Join us for a look at the mortgage market's current state as we team up with Jake Silvey, Director of Mortgage Pipeline Hedging at ALM First. From the seismic shifts of post-recession interest rates to the dizzying heights of 2023's market values, we explore strategies that keep lenders afloat. Learn how fine-tuning operations and slashing overhead are critical maneuvers for riding the waves of economic uncertainty and why meticulous process auditing is not just necessary, but at the heart of sustaining profitability.
Venture with us into the intricate world of outsourced mortgage processes. Discover how the agility of month-to-month contracts can provide a lifeline for lenders in a rapidly changing environment. We tackle the significance of product and pricing engines for independent bankers and reveal how the strategic adoption of automated systems can streamline operations. And, for those contemplating the leap from best efforts to mortgage-backed securities hedging, we map out how expertly navigating interest rate risks could position you at the vanguard of the industry.
In our closing insights, we reveal the potent strategies that can bolster your bottom line amidst investor unpredictability. Hear the transformative tale of a client's windfall through shrewd partnerships with federal home loan banks. Delve into the art of vendor relationship management, where flexible contracts and proactive customer service aren't just perks—they're the pillars of success. For anyone with a stake in the mortgage market, this episode is a treasure trove of insider knowledge, guiding you to thrive in a landscape where only the most adaptable and astute will prosper. Join us and arm yourself with the intelligence to navigate the mortgage industry's future with confidence.
ALM First Financial Advisors is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors' Brochure. You are encouraged to read these documents carefully. All investments involve risk and may lose money.
Speakers today are affiliates of ALM First, an investment adviser registered with the U.S. Securities and Exchange Commission. All investment decisions for client portfolios are made independently by the asset managers at ALM First. The views expressed are those of the speakers, and do not necessarily reflect the views of ALM First or any of its affiliates. These comments may not be relied upon as recommendations, investment advice or an indication of trading intent.
Join us for a look at the mortgage market's current state as we team up with Jake Silvey, Director of Mortgage Pipeline Hedging at ALM First. From the seismic shifts of post-recession interest rates to the dizzying heights of 2023's market values, we explore strategies that keep lenders afloat. Learn how fine-tuning operations and slashing overhead are critical maneuvers for riding the waves of economic uncertainty and why meticulous process auditing is not just necessary, but at the heart of sustaining profitability.
Venture with us into the intricate world of outsourced mortgage processes. Discover how the agility of month-to-month contracts can provide a lifeline for lenders in a rapidly changing environment. We tackle the significance of product and pricing engines for independent bankers and reveal how the strategic adoption of automated systems can streamline operations. And, for those contemplating the leap from best efforts to mortgage-backed securities hedging, we map out how expertly navigating interest rate risks could position you at the vanguard of the industry.
In our closing insights, we reveal the potent strategies that can bolster your bottom line amidst investor unpredictability. Hear the transformative tale of a client's windfall through shrewd partnerships with federal home loan banks. Delve into the art of vendor relationship management, where flexible contracts and proactive customer service aren't just perks—they're the pillars of success. For anyone with a stake in the mortgage market, this episode is a treasure trove of insider knowledge, guiding you to thrive in a landscape where only the most adaptable and astute will prosper. Join us and arm yourself with the intelligence to navigate the mortgage industry's future with confidence.
ALM First Financial Advisors is an SEC registered investment advisor with a fiduciary duty that requires it to act in the best interests of clients and to place the interests of clients before its own; however, registration as an investment advisor does not imply any level of skill or training. ALM First Financial Advisors, LLC (“ALM First Financial Advisors”), an affiliate of ALM First Group, LLC (“ALM First”), is a separate entity and all investment decisions are made independently by the asset managers at ALM First Financial Advisors. Access to ALM First Financial Advisors is only available to clients pursuant to an Investment Advisory Agreement and acceptance of ALM First Financial Advisors' Brochure. You are encouraged to read these documents carefully. All investments involve risk and may lose money.
Speakers today are affiliates of ALM First, an investment adviser registered with the U.S. Securities and Exchange Commission. All investment decisions for client portfolios are made independently by the asset managers at ALM First. The views expressed are those of the speakers, and do not necessarily reflect the views of ALM First or any of its affiliates. These comments may not be relied upon as recommendations, investment advice or an indication of trading intent.
Welcome everyone to, in your Best Interest, an ALM First podcast, a show that will explore common depository challenges, give you an insider's view of the latest market trends and share stories and insights from industry leaders. I'm your host, mike Ensweiler. The US economy recovered well from the Great Recession in the 2010s, with tighter lending practices post the subprime mortgage crisis aiding a comeback in the mortgage and housing markets. Consumers benefited from record low interest rates during this period, with the average 30-year mortgage rate dropping from around 5% in early 2010 to approximately 3.5% by mid-2012. Throughout the latter half of the decade, rates remained within the 3-5% range. However, the COVID-19 outbreak in early 2020 led to a widespread economic crisis, causing unemployment to surge and stock values to plummet. Mortgage rates reached historic lows in the aftermath of the pandemic, hitting an astonishingly low 2.65% in January of 2021. Throughout that year, rates remained relatively stable in the upper 2% to low 3% range. Inflation started to rise in 2021 due to supply chain issues in generous economic stimulus packages. By mid-2022, inflation was soaring, prompting the Federal Reserve to raise interest rates in an effort to curb inflation. Mortgage rates followed suit, with the average 30-year rate reaching 5.3% by mid-May 2022, and surpassing the 6% mark by the end of that year, in October of 2023, rates peaked at almost 7.8%, the highest in two decades. As of November of 2023, the average 30-year mortgage rate stood at about 7.25%.
Speaker 1:Looking at the Fannie Mae economic and housing outlook for January of 2024, in terms of mortgage rates, they stated following the Fed pivot in December in anticipation of more dovish policy and the recent decline in interest rates, our mortgage rate forecast has been revised meaningful lower this month. We expect the 30-year rate to average 6.1% in 2024 and 5.6% in 2025. In terms of single-family mortgage originations, they said they expect single-family purchase regidation volumes to be in the $1.5 trillion range in 2024, an upgrade of about $49 billion, driven primarily by upgrades to home sales and home price forecasts. They also stated that they expect single-family purchase volumes to grow to $1.7 trillion in 2025, an upward revision of about $67 billion from the previous month. For single-family refinance originations, they said we project 2024 volumes will be $490 billion, an upgrade of $39 billion driven by the lower mortgage rate forecast.
Speaker 1:The questions that naturally come to mind are how can originators get either profitable or remain profitable in this environment? There has been a lot of scaling up and scaling down in the last several years, as rates have gone from being historically low to a quickly increased environment. My guest today is Jake Sylvie, the director of mortgage pipeline hedging at Ailin First, who is here to talk with us on getting and remaining profitable in this current environment. Jake is going to talk to us about maximizing your processes and execution while minimizing your overhead, which should be the focus of every lender right now. Welcome to the podcast, jake. Thanks, mike, thanks for having me. Well, let's dig right in. It's been an interesting year and I think what our listeners would really like to know is how do you see the impact of rising rates in historically high housing values on mortgage lenders' profitability?
Speaker 2:Yeah. So I think the impact of that let's just paint the backstory for a second Four years ago right pandemic starts and that's when we start to see rates coming down to the floor. The cost of borrow is virtually nothing. Get a 30-year mortgage rate under 3% and then you start to see the demand, right, people trying to move out of cities get a second home. What have you but that, coupled with even investment real estate is really turned on lately.
Speaker 2:So all of these different factors inflation has started to kick off all these different factors are playing into what we saw in 2020 and 2021 of just record high mortgage originations for those two years. So we've got Q4 of 21. I think we originated 1.35 trillion and then obviously fast forward to Q1 of 23. We originated $333 billion, so literally a quarter of what we were doing. So if we look at that moment in time there, all of these lenders, everyone's got a nice big margin, everyone's happy, everyone's eating and now everyone's staffed up for that.
Speaker 2:And then what we've seen lately here we're seeing rates literally climb five points in two years and You've seen those housing values skyrocket through all that demand through those first two years. Now what you're seeing is as fast as those rates climbed, mixed with that combination of outside you know inflationary pressures, but also that the record high housing values You're seeing that mortifying drop off quicker than than anybody's able to adjust to it right. So what's the first thing that happens when you start to see, you know, volumes drop by a quarter percent industry-wide.
Speaker 1:The first thing you see is margin compression right.
Speaker 2:You're gonna see lenders competing for, for the volume that is out there, trying to to, you know, keep that volume that they were staffed for, and and then ultimately, is that that volume is low long enough, you're gonna start to see around one of layoffs, round two, round three, and ultimately, what we have already seen Is people closing the doors right and even some of the bigger, bigger lenders. You've seen mergers on acquisition, so that's that's been the unfortunate. You know results of what's happened, specifically, as that speaks to profitability. Like I said, you got a much thinner margin now and it is a rake war. Everybody's Going after what's out there, and so what you really need to start as a lender is an Institute. You know, lending institution.
Speaker 2:You start looking under every nook, every cranny and really seeing where you can cut back, whether it be overhead or how you execute. You know how you, how you buy and sell loans. It's time to start auditing every single thing. You need to count every single basis point. And now?
Speaker 1:So basis points matter right, oh yeah, when times are good, you can be fat and happy, but this is a time to certainly do some belt tightening in. We've seen that. So you know, as we've seen these things, these events of 2023, just kind of prognosticating a little bit what was your outlook, I'm going forward.
Speaker 2:Yeah, all right. The outlet question I I'm not necessarily. I'm a hedger, you know, that's how I make my money. So I don't necessarily like the, the crystal ball you know prediction, if you will, and in every talking header or agency prediction I've ever heard. For you know, I've been doing this almost, you know, 14 years now. Every prediction I've ever heard, typically gets it right about 50% of the time. But educated guess-wise if I had to say you know, I do think the borrowers.
Speaker 2:I do think the borrowers are out there. The demand is still out there. They're just sidelined because they can't afford a mortgage right now. Right. So they're out there. They're waiting for something to break here on the markets, whether it be values, whether be interest rates. I don't think values are gonna be the one to do it.
Speaker 2:I think interest rates are gonna come down slowly here in 24, maybe quicker than I'm saying, but I think they're gonna come down here to what would be considered a respectable range. I think five to six percent it's probably we're gonna see rates plateau for a little bit. But that happening, I see, when the rates get to that range, demand comes into the market again and forces that those values even back up. I think values peaked in the end of 22. Average housing, average house price was 550. You know, I think it's come off of that a little bit here in 23. I think it's down to like 500. But so I see, once the rates get to that that range a respectable range that they're looking for, I think the demands are just gonna drive the value back up. So I actually see this low volume environment going longer than we're actually thinking.
Speaker 1:Excellent and so maybe shifting gears on you a little bit. I mean, you talked about, you know, staffing and those kinds of things. So, in the context of mortgage lock desks, why is it important to have policies and procedures that ensure consistency and pricing and compliance?
Speaker 2:Oh yeah. So, as it relates to pricing, you know policies and procedures, and let me take this from a lot of these views. So when I first got into the industry I cut my teeth at a wholesale shop, pretty sizable one. When I started they had like a $50 million running pipeline and about 12 months into my tenure there it was up to $500 million pipeline.
Speaker 3:So it grew pretty radically pretty quick.
Speaker 2:And I was doing a lock desk and also you know second hedging and best execution and all that stuff. So from what I've learned over this, these years in this career, is your policies and procedures are the guardrails to the profitability. The lock desk is the guardian of profitability. Right, make sure they're adhered to as policies and procedures. So what I would do if it was my lending operation I would make sure that the policies and procedures are as conservative, as strict as possible to protect the house and always end the PMP with a clause with a case by case consideration clause, right.
Speaker 2:So what I mean by that is let's take into consideration, like a rate renegotiation, right, rates are dropping a little bit. The bar is like, well, hey, I can get a little rate out there. What can you do for me? Well, according to the policies and procedures, you're locked in at the rate that you locked in with.
Speaker 3:But now you don't want to lose that loan, right.
Speaker 2:So now that case by case consideration, you can have the lock desk. Actually look at the. What's my con if? What did I buy it for? What can I sell it for right now? What could I stand to profit? And then I don't want to lose this loan because I'm going to lose more. That way. I'll be paying for the hedge and I'll just lose all the value that the loan could have gained, right? So in this case, all right, how much can I give without losing?
Speaker 2:So you have to have those case by case considerations to make sure that you end in a win-win situation Barbers happy, institutions happy and yeah, I mean so. Pmp is critical. And then obviously lock desk making sure that it's adhered to.
Speaker 1:Yeah, okay, yeah, and maybe jump the gun a little bit. But again getting back to that staffing idea, what are the potential benefits and maybe challenges of outsourcing lock desk responsibilities and how can it contribute to maintaining profitability during market fluctuations?
Speaker 2:Yeah, okay. So outsourcing benefits and potential challenges, Saving lock desk I got to tell you I'll start off with this. I actually don't see any challenge to it. The benefits speak for themselves, and I'm going to speak specifically to ALM first right and our lock desk product and the way we're structured. So, number one, what are you getting with an outsourced lock desk? Well, obviously you're getting a proven product, right?
Speaker 1:They've been there. They've done that.
Speaker 2:This is something they offer and you know you're going to get that expertise immediately. Number two you're getting that business continuity right. So there's no vacation days, there's no sick leave, there's no paternity leave. Someone's always going to be there to make sure that that job is handled.
Speaker 3:Number three specific to ALM first, you know we offer a month to month contract, right?
Speaker 2:So what does that mean? What does that tell me? If I'm an institution looking at a vendor that's offering this service at a month to month contract, that tells me that they're more invested in the success of this than maybe I am as a lender, right? So you know the benefits, I think, speak for themselves. And then obviously, other benefits to outsourcing is they're able to share those best practices right industry-wide so the benefits go on and challenge-wise, I don't see any, honestly.
Speaker 2:I mean we work very closely with the institution's processors and underwriters and closers. We're making sure we're running validations on all the pipelines. We're making sure that that data is clean start and finish and that loan gets delivered successfully.
Speaker 1:So in what scenarios do you believe a product and pricing engine is essential for mortgage institutions, and how does it contribute to streamlining processes and ensuring adherence to the policy and procedures you were talking about earlier?
Speaker 2:Yeah, so PPE, that's a good question. There are certainly useful tools. I think it's essential for lenders that sell servicing released, right, so they're not retaining that servicing in house, they're releasing that, and typically when they sell released, you might have maybe an independent mortgage banker. Then they can work with the agencies for sure, but they could probably work with a handful of aggregators. I think that's really where, especially when it comes to eligibility, that's really where PPE can shine, because it brings in all the different overlays that these aggregators have on top of what Fannie Freddie might have in their guidelines right, so they have their own risk that they consider.
Speaker 2:So it gets hard for an underwriter if you're selling to 10 different aggregators, as well as the agencies. It gets hard for an underwriter to stay on top of all that. And so obviously a PPE. It would be very critical, I think, to that type of independent mortgage banker who has 10 to 15 investors. Where I don't think a PPE is absolutely necessary, especially in this environment right now because they are rather pricey, is to maybe a depository that just only retains and they sell strictly to Fannie Freddie, or maybe Federal Home Loan Bank.
Speaker 2:I don't think it's necessary for them to have to use a PPE Everything-wise. That's what the automated underwriting systems are for, right DUNLP? Yes, you're going to have to have an underwriter on hand, but those AUSs really take care of it, you know the bulk of the underwriting, I would say. And then from a pricing standpoint it's pretty easy to build a profitability margin.
Speaker 2:Your lock-dish should be able to build a profitability margin into those prices that you get from Fannie and Freddie and be able to lock and revise a loan and ultimately sell it with a lot of profit in it. So it really depends on the lending institution, right? What are they doing? You know it's a good way to save money, especially right now in this environment.
Speaker 1:It's a good way to save money. If you only have those one or two investors in here, retain that servicing you know you mentioned early on that you've had a long career in this space, that you've done a lot on the hedging side of the process, and so you know, just thinking about that, what considerations should lenders take into account when transitioning from a best efforts commitment style to hedging interest rate risk, with mortgage-backed security to be announced forwards, yeah, so.
Speaker 2:I would consider you know the best efforts that's going to be step one for any lending. You know secondary, successful secondary setup. You know selling best efforts, making sure that that's how you at least protect that initial profitability margin that you've aimed to price into your tier H sheets in the morning.
Speaker 2:And now, if you get to that point that you're ready to take that next step, the more advanced delivery execution style being that mandatory sales strategy and your hedging with those MBS TBAs, then there really isn't too much additional resources needed as long as you know how to properly hedge that interest rate risk right.
Speaker 3:I mean that's going to be critical.
Speaker 2:You're likely if you've never done it or seen it you're likely going to need to outsource to someone that's been knowledgeable in space and been doing this for some time. So it doesn't take anything additional, any additional resources other than that advisor. You know, underwriting nothing changes. Processing nothing changes. The only difference is obviously, instead of upfront having that, you know, that investor, that end investor identified.
Speaker 2:We're not gonna know that until you know, until time to to sell, to sell those loans. So I mean you're, instead of selling loans on a flow basis, you will now be selling on a bulk basis. So, as opposed to every time a loan comes at the door, turning around and locking that best-effort commitment with an investor, now you're just gonna sell that hedge to offset that pricing, change, risk and then, ultimately, you know, whenever you collect your funds, you collect interest, carry, after that you continue to hedge with the MBS, dba and then ultimately, let's just say, you know, five months down the road, hey, we got a collection of four or five million dollars ready to be sold. Now you turn around and you, you best X every single one of those loans. It could be you could have a 10 million dollar loan sale, full of 40 loans, but your pricing goes to every single investor, right? So 14 of those may go to Fannie, 16 may go to Freddie and, obviously, the remaining 10 go to Federal Home Loan Bank or whomever, whomever your pricing to.
Speaker 2:So there's, there's nothing too challenging about changing, changing your processes, but finding the you know. Obviously the right advisor to execute is most critical portion.
Speaker 1:Jake you talk about delivering the multiple lenders. I've heard a number of institutions that have only one investor Explain to me, explain to us. You know more about maximizing sale execution and why you'd want to sell it more than just one.
Speaker 2:Yeah, absolutely. Um. So I can say, even in the 14 years I've been doing this, I've never sold to just one I, if you want to maximize return of value on your sale of your mortgage pipeline, it makes sense to get every and I'm gonna use this, let's the specific to a depository right. So we're taking that servicing where your options are limited, you've got, like I said, you know Fannie, freddie, if you securitize the Jenny, you know fantastic but also potentially federal home loan bank right. So if you have only those Options, you need to maximize those options to maximize your return. I can tell you Fannie and Freddie are competitive with each other. They're within, you know, 10 max 20 basis points of price from each other. But when you extract late 10 20 basis points to an annual, you know origination, that's gonna turn its substantial, substantial numbers.
Speaker 3:I can tell you that you know we sell loans Appetites come and go from a investor standpoint right.
Speaker 2:Appetites coming go and we sell loans. For you know, for one of our clients, and they were strictly selling the fray and we introduce them that they they already had a federal home loan bank Relationships set up, they just weren't best exes.
Speaker 1:And so, once we did the analytics for them, 80 basis points to 120 basis points, pick up strictly on that Provincial paper.
Speaker 2:Wow is what they experienced. And so they're making substantially you know substantial amounts of money more than what they were.
Speaker 3:They didn't have to change much of anything.
Speaker 2:I mean All they have to change is how long you know how long delivered. So it can be substantial pickup and, like I said, Maximizing the amount of money that's going to be spent on that and maximizing the options that you have.
Speaker 2:Now, if you're in the servicing release space and you have aggregators. I would Try and focus in On a select few, maybe five, six that maybe specialize in different areas. But certainly maximizing the amount of investors you have is going to maximize return that you get. Like I said, if it's 10, 20 basis points, that might not sound like a lot for a single loan by loan scenario. Extrapolate that to a year's worth of funding and and watch, watch how big your eyes get.
Speaker 1:So you know, the 80 to 120 basis point certainly has my attention especially in this environment with with volumes down, and so now I want to explore multiple investors. You know what criteria should mortgage lenders consider when auditing current vendor relationships and sourcing new ones?
Speaker 2:Yeah, so you know this really money really ties into Profitability. You know how do I stay profitable in this environment, right? So I Vendors common in a few different Departments in the mortgage space. I mean they're vendors for underwriting and post closing, secondary marketing, obviously so, if I was a lender right now in this space In to ensure I'm profitable, I will look at every one of these relationships, look at every one of these contracts today. Do they favor me? Do they?
Speaker 2:are the is the customer service there Do they have my best interest as a, as a client, a partner they have my best interest in mind. So if I was looking at vendors, I would definitely look at look at the structure like.
Speaker 2:I said I think a month-to-month contract is speaks to exactly the approach that vendor wants to take to that relationship. They're going for absolute success. They want to know they don't know month in, a month out that you as a lender want to be with them Because of their job that they've done for you. Other important Things to consider with vendors is you know variable cost structure right. Volume volumes are horribly low right now compared to where they were right.
Speaker 2:So If my volume is down, is your cost going to come down with me, so make sure I stay profitable, right. So that's something I would consider too. My final thought is finding a vendor that you know is looking out for your best interest, right? What's coming down the pipe? Is there any potential pitfalls? Are they giving me the necessary information?
Speaker 2:I need to make the best decision with my pipeline currently right, and a good example of that is what we, as Mortgage Pipeline Hedging Group, what we did for our clients when the LLPAs changed or the loan-level price adjustments changed with the agencies this past May, they had announced a completely different structure of risk adjustments, and so what we did is we put together an AOLIX package that housed every loan on the pipeline for our clients and we gave them a cost-benefit analysis, loan by loan, if it was best for them to sell the loan before the change or retain it until after the change to make sure they maximize the return on those loans. So, yeah, making sure you find a vendor that's doing that analysis that truly has your best your best intentions at heart there and is truly helping you maximize your return.
Speaker 1:So let's just touch on maybe one more thing on the vendor side. Can you provide some examples of how effective communication and customer service from your vendors contribute to the success of your mortgage operations, especially in critical areas like lock desk, hedging, underwriting and quality control?
Speaker 2:Yeah, so I really only have one thing to contribute for that. You know, I've worked for a couple of companies now where we've had to send in a request to the vendor and we get stuck in a queue. We get a response email that says please give us 24 to 48 hours before we get a response to you. And to me that's just not going to work.
Speaker 2:If we need something as an institution, we need that as soon as possible, and so for me if it's my company and I have a request, I want to know that I can pick up a phone, call my vendor, talk to them on the phone immediately, send them an email, get responded to quickly, and so we can address the issue and move on.
Speaker 1:And so that's what we do here at A1 versus.
Speaker 2:That's how we treat our clients, and I think that's critical in vendor selection.
Speaker 1:You know, these things always go too quick. The podcasts are shorter by nature to, you know, certainly give an overview of what's going on, and so, as we run out of you know, butt up against the clock here. Do you have any closing thoughts or anecdotes that you want to leave with the audience?
Speaker 2:The only thing I want to leave is exactly what I've been kind of talking about this whole time. Right now, times are tough and you need to look under every rock, around every corner. Right, how do I keep my head above water and how can I do it with the right partner? How can I make sure I'm maximizing? Our potential, so do that.
Speaker 1:Well, thank you, Jake, for joining us today and sharing your insight.
Speaker 2:Thanks, Mike.
Speaker 1:I appreciate it, man. At the end of each episode, I'd like to take a moment and let you know more about the resources we have available. We have a robust workshop, conference and webinar schedule, so be sure to visit our website for more details on these, as well as our Education Hub and Resource Center for reporting webinars, articles and more. As always, stay safe, stay healthy and thank you for listening to our best interest in the first podcast.
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