Impact of California Fires on the Industry & Optimal Blue Summit Preview | Jan. 27, 2025

Jim: 00:00:31

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: 00:00:41

Your profitability this week.

Jim Glennon: 00:00:47

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 everybody, welcome. Hope you had a wonderful weekend. Thanks for joining us again today. A lot going on.

We've got our summit client conference coming up in just one week from today.

We're going to talk a little bit about that later on, do a little bit of a preview for you in case there's any stragglers out there who have not registered yet. But first we'll welcome Alex and we'll talk to Alex about econ and some current events and then we'll have Vimy join us.

We're going to talk a little bit about the LA fires and some of the, you know, mortgage related potential aftermath of that and then we'll get to that summit preview here in a few minutes.

Just data wise recently, if you're watching the obmmi, right around 7% still 6.95 is where we see 30 year conforming loans today and volume is still healthy.

We're still seeing volume, you know, a bit above our benchmarks, a bit above where we were last year, kind of like 80 ish percent of where volume was pre pandemic. So again as we talked about on this cast before, you know, there's, there's a lot of pent up demand out there that's starting to get dislodged.

You know, people need to move whether you know they need to purchase a home or we've talked about the record amount of, of credit card debt that's out there. We are seeing folks take cash out of their homes from some of the record equity that's sitting out there.

So starting to see, see that as well as just the fact that rates are expected to stay higher for longer.

So I think we're not all just waiting for the rates, you know, rates to get back down to 4% because it doesn't look likely that's going to happen in the next half decade. Anyway, we'll talk about that and more here in a little bit. Summit is coming up February 3rd through the 5th. So if you're not registered.

Summit.optimalblue.com all right, let's go check in with Alex. Okay. Welcome Alex Hebner, our local desk econ and current events guru. Let's talk a little bit about what's been going on last week.

A little bit of a short week market wise because of the MLK holiday. Not a ton happening. But some things are already starting to heat up this Monday morning.

Alex: 00:03:09

Yeah, yeah, definitely. It's, yeah. Last week you said was pretty quiet.

Some, you know, jobless claims numbers which came in at expectations in addition to some existing home sales which came in at expectations as well. Not the most important metrics in the world from a holistic perspective.

You know, a lot of things on the world of politics happened which we'll touch on in just a minute.

And then on the coming week, some bigger items to hit the tape this morning, got some new home sales data came in just a little bit around the expectation there. But, but the really big item for this week is the FOMC meeting, first meeting for this year.

There isn't expected to be a cut, but there's quite a bit of kind of drama surrounding this and the Federal Reserve in general right now. Just with Trump last week saying that he wants to see see rate cuts.

He thinks that rate cuts would be appropriate for the economy right now and that he wants to make that call himself. There's definitely going to be some pressure on Powell and the rest of the board to maybe deliver a cut right now.

The there's an expectation for a pause all the way through June. I hope they kind of stay strong.

As we've talked about many times on this podcast, there's, there's a reason we, you know, there's a separation between the Fed and the executive and the legislative branches. But we'll see, we'll see how much pressure gets heaped on him.

I think the economy's in a strong enough position right now that he can push back a little bit. But we'll definitely see in addition to that, we have GDP and pending home sales numbers on Thursday and then people PCE on Friday.

So just after the FOMC meeting. But we're getting some PCE inflation metrics on Friday, that being the Fed's preferred metric for inflation.

Jim Glennon: 00:04:42

Yeah, that's, I'll be very interested to see what, if any, change there is in language from the Fed.

They're basically, there's been saber rattling, as you said, from the new administration about basically forcing rates to go down somehow, but just all these things Coming together. The math to me doesn't make sense yet.

Alex: 00:04:59

Right.

Jim Glennon: 00:04:59

There's possible it's going to be a ton of spending. There's going to be tariffs most likely, or at least big threats of tariffs.

There's the likelihood of mass deportations, like all this inflationary policy and then we're going to cut rates like that's. It could be a bit scary. And then you got PC comes out on Friday, hopefully is maybe a little bit elevated.

So it still keeps us a little bit afraid of inflation coming in.

Alex: 00:05:22

Exactly. Yeah. It gives them some grounding in there in their likely decision to, to keep rates where they're at this time around.

I think we are somewhere in the range of 80 to 90% are expecting no cut this time around. And then, and then just wanted to quickly mention, just because kind of hitting the tape this morning, some semiconductor news.

If you have a stock portfolio 401k, you're likely seeing it in a bit in the red this morning. Just wanted to touch on kind of semiconductor news and AI in general.

Just the reasoning behind that was a Chinese model called Deep Seq was released that is far cheaper and uses far less advanced hardware supposedly than, than the US based AI models. So it's, it's calling a lot of the assumptions been made about AI and how capital intensive it is in recent months.

Jim Glennon: 00:06:07

Yeah, it's been wild. We were talking about it before we started recording and $6 million I believe was the quote.

It cost $6 million to build that model and whereas, you know, Nvidia probably spends that on coffee, you know, in a month.

Alex: 00:06:18

Yeah, yeah. I mean, yeah, when you're talking millions of dollars in a, in an industry that often quotes things in hundreds of billions of dollars.

Yeah, it's scaring the market a little bit, I think. There's definitely something to it. Obviously as technology progresses we'll see lower costs to produce these AI models.

But this just seems a little too good to be true. I'm sure there'll be some positive takeaways.

They are making an open source AI model so it'll be able to be opened up by developers around the world and see what's really in there and what it's truly capable of. Right.

Jim Glennon: 00:06:53

Okay. So we've talked a little bit about current events, we've talked about the PCE coming out this week and the Fed meeting.

What's going on with the new administration though. That's most of the big news that's been coming out recently.

Alex: 00:07:03

Definitely, definitely last Monday we were all off of work for MLK Day, but in addition to MLK Day, it was also inauguration Day. So we, we haven't had much of an opportunity to talk about the new administration and everything.

nd of, kind of in contrast to: 2016

But they really seem to have their ducks in a row this time around with like a flurry of 20 plus executive orders being signed in the first 48 to 96 hours or so. There's definitely, I mean they're broad ranging.

You know, some of them just pull back some of the Biden era executive orders, but some of the ones I want to touch on just kind of revolving around jobs, the economy, in the workplace.

They really, in addition to the Doge, Doge the thing Elon Musk is heading up on government efficiency and waste, there was a executive order to kind of kind of point in the direction of like curtailments to, to federal jobs. It was specifically around diversity, equity and inclusion.

They're really, they're really hammering home that they don't want to see these potentially wasteful job roles that are strictly focused on diversity and equity and such. So far I think it's really been focused on kind of like culture war issues.

Some of the things I was seeing coming out that they don't want to see non US or non US Military flags displayed. And again, just, just really hammering on diversity and equity and inclusion and getting people back in the office.

But I think that it does point to, like I said, in addition to the Doge administration, I think that it does point to, to maybe some curtailments in the number of federal jobs. And what worries that for me is that jobs with the government have been one of the biggest growth areas for employment numbers.

So we might see off of this some, some weaker employment data if as I said, we just start to see some, some cuts in, in the number of job roles in the, in the government.

But the kind of counter argument to that in my mind is there's definitely areas of the government that they, that they want to expand specifically, you know, immigration, custom enforcement, Homeland Security, energy, which could just, we could just see like a transition from where certain jobs are to, to, to other departments. So, so we'll just keep an eye on that one.

I think it's, it's early days in regards to that and then the economy kind of kind of just kind of trying to, I don't want to say jumpstart the economy, the economy's in a, in a fine spot, but, you know, pulled out of the Paris climate agreement. We weren't meeting our goals there anyways, but I think it kind of frees the US from maybe a little bit of bureaucratic red tape.

Trump's been saying he wants to drill, baby drill. You know, once it wants to bring down the cost of barrel of oil to, to $45, US can only do so much there.

You know, we have a lot of capacity to, to drill more, but it's, that would take all of OPEC to really chip in on that. And his end goal there is really just to put some pressure on Russia to bring him to the table in regards to the, to the Ukraine war.

We'll see how, how much success they have there because again, I don't think our allies in the Middle east want to, want to see $45 barrel of oil either, because that's also their main source of income, in addition to Russia. You know, we were talking about AI just a little bit earlier.

I think kind of one of the last things I want to touch on was, came out with a Stargate program, kind of public private initiative to jumpstart USAI initiatives. They were quoting something like 500 billion in private investment into this.

Elon quickly called them out and said, I don't think any of These companies have $500 billion to spend on, on AI. And it does. He's probably right in that, in that regard.

A lot of these companies are, are kind of running up against their capital expenditure limits. I've seen a couple of jokes today that maybe Stargate will just be used to bail out Nvidia when if they're down 17% today, but we'll definitely see.

Jim Glennon: 00:10:32

Yeah, it only costs $6 million to build a large language model is what we've, what we've learned this morning.

Alex: 00:10:36

Apparently, man, we're going to see a lot of mom and pop AI model popping up, I think.

Jim Glennon: 00:10:40

So we were, we were talking earlier about inflation, right. And all of these, this math points towards inflation. But you just mentioned the, just the efforts to drive down the price of energy.

And that's, that's the one area where it does feel like that maybe that's a big part of the strategy of the new administration to keep costs down. So if you can, you can chop away at energy costs, that has a direct effect on almost every good and service. Right, right.

Alex: 00:11:03

Yeah, yeah, the, the, the core metrics, or rather, rather the non core metrics. It definitely does. But yeah, we'll See? We'll see. I think, I think gas is, it's definitely not, it doesn't appear to be obvious.

but I don't think it's like a: 2014

Jim Glennon: 00:11:20

Yeah. All right, as always, appreciate the insights, Alex.

Alex: 00:11:23

Thanks, Jim, Appreciate you.

Jim Glennon: 00:11:25

Okay, as we mentioned, we're going to talk a little bit now about the fires in the LA area and what some of the ramifications might be on our industry, on the capital markets, on the mortgage industry and, and other than the obvious, you know, personal impact, which is just horrible, you know, a lot of tragedy there that some people have died. Tens of thousands of people have lost everything, you know, lost their homes and, and all of their, their belongings. I'd like to welcome Vimy.

Vimy, welcome to the podcast to talk a little bit more about this with us. I mean, you know, high level, the effects on the mortgage industry and the capital markets have yet to be seen.

You know, it does feel like a little bit of a, kind of a micro Covid, but we're going to have things like mortgage forbearance and there's already talk about mortgage banks coming in and providing some relief there. Right. There's probably some concentration of these high dollar loans that live with certain banking entities.

Although there is, there are Fannie Mae, Freddie Mac loans, there's certainly some FHA and VA loans in there, but kind of a widespread effect on banks. So we have to consider that. And again, you know, it remains to be seen what that looks like.

And there's obviously some insurance issues that are going to be happening that are going to affect people's just overall affordability. Right. And ability to pay to rebuild these homes or to pay to remortgage these homes or even for people to move in and redevelop some of these areas.

The numbers have become pretty catastrophic and record setting. We've seen that 30 to $50 billion are going to come out of the insurance company's pockets or out of the state.

That insures at least partially some of these properties. You know, the overall number has been estimated at 250 billion. Just the overall economic impact of these fires.

So that includes, includes the insured losses, includes other property damage, buildings, gas stations, all of it. Right. Has been leveled, lost productivity in there as well.

I mean, as these things are going on in the LA area, there's not, you know, there's not work getting done necessarily, it's more of a, you know, recovery type of situation for the foreseeable future. And even people have already started to calculate the long term health effects of these fires. Right.

There's a lot of smoke, there's a lot of toxic fumes from some of these, these buildings that have burned down.

But what like, as far as the MSR world, Vinny, which is very much an expertise of yours, what should we be thinking about there as it relates to things that affect all of us like mortgage pricing and the value of some of the assets that a lot of mortgage banks have on their books?

Vimy: 00:13:53

Yeah. So firstly, I would like to say that my heart goes out to everyone impacted by this catastrophic event. It's absolutely terrible.

I think, you know, along those lines, I was quite happy to see when California Governor Newsom came out with the announcement that he had been working with a variety of financial institutions to actually help those that are impacted by this.

And so to specifically answer your question about how does this relate to servicing, I'd like to take a moment to define forbearance for our audience.

And so with this new policy that Newsom has put in place, these financial institutions are actually going to offer borrowers a 90 day forbearance on their payments. It could be up to a year, but 90 days to start.

And what this means is that borrowers are going to have a relief from having to make their mortgage payments on time, at least for the next 90 days. So they don't have to make the payment.

They don't have to worry about being reported to a credit agency and having this impact their credit score or they don't have to worry about late fees. And a lot of this is also being done with ease.

So there's not a ton of documentation and red paper, you know, involved in this, which is great because the borrowers certainly have so many other things to consider right now. So I think that that was really the right move on the financial institutions parts as well.

Jim Glennon: 00:15:17

Yeah, it makes a lot of sense.

I mean, you know, people have much bigger issues to deal with right now and I would also imagine that the banks don't want to be seen as putting their foot on someone's throat when, when they're, you know, they're, they're worried about if their house is even still standing and dealing with some of the, the aftermath of that so that it makes perfect sense that they would offer some sort of forbearance. Yeah, like, like you said, I think I read that you just pick up the phone and call a hotline.

Like there's not a ton of paperwork that has to get done. You just basically call in and say, I was affected by the fires and I'm going to be, I'm gonna be late on my next few payments.

Vimy: 00:15:48

Yeah, definitely. Good to make it as easy as possible given all the stress.

And you know, to your point, of course they don't want, servicers don't want to look like they're being difficult at a time like this.

But I will say that they're also incented to provide this forbearance because the last thing that servicers want is to suddenly have a wave of defaults on their books. Right. So it's imperative that they work with borrowers for the borrower's sake as well as for their sake, but that will.

Jim Glennon: 00:16:15

Have some impact on the value of that asset for them. Right. And therefore that streams through to the kind of pricing that we see on rate sheets.

Vimy: 00:16:23

Right, yeah, so that's a good point. So I feel like there's an immediate impact to discuss and then there's the potential rate sheet impact.

And so to start with the immediate impact, the forbearance is really going to change the cash flow projections that the servicers have made in order to ascribe a value to the asset. Right. So with borrowers missing payments, this is going to cost servicers revenue that they don't necessarily earn back.

And, and it's not just that borrowers are exempt from paying late fees like we had talked about earlier, but there are so many different components to the MSR valuation.

And so if an MSR owner has modeled out the potential to earn float income on a borrower's payment, well, they're not going to receive that, at least during the forbearance period. And given the high interest rate environment that we're in, float is still a significant portion of the MSR value. Granted in this case.

You know, to your earlier point, Jim, this is a fraction of what we saw during the pandemic. So this was a very real issue. Modeling out the forbearance cash flows was very important during that time.

Still important now, but on a smaller scale.

Jim Glennon: 00:17:31

Right. It could be more concentrated because of the unique area where these fires are happening though. Right.

Like some of these banks probably do more than dabble in non conforming jumbo type of portfolio loans.

And I think I read somewhere that of the homes that had a mortgage on them that were affected by the fires, some 60% were portfolio loans, meaning the banks own those loans outright.

So they're going to have an even more vested interest in ensuring that they do not go delinquent, that they work with those borrowers because they're. A lot of those loans aren't guaranteed by Fannie, Freddie or Ginny.

Vimy: 00:18:05

Right. And you also bring up another good point. Point.

Given the location and the borrower demographic of Southern California, a lot of the property value is actually coming from the land rather than the structures themselves. And so that's another reason why borrowers are incented to stay current on their mortgage even if their home has been destroyed.

Jim Glennon: 00:18:26

Yeah, I've read that that's just the relative wealth of that area and the economic diversity that it has is going to basically ensure that the worst case scenario doesn't happen. Right. If this had happened more inland or in other parts of the country, it could have long term impact on the economy where people flee. Right.

Or the, or the property values nosedive. But because of, of this area and how it's, it's so attractive to anybody who has the money to live there, it's likely that rebuilding happens.

It's going to take a very, very long time, but it does seem likely that folks will want to stay current on their mortgage, maintain that land and hopefully be able to build on it with relative ease.

I know there's been some discussion about permitting and different types of code that may have to be changed or there may need to be some concessions around code to be able to build more quickly in this area versus some of the rules in Southern California that have made it a bit difficult to rebuild quickly.

Vimy: 00:19:23

Yeah, and you know, that's actually, that's a good segue into how does this impact the rate sheet from that borrowers are seeing right now. So we had spent a few minutes talking about how the forbearance is impacting current MSRs.

And one thing I hadn't mentioned yet, which is probably important to mention as well, is you know, in addition to the loss of income and the late fees, there is also this really large obligation for servicers to advance the P and I, the principal and interest and the taxes and insurance even if the borrowers aren't making the payment. But the servicer is on the hook for that. They have to fund that.

So there's this whole added cost and layer that we need to consider and so that we can consider that in with current msr. So how is this impacting the servicing that I own right now?

And then there's the idea of what you've mentioned, Jim, is like in the future, what does this mean.

So in a place like California, maybe there really isn't as much of a loss because of the things that we had talked about, the value of the property and so on. But maybe in a state that doesn't have a similar makeup, would a servicer want to start modeling out future forbearance?

So if you're servicing heavily in a disaster prone state, are you going to want to model out potential forbearance? If you do, that will certainly impact what you're willing to pay for the servicing.

And then that of course goes all the way down to the rate sheet, which is impacting the borrower directly as well.

Jim Glennon: 00:20:53

Right. A lot to consider. Yeah. Obviously a lot remains to be seen, but these are the types of things we should be thinking about as we move forward.

Vimy: 00:21:00

Yeah.

Jim Glennon: 00:21:01

Thanks so much, Vimy, for the wisdom and for the info.

Vimy: 00:21:03

Thanks for having me, Jim.

Jim Glennon: 00:21:04

Okay, let's switch gears back here a little bit. Welcome, Kevin. Welcome to the show, Kevin.

Jim: 00:21:10

Yeah, happy to be here, Jim.

Jim Glennon: 00:21:11

We are going to come back around and talk a bit about our summit again coming up next week, February 3rd through the 5th in sunny San Diego, which I think most of us in the country are going to be pretty excited about. The weather that we will find there. I hope even if it is maybe a little bit rainy, it is pretty nice out there.

Jim: 00:21:29

Yeah, I was looking at the extended forecasts and you know, knock on wood, things are looking, looking okay so far.

But you know, to your point, Jim, if it's snowing all the way down to, you know, New Orleans and Pensacola, then you might as well make your way to San Diego where it seems to be a respite of winter right now.

Jim Glennon: 00:21:47

That's right. Or even Kevin had an earthquake this morning, which was weird news.

Jim: 00:21:52

Speaking of just off scary stuff happening in Maine. Yeah. Rattled the house. It was, that was, that was pretty, pretty interesting.

So another sign for me to get out of here and get down to San Diego and spend some time in the sunshine and warmth.

Jim Glennon: 00:22:06

Sure, sure. All right, well, once we get down there, what do we have in store?

So you've done a really nice job of summarizing some of this and generally spelling out what this event is about and what types of conversations we're going to be having.

Jim: 00:22:22

Yeah, super excited about this.

I know that a lot of folks here at Optimal Blue have been putting in a ton of time prepping for this and there's some, some really cool stuff that we're going to be covering next week.

But what I find most interesting about the event the way that we sort of put this together, what's so unique about it is the breadth of content that we're going to be covering.

So we're going to be talking about everything from the latest in secondary markets, of course, artificial intelligence origination, best practices, economic updates, and we're going to be talking directly to executives as well about how to make the most of being an optimal blue client. And also mentioned we're going to be revealing some exciting new capabilities.

So if you're listening, you could be there and you could be the first to see it. So very exciting stuff.

Jim Glennon: 00:23:08

Right on. Yeah.

If you haven't registered yet, please do summit optimalblue.com so in addition to the sessions, we're also going to have, as you normally would at a conference, at a user conference like this, we're going to have the optimal blueprint zone, which is kind of like a genius bar, right? Or we used to call it blue bar.

Jim: 00:23:26

Yeah, yeah, exactly.

So, you know, we don't want this just to be, you know, if you're, you're coming, you're just sitting in the audience and, you know, you're listening to us talk. We're going to be having this recurring optimal blueprint zone area where you can go and it's going to be more interactive.

You can talk to OB experts, you can. We're going to have, you know, optimal blue there.

We can pull it up, we can, you know, walk through things with you and it gives you an opportunity to just ask questions or, you know, make the most out of your time there. So we don't want you to feel like you're just sitting there passively.

You get to interact with us and, you know, we all get to, you know, work through things together.

Jim Glennon: 00:24:02

Beautiful. And I mean, as we've talked about before, this event is for every role within a mortgage company, right?

Jim: 00:24:09

Oh, yes, yes. Loan officer, broker, C suite operational leaders, you know, our investor partners or vendor partners.

We've got content, you know, specifically for you as well. The breadth of content, I think is something that's really interesting about this event. And we've actually broken things up into four, four tracks.

So we have a track that's really dedicated towards AI and automation. We have one for what we're calling end to end connections, and that's really spanning the full perspective of the primary two secondary markets.

So from rate lock to hedging to loan closing to loan sale, tying all those pieces together and helping you understand how you can use optimal blue throughout the entire process, really to make the most of, of your profitability during the origination and loan sale process. We have a section dedicated towards growing profitability.

So if you're just focusing on wanting to grow profitability, what are your strategies going to be? What are some tips and tricks from our industry experts that, that we have to share? We've got a whole track just dedicated to that.

And then finally we have our tech showcase which is going to be more interactive. It's more, you know, live demos as opposed to, you know, thought leadership content.

So it really gets, you know, much deeper, I think, than you, your average session where, you know, you might be listening to us talk about some of the new capabilities we have.

So we've got really this, this whole gamut of, you know, opportunities to get way in the weeds, opportunities to focus really the 30,000 foot level and everything in between.

Jim Glennon: 00:25:42

Beautiful. And last but not least, we have a celebrity speaker on Wednesday on the last day of the conference and pretty much everybody out there.

Jim: 00:25:53

Has anybody heard of Tony Hawk? I don't know. Is he, you know, world famous, the original guy who did the 900 on a skateboard, something like that? Yeah, Tony Hawk will be there.

You know, this is a great incentive to stay right to the end. He's going to be coming on and giving a talk, so I'm super excited to listen to what he has to say. He was one of my idols growing up.

I had my own stint as a, as a teenage skateboarder and loved playing his video games. It was, it's going to be really cool just to, you know, be able to see him and just, just hear what he has to say.

So, so if, if the, the content itself wasn't incentive enough to, you know, make the trek out to San Diego and the warm weather wasn't incentive enough, then Tony Hawk really is the, the icing on the cake.

Jim Glennon: 00:26:39

Yeah, I've, I've heard he's an amazing speaker and obviously super successful person who likely has a lot of good, a lot of good advice for all of us in this industry and anyone I.

Jim: 00:26:48

Think you know, who's reached that level of excellence in their craft is just going to be super interesting to listen to. So I'm, I'm very excited for it.

Jim Glennon: 00:26:55

Definitely show up for Tony, stay for the content, enjoy the weather, hope to see everybody there. Awesome. Thanks again, Kevin. Good stuff.

Jim: 00:27:02

Sounds great. Thanks, Jim.

Jim Glennon: 00:27:03

Talk soon. Okay, let's close this thing out. Thank you, Kevin. Thanks, Alex. Thank you, Vimy. Really appreciate the insight today. And that's it.

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.

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