Um, you know, revise we're at an all time high that said mortgage production's definitely still staying pretty high. We've seen purchase volume increase. We've seen new home sales start to skyrocket a little bit. Um, I think it was Fannie Mae showing that new single family construction's up 25% this year compared to last year. So there's definitely still a lot of volume out there right now.
Speaker 2:Welcome everyone to the 13th episode of in your best interest and AOM 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 Ehnes Weiler. I was recently reading an article from zero hedge that stated the fed is purchasing 40 billion in mortgages a month. As a result, mortgage rates and spreads are at or near historic lows. The benefit of lower mortgage rates is greater affordability for buyers while that helps everyone low rates also drive up home prices for the case Schiller 20 city composite home price index home prices are up nearly 17% since the fed started buying mortgages in early 2020 last September. In episode eight, we discussed maximizing mortgage profitability with our very own Alec Hollis. Now that we are almost six months into 2021, I thought it'd be great to examine the state of the current mortgage market. Since that time. Alan first is hired Anthony Olsen, who comes to ALM first from Fannie Mae's national client delivery team and capital markets pricing and sales desk. And that would be great to have both Alec and Anthony on the podcast to share their thoughts and observations. Thank you gentlemen, for joining me today. And before we get into our theme of the day, which is the state of the mortgage market. Anthony, maybe you can tell us a little bit about yourself.
Speaker 1:Absolutely. Mike, thanks. Uh, yeah, as you mentioned, uh, I've been at ALM first for about a month now, um, coming here from Fannie Mae where I spent, I spent eight years there working in a couple of different departments, primarily the capital markets pricing and sales desk and assisting the 1300 approved Fannie Mae sellers and hedging their pipeline, loan delivery, uh, credit profile. And then I also worked as a relationship manager and while I was a relationship manager, I covered 60 accounts, um, the, uh, on the Northeast and in Michigan, and these were all small to accounts and did a lot of technology implementation with them, whether it was the mortgages, uh, asset or income verification, making that as seamless as possible, but then also assisting them with their pricing.
Speaker 2:So tell us something about yourself that not many people know. Absolutely.
Speaker 1:Uh, so originally I'm from Michigan, uh, outside the suburbs and, uh, outside of Detroit, uh, I've played hockey pretty much my entire life. Uh, I played college and now that I'm a little bit older, uh, I spend most of my time trying to improve my golf game and fishing and hunting as much as I
Speaker 2:Can. So no, barely hockey on them these days.
Speaker 1:Not as much, not as much. I'm also, I'm also getting married in a couple of months. So that's taken up a lot of the time. Unfortunately,
Speaker 2:Brett hall went from the beer league to the NHL. There's still time.
Speaker 1:Yeah. Yeah. We all ended up in the beer leagues at seven nights. So I think I'm there.
Speaker 2:That's great. Um, you know, throughout your career, you've worked with a variety of community institutions, as you mentioned, focused on mortgage lending and secondary marketing. What are some of the challenges that each is facing in this environment?
Speaker 1:Yeah, especially I think last year there was, you know, a ton of policy updates and one of the biggest things, uh, people were facing was the origination piece of the mortgages. They were having a hard time getting, uh, praisers out there. They were having a hard time getting loan documents certified and all that really translated to their actual, uh, delivery, their delivery time increased. They have to manage extension fees and all of it made it much more cumbersome. And on top of that, the crazy volume that we had all last year. So,
Speaker 2:And Alec, you know, you've been running our mortgage pipeline, hedging service since its inception. What are you seeing? The challenges that our current clients
Speaker 3:Are facing? Absolutely. Mike and what's interesting about that is some of it is almost a little bit of a reversal from what we saw last year. Um, and again, since our primary client base is depositories, um, they, in a way have an option, do they sell it or do they portfolio well with the, uh, even though volume has a necessarily fallen off a cliff that the liquidity inflow has just been massive in the depository systems. So it's in a way almost a little bit the opposite problem, which ones do we sell? Which ones do we hold? So working with through clients on that question is something that we've been having a lot of conversations about. Additionally, you know, just the shrinking volume by itself, the shrinking margins as a result of the primary secondary spread, which has normalized over the last year or so. Um, it's just leading to a little bit less profitability. Um, so there's been a little bit of challenge there and just working with institutions, uh, as these market environments are influencing their profitability
Speaker 2:Know, I've talked to a number of institutions whose pipelines have gone down and they said their portfolio knowing more than they ever have. Part of that I'm sure is, is because as you mentioned, there's been this inflow of liquidity. So we need more earning assets on the balance sheet. Are you seeing them hold loans that they probably wouldn't have held in the past? You know, maybe even in the past, we're going to keep the high phyco, low loan balance type of loans. Do you see people stretching more just to have more loans on the books?
Speaker 3:That's an interesting question. Um, I think it varies. Um, I've seen actually some institutions say, no, we're not going to hold an investment loan. That's 30 years and we're sticking to our guns. Um, so it's, it's a mixed bag from my personal experience, from what I've seen. I think there is more of that. Um, but in general, um, most of the clients and most of the institutions we're working with, they're deciding to hold, uh, there, it sounds like they're a little bit ambivalent in a way. So when they have such massive inflow, they're really just looking to put it on the balance sheet by nature of concentration of loans, declining as much as it has. Um, and if it were me, you know, in some cases I even recommend, Hey, based on your total balance sheet, um, it makes sense to portfolio a little more loans, even though I'm involved in the mortgage selling process. Um, I like to always come to the table and in a holistic sense, looking at the total balance sheet and just doing what I would, you know, what we would perceive from it from ALM first perspective is in the best interest to, from a total balance sheet management standpoint. And that's really how we try to approach our clients as well. Um, in terms of, uh, doing what's best for them in a holistic sense.
Speaker 2:And so Anthony and your experience, you know, prior to a month ago, you know, have you, did you see differences from, let's just call it March to March, you know, the last 12 months, um, in how originators are dealing with their production? Yeah,
Speaker 1:Absolutely. I mean, obviously there's been a slow, you know, it's tough to keep up with the volumes that we had in 2020, um, you know, revise we're at an all time high that's a mortgage production is definitely still staying pretty high. We've seen purchase volume increase. We've seen new home sales start to skyrocket a little bit. Um, I think it was Fannie Mae showing that new single family construction's up 25% this year compared to last year. So there's definitely still a lot of volume out there right now.
Speaker 2:So I think Anthony, you touched on this a little earlier about some of the policy changes and you may have as well, Alec implemented by FHF bay recently. What are some of the big ones in, how are they affecting the industry? Absolutely.
Speaker 1:Um, I think last year throughout, uh, the pandemic, there was a different lender letter coming out almost every single week that, uh, wonders had to try to digest and implement into their origination process. But one of the biggest ones, uh, recently has definitely been the delivery cap on non-owner occupied loans. Uh, basically pushed down through FFA to both agencies for any loans that are backed by investment or second home properties. They can't acquire than 7% of their entire volume that they're purchasing. Um, both agencies are implementing this a little differently, how they're going to enforce it because they're both above that threshold right now. And they have to be there by year end. Um, Fannie Mae's really done it. Uh, any lenders that are over the 7% tap they have to get there, um, by July, August. And if you're a lender that is under the 7% cap, now you have to stay where you're at. And I think Freddy just came out yesterday, actually telling lenders that come July, they have to be at six and a half percent of their delivery volume. And, and the month after that, it'll be 6% of their monthly originations on a go-forward basis.
Speaker 2:Interesting. Okay. Huh, what else do you see on the horizon? Yeah,
Speaker 1:One of the other big one that's affecting some of the bigger, uh, large originators is the whole loan delivery cap. Uh, that's going to go into effect the beginning of next year and basically any lenders that are selling more than a billion and a half worth of loans direct to the agencies. They are no longer going to be able to deliver into the whole long conduit. And this is a roll of rolling 12 months, um, that they calculate, you know, this volume. So they've seen a lot of lenders starting to switch to MBS if they're going to be anywhere near that cap.
Speaker 2:Alec, how do you see that impact in our client base?
Speaker 3:Um, well, so we've, we've had many conversations about the idea, but many we don't work with, you know, some of the largest stuff lenders. So, um, that doesn't necessarily come into play for a good majority of clients. There's a handful that are concerned about it. And some of them are talking about directing the loan flow to other investors. Uh, even if it's just Fannie and Freddie, because I think when you have the one and a half billion dollar cap, you can direct it to either one of the two, as long as you don't max out, uh, for one of them. So
Speaker 2:If I'm approved for both Fannie and Freddie, I get to essentially$3 billion. That's correct. Yep, absolutely.
Speaker 3:But there's, there's another really looming possibility of continued policy volatility and change as well. Um, just based on right now, there's an outstanding pending Supreme court case. Um, it's Collins V uh, yelling in that case is actually, um, they're ruling on whether or not the structure of the FHA FAS leadership is constitutional or not. In a very similar case actually was, was done last year in 2020, where they ruled that the CFPB director, which had a five-year term was unconstitutional because they ruled that the, the, uh, director wasn't, you know, an agency is part of the executive function of the executive agency. So to say that the president doesn't have the right to appoint his own director of a, of an executive agency was deemed a constitutional in that case. And so it's very, uh, it's definitely, um, I couldn't really it in of the likelihood, but it's definitely a possibility that if this Supreme court case goes in a similar direction that, um, Biden administration may be able to appoint their own director and that could lead to some significant reversals in some of these very policies, we were just discussing in terms of the removal of the cap that they had just implemented. Um, the current director being mark Calabria has a five-year term on his, on his directorship.
Speaker 2:Interesting. So a new director effectively means policy change. Yep,
Speaker 1:Absolutely. Yeah. When Calibra really went and went into the role, his number one goal was to help the GSEs exit from conservatorship. So a lot of these policies that have been implemented have been to strive towards that goal. So
Speaker 2:How would that, how would that ultimately impact our client base
Speaker 3:The reverse, um, some of what we've been talking about, um, in the sense, but at a broad level, it actually doesn't impact them as much. Um, we, we do know that impacts the, the large mortgage market in a much more broad fashion. Of course, the total mortgage market, you know, total mortgage debt outstanding is, and, you know, 11 trillion,$12 trillion. It's just a huge, massive market with hundreds of billions in issuance each month. So, um, even just the investor property caps could direct another eight to 10 billion a month and flow to different sources and the cap on the whole loan, uh, purchases as well, uh, could even be more impact in terms of volume, but for our clients, um, they have an additional flexibility element that a lot of mortgage lenders don't have, which would be the balance sheet. So many of our lenders are actually in good shape. Um, regardless if this cap were to remain in place, um, either their volume isn't high enough because their portfolio being a good amount already, or, um, you know, their investment property portion of lending just isn't a huge portion. And even if they are a little bit above, um, they're able to find either another outlet or more, more than likely they can just tailor the sales to meet that 7% on an annual basis.
Speaker 2:Cool. All right. That's interesting. Good to know. Do you see any new GSE products coming to market? Yeah,
Speaker 1:That was actually just announced. Uh, I think it went into effect the 5th of June was from Fannie Mae. It was a it's called refined now, and it's basically a product aim to assist, uh, low income borrowers who have been unable to take advantage of the historically low rates that we've had over the past year or more. Um, and what it does is for any borrowers below 80% AMI, they're able to refinance, um, with some additional incentives. Basically they remove the 50 basis point adverse market fee hit that, um, that was put in place last September. And also they're allowed to refinance with a DTI of up to 65%. And I think it was just released today as well that Freddie is going to be coming out with the same thing starting in August and will be called a brief high possible. Uh, so definitely something that will is great for the borrowers and should help, uh, drive a little more volume to our lenders.
Speaker 2:We're halfway into the year, you know, talk to them, the audience a little bit about the mortgage market outlook, specifically as it relates to volumes and spreads and things that our depository clients would be interested in.
Speaker 3:Absolutely. Um, so as Anthony had alluded to earlier, volume is still relatively high. Um, it's not like volumes really fallen off a cliff. I'm again, most of the outlook that we were seeing, um, just involves, uh, depository specific lenders and how, you know, in general, even though mortgage volume itself is isn't, you know, falling off a cliff loan demand, uh, on the whole kind of is when it comes to just traditional core banking type lending. And so many of our clients are just experiencing really heavy declines in their loan to deposit loan, to share loan to asset ratios. Um, so, you know, we're seeing a, a really big, uh, trend, um, in that and whether it's involved with, you know, trying to purchase more loans. Uh, we're seeing a lot of activity in the, in the loan trading side, whether it's through different channels, trying to establish correspondent lending with private type, um, there's private type loan products and non QM, if you will. Um, there's a little more activity on the non QM space as a result of that. And perhaps even some opportunities to establish some programs there, uh, as more kind of lending picks up in that area. Um, and, and we're seeing clients very interested in that just based on the fact that, or at least some of them just based on the fact that they're looking to supplement loan demand. Um, in general, it's been a rates up environment for the year. Uh, so we've seen treasury rates increase a good amount. Um, I think we're at one fifties around, at this point in time, whereas, you know, in the beginning of the year, so it was, I mean, hard to believe, but just probably half that value, you know, around 70 basis points or so. So it's been a rates up environment we've seen pay ups collapsed quite a bit. That's one conversation we're having a lot, uh, with our current clients in terms of, um, the pay ups on loan stories, low loan balance. Um, for example is a story that right, because the low loan balance has less refund Centive. So therefore the prepayments tend to be a little more predictable and stable. Um, so those types of stories get a pay up relative to TBA. And those pips, uh, really were very wide. They widen out a lot in 2020 just based on the rates falling. They tend to be rate directional. So when rates fall, um, refi send a boom, prepayments become very uncertain. It's hard to predict prepay. So therefore call protection or the value of that pay prepay stability increases. So pay it's really widened out in 2020. Um, if you made it through March chances are you had a great year in 2020, that's what we've been talent telling all our clients. Um, so, you know, we're seeing that reverse itself a little bit too, just in terms of, you know, what's different this year than last year. Well, last year was a bit of an anomaly and some of what we saw last year is, is kind of coming back to bay and pay us is one of those things as well. Um, it's, it's part of the performance and as rates, uh, kind of are increasing prepayments are becoming a little more predictable. The market's becoming a little more at, you know, at bay and at, I used with the current pre-pay environment. So that protection of that pay up is stinking. So we've seen a little bit of that. Um, and we, you know, continue to expect, um, volatility in any way really. So we're, we're continuing to just ensure that our client's coverage is set in the appropriate manner. I'm not sure Anthony, if you've seen anything in terms of, uh, the Fannie Mae or Freddie Mac's, uh, updates on the, on the housing market.
Speaker 1:Yeah, absolutely. I mean, like we've said earlier, um, based on the analysis we've looked, our lenders pipeline is about 50, 50 refile now versus purchase. So, um, you know, despite what a lot of people think that volumes are just going to drop off, we've seen new home sales increase, new, uh, new con new single family construction increased dramatically, and all this should continue a very strong rest of 2021 here. So positive outlook on the lending side. Absolutely.
Speaker 3:And a lot of big banks actually are gearing up for a stronger loan demand, not just in the mortgage space, but just in general. Um, when we're tracking the industry, um, we S we listened to it on some bank earnings calls and looked at some earnings released statements and everything like that. And earnings are definitely a upward trend, especially relative to a year ago when they took a big dip. Um, but you know, they have to return a directory of profitability. A lot of it's related to provisioning. So credit loss is not coming in as strong as people once thought that, that it would, um, based on the initial outlooks of the COVID environment back in March of 2020. Um, but, uh, so just pricing in and kind of expecting a pickup in demand does seem to be a bit of the, uh, trend that we're seeing as well. That's
Speaker 2:Great. So we talked a little bit about excess liquidity. Some institutions may be portfolio going more than they have in the past. Let me ask you this. Is there a continued need to head your mortgage pipeline in? What if so, you know, what are the advantages of TBA? Yeah,
Speaker 1:Absolutely. I mean, the need to head your pipeline is always there. Um, I mean, we've seen just over the past week, we've seen a rally in the TBA market without a lot of economic releases coming out, a lot of speculation about, you know, possible fed tapering and th the, um, the effect that will have on the market. So, you know, when the hedge, we're not trying to increase, uh, you know, revenue dramatically, we're trying to maintain that profit margin that you planned on making when you originated that loan and hedging with TBA is arguably the most efficient way to do so. You're hedging mortgages with mortgages. So they correlate very together. And most of our customers, you know, that switch from a best efforts, um, execution switching to mandatory, they're making an additional 25 to 50 basis points through that type of delivery.
Speaker 3:Absolutely. I think that's well put, and yeah, we see the need to hedge, as long as you're continuing to sell, uh, as, as just a business, as usual type process, it's just fundamental the way we see you posting your margin and you had your risk, um, because it's definitely a, we've seen it happen before where the market moves in one direction and, you know, your profitability goes through the floor. Um, so that level of volatility is something that we're actively trying to mitigate through. Uh, hedging hedging is really about managing risk. Now, what we will say is, you know, if you're not selling loans, the idea of hedging actually becomes a little different, and we've done a lot of kind of topics on the difference of core balance sheet hedging versus mortgage pipeline hedging. And one of the major differences is mortgage pipeline. Hedging is pertaining to loans that are intended for sell, and your loans held for sale as opposed to, you know, loans that you're holding on the balance sheet for the total life of the loan. So that'd be, you know, held for investment say, um, so there are some differences there. Um, but in general, uh, we do see the need, um, as you know, rates continue, uh, the uncertainty of the direction of the market, you know, all of those, all of that. And additionally, uh, implementing certain strategies as well. We are seeing institutions becoming more interested in, uh, helping bolster income through, um, Kerry strategies, you know, held for sale, you know, earning the interest, carry on the held for sale book and holding that hedged. Um, so those are other strategies that, you know, the hedging can also be complimentary to. So it's not just about, you know, managing risk, but it's also about, you know, Kerry strategies which can help build profitable.
Speaker 2:Yeah. Increasing path. Really. I liked that. So, Anthony, you talked a little bit about it generalizing, of course, but moving from best efforts to mandatory saving 25 to 50 basis points. What about as you were just talking about Alec, what if you go from mandatory to, you know, selling to the discount window, what kind of the pickup can you see there, if any,
Speaker 3:Um, so going from a mandatory strategy only to sort of a TVA hedging strategy, um, does involve, uh, it does definitely involves a little more work in terms of understanding kind of the nature of the business, right? So the cashflow model changes a little bit. You're no longer using the liquidity provider as the hedging instrument as well. So, um, it's really important to be on the same page in terms of the accounting and everything that works there. Um, and some of the pickup really just depends on the operation. Um, so, uh, best efforts to mandatory in a way is, is a lot more quantifiable, um, because there's an easy spread that you can really quantify, but on the mandatory side, you know, let's say you're doing 45 day mandatory 60 day mandatories. And then, you know, you get into a position where loans are delayed, underwriting is taken a little longer, or maybe it underwrites a little faster. Um, well, if it underwrites faster with the TBA hedge, it's, it allows for timeline, flexibility. That's one of the biggest values. Um, that's why you can also do the health for sale carry strategy as well, because you don't have to lock into 90 day price. Um, and then continue extending it. It's, it's a dynamically hedged TBA hedge. So therefore it's rebalanced daily. Um, the cost extended just isn't, isn't the same in terms of extension fees. So it can enable more flexibility and more streamlined, uh, commitment management. And I know Anthony has seen a lot on that end.
Speaker 1:Yeah, absolutely. I mean, the ability to roll your position still the next month pare out when you're able to deliver it makes everything a lot more streamlined, managing commitment by commitment. Uh, when you're on delays with getting loans certified and having to extend those, it's a very cumbersome process. So that's one of, you know, one of the many advantages of utilizing the TBA strategy pairing out and then delivering into mandatory short-term five day commandments say, so you guys, aren't going to give me a number,
Speaker 2:Our compliance folks will appreciate that. So, you know, one of the great things about this podcast is that we're able to tackle a subject in a very short period of time and, you know, kinda get under the hood a little bit. But the downside is we can't take too deep of a dive and we are pushing up against the clock. So let me just ask each of you, you know, if I'm a mortgage originator, if I'm a depository, especially what are the top takeaways that I should have, um, from this conversation or from the market in general?
Speaker 1:Yeah, yeah, absolutely. I mean, as always, as we've seen over the past year and a half, I think we can expect many more policy changes to be put in place. Um, I think every time it seems that the waters call and that they throw a curve ball at us and it's something else we have to put in. Um, that said, I mean, mortgage origination volume is still very high right now. And I think we can foresee that continuing, uh, for the rest of this year
Speaker 3:Talk to is from my perspective would be the, you know, this is about scalability, right? We're, you know, credit is provided a great service community. Banks can do a great job in lending. And as that business grows, um, it's necessary to have tools in place to be able to manage the risk and have liquidity channels for selling loans. Um, so really the question is when you set up a management process for managing the risk, well, what do you do then you do more of it, right? You continue to scale the business. Um, this is all about scaling the business and managing the risks that's inherent in that. So, uh, from my perspective, you know, I w I would love to encourage anyone who's listening. Um, you know, do you do a great service, and this is about really continuing to do more of it, make hay while you can and make hay.
Speaker 2:All right. Well, thanks so much, gentlemen, for joining me today. Thank you, Mike, for having us. Absolutely.
Speaker 3:It's very much my pleasure, really happy to be here.
Speaker 2:I want to thank Alec and Anthony for taking time to share their thoughts on the state of the mortgage industry. At the end of each episode, I like to take a moment and let you know about some of our additional resources we have available. Registration is open for the Halem first financial forum. Anthony and Alec will be part of the mortgage panel along with Robert Perry at this event, and will be a good time to meet them and gain additional insight. We also have a robust webinars scheduled, so be sure to visit our website for more details on these and additional educational offerings, as well as our resource center for recorded webinars articles in more as always stay safe, stay healthy. And thank you for listening to in your best interests in ALM first podcast,
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