Navigating Economic Winds: Employment, Rates, and Refinancing | Oct. 7, 2024

Jim Glennon: 00:00:03

Welcome to Optimal Insights, your weekly source for real time rate data and expert capital markets commentary brought to you by optimal blue.

Jim Glennon: 00:00:10

Let's dive in and help you maximize your profitability this week.

Jim Glennon: 00:00:14

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. I'd like to welcome our guests today. We have Jeff McCarty, director of product management. We have Alex Hebner.

He is a hedge account manager on our desk in Denver. And we've got Vimi Vasudeva, who is managing director. All right, let's get right into it, Jeff.

Jeff McCarty: 00:00:50

Yeah. Episode number two. Let's go.

Jim Glennon: 00:00:53

Yeah, a lot going on, obviously, geopolitically, economically. Had a big number come out this past Friday. So a lot to talk about today. We'll get into really a lot of details with Alex.

Jeff McCarty: 00:01:06

Yeah. The employment numbers, some interesting things on the employment numbers that Alex would go through. Obviously a strong number.

So that has kind of slowed the progression of a fall in rates. That's the big thing we're looking at right now. But a lot of other things going on in the world that we should hit on here upfront.

Jim Glennon: 00:01:24

Yeah, we're seeing a sell off again today, so rates are ticking up a little bit, but we want to talk a little bit about refinance activity today as well. So we'll get into that with Vimy later.

Just how we can do our best to recapture some of the volume that is out there and then keep an eye on rates over these coming months where we'll hopefully see some more opportunities for little waves of refis. We also have the aftermath of, of Hurricane Helene all across the eastern seaboard.

We've got, you know, brewing issue in the Middle east that's been going on for quite a while, but there's, there's a retaliation potentially here in the next day or so by Israel and then.

Jeff McCarty: 00:02:03

Another hurricane potentially hitting Florida here in a couple of days. So that's, you know, we're watching that one closely. That one could be pretty strong hitting the, the Tampa area.

Jim Glennon: 00:02:14

Yeah, we, you know, the strike is over. That, that was big news late last week. That strike kind of came and went without much incident.

So that was a good sign because we definitely could have had pressure on inflation and obvious issues with employment if we had a shutdown of imports coming into the country.

Jeff McCarty: 00:02:32

Yeah, that was an interesting one. Just huge, obviously political implications.

I think people on both sides of the aisle were watching that one very intently for what that meant for the presidential election, which is only four weeks away at this point. So that's, you know, presidential. All eyes on that for the next few months.

SNL joke over the weekend, Saturday Night Live joke over the weekend was it'll all be over in four weeks and we'll never have to hear about the election again. Obviously that'll be the case.

Jim Glennon: 00:03:04

So manifesting good things. So, yeah, I mean, data wise, I just pulled up, obmmi, you know, we're at 6.27 right now, so starting to see that number inch up.

It was up about ten basis points on Friday.

So today, obviously, you know, with the activity we're seeing in the market, you're going to see that tick up once more, probably another eight to ten basis points before the market opens tomorrow. So, you know, that's going to have an impact on volume.

We've been seeing volume in our daily market briefing again, up about double over what we had last year around this time and seeing 40, 50, 60% increases over previous months. So we would like to see that continue happening. But I think this backup in rates over the past few days is going to put a crimp in that.

Jeff McCarty: 00:03:50

Yeah.

All right, so let's get into the big economic number of the week, obviously, that we've been looking at for really maybe the big economic number of the month that we always look closely at. The unemployment numbers announced Friday morning obviously came in very strong.

So, Alex, maybe you can talk us through some of the specifics of the numbers and how that's affected rates and expectations so far.

Alex Hebner: 00:04:12

Definitely, yeah. The non farm number came in extremely strong on Friday. We saw 254,000 jobs out of the economy this time around.

That was against an expectation of about 144, I believe it was. So a strong 100k extra jobs out of the economy. And on top of that, there were two revisions for the past two months that added an additional 72,000.

So well over 300,000 jobs out of the economy.

Based on these BLS numbers out there, you're also seeing headlines such as through the holiday season, Amazon's planning on hiring a quarter million alone just to deal with holiday shopping and getting packages to everyone in time for the holidays, which.

Jeff McCarty: 00:04:58

Is also an expectation of just consumer spending. Probably going to be strong too.

Alex Hebner: 00:05:03

Yeah, the economy remains strong by all accounts and standards. Really? Really. The soft landing narrative seems to be.

Jim Glennon: 00:05:13

Where we are, which is a bummer for rates, unfortunately.

Alex Hebner: 00:05:18

Yes, I know we were talking last week on how we do wish for recessionary trends, as that will help our industry specifically. Uh, but for right now, it seems the, uh, consumer and the economy in general remains strong.

Jim Glennon: 00:05:30

Yeah, I mean, but it's worth noticing, right. Or worth noting that the majority of the jobs in that number on Friday. Right.

Came from restaurants and bars, which we all, we've all been to restaurants recently, in the past few years. And we all know they need more people and they need help. Right. Healthcare, construction. And then I think the balance was government jobs.

It's just a different. You don't see white collar jobs being added. It's just a different. I don't know exactly what to make of these numbers post Covid.

Alex Hebner: 00:06:02

They're definitely sector specific, seeing like you said, a lot in bars and restaurants, in the food, hospitality, service industry, industries that were particularly impacted by Covid. So we still see some shake out there. There's still issues with wages there.

People not be able to find dishwashers because they're not willing to pay enough or vice versa. So there's still a lot shaking out in that industry specifically. So that is where you're seeing a lot of the job growth.

Jeff McCarty: 00:06:30

How is that affecting rates at this point and expectations going forward? We talked about some of those fed expectations last week.

Alex Hebner: 00:06:37

Yeah. With that blowout number on Friday, we saw close to a half point in moves in NTbas.

I think it was: 1415

So we're approaching three quarters to a point depending on the coupon of price improvement.

Jeff McCarty: 00:07:01

But you're talking about, I mean, that's a 8th quarter point move in mortgage rates around there. So pretty significant. And just essentially a little over a day of trading.

Alex Hebner: 00:07:12

Yeah. In the rates market in general, we've seen the chances of a 50 basis point cut at the next meeting in November completely evaporate.

We're now looking at about 25 basis points. As of this morning, there was 86% of futures contracts on the CME Fedwatch tool were showing expectations for 25 basis points in November.

And looking out to December, it was the same, expecting 25 basis points there as well to close out the year.

Jeff McCarty: 00:07:38

So all super hopeful. Again, we were hopeful. This initial 50 point basis point move in rate.

Those are potentially more to come there, but it's really just dependent on the next big economic number that's up, right?

Alex Hebner: 00:07:52

Yeah, yeah. It's always data dependent. The Fed will always lean into the data dependency of their decision making.

And right now it doesn't seem that the economy needs stimulating.

Jim Glennon: 00:08:05

Yeah. Does anybody think that the Fed is going to pause in this next meeting?

Alex Hebner: 00:08:11

There's a minority there. When I quoted that 86% are expecting 25 basis points in November. The remainder are in a pause camp, but for the time being remains ten to 15%.

Jim Glennon: 00:08:23

Okay. But zero. Think that we're going 50 suddenly.

Alex Hebner: 00:08:26

Yeah, zero. Yeah, that completely evaluated.

Jeff McCarty: 00:08:28

All right. Well, yeah, big numbers. So looking forward, what are we looking at the rest of the week? Anything important?

Probably nothing nearly as big as that unemployment number coming up soon.

Alex Hebner: 00:08:39

Well, on the flip side of employment, there's inflation metrics this week, Thursday and Friday. We have CPI on Thursday and PPI on Friday.

CPI is expected year over year to come in just right around where the Fed has said that they're okay with inflation metrics averaging right now. They're expecting like 2.3% year over year for this release. If we land there, I think it's just going to reinforce the 25 basis points route.

In addition to that, we have some other metrics. We have consumer credit out today, later today. This is being recorded on Monday the 7th.

So later today we're seeing some consumer spending metrics and recurring debt. Not too much to worry about there. Like I said earlier, the health of the consumer remains strong.

We are seeing record high, just raw dollar values of consumer debt out there.

But taken in conjunction with disposable income, which has increased markedly over the past five, six years, there's not too much of a default risk there.

Jeff McCarty: 00:09:45

That's always the number.

You always like to mention some of that debt spinning, especially how it kind of leads into an indicator of what will ultimately hit the mortgage industry.

Jim Glennon: 00:09:55

Yeah, I mean, you watch what I would call like the debt cycle, right, or the credit cycle. There's always, in our economy, our economy is very much driven by consumerism and I believe 60% of GDP still is just consumer spending.

And coming out of any, coming out of COVID for instance, we were at record levels of savings, which also means record levels of paying off debt. And we've gone in the opposite direction. Right.

You can, if you look at any graph of how much we're borrowing as a nation, it's, it's topping out one once again. And when that's happened historically, you have debt go up and then you have delinquencies start to go up and it starts in subprime, right?

Starts in car loans, subprime credit card debt, and then eventually gets to mortgages. But that typically foretells issues with credit.

Issues with recession potentially can lead into more cash out refis for us, which we'll talk about here in a little bit.

Alex Hebner: 00:10:53

Yeah. If you look at the numbers at a bank level, you are seeing some increases in delinquency in the small cap or more regional banks.

And that is where, like you said, those subprime borrowers tend to be members. But overall, if you look at the numbers across the economy, there isn't too much stress so far.

Jim Glennon: 00:11:13

Like you said, bubble.

Alex Hebner: 00:11:15

Yeah, no bubble.

Jim Glennon: 00:11:18

Something that keeps popping into my head too, is where the markets are priced right now. We're all in equities, whether it's our 401K or we dabble in the stock market.

And there's a lot of folks that are worried that the stock market is too frothy. Right? I think it was Jamie Dimon recently who said, this market right now is priced well and priced correctly.

If everything is going to be great, which is kind of the way our market in the US tends to act, you get this exuberance and you get this ongoing excitement about whatever it is, whether it's AI or technology in general.

And I don't know, I think that worries some people that one of these wars starts to bring in additional participants or if we see issues with unemployment, finally, that the market could be very well overpriced.

Alex Hebner: 00:12:13

Definitely. Definitely. I know there's voices out there saying that AI is a potential.com 2.03.0 kind of bubble out there.

Nvidia is up, which is that market leader in the graphics chips. They're up 350% in the past two years, which is not a sustainable growth path for any company out there.

Jim Glennon: 00:12:33

All right, that was a great segment. A lot of things to talk about, a lot of things for you all to take back to your respective businesses and think about the rest of this week.

Thanks a lot, Alex. Really appreciate the insight and the expertise.

Alex Hebner: 00:12:45

Appreciate it, guys. Thank you for having me and welcome.

Jim Glennon: 00:12:48

Vimy.

Vimi Vasudeva: 00:12:49

Thanks, Jim.

Jim Glennon: 00:12:49

We're going to talk a little bit now about what originators should be focused on as we get into what is hopefully some waves of lower rates.

Based on our previous conversation, it seems reasonable to assume over the next couple of years that generally the trend is going to be lower, even though we've seen rates back up a bit here in the past couple of days, it does seem like we'll probably see some opportunities for some mini refi waves here going forward.

Vimi Vasudeva: 00:13:15

Yeah, certainly, as you said, it might not be as soon as one might have predicted prior to the strong number that came out on Friday. But when you look at trigger points.

So for that, that meaningful point that rates have to dip to in order for us to see quote unquote mini refi wave, we're really not too far off from what I've seen.

Rates would have to fall to maybe the six ish percent range in order for the number of in the money mortgages to increase to nearly 5 million, which is nearly a doubling of refinancing incentive from today's levels.

Jim Glennon: 00:13:51

We came so close to that number before the bad unemployment number on Friday. We were just about to touch that five handle.

Vimi Vasudeva: 00:14:02

You're exactly right. I'm sure there were many lenders that were disappointed, but despite that, we know that on the horizon there will be lower rates.

And to your earlier question, Jim, originators should really be thinking about what to be doing to position themselves to be successful in this environment.

I think that there's been a lot of focus recently on just general customer satisfaction and even marketing branding efforts and certainly successful business 101. Those things are critical in any industry.

But I would caution originators to really look beyond that because we are, we're not the local mom and pop coffee shop where repeat customers typically give you their business because of brand loyalty or because of having had a great experience.

While a coffee shop might be successful in extorting $8 out of someone for an oat milk latte, we're talking about home purchases in the mortgage industry and this is likely going to be the largest purchase that one makes in their life. So the strategy really has to look beyond customer satisfaction and brand integrity.

Jim Glennon: 00:15:16

Yeah, it's such a huge purchase. Right. It's a purchase that's going to affect your finances for potentially the next 30 years.

So, yeah, just relying on a relationship might not get it done.

We want to be surgical and we want to get ahead of these refi waves and really be the first person who calls that borrower before they spend a lot of time shopping on the Internet for a rate.

Vimi Vasudeva: 00:15:36

Yeah, absolutely. And I love that term surgical.

I think that that's the exact right thing in this scenario because we're actually, I would almost say, an unprecedented Refi approaching an unprecedented refi wave.

It's going to look very different than it did the last time around after the pandemic where rates dropped precipitously so now rates are decreasing, but certainly not at as fast of a pace as we've seen before. I think it's important to note that at this point we're actually in a very different landscape than we ever have been before.

And a lot of that is due to the nature of the entrance in the market over the last couple of years.

I think many lenders are very familiar with the recapture play that has been going on, where we've seen a lot of aggregators really pay up for the opportunity to recapture. They're paying to get that borrower relationship from you and to keep that relationship.

And we know it's interesting because we've heard multiple times that this recapture play, it's not just based on one refi wave. In fact, we've had aggregators openly state that they're really banking on recapturing these borrowers multiple times over.

And so for the non, for the IMBs out there who have not been retaining servicing for whatever reason, a lot of it had been because of the need for cash. And unfortunately IMBs were strapped into a corner to have to sell their servicing.

But then with that comes that, the negative that they had to sell that borrower relationship, the servicers that have been paying up for it are not going to let it go easily.

Jim Glennon: 00:17:13

Yeah, we've certainly seen that on the desk and you've likely all seen that out there where there's a handful of investors who came out of the woodwork, so to speak, in the last year or so and have really been paying through the market to accumulate volume. And that's not just kind of a random appetite, as you said, Vimy.

That's what the intention of retaining those borrowers and recap, which we would call recapture. So when rates do dip, their intention would be that by some measures that they're going to recapture some 60% to 80% of those borrowers.

So by selling the servicing, you're taking that risk of those investors refinancing that loan before you get a chance to refinance it.

Vimi Vasudeva: 00:17:56

Right. And of course lenders are already thinking about this. So they've employed multiple strategies.

So some of which are, we've seen lenders leverage analytics around credit triggers or borrower behavior triggers. Some are leveraging their CRMs. And while these are all good strategies, I feel they're a little bit more reactionary.

And in this competitive landscape, we really need to be proactionary. And so how do you do that?

Jim Glennon: 00:18:27

Right. So everybody needs some sort of system, right?

Everybody needs, in addition to that strategy, they either need to be using something like a CRM, or they've built their own internal tools to help identify good refinance opportunities. And then we at OB, we obviously have a tool for that as well.

Vimi Vasudeva: 00:18:45

We do.

We have our capture tool, which has of course become very popular as of late, you know, as lenders are trying to be proactionary, as we've talked about.

And I think, you know, while the other models certainly have their advantage, I really do believe that the capture product encompasses all of the facets that are required for a very successful proactive strategy. And the pricing capabilities in capture are incredibly accurate.

They can produce more meaningful offers because the capture product is powered by optimal Blue's industry leading PPE.

So we can calculate the loan pricing based on borrower specific attributes, current market conditions, current margin structures, and not only is the accuracy and the efficiency there, but their capture can also continually monitor the current rate environment and it can trigger and notify you for when you should be contacting a borrower. And it's not just a mass email campaign like hey, rates have dropped a quarter point. It's very targeted and borrower specific.

And I know on the receiving end of mass communication, I would not pay attention to something that seems very generic.

And I would very likely, again, going back to the customer satisfaction loyalty thing not being as much of a play in this space, but I would really go to the lo that can spell out for me exactly how much I'm going to be saving every month and what that translates to for my entire loan savings, which capture does, right?

Jim Glennon: 00:20:19

So the critical components, right. It's automated, which I think everything needs to be automated these days, especially when you're dealing with so many past borrowers.

It can look at your entire portfolio for opportunities, yet it can get down to the scenario level so the actual borrower level and tailor an offer of a new rate and new savings going forward for that specific borrower.

Vimi Vasudeva: 00:20:42

Exactly.

One last comment I would like to make around helping originators prepare for this potential refi wave upcoming is that, and this was actually something interesting.

I heard from the recap of the housing wire summit last week, and one of the panelists made a point to remind originators to train their loan officers on how to do refinances. Apparently muscle memory might not. It's not a thing. It's not like riding a bike. And lots of regulations and administrative requirements have changed.

I would say time to get those training programs up and running.

Jim Glennon: 00:21:20

It's been a minute since we've seen a lot of refis, that's for sure. And related to refis.

There's something I want to get out there that we've been talking to clients about pretty much for the last three to four months.

That's lo comp as it relates to refis and not given any legal advice here because there's certainly been some disagreement on this subject, I would say, in the industry. But we're seeing a lot more of unique comp schedules for refinances. So high level.

What that means is we're seeing loan officers opt in to a lower comp number specifically for Refis. So you would have one comp for purchases, one comp for refis, roughly half.

So if you're making 100 basis points on a purchase, you're making half point on a refi. Reasons to do that are pretty obvious, right?

You're looking to give a better rate to compete for these refis for all the reasons we just talked about. So, yeah, I think there is some, there's some controversy there in terms of whether or not that is compliant in terms of Reg Z.

So again, not going to give any legal advice, but something you should look into.

If you've not looked into offering a lower comp plan for refis within your organization, you should have your compliance folks look at that because I do. We do see a lot of clients opting into that. All right, let's wrap this one up. Jeff, thanks so much. Alex, thanks so much, Vimy, for joining us today.

Jeff McCarty: 00:22:49

Another great episode the week ahead.

Jim Glennon: 00:22:52

You know, make sure you're paying attention to the CPI and PPI numbers. Watch the other, you know, that other hurricane scheduled to hit Florida on Wednesday. We got a long weekend coming up.

It's a three day weekend, so next week is a short one. Also pretty slow in terms of data. We'll have retail sales coming out, I think is really the only big number.

And, but we will have a podcast next Monday.

Jeff McCarty: 00:23:14

Yeah. Looking forward to getting some additional topics.

We'll look at the capital markets, secondary implications of some of these refi ways, some of the things you should be thinking about in the coming weeks.

We'll also start getting into some additional products that are out there, some of the new mission score products that the agencies have, have recently released, talking about the implications of those. So lots of good things coming up.

Jim Glennon: 00:23:39

All right, that's it for today, gang.

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 to access our latest video episodes.

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