percent. It also, I don't think it bodes

well for the rest of the year. This is a hiring heavy time of the year. This is a hiring heavy report as folks in Q4 get their approvals for additional budget into the new year. so these reports are generally a little bit heavier on hiring.

But it is it was good to see 50,000 jobs a little bit below expectation dropped the unemployment rate by a tenth of a percent I think the big thing here is just a continuation of the trends that we've been seeing manufacturing jobs continue to contract Pretty much all of these new jobs were in the health care space as you know health care is outpacing the economy and growth overall with our aging population it just one thing I was kind of noticing in a couple things that I read

know GDP has expanded about 7 % over the past three years but the prime age employment those between the age of 21 and 54 been in the same 1 % range so we haven't seen that expansion in GDP in an expansion of the workforce which touches on a number of the themes that we've been talking about for the past year whether it's AI whether it's just this slow to hire slow to

So that's just something to keep an eye on because historically in the US we have seen a higher prime age employment number north of 81 % where we're currently about. And also in similar economies, the G7, all our allies, Japan, Germany, they currently have higher prime age employment. So that's just something interesting to look

Mm-hmm.

Right. But a pickup and productivity on the heels of the internet kind of being newish in business.

Yeah, there's a lot of parallels you could draw with technology between the two for sure.

Right. Okay. also worth noting again, some of this is yet to see actual details, but there's also been some talk out of the administration about capping credit card rates. I don't understand the math on this one. I mean, I think everybody knows that credit cards have a certain rate on them because we're all kind of paying for potential delinquencies down the road. It's not all, you know,

If the average rate on a credit card is 22%, that's not profit to the bottom line for Chase or Citi or whatever. A lot of that goes towards delinquencies and collections and all that. So capping interest rates at 10%, which is what the administration would like to do, seems like it would be a disaster for the big banks, for all the banks really, or it just wouldn't work mathematically. People would stop extending credit card credit to people unless they had the best possible rating you can have, which would kind of count out the

you know, vast majority of the country.

Absolutely, yeah. I when we're talking about credit card debt, these are unsecured loans which carry with them a higher interest rate just because if you go into delinquency with a credit card, there's nothing the bank that extends you that line of credit can come after you for. Whereas with a mortgage, they can take the house, auto loan, they take the car if you fail to make your payments. So that's why we see a rate on credit cards, average in the US somewhere north of to bring it down to 10%, yeah, on the

Mm-hmm.

lower end of the credit spectrum, we're probably going to see credit evaporate for the very low lower end of the spectrum, those with low credit scores.

On the other end of it, these credit card companies are massively profitable and they redistribute some of those gains via point systems and ⁓ such for those that make their payments on time, 80,000 sign up points, whatever it might be. We could probably see a curtailment in those if the lower end of the credit spectrum, those that aren't making their payments on time where the vast majority of this interest income is coming from dries up.

I think it could really put the pinch on the credit industry on both sides. Obviously the most painful spot would be for that lower end of the credit spectrum in many places is reliant on extension of credit to make it between paycheck to paycheck.

Right. Yeah. guess I'm interested to see what details come out of what the back and forth might be in any sort of concession. Cause mean, the administration has to know these simple facts of math of, of credit. So I think there's a plan there that's kind of, this is like the starting offer

You would think so. Yeah.

is something that would have to go through Congress and what Trump proposed was a single year, ⁓ which is.

you know, it would be like a slight relief. That'd be like a COVID era stimulus program more than anything. You know, if you carry, you know, 5K on your credit card at any given time, month over month, you're probably paying about $100 in interest. And at 10%, if you were brought down to that, you'd be paying about $40 or so, which over the course of a year would amount to 700 bucks, which is nothing to scoff at, but, you know, one year and then it pops back up. I don't think it's going to be long-term relief for anybody.

Mm-hmm.

Well said. Okay. So it is hard to figure out how the market has reacted to each of these individual things that have come up involving the finance industry. But we've certainly had a lot to chew on and the markets have moved in both directions very quickly over the past two weeks. As we've said, there was the, you the band probably didn't trigger much in the way of interest rate movement.

Announcement about the $200 billion that Fannie and Freddie are being instructed to buy made a huge difference in rates momentarily. Call that Thursday and Friday of last week. But then over the weekend, I really want to talk about this now. If you've not read this news yet, you should go check it out and actually watch the two minute video that Jerome Powell posted yesterday on Sunday. the, department of justice has launched a criminal investigation against Jerome Powell.

and potentially others within the Federal Reserve related to improvements of the historic Fed buildings. This was some drama back, call it six months ago. So a criminal investigation at this point, which is more than just kind of jawing in social media and having arguments in television interviews. This is a major escalation, I think, in this sort of attack on the Fed.

by the White House. And this is another one where I don't know what to make of it, but the market doesn't like it. The market has sold off significantly today. So rates have popped back up because again, there's this threat against the independence of the Fed. this is, you know, once again, the White House saying we don't like, well, on paper, it is attacking the management of this improvement of the Federal Reserve buildings.

I think I'm just going to say that it's pretty obvious that this attack has to be related to the white house, not agreeing with how the fed is managing interest rate policy. And even though Jerome Powell's tenure at the fed is almost over, this is likely a message to whoever replaces him and everyone who's on the federal reserve board that

It's a message. I'll just say that it's a message and it's not a good message that if, you don't play ball the way we would like you to potentially there's, you know, criminal consequences at this point. don't know. What do you make of all this, this over the weekend drama with, with pal Alex.

Yeah, it comes at a really odd time. I kind of thought we were out of the forest in regards to the drama between Powell and the executive. You know, they had their little tiff late summer last year, early fall, where Trump went with his hard hat and he and Powell toured the new building they're doing renovations on, which was quite comedic if you take a step back from it all.

Mm-hmm.

Yeah,

it was.

And it was kind of like, okay, they got through that, they did their little tour, and then we stopped hearing about it. And we are four months away from the end of Powell's tenure. kind of seemed like he was just in the clear, he'll retire, they'll put forward someone, which again, as you were saying, this is not just a threat to Powell, it's a threat to anyone who takes any post with the Federal Reserve now.

It just seems to be very oddly timed because what you're doing is you're creating a lot of judicial and forth that needs to take place. It's really shook the markets up because the cornerstone of the Fed is knowing that it is operating on objective data and it's operating independently of politics. ⁓

which many will say that, well, they're always being driven a little bit by politics. But this is much more on the face of it than historically we've ever really seen. There's been a couple standout moments, mainly like the 60s and 70s, Fed has come into contact with the presidency and the executive. But this is definitely a first to be serving the head of the Federal Reserve with a subpoena. again, like you said, it's not about the cost of a building, because it was about the cost of a building.

Come on, it's the federal government. Like they're always overspending and going over budget and time The Department of War can't pass an audit. So It's not about that. It's about sending a message it seems to in my opinion kind of seems to be backfiring already. Like we said, we didn't get a good reaction from the markets and Senator named Tillis Republican from North Carolina has said that he will block any Reserve nominees

until this issue is resolved. Now, Tillis sits on the Senate Banking Committee.

and his voice alone would be enough to hold up any nominees, whether they're Powell's replacement or Myron's replacement, whoever it might be in the next, in coming months. And Powell doesn't have to step down until his successor has been confirmed by the Senate. So to me, this has just created more drama than it's worth. Like just let Powell finish his term and put one of the Kevins in who's gonna be ⁓ a loyalist to the Trump presidency and move along in the summer.

there'll be a second act to this, for right now, it seems to be a misstep in my view.

It's again, I understand the math, right? The administration is not dumb. They have a strategy. I just don't get what it is yet. They had to know this reaction was not going to be good. think they've proven each time that the Fed has attacked, especially when it gets serious like this, that not just our country, but the entire world kind of depends on that independence of the Fed to keep the dollar stable, to generally be a backstop in case of like

global financial shutdown, like what we saw during COVID and what we saw during the great financial crisis. So to just so overtly threaten that independence so publicly just seems like such a huge risk. And the reason that rates are going up today is because globally folks are seeing that again. saying, I don't know how much US assets I want to sit on right now if this is really going to happen. And we didn't have a absolute meltdown today in interest rates, thank goodness.

So doesn't seem like people think this is going to go very far. It's possible it won't. Other criminal investigations launched by any administration, the Trump administration, Biden and so on, typically don't result in anyone actually going to jail or there being any sort of dire consequences, but it's still, it's such a symbolic gesture that is difficult to ignore at this point. especially in other countries where it may not translate so closely or they may not quite understand the nuances.

or the sort of the erratic nature of the administration, you're going to get folks who are wondering what's going on over there in the US and how do we isolate ourselves or insulate ourselves from the risk that might come from it. And to me, as you said, that risk is real and that it may be backfiring or this may be part of the dance. I just don't know what the steps are going to be of this dance if this is how it started.

Agreed, agreed. Like I said, I need to see a second act here before. ⁓

making a final pronouncement, from how it sits right now, it doesn't seem to have been the most politically again, anytime they do stuff like this, they're burning political capital. And as you said, it's not just political capital in the United States and Trump's approval rating or whatever that might be. It's our the world market and how we're viewed and the stability of the dollar. equity markets have come back a little bit. The 10-year is around.

right around where it was before all of this drama last week, know, for, for, for 18 or so. the precious metals all popped up on this, which has just been the theme over the last 12 months where, folks are fleeing to, you know, the oldest safe haven assets out there.

The old,

right, de-risking it to the literally to metals that are dug out of the ground. It had been for, for millennia.

All right. Otherwise, mean, almost any of this kind of pales in comparison to what may come of this DOJ investigation this week, but we do have a couple of things coming out this week. We've got inflation numbers. No big surprises expected there now that we've had a more regular cadence of inflation numbers coming out. got CPI, PPI, the typical numbers there expecting mid to high twos, right? Which is sort of in that new range for the Fed, which is kind of okay-ish.

Yeah, yeah, only surprise that we could see there would be if they fully correct the rent and the odorors equivalent rent that was way off in December that saw us actually dip on CPI that created that big miss on the inflation ratings last month where they carried over pre-government shutdown rents over to the December report, which, you know.

rents are about a third, 25 % or so, of the total CPI number. So when that doesn't change at all month over month, it's gonna drag the entire number down. That's really the one thing I'm keeping an eye on there. Other than that, I'm with you. think we'll see it somewhere around two and three quarters.

Gotcha. Okay. Great. Yeah. As far as concrete scheduled numbers, watch out for that this week. Otherwise just watch the news headlines. If you happen to be on social media, watch that as well. Cause that tends to be where these are. These things are first posted. So watch out for anything around the GSEs and buying MBS, the institutional investor ban and definitely the drama between now the DOJ and Jerome Powell and the Fed.

Yep, and if I can throw one more thing in there, just keep an eye on the geopolitics outside the United States. They can shake markets here. Obviously, the action we saw in Venezuela a week ago seems to have died down quite a bit. right now, there's some pretty heavy protests in Iran. Trump has said that he's weighing military options if they continue to crack down on those domestic protests in a violent, deadly manner.

Good point. Yeah. Iran's back in the news. Just so many distractions right now. It's difficult to know what to focus on. So it's, yeah, it's going to be a headline driven market here for the foreseeable future. I would say, as it relates to interest rates, especially mortgages. All right. Thanks so much, Alex. We'll try to keep up and talk to you again here in a few days. Thanks, man.

Absolutely.

Appreciate it, Jim. Thank you.

Okay. Kevin and I are here with Mike Vough SVP of Corporate Strategy for Optimal Blue. We wanted to have Mike on today. You know, we've already done kind of our just general macro things to watch out for in 2026. We covered that. If you missed it, we covered that the late in December on the cast, but we wanted to have Mike on to talk a little bit about some very specific things to cover in terms of watching out for

Yeah, some light, some light holiday period reading. was, was, yeah, great, great read for sure.

Thanks for being on again.

I appreciate the opportunity to be here guys. ⁓ you know, it was funny. Like it was, you know, maybe a first week of December and somebody signed off a call being like, see you next year. And it kind of freaked me out. ⁓ and I was like, my God. And now we're already, you know, 10 days into, into January. And, ⁓ you know, I thought it was a good time to kind of sit back and think about the things that have changed in the last year, how that can like impact things going forward for, know, not only like.

Again?

the mortgage world, but like just in general, right? There are some things that are happening that I think are that could impact the economy at both like a micro and a macro level too. interesting, interesting subjects to talk about.

Definitely. It'd be good to come back in December of 26 and see which ones of these came to fruition, what we needed to add to the list for next year, what might have been shot down by whatever the administration is going to do this year, whatever. just start at the top of the list, right? First day of 2026, if you will, the yield curve is likely to steep in. That seems like a foregone conclusion with A, the administration, B, the Fed.

Yeah, for sure.

see just the economy probably slowing down a little bit with some of the jobs reports we've been seeing and tariffs started to kick in and just a general business cycle. What else are we watching for in terms of the yield curve in arms?

Yeah, I think be good for us to kind of take a step back and go back to, say, February of 25. The 210 spread on the silver curve was three basis points. we ended the year, it was close to 40 basis points. So that spread, referred to as the term premium, right? So like how much more you're going to pay for a longer term of your investment locked really started to expand kind of around that time when the administration

Announced tariffs, right? I think a lot of folks kind of assumed there would be an inflationary shock from that I don't really think we've seen that yet could still happen, but I don't think we've seen it But the you know, the markets themselves are pricing in some forward look of inflation Above what they see in the short term, right? So they're expecting more inflation, you know or a rise in rates, you know out out past that two-year period what that

curve steepening does is it gives lenders and in particular financial institutions like banks, credit unions, it gives them that ability to kind of play with that term premium. And when they have that excess term premium or spread to play with, that's typically when you see an increase in arm So around that time when we saw that yield curve spread really, really widen,

we saw a large uptick in arm originations in the system. ended the year bouncing between eight and 9 % of the locks observed in optimal blues PPE arm products compared to about three or 4 % at the beginning of the year.

So as long as that spread stays, even if it decreased a little still think we would see decent arm production going into 26. And man, wow, if rates drop even in our 10, 20 basis points, and then you're able to look at arms in that mid-five to low-five range, it becomes really attractive to borrowers from my perspective.

would certainly be huge just on the affordability front. think that's, that's been something lots of folks in our industry and some signals from the administration that they're going to be increasingly focused on. we've talked a lot about in 2025, you know, arms are fairly common throughout the rest of the developed worlds. know, fairly common to, you know, refi.

after five, 10 years at the current rate. anything that we can do to help out affordability, think will be, will be helpful. And just, you know, in terms of the yield curve steepening, think we're already seeing some signals of that continuing in into this year. I was just looking at the Atlanta feds, GDP now for Q4. It's got a five handle on there. I mean, things are just running hot right now. granted, a lot of that's from, ⁓ drop in imports.

due to the tariff situation, but we still got an economy that still seems to be in fairly standing. Labor market, a little bit less so, but I think watching that yield curve potentially continue to steepen this year, certainly a strong possibility.

Yeah, mean a five handle on GDP, like no one expected that. But we'll see if any of the other feds come out and corroborate that. think they're the only one who has that high. it'll be interesting. think it is strategy, right? The administration could try to run it hot to kind of ahead of some of these problems that they're foreseeing.

preposterous.

Agreed. But for now, know, arms are certainly a bit of the creativity that, you know, good loan officers are engaging in to get certain borrowers into certain types of homes, especially if you're dealing with a buy down situation. Maybe you've got a builder or seller. You can buy down an arm. We've talked quite a bit about that on the podcast. A lot cheaper than you can buy down like a 30 year loan for many reasons. And I think that dovetails nicely into your second point, Mike. I believe you call it the couch cushion effect, right? Which is...

getting creative as an originator, as a lender to make deals, to make mortgages work for a borrower. Maybe it's looking into an R, maybe digging into the other aspects of the loan origination process and the monthly cost of a loan. Could you delve a little bit more into what your post meant in those terms?

Yeah, I think not only mortgage originators, but lot of corporate America in general, I feel like has been asked to do more with less, given the current environment. And the mortgage world has been asked to do that for the last three years. And I think we're starting to see some interesting signs of development there. And ⁓ I went through the process and bought a new home year, and it was...

Honestly, a little eye opening to me, even, as somebody who lives in breezes and stuff, just all the economic decisions that need to be made or the things to consider along the way. So, you know, I work at Optimal Blue, rates are really important. It's always going be the most important thing as a part of this decision, in my opinion. But some of these other like economic considerations have risen in relative importance. So for example, homeowners insurance is up 60 % in the last five years on average.

They're obviously very geo-dependent, but on average, still up and local taxes up under 20%, right? There's been tons of news out there about credit fees. You think about the rise in homeowners equity. There's all these things, some positive, some negative, that could impact the borrower's economic decisions. So when we see folks,

looking at arm products, you know, in the hope of finding some more affordability, I think you're gonna see folks also start to look at, what's the impact of lowering my homeowners insurance by moving one geo to another? What's the impact of, you know, moving from one, you know, local municipality to the other? Or what's the impact of maybe leveraging existing equity? the value of US housing stock right now, I think is about $44 trillion, but 14 trillion of that is outstanding mortgage debt.

So there's about 30 trillion of homeowners' equity out there that could be used. Again, to go back to my personal anecdote, I ended up using a HELOC on my original home to kind fund my down payment so I didn't have to, again, taxes and insurance. I didn't trigger a tax event in my stock portfolio because stocks have been up so much. So I think it was a creative loan officer who came to me with that suggestion. So I think you're going to see potentially less selling on rate.

and maybe more on the total economic output to the borrower, more of that advisor role, maybe more like deal structuring or like decision help preached from the originator community as opposed to just, I'm an eighth better in rate, because that's just a component of the economic decision from my standpoint.

Right. Thus the analogy of turning over every couch cushion, looking for the nickels and dimes and pennies to figure out, yeah, if moving over six blocks helps me with my liability insurance, maybe that shaves $150 off my loan every month.

And then also think about just cash upfront to close too, right? Like, yes, it is a payment thing, but it's also like payment plus cash upfront too. There's, you know, I think everyone's always kind of shocked when they see how much like something like title insurance costs as they go through the process. So there's these economic decisions that kind of like pop up as you're going through this. And again, it's something that most people do every six, seven years. So you kind of forget about it, you move on to the next thing. like, if you're really like,

Mm-hmm.

you know, trying to push what you could spend on a payment perspective, and then you have a couple thousand dollar fee come up that you weren't really expecting at day zero. Well, you're already so far gone, you just got to do it.

Yeah. And I think the other factor that sort of that helps couch cushion effect is regime stability, right? We had the interest rate shock in 2022, going into 2023 was all what's going to happen and we're going to go back down. we've kind of, we've come down a little bit, but we're stable now. We've been in our interest rate regime for a while and this gives lenders more opportunity. They're not trying to

Agreed. ⁓ Let's move on to the third day of 2026. Mortgage spreads. We've been watching mortgage spreads forever, ⁓ Pre-COVID and then during COVID was obviously an anomaly. And then post-COVID, we saw a huge spike in mortgage spreads. When we say mortgage spreads, we're talking about typically the difference between a treasury bond and a mortgage rate. You might look at the OB-MMI versus the 10-year, which is how we look at it. You might look at

Yeah,

it's interesting, you talk about, you mentioned some really good spreads there, but there's almost like spreads within those spreads too, right? That sometimes move like counter each other. So like on the post, I called out like just, you know, year over year, what happened to the treasury,

Treasury spread to TBA, TBA to SOFR, and then I was looking at primary, secondary spread and then agency to non-agency. And like the interesting thing is, know, hey, over the course of the year, you know, we saw spreads decrease between mortgages and, you know, quote unquote, risk-free rates, right, like SOFR or Treasury,

is great, right? That will bring mortgage rates down. But at the same time, we saw spreads widen between what we call the primary and secondary market and then agency to

non-agency. you know, when folks like watch CNBC, for example, and they're like, hey, 10 years down 15 basis points, let me call my mortgage broker and get a quote. There are these like other dynamics at play that maybe they don't see the 15 basis points, they might see seven, right? So when we talk about something like the primary secondary spread, that's typically

you know, again, where we see mortgages trading in the secondary market versus where mortgages are being originated in the primary market. So you might see loans originated at, you know, a six and an eighth, but they're sold in the secondary market at a five, right? And so that spread contracts and expands as lenders have capacity to do more mortgages. But it's also like a proxy of profitability, right? Right now, folks are still fighting for every every mortgage that they can get their hands on. So that spread is is tight.

Thank

But it actually isn't always bad that it expands a little bit. means that mortgage lenders are doing a little bit better or they have a little bit more capacity to deal with. But in general, you do like to see an aggregate spreads have dropped quite a bit, which is great. But what that means, though, is that not that whole move is getting passed to the borrower and maybe loan officers and lenders are making a smidge more money than maybe what they were making in 23 or 24.

Mm-hmm.

And the other interesting piece I would say is when we look at spreads between agency and non-agency products, it rose a little bit in 25. what that is basically telling us is...

that investors are requiring a little bit more yield on that paper to make up for the fact that it's not guaranteed by the agencies. So I think Mike Post had a quote of that 17 or 18 basis points of an increase between non-agency and agency loans over the course of the year. Now we've seen a lot more production come that way, but.

the investors are still requiring a little bit extra there to account for the fact that if someone defaults, there is no guarantee if Fannie and Freddie are not making sure the investors hold on the payments. So there is extra risk there. So that kind of makes sense. Especially if you think the economy is wobbling a little bit that you might want a little bit more spread there for that non-agency product. But in general, I think.

President Trump's news about buying more MBS will drive down spreads, again, in general. But you could see that tail effect where, hey, lenders are able to make a little bit more money. They're able to staff up a little bit more, less overtime. But in general, again, spreads down is good for the consumer.

Great.

Yeah, think so. Generally speaking, you have this, this total spread between what would be considered risk-free and what a borrower is paying. And that is generally shrinking. But within that, you've got some of those numbers that are expanding, but on the net we're shrinking, which as you said, is a good thing. And throughout this year, hopefully we see that continue to happen. You know, I might call for a little speculation here again, thinking ahead into 26 with the administration making sometimes erratic, but sometimes very creative moves.

Mm-hmm.

Yeah.

We've talked about on this podcast a little bit about how there's some large components of that spread that are fairly static over the years, but could be affected by the GSEs for instance, like the G-FE and LLPAs. Those all fall into that, right? What's the probability that there's major changes made to those numbers as Pulte suggested several months ago, but it kind of didn't come to fruition at that moment. But could we see something like that in 2026? Do you think I will hold you to this, but how would you speculate on that?

Exactly. ⁓

Maybe, ⁓ I think I'd be shocked if they didn't do something, right? right now I think the administration is feeling a smidge of pressure to get prices in general down, not just keep stable, get down to keep up campaign season promises. those big, back to that example earlier where I said six and an eighth primary to TBA at five, that's about a point in ⁓

eighth of a prime secondary spread, well, 75 basis points of that is the G-fee and LLPAs on average, right?

So if you took G fees down by half, if you decreased LOPAs for a large swath, you could see a lot of changes there. I wouldn't be surprised if something happened. The one point I wanted to make is because you have these spreads moving counter to each other. sometimes, and this is on top of yields moving up and down, So rates moving up and down, and then you have this spread expanding, the other spread contracting. It makes a hedger's life pretty difficult.

So, shameless plug-in coming, but we partnered with the CME to at least contract some of that spread risk with our Opmo Blue C30 mortgage rate future that actually tracks the primary rate as opposed to the secondary rate, which is where our TBAs kind of live right now. We've had some...

some success there this year, but we think that helps minimize some of that spread risk because you don't have to account for lender profitability, G-fee change, LOPA changes. It kind of tracks that for you instead of having manage that outside, maybe on piece of paper or a post-it note or something. just something for folks to think about.

Right. That basis always exists out there and it is difficult to hedge against that. And that probably again dovetails into day four, I think we're on to at this point, which is, we've talked about specified payups on this podcast several different times, right? So for the folks out there, specified payups, that's what we're talking about. Like a loan rate, a rate possibly being better for a borrower has a low loan amount or a loan that happens to be in the state of New York. There's these certain attributes of a loan that

broker dealers and ultimate investors will pay more for when a mortgage bond is issued because there's certain prepayment characteristics that make that bond more valuable essentially, right? But that's another thing that can be difficult to hedge. It can change on a dime without a lot of notice or without a lot of market indication, but will manifest itself through things like a primary rate. What should we be focused on in 26 in terms of specified payups or spec payups we call them?

as it relates to just origination and hedging and just being in the mortgage business.

Yeah,

to build off Jim's point there, the things for folks to just think about here is when you have a loan that has a lower loan amount, for example, payment savings, even if rates decrease materially, like a point between your origination and current rate, that delta on the payment could not, there's potential that it may not outweigh closing costs.

Right. And so that makes it really sticky from a potential refi perspective. And because it's very different than how we see other other mortgage loans out there, you typically have investors who want to pay more for it. And this started off with like, less than 150, know, less than 125 when like the average loan amount was like in the four hundreds.

you know, now we see the average loan amount and that like a little bit under 400, you know, a 400 K perspective, but you know,

Mm-hmm.

on average, home values are way higher. Home values are in that, you know, 800, 900K range, million dollars in some places. And we've seen investors start to carve up this like low loan amount even more up to about 350K, I think last year is where the agency has kind of settled as a potential spec pay up. So basically saying, hey, like if the average loan amounts 400, if you're 350, you know, we're gonna pay you up a little bit more. And then that,

specified story kind of adds another spread that you have to then manage, right? And it doesn't always move with rates, it could move against rates, makes life more difficult for pricers, hedgers out there in the industry. And that's not the only story out there, right? You have these loan amounts, but you also have things like investment in second homes, have, you know, there's a credit play here as well. It's one's like kind of funny, it's kind of counterintuitive. It's the idea of a lower FICO score being less likely to prepay because that borrower has less access to credit.

So it's kind of like counterintuitive. And you throw in things that there are certain states out there that have, you know, refi taxes. There are other types of, you know, kind of mission related things that the agencies are looking at. And when you zoom out here, looked at the pipeline data across our hedging products in December, and about 70 % of the loans that we saw in the pipelines was eligible for some specified pay up or another.

So it becomes where the world is, it's not the average loan anymore we're thinking about and then delivering in the TBAs. The majority of the production that we see is eligible for one of these specified pay ups. Now it brings into question all types of things, right? Like how you're managing these pay ups on the front end pricing, how you're hedging them, how you're maximizing them. But then also like much bigger, like macroeconomic concerns, like does this impact the sanctity of the TBA market at some point in time?

Mm-hmm.

Right, if 70 % of these loans don't make it into the multi issuer pool, what are we doing here? So that's something I'm really concerned about and kind of watching like concerned citizen slash mortgage observer. just something I wanted to shout out here and I love to your guys' opinion on the amount of specs too that are out there.

Hmm.

Go ahead, Kevin. I feel like we haven't heard from you much.

I think the 70 % stat is, is, is very interesting. And, you know, I wonder, yes, as we continue through 2026, do we see that, you know, potentially growing more? And then, yeah, what is, what does that mean for the, for, normal TBA, delivery? It does that become the, you know, the ugly stepchild, you know, to your point.

of ⁓ overall mortgage bonds because if you're not doing a spec, and also just gives much more opportunity for investors to find their niche and wouldn't be surprised some of those pop potentially as we go into this year as we start to see what does some of that data look like from the most recent

Boom lit that we had, say, know, September ish timeframe. I've actually seen some data. know someone I follow, ⁓ who's very deep into, ⁓ prepay modeling and whatnot is, showing that there's, there's, there's actually a very high propensity to, to prepay, across lots of different strata. ⁓ if you will, what, once you hit that six month mark.

And once you're six months in, that has become, in some of these more recent, like mini refi waves, that has become the defining mark is not, what are the characteristics loan the pool, but does it hit that six month mark? a whole lot to unpack in that story. And I think that

As we're seeing much more vertical integration, it's just going to be another important thing to watch. know, how fast are these borrowers being hit? Are there ways to, you know, attack some of these different specs, from a Revi perspective? So there's a lot of interesting stuff there.

Yeah, and maybe this is like a self serving segue to the next one, the next topic, but could we see something like

penalties come back, right? Like, can, you know, I think we've seen some of that in, in trend five, but I think that'll be an interesting thing to observe going into the 26.

Absolutely. mean, this is kind of full circle. This is kind of the industry turning over every couch cushion. How can I just get a slightly better rate by offering a prepayment penalty? Right. That goes way back to the subprime days. That basically says, all right, Barmer, I'm going to give you a better rate, but you can't pay this loan off for two or three years, but I'll give you an extra quarter point in rate. That's, could be amazing. Or I noticed that your, your front door is blue. I'm going to give you an extra eighth of a rate for that.

Hmm.

That's turning over the couch cushions, right? And the industry has just been doing that. It's grown into this ever-growing granularity that kind of makes the TBA, if you will, or the generic 30-year fixed loan, the exception to the rule. Where the rule is just this, give me every piece of information, credit, LTV, down to the 10th of a point, and I'll make sure you get the best rate I can possibly get you. That's just going to continue evolving, I think. It's fair to speculate.

But that does dovetail into the fifth day, the final day, Mike, as you alluded to, which is non-QM. We've got spec that's poaching business. We've got arms that's poaching from the conventional and government business. we've got non-QM is also a huge chunk of volume this year, especially if you talk about arms, it's a large percentage of those. Where does non-QM go this year? Now that it's a true player in the game, it's not this kind of onesie-twosie deal. It's a major component of mortgage origination right now.

Absolutely. Like so so just this last year, you know, we effectively saw non QM go from about 4 % market share to close to nine to NT and the year. pretty massive jump. And in general, all these trends are about like lender profitability, right? Like lenders are doing anything that they can, they're in the couch cushions, right? They're looking for, you know, pennies, nickels and dimes. And these nickels and dimes are starting to add up. And I think that's what we're seeing here with non QM. It's really starting to a

focus for lenders where you see specialized A.E. teams, specialized underwriters across different lenders as well to make sure that, you have people who are specialized and knowledgeable in all these products. And there's a lot of products.

at every conference I went to this year, I think I heard of some other iteration of, you know, different types of DSCR loans or different types of, you know, I 10 loans or different types of, you know, bank statement or asset depletion type loans. And in general, we have seen a lot of trends in the industry, just from a demographic or a, you know, occupation perspective that are also pushing it this way. in general, we're seeing, you know, more demand for the extra yield, I think is the big driver here, right? You have

the

the private credit, you know, investors out there who

you know, they want that seven, seven or 8 % interest rate on these loans. That's becoming valuable. And the performance on them is good, right? We haven't had, you know, knock on wood and type of delinquency shocks in any of these these spaces. And so right now, you know, I actually was watching the big short over the holidays. And, you know, there are some words that are that rhyme, but like, the story is very different, right? The LTV story is very different. The amount of people who are about to hit like a fixed floating as a

Yeah.

opposed

to fixed is very different. The credit story is very different, right? So there's a lot of, a lot of different now today. but I know people always kind of get a little funny about the non-agency world, but non QM seems to be just chugging along and friend of the podcast, Dave Savage commented on my post and asked me for a prediction in 26 of where I think it's going to add. I don't think it's going to double again, but I think we could be in that 12 or 13 % range.

and the students and the students of the class

the end of next year. I don't really see any reason for it to stop and decrease. Maybe it's only 10, but I think it will keep churning. The industry is investing in it, investors want it, so I think there's still enough headwinds for it to continue to increase. And if it gets to that level, there's really only conforming 30 and FHA 30 above it from a market share perspective.

It's kind of already past the 15 year conforming loan. It's past VA, right neck and neck with VA. So it's really starting to carve out a nice niche for itself.

Yeah, follow the market, follow the money, right? I'd say certainly from the desk perspective, we are spending a lot of time discussing non-QM with clients, how to price it, how to hedge it, who to sell it to, how to prepare for that next level. Cause it's likely not, not just going to be a onesie-twosie thing in 2026, like it was in 25, if that's the case for the previous year for you. So yeah, I think this is the year that we're going to see a lot more of it. And to your point, as we've talked about many times, it is not subprime.

Mm-hmm.

Hahaha.

of 20 years ago in this industry and have refilled the niche that non-conforming, non-QM subprime was supposed to fill back then, which was the underserved borrower who was still very much eligible and had the capacity to carry a loan and to buy a home or to buy multiple homes, but they just didn't quite fit into the boxes of Fannie, Freddie and Ginny.

Yeah, I think a lot of updates that we've been doing, just staying ahead of the market, in touch with investors are out there creating new offerings in the non-QM space. made a number of updates in 2025, continuing. There's some big updates that are going to be coming that non-QM space as well.

to wrap all these five together, it's just all about profitability, right? the lenders are looking at different ways to try and be a more profitable institution. And when they're more profitable, they're able to push that primary secondary spread down. They're able to pass more of that onto the borrower, give better rates. It's a good story for everyone when these institutions are a bit more profitable. And that's going to be, to Kevin's point, a big driver for us going into 26 in terms

terms of what we're releasing, what we're focusing on, things related to the upcoming as well.

Agreed. Agreed. It should be a really good year. We've seen volume increases year over year. We're finally in a spot where maybe folks are taking a breath, getting more creative, turning over every couch cushion, if you will. So if you had to focus on a handful of things in 2026, it's like Mike said, the yield curve is going to steepen, most likely. Take advantage of that. The couch cushion effect in general. Look at every factor of a loan. Turn over every couch cushion to try to...

to try to bridge that gap with a heat lock to try to move that borrower into a house that maybe has a lower tax premium. Number three would be spreads, just keeping an eye on all those different spreads within that difference between risk-free rates and what mortgages are costing borrowers. Spec payups, those stories are just going to continue to proliferate. And then non-QM, just the ability to have these sort of private label loans that are going to be able to cater to every possible borrower out there, not just the ones that fit neatly into the...

into the GSE and government boxes. But again, especially with what's going on the last few days, you know, the administration continuing with the creativity. we get actual, just rates in general coming down on top of some of these spreads and some of this creativity, again, should be another great year for, for mortgages. So thank you, Mike. Thank you, Kevin. Really good conversation. A lot to chew on and we will talk again soon. Thanks everybody.

Awesome, thanks gentlemen.

Thanks,

everybody.

All right, let's close this thing out. Big thanks to Mike, Alex, Kevin. Great conversations today. This is a long podcast, but it's dense. A lot of good items were discussed. Appreciate the time, appreciate the wisdom. And everybody out there, don't forget to register for the Summit, the Optimal Blue Summit, that's at summit.optimalblue.com. 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 and insights to help you stay ahead. Check out our full videos on YouTube.

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