What’s Happening in MSRs and Servicing, Plus Last Week’s Tariff Ruling | Feb. 23, 2026

Jim Glennon (: 00:18

Welcome to Optimal Insights. I'm your host, Jim Glennon, Senior Vice President of Hedging and Trading Operations 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. Welcome everybody. Welcome to the show. We've got a ton to talk about today. It is the week of our summit. Hopefully you all are watching this from.

Phoenix, Arizona, and we'll be seeing you over the next couple of days. But either way, whether you're there or not, ⁓ really good episode to pay attention to today and take some time to listen. In the interest of making sure that you know what to watch, whether you're an originator, capital markets person, or just someone interested in the mortgage industry, we've got some great commentary coming up. So we'll start out as always with a market update with Alex and James, a lot to consider there. You all probably saw the Supreme Court shot down. ⁓

Donald Trump's tariffs, obviously a lot to consider there, not necessarily a black and white deal. We'll get into some of those details as well as some numbers and some other things to think about in the economy. And then after that, we will recap the MBA servicing conference with Mike and Vimy of Optimal Blue. You may not watch very closely the servicing industry at all, but there's a lot of moves being made right now in that space. A lot of &A going on, not just...

not just in the lender space, but in this servicing space. And there's a pretty big surge in &A, but at the same time, also new entrants coming into the market, which is sort of unusual, right? Sometimes we worry about &A meaning just consolidation and lack of competition, but at the same time, we're seeing new entrants come into that market, which is, I think it's pretty exciting in the way capitalism should work. It's pretty fascinating actually. So it's well worth the time to listen and consider how either your organization or if you're a borrower, like how

your lender is handling servicing. Before we get to the market update, a little bit of data, the OBMMI is still just kind of swinging around 6%, but generally hanging below 5.99. So very good news there. The 10 year below 4.1 and still continuing to see volume surge right now. So all good news from the rate and the volume front. Let's go check in with James and Alex and see what's going on in the market.

Alex Hebner (: 02:38

Good morning, everyone. We hope you had a great weekend and hopefully are out in Arizona right now at our Optimal Blue Summit this week, just James and I here on the economic update. some headline numbers here and then talk about what I think everyone's talking about still in the policy circles in regards to the spring course decision on tariffs last week. Initial jobless claims dropped a little bit last week, floating right around 200,000. That's not too far out of the ballpark for what we've

come to expect of that number week over week. We are closer to 250, kind of that red line when we get worried about how many initial jobs we're seeing each week. But to see it ticked out about 30, 40,000 jobs last week was a positive sign. But again, we always want to continued trend in that direction. We got trade numbers last week. think the big thing there is that it hasn't.

tariffs that are in place haven't stymied America's demand for foreign goods, still showing a deficit there of 900 billion. And just one interesting note out of that, if you've really dug into the numbers, with the AI boom going on and companies diversifying their supply chains away from China, US actually imported more from Taiwan than they did from the Chinese mainland last year.

Looking at PCE inflation came little bit hot. 0.4 % versus 0.3 % was the expectation. Year over year, it came in 2.9%, showing a little bit of acceleration there in PCE. So not what we want to but PCE excluding energy and housing was at 3.3%.

showing that actually in this particular release that energy and housing numbers were actually deflationary, pulling it down to under I think the big takeaway here is just that number creeping up towards 3%. We've been in the two point something camp. I've heard some jokes in economic circles now that the Fed targets a two point something inflation rate at this point.

And seeing it creep up there and, you know, by some metrics being north of 3 % is a little bit concerning. So I'll have to keep an eye on that. But, you know, let's get to the big thing for this week. I believe it was Friday, the Supreme Court struck down ⁓ Trump's initial tariff regime. James, what are your initial takes on that?

James Cahill (: 04:57

Yes, you know, it's funny sometimes when we group up for these we you know, what are we gonna talk about? We've got inflation. We've got jobs, know, you know, is there anything else out there? This one, you know, this is a weekend where we knew exactly what we were gonna be talking about So Friday the tariff ruling comes out it is definitely interesting because it's a 6-3 ruling saying that the structure of the tariffs that the administration have been using was not legal had been using

a statute called AIPA. Donald Trump was able to blanket tariffs across countries saying it was an emergency act, citing fentanyl and the trade deficit as the emergency that needed to be fixed. The Supreme Court said, know, tariff is a tax that goes under the ⁓ congressional side of our balance of powers. So they ruled against it.

I would say interestingly, just first of all, is that Kavanaugh was one of the dissenters. He tends to be pretty pro presidential power, but the right leaning side of the court also tends to be kind of a constitutionalist. So that was an interesting ruling from him. it definitely throws a rock into the administration's major economic policy. Trump came out on Friday, right after the ruling said he would put a blanket.

10 % tariff across the board on everyone. There is now a they've bumped it to 15%. It's a little unclear exactly the statute that they're going to be doing that under. Although the administration does have the power to levy some tariffs using a different statute called Generally, that is more specific. So think about the aluminum tariffs that we have on they can target very specific items.

So the theory right now is that the administration is going to go through and be looking at different items and running basically a trade review on them saying, are these, you know, we're to put 15 % on this. Who is this really coming from? Argue and negotiate, bring that down slowly. it's definitely slowed down their process and it definitely does take a lever of power away from the administration.

It's a huge change. The market did not enormously react. I think people had kind of priced in that these tariffs were probably unconstitutional and going to get thrown eventually. And then that as soon as they were done, the administration would try something else. So you don't want to move too fast on something that's this kind of volatile.

Alex Hebner (: 07:37

Definitely.

I think I had the same takeaway in regards to the market action on Friday. I would have expected a larger move had the market actually priced out tariffs. So I think the market is continuing to price in some continued form of tariffs. We've talked about section 232 quite a bit on the podcast before, that's kind of the avenue that everyone has said. If the Supreme court throws it out, they'll just default to this, but it'll make the way.

James Cahill (: 07:42

⁓

Alex Hebner (: 08:07

these tariffs are collected and enforced, just that much more complex. again, like you said, they're gonna have to do a product by product review. It's no longer gonna be a 20 % tariff on any products from the EU. It'll be 20 % on wine, 20 % on automobiles, but they could also differentiate. It could be 10 % on wine to help on a deal we did with the EU, but it could be 30 % on automobiles to stimulate the US domestic market or something like that.

It's going to make it, think, if they go that route of product by product, I think it's going to make it harder and more complex to collect these tariffs at the borders just because it's no longer going to be like, this shipping container came from the EU. The shipping container contains 20 % of this, 30 % that. So that's interesting to me.

James Cahill (: 08:48

you

Definitely. And when you think, you know, over the past year, we've got a deal on cars as easy with the UK, right? They had had something like a 26 % tariff. It got brought down to 10 or 15. They argued it down. It was a major item for Keir Starmer, the prime minister of the UK at the time. But meanwhile, we had another negotiation with Korea and Japan on their cars, and those tariff levels were different. So now it's a blanket 15, you know,

that might be a huge score for Korea. It might be lower, but it might be worse for the UK. How are they going to really suss that out? And if you were one of those trade partners, I think you are going to be looking at this very, know, skeptically as to how am I, how am I not going to be putting the, pinch.

Alex Hebner (: 09:48

That's a fantastic point. ⁓ do think there's probably a lot of people on Friday who saw about a year's worth of their trade negotiating work kind of thrown out the window, especially, yeah, like think that that's a perfect example with the UK and the automobile industry there.

James Cahill (: 10:00

with a year's worth of work thrown out the window, I think that this is the major hanging question that was not yet answered by the Supreme Court is, do we have to pay it back? seen a couple of different measures. At the high end, I saw $274 billion, which that's, you know, that's not too low. It's a fourth of a musk, but it's not that low.

Alex Hebner (: 10:23

Yeah.

James Cahill (: 10:24

The Supreme Court did not really mention their opinion on it, which means it's going to get kicked down to the appellate courts. It you know, I think I've raised this question before is, well, who would you pay back? Right. The importers are technically the people who have been paying the tax. But if they've raised their prices and Walmart and Target, some of whom were suing the administration before this ruling came out.

If they've been eating the cost, then they can definitely show harm. It should be pretty easy to show, hey, we raise prices on these items by this amount because, prices and that hits you and me, well, shouldn't we get the refund? It seems very difficult to figure out how they're going to unwind this. I would bet that it gets ruled they don't have to.

Alex Hebner (: 11:18

⁓ I would agree that any dollar you've paid in tariffs, you're probably never gonna see again. I'll leave it there. ⁓ Yeah, think, I mean, we've been trying to suss out, we've been trying to suss out the last year, have the costs been passed on to the consumer? You I think we've landed at least You know, if we can, I don't think there's any way we're gonna be able to reverse that math and see, okay, how many dollars am I owed over the course of last year? So yeah, I'm with you. I do think the appeal at court.

James Cahill (: 11:24

Ha ha!

Alex Hebner (: 11:45

they may defer on this and just say, just keep the money. ⁓ But yeah, if they do ⁓ signal that there needs to be repayment done, I don't think it's going any further than Walmart maybe getting themselves a check ⁓ back from the importers.

James Cahill (: 12:01

And that could be a pretty hefty windfall for Walmart, right? That sitting there, if they've raised their prices and you and me have been paying more for bacon, eggs, and gold bars, then they get the cash back. This worked out. This is a great deal for Walmart and Target in that case. So I might argue, pay me. But I guess I'll take it up with the appellate court.

Alex Hebner (: 12:25

Yeah, mean, in that case, it's going to argue, it's going to,

it's going to, I would also argue, please pay me. ⁓ But yeah, I think it's going to act like an economic stimulus package, a minor one, or, you know, the minor economic stimulus package, lot of Americans get every year in the form of tax, tax refund, because you overpaid over the course of last year. I think that's a great lens. You could probably view this through.

James Cahill (: 12:36

Hahaha!

Alex Hebner (: 12:49

if you're a company who has a dedicated team going after the importers to get their money back. You and I, I don't know if you've got a personal assistant on this yet, but I personally don't.

James Cahill (: 13:01

Yeah, I pay my $15, $30 for the online. I mean, it's a huge conversation. It's definitely going to develop over the course of the next few months. It is still a giant question marks. The market didn't react too heavily and we do have 15 % tariffs again. it's chaos as always with the tariff subject.

but at least the ruling came out. Really felt like we were waiting for it for a long time.

Alex Hebner (: 13:34

Yeah, no, was expecting this maybe more mid-January than the end of February. So it's good to have it out there. The market reacts well to just not having a fog of war. So we'll continue to see how this develops. Again, I think, as we stated, I don't think that this is going anywhere. It's just going to take different forms. And you're going to continue to see that one-time price hit from tariffs. Looking at the week ahead.

We have a consumer confidence number out on Tuesday. That number has been in the doldrums for a number of months now, probably going on three quarters of a year. You know, that's something that we've talked about many times before on the podcast about how confidence remains very low, but consumer spending looks great. So there's a little bit of, you know, sussing out what Jim likes to call the K-shaped economy and the issues there with how high spenders might be making consumer spending for the entire economy look stronger.

⁓ Then the consumer confidence numbers would have you believe We have initial jobless claims on Thursday as we always do to keep an eye on that number last week. It was 202 so anything above that the ⁓ degradation anything better than that would be lower ⁓ And then the final inflation reading for this month will be PPI out this Friday ⁓ we've seen ⁓ services up big last month two months ago was the goods number that was up but

Overall, that number has remained relatively flat. Month over month is just where we've seen the spikes in either the goods or the services side. Then throughout the week, we also have a spattering of Fed speakers. Waller was speaking, I believe he's speaking right now as we record this. Lisa Cook is speaking later this week as well, in addition to two or three others.

With all that being said, we hope if you are attending the Optimal Blues Summit, we know there's a good number of you out there in Arizona. We hope you have a great time. ⁓ If you see James out there, please say hi to him. He is attending. And with all that being said, we will ⁓ talk to you next week. Thank you.

James Cahill (: 15:29

Ha ha.

Yeah. Thank you, Alex.

Alex Hebner (: 15:38

And with that, we'll lead you on here into our special segment for the week,

Jim Glennon (: 15:42

All right, everybody, as promised, Vimy and I have Mike Vogue with us today. You all know Mike Vogue. He was at the MBA servicing conference in Dallas earlier this week. I mean, don't know where to start. Vimy usually goes to this conference. We have a lot going on at OB, so Vimy wasn't able to make it. But we wanted to be sure we sat down with Mike here to get the highlights. What are people talking about in not just the servicing space, but just everything that wraps around that?

Right. There's a lot of and A going on right now, which we'll get into here in a sec. We're in this market that's still trying to figure out which direction it wants to go in, but we know that volume is up over the last couple of years. Rates have not dropped precipitously, but we're in a much better space now than we were a year or two years ago. So there's obviously a conversation around recapture and who owns what in terms of technology and servicing rights. So.

just kind of a multi-pronged matrix that we're looking at at a conference like this when it comes to the servicers that are kind of in the spotlight right now. So Mike, what was the talk of the conference? What were some of the highlights of the conversations in the networking rooms, but also in the actual presentations?

Mike (: 16:56

Yeah, I think the main trend to kind of think about is, ⁓ server-syncing has a lot of eyeballs on it right now. There's been, to what you've mentioned, Jim, there was a lot of news about different acquisitions, different seed investments in different technologies that have come out recently. And what was once a sleepy side of the mortgage industry?

I think has a lot of eyeballs on it from both a dollars and cents perspective. There's been different &A things, both tech and in the mortgage company space that have additional eyes on that. And I think folks are just looking for any way possible to turn this like sleepy asset historically into something for more cash generating.

for both the lender side and the tech side. So there's like a bunch of new vendors coming into the space. It seems like there's a bunch of new servicing vehicles that are coming out there. So just a lot of eyeballs and attention on what was once historically like a sleepier side of the industry.

Vimi Vasudeva (: 17:57

Well, it's about time that servicing got the limelight, isn't it?

Jim Glennon (: 17:58

Yeah.

Mike (: 18:02

Yeah, if you think about it, it's such a core part of the experience, right? Your application and the origination of the loan is 30, 60, 45 days. Servicing is years, right? It's actually where you touch point with the borrower much more. And especially if there's like delinquencies or foreclosures, it becomes a very high touch thing. So arguably, the origination is just like the beginning part, right?

It's interesting that the industry is kind of changing their focus to this now, but there's a lot of reasons why I think we'll get into.

Jim Glennon (: 18:38

Yeah, I mean, for our listeners who may not think about this very much, because it very much is a behind the scenes, sleepy kind of area of the industry. do, you know, the last couple of years, we've done about $2 trillion in originations as a whole industry. But all those loans are being serviced somewhere and they don't stop being serviced. So the number, I don't know exactly what it is, but it's well above $10 trillion worth of loans are out there somewhere being serviced. And many of them are on a couple incumbent platforms.

over the past couple of decades. And that seems to be changing rapidly is what you're saying, right? There's more kind of, everybody wants to kind of bogart their area of the business and their servicing so that when opportunities arise to either get more efficient on how they service loans or better yet, when they want to refinance some of these loans, that they have a closer connection with those borrowers.

Mike (: 19:29

Yeah, definitely. One of the trends that we've seen start to play itself out here a little bit is, think of a servicing system, kind of like an LOS, but for the servicing of the loan. So it's the system of record. It's where you're keeping track of the payments, keeping track of the payments going to the investor who owns the actual loan. Only that quarter.

or 0.25 of your interest rate typically is going to the servicer. The rest of the P &I goes to the investor. So have to keep track of all of that. They're also keeping track of taxes, insurance, dealing with touch points around delinquencies. There's different laws within every state that impact that. historically, there was one very large incumbent in that space. And we've started to see some new entrants come into the space. We've seen a couple of companies that were predominantly known as a

Low origination software, start to open up servicing channels. There are servicing businesses. We've seen some venture backed companies with some very large backing from Silicon Valley come in the space.

We've also seen just a lot of investment there. So we're seeing some market share change from that incumbent to these other players.

Vimi Vasudeva (: 20:40

Were those other players represented at the conference quite well, like with respect to booth space and participants speaking on panels? Like I'm curious about how loud they're being about their new initiatives.

Mike (: 20:51

Yeah, mean, they're being pretty loud. know, and also you're seeing just in the news, right, as well, I think that, you know, news came out that New Res made a big, a very large investment in an upstart service and company called Valen.

So like that's an interesting play right there. ⁓ We've seen, you even people like our sister company, Dark Matter, like they have a servicing platform that they just rolled out. heard rumblings of a number of other LOSs that are thinking about getting in the servicing space, because they have a lot of that data, lot of those same touch points with folks. And then, you know, kind of the next big word that was on the tip of everyone's tongue was recapture. There was a ton of vendors there that were focusing in recapture.

LOS's servicing systems, you know, were all also thinking about different ways where they could recapture engine of some kind. And, you know, it was a really good conference for, for Opomoblu because, you know, a lot of times these, sometimes these servicing technologies just on the origination side doesn't think about servicing. Sometimes servicing doesn't think about originations. And so making sure that when they're looking at things like retention, right, that they realize the importance of having that directly connected to your PPE, for example.

not good enough to use a ⁓ rate that you see on CNBC. It's not good enough to just like do the back of the envelope like P and I math that you could do in Excel. There are way more moving factors that go into the rate that's offered to the borrower. And if you're not connected to a PPE,

I think it's very difficult to have a really good retention operation. So I think it will be interesting to see if, know, Alpana Blue partners with some of these other, you know, kind of like servicing providers to help that or to, you know, partner directly more with the existing products that we have.

Vimi Vasudeva (: 22:32

Yeah, that's an excellent point, particularly your point about the rates, right? Like, of course, you want to have something like the OB-MMI, which is tracking so much of the industry. And with our integration to the PPE, it obviously allows for very granular pricing scenarios so that our clients are really putting their best foot forward in terms of what they're offering the borrowers. know, which, as you stated, Mike, is incredibly important right now with all of the &A that we saw last year and with so much anxiety around lenders using

losing their relationships with the borrowers.

Mike (: 23:06

Yeah, and that was kind of the underlying current, I would say, at the conference was ⁓ folks making sure that they had that touch point with the borrower. So the idea of retention in servicing has always been a little divisive of like, do we include it in the valuation? Do we not include it in the valuation? When do we, when can we? But from an economic standpoint,

Jim Glennon (: 23:18

Mm-hmm.

Mike (: 23:32

you know, that touch point with the borrower is very valuable. And, you know, I think in previous lives, I've seen that like, you know, if a 10 % increase and...

know, recapture, right? So going from like a 10 % retention rate to a 20 % retention rate is almost like a molt of servicing value, right? So like you're really, you know, making that servicing valuation more aggressive. And that's actually really awesome for the origination side. If you have a really fine-tuned recapture model and you think that you can get 10, 20 % retention and that increases your valuation or your, you know, of what you believe the servicing rate is worth, that means that you could increase the

Jim Glennon (: 23:48

Mm-hmm.

Mike (: 24:11

of these loans that you're offering out to the street. then that goes, know, bond math, price up, rate down, right? So you'll get a better rate to the borrower as well. So there's this like flywheel effect that I think folks are really becoming aware of. And that I think has led to some of this change that we've seen with who's using what servicing technology, because now folks are really worried that, if I'm using a servicing technology that maybe is owned by lender, for example.

Jim Glennon (: 24:38

Mm-hmm.

Mike (: 24:38

⁓

like that becomes difficult. If I was getting my loans subserviced, for example, I might need to now think about using a different subservicer. For example, my subservicer was Sendlar, right? Sendlar was acquired by PennyMac a couple of weeks ago. And if I was using Sendlar as a subservicer, I'd have to seriously consider thinking about changing that. Now, it doesn't mean that PennyMac gets to see all of your loans, but like, do you, you know...

is still captured by Penny Mac, right? Like, when did you want to have that on something that has more line with what you're trying to do in terms of keeping those loans within your four walls? So I think that's another big driver of what we've seen. You know, you've kind of seen some shakeout as well from the Mr. Cooper rocket transaction there as well, with folks kind of switching providers, going there and folks, you know.

pontificating or scheming about, when am gonna put my loans on this one or that one? And there's a lot to consider there, but I think the territorial over that territorial rights of the servicing of who's gonna recapture it is a big driver behind all these art trends.

Jim Glennon (: 25:38

Yeah, I kind of love this from the perspective of just anyone looking at this and thinking about the competitive aspects of it. So on one hand, you do have these behemoth lenders who have been merging. You think about &A, usually you think about a larger larger entity that potentially takes competition away. But the servicing space, feels like the focus is more like we're just starting to grow. Like you said, there were a couple of incumbents in this space years ago, not many years ago, and now there's

There's &A, but there's also new entrants coming into the market and creating competition and creating new things to think about when you decide who you want to partner with as a subservicer. And also just, again, it gets the servicing conversation out in the ether where we used to never, honestly, pre-COVID, I feel like we didn't talk about it nearly as much, but COVID kind of forced a lot of smaller lenders to retain servicing. So if you're an originator out there and you're wondering, you should ask your head of secondary or capital markets, do we retain servicing? And that's a huge.

advantage right now for all the reasons that Mike and Bimmy have been talking about. If you're selling the servicing on every loan that you originate, which a lot of lenders still do, you are essentially handing off that relationship with that borrower to someone else and you don't know what they plan to do with that loan in the future. They may have a recapture machine or they may not, meaning they might aggressively pursue your borrower down the line when rates dip half a percent or they may not. If you own that servicing, if you're retaining it, you have that first kind of right of refusal in a lot of cases where you

You own that servicing piece and you have full visibility into what that borrower is doing in terms of payments and what their balances are and what the value of their home is. I don't know, right now it just feels like that's becoming an even bigger conversation with I think, which I think is healthy for lenders to think about. And if you're not retaining servicing, that pressure continues to grow, I think, as we came from this $5 trillion a year market to a $2 trillion one, there's just less to go around. Like you have to be thinking ahead on what might, you

what I'm going to do with hopefully with this current borrower in 12 to 18 months from now.

Vimi Vasudeva (: 27:41

You're exactly right, Jim. And I think you brought up a good point about how servicing has become much more of a conversation since COVID. And just to help our audience recall, at that time, we actually saw so many lenders retaining servicing because there was a kind of a negative bid on servicing at the time. So a lot of lenders switched to retaining. And then over the last couple of years, as things had gotten more challenging with a higher rate environment and lenders being strapped for cash, we actually started to see a lot of our clients

shift to releasing servicing and we kind of saw that balance for about a couple of years and then actually just in the last quarter We saw our clients now very marginally, but ⁓ they're starting to increase Retaining so the last I checked a week ago. We had we saw that our clients were retaining 53 percent. So again marginal increase but it's not 50 50 so I think a lot of this is because exactly what we've all been talking about and

Mike, your point about the hot topics at the conference, I everyone is just terrified of losing that borrower relationship. And honestly, they should be. So whatever you can do at this point.

Jim Glennon (: 28:50

Yeah, that's a great stat.

Mike (: 28:52

Yeah. mean, the, uh, a couple of other ones to kind of throw out there too is like, this is like the value of a lot of these lending companies in a lot of ways, right? Like there, there's not like a ton of like IP within them. They're, effectively using a lot of outsource solutions. They're, they're working with, you know, loan officers, right? Who could, who could jump ship and go to any other, any other company out there that servicing, right. Is like really important to like the intrinsic value of the mortgage company. If you're like an operator or owner of that mortgage company.

So not only is it important to your business, but to be important to an exit opportunity if that's something that you're considering as an operator of one of these things.

Jim Glennon (: 29:29

Yeah, by far the largest asset. That's a great point of any, especially an independent mortgage bank that doesn't have deposits or anything else to put forth. And since the great financial crisis, an independent mortgage bank on its own without servicing could be worth close to zero just because it really is just, it's a pass through, right? That generates income every month, but it doesn't have any sort of assets to sit on or to put out there and say, what would you pay for this?

Vimi Vasudeva (: 29:54

Yeah. So Mike, I'm going to pivot. I know that the MBA servicing conference, it's a little less quantitative and valuation focused than the IMN, for example, which Optimal Blue always has representation at. But I am curious, just given the fact that rates have finally decreased, if there was any conversation around MSR hedging, if anyone feels like they were late to the game or, and if they were, mean, has this motivated people to start considering hedging the MSR, given the kind of unknown rate environment?

Mike (: 30:23

Yeah, I would say almost. So at this conference, it's definitely not the capital markets focused. I would say it's more like operationally focused on servicing. But I think we're starting to get to that point where folks are getting worried about where they are on the S curve of a refinance, where if you get right below that 6%, which I saw Jim celebrating this. I was celebrating it too in my own way, was when OBMMI this week was below 6%.

That I think could be like the tip of the S curve. And for folks that don't know, when you kind of like like prepayments, people kind of think about like an S curve. Like it takes a while to get to the like inflection point where everything else like kind of falls off the cliff from like a risk perspective. And I, you know, I've been saying for a couple of months, I know Jim's been saying the same thing too. Like once it gets below six, I think that could trigger a lot of things, right? It trigger the fact that like an arm loan, for example, is probably close to five.

That is pretty appealing to a lot of people, right? could be that, you were in that seven or that eight range, well, even five and three quarters or five and seven eighths, that's material, especially on larger loan amounts. So I think folks are starting to get there. I don't know necessarily how folks are feeling the pain just yet, but I think that that's starting to happen, you know, in terms of folks looking at the asset. Historically, folks really haven't hedged this asset unless they were a bank or a depository.

or if they were really of size, like north of 10 million, 10 billion from a UPP perspective, usually when we saw folks doing that, even on some folks who had large ones didn't because they were like, Hey, it just offsets what my, my originations business, right. Originations, do better when rates go down, my servicing rights go down then. And then, and firstly, there is a big problem with that, that it's the cat, there's cash timings between like,

Jim Glennon (: 32:00

Yes.

Mike (: 32:11

the originations business and the servicing remittances that make that a little difficult, but intrinsically they move this in counter directions.

Jim Glennon (: 32:11

Yeah.

It's hard to count on it, right? But that's always been the wisdom is just that, and another reason to retain servicing is we know when rates go down, originations are going to go up. So it's kind of a natural hedge to the value of that portfolio dropping because the portfolio thinks, I'm going to lose some of these borrowers, which you kind of are, but if you lose them to yourself, it kind of washes itself out. And you've made however many points of revenue on the origination of the new loan.

Mike (: 32:42

Yeah, one of the things that came up that I thought was the person who brought this up, I told them they were a man after my heart was, you know, could retention be used as a hedge? Right? So like, and yes, it could in some ways, right? Like, so for the example being, like, hey, like if you're, if you've got 10 or 20%, you know, retention model into your valuation, realistically, that should negate your sensitivity from a DVO one perspective on the MSR portfolio.

Jim Glennon (: 32:53

Mm-hmm. It is, yeah.

Mike (: 33:10

So it's not like, I take this and then this and it all works out. It kind of lowers the sensitivity of the servicing rate from a interest rate sensitivity perspective. And then that means you need less of a hedge to counter that. So I thought that was an interesting point that I wanted to surface here.

Jim Glennon (: 33:29

Agreed. Also very interesting.

Vimi Vasudeva (: 33:29

Yeah, certainly.

Jim Glennon (: 33:31

All right, other odds and ends, Vimy, got any other questions on your mind at any existing FOMO from missing the conference this year?

Vimi Vasudeva (: 33:31

Hmm.

have some FOMO for sure, but being on a beach in Cancun wasn't so bad. But I'm glad, Mike, that you were able to go and represent Optimal Blue and share all this wisdom with us and our audience.

Jim Glennon (: 33:45

Yeah, that's right. That's right.

Mike (: 33:54

Yeah, I know. think it's going to be interesting to see what's happening in the servicing space. I think it's going to be a little of a land grab for butts in seats by both the lender side and the vendor side, honestly. So I think it's going to be really interesting to see who kind of pulls away there. I do think a lot of these folks are just like, uber focused on retention, just given some of the things we talked about, like the value of the asset, what we're seeing from an M &A perspective in the servicing space.

It should be super interesting to watch that. think that's going to kind of be, I think a couple of years ago, people called out like the point of sale or like the portal wars. I think we might have something like that on the servicing side in terms of getting more competition. And, you know, looking back on it, you guys mentioned how there wasn't a lot of lenders who were servicing pre-COVID. Like maybe that was why there wasn't a ton of competition in the servicing space, right, from a technology perspective. And then as that

Jim Glennon (: 34:33

Mm-hmm.

Mike (: 34:47

population grew, you needed more options, right? More options for maybe those smaller services. There were a couple of technology providers that I talked to who were like, hey, our focus is less than X thousand servicing rights. we like, that's where we're gonna focus right now. at that, you never really saw that before. I think that was interesting. like conversely, if you like compare it to the LOS market, there's like 30 different LOSs out there. And it seems like it's constantly growing.

while rewind a couple of years ago, there might've only been like five options, like on the servicing side. So it's gonna be interesting to see if this is like a flash in the pan and we all forget about it in 18 months, or if this is a longer term trend that could be persistent and durable for a couple of years.

Vimi Vasudeva (: 35:34

If I had to guess, I would put my money on a longer term trend. And then also just brings lots of opportunities for integrations for companies such as Optimal Blue too, right? Like feed that data directly into your MSR evaluation portfolio, your MSR hedge, and you look at your whole enterprise reporting with your pipeline and your MSR, and it's all very seamless. With all these new entrants, I'm sure there's gonna be a lot of investment in integration as well.

Jim Glennon (: 35:34

Yeah, competition is good.

Yeah.

Mike (: 35:40

Yeah, I think so too.

Yeah, I it's all connected, right? Like, you know, we kind of think of these as like point solutions at time, but like MSR is a huge part of the profit margin that lenders price on their originations every day. So like having that feedback loop set up, like we talked about the feedback loop between primary and secondary market. There's even the feedback loop between primary secondary market and then maybe like this tertiary market of servicing, right? Or loan performance that I think is

kind of where people are maybe skating to, that could be like the pocket out there that folks are trying to get to. I'm not really sure if anyone has nailed it just yet, but it is a way I think the word industry is going to.

Jim Glennon (: 36:32

Mm-hmm.

Agreed. Now this, this all fits well into the narrative and the conversations that we've had on this podcast quite a bit. You know, we mentioned Julie May, talked about FICO. FICO has encountered some competition and suddenly they're innovating faster than anyone can keep up with. And we've certainly seen it in our area of the world where we've, you know, we've seen more competition across all sorts of platforms. And, ⁓ you know, as, had us highlighting more of the innovation that we're already doing, you're seeing it with LOSs. Now you're seeing it with servicing platforms and.

I think it makes any industry better. So this is a conversation we will probably have about some other darker kind of behind the scenes area of mortgage here in the next few weeks.

Mike (: 37:26

Yeah, think competition is good. O'opama Blue dealt with additional competition. I think it's made us better as a company. I think it's making all these things better. I think the thing to watch is, you know, looking at like the profitability of lenders, right? It's kind of been like taking a hit the last couple of years, just because of the lower volume. I think it will be interesting. And like we track these metrics, right? Like primary, secondary spread, for example, that is a good proxy for lender profitability. I think it will be on a per loan basis. I think it will be interesting.

to see if we, you know, let's say we're at like a five and a quarter in like a year from be interesting to see if the spreads stay the same. So like, will the promise of this technology actually shave margin off the transactions? I don't think we've seen that yet, honestly. And that pains me as a mortgage technologist, but like, I don't think we've seen that. And so I think it will be interesting if you can connect these three kind of like,

Jim Glennon (: 38:09

liver.

Mike (: 38:23

feedback loops together, ⁓ and the technology is really good and tightly integrated and kind of like a full end-to-end solution, will we see a permanent lower spread, right? Because lenders have less overhead, less people, better technology, more automation, et cetera. That's the long-term trend I want to watch, but no evidence at present day. But the dreamer in me is hoping for that.

Jim Glennon (: 38:51

Yeah, it's been six or seven years since we've had an opportunity to see that in kind of a natural environment. Like the 2020 was, it had to be nearly impossible to just go out and figure out how to scale up for that. But the last time we really saw kind of a gradual increase in volume where you could try to measure, are people hiring incrementally head count and adding to then their overall cost to meet that new volume requirement? Or are we able to get there with keeping costs low?

Mike (: 39:02

Yeah.

Jim Glennon (: 39:18

I mean, that's why we're all here. That's why we're all providing better and better technologies is to allow that scale to build hopefully in a bit of a controlled manner, but to be able to not continue to add headcount or costs and bring that, what is it, 11 or $12,000 on average cost per loan. Can we get that lower and lower as we continue to do more and more loans and really see that profitability grow for the average mortgage lender?

Mike (: 39:45

Yeah. And I think it was ⁓ a topic there. It's a topic every time you turn on the news where it seems like a lot of ⁓ the CEO class of people ⁓ is talking about like never hiring again or keeping organizations flat, just backfilling with AI. And again, I don't know if we've seen that just yet. Maybe we will, especially not in the mortgage industry, not yet. But if that's possible, like, hey, instead of managing five people, you're managing five bots. And that means that you could do X percent more work.

Jim Glennon (: 39:56

A.I. baby.

Mike (: 40:13

deliver more value to the borrower, right? It's not all doom and gloom. There's a angle here as well. So I think it'll be interesting to see if that happens, but it's definitely on people's minds and consciousness right now.

Jim Glennon (: 40:24

Right. All right. Good stuff. I think that's a good thought to leave people with. It will certainly be a major theme of our summit. Hopefully we'll see you all there. Thank you, Mike, so much for the interview. Thank you, Vimy. Great conversation and we'll talk again soon.

Vimi Vasudeva (: 40:40

Thanks guys.

Mike (: 40:41

Let's

go optimal blue summit.

Jim Glennon (: 40:43

That's right.

Jim Glennon (: 40:45

Okay, let's close this thing out. Big thanks to Alex and James, of course, for the market update and Mike, Vimy, awesome interview. Thanks so much for taking the time to talk with me and we'll see you all at the summit this week. That's it for today. 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. Check out our full videos on YouTube. You can also find each episode on all major podcast platforms. Thanks again for tuning into Optimal Insights.