BONUS: Navigating Tariff Changes: Impact on the Mortgage Industry With Chris Maloney

Jim Glennon: 00:00:02

Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by Optimal Blue. Let's dive in and help you maximize.

Alex Hebner: 00:00:12

Your profitability this week.

Jim Glennon: 00:00:18

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm your host, Jim Glennon, Vice president of hedging and Trading and client services at Optimal Blue.

Our clients and industry partners have long relied on Optimal Blue for trusted insights and commentary. And these podcasts are an evolution of our commitment to keeping the industry informed. Welcome everybody. Today is Thursday, Thursday afternoon.

We just had our last podcast Monday of this week.

In the interest of keeping the industry informed, we will always strive to bring you up to the hour current events and this is one of those weeks where we really need to do that. We've got a great bonus episode for you today.

We've been keeping you informed about tariff related market turmoil as of late as it's been dominating the headlines, especially if you're at all interested in the capital markets very much near and dear to us in the mortgage industry. And we've even shared some hot takes along the way and what we expect in the coming weeks and in the coming months.

And we don't always agree with each other and we'll probably all be wrong in the end, but we figured why not bring another voice into the conversation, in this case, a voice far more educated and smoother than my own. His name is Chris Maloney. We have Chris Maloney with us. Chris is a vice president and head of Mortgage Strategy at Bank of Oklahoma. Welcome, Chris.

Chris Maloney: 00:01:42

Thank you for having me. It's somebody else to join you. And I can be wrong too.

Jim Glennon: 00:01:47

Yeah, that's right, that's right, that's right. We're keeping a scoreboard on the side. I've got a notepad where I'm keeping track of everybody's tariff projections. It's just crazy times we're in.

Unless you've been completely off the grid this month, you know about the tariff drama. But I'll just recap what's going on this week. So this past weekend we had just the tariff fight between China and the U.S. that escalated, right?

Tariff, reciprocal tariff.

And so on Monday morning we had this rumor that, well, it was a rumor at the time that There was a 90 day pause being contemplated by the White House. So stocks went back up briefly. We had a little bit of a rally. People were happy for a moment. Turned out that was a false rumor, at least at the time.

So equities faltered that day. Then On Tuesday, absolute bloodbath in equities. And then bonds started to take a pretty good beating as well.

And I think that really freaked some people out, maybe even the president at that point. Business CEOs, other people within the administration were speaking out publicly. We had the 10 year hit four and a half percent overnight.

The 30 year treasury hit 5%. Our, our OBMMI, which we've talked about every week and recently we were, you know, kind of applauding it being below 4 and a half.

Is it like 6.8 now?

So a little bit of damage down there and then you had Wednesday yesterday, a little bit of recovery because the 90 day pause actually did come out for every country but China, which was a pretty big change.

Although, you know, we'll talk here a little bit about, you know, we do a ton of trade with China, but at least opened up more room and more time to have conversations with many of these other nations to, to make, to make tariff deals with us either above, below or at that 10 base level that was implemented instead of some of the 30, 40, 50, 70% tariffs that were originally announced last week. So, you know, move on to today. We're still, we're selling off again after historic rally yesterday.

And I think, you know, some of that may be because we realize the China issue is pretty big. You know, that there is a trade war there that's escalating quickly and that could caused a lot of problems for businesses in our country.

MBS also down today, so yields continue to go up. So a little bit of stress there, you know, not in a great spot at the moment. So where, you know, where do we go from here?

And I'll, I'll shut up a second to get, you know, to get a little input from, from Alex and, and from Chris.

Chris Maloney: 00:04:26

If I could start off, I mean one, I hate the term trade war. It's not a war. Trading with people is peaceful. It's mutually beneficial.

And it's a shame that we're at the, you know, Adam Smith, years ago in the wealth of nations, he said tariffs and trade restrictions come about due to national prejudice and animosity. That's what we see here right now.

Now we have to remember that if you combine China and America, the two largest economies in the world, we account for about, I believe it's 40% of global GDP. Ridiculous like that. And China, we have the largest trade deficit of all with China.

And that's where the animosity comes from because people look at it as a win lose situation with trade.

You Trade with somebody because it's mutually beneficial, because the division of labor that again, getting back to Adam Smith talked about certain nations do something better than other nations. So like for example, you know, we could make champagne in America, but who would want it?

We buy from France, they make better champagne at a decent price. So we have a. I believe the total trade last year with China was about 450 billion.

We have approximately 310 billion trade deficit with them last year, the largest trade deficit of any nation. But we have to remember too, we also export a lot to China, to the third largest nation in terms of our exports in the world.

We export about 130,150 billion per year to China. There's a lot of agricultural products go there, especially soybeans. A lot of oil goes there.

So a lot of businessmen depend on this relationship with China as well. So, you know, people look at it like it's a war and I think it's the wrong way to look at it.

Jim Glennon: 00:06:27

No, that's a good point. I think it's, I don't know, call it a dance or a negotiation at this point. But until now, I guess it's been generally status quo.

But now we've reached a point where we're kind of tearing down the world trade map and putting it back together in some ways. Right.

Chris Maloney: 00:06:46

Well, and it's a shame because you look at it, for example, like what are tariffs, especially the prohibitive tariffs we put on China, which even though the latest executive order, we have 90 day delay and these retaliatory taxes or reciprocal taxes, excuse me, what they're calling them, but China, those tariffs are still in effect. It's 124%. They retaliated goods coming from America to China. It's an 84% tariff. Now what is the purpose of that?

The purpose of that is to literally stop imports into your own country. That's something you do to the enemy in times of war. So right there people should stop and think what are we doing to ourselves?

Because ultimately, you know, you could say tariffs are paid by the corporations, the importers, the foreign country. No, they're not. All tariffs and tariffs are a tax are paid for by the American consumer. That's who pays all these taxes.

And we're only hurting ourselves.

Jim Glennon: 00:07:53

Interesting take. Yeah.

And I know it's a fairly common take, especially with, with those that would look at kind of the traditional textbook examples and teachings of, of what tariffs are and how they've been used in the past. Right. As you said, during actual war. Right. Tariffs are levied on. On countries to stop the flow of goods.

But, I mean, in this case, there's so many countries involved and us kind of being in the middle of it and orchestrating it and being the, you know, the. The largest economic power in the world. I mean, are we doing some of this as a negotiating tool?

Are we doing some of this in some sort of retaliation or trying to exert some sort of influence on countries like China that have been accused of unfair trade practices or even kind of shady ways that they procure labor to build certain things that they could sell more cheaply to the US and other nations?

Chris Maloney: 00:08:50

Well, you know, there absolutely are instances where you could look at, for example, if you're trading with country A and they utterly refuse to allow imports from you. And what that does is they accumulate a lot of your debt because they've been recycling all those trade surpluses back into the US Dollar.

And where this all comes from, the problem is now you're never allowed to mention a gold standard. It's considered a barbaric relic. But when the world was on the gold standard, we were all using the same exact currency.

Ultimately, the currency was gold. And the flows, the inflow and outflow of gold is what kept trade on an even keel because that would raise or lower domestic prices relative to.

To your trade partners, and that would equalize your trade flows. We don't have that anymore. We've broken up into our own little blocks.

Every country has its own currency, which is easily manipulated, and people use a national currency for nationalistic purposes. And they can have. What would you consider, and Trump obviously considers unfair trade practices. And that raises all the problems we have today.

And as long as we are all on a fiat money standard, and we're not all using a common standard for the monetary system, it's never going away.

Jim Glennon: 00:10:20

Right.

And that's been whispered about a little bit or even maybe louder than that, that, that China may or may have already influenced their currency valuation a little bit to deal with some of these tariff issues. Is that when you. To Alex or Chris, do you have. I don't want to get too political with this, and I don't know that we are.

I think some of it's just economics. It's math. Right. I mean, we've sort of done it ourselves with Fed intervention.

Chris Maloney: 00:10:46

Everyone has a central bank, and when you're on a fiat currency, the entire purpose of a central bank is to manipulate your currency. Everybody manipulates their currency without exception.

Jim Glennon: 00:11:00

Right. It's just in the US It's Ostensibly separate from the federal government, it's still open to the free.

The free market still kind of drives prices and drives the value. But there's influences you can push and pull by qt, quantitative easing, lowering rates, raising rates.

But other governments could potentially literally just change the peg. Right? Change the value overnight. Exactly. We're on a number.

Chris Maloney: 00:11:28

But if you look at the Federal Reserve act, the very last clause of that act states the Federal Reserve act may be amended, altered or abolished at any time by Congress. The Federal Reserve is a political creature through and through.

I mean, yes, it has ways to fight back if the executive branch wants to really take away some of its power that it has. But it only has that power at the behest of Congress.

Jim Glennon: 00:11:57

Sure. Yeah. I think for now we'll hope that that does not happen. It is not a factor in the, in the tariff war or the tariff discussions.

I mean, what happens now internationally? And this is, again, we're just getting into speculation here, coming up with our own ideas of what could happen.

But so now we've got China singled out in these, these tariff discussions. Does China become a pariah, a world pariah, potentially? Do we maybe the US Becomes a pariah because then we've kind of been singled out as well.

Are we in the middle of the boxing ring right now and the rest of the countries are just watching to see how this plays out?

Alex Hebner: 00:12:34

I think the US has put itself in a bit of a tough situation in that a lot of our allies, the friends we have around the world, have felt un maybe not unjustly, but they thought they had a special status or a special relationship with the United States that, you know, that would maybe have excluded them from the tariff regime. You know, we kind of applied blanket tariffs across the board.

Whether you're, you know, a friend or I guess we don't, we don't trade with our real foes. But, you know, folks were a little bit less friendly with no favoritism.

Jim Glennon: 00:13:06

It was like, abrupt. Like, suddenly all of our friends are on the same row. Right?

Alex Hebner: 00:13:11

Yeah. And you can get into the geopolitics, too.

Europe isn't too happy with us over, you know, our talks about they need to, you know, kicking their own money for their own security. And the Ukraine, I think the US Long term, may have backed itself into a more difficult position than it otherwise would have found itself in.

But who comes out on top in regards to the China US Spat? I think it's just going to be who blinks first in regards to this. And I think both sides have cards to play.

China is a large holder of our Treasuries. All these articles, I guess 48 hours ago now talking about they can pull the lever and sell our Treasuries.

Not that they own a vast majority or half, you know, by any, any means, but enough to move rates up and flood the market. So, so I think that's, that's a card they still hold. But again their economy's already in a weak spot.

The 100 plus percent tariffs that we have now in place on both sides, I think that's already going to, to slow their economy as well. So I think that that plays into our, into our hands. Well, we'll see who, who comes out, who comes out looking like a hero or hard to say.

I, again I come back to my, what I initially said there. I do think we started it this time around.

Chris Maloney: 00:14:24

So you know, one thing, especially when you look at Europe, you know, America is horrible at being an empire. We're not any good at it. Historically empires would take from their vassal states. America does the opposite. We give to our vassal states.

We provide them basically military coverage for free that cost a fortune. And the quid pro quo has always been we will protect you from Russia, China, whoever the bugaboo is and we will trade with you.

But you recycle all those trade dollars back into the treasury market which allows us to keep borrowing money from, to pay for this massive money losing empire that we have. But one of the things also that keeps underpinning the dollar is the fact that it is the reserve currency of the world.

If you look at trade flows, Even today about 85% of all trade flows are settled in US dollars. That's a massive demand for US dollars. What has changed over the past 30 years?

If you look at central bank reserves around the world, the amount of dollars in central bank reserves, if you include gold holdings which have skyrocketed over the past 10 years, US dollar holdings have dropped below 50% of total global banking reserves that there now, I'm not saying it's going to happen tomorrow. There's still absolutely no substitute for the US dollar because there's nothing out there which is large enough to, to handle all these trade flows.

But you could see sometime in the future when it happens. I don't know. There's been whispers that the BRICs for example are going to institute a gold backed dollar that would crush the US dollar.

That would absolutely lead to war. Who would you trust? Would you trust a paper dollar which only keeps its value at the good sense of whoever runs the Federal Reserve.

Or do you trust gold? I think anyone with any brains would trust gold.

Jim Glennon: 00:16:34

Maybe I'm like the lone person on the desk here in Denver that wonders what go why gold's worth money other than like, I don't wear a chain or anything. I got this isn't for this podcast, but I've always been skeptical.

Chris Maloney: 00:16:50

I'll answer that.

Jim Glennon: 00:16:51

How useful gold is.

Chris Maloney: 00:16:53

Gold makes an excellent money because it has. It uniquely has a characteristic unlike anything else. You can't counter, can't fake it.

Jim Glennon: 00:17:03

Yeah.

Chris Maloney: 00:17:03

So it makes a very stable base for your monetary system. That's why it's been used throughout history.

Jim Glennon: 00:17:09

That helps. Yeah. And you can hit somebody over the head with it if it.

Chris Maloney: 00:17:13

Exactly. Take a bar, whack them over there.

Jim Glennon: 00:17:16

If we end up at war. Yes.

Alex Hebner: 00:17:19

No, Chris, actually, you got to my question before I was even able to ask it. I did want to ask dollar hegemony, is it at risk?

You know, in like you said, it's not going to happen tomorrow, but on a two to three decade horizon, you know, are we looking at a global shift away from, from the dollar?

If, you know, if the petrodollar falls apart, if, you know, oil transactions start to be settled, you know, outside the dollar, or the majority of them start to be settled outside the dollar, if that. And what that looks like for us.

Chris Maloney: 00:17:52

The worst one, your interest rates would certainly skyrocket inflation, because what being a reserve dollar allows us to do, it allows us to export inflation because everybody's linked to the US Dollar. They have to mimic your monetary policy. But the real problem with the dollar is the unending deficits.

People are starting to notice that the deficits we're running.

And right now the deficit run rate for this fiscal year is $2.5 trillion, largest in at least five years without the excuse of a recession to explain it away. But the weaponization of the US dollar is really the problem. That's not a recent thing. It's been over the past 20 years.

If you want to be the reserve currency of the world, everybody from the Pope to a drug lord has to trust your money. And what we did, for example, when Russia invaded Ukraine, we literally stole their central bank reserves.

Now everybody looks at that and even our allies are going to look at that and think, well, we may be friends with America today, but what happens if we get on the wrong side of America? What do we do then? So that pushes everybody to seek alternatives. That's the biggest threat to the dollar.

Jim Glennon: 00:19:19

Sure.

Alex Hebner: 00:19:21

Absolutely.

Jim Glennon: 00:19:22

Okay, man. We're Getting heavy here. So I mean just bringing this back to tariffs. Some of what we're doing right now is not making friends.

I suppose at least at the moment we're doing some negotiating internationally and otherwise we may be stoking inflation, so we may have some inflation to then export and hopefully still end up on top of maybe a higher cost situation around the world. So some of that damage is being done right now and we'll find out I guess in these coming weeks where we end up.

I mean where do you, you two, where do we all think we end up in terms of, I don't know, average tariffs? Which countries are most effective affected? Is this mainly and us against China situation?

Do we, you know, we work things out with Canada and Mexico, like I don't know, where do you all think we end up in a couple of.

Alex Hebner: 00:20:10

Weeks, A couple of weeks out.

Jim Glennon: 00:20:13

A couple of weeks out and then the 90 day, you know, deadline.

Alex Hebner: 00:20:18

I don't see. I honestly thought that the reciprocal tariffs on the rest of the world were going to be held for more than 12 hours.

You know, I did, I did expect them to be pulled off. But you know, 12 hours shocked me. I had to unwind a corner. Quick little stock trade I had going middle of the day.

But no, I, I do, I, it's unsustainable.

Everything Chris said earlier in regards to third largest trading partner, you know, if the EU is counted in their third or fourth largest trading partner, we, we export tons to them and 100 plus percent tariff on them, 85% reciprocal. It's unsustainable for the, the global economy. We're speeding towards a cliff at the moment. I think.

You know, these Again, we are 36 hours into this tariff regime with China. It has yet to hit corporate earnings, it has yet to hit the inflation metrics. It won't hit the inflation metrics until the earliest in June probably.

So I do see a reduction. I could see it being gradual. I could see it, you know, 20% at a time maybe as we get concessions.

But I don't see the current regime that's in place holding for more than 90 days. I'm ready to be wrong. I've been wrong on this podcast before.

Jim Glennon: 00:21:34

We're all going to be, I mean, does that sound right?

Alex Hebner: 00:21:37

Chris?

Jim Glennon: 00:21:38

We were talking before the podcast in terms of sustainability. It does not seem like who's going to make an iPhone this year, next year, the year after that in the U.S.

you know, to build factories, to come up with infrastructure for some of these things is I believe physically Impossible or a lot of folks would, would say that. So we have to come to some, I don't know, tapering process.

Chris Maloney: 00:22:03

If I was China, looking at the current administration, one thing you do to get past Trump is you, you stroke his ego. It's the easiest thing to do with the guy. He's, he's. Well, I'm not going to go there. But the point is that's the easiest thing to do.

Show, show any type of deference to him. And that opens up doors. We trade too much with China to completely cut it off. I mean we have a lot of reciprocate and, and again, trading is two way.

As I stated, they're one of our largest trading partners just outside of Mexico and Canada. And but the, if you look at the reciprocal tariffs we put on, they hit hardest in all throughout Asia.

You look at Vietnam, Cambodia, they were both going to have tariffs of I believe just shy of 50%. So people are going to come and kiss the ring. The threat to all this is we're dividing up into different trading blocs.

And the, I read something not too long ago where the Trump administration was saying, well, if anybody trades with China, then we're going to slap tariffs on you for trading with China. Now that right there, everyone would resent that, any country would resent that type of attitude. So right now things are at a boil.

I'm hoping over the next 90 days everybody calms down a little bit, especially in D.C. because all in all, to disrupt trade in this manner, you're going to see a hit to the economy.

You're certainly going to see a hit to inflation because it's going to disrupt trade routes. And if everyone's pricing in right now, four Fed rate cuts by year end.

But if you look at what Powell said, what Lori Logan said yesterday, what Cash Carry said the other day, like if tariffs push up inflation, it's going to make it very difficult to cut rates. So there's four rate cuts priced in, those are going to have to be unwound and that's going to raise interest rates again.

And already inflation is a problem. If you look at since the Fed began to cut rates on September 18, 10 year interest rate is higher, the 30 year mortgage rate is higher.

So they're really between a rock and Iraq. And this isn't going to make their job any easier. Even if it does lead to a recession.

Alex Hebner: 00:24:29

I think the American populace in general is less inclined to weather the tariffs as China may be. I think the Chinese would largely see this as you know, we say that these, these tariffs are retaliatory for their trade practices.

I don't think they see it that way. And I think that China would have a more of a rally around the flag effect than, than we would hear domestically.

Chris Maloney: 00:24:51

Yeah, China has an advantage if you want to look at it this way, and the fact that they don't have to worry about the next election cycle. So they can. And you know, one of the things with democracy is, you know, the people sitting in the seats of power change pretty frequently.

So historically speaking, democracies are extremely difficult to deal with because you never know how long they're going to stay on their current course. And markets don't mind bad news. Markets, like good news markets cannot stand uncertainty.

And unfortunately the current administration is the embodiment of, of uncertainty and that's why you've seen volatility spike and that doesn't help mortgages at all. And in effect that doesn't help mortgage rates and that doesn't help housing. So I agree with Alex.

I don't think the American people, once they see the effect of this in terms of inflation and its effect on the economy, the Republicans can come in for a lamb basting during the midterm elections.

Jim Glennon: 00:25:58

Right. And that's something I wanted to be sure we covered before we wrapped up was what does this do for the mortgage industry? Right.

And it's, it's not right now. It is not great. Even though sometimes volatility can be, can be good for us. Right. This time around it seems at least this week it's been bad.

We had a good run in January and Feb. March. Now we're getting a little bit worse.

It seems with some of the, the inflation pressures we might need to expect what we've been expecting for about the past six months, which is, which is higher for quite a bit longer would be my opinion.

w. I started Getting March of: 2020

You wonder if that was contemplated in the closed door Fed meeting that was, that took place a few days ago. I don't know. That's the only thing I could see is just is a catastrophe causing rates to go down.

But otherwise we're just kind of stagnant for the next couple of years.

Chris Maloney: 00:27:13

I would agree. I, at the beginning, at the end of last year when I was look doing my forecast for this year and again, I don't like the forecast more.

Jim Glennon: 00:27:20

Than six months ahead because sure, it's all just conjecture.

Chris Maloney: 00:27:25

Yes, exactly.

But even now, and if you look at the 30 year conventional rate is bumping back towards 7% historically speaking, it's a very low interest rate for mortgages but you have a massive lock in effect on current homeowners. Even now about almost 60% of all American homeowners are paying 4% or less on their mortgage. So they're sitting in place, especially with inflation.

They don't want to give up a cheap mortgage, the one thing they have. So what that's done is that's it's not so much the new home sales and home building that's held up fine, not great, but okay.

It's on the existing side of things. Existing home inventory is about half the average seen this millennium. That's the problem in the housing market right now.

And I can't see anything that could be done with that outside the catastrophic drop in mortgage rates. And what are you going to do then? Where are they going to go? Because we have a shortage of single family homes in this country to begin with.

So all that's going to do is shuffle the deck on the Titanic.

So until such a time as you have the three days gradually wind down the amount of people in these ultra low mortgage rates, the amount of inventory available for sale is not going to skyrocket anytime soon. So I don't see any relief for the housing market at all.

I mean, and with the tariffs, I've read anywhere these tariffs go into effect, they say it can raise the median sales price of a new home anywhere from 8 to $21,000. And that's not going to help.

Jim Glennon: 00:29:12

No, that's fairly significant. And yeah, like you said, I think the 3D, it was a death divorce default.

And there's also time, I think just as time goes by, we're seeing, you know, this year we'll see a little bit of a pickup in volume and next year and so on just from folks absolutely needing to, to move out of their houses. But you're right, we're, we're still at rates that are double what they were, you know, a few years back. All right, gentlemen, did we miss anything?

I'm sure we could talk for three or four more hours on these, on this subject.

Alex Hebner: 00:29:40

I love talking with you, Chris.

Jim Glennon: 00:29:42

Yes, I mean, I think that, you know, one thing we were talking about before. I don't know if we all want to sign off with this, but what. What should we go out and panic? Buy right now? Because tariffs are coming?

I bought some shirts, or my wife helped me buy some shirts.

Chris Maloney: 00:29:59

Hey, Tay, 30 years in this industry, never panic. We've seen this all before. This is nothing new. I mean, look, Trump is definitely an X factor, but when all is said and done is.

Oh, it always comes back to fundamentals. Always take a deep breath. Think before you leap. That's all I could say.

Jim Glennon: 00:30:21

Wise words. Wise words. Yeah, I think. And it's fun, isn't it? I mean, at the end of the day, once it's all over, we're blessed.

Chris Maloney: 00:30:30

To do what we do. This is fun. It's fun.

Jim Glennon: 00:30:33

All right, great, gentlemen. This was fun. Appreciate you. Thank you, Alex. Thank you, Chris, as always, for being here and always fun. Yeah. Hang on to your hats, everybody.

Good luck out there.

Chris Maloney: 00:30:45

Yeah, definitely. All right, gentlemen, have a good weekend.