The Current Landscape of Mortgage Servicing Rights and Recapture | Nov. 25, 2024

Jim Glennon: 00:00:31

Welcome to Optimal Insights, your weekly source.

Ben Larcombe: 00:00:34

For real time rate data and expert capital markets commentary brought to you by Optimal Blue.

Jim Glennon: 00:00:39

Let's dive in and help you maximize.

Jeff McCarty: 00:00:40

Your profitability this week.

Jim Glennon: 00:00:44

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 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. Let's dive into today's episode. Hey, gang. Welcome. Today on the podcast we have Jeff McCarty, VP of Hedging and trading product.

We also have Vimy Vasudeva, managing director on our desk. And we've got Ben Larcombe, team lead on the desk and resident market expert. Welcome, everybody.

Jeff McCarty: 00:01:22

So Ben and I got the memo. It's flannel season. But Vimy and Jim, you're, you're slacking on that.

Jim Glennon: 00:01:28

So I know it's, it's a holiday week and everything.

Vimi Vasudeva: 00:01:32

Missed a memo, sorry.

Jim Glennon: 00:01:34

Yeah, we do have a nice holiday week shaping up here. In case you're not aware, the bond market is closing all day Thursday and it's closed for only half a day on Friday. Not everybody is aware of that.

And full day Wednesday. We do expect Wednesday to be pretty slow in terms of lock volume and just trading volume in general.

So if you're selling loans this week, for instance, you really want to get a lot of your trading done Monday and Tuesday. Wednesday will be difficult. Liquidity. Thursday closed, obviously, and then Friday is just a really lame half day.

Jeff McCarty: 00:02:08

Yeah. And the reason there's a rule the market can't be closed two business days in a row. Right.

They're just trying to make sure that any sort of, you know, global economic news has, doesn't kind of get pent up.

I think that was, that's one of the main reasons they do that, so that, you know, you come in Monday and you've got several days of news that have been pent up in the market that'll be received Monday.

But, you know, essentially that's what happens anyways because Friday, you know, half day, very few people working, not much liquidity in the market, probably not many people locking loans. So it's a little silly. But there is a reason for why the market is open.

Jim Glennon: 00:02:46

Yeah. Can't have the market closed for a full four days.

Jeff McCarty: 00:02:50

Yeah, I think the only time it's happened is certainly 9, 11. Obviously the market was closed for a While I think one of the hurricanes that hit New York pretty bad, the market was closed for a couple of days.

A few other weather related incidents that hit New York in particular. Sometimes the market will be closed, emergencies only to be there.

Jim Glennon: 00:03:09

Yep.

All right, in a minute here we'll talk with Ben, check in on our market update and then as discussed last week, we're going to have Vimy do another recap of the MSR topics that we talked about and then get a download from Vimy about what was discussed at the IMN conference in New York last week. First, we hope you're planning on making it out to San Diego for our for our summit. We've talked a lot about it on the, on the podcast.

You're probably getting a lot of marketing materials about it. Early bird registration is still out there, so please do register for the conference.

It's February 3rd through the 5th at the Marriott Marquee San Diego Marina. So very much looking forward to that. Again, no matter what your role is within a mortgage bank, we'll have something for you.

We'll have a full track of things for you to sit in on during the week, whether it's panels, instructional educational sessions or other kind of profitability discussions. And of course we have Tony Hawk. Tony Hawk will be there. That's right.

Jeff McCarty: 00:04:10

Should be a great time.

Jim Glennon: 00:04:11

It will be a very, very fun time as well. All right gang, let's, let's go check in with Ben and see what's going on in the market.

Jeff McCarty: 00:04:20

All right Ben, my fellow brother in flannel. Welcome.

Ben Larcombe: 00:04:24

Glad to be here.

Jeff McCarty: 00:04:26

Yeah, so pretty slow week past week. Not too much going on like we talked about in the holiday week, but a few things worth noting, right?

Ben Larcombe: 00:04:34

Yeah, yeah, for sure.

year over year increase since: 2021

However, a lot of this is probably just due to lower rates earlier this fall. Kind of filter it into the the actual existing home closings, you know, once they finally closed here.

So it seems like we're likely to see another slowdown with just knowing with what rates have done. We also got housing permit and housing starts data last week, both a little bit below expectations. So not a great sign there.

Some of that could probably be attributed to hurricanes, etc. But definitely a little less than expected. So some mixed housing data. We got jobless claims as we do every week, they dropped a bit.

So kind of another indicator that there's not really any sign of the labor market weakening much. Kind of pointing to Fed keeping things maybe a little bit tighter. And yeah, overall rates kind of just largely leveled out.

Four and a half percent on the ten year seems like a, a pretty key resistance level that we have not broken through. And even as of this morning we're below 430 on the 10 year. So definitely off of those highs in yield which is nice to see.

And actually the yield curve is oddly pretty flat. Again we have the 2 in 10 year right around there at 430.

Jim Glennon: 00:06:13

Yeah and the OBMMI is just stubbornly stuck right about 6.8 if you're following that, which is dead flat to where it was last week. That hasn't done wonders for volume.

Obviously we're still seeing volume still at better levels than this time last year and still seeing that cash out number remain pretty resilient. Folks are still pulling some equity out of their homes.

Jeff McCarty: 00:06:35

That 210 we've been talking for a while about that normalizing it. That's pretty stubborn as well. Right, Right.

Ben Larcombe: 00:06:42

Yeah, we were looking pretty good there where it actually had the 10 year had risen, I want to say as high as 15 basis points above the two year but has reversed back down again. So again we'll have to see if we do get some Fed cuts that's probably going to affect the two year more.

Might lead to a steeper yield curve but it's almost like we're getting back to where the 10 year was.

Pricing in a recession there for a while and not saying that's the case now, but maybe pricing in a little bit less growth or perhaps less of a deficit. Tough to say exactly. But yeah, we're back at the a pretty flat yield curve and it's tough to see what exactly the path forward is from here.

Jim Glennon: 00:07:23

Yeah, no hope for adjustable rate mortgages right now. It sounds like.

Ben Larcombe: 00:07:27

Right. No, yeah. Not a.

If you're looking for a steep yield curve, I think it's been quite some time long before I was in this industry before we had like an objectively steep yield curve. But we've certainly seen some steeper times in recent history. But nothing that's probably going to indicate a good arms market.

Jeff McCarty: 00:07:46

All right, so a little bit light on economic news but kind of the big thing in the news right now is the new administration's various Cabinet picks. Treasury secretary being the most interesting one for our industry, I think. Right.

Ben Larcombe: 00:07:58

Yeah, yeah. And we over the weekend or, you know, late Sunday night, perhaps early Monday morning, Scott Besant was named Trump's pick for treasury secretary.

So coming from a hedge fund and a wealth of experience on Wall Street, I think he's well respected as being pretty pro Wall street, but also understanding economics and financial markets.

Definitely still pro tax cuts, getting the deficit down, and likely not quite as aggressive on tariffs as perhaps some of the other candidates might have been. Definitely understands the impact that those could have on prices and growth as well eventually. So the.

Yeah, the interplay between Besant, Trump and other economic advisers could be interesting.

We'll see, you know, if Besant is given room to, you know, kind of push policy that he sees as appropriate while kind of staying within what he knows Trump's going to want and what he probably wants, versus, yeah, if we see, you know, other parts of Trump's Cabinet or advisers pushing for maybe more aggressive policy. So that'll be a key dynamic to watch. Another name that was floated for Treasury Secretary kind of towards the latter stages of this was Kevin Warsh.

r when Powell's term is up in: 2026

He was previously a Fed governor under the Bush administration. He was only, I think, 35, so quite young, but does have Fed experience. And so that'll be an interesting dynamic.

Probably not something we need to worry about right now, but certainly within a couple years, markets will be paying close attention to that. On this Besant news, bonds rallied. They clearly like the.

They see stability, they see someone who's going to advocate for markets and understands the economy. So good news there. One other mention over the weekend, we did get Scott Turner nominated as HUD secretary.

So kind of the overseer of a lot of facets of our industry.

Ginnie Mae, the fha, more of a multifamily background, but certainly probably, you know, a good, a good pick to see where that role will develop, as it does have big implications for us.

Jeff McCarty: 00:10:24

Yeah, I think both these picks kind of waiting to see how it'll affect our industry in particular. Right. We've got, you know, maybe a decent sense about how best it will affect the overall economy.

But, you know, what type of focus is he going to have on, you Know, single family industry in particular remains to be seen.

Ben Larcombe: 00:10:43

Right, exactly. Yeah, I would say, yeah. Still, the jury is still out on a lot of that and we'll probably just have to see how it plays out starting next year.

And even then it could take some time before we see any true policy change and perhaps it is more of a status quo. I don't think the Trump administration wants to kind of rock the boat everywhere.

Certainly some more targeted areas, but we'll have to see how that plays out.

Jim Glennon: 00:11:09

Right.

Jeff McCarty: 00:11:09

I mean the timelines for all these nominations can drag on a while. Right. I mean, you know, Trump doesn't come into office until January and then you know, some of these high level nominations get confirmed.

There's probably some back and forth and then it trickles down from there.

Ben Larcombe: 00:11:25

Right.

Jeff McCarty: 00:11:25

So we're, you know, I was, saw something, you know, the head of that FHFA for instance, might not change until, you know, well into next year. Right. So you know, all these things just take time.

Ben Larcombe: 00:11:35

Right, exactly.

er plan this go around versus: 2016

But yeah, just as with everything in government, it, it takes a considerable amount of time and for the impacts of potential policies or leadership changes, it probably takes an even longer period of time for, to see those impacts.

Jeff McCarty: 00:12:06

But we'll be watching all these closely and be talking about that much more in the coming podcast. So we do have a few interesting economic numbers coming out in the coming week. You want to hit on those?

Ben Larcombe: 00:12:17

Yeah, yeah. So definitely the, the shortened holiday week that Jim mentioned worth mentioning. Fed minutes are tomorrow. Probably no major surprises.

Again, we're kind of looking backwards. It was a rather ho hum as expected post election 25 basis point cut. So look for any surprises there.

e'll know new loan limits for: 2025

That's probably going to be a, a point of interest for originators out there and we know some correspondents as well as brokers have kind of tried to front run that as they have for the last few years. So we'll see if they're caught off sides or not.

We have the PCE on Wednesday, so Price Consumption Expenditure Index, the Fed's preferred inflation measure. Look for the headline on that to be just at 0.2% or 2.3% year over year, the core at 0.3%. So a bit higher in that reading at 2.8% year over year.

Going back to what Jim said about how if you get important economic data kind of in a weird holiday closure week, you could sometimes see weird market moves where there's not going to be a lot of liquidity on on Wednesday as well as Friday.

And so it could be one of those things if this comes out in as a big surprise, we could see the market move in a weird or potentially unintuitive fashion and we might have to wait till even like next Monday to kind of sort out what the actual impact could be there a few, you know, new home sales tomorrow, pending home sales Wednesday, not going to be market movers but certainly important data for the mortgage industry. And just to kind of get a pulse of how the housing market's doing next week.

ISM data, jobs data, especially the non farm payrolls report Friday could be strong with the some of the hurricane effects we saw last month perhaps getting overridden with with some more accurate data and then also a longer measurement period in, in November. So we'll look for a bounce back there.

Jeff McCarty: 00:14:29

Numbers keep coming out even on a short holiday week. Got easy.

Ben Larcombe: 00:14:32

Yeah.

Jeff McCarty: 00:14:32

Keep paying attention.

Ben Larcombe: 00:14:34

Whether you're here or not, the market's going to react and do things and the show must go on.

Jim Glennon: 00:14:40

That's right.

Ben Larcombe: 00:14:41

Great. Thanks Ben.

Jim Glennon: 00:14:43

Thank you, Ben. Thanks guys. Okay, as promised, we're going to check in here with Vimy.

Vimy and others attended the IMN conference Servicing Conference last week in New York City.

And as we talked about, it's a very math heavy conference but lots of attendees, lots of experts, finance people, folks who are directly involved in the servicing area of a mortgage bank. Let's check in. Vimy, how was the conference?

Vimi Vasudeva: 00:15:13

It was great, Jim. Yeah, I'm so glad that we were able to attend.

It's always a very well attended conference with participants all across the mortgage servicing rights ecosystem and many of those participants speak on panels and so you really get great insight from many different perspectives. It's very well attended by our clients. It was great to connect with our clients.

As always, connecting with our industry partners provided for some really valuable conversations as well.

Jim Glennon: 00:15:42

Very good, very good. What I mean what were the big topics this time around? It's kind of a heavy, there's always the heavy math.

There's always going to be what's going on with valuations. But I'm sure there were some interesting topics that maybe were more timely.

Vimi Vasudeva: 00:15:57

Yeah, for sure.

In fact, there were so many topics on my train ride back, I kind of narrowed it down to what I thought would be a good top five for us to cover today. And the first one is probably not going to be surprising at all.

It's something that we've spent a lot of time talking about, many people have spent time talking about. So of course the recapture concept, so that was discussed in a lot of panels. It was actually funny.

By the second day, a lot of panelists and moderators had to preface their statements with, we know we've talked about recapture a lot, but you know, but it's still worth mentioning, right? Because it's, it's, as we talked about last week, Jim, it's such an important part of that final MSR price, which translates into borrower pricing.

So it's impacting originators and borrowers, you know, directly. So it's an important piece to keep discussing.

Jim Glennon: 00:16:43

Right. And this market is so unprecedented. Right. It's a knife fight out there for refinances right now.

And if rates dip again, we're going to see that probably get even, even nastier. Right. We have, you know, a few years of unprecedented low rates that we will likely never see again.

So everybody's got their mortgage and people are pretty much set. And then we do have two or three years worth now of mortgages that were originated at these higher rates. Right.

Five, six, seven, even 8%, you know, a few trillion worth of those loans that folks are going to want to refinance as we go forward. But we're, you know, so that's a relatively small amount historically for the refinance opportunities.

And we're just more and more in a different dynamic across the industry and across the country where people, you know, with the Internet and apps on your phone and AI now getting involved and, you know, scouring for refinance opportunities, it's just too easy for borrowers to, to shop around. And it's also pretty easy for lenders to rev up a machine that recaptures loans.

Vimi Vasudeva: 00:17:55

Yeah, I couldn't agree more. A lot of the points that you mentioned I'll expand upon later as well with respect to some of the highlights.

But along the lines of recapture, one really interesting anecdote that I heard on a panel that I thought was worth mentioning was there was an originator who was explaining their sell strategy.

He made a point to mention that they specifically do not sell to these certain Investors that are known for their aggressive recapture play, at least upfront. Right.

So when they can pick and choose who the servicer is and they're selling through Fannie, SMP or Freddie Exchange, they will remove these partners as an option, all for the intent of not upsetting their los.

And I thought that was a really great strategy because those los know that if their loan is being sold to one of these investors, they're very likely not going to see that again.

Jim Glennon: 00:18:46

Right.

We see that on the desk as well, where certain clients who we sell loans for, they sell loans on their own that they're, they're pretty deliberate about who they do and don't sell loans to because there's, there's very large investors or aggregators who, some of which have very little retail presence and very little recapture initiative.

And then there are others who can price very similar to them that have a huge recapture machine and you know, lenders are afraid of them for that reason. It's wild to me how similar their pricing can be.

And it's just, it's definitely best practice to keep that in mind when you're deciding where to sell your loans.

Like you said, there should be a pretty big difference between the way you look at those two different types of investors when you're looking to sell loans, especially if you have any ambitions to refinance those loans down the road and keep your originators happy.

Vimi Vasudeva: 00:19:38

Yeah, exactly. And this is one of those things where you can't just look at the numbers. Right.

It's not just a quantitative analysis, but it's a qualitative analysis. And keeping those LOS happy is so important. So that kind of wraps up point number one.

And then the second anecdote that I thought was interesting or a comment, I should say, and you guys had kind of alluded to this in the early, earlier part of the conversation as well, but just a lot. There were a lot of questions around the political landscape. What is the new regime going to do? What is that going to look like?

And of course there was a lot of focus on how does that impact mortgage servicers directly.

So recently we've seen capital rules that have been, that have sort of pushed servicing more to non banks by way of making it a little bit more difficult for banks. And so is that going to change under the new administration?

And even if it does, again, to your earlier point, it would take a while before we saw any of that come into fruition. So it'll be interesting to see what happens specifically with capital requirements and banks versus non banks.

Jim Glennon: 00:20:42

Yeah, Capital requirements has definitely been a boogeyman that's been out there that has not been settled. Right.

There's, there's all kinds of proposals and then there's comments that come in on those proposals and we could spend a whole podcast talking about, talking about this. But yeah, there's, there's a difference in the competitive landscape that results from different types of requirements, especially on banks.

And yeah, a new administration could change that game.

Vimi Vasudeva: 00:21:06

Yeah. Be interesting to see.

Another interesting point was, and this, you know, we kind of, a few of us in the audience who were there together looked at each other and laughed because it was so sensitive to us too. But there was a specific panel dedicated to how hard hedging the mortgage servicing. Right. Has been recently with all the volatility.

You know, there are certain things that you can hedge for easily and then there's certain things like volume which are so much harder to hedge for. So that was interesting.

And then in the same panel, it was great to see that one of the panelists actually highlighted the use of Optimal Blue's joint effort with the CME for a new mortgage rate future product that's based on Optimal Blue's mortgage market index. This index is so fascinating because really it's driving the rate based on a third of the locks that are processed through our platforms.

And so naturally one of the beneficiaries of a product like this would be mortgage servicers who can now actually hedge that primary rate with much more precision than they've been able to until this point.

And so like other commodity traded securities, you can actually get access to the mortgage rate future by working with a future commodities merchant such as RJ O'Brien.

Jim Glennon: 00:22:23

Right. Well, that's great. Love the gang over at RJ and yeah, super exciting.

We had a nice press release that went out a little bit ago about this, this new security basically, which is based on our OBMMI index, which as you said, is based on all the lock volume that runs through our system, which is roughly a third or more of the lock volume in the entire industry. So it's a really early indicator of where rates are and couldn't be a great hedge for the use case of hedging, hedging MSRs long term locks.

There's a few places where it could be really, really effective.

Vimi Vasudeva: 00:22:58

Yeah, for sure. And it was just, we had issued the press release, I believe, just a couple days before the conference.

And so it was so neat to see that there was already so much buzz about it, just kind of helping us justify the move and how widely you were hoping this will be.

Jim Glennon: 00:23:13

Yeah, that was super exciting.

Vimi Vasudeva: 00:23:15

Yeah. And then let's see. Another interesting point worth mentioning was the concept of potentially higher default.

So as, and I think you guys have noted this on the podcast a couple of times.

But with credit card auto debt increasing, you know, there's, there's that one factor and then the second factor of course is the COVID forbearance which has now translated into some Covid defaults.

So definitely need to look out and monitor for potential more further delinquencies and or potentially more defaults, particularly with the government loans.

Jim Glennon: 00:23:50

Yeah, that's another number that's been stubbornly low. Right. Delinquencies have been at all time lows since the pandemic kind of faded away. But that's a cycle. That's always a cycle. Right.

And we have mentioned that on here where we've talked about how credit card balances are higher than they've ever been. Auto loan delinquencies are starting to tick up. Subprime credit card delinquencies are starting to tick up FHA a little bit.

That usually starts at that end of the spectrum.

So I would think that barring any sort of other change in the economy, I would think that we go back into a cycle where delinquencies pick up a little bit. And that's a consideration when you're retaining servicing, among other considerations, Right?

Vimi Vasudeva: 00:24:36

Yep. Because it's going to impact your value, but it's also going to impact your advance requirements.

So do you have the cash on hand to support advances in the case that you do need to advance the principal and the interest or the taxes and insurance, those acronyms that we talked about last week, the P and I and ti. And then the last and final point I wanted to touch upon was of course technology. Right.

So a lot of focus on AI and how that's going to change the landscape of the industry. And again, specifically mortgage servicing, you know, there runs a gamut from how it will impact customer experience.

Even looking at credit trends, which is trends that of course are like more future based, but there's enough data to be able to start thinking about how credit might change in the near future.

One of the most interesting use cases of technology that I heard, which I hadn't really heard about before, so I found this quite remarkable, was the idea of. Well actually let me take a step back. I just wanted to talk about subservicing for a moment.

So we talked about this last week, the idea of servicing in house versus subservicing and if you're a bank and you're servicing the mortgage yourself, there are plenty of opportunities to cross sell.

You can cross sell products like insurance and credit card and that doesn't traditionally exist for a subsurfacer, but with this new technology that was mentioned at the conference, there actually are options now for subsurfacers to vertically integrate and to use an app and integrate with other white label providers. That provides a technology for borrowers to very easily access other parts of the mortgage servicing ecosystem.

So a borrower is going to log into their app anyway to make a payment.

But if they saw many other options to help out with, I mean, let's say they're interested in solar panels, for example, or looking for new insurance, you can actually there's a technology that supports finding all of this in one place. And I thought that was really neat.

And that really does change the landscape for subservicers and it allows them the opportunity to cross sell that they haven't really had until now.

Jim Glennon: 00:26:47

Yeah, that's a. I had not previously considered that, but it makes sense.

Back to the idea that, you know, it's a different world now in terms of technology for what borrowers, you know, what kind of access they have to lenders. Also makes sense that you would integrate other related products in that same ecosystem. So that it's kind of a one stop shop. Right.

I open up that app, I make my payment, I see whatever the lender wants me to see, whether it's an ad for, for a certain type of umbrella insurance or it's, you know, access to get a car loan through the bank. That's. Yeah, that's makes sense that the industry is going that way.

Vimi Vasudeva: 00:27:23

Yeah, yeah.

And even, you know, as borrowers ourselves, it's a really neat thing to think about to have this one stop shop instead of having to call around multiple.

Jim Glennon: 00:27:31

Places or having to have an agent like a human that you're paying to do that, you know, paying a percentage to do that for you.

Vimi Vasudeva: 00:27:38

Yep. Yeah. So that kind of wraps up the five highlights from the conference again. It was great. I look forward to the next one.

They traditionally host two conferences a year, one in the spring and one in the winter. And so I'm just very curious to see if, fast forward six months from now, what are the topics going to be?

Jim Glennon: 00:27:56

Yeah, no, this is great. I really. We appreciate you going to the conference Vimy and attending and you know, bringing back your wisdom and bringing it to this podcast.

Vimi Vasudeva: 00:28:06

Yeah, thanks for having me. I was happy to share.

Jim Glennon: 00:28:09

Thanks a lot. Vimy. All right, good show. Let's close this thing out. Jeff, big thank you to Vimy. Thank you to Jeff. Thank you to Ben.

Appreciate the discussion and the wisdom you guys brought to the podcast today.

Ben Larcombe: 00:28:22

Yeah, I really enjoyed the conversations you and Vimy have had over the past couple weeks trying to break down, you know, a pretty nuanced topic of servicing rights because it has such a big effect on the pricing that we see throughout the market that gets all the way down to the borrower. So great job breaking that down.

Jim Glennon: 00:28:40

Yeah, thanks again, Vimy. That was really good discussion.

I think we really demystified some things there and broke down some acronyms, made it a little bit, a little bit simpler to think about what the important factors are when thinking about servicing and recapture. All right, if you haven't already, please do register for our summit. And then what are we talking about next week?

Ben Larcombe: 00:29:00

Jeff so FHFA loan limits, new loan limits come out tomorrow has been mentioned. Ben talked about some of the things how those are already on some rate sheets.

So we'll talk about some of those dynamics in a lot more detail next week.

Jim Glennon: 00:29:15

help us plan a little bit for: 2025

Join us next week for another episode of Optimal Insights, where we'll continue to provide you with the latest market analysis and insights to help you stay ahead. Don't forget to follow us on LinkedIn for more updates and access our latest video episodes.

You can also find each episode on all major podcast platforms. Thanks for tuning in to Optimal Insights.