Welcome to this week’s episode of Optimal Insights. In this episode, the Optimal Insights team discusses recent unemployment data, labor force participation trends, and their impact on rate expectations. They share their expert opinions and insights into how these factors are shaping the industry and the broader economic landscape, along with a deep dive with Justin Roddel into non-QM growth and execution dynamics following the IMN conference.
Key Points:
Unemployment data reflects softer job growth and declining participation
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.
Jim Glennon (:
Right. Welcome everybody. Welcome to another episode of Optimal Insights. We've got a great show for you today, as always. hope everybody had a great Fourth of July weekend. James, Alex, and I were just talking about ours. We we all basically kind of low-keyed it a little bit, but no incidents, no injuries, but had a good time and celebrated our two fifty. So that was like there were a lot of really fun stuff going on around the country, including the World Cup. That's obviously something that's
I think a big focus for everybody right now, big game coming up tonight. You will have already seen it by the time you you see this podcast. a lot to talk about. We're here making sure that you know what to watch out for as an originator, a capital markets person, or just someone interested in the mortgage industry and some great market commentary. So we will kick it off here in a sec with a market update, unemployment report being kind of the big news there.
Then we've got a great interview to share with you. Vimi and I are going to talk with Justin Rodell, our own Justin Rodell, about the IMN non-QM conference that took place back in mid-June. So some great tidbits there if you're at all interested in the non-QM industry or just about, you know, generally what people are talking about in the non-agency part of the world. Stay tuned for that. before we get to any of those things in the way of data, the OBMMI is still kind of hanging around that.
That 6.45 to 6.5 range conventional 30-year tenure treasury bumped up back a little bit closer to four and a half. So still continuing to keep an eye on that as we have the war in the wings and some of the unemployment data and some of the inflation data as well. So we'll keep you in tune with that as best we can. But let's get right to it. Let's get to the market update. Gentlemen, welcome. Thank you for being here. Thanks for sharing your fourth of July.
experiences with me earlier. let's talk a little bit about what's going on market wise. So James, we had a kind of a weird market week last week. It's kind of like a three and a quarter day week. Full full market Monday through Wednesday. And then Thursday was half day. But we also had the unemployment report, which always makes for a little bit of excitement, especially when it comes in a little bit light, which is what we saw Thursday. Is that right?
James Cahill (:
So Thursday the expectation was around a hundred and fifteen K. We came in nearly half that at fifty So far below what was the real kind of item with it beyond that
It wasn't as healthy of a number as we were hoping, but at least, you know, jobs are growing rather than shrinking. It is in the right direction, positive direction. I I would say the real kind of kick on the story is that the unemployment rate fell from four point three percent to four point I know I there
Scratching my head a little bit when I saw this number coming out, going, okay, so we were just on the brink of bringing unemployment down. How is it possible that just 50k jobs really pushed us over? We were right on that line. It didn't really and after you know, a bit more reporting comes out, a bit more digging in. the for that really boils down individuals leaving the
Total labor force. So when you think how that unemployment rate is it is the number of unemployed divided by the participation rate. So that participation rate actually shrunk this time around. So with a little bit of the lower denominator, we ended up with a big
Jim Glennon (:
Yeah. That's an interesting I don't know, I wouldn't even call it an anomaly, but it's something that has come up over the years and sometimes that can be because workers are discouraged. But it doesn't feel like that this time around, because jobs are relatively plentiful and the the headline number is low. I mean, could it be because the the stock market has done so well that we have people retiring early? I've wondered about that recently with you know, continuing to set records in the in the markets, people who have money and are getting close to retirement.
That extra ten percent a year makes a huge difference. I don't know. What do you guys think about that that theory?
Alex Hebner (:
I think on a decade long front, if you were look at, you know, the labor rate across across the full decade, I think that this decade is gonna be significant in that we are gonna see a large number of those that are approaching the end of their careers retire. you know, on an individual basis. you know, who knows like what that number is for each individual. But I think there's some creed to that theory, Jim, that, you know, we've we've been on a a decades long
stock market rally, so to speak, and that there's a good chance that people are going to begin to retire, you know, maybe, you know, no not not like a decade early, but you know, one or two years earlier than they might have expected to. you know, the birth rate is is low. I think you know, the largest high school class in America was a few years ago. we we've continued to see a a lower number of babies being born. as this all feeds through into the the labor market, the
Yeah, there there's probably some creed to that theory, but on a month to month basis, you know, I I do think there's a little bit of frustration right now around the job market that at least from what I read on this report, was that, you know, seeing an exodus from a labor force down to you know, lows we haven't really seen since since COVID and COVID was its own special time. I think that there's a little bit of frustration out there with finding a job.
To me it's it's a continuation of the slow to hire, slow to fire narrative that we've seen over the last twelve months.
Jim Glennon (:
Right. Yeah, there's that in certain sectors for sure, right? You've got the like you said, slow to hire. You've got AI that some companies are using maybe either legitimately or as an excuse to not hire people in certain demographics. There's also this sort of doubling of the unemployment rate of people coming out of college, but some of that has been attributed to also the some of the expectations that were set during COVID of full remote and all these sort of things that are starting starting to dry up a little bit. So it's tougher to find that perfect
job environment that some may be looking for. what were you gonna say, James?
James Cahill (:
Yeah, I would I would point to that side of it a little bit more. prime age employment is 25 to 54. So the employment fell here about percent. And a lot of you know what we've been seeing is it's harder and harder for young people to get a job or perhaps to find one that they so maybe that that's part of the delay but I always
That young group seems to be struggling. That young group might not be counted in the labor participation force yet if they haven't had a real job, they haven't paid into social security. You know, if you go 12 months without one, without technically looking, you're booted from the survey. So that always leans to me as a place And the Bureau of Labor Statistics splits the labor participation force into a different
brackets. One of them they have is
is this bucket that includes those who are discouraged, those who have technically walked away from looking for a job for now. And the unemployment rate, if you include discouraged workers, is closer to 4.5, 4.6%. So I I think that that might be a little bit of our answer as people are bleeding out of the participation rate, possibly younger people, they're falling into this discouraged bucket. So they quote
Jim Glennon (:
Right. Okay. Yeah, and there's also the I I believe there's not as much talked about this year, but there's still the issue of migration, right? We had a major shift in migration when the Trump administration took over in in early January of twenty five, and that likely still has some effect on what we're seeing today, where we're able to produce very few jobs but still keep the unemployment r rate essentially at full employment at, you know, between four and four and a half percent.
Alex Hebner (:
definitely that seems to be the the line that's been adopted by most mainstream economists at this point that yeah the the shifts in labor migration are able to offset the the slower rate of job growth. But I'm with James. I think you know if you look at the you know the U4 and the U six the the less commonly cited more broad unemployment rates they've stayed pretty steady despite this tick down in U three which is the the headline number.
Jim Glennon (:
Right. Okay. So decent report, probably nothing to overreact about, as we've said many times on this podcast, and you've probably read it out in the media as well. A hundred thousand job swing one way or the other is almost a margin of error, especially in a survey, but also just at the size of our economy. It's it's a bit of a drop in the bucket, but it'll potentially put a little more emphasis or a little more focus on the unemployment numbers as we go forth while we're also still
You know, pretty worried about the, you know, headline inflation numbers.
Alex Hebner (:
Right. To me the biggest takeaway from this report was that it it put a damper on the the rate hike expectations that we were beginning to see as a almost certainty in the early to midfall, sometimes September or October. I I to me that was the biggest takeaway from this this number.
Jim Glennon (:
Right. And we like that in the mortgage industry. We like that that we're de emphasizing the possibility of a rate hike and maybe drawing the expectations back in the other direction. Maybe we don't see a cut, but avoiding hikes moving forward and keeping the, you know, long term rates near four and a half and six and a half percent is probably the best we can hope for in the near term. So what do we have this week? We have a full week market wise.
What do we see coming out later that we should be keeping our eyeballs on?
Alex Hebner (:
It's a relatively quiet one from our headline numbers that we're you seeing on unemployment and inflation. I think the biggest ones are gonna be we're gonna get FOMC meeting minutes. So just a little bit more detail on what was discussed at that first Warsh meeting, some consumer credit just to see where those consumer credit levels are at. Those are both on Wednesday. then Thursday, we'll get initial jobless claims as we get every week, which continue to give us a peek into how the labor market is.
performing as we were just discussing. but other than that it's a relatively quiet week. We'll get in some inflation metrics the the week after.
Jim Glennon (:
All right, good. And I suppose we still need to keep an eye on any developments in the negotiations to officially end the conflict in Iran. We seem to keep seeing lower and lower gas prices. I've certainly noticed it even during the busy travel holiday, fourth of July weekend. I paid less up in the mountains here in Colorado than I've paid in even in Denver over the past four months. So that's probably a welcome development for folks.
Alex Hebner (:
Yeah, from my my take right now on the energy market, it seems to definitely be a glut. We've seen OPEC has boosted their production numbers a couple of times now over the past month or two. in addition to that, it seems to me that the the Straight Hormous does seem to be remaining relatively open. some of the sources that I follow are saying that it's not so much that price per barrel so much as the price that's being charged for insurance for the specific ships.
transiting
the the horse straightforward moose. so that that could bleed into insurance rates for global shipping overall, but I think that that's gonna keep the price at the American pump, where the American pump is generally pumped domestically, that's gonna keep those prices relatively muted again. Supply glut and the increased prices of insurance are going to be affecting the price of a a barrel in Europe and Asia.
Jim Glennon (:
Right. And it also seems like over time that these oil companies are finding a way to avoid the Strait of War moves altogether, right? It's become it's always been a bit dangerous, but it's obviously become far more dangerous during this war, and politically it's dangerous. Who's to say that there won't be another conflict in that area? So it does seem like tankers are finding other ways to get around or oil pipelines are being emphasized. It's very c sort of interesting dynamic there that has taken
you know, four or five months to play out, but could have long lasting ramifications, especially for the for the nations in that that quadrant of the world.
Alex Hebner (:
Absolutely. I I would expect there to be a boon in pipeline construction once we have a full peace deal in effect, for sure.
Jim Glennon (:
Okay, what else do we have, gentlemen? Any loose ends that we need to tie up?
James Cahill (:
I the thirteenth is class A settlement this month. So that will be Monday. It's gonna sneak up on people after this long holiday. So, you know, optimal blue, we always say roll early, roll often. Today is maybe a hundred and six hour day, so start looking to kick that, you know, kick the tires, get rolled, get moving.
Jim Glennon (:
Well said. Get your roles done, you capital markets folks. We we've we we harp on this constantly in our webinars and calls with clients. The the roles, especially in the it when you have a little bit of odd liquidity like we're we've seen during this conflict and just in general in the smaller market, we've seen roles escalate as you get closer to settlement. So keep that moving. In fact, it I'd have everything rolled for for July by now. I'd be looking at class C probably.
And thinking about my plan for for August rolls already.
Alex Hebner (:
Definitely. one spot I'd like to highlight is the the fanny six. Someone's definitely built a position in that one and the the roll cost there's been relatively steep. So I'd get out of that one expeditiously, as you should be for all of them. But definitely keep an eye on that fanny six.
Jim Glennon (:
Good call.
All gang. Well, we will leave you with that bit of wisdom. Get your roles done early and often. And thank you, gentlemen, for the excellent conversation. Now let's move on to the interview. Thanks, guys.
Alex Hebner (:
Thanks
for.
Jim Glennon (:
All right, as promised, we're gonna talk a little bit about the IMN non-QM conference that took place in Dana Point a few weeks ago. as a reminder, IMN it's called it's the Information Management Network. They
run events across the spectrum of finance, real estate, just a really good group that that brings a lot of good people together to share a lot of good good information about whatever the topic is. And this time it was non-QM mortgages, which obviously is a big topic in our industry. seeing that 10 plus ish percent of mortgage loans that are going through right now are non-QM. So just a reminder, right, folks, non-QM
If you've listened to this podcast before, we've talked a bit about it, or even if you haven't, non-QM, it means non-qualified mortgage. It's pretty much any mortgage that doesn't get guaranteed by the GSEs or Ginny Mae. So it's not a Fannie Mae, Freddie loan, Freddie Mac loan. It's not a FHA VA loan. But these days that doesn't mean subprime, right? A lot of people think that. Doesn't mean low credit, high LTV. In fact, there's still very little of that sort of thing out there, aside from some hard money kind of independent bank stuff.
Despite what the media might tell you, right? They see non QM growing. They start, you know, people misunderstand it. They kind of either try to freak people out or just get freaked out themselves, but you get some kind of bad, I think bad information. It's more non QM is more for unique borrowers, properties, unique circumstances, like non-ordin non-ordinary income. People don't get W two income. High loan amounts, which is a bigger and bigger deal every year, right? People are buying houses at higher and higher values. The agencies only
Guarantee loans up to close to a million. So anything above that typically is going to be non-QM. Unique locations, unique properties. People own many properties, like landlords, that sort of thing. Anyhow, it fills a niche that has been sorely needed. I would say most people would say and some very good programs that were thrown out during the meltdown of the great financial crisis, right? The Alt days and the subprimes that went away. There was a lot of good non-QM product that got kind of tossed out with all of that.
So this conference is one of a few in our industry that focus on helping educate and create some collaboration around the segment of the industry. So really good event for us to be represented at. And we have our own Justin Rodell who represented us there. Welcome, Justin.
Justin is a specialist on our sales team and is also longtime capital markets authority. So he he shows up at that thing as, you know, one of the gurus. And then of course we have Vimi with us today. Vimy, welcome. Vimy is a resident expert on all things non QM.
Vimi Vasudeva (:
Thanks, Jim.
Jim Glennon (:
So let's talk about the conference and just the state of non-QM. So many things we could cover, but Vimmy, do you just want to start by setting the stage for us?
Vimi Vasudeva (:
Yeah, absolutely. I I wanna just talk about how one of the biggest takeaways from what I've heard from folks that have attended the conference was the sheer growth, which of course makes a lot of sense. That every conference we've been to, non-QM has been such a hot topic. As you mentioned, Jim, 10% of origination volume, and that's pretty significant for those that are in that are investing in non-QM at this point. So, Justin, I'm kind of curious, what was your biggest takeaway, even just from a growth perspective? Since you attended last year, I'm sure you've got some interesting comparisons for us.
Justin Roddel (:
Yeah, growth was definitely a a big one, right? So this is this is the third year in a row that I've attended this conference. And yeah, I mean I looking at the attendee list, I think it was well over six hundred people. And when you were there, I mean it even felt like more. So I'm sure there were some folks that, you know, weren't weren't registered to the for the conference that were still there trying to get as much information as they can 'cause that's typical at most conferences. But yeah, I mean it it it has grown substantially.
over just the last couple of years. I mean, you talk about, you know, being ten percent of the market share right now. I mean, that's huge. And I think most folks forecast wasn't that it was gonna be double digit at this point yet. Like I think they were thinking more twenty twenty seven, but we're already there. So a lot of rapid growth and that was definitely probably the biggest surprise when we got there for sure.
Vimi Vasudeva (:
Would you say that you've seen we've seen that growth on the origination side, right? We've all heard it. We ourselves at Optimal Blue have access to data that can actually back up those numbers through our PPE. what I think is really interesting to think about though is that while we've seen this rapid growth on the origination side, there seems to be a little bit of a leg when it comes to execution and risk management. And it seems like that gap is is really starting to show up. Justin, do you feel like that was the sentiment at the conference as well?
Justin Roddel (:
I I I definitely agree. Yeah, I think there's a there's been a lot to be learned about just the the executions that are available for folks, right? And so I think that really depends on who your takeouts are, right? Whether it's investor based or maybe insurance company based. But but definitely on the origination side, it's obviously skyrocketed and I definitely feel
least the consensus that we got there was most folks are selling their loans on a best effort flow basis, versus a a mandatory one. That said, I think that there there there's gonna be some some cracks here where folks are starting to increase their production a at a very rapid rate. And ultimately, just like in the agency space, right, it becomes difficult to manage
flow basis, bas you know, best effort locks for every single loan. So I think once you reach a certain production number, whatever that barometer might be for you, there's definitely gonna be have to have to be some conversation about, you know, shifting to, you know, help with some of that operational efficiency to start going more the mandatory side of things. Whether that's you know doing kind of all or nothing bids or, you know, finding some for commitment to kind of help you
manage the risk or even hedging it and working with some of the folks out there that can help with that. So obviously here at OB, you know, we can help support that effort. can also support any trading instrument that you would want to use. But there's definitely going to be some sort of shift at some point, I think, when the production reaches a certain limit.
Jim Glennon (:
Yeah. So just if I could kind of paraphrase this for for folks like myself, but also folks who aren't in the mortgage industry. Non QM comes along, comes back five, six, seven, eight years ago. And it's kind of onesie twosie deals, right? And they're getting done maybe by banks that just take that loan and they keep it. They they lend the money to the borrower, they put it in their portfolio.
And then as the market grows, it becomes less harder to manage or harder to to have those loans occupy your balance sheet. So you start to develop a sec what's called a secondary market for them. So you loan that money to the borrower and then you sell those loans on a secondary market. So that developed several years ago and that's grown. now lenders are trying to get more efficient in order to give better rates to the borrower, to establish to re-establish capital, to do more loans, right? So now that it's 10%, which is to put that in.
perspective. That's over 200 billion with a B. 200 billion dollars worth of non-QM done every year. And it needs to go somewhere. So you need to find capital for it. So with the we're starting to see more securities, bonds being created and sold out on the market that have these non-QM loans in them. And that's what you're talking about here, right? Is that more and it's not just the huge lenders that are creating those securities or that or that are delivering mandatory, which is more of like a an advanced execution. We're seeing more a lot more of our optimal blue clients.
Just private lenders, wholesale lenders, retail lenders start to package these loans up and sell them, which is is a really good sign of liquidity and that these loans are becoming more fungible, if you will, or there's more conformity, uniformity to them so that they can be sold to multiple buyers, which just creates more competition, which then again is better for the borrower, right?
Justin Roddel (:
Yeah, no, I definitely agree with that. I think there's still a ton more room for that conformity that you just mentioned, right? I think the biggest struggle with most of the lenders and originators out there is that that the the credit risk is real, right? You have different investors that have different credit boxes. they also have to compound things even further, they also have different LLPA schedules for every every product that they offer as well. So
where, you know, most of us on the agency side are used to the now conformity I think that the investors have come to, right? Right on top of Fannie and Freddie guidelines, there's still a lot to be done in the non QM space to kind of help with that. then you're able to get to a point where you can create one product or a blended product, if you will, create your own credit box.
that you can now get approved to a number of takeouts to make it a little more manageable. I think that's gonna come at some point. It's just gonna have to with the rapid growth that we're seeing, with more and more folks adding non-QM to their product mix. And again, if you're gonna do it, I I keep going back to the production size, if you're gonna continue to add more and more of that production, you know, you're gonna need to be able to be more flexible in how you manage it.
not just from a front end pricing side, but also operationally and then on the execution side as well. think most folks, right, they're very used to how they sell agency and if they're getting the non QM space and want to do a lot of it, some of this stuff's gonna have to break. We're gonna they're gonna need more ways to help manage the process overall.
Vimi Vasudeva (:
Yeah, that's such a good point, Jess. And I do feel like there's generally been a lot of hesitation down moving to the mandatory basis here. And if you step back and think about it, it actually makes sense, right? And and as you guys highlighted, an agency moving to mandatory is a pretty logical progression. You've got standardization, liquidity, predictable execution. We don't quite have that yet in the non-QM space, but I know several there are several industry players out there who are trying to make that happen.
know, as you mentioned, Justin as well, even here at Optimal Blue, of course, we're certainly advising lenders. We have lenders who are hedging their non-QM production now. And it's exciting. It's exciting to work on something that is bringing liquidity to the market and home buyers the opportunity to to get into homes, especially and Jim, you'd mentioned this earlier that a lot of these loans, they're they're not subprime. Like they're actually
Prime borrowers, they just don't quite fit into the exact agency eligibility. It was interesting. Just the other day I was talking to someone in the industry, of course, because I don't typically talk about mortgages with with friends, but I was speaking with someone in the industry who mentioned that they have a friend who recently just qualified for a non-QM mortgage. and it's just a very unique scenario. He's he's doing very well financially, but he owns a bagel shop. So
He doesn't he had to get a bank statement loan and he's got tons of investments. I mean, it's there's no way that he's going to default on this loan. And so it's just an interesting example of how non-QM is so different than subprime.
Justin Roddel (:
I couldn't agree more. I think when people hear the the word subprime, there's they still shudder a little bit, right, from from from back in the day and and and prior to the financial crisis. but yes, these loans are are very much designed, right? When you talk about a bank statement loan, very much designed for like that self employed borrower, right? Like the DSCR stuff is very much designed for like real estate investors.
And the average FICO that they're seeing over all of these loans is right around seven hundred and thirty, you got a seven thirty score, I mean I think most of us here would say, well, that's a that's a prime borrower. but not necessarily, right? Not necessarily. again, if you're an investor and you're trying to buy multiple product or multiple homes, it could be it could be very tough to do that in the agency space. And so I definitely feel like this is much different.
Jim Glennon (:
Mm-hmm.
Justin Roddel (:
I what it is much different than the subprime space. And this non QM product that we're seeing today is is here it's here for the long haul. and it's only again, we've seen the rapid growth and I think we're only going to continue to see it not only this year but in years to come. So having, you know, a place to where you can manage the product and and hopefully potentially hedge the product or move to mandatory, which I know we're gonna talk more about, you definitely need that technology to help
manage it all in one place.
Vimi Vasudeva (:
So Justin, talk to us a little bit about the best efforts mandatory spread. Were there conversations around what that spread is and what it actually even represents at this point with a developing market?
Justin Roddel (:
it's it's a bit of a secret, overall. I think prior to going to the conference, right, we were hearing, you know, rumors about you know 50 basis points or 50 to a whole point over best effort. But to be quite honest with you, with the conversations that I had with some folks, you know, they weren't seeing that execution. I talked to one client
Specifically, that does a hundred million a month in non QM business. And they they they stuck their their their toe in the water of the mandatory side, sent out some kind of all or nothing bids to see what kind of color they could get back. And really the overall execution was less than what they were getting on a flow best effort execution. I think it's largely due to
Some of the higher risk loans that you would have in those all or nothing bids, right? So if you remove some of the higher risk stuff, you'd obviously probably see a higher execution. of this stuff is done on a weighted average basis. So again, if you're taking out maybe some of the higher risk stuff, you could probably see a better execution. But I even talked to some investors there, Vimmy, that weren't interested in even providing.
a mandatory price at all. They're very comfortable with just the the the best effort execution. And I think that's because a lot of these investors that are in the game right now are kind of they're they're kind of getting their fill, right? I think they're at capacity. I think when you start offering folks the ability to do more all or nothing or loan level mandatory, well then you're starting to take on a lot of loans at one time and you better be prepared for that.
Obviously we saw that back in the COVID days with the agency space with all the investors in the space, right? They had to back off their pricing because they were at capacity constraints. So I think we could kind of see that a little bit if it moves too fast. But if it moves at a gradual pace, then again, I think these investors at some point are gonna need to offer more of a loan level price when it comes to mandatory delivery. Some are already doing it, but it's very slim pickings at the moment. So I'll stop there.
For for now.
Vimi Vasudeva (:
so Justin, I think that speaks to the adverse selection, the thing that we've seen consistently, as you mentioned during COVID or just in general, even in the MSR space, right? So there's kind of a structural issue where each investor that you're acting that you're interacting with, they may actually represent multiple downstream buyers. And then if you're if it's an all or nothing, you could have one buyer who likes DSCR loans, another likes bank statement loans.
No one likes one segment of the pool and then suddenly that one weak spot drags down your entire execution. So that's that's kind of the challenge with this all or nothing bulk trade, right? You're you're exposed to the weakest link.
Justin Roddel (:
Completely agree. Yeah. And I think it takes out some of the competition as well, right? When you start doing an all or nothing with one investor or two investors, right? I think, you know, if you're getting better execution by selling to five, six, seven different investors in the best effort space, you probably want that when you're selling mandatory on a loan level basis, right? You would want, hey, I want to send.
out my pipeline to the same five, six, seven investors and just get a mandatory loan level price. Hey, you can have these loans now versus waiting, you know, the 30, 60 days that it it takes to get it to you. So what is the difference there? What is that BE to mandatory spread? And I think it's still a little bit of an unknown because it's not real well offered. but again, I think we need to think more about the seller and how they can manage their pipeline
And so that's why I think at some point these investors are going to have to conform a little bit to help the seller out. But I think it's definitely going to be driven by the seller. That's all the way these things work all the time. even in the agency space when we move to, you know, bulk bid delivery, you know, that wasn't a thing ten years ago, but that definitely became a thing for sellers that wanted to sell in that fashion. And, you know, the investors conformed.
So again, it's still early on in the stages here in non QM space, but I think ultimately we'll get there at some point, which would be super helpful for for clients alike.
Vimi Vasudeva (:
Yeah, and then like I guess that's a kind of chicken and egg problem, right? The the classic market standoff, if you will. Like investors are saying, Hmm, there aren't enough mandatory sellers out there. But to your point, the market infrastructure will catch up. So there the whole eco someone is gonna be out there helping coordinate this whole ecosystem. And we are trying to do that here at Optimal Blue with our our piece of things as well.
Jim Glennon (:
Yeah, we're right in the middle of it. I mean, we hear a lot on the desk and we talk a lot on the desk to clients about this very subject. And and then you do hear those rumors, right? The client comes to us and says, My rep tells me that I could pick up fifty to a hundred basis points if I deliver mandatory. But that never that that's yet to materialize in most cases, right? And and that might be just if hey, if you sell everything to me, I can show you any kind of spread you want, right? But what when we get this competitive environment, that's when it really shows and that's when you can really
put your stamp on and say, we're making forty basis points more by delivering mandatory than we were just delivering flow best efforts. It's it's gonna take more volume, but and and it's coming. I mean, the if you look at the graph, we have one on our market advantage report that shows the market share of non QM and it's just up and to the right every single month. And I believe that will continue happening. It'll reach some sort of peak.
But I don't think we're there yet. You know, if if we get to twenty percent of this market is non QM, the competition will happen. But to your earlier point, Justin,
There probably needs to be more non QM lenders that come in and some of that is gonna be the traditional aggregators that are already there, right, that are starting to do non QM, like the Penny Max and the Rockets and the the Americans of the world. There probably will be new entrants to the market that see this opportunity to make some some margin on this product. It's just gonna have to mature. It it got destroyed, right, in the great financial crisis. It was it was a four letter word for a decade or longer. So there was just borrowers in this
in this sector we're just having to go to their local bank to get money. But now it's back. It's just gonna take time to mature. But we're we're at a good nexus of this situation where we can kind of feel out what the market is, test the waters and and guide clients through that's whatever their strategy looks like.
Justin Roddel (:
Yeah, and I think that's the most important is that here here at Optimal Blue, I I feel like we are very much prepared to kind of take on when when that does happen, right? We won't be in a in a reactive space. we already can offer the loan level stuff. We even have functionality for the all or nothing bid. we can help, like I said earlier, we can help support it if you're going to decide to to hedge it with some sort of instrument,
whatever you deem that to be appropriate. so again, yeah, I think we'll eventually get there at some at some spot. But you're absolutely right, Jim. There was a lot of new investors at this conference this year. of the bigger names that you mentioned there are yeah now starting to get into the space and obviously when that happens, when the competition increases, I mean the advantage seller, right?
from there, you know, the options definitely increase for them to execute in different ways. And and hopefully, yes, some of that be eat a mandatory starts materializing a little bit further. Now, right now, I think it's definitely more of a production play. and you kind of hit the nail on the head there. It's like, hey, well, if you can offer me X amount, then sure I'll bump up your pricing by you know, X amount, whatever that might be. But I think for the average guy who's doing maybe sub 50 million a month in non-QM.
There's probably not a very big pickup in in the mandatory space right now. And hey, there's no reason for you to take on the extra risk. fifty million or less is probably a good place to continue to do best effort flow basis.
Vimi Vasudeva (:
So Justin, any final words that you'd like to share with us? Any other intel from the conference?
Justin Roddel (:
Yeah. again, I know we covered a lot here. there's there's definitely a lot more originators in the space, right? I think it's no secret that, you know, the agency space is still in a very high interest rate environment. And so folks are still trying to add these products, you know, to help kind of subsidize the loss of, you know, what they were doing in the agency space.
But I I really do think and and for those out out there that are listening, you know, if you have an added non-QM to your product mix, now's the time. I would definitely add it. It's definitely gonna be here to stay. Like we touched on earlier, this is not subprime. You know, this is definitely a very manageable space for you to add some more product to your mix, not just that, but like the whole
non-QM space, in my opinion, is very much untapped. not a whole lot of marketing going on to kind of help some of these folks that are out there that are looking for answers to buy a home, right? That can't qualify for for the prime market. So not only is it untapped in in in the public market, but it's very untapped in the secondary market as well. But again, we're starting to see leaps and bounds.
just just gradual increase here in not just folks getting into the business, but more product, more investors. And I think we're just gonna continue to see it grow. And we're gonna be here to to help support our clients that wanna add that business to their mix.
Jim Glennon (:
Great. Good stuff.
Vimi Vasudeva (:
Appreciate all that intel,
Justin. Yeah, we appreciate that you go every year. Maybe I'll join you one of these years. It is in beautiful Dana Point, California. So there's that incentive.
Justin Roddel (:
It's a it's a it's a hard place to beat for sure, weatherwise.
Jim Glennon (:
Yeah. Da
that's a good spot, Dana Point. Thanks for representing us, Justin. And and I suppose I mean, coming up here is Western Secondary in Terranea, which is also a very beautiful spot, coincidentally. We tend to see a lot of the non QM buyers and sellers there as well. so we will I don't know if you'll will you be at that one, Justin? I'll I'll be Okay. That that is in that's
Justin Roddel (:
I will. I'll be there as well. Yes. So would love to talk to anybody who's
interested in yeah, learning more about that and learning more about our product product. Happy to help.
Jim Glennon (:
Good, good. Yeah, that's the next time I will see you in person, I suppose. I'll I'll be on a panel out there too. So yeah, come see us. We'll also be having some client meetings at Terranea. And honestly a big conversation there for us was going to be non-QM. Was you know, we're we're coordinating a lot of buyer and seller transactions on on our our platform Compass Edge and ResiTrader, which is what the investors know from their side.
So we're gonna we're gonna be spending some time in meetings with with buyers and sellers out there just trying to connect more people. So definitely come talk to us. All right, as always, Vimi, thank you so much. Thanks again, Justin. Talk to you again soon.
Justin Roddel (:
Thank you guys for having me.
Vimi Vasudeva (:
Thanks guys.
Jim Glennon (:
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