In this episode of Optimal Insights, Jim Glennon, Alex Hebner, and James Cahill break down the latest market developments impacting mortgage rates and capital markets. The discussion focuses on the Federal Reserve's recent decision to leave rates unchanged, market reactions to the continued lack of forward guidance, and the resulting volatility in Treasury markets. The team also explores inflation concerns, global debt dynamics, foreign currency interventions, and why investors remain focused on upcoming employment and inflation data.

Later, Kevin Foley joins Jim Glennon for a discussion on the topics lenders are talking about most frequently today. They examine continued growth in non-QM lending, emerging strategies around non-QM hedging, adoption of alternative credit score models such as VantageScore and FICO 10T, and practical applications of AI across the mortgage industry. The conversation highlights how lenders are evaluating new technologies and products to improve efficiency, profitability, and borrower access.

Key Topics

• Market reaction to the Federal Reserve's latest meeting
• Treasury yields, inflation concerns, and global debt pressures
• Japanese currency intervention and potential market impacts
• Upcoming employment and labor market data
• Continued growth in non-QM originations
• Alternative credit score model adoption
• Practical applications of AI and knowledge agents in mortgage lending
• Client priorities and emerging industry trends

Chapters

00:18 — Welcome & Mortgage Market Snapshot

02:44 — Fed Holds Rates Steady and Market Reaction

07:42 — Inflation Risks and September Rate Outlook

09:45 — National Debt, Treasury Yields & AI Investment Impact

11:41 — Japan, Currency Intervention & Global Market Risks

16:52 — Yen Carry Trade and Potential Market Contagion

17:57 — Jobs Week Preview: ADP, Claims & Employment Data

20:08 — AI's Impact on the Labor Market

22:12 — What Clients Are Talking About Today

24:36 — Non-QM Growth and New Lending Opportunities

26:07 — Non-QM Hedging: Risks and Strategies

32:45 — VantageScore, FICO 10T & Alternative Credit Models

37:52 — AI Adoption Across Mortgage Lending

40:24 — Knowledge Agents, Virtual Economist & Practical AI Use Cases

44:20 — Closing Remarks

Optimal Insights Team

• Jim Glennon, SVP, Hedging and Trading Operations
• Alex Hebner, Hedge Account Manager
• James Cahill, MSF/MSR Account Manager
• Kevin Foley, Director of Product Management

Production Team

• Executive Producer: Sara Holtz
• Producers: Matt Gilhooly & Alex Kreuter

Disclaimer

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

Mentioned in this episode:

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Welcome to the show, everybody. Thank you again for listening here for our first podcast of August. got a really good show as always today, in the interest of keeping you informed. We're always going to strive to bring you up to the hour, current events, and how we should think about them, whether we're originators, hedgers, capital markets folks, or just anyone interested in the mortgage industry or some good market commentary. So we will kick it off here in a moment with the market update with James and Alex.

then we've got a a bit of a new segment that we may do regularly on the podcast. I mean, we're always out there talking to clients, talking to originators, asking what's new in the industry and what they need to be successful, right? We obviously we don't talk about it a ton on this podcast. We produce you know, the best in the industry in terms of capital markets product in terms of technology. So we're always out there again, listening to the masses and understanding.

what's coming down the road and and making sure that we're prepared for it and that we're able to support it. So we'll talk a little bit with Kevin about just what are we hearing out there and and what our clients telling us they need and what things have we rolled out recently to accommodate. before we get to the market update, in the way of data, certainly seeing a little bit of a spike in rates higher than we've seen in quite a while. 6.7 on the OBMMI. That's 30-year conventional fixed. The 10-year is

on volume. We talked about it on a couple webinars last week. Just really sort of an unsung story that's going on right now is despite rates being stubbornly high and probably high for a very long time, there's a lot of reasons why we're seeing volume just continue to come in and the the borrowers and and home buyers in particular just being fairly resilient. So let's get right into the market update, which has a lot to do with where rates are going right now and where rates

have moved over the past few weeks. James, Alex, welcome to the pod.

Thank you as always.

Morning.

probably good to start with the FOMC meeting last week. So there was an FOMC meeting, as always, as we know, and we kind of educate our friends and family. Just because the Fed moves rates doesn't mean mortgages are going to get more expensive or cheaper. And if the if the Fed does nothing, which is what they did last week, they did not change rates. But there was still

fairly big market reaction and that reaction is continuing today, I believe, four days after that that meeting. Like what did we get out of that meeting and what are some of the the maybe renewed or new concerns that are out there around this new regime, the Kevin Wars regime of the Federal Reserve?

I think broadly speaking, the remaining concern is the lack of forward guidance and the hands-off approach, if you will, that the Warsh Fed is has so far been pursuing. they once again came out swinging and saying that that he's not gonna provide any forward guidance. He's gonna he wants the market to digest the data and the market get to to play the ball, stop playing the referee. That was what he said during the press

conference. as you said, no change in rates this time around.

I think a good signal of, you know, how the market is reacting to this no forward guidance is heading into this decision 10 minutes before, if you were looking at the CME futures, one third of participants were still saying that there was gonna be a hike, two-thirds were saying no hike. So yeah, the majority were saying that there was not gonna be a hike of any sort, but

if you went back and maybe looked at, you know, 10 minutes before a PAL presser, you know, last year sometime, usually we saw those CME numbers locked in at 95, 99%, just because of how well forward they were they were guiding themselves. Granted, this environment's a little bit different with this emergent inflation. We've seen a bit of a divide on the FOMC council itself. There were three votes actually, two hike rates by 25 basis points, Hammock, Kashkari, and Logan. Those three have been.

outspoken on on being a hawkish on inflation in the past as well. so I I think that's the number one thing the market is still coming to grips with in regards to Kevin Warsh's Fed is is, how do you play the ball? How do you stop playing the referee as they have been for for years now during in the post global financial crisis

the Fed made no change to that overnight rate. But the Treasury markets, especially the long end of the curve, the ten and thirty year, both rallied rate-wise quite significantly towards the end of last week out of the out of that Fed meeting. the thirty

year topped out at about five and a quarter percent, a little under that this morning if if rates have backed off a little bit. but I think there's an argument to be made there that, you know, the market is potentially

pricing in hikes ahead of time. I mean, they are pricing in hikes ahead of time. but it seems to be pretty aggressive at this point. We've seen pretty aggressive changes in in those treasury rates over the past week.

I very much read the reaction that day, right? It it almost felt going into the meeting, as you said, thirty percent of the CME or thirty-three was saying, Hey, it we might actually see the rate cut today. So the pricing in the market that morning was

Trying to build in the possibility of a rate hike already. And when that did not manifest, we actually saw an alleviation in the pricing in the market very quickly from you know right after the Fed announcement until about 3 p.m. And then come 3 p.m. it's almost like someone came out and they said, Well, hey, does this mean the Fed might be too slow?

Right, like are we gonna have to keep rates higher for longer in the future because

we didn't do it now? And all of a sudden the treasury just came swinging right back. Right. We got above four point seven twice in the past week. We're at about four point six nine right now. So just teasing it on the 10-year. so it very much felt like it was there was a lack of certainty around what might happen. And once it was clarified, everyone had to recalibrate what do we think about the future now.

And is the Fed moving quick enough? Maybe not. You know, we've played this game before. The the one of the main things Warsh had been hammering on was, hey, I think the Fed was too slow to raise and lower rates last time around. So there was the possibility that he was going to hike them this time because he, you know, wants to act fast.

Yeah. That's an interesting take as well. And I think I think you're right. Yeah, there's there's just there's this underlying just a little bit of a panic, it feels like. And when when the investors are in doubt, they're gonna sell probably, right, into this market. And and the the long end of the curve is always gonna be more volatile, right? It's gonna move faster. And we're certainly seeing that the last few days and it it that heavily affects mortgage rates, because it is better tied to the thirty year treasury than it is

The ten year old of the ten is a lot more common, obviously, in in terms of quoting it and using it in these conversations.

All right. anything else to talk about regarding the Fed in the short term?

didn't get any real feedback yet on his his working groups that he set up, those five working groups he announced at his first Fed meeting. So I still am just kind of keeping a tab on that, see what those, see what the takeaways are from those groups as they get up and running. looking forward towards the September meeting, I I'm just just gonna continue to hammer on it that inflation's gonna be, you know, on the front burner. we will get two rounds of CPI and PPI between now and the September meeting, as well as a PCE release.

you know, we can we can hope to see those inflation re markings come down. but you know, that that's really gonna be contingent on geopolitical developments.

Yeah. It feels like it would be a minor miracle to see a two handle across the board on all of these measurements by the September meeting. So the Fed has to act at that point. Otherwise they start looking slow like the Jerome Powell administration was accused of, right? Just waiting too long to to let this inflation thing play out and possibly reignite or get hotter.

Otherwise, what should we be watching in terms of not just the Fed, but just what is driving interest rates? I mean, it the the national debt of our country is one of those things. We talk about it a lot here. And the fact that treasury rates are going up only exacerbates that, right? We're we're already paying a trillion dollars a year in interest.

as a nation, as as taxpayers. So, you know, you add 10 basis points to the tenure. I haven't done the math, but that's a lot. But way into the, you know, into the billions of dollars that are we're just paying for air. We know we're paying just to to continue borrowing money. the AI trade is another piece of it, All the these these companies that are investing heavily in AI, whether it's Meta, Google, Microsoft,

server farms that are being built, nuclear reactors that are being invested in, foreign debt of these countries that have to rearm themselves in a continually unstable geopolitical environment. I mean what else can we throw on the fire there that that's just pushing rates higher?

Right. I think when you look on a you know five to ten year timeline, the geopolitical and the the global debt picture looks pretty precipitous. you know, coming out of the COVID era, the US national debt's well over, you know, a hundred percent GDP to to national debt. and yeah, it seems painful.

to your point, you know, the refinancing of the US national debt is happening all the time. There's there's constantly auctions of of varying maturities. and and one thing I've been kind of keeping tabs on over the course of past week and this got caught up in the news cycle as well a you know kind of a b-roll picture of some notes from a meeting where Scott Bessant had written, you know,

US to buy five to ten billion Japanese yen. and late last week we saw some pretty significant moves in the the exchange rate there between the USD and Japanese yen. both the Bank of Japan, the the National Bank of Japan, as well as the Federal Reserve Bank of New York. We're doing open market operations to to prop up the the value of the yen. The yen has been extremely weak and and declining in value for for some time now.

And you know, that raises the question, you know, they they are, you know, Japan's an ally, they're a friend of ours, but you know, you have to ask the question of, you know, I don't think we would just be going out and buying yen out of the goodness of our of our hearts.

and so, you know, a lot of the news media that I have read is that, you know, the the Bank of Japan was saying we have to buy yen to prop up the currency. and to do that, they were saying that they may need to sell US treasuries. They're a massive holder of US treasuries to to finance that buying of yen. So

you know, I think we could see that that open market operation is in part to, you know, stem the the raising of those rates we've been talking about this whole this whole podcast, those ten, thirty years. Don't want to see more selling pressure out of Japan on US treasuries.

That is exactly how I was looking at this one as well. Korea right now is experiencing a a real stock market sell-off over the past two months. They are getting crushed. I this is

a shocking stat to me, but one in every 30 adults in Korea has been margin called like since July. That's that's preposterous. but

Yeah.

their their stock market is crushing itself and very, you know, relationally closely tied.

Japan, they do have stock market, you know, relation. The market's not going quite the right direction. The currency in Japan is starting to slip. They have to take action and that can negatively impact US rates. Well, you know, we can step in and do a little helping there to stop that from happening. Cause right, we're flirting with that four point seven. If things go the wrong

way, we could be flirting with four point eight, four point nine, and that is on the tenure, it's just

Absolutely not what we want to see pressure on.

Right. So it could be worth the US continuing to intervene and you and buying Japanese yen on our own to try to try to create a little bit of scarcity there to put a floor underneath that value, right?

Correct. It seems to be in our interest to to be helping Japanese here keep that currency to at some value.

that stock market stat is crazy too. That I mean, that indicates a lot of risk being taken by a lot of investors. One out of thirty investors is is using margin. Most like American

Yes.

casual investors do not trade on margin, right? So margin

for those of you who don't use it is means you're borrowing money to buy stocks and bonds in with the intention of making money and then selling and paying back that debt. But you're obviously investing more than you own.

So anyway, that's one out of thirty is a tremendous number. I I would doubt that one in a thousand American investors is utilizing a margin account.

Yeah, that that's where like it's shocking 'cause it's so high, one in thirty, but it also just that enough people are either using options or taking leverage that they could be margin called is one in thirty people could

be doing that as is really an aggressive market.

Yes. And they're underwater. They're that many are have have made the wrong bet. They have they're getting called. They to they have to find cash or s or liquidate their positions to pay off that debt. that's the sort of thing that can lead to a compounding effect that can cause a market crash, right? As everyone is forced to sell to pay off their debt. And we're not saying that's gonna happen here, but that's what you start thinking about. That's what happened in in seven and eight.

in in the US and across the world with just some of the options and insurance policies and derivatives that were caving in as everybody was forced

at some point to liquidate.

And as people are forced to liquidate, it can create that spiral where the stock market is pressing down. And so foreign investors would try and get out. And if foreign investors are trying to get out, they're selling your currency, which is going to d depreciate the value of your currency. So someone needs to step in and bottom

out your currency.

Right. Which, you know, the the Japanese central banks have been they've made no secret that they I believe the government pegs certain aspects of their economy, such as their treasury rates and I think their currency to some level. So they're not a they're not against intervention, but there is a point where that can you can lose control of that. It sounds like we're a bit worried about that.

It's definitely something to be keeping your eye on over

the next couple of weeks.

Yeah. No, hopefully that one works itself out.

if you pull up a USD to Japanese yen chart, you can see directly where the the interventions happened. It'll it'll pop, you know, a tenth of a cent, which is might not sound like a lot,

but it's that's a lot when it comes to, you know, the value of a foreign currency. and if we see, you know, you know, it's steadily give that back, that would indicate potentially needs for additional support.

Also that

Yeah, great info. Definitely something to watch out for. There's, you know, generally speaking, equity markets have been strong i in the Western world over the last, you know, five years, but we tend to follow each other and and there's been a lot of profits made. So like you were saying, James, if selling starts to beget more selling, some folks are gonna just decide to those gains off the table even if they've diminished somewhat over the past

few months. So something to to watch in terms of just equity that's out there and also as it relates back to our own interest rates in this country, if Japan or anyone any other nation needs to start selling large amounts of treasuries to finance propping up their own markets.

and and if I can make one more, you know, potential path for contagion for this is is these open market operations are boosting the value of the yen. last year we we were talking quite a bit about the the yen carry trade where you you know you borrow

in yen and then you you purchase you know assets in the West that are that are higher yielding and then you pay back that that loan in Japan. But you know, if you know we're seeing the value of the yen be artificially brought up to a certain level, we could see you know some these financial institutions that are using that yen carry trade.

be caught out by, you know, an open market operation and the yen is now trading at a more positive value than they were expecting it to. so if they if they run into a you know a number of concurrent events, they they could also be put in pain there.

Absolutely. good points there. Again, probably a major thing to watch in the short term. speaking of short term, what do we have on tap this week? It's it's it's unemployment week, obviously, so that's big. So we've got lots of numbers around that. You wanna run us through those here, James?

Yeah, so I'd be watching out for Wednesday. We'll have ADP. It's gonna come out around just before 8 30. It's 8 15 a.m. ADP is you know not like the official number that you should look at, but it's always kind of a a good barometer of where we're heading

future tense. Thursday we'll have the jobless claims. We were a little bit better last week than was expected, so

Watch out just to see if we are keeping on a healthy trend or slipping back up towards about 200,000 on the job list, which is the expectation at the moment. then Friday, of course, is the employment report. It'll come out at 8 30 a.m. Eastern. we're expecting it. It's not a

Grand slam of a economic report this time. It looks like 85,000 is roughly the expected job gain, which is you know not high enough. It's not where we'd like to be, but compared to the previous, which was below 60,000, it's still an improvement. the unemployment rate has been hovering around 4.3. It did get down to 4.2 last release. It looks like the expectation has us back up at 4.3.

But my question is always, you know, has the denominator changed as more people go

without jobs for longer, are they no longer in the survey? And so do things improve or get worse based on that? I think that this number will probably be pretty static for the medium term.

Yeah, that sounds right. Lackluster. There, you know, like you said, nothing not a grand slam, eighty-five thousand, but with some of the changes to migration patterns, but also the job participation rate, as you said, that you should also watch on Friday. We're managing to stay well below four and a half, which until we get to four and a half, it seems super unlikely that the Fed is gonna focus on employment as a concern in their dual mandate. They're gonna continue just watching CPI, which means they're gonna lean more towards hikes.

Then cuts. Alex, anything you would add on the just the job stuff to look at this week?

just always, you know, continue to dig into the numbers. I note this one quite a bit. Kevin Warsh, he's he's big on the product productivity gains that AI could bring to the economy. But as I think we're all quite aware at this point, there there are concerns about what you know AI disruption could do to the labor market. so I like to look at the those with a bachelor's degree, ages 20 to 24, that unemployment rate, that number comes out with the those non farm numbers each month.

Just because it's expected that, you know, those entry-level white-collar work is going to be the first to see pain from, you know, matt mass AI adoption. so that's one I would keep an eye on, but but other than that, I'm really just gonna be watching the headline number for for any pop to either side. but like you said, I I don't expect us to be bringing labor back to the forefront unless we get a number a string of of bad releases.

Yeah, that's a good a good thing to remind folks of to look at that that very specific demographic, 'cause that's likely to be the first shoe to fall, right? The the white collar, sort of the analyst right out of college, if you will, that gets hired to to run spreadsheets and build reports and presentations and things that we all use AI for right now 'cause it's it's does a decent job of it, right? you may need half as many as many of those type of of new hires going forward if AI gets

You know, how however many orders of magnitude smarter. That's the one the one hand, the one argument. The other argument is you just get more productive, you hire just as many people

So

We'll all be watching for that on Friday leading up to it. All those other numbers you mentioned, James, that kind of give us a little peek into what's going on with jobs and especially that initial claims. Still still super interesting that we saw a record low in that number two just two weeks ago we used to say 220 was a decent number, and now we've kind of set the bar lower. So 200 is kind of that bogey. If we're under 200, we're doing really well.

But if we break two hundred, then maybe we're talking about rates going lower.

All right, gentlemen, anything else?

That just about covers us.

Beautiful. Thanks so much.

Yeah, everything for mine.

Okay, as promised, I have Kevin Foley with us today. We're gonna do a little chat about just what are we hearing from customers, right? We are out constantly, whether we're you know on Teams calls with clients. Kevin and I are actually going to a couple different conferences, industry conferences next week. He'll be at the Housing Wire AI conference, I believe, and I'll be at the CMBA Western Secondary out in California. but we're always just listening to customers. In fact, we have a whole group.

That deals with things like escalating what we are hearing from clients, what they need to be successful due to any changes in the industry or just changes in the way that mortgage banks do business. So we thought it'd be good to kind of collect some intel on that from across our teams and just highlight a few things that are hot right now, just a couple hot topics. And just generally

how are lenders out there being successful at addressing some of these new hot topics in the industry. And some of them not super new, but but every month they kind of evolve a little bit. And maybe we kick off with the first one here, which is not new but growing, non-QM. So we're talking about non-qualified mortgages, right? depending on how you look at them, we've had we've on this podcast talked about how it's it's not

you know, the subprime or the alt A of the early two thousands, but it's also not G S E eligible loans. That's the point. It's this kind of in the middle where there's clearly these groups of borrowers that are underserved by the GSCs or Ginny May because they're not first time homebuyers. They may not have traditional types of income. They may own multiple properties, whatever their deal is, they you know, common sense wise should be eligible to borrow money, but just can't because they don't quite fit in the box. But

Non-QM has grown. It's it's about 10% of what we see in our systems today. If you go back a couple of years, it was five, and before that it was close to zero. But again, growing. It and and we have had to make some moves to accommodate because there's, again, this is not GSC eligible loans, which is GSC eligible has been kind of the only game in town since the great financial crisis, but non-QM has picked up significantly over this last few years. Kevin, what are you hearing in terms of

What people need and what people what lenders are doing to be successful in that realm of the industry.

Yeah, so it's it's a great question. We we went out for this episode, we did a little bit of field work and trying to collect some anecdotes from folks on just the latest developments in in these areas. so for non-QM, just a few stats, like you said, right around 10%. You can see that in our market advantage report, which we cover here, monthly basis and optimal insights podcast. And the breakdown for that is about a third DSCR type loans, a third bank statement loans, and then a third.

all others. So it's pretty, pretty evenly split between those those categories, those buckets. we're seeing more anecdotes from lenders who are moving away from this as, you know, I'm dipping my toe in or I'm just I'm just trying to kind of get a feel for it, figure it out to lenders expanding their their volume in these products. And you know, they're generally pretty healthy margins with with these products as well, which is

supports lender profitability. we also happy to announce we we did a a big update in the last couple of months expanding optimal blues support for non QM. So we rolled out support for short term rental, we rolled out support for first time investor equity vesting, also a number of new income verification types related to bank statements.

Some additional support in in areas for DSDR. So we are staying very close to the pulse on what lenders as well as investors are looking for with non-QM, and we're rolling out enhancements to to to support that. But one other thing I would highlight is there's been a lot more discussion, I will say, around non-QM hedging and how to

potentially hedge non QM in house and then ultimately deliver that to investors. So, you know, getting away from best efforts transactions. still very I would say early in that. I I think that's that's the sort of thing that's not every lender profile is gonna be a great fit for for non QM hedging. I am hearing that as something that's being talked about more.

the component that's difficult with hedging non-QM is is of course the credit risk. You can hedge your interest rate risk, but if you end up in a situation where credit sp spreads widen, then you know that could that could be an area where unless you're prepared for that, you could be more exposed.

from a hedging perspective. And there there aren't a ton of great instruments for credit risk hedging at the moment, on par with let's say like TBAs for, you know, MBS, you know, duration, convexity, interest rate risk.

white labeled non-QM products or products that they eventually s hedged and sold on a mandatory basis to investors. then when COVID happened, that

was a that was a very, very big disruption.

so so just as a a reminder for everyone, a refresher, when when COVID happened, we had the Fed coming out saying they were buying unlimited MBS and pushed

you know, UMBS way the the yield on that way down. So prices went way up. but then credit spreads widened. So you had two moves kind of moving in opposite directions, created a lot of lot of difficulty for investors. a lot of folks were just scrambling to get production off of their books. And the the lender that I I'd worked closely was

selling some loans for for 80 cents on the dollar, you know, by by the tail end of it. So we are seeing more folks get into that get into that area or or at least discuss getting into that area. something that we're we're looking you know pretty closely at and and talking to folks about. And in terms of like hedging strategies around credit risk, you know, some of the things that I've I've looked up that seem like the best tools

would be more like high yield ETF puts, like super out of the money,

Ha ha ha.

because the types of instruments that you're gonna want to protect yourself with are gonna be the ones that are gonna work well in that crisis environment, a credit, explosion environment, the credit spreads widen pretty substantially. And for that, you're looking at things like, you know, high yield ETF puts,

low grade bond shorts. But all of these are, you know, they're

they're gonna have different, you know, different benefits or and different drawbacks associated with them. but if you are considering this, the one thing I would say is try and as best you can bake some of that option the cost of those puts, the cost of the hedge into what you are what you are modeling out so that you're you can incorporate that ultimately into the pricing.

anyways, those are some anecdotes around what we're hearing with with non-QM. again, more folks getting into it, some recent updates from Optimal Blue to help support some of those newer areas, and then also more conversation around hedging non-QM and some of the risks associated with that.

Yeah, well that's great stuff, Kevin. That's a lot to unpack there. If I was gonna paraphrase, right, good pointing out that there's all these additional fields that are needed now. So as we mentioned, there's there's these different aspects of sort of the borrower profile that that haven't really been an issue for the last 20 years since the great financial crisis. But now as you're interviewing borrowers, there's more questions you can ask them that could fit them into a non QM loan program.

Whereas otherwise they may have not been approved for an FHA VA conventional loan. So those fields are up and running, ready to go. A lot more again, a lot more lenders adopting non QM and and having that alternative to some of those more common, more liquid products. Then there's the question of hedging. Do I should I hedge this stuff to try to make more money off of it? As you said, not one size fits all. If you're doing a hundred million a month of this stuff, absolutely talk to us about hedging it. If if you're not,

There there's a a cohort in there that should be l likely just locking these things best efforts. Otherwise, yeah, apparently you're on your e trade account trading you know, ETFs to hedge your pipeline, which is a is a little bit of an interesting proposition. In fact, during COVID, that was one of the things that was pointed out was the only way you could have really made money hedging conventional loans during that absolute crisis would have been to short the S P.

You know, just the short stocks in general, because that's that's where the money would have been made is when everybody else was losing. and yeah, like that that sort of credit disruption is very seldom, very unlikely. So kind of if you're, you know, producing a significant amount of of non QM every month, you can you can weather a storm like that if you build it into your pricing and build up some sort of reserve, which I think is what you were

alluding to there. You wouldn't want to price this the way you would price a conventional loan because conventional loan margins are extremely thin, but also that product is very, very liquid. There's not a an undefined credit box. If there is a crisis crisis, it is likely that the US government steps in and backstops something like that versus a non QM loan, which will have theoretically no backing at all, right? If it if those loans fail, the investor holding that paper will incur that cost.

Good stuff. Anyway, we're here to talk through those things, whether you're trying to price it, sell those on the secondary market or even hedge, non-QM. So sort of related to this, in terms of interviewing clients, trying to qualify more borrowers. There's these new scoring bottles that have come out, right? FICO 10T, Vantage Score, just that there's additional.

Credit models now on top of classic FICO, which we've used in the mortgage industry for many decades and are now making, you know, potentially making a shift towards having a a better selection of models. What are you hearing from folks in terms of those new models right now?

Yeah. So I I think my my punchline is we'll we're probably gonna know a lot more by the end of the year. And it still feels like it's very early. so a little bit of background. vanish score, kind of an interesting story there. It's optimal blue rolled out support for a new credit score model field that supports classic FICO vanish score as well as FICO 10T. So all that's

supported within Optimal Blue from a pricing from an eligibility perspective. we're mapping that to and from LOSs where we can for for those who are who are supporting that as well. this was a a very quick fast conversation that happened that sort of came together and we there because there are a lot of different ways to do this. Do we do borrower level fields? Do we do you know one

single loan level field and Optimal Blue

helped kind of pioneer and lead a lot of those conversations to coalesce around that one lone level credit score model field, which the industry is sort of coalescing on as well. So a little little bit of a plug there just since I was involved in some of those conversations, but we're we're super excited to get that out. And the early data that we're seeing is

A lot of lenders are still thinking about adopting alternative credit score models. They might be still researching, but not a lot of activity yet. and like I said at the beginning, very interested to see what this looks like towards the end of the year because I think that's going to be the big tell. We are hearing that especially some of the bigger lenders are jumping in a little bit quicker, probably those with you know bigger compliance apartments.

know just more resources to to put at the problem and figure out exactly where that fits in your overall strategy. Now, I mean the good news here is from a pricing perspective, that's not what lenders need to be worrying about. It's not what lenders need to be focused on. That's all covered here. but I'm sure there's a lot of conversations that are going on around

How are we gonna expect? Do we do we do one score? Do we do both scores? How are we gonna see these loans perform over time from a prepay, from a you know, credit perspective, delinquency perspective? that seems to be the sentiment that I'm hearing from lenders when when we're going out and asking for feedback. but yeah, so far it's it seems like it's kind of a a slow early adoption. A lot of lenders

still thinking about it and very interested. I'm I I'm sure that this is gonna be a much, much larger percentage towards the end of the year. I'm just interested in how quickly that ramps

up.

Yeah, that's a good overview, Kevin. glad we're prepared and and we feel confident that borrowers don't or that our clients don't need to worry about the pricing side of this. We're we're geared up for however it ultimately plays out in terms of an actual announcement from the GSEs on how it will be priced, but we're set up for however that works out. But we are working with many of the pilot lenders who have already rolled out bandage scores, so we have a lot of information on it from that perspective.

I had we had Ricard Bandebo from Vantage Score. He's the chief strategy officer from Vantage Score on a couple of weeks ago and and he was posting some early numbers and the the securitizations that are utilizing Vantage Score have are increasing exponentially. And a lot of that is the large lenders, as you mentioned. It's the it's Rocket, it's New Res, it's UWM and so on that are that are heavily adopting these where

Each of those big lenders, they're like fifteen to twenty percent of what they're producing is using vantage score. That still translates to a very small percentage of overall securitizations, call it two percent, but that was zero percent just a few months ago. So seeing some good adoption there. so it does feel like these new credit models are are here. It's just gonna take, like you said, second half of the year, maybe we see it really ramp up and we start talking about you know, FICO has has new models that are that are being designed and coming out.

Soon they already have FICO 10 T out there. So you would assume that's going to be in the the lexicon, if you will, going forward too. Still a lot to be a lot to be discovered, but in any case, we're trading those loans currently and folks are locking them in our PPE. And again, it's just another thing you can use, another weapon you have to try to win deals. when you have maybe a borrower that has early credit, not a lot of credit lines, maybe they're

a little bit low on the scale and you could boost them up with you know with things like rent and other things that that may not be accounted for in all the the different models that are out there. So you have you have options. Options are good.

All right. So last thing I think is always a question. It's gonna be a question that we we will be either presenting on or listening to or on a panel next week, talking about at our respective conferences. AI. Like, you know, where's AI today in terms of the mortgage industry? Who's using it? Where is it actually practical to use it? You know, what's the true adoption? And we we actually just talked about it on our market update a few minutes ago. It's it's you know

Where are we actually seeing value created or where are we seeing efficiency created in this market?

Yeah, I think I think that's still a big question. And even for folks at a macro economic level who are trying to look for the ROI and all of this AI capital expenditure investments, know, data centers, et cetera, it's a huge chunk of our annual GDP right now. I I mean by huge, it's I think somewhere in like the two percent range, but that's for for a a single, you know, investment build out, it's

you know, on par with, you know, broadband, the internet, getting

closer to things like the national highway system, for instance. So all this money being spent, where is the ROI? and I think in the at the macroeconomic level, some some of the answers are still elusive. but there are there are definitely once you sort of peel back layers of the onion within our our industry.

I think a lot of opportunities for ROI. I'm gonna be talking about that next week at the HousingWire AI Summit. I have a a a sit-down with Sarah Wheeler from Housingwire.

Nice.

Yep, very very excited about it. And the topic is gonna be looking beyond the model. And so a lot of the been a lot of conversation around who's the better model provider. Is it open AI? Is it

Chat GPT, Google was in the conversation a period of time, anthropic, Claude, et cetera. and I don't think that that is really the question that we need to be asking ourselves or the question that we need to be worried about. And I think a lot of the opportunity exists within the institutional data that we all have or institutional context.

You know, th this is the sort of the information that's contained within an enterprise, within an organization. A lot of it, you know, lives in in folks' heads. A lot of it might be, you know, written down about how your systems work and what is that secret sauce that gives your company an edge versus you know the many other companies

that are out there, whether that's a mortgage mortgage company, whether that's a technology company and whatever footprint that you're operating in. And

So that's where I think the the real value add is. Well I don't want to give too much away about the the the talk, but I do think that when when you think about what is like the lowest hanging fruit for opportunities for AI adoption, I I think knowledge agents are a big number one. So knowledge agents can can help you harness that institutional knowledge that exists. Think about it as like a wiki or a, you know, a chatbot that can answer questions that folks in your enterprise might have.

about whatever it might be, you know, how your systems, how your systems work or how to get data out of certain systems. And you know, those were some of the, you know, back kind of going back now, this was a year and a half, two years ago was was were the some of the first areas where we had at Optimal Blue, where we had invested in in knowledge agents and things like Ask Obi that allows you to pull answer questions on any of your data within the pricing engine and now

within the hedging and trading systems as well, and get very specific answers to specific questions. Are you our hedging agents that we have to help you through understanding your position, understanding what trades that you should take. And we also have going to be launched this week actually are our the virtual economist, which is a knowledge agent that sits on top of proprietary machine learning models that can help

develop customized interest rate and lock volume forecasts under a a variety of macroeconomic scenarios to help you better plan for how to grow your business. So that is definitely an an opportunity. and then, you know, I'll talk a little bit more about when I'm at the Housing Wire AI conference, how lenders can can go about making that happen.

That that is definitely an area where I think a lot of lenders are still trying to figure out, you know, maybe you're more familiar with with AI tools, you're more familiar with how to use them, but how to identify areas that have our higher ROI and then go and and deploy solutions to solve those problems. That's an area where I think a lot of lenders are still still are today.

Right. That's a really great way to think about it. And it certainly is does seem to be playing out. And it's the way we think about it at Optimal Blue. yeah, all these l large language models are trying to do the same thing. They're designed to do the same thing, to to encounter a problem and try to solve it and try to find resources to do that. So sometimes it's or for a lot of tech companies like us and and then all the way down to our clients, to the lenders, it's about how you connect that model.

To the right resources to solve the problem. Some of it might be prepar proprietary data, which is super important. Or if you have a proprietary model, like you said, whether it's machine learning or another type of model that solves a problem. If that problem is finding borrowers or knowing where to post your leads to to bring borrowers in the door or to find the right loan program for that borrower, and it goes on forever, right? It's it's it's the deployment of that model versus

Yeah, maybe the underlying debate of which model is better, which is probably a probably not the best thing to talk about because by the time you've had the conversation, that model has rolled out a new version of itself and that's gonna continue happening over the next couple of years and decades as well. So these in my mind, these models are gonna leapfrog each other in terms of their capabilities and their speed and their efficiency, but it's how you deploy it. It's how you everyone's talking about AI now. We have sometimes it's like it's too much.

Oversaturation.

Yes, it's just you have to have AI. If if you're not AI enabled, what are you doing? And it's just not AI's not for everything still. It doesn't it it's not gonna solve every problem today. It's just not the most efficient way in a lot of cases. Sometimes machine learning is, or sometimes you have again, you have your own data that's driving your decisions versus the this model that's just looking for good information versus the the sort of the omniscient being that's going to solve everything today. Yeah, good way to think about it. Yeah,

that was great, Kevin. Thank you for for cluing us in and educating us on some of these things and and helping us all be more successful.

Absolutely. Happy to be here. Thanks for having me, Jim.

Cool. Thank you, Kevin. Talk soon, man.

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