Recent Trends in Mortgage Servicing and Upcoming Fed Announcements | May 5, 2025

Jeff McCarty: 00:01:01

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.

Jeff McCarty: 00:01:11

Your profitability this week.

Jeff McCarty: 00:01:16

Welcome to Optimal Insights, your weekly source for timely market analysis and expert commentary from Optimal Blue. I'm Jeff McCarty, Vice President of Product Management at Optimal Blue.

As you may notice, Jim's not here today, but joining me are Kevin Foley, Director of Product Management, Alex Hebner, our resident economic guru and recurring guest, Vimy Vasudeva, our resident MSR expert. Let's dive into today's episode. All right, so welcome Alex, Kevin, Vimy, we've got a great show today.

We'll focus on some of the economic data that came out last week.

Obviously talk about the Fed announcement coming up this week and then Vimy and I will get into an update on the state of servicing right now after one of our big servicing conferences in the industry that we had last week. So excited to dig into that a little bit later on. So first quick look at the data.

Really kind of the state of the market is everything's flat right now.

So obmmi hovering around six and three quarters, 6.755 I think as of the end of the day Friday on the conforming 30 year, 10 years, pretty flat at around 4.3. You know, stocks started the day down but they've, they've come up a little bit and they've been pretty flat.

They've made a little bit of a modest rally off the, the lows over the past couple weeks. So, you know, everything is looking pretty flat at the moment.

We're kind of just waiting for the other shoe to drop, waiting to see where things shake out with tariffs, where things shake out with some of these budget proposals. So we'll dig into some of that as we go. So let's dig into it. All right. Welcome Kevin and Alex.

Kevin Foley: 00:02:51

Yeah, good to be here.

Alex Hebner: 00:02:53

Thank you.

Jeff McCarty: 00:02:54

So let's jump right into it. Let's talk about the kind of two big economic releases from last week.

Alex Hebner: 00:03:00

Yeah, definitely. I think I'll start with employment first week of the month, rather first Friday of the month.

We got some, some non farm numbers there and they were really, really solid.

Honestly they beat expectations, saw a couple tens of thousands additional jobs than expected which, which really put the worries that kind of emerged midweek about the ADP survey. The ADP survey came in well under expectations, like I believe somewhere around half.

We saw continued growth in the health care sector, 50,000 jobs there. Kind of a surprising one that I caught was around 30,000 jobs in the warehousing and transportation services.

That to me seems like maybe kind of in line with the front running of imports that we've seen, you know, maybe some part time work being generated there. Definitely kind of want to keep an eye out on if we see any contractions in that in, in the coming months and quarters.

But we also had some GDP numbers last week which were pretty disappointing, kind of in line with the, those Atlanta Fed projections have been showing that the economy is slowing if not contracting.

But I was chatting with Kevin this morning and we were just chatting about, you know, how much credence to give this, this particular release and what that negative 0.3% GDP release actually means.

Kevin Foley: 00:04:12

Yeah. So you know, I think this is interesting.

So a lot of folks have already talked about how because of the way that the GDP calculation works, if you have, you know, significantly higher number of imports, you know, in a given quarter that's going to drag down gdp and we can talk a little bit about that and theoretically it should all sort of even itself out.

But the main reason to your point, Alex, that we saw a contraction was because of that really high number of front running imports, folks trying to import everything they can abroad before the tariffs kicked in.

But I think if we take a step back, Q1 GDP I think is kind of the least reliable quarter in terms of indicating for us where things are actually going. And the Federal Reserve has actually done some analysis on this.

y published something back in: 2017

rs of data and let's take out: 2020

And the likelihood of that happening with random Data is about 6%. And the Fed actually has a term for this they call residual seasonality. They take into account things like the weather and their calculations.

But what's interesting is that the Bureau of Economic Analysis, the bea, they don't actually take what the temperatures were, what the weather was in Q1 as an input to the seasonality. They just base it off of the historical data.

And, and on top of that, if you look at the possible temperature spread in the contiguous US you know, where it's at its highest is in Q1 so the most variability between the, you know, possible high temperatures and possible low temperatures.

So I've got this theory that given the temperature variation in winter that the BEA is unlikely to get the seasonality adjustment nailed down unless they start taking temperature or weather data as an input.

And so the adjustment now whatever effect that had, I think probably some because it was, you know, colder than average winter, you know, sort of relatively speaking versus the last few years, whatever effect that that had probably swamped by the whole tariff conversation.

But even that's sort of interesting, right, Jeff, because you know, technically things should really even out if you have more imports, you'd expect kind of an offsetting adjustment there for investment. Right?

Jeff McCarty: 00:06:54

First of all, I got to go back to. You're taking the phrase taking the temperature of the economy quite literal right there, Kevin.

Kevin Foley: 00:07:03

Resident meteorologist.

Jeff McCarty: 00:07:05

Right? That's great.

But as you said, there's been so much focus on the GDP equation over the past couple months and how net exports plays into the role of gdp. But as you said, you know that that net export number should be offset by either investment or consumption.

You know, if there was a flood of imports to try to get in front of tariffs towards the end of Q1, that should be counterbalanced by an increase in either investment or consumption, which, which should come into the GDP number as well.

And so I was reading a few interesting things that maybe those import export numbers, much easier to measure just because you're counting what's coming in and out of ports versus investment and consumption numbers are based much more on survey results. And so maybe those survey results aren't quite as accurate or maybe there is a little bit of lag in those survey results.

So again, you know, it goes back to maybe our conversation from last week where we got to have a little bit of patience.

We've got to not rely too much on one number because there's going to be a lot of noise, especially with how quickly things are moving right now with these tariff announcements. You know, how much noise is there in one part of the equation versus the other. But, or it could be, you know, we truly seeing a decrease in gdp.

Kevin Foley: 00:08:21

So it does feel like this year in particular the Q1 GDP numbers, you really just almost got to like throw them out the window because the factors that were at play in Q1, the front running of imports before tariffs, not there anymore. There's a seasonality adjustment.

There's, you know, all sorts of questions around serving data, how that's going to play into things and the factors going to Q2 are, are very different. So to your point, I think we just got to be patient and see how things play out over the coming quarters.

Jeff McCarty: 00:08:51

the past week, Maybe just the: 2026

A good portion of that was focused around HUD and, you know, 26, 27 billion in cuts to HUD, although a lot of that comes from a lot of down payment assistant programs, some affordable housing programs. So nothing kind of broad across general fha, Ginnie Mae staffing or anything like that. Nothing like that right now.

So I think, you know, as far as overall stability of our industry in particular, nothing to be too concerned about yet. Although these budget proposals are pretty broad to start.

So, you know, it's hard to see, you know, what type of details, but, but certainly something to watch as we get more details about those budget cuts.

Alex Hebner: 00:09:54

Yeah, that was going to be my comment that I just think, you know, this is a proposal, take it with a grain of salt. And it's coming from the White House. The White House doesn't control the purse strings. They do have Congress, you know, on their side.

You know, they have majorities in both houses. You know, we'll see those, those plans dialed back, I would, I would imagine. And they have a lot of lead time here, too, I think.

I don't think they need a budget until September, the early fall.

Kevin Foley: 00:10:13

So, yeah, to your point, Alex, the way that I see these things, you know, in a White House, whoever's in the White House proposes a budget is it's more to try and, you know, get the folks who are maybe most likely to peel off on board for whatever it is that they're trying to do, whether that's budget cuts or, you know, increasing spending. So it's really just all kind of part of the negotiating that's happening within Congress.

So interesting to see what the numbers are and just get a sense of what it is that they're trying to push. But certainly long way to go before anything like that comes to fruition.

Jeff McCarty: 00:10:52

All right, so then let's start talking about the big announcement coming up this week, the Fed announcement on Wednesday.

Alex Hebner: 00:10:57

Yeah. Yep. We are around to another FOMC meeting. We'll get that on Wednesday. Drama surrounding Powell, Trump butting heads there.

It's definitely subsided, I'd say, over the past two weeks, since it really was kind of capturing headlines.

I think the news and we were talking about this just before the show, but you know, CME Fed Watch Tool this morning dropped off the chances of a rate cut at the June meeting.

So not this meeting, but the next meeting really kind of dropped off a cliff from, from being around 60% sometime last week to under 30% this morning. So definitely seeing like a reevaluation of if there's going to be rate cuts incoming in the, you know, the near future inside this quarter.

There is an additional FOMC meeting in July. I'm still seeing a majority of, you know, expectations there being for a rate cut in July. But it does seem to be a bit of a kick the can moment.

I agree. Personally, I think, you know, the data isn't quite there to support a rate cut at the moment.

You know, we just got, like I said, a great jobs number. Rate cuts are designed to, amongst other things, you know, promote, promote employment.

So with a 4.2% unemployment rate, it doesn't make a whole lot of sense to, to make a cut at this juncture. Thursday we get some initial jobless claims and other survey, just keep an eye out for weakness there.

And then Friday isn't anything data specific, but we have a whole slew of Fed governors and board members all with speaking engagements. They have a blackout period up in the two weeks preceding an FOMC meeting. So on Friday they're free to attend speaking engagements.

And we have, and I'll read them off here we got Barr, Williams, Coogler, Barkin, Waller, Cook and Bowman all with different speaking engagements on Friday. Some of them are on panels together and some of them are at, you know, solo speaking engagements. So, so keep an eye out there.

I think, you know, they could provide some additional clarification that we might not get on Wednesday out of Powell's press conference.

Jeff McCarty: 00:12:47

Somebody's going to, with that many speaking engagements, somebody's going to slip up and say something provocative. Right. Are we going to get anything interesting this week?

I, I think the Fed announcement, they're going to be overly conservative in their language to make sure they don't, you know, as usual say anything particularly interesting.

Alex Hebner: 00:13:06

I would agree. And these folks are well trained, they're pr, they're extremely, well, PR trained. They know what to say and not to say.

I personally would love to hear them, you know, say something a little more out of pocket or you know, give us a more fly on the wall in their, in their meeting type of point of view. But we'll see, we'll see.

I do think, you know, just, just watch for changes in language regarding, you know, the rate cut expectations this summer because, you know, part of their job is setting policy, but a large part of their job is also managing the expectations about that policy. So just keep an eye out on, on how they address any questions regarding rate cuts into the, the middle half of this year.

Kevin Foley: 00:13:43

Yeah, I'm sure there's, there's going to be a lot of, you know, traders looking to read the tea leaves next week is in terms of, terms of what they say.

So and we'll see, you know, they, those statements where they highlight, you know, keywords and you know, so I'm, I'm going to be interested to look at some of those outputs to see how many times they talk about uncertainty or, you know, growth or challenges or things like that.

Jeff McCarty: 00:14:08

So, yeah, going back to expectations going forward, I mean, we talked about how even the June cuts are looking less and less likely. And then looking through the end of the year, people were expecting about four cuts.

That was kind of the plurality of what expectations were four cuts this year. And now it's shifting more towards three cuts. Even as Trump tries to pressure explicitly ask for rate cuts.

We're kind of shifting in the other direction just based on the data that's out there, right?

Alex Hebner: 00:14:42

Yeah, yeah, I think they're making a point of remain data dependent. I think that'll be something that they highlight in their, in their speaking engagements. But yeah, I think I tend to agree there.

I don't think, you know, I think a full point cut this year was seemed a little unwarranted unless they're really trying to get out ahead of something that they're seeing that the rest of us aren't. Quite a lot of storm clouds on the horizon as we talk about every week on this podcast. But again, you know, unemployment's at 4.2%.

There's no, you know, Black Swan events, no bank failures, no Covid or anything like that. But again, Black Swan events are called that for a reason. They come out of almost nowhere.

Kevin Foley: 00:15:19

Yeah, I think to pick up that point, one thing that I'm seeing and reading more and more, the Wall Street Journal just did an article about it.

But the folks who are very plugged into tracking shipping are starting to notice a drop off in container ships coming from Asia to the US and typically if something like that were to happen and there's past instances during COVID and whatnot where we saw similar mechan that that could potentially lead to troubles in the next couple months in the retail sector. So something to keep an Eye on. I've been seeing it talked about more and more. Whether that comes to fruition, you'll have to keep an eye on it.

Alex Hebner: 00:16:00

Absolutely. I've read a number of articles. One about a third contraction and as you said, Kevin, shipments coming towards the west coast right now.

And then in addition to that, just also backups at the ports, those that can wait with their.

With their goods on a ship, preferring to pay those crews and those ships the maintenance costs, just keep them offshore, ready to come in should, you know, trade deals come into place very quickly.

Jeff McCarty: 00:16:22

All right, well, thank you as always, Alex and Kevin. Great.

Alex Hebner: 00:16:26

Thank you, Jeff. Have a good one.

Jeff McCarty: 00:16:27

Thanks.

Kevin Foley: 00:16:28

Yep, thanks.

Jeff McCarty: 00:16:29

All right, welcome back in. Vimy Vasudeva, managing director on our desk and our resident MSR expert. Vimy, thanks for coming back on.

Vimi Vasudeva: 00:16:38

Thanks for having me, Jeff.

Jeff McCarty: 00:16:39

Yeah. So you've been catching up. There was a big servicing conference last week, imn.

Servicing conference, kind of where all the big industry players come in and do kind of a state of the MSR market. You were catching up with some folks were at that conference last week, right?

Vimi Vasudeva: 00:16:54

Yeah, yeah, I was. I typically attend that conference. The IMN puts on this specific Residential Mortgage Servicing Rights conference twice a year.

I wasn't able to make it this year, so I did make sure that I got notes from the field. We did have Tony Pachente, who a senior account manager on our MSR desk, attend.

And so I got a chance to catch up with him this morning to hear some highlights from the conference.

Jeff McCarty: 00:17:17

Nice. So what were kind of the big talking points from last week?

Vimi Vasudeva: 00:17:21

Yeah, so of course, this is not a surprise because the biggest change from the last conference in November is the administration. And so there was a lot of focus on the changes from the administration and particularly with respect to the cfpb.

As we all know, the CFPB has been reduced in size.

And, you know, while a lot of panelists and many people out there agree that the CFPB may have overstepped in the last administration and become a little too punitive, there's certainly a benefit to having just one entity to deal with, regardless of the punitive nature. So with less oversight at the federal level, states will be now picking up the slack with respect to regulatory compliance.

Jeff McCarty: 00:18:03

Yeah, that's interesting. And so that just kind of broadens the amount of regulatory oversight that you have. Right.

So now you've got 50 different states taking on more oversight instead of one centralized regulatory entity. Right?

Vimi Vasudeva: 00:18:19

Yeah, it was interesting because some servicers apparently mentioned that they've already started to see an increase in inquiries from the states.

And what I mean by that specifically is that previously, while a 5,000 loan sample size may have been sufficient, regulatory monitoring servicers commented on having to increase the sample size. And so 5,000 is not enough.

Or another example was that instead of providing this sample size to one federal agency, they now have to supply it to three states, for example, if they operate in three different states. So that's a pretty big burden on personnel and many other things.

Jeff McCarty: 00:18:58

Yeah, we've heard that across the board, again, all the way from origination through servicing. And that ultimately just drives up costs, right?

Vimi Vasudeva: 00:19:08

For sure it does, because these servicers now have to add personnel to accommodate all the. All the increase in the inquiries.

So adding personnel adds to the cost, which, which decreases the value of the mortgage servicing rate, which we know ultimately down the line impacts the borrower as well.

Jeff McCarty: 00:19:27

Yeah, it goes without saying. I mean, certainly, you know, say like California is probably going to look at things a lot differently than states like Texas or Florida.

Vimi Vasudeva: 00:19:35

Yeah, good point. I guess.

On the other hand, the potential of this added personnel might mean that this is me trying to look at the bright side, but it might mean that those who have lost their jobs@ the CFPB now might have opportunities at these state level agencies.

Jeff McCarty: 00:19:50

So yeah, I don't really look at the glass half full. That's good.

Vimi Vasudeva: 00:19:53

Yeah, trying to. You've got to. And in these uncertain times.

Jeff McCarty: 00:19:58

Right, yeah. Yep. All right. Well, always the, the big topic is what is the state of delinquencies in the servicing market? So. So what are you hearing there?

Vimi Vasudeva: 00:20:08

Yeah, so a lot of discussion around Ginnie Mae delinquencies, which is not that surprising. I think a lot of people are viewing Ginnie Mae delinquencies as a canary in the coal mine, especially in the FHA side.

So the last time I was on the podcast, I actually focused on the increase in VA delinquencies. And that was due to the timing of that podcast was around the termination of VASP program that the current administration was terminating.

And just as a quick reminder, the VASP program is the Veterans Affairs Servicing Purchase Program.

And this was a tool launched by the VA last year, which was designed to help eligible veterans experiencing financial hardships avoid foreclosure and stay in their homes as another post pandemic era relief program was dismantled. A lot of dismantling going on. And so there's a lot of scrambling to try to figure out how not to have this. These be catastrophic events.

encies, particularly with the: 2022

2022 and later vintages, they're starting to show cracks. I suspect this is due to the higher DTI and the higher LTV loans.

And then, of course, just like I mentioned, with the programs being dismantled, who knows how many more there are out there, which is certainly going to make it more difficult for FHA borrowers. And I think that modelers are already starting to model out an increase in FHA delinquencies because of this.

Jeff McCarty: 00:21:37

bout proposed budget cuts for: 2026

Vimi Vasudeva: 00:21:47

Absolutely.

ad mentioned was that back in: 2008

But we didn't see that same trajectory necessarily in the auto debt space, because the mentality was, I have to get to work, so I need a car. I don't necessarily need my home. Like, I can figure that out. And then now, almost two decades later, which that's crazy to think of.

It's been almost two decades, but almost two decades later, the mentality has completely shifted as everyone, as many people, has started to work from home or on a hybrid basis. The need for the car is just not there. And so, as we've talked about on the podcast previously, we have seen an increase in auto debt.

So it's just interesting to see that mentality shift. Whereas now it's like, I can't let. Can't let my home go, but I'm okay with the auto.

Jeff McCarty: 00:22:44

That's fascinating. Yeah. It really just reiterates the point that all of this is about trying to model borrower behavior. Right.

What are actual borrowers facing as they're trying to make their mortgage payments? It's fascinating. It's a completely different dynamic now.

Vimi Vasudeva: 00:22:59

Yeah. So it'll be interesting to see if we, you know, what else might shift because of that.

Jeff McCarty: 00:23:04

Yeah, well, one thing that hasn't changed is, I mean, you mentioned the FHA space. You mentioned Ginny loans always kind of being the canary in the coal mine.

So it's another one of those early indicators that we've been talking about throughout the economy of are we at the precipice of a recession? And there's some warning signs, I guess, as you mentioned that we might be, but we're not, you know, it's not fully obvious yet. Right.

So we're just going to keep watching this closely over the next several months.

Vimi Vasudeva: 00:23:35

Yep. And listeners should tune into optimal insights to keep up to that.

Jeff McCarty: 00:23:41

Absolutely. Good.

Maybe we can talk about a couple things about how people with, with existing portfolios, how can they make the most out of their existing portfolio or how are people in the industry trying to make the most out of their portfolios right now?

Vimi Vasudeva: 00:23:55

Yeah. And so that actually brings me to the final point I wanted to talk about was with respect to MSR values.

So particularly at this conference, there is a lot of content around the valuation side of things, as opposed to the MBA Servicing conference, which can be a little bit more operational. And so there was certainly a lot of panels around MSR values.

And this has been a consistent theme in all the conferences I've attended over the last year and that we've talked about on the podcast many times. But it's a whole concept of recapture and how that is impacting the MSR value.

So MSR values are still quite high and it is because of this recapture potential.

Jeff McCarty: 00:24:32

So reiterate that recapture concept one more time. Just kind of breaking it down.

Vimi Vasudeva: 00:24:37

Yeah.

And so the idea here is that if you are an originator and you sell your servicing to an aggregator and you're basically getting rid of that borrower relationship, I mean, to put it very bluntly. Right. You're selling it to someone else who now has more of an opportunity to recapture that borrower when the borrower decides to refinance.

And so there's a lot of focus on those who can retain, should retain, particularly in this environment, so that they can keep the borrower close and they have more of an opportunity to hold on to that borrower for hopefully many refi cycles down the road.

Jeff McCarty: 00:25:14

Yeah. Interesting.

And obviously again, that all leads to how mortgage company values that servicing, if they can value that recapture or not drives the price that ultimately leads to the borrower. So it's the relationship and the price huge components of this recapture concept, Right?

Vimi Vasudeva: 00:25:34

Definitely.

And so with respect to the price component, that leads me to an interesting point where of course, everyone, so servicers look at it a little differently.

And so some play the more conservative approach and they do not include the value of the recapture because it's not as black or white as modeling income on payment and principal and interest floats, for example, like there's a lot more steady data there to put a, to really ascribe a value Recapture is really. It's almost like a bet. Right. And so for that reason, some entities decide not to include it.

Others do because they want to be more aggressive, all the way down to the rate sheet. Right.

They want to be able to give the most competitive price, and they justify it by a higher servicing cost coming from the opportunity to recapture. But finally, regardless of what an entity might want to do, auditors also view this differently.

So some auditors are okay with including recapture, and some absolutely are not. And it goes back to that same concept I just mentioned with respect to the predictability and being conservative with that or not.

So lots of different considerations with how, how and when to include the value of the recapture.

Jeff McCarty: 00:26:46

And we see some wild discrepancies on what people estimate for recapture. It can be anywhere as low as 5 to 10% to some crazy numbers out there of over 50%.

They think their ability to recapture is over 50%, which has led to some very high valuations.

Vimi Vasudeva: 00:27:05

Yeah.

And what you're bringing up is probably what happened last year with certain aggregators that were really driving up the value and just being able to put really aggressive bids because of this belief. So.

Jeff McCarty: 00:27:16

Interesting. So last anecdote I think you had was kind of around some of the movement.

We talked on this podcast a couple of weeks ago about the acquisition by Rocket of Mr. Cooper. And, you know, one of. One of the side effects of that. I think you got an anecdote from that as well, right?

Vimi Vasudeva: 00:27:34

Yeah, absolutely. In fact, this just happened last week around the time of the servicing conference.

And so when I caught up with Tony today, I asked, like, did this topic come up because it was very timely. But it didn't probably, because I think the news released the day before the start of the conference.

And so people were probably trying to wrap their heads around it, but essentially last week, United Wholesale Mortgage announced that they were bringing servicing in house. And they traditionally haven't held as much servicing as other lenders of their size.

So it really does make sense now for them to do this, given that Mr. Cooper was one of their primary subservicers. And of course, with Rocket being one of UWM's largest competitors, and now with their acquisition of Mr.

Cooper, it certainly makes sense for UWM to switch their strategy and bring servicing in house.

Jeff McCarty: 00:28:24

Interesting.

So, I mean, some of this stuff, you know, somewhat subtle movements on the back end, but end up very much driving what pricing looks like to borrowers and what borrowers are seeing across the market that then, you know, filters down to, you know, even our smaller originators or something they, they have to keep an eye on because, you know, a lot of those borrowers are using those, you know, Rocket and UWM as kind of their, their, their bogey for what type of pricing they need at least get close to. Right.

Vimi Vasudeva: 00:28:53

Yeah, exactly. It's a good point.

Jeff McCarty: 00:28:55

Yeah. Interesting. Anything else?

Vimi Vasudeva: 00:28:58

No, I think those were the highlights, but I look forward to sharing what might be different six months from now at the next IMN conference.

Jeff McCarty: 00:29:07

Yeah, absolutely. No, always, always great getting your insights.

I think thinking about how the state of the servicing market, because that does drive so much of the pricing that borrowers see and we think about borrower behavior, it's fundamental to what we do in this industry. So it's always great getting your takes.

Vimi Vasudeva: 00:29:23

Yeah. Thanks, Jeff. I'm always happy to participate on the podcast.

Jeff McCarty: 00:29:26

Cool. Thanks, Vimy.

Vimi Vasudeva: 00:29:28

Thank you.

Jeff McCarty: 00:29:28

Let's wrap this thing up. Another great episode. Thank you, Kevin, Alex, and Vimy for some really great insights today.

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

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