Looking Ahead to 2025 & Year-End Market Wrap | Dec. 23, 2024

Intro Voice: 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 your profitability this week.

Jim Glennon: 00:00:43

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. Welcome, gents.

Jeff, Ben, thanks for being here for our final podcast of the season.

Jeff: 00:01:11

Everybody looking festive today. Happy holidays.

Jim Glennon: 00:01:15

Happy holidays. We'll get right into it here in a minute. We're going to do as always with Ben. We'll do the economic update.

ear in review, so we reviewed: 2024

ng to talk a little bit about: 2025

again be our last podcast of: 2024

A bit of a reminder, the Optimal Blue Summit is coming up February 3rd through the 5th in San Diego. Get a hold of the special that's going on right now. You can get a discounted registration fee by typing in holidays, all capital letters, holidays.

And remember that Tony Hawk will be there. Jeff just pointed out Tony Hawk is from San Diego, so a little bit of a homecoming.

Jeff: 00:02:21

Yeah, I probably have some fun anecdotes about growing up in San Diego since we'll be there.

Jim Glennon: 00:02:25

Yeah. So please join us. All right, let's check in with Ben, see what happened last week in economic news.

Jeff: 00:02:31

All right, Ben, so obviously big announcement last week was the Fed announcement. A lot to unpack there, right?

Ben: 00:02:38

Yeah, yeah, a lot to, to unpack. I do want to mention, glad to see you in festive spirits this morning, McCarty. I managed to defeat him in fantasy football thanks to Brandon Aubrey.

So thank you for showing up and being a good sport here.

Jeff: 00:02:53

McCarty beat by a kicker is not a good way to go into the holiday season, but I showed up in spite of it. So yeah, that was a little bit of a rough loss. Thanks for pointing that out.

Ben: 00:03:04

Well, yeah, kind of a sad commentary on the Cowboys that their star player is their kicker at this point.

Jeff: 00:03:10

So yes, thank you for pointing that out to the entire market. Appreciate that.

Jim Glennon: 00:03:15

I'm sure there's a lot of that going around. Right. Tis the season for fantasy football playoffs.

Ben: 00:03:20

Yeah.

Jim Glennon: 00:03:21

Yeah.

Ben: 00:03:21

So speaking of bloodbaths, let's talk about that Fed meeting. Just kidding. It wasn't a bloodbath. I mean, the Fed meeting was unfortunately we saw a pretty big sell off the high level outcome.

lly the dot plot for year end: 2025

So a pretty sharp upward revision to where the Fed sees the Fed funds rate ending next year as well as the year after. So definitely some, some hawkish news there. Their forecast for PCE inflation, also not good news.

Both those forecasts were raised substantially higher. So again, kind of just a bad news all around.

And then Powell got to his press conference, basically indicating they're willing to be very patient with rate cuts from there. Even a slight acknowledgment that fiscal policy was creating more uncertainty.

So definitely some, some credence to the fact that politics can play a role in, in kind of the Fed's outlook. But certainly not an explicit acknowledgment of that. But certainly a slight acknowledgment, I guess you could call it.

Jeff: 00:04:41

But as explicit as they're going to get, really.

Ben: 00:04:43

Right, Exactly. Yeah. I'm kind of surprised he even said that much. I think everyone knows, you know, that's in the back of their mind.

But certainly, yeah, interesting to see that come out of Powell's mouth.

Jim Glennon: 00:04:55

Yeah, I mean, the mortgage market didn't like it. Right. We saw rates go up on mortgages. The OBMMI hit a level it hasn't seen since the summer. So we almost hit 6.9 and volume dropped significantly.

That could be a little bit of seasonality just with the holiday being this week. But we really saw last week rates up and volume down, but average, I.

Jeff: 00:05:15

Mean, average at 6.9.

There's a lot of mortgages being originated in the sevens, which, you know, obviously all were really hoping we would be out of, but we're well into a lot of volume being originated with a seven handle, which is Just not great to see.

Ben: 00:05:32

Right. And we did get a little good news with the actual PCE reading for November. That was below expectations both on the headline and core component.

So that was good news. I think we tried to rally a little bit off that. Retail sales also came out, you know, grew at 0.7%. So a little bit higher.

But digging a little deeper, there was actually some good news in there that if you exclude autos and gas, it was only up 0.2% whereas the expectation for that was 0.4%. So some good news there. Yeah, just not a great spot for mortgages right now or bonds in general. Just kind of in sell off mode.

The trend has not been our friend, but as we all know, we're only one Fed meeting or a few economic data releases away from that entire narrative changing.

Jeff: 00:06:20

Right. I guess to walk back the negative talk just a little bit, we are still in a range, right.

We're not fully trending up in rates, certainly not trending down like we all optimistically hoped we would be doing at this point.

Jim Glennon: 00:06:31

e of the expectations are for: 2025

Ben: 00:06:39

We've been talking a little bit about that four and a half level on the ten year. Unfortunately we have breached that we're not massively above it.

I think we're kind of right around 455 on the 10 year, but we did break through that level.

So if you're a believer in technical analysis, which a lot of folks out there are, and I guess if, if a lot of people on Wall street and mortgage traders believe in it or just treasury traders in general, then it definitely becomes real if enough people are trading off of it. So we did break through that.

Hopefully the carnage is somewhat contained there and maybe we could slip back back below, but definitely some signs of a little bit of a breakout if you're paying attention to those sorts of things.

Jim Glennon: 00:07:22

It's a psychological thing with, with a lot of folks, right. People will say you break four and a half, you end up at five on the 10 year. And that would be, you know, that'd be pretty bad for mortgage rates.

That would be another, easily another half to five eights up in rate. But again it's. If you believe in technical analysis and believe that we're going to sell off pretty hard from here in the bond markets.

Jeff: 00:07:41

And then we did have another interesting thing about some of the Fed talk. The Fed announcement was we had various Dissenting opinions.

Jim Glennon: 00:07:48

Right.

Jeff: 00:07:49

We had a dissenting opinion in the Fed vote, but then some talk later in the week as well. You want to comment on that, Ben?

Ben: 00:07:55

Sure, yeah. I believe Beth Hammack was the only FOMC voter to actually not want to cut rates at all. So that was kind of interesting to see some dissent there.

But then, yeah, some dovish speak later in the week. You know, Waller believes monetary policy still is restrictive and Powell agreed with him essentially in his comments after the meeting.

And they're not thinking it's creating undesirable weakness in the labor market. Still kind of humming along in the labor market, but we'll have to see how that continues to evolve.

Jim Glennon: 00:08:28

I mean, that's the debate, right. We've been struggling with all year is people are saying that by definition, by math, the policy right now is restrictive.

But GDP is good, unemployment's good, inflation is still running above 2%. Like there's very few arguments to drop rates any more aggressively than the Fed already has.

And maybe to argue that rates should go down anymore at all.

Ben: 00:08:52

Exactly. Right. I think as long as the labor market continues to hold up, they kind of have a green light to at least be very patient.

o keep an eye on heading into: 2025

Jeff: 00:09:18

Yeah. So short term, looking through the end of the year and I guess really looking up until the next monthly employment readings.

Anything else big out there in terms of announcements?

Ben: 00:09:28

Honestly, not really. It'll be the non farm payrolls for December. We could look at unemployment claims weekly. Those come out.

But again, you don't want to make too much out of one week readings there. So definitely kind of a keep an eye on the trend of that for sure. But I doubt we'll get any major revelations these last few weeks of the year.

And so it really is going to kind of turn into typical holiday weeks where we have liquidity issues. There's some volatility you could get investors backing off pricing.

So definitely good to be aware of all those phenomenons that tend to happen during these weeks and trade accordingly. Or if you have the ability to hold for maybe the new year or at least pick days that are not half days and make sure the market is looking good.

That's always a smart move.

Jim Glennon: 00:10:17

Yeah, great advice.

Jeff: 00:10:18

Yeah. Whether you're an originator or a trader, you're going to run into some of those Dynamics. Right.

Investor like you said, investors may be backing off the rate sheet pricing just being a little bit more conservative because of a lack of liquidity in the market. And again, lack of liquidity in the market. You got to be careful as you're trading, right.

Especially early in the morning, later in the days, on some of these half market days, all those different times, things get a little sketchy sketchy. So just be careful on, on how you're trading. Make sure you're really watching things.

Jim Glennon: 00:10:48

into some of some more of the: 2025

sly what's going to happen in: 2025

Ben just, just talked about the Fed and we are expecting for now the Fed to pause for a bit in their rate moves, which is again was expected for, for quite a bit here. But they've been more explicit about their patience there.

for maybe two cuts in all of: 2025

But also as we've talked about, you know, we're a couple data points away from that changing or we're one international incident away from from expectations. They're changing.

So we should always be watching the dot plot, always watching the the future is always listening into what on the Fed is thinking because that's going to affect mortgage rates. All these things that we're going to talk about here, I think somehow directly or indirectly affect interest rates on mortgages.

. And also we're last year in: 2023

So if you look at almost anybody's projections for the next couple of years in mortgages, you're going to see, you're going to see a six handle on almost everything, which is good. We're not seeing a 7 or 8, but we're also not seeing any fives out there.

We follow, you know, we follow a bunch of forecasters, but Fannie Mae has some good forecasts. You can read about NBA obviously a Lot of the big banks like Wells Fargo will keep an eye on mortgage rates and have models that forecast those out.

r, you know, rates to drop in: 2025

, people were calling for, by: 2026

Jeff: 00:13:21

But maybe that makes sense. I mean, you know, maybe this actually is what a true soft landing looks like. Right.

We've never achieved, you know, a true soft landing in our economy. And, you know, there's going to be ups and downs. It wouldn't be a, you know, drastic drop in rates.

So I think it kind of fits in with what we're seeing in the broader economy. Of course, kind of everything's. Everything in the broader economy does trickle down to mortgages.

Jim Glennon: 00:13:43

So, yeah, it's the higher for longer narrative was out there the whole time we were calling for lower rates. So one side of that had to win. It does seem like higher for longer is the narrative for now. So what about.

There's a ton of other stuff, but it feels like overarching. A lot of what we're going to be talking about next year is going to have a lot to do with the new administration. Right. The new.

There's a lot of still what ifs out there. There's a lot of questions. There's the tariff discussion we had a couple of weeks ago and what that might mean for the economy.

There's the spending, you know, the government spending that, that shows no signs of slowing down. What does that look like for inflation and for jobs?

Ben: 00:14:21

as extension of the, I think: 2017

But yeah, those will be big things to watch. You know, how much are we adding the deficit? You know, are there some maybe on the immigration side?

Is there something that's going to occur there that perhaps stokes inflation further? So definitely something to. To keep an eye on there.

And like you said, with tariffs, like, could that actually cause lower growth and we could actually see lower rates from that, even though another impact to that might be inflation. So definitely a lot of moving pieces there.

So we'll have to see how those, those political winds kind of change and what actually comes into effect on those.

Jeff: 00:15:12

Right.

We already saw some of that play out over the past week and this weekend with the potential government shutdown and all the discussion around Elon Musk and Doge. And there's still, even though a lot of people think Elon is all powerful, still got to get through Congress for a lot of these things.

So how much does Congress push back on some of these Doge concepts when they have constituents to keep happy and that, you know, they're not going to want to cut spending across the board. So seeing some of that play out. We're starting to see some of that play out already and that'll continue to 25.

Jim Glennon: 00:15:47

Yeah, just a lot of talk so far. Right. So I'm kind of on the edge of my seat to see what's actually going to happen, how it's going to affect us. But yeah, it's just a recap.

It's the possibility of mass deportations that's going to affect, certainly affect the labor market and could affect wage based inflation, the budget overhaul.

So that's the Doge and Brahmaswamy and Elon Musk looking to cut big pieces of government budgets and then there's the tariffs piece and then there's spending in general. Right. And what does that do to inflation and just overall global growth?

Jeff: 00:16:18

You know, thinking about how some of those concepts do affect our industry. Right. You know, how does that get into GSE reform and overall deregulation in our industry? Right.

Are there going to be broad cuts to some of these government agencies? Whether it's the fhfa, you know, Ginnie Mae specifically indirectly through, through Fannie and Freddie.

Watching some of that play out, obviously like we've talked about, you know, I don't think our industry is front and center in terms of concerns of the new administration. But you know, eventually we kind of will probably have our time in the limelight for better or worse for, for some of these items.

Jim Glennon: 00:16:59

Yeah, they haven't commented a ton on mortgage specific deregulation, but because it's a Republican government largely now there's going to be some favor towards deregulation. And in the past I believe Trump has talked about GSE reform or even taking the GSEs out of conservatorship.

I think a lot of folks have talked about going after the CFPB which also has an impact on what goes on in the mortgage industry. And there's going to be turnover every time there's a change in government. There's turnover in the CFPB and the FHFA for instance.

So there's just going to be different brains thinking in different ways and with different priorities.

Ben: 00:17:38

Yeah, going back to the GSC reform that'll be really interesting. Obviously could have massive impacts on not just the mortgage market but the entire bond market generally.

An interesting article we kind of saw came from Wayland Global Advisors kind of talking about what that could look like and some of the ramifications.

We don't need to get into all that right here, but kind of the potential for the downgrading of a lot of agency MBS debt and how that could affect really the financial ecosystem as a whole. So definitely a lot of things there and that's something that's probably going to play out over years.

If it is going to be a priority like you hinted at, Jim, it probably doesn't need to be. It doesn't seem like any. That's not low hanging fruit. It's a complicated project.

So definitely a lot still needs to come out before we have any idea of what that's going to look like. But definitely something big out there that's kind of lingering that could have major impacts to keep an eye on.

Jim Glennon: 00:18:35

And as always, we'll keep you all of you informed on these things because they're going to be super interesting topics for us to bring up on the podcast.

Jeff: 00:18:42

Yeah, a few more things that come to mind.

goals for Fanning Freddie for: 2025

Do some of those start to take back seat or do those still have enough momentum and support where we still see that throughout, throughout the industry. So we'll be watching those closely as well.

Jim Glennon: 00:19:11

Right.

And outside of the GSEs and other regulated entities that are governed by federal government, there's also just regulation in general that directly or indirectly affects mortgages. Right.

I mean there's Basel III that's been out there forever, but it's possible that that gets deprioritized, but not that it's been a top priority for the government over the past eight years, but it does seem like there's was a possibility that gets, gets deprioritized or gets changed. There's possible other areas where there could be reforms that would bring bank demand back to mbs.

I think that's something we've all been cheering for for the last couple of years and was hindered a little bit when, you know, Silicon Valley, Silicon bank went under and a signature bank. But we've, we've been waiting for, for more demand from banks which could come from some loosening of capital restrictions for banks.

Ben: 00:20:06

Right?

Yeah, there's definitely some potential for banks to get back in and they're not, they are somewhat of a price sensitive buyer, meaning they're not like the Fed who's just going to buy a certain amount regardless of price and essentially really help to keep MBS prices high. They are somewhat sensitive to that.

But again, with spreads still relatively high compared to Treasuries, I think, you know, banks are primed to step back in less balance sheet regulation, a steeper yield curve where banks, you know, every time the Fed cuts rates, they're probably cutting their deposit rates too.

hopefully a good prospect in: 2025

Jim Glennon: 00:21:03

Yeah, and the, and the prepay story has changed too, right?

A lot of banks last year would have said one reason the spread between Treasuries and mortgages is so high is the prepayment risk because everyone was expecting rates to drop over the next couple of years and therefore mortgage borrowers would refi and pay off those bonds.

ontinue or show themselves in: 2025

I mean, the recapture play is certainly still out there even though we don't expect rates to plummet. We don't expect it.

It is certainly something that could happen, but we expect rates to get down into the six low sixes, which still leaves a ton of mortgages out there to be refinanced.

So we saw, you know, some investors, some servicers really get aggressive over the past year and a half and buying up the market of the, you know, six plus interest rate loans. So there's going to be some definite scratching and clawing to try to try to refinance some of those loans next year.

sh out refis to, to happen in: 2025

Jeff: 00:22:28

Right. This ambiguity that we've had in the market for a long time is going to play out in a variety of different ways. Right.

You know, how many, how many borrowers or people waiting to borrow. Right. Waiting to be first time homebuyers, waiting to move.

Are they going to continue to wait for rates to drop, are going to finally give up and bite the bullet and move to another home, upgrade to another home or buy their first home? Right. How's that going to play out?

Ben: 00:22:54

Yeah, I was just going to say that's kind of one way to look at these higher rates is the longer we stay at 7%, that's just more potential refi volume when we eventually get to 6%. And obviously a lot of IMBs and maybe even some bank lenders as well, like these times are tough. We're still not in a great spot.

So you kind of still just gotta do what you got to do to survive. But there is potential for hope on the horizon and yeah, still we'll get refis eventually.

Yeah, it might not be 4% rates or anything like that, but yeah, even if you could pick up with the way loan sizes have moved, it's even less of a rate incentive necessary for you to want or for it to make sense to refi. So some things to keep in mind that maybe we're just building the next refi boom and it's just going to take a little time here and it'll.

Jim Glennon: 00:23:46

talked about that going into: 2025

We're a little bit better off this year than last year and most mortgage businesses are profitable as of second quarter of this year.

So going into next year, if we saw a 10 to 15% increase in volume, which doesn't seem outlandish between a bit of refis on just purchase activity, continuing to, to trudge along, we could have a really good year even if rates stay kind of where they're at today.

Jeff: 00:24:17

The other thing Ben touched on it, the flat yield curve, when do we see a start to see a steepening in the yield curve? I think that really is kind of one of those key indicators of when we start getting out of some of this ambiguity. That's going to be one.

Obviously we always watch, we'll continue to watch when will there be a turning point in, of the rate structure overall. And so as always, watch that yield curve. Watch that 2 year, 10 year treasury spread as an indication for what's going on in the broader market.

Jim Glennon: 00:24:48

Good call. Yeah. It's going to take more cooperation for the Fed, probably. We would hope that longer term rates don't go up to tilt that yield curve further.

Yeah. One last little thing to note that I think is worth keeping an eye on is the changes in how credit scores are going to be looked at.

You know, FICO10T, you might have heard some things about that already, might be hearing about it from, from investors, from lenders. So we'll see more on that next year. That's starting to heat up a little bit.

Jeff: 00:25:14

Yeah, that's an interesting one. I think there's a few other alternatives out there. People are.

I think it's just a good indication of like maturing market with, with more innovation, you know. How do we look more granularly? We've talked about looking more granularly at prepay stories. How do we look more granularly at borrower profiles?

Kind of updating our assumptions about the risks of borrowers, the risks of the underlying asset here.

Jim Glennon: 00:25:39

Right. So FICO 10T essentially. Right.

o be, I think, implemented in: 2025

Jeff: 00:26:02

Yep.

Jim Glennon: 00:26:02

And as always, be ready for the unexpected.

I feel like in any market it's always when things seem like they're going to be flat for a long time, like projections for interest rates right now are, that's when something happens, whether it's geopolitical or some cracks in the economy or jobs, outlook starts to deteriorate. Like there's always something lurking out there. So obviously we all want to be paying attention to that.

And that's when you'll want to listen in with us as always to help you navigate through those things. All right. I thought it might be kind of fun to close out with our favorite Christmas movie, maybe give listeners out there some ideas of some movies.

Maybe they haven't, maybe they haven't seen yet. Let's start with, start with Ben. And we didn't discuss this beforehand, by the way, so it's a surprise to all of us.

But Ben, what's your, what's your favorite Christmas movie?

Ben: 00:26:47

I think I gotta go with how the Grinch Stole Christmas. The, the Jim Carrey version. Yeah, yeah, kind of a classic.

I think I saw this weekend that apparently Jim Carrey, it took him like each time he got that outfit on, it took him like five hours in makeup or something. Just something insane. So I believe it. But yeah, definitely a family friendly option. Yeah, just always a classic.

Jim Glennon: 00:27:13

All right, good. Jeff.

Jeff: 00:27:15

Mine's A Christmas story, the classic.

It's, you know, always on, I feel like always on in my house in my childhood and it's just, it's, it's the sounds and visuals of Christmas for me and it's just a, a nice, silly, light hearted movie. Always gets me in the spirit.

Jim Glennon: 00:27:32

So yeah, man, you can watch it for 24 hours on TBS. Definitely happens in our house too. That's a classic. So I'll go with one that's not for children. I'll say that at the onset.

So Jenny and I, every Christmas Eve we watch a movie called the Night Before. It's Seth Rogen and Anthony Mackie and Joseph Gordon Levitt in it. It's just, it's become a classic for us to watch.

Again, not for children, but if you like a good comedy, if you were a teenager in the 90s especially, there's some throwback jokes in it that you would appreciate. And as, as Jeff has pointed out, there's a just a classic performance by Michael Shannon if you're a fan of his.

He's not one of the main characters, but he kind of becomes one of the critical characters in the middle and towards the end of the movies.

Jeff: 00:28:15

Yeah, it's got a great cast. It really is. It holds up well.

You know, watched it once and then the past couple of years I started watching it more and more again around this time of year. It's really good.

Jim Glennon: 00:28:25

Yes, it's a pretty wild adventure.

. This is our last podcast of: 2024

We will not have one next week unless something happens.

t otherwise, we'll see you in: 2025

Huge thank you to the podcast team here at Optimal Blue. That includes our marketing team and, and the folks whose faces are on the screen right now as long as, as well as tons of other guests we've had on.

I just want to thank you so much for, for, for producing this, this event and the desk, you know, want to thank our, our team on the desk in Denver and in D.C. and in San Francisco and just all of OB who just make this just a wonderful, super nice place to work.

So appreciate everybody and happy Holidays, Merry Christmas, Happy Hanukkah, Happy Kwanzaa, and Happy New Year. That's it for today.

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