Margin Mgt., LOS, Correspondent, AI Products; Fed Strategy and Goals; Remembering Dave Stevens

Then VP Al Gore supposedly said, "It isn't pollution that's harming the environment. It's the impurities in our air and water that are doing it." Here in San Diego (current low temperatures in the high 40s), residents are very pleased about a new wastewater treatment plant being built south of the border, since SD has suffered beach closures for years due to effluent flowing north. Effluent aside, much of the mortgage talk here is about repurchases and early pay off penalties, as well as how independent mortgage banks (IMBs) have not been retaining servicing but instead have not only been selling everything servicing released to the usual correspondent suspects, but also selling the servicing they had retained during 2020 and 2021 in order to cover their origination costs. The lack of inventory is an issue, of course. Speaking of which, up north, between San Francisco and Lake Tahoe to the east, along Highway 80, 20,000 homes for 50,000 people are in the works, financed by a collection of billionaires. But California is a great agricultural state, and turning ag land into houses will take a lot of work, as well as voter approval. Today’s podcast can be found here, and this week’s is brought to you by nCino, makers of the nCino Mortgage Suite for the modern mortgage lender. nCino Mortgage Suite's three core products (nCino Mortgage, nCino Incentive Compensation, and nCino Mortgage Analytics) unite the people, systems, and stages of the mortgage process. Today’s features an interview with nCino’s Pam Faulkner on a topic that every mortgage lender has to contend with: change management.

Lender and Broker Services, Products, and Software

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“Lending operations leaders who care about increasing revenue and decreasing costs, join your tribe in this live event. On January 30th at 1pm CT we have an electric panelist lineup made up of Industry leaders that are going to ‘spill the beans’ on ten strategies they are focused on to increase sales and reduce costs with minimal investment in 2024. Some of these strategies are directly saving 50-80 percent per month on the larger costs that lenders face, and others allow them to close more loans, faster. Come and join Kevin Peraino, Chief Lending Officer at PRMG, Delfino Aguilar, Chief Production Officer - TPO, Kind Lending, David Lykken, Founder & Chief Transformation Officer at Transformational Mortgage Solutions, LLC (TMS), and Richard Grieser, VP of Marketing at TRUV as they share the revenue generating and cost saving must have strategies that you can put into practice today! RSVP now and we hope to see you there!”

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Capital Markets

We had “Quantitative Easing” during the pandemic, lowering rates to spur economic growth when people and companies were hunkering down, hoarding toilet paper, and watching Tiger King. The central bank aggressively bought Treasury bonds and mortgage-based securities at the start of the coronavirus pandemic in the spring of 2020, causing its overall holdings of cash and bonds to more than double to around $9 trillion by the summer of 2022. But now we’ve had “Quantitative Tightening” (QT)… What is the game plan?

The QT process has been in the headlines with the rate hikes delivered by the Fed as part of its effort to lower inflation back to its 2 percent target. Whether we return to 2 percent, or lower, is arguable. The Fed has been shrinking its holdings since last year but has not given much guidance about how long the process will play out. Of course not, since that involves the future, and no one has a crystal ball.

But wait! Minutes from the recent Federal Reserve's Open Market Committee meeting noted that some officials are now ready to talk about the how and when of ending QT. The question has been on the minds of investors and traders given the apparent end of the current rate hiking cycle and rising bets in financial markets that the central bank will be cutting rates as soon as next spring as inflation pressures wane.

The challenge for the Fed, any time it increases or decreases stimulus, is that it is trying to achieve a level of liquidity in the financial system that will allow it to retain control over short-term rates with a cushion to deal with the volatility that can often strike money markets. But there's no clear sense so far of how to measure the needed amount of liquidity. The minutes of the last meeting have led analysts to suggest that we could see a fuller discussion of potential balance sheet plans going forward using tools like the federal funds rate and the Secured Overnight Financing Rate.

With the above in mind and looking at yesterday’s bond market… Stop me when you’ve heard this one before: investors have gotten ahead of a hawkish Fed and are being forced to walk back rate cut bets. Apologies that this is the seventh or eighth separate time that this has happened over the past 18 months, but don’t shoot this messenger. It was the case again yesterday in the wake of hawkish chatter from global central bankers.

The U.S. Federal Reserve last decided to cut interest rates in 2019, 75 basis points over the course of four months to give the economy a boost facing tepid inflation and moderating growth. Recent Fed rhetoric has suggested a similar 75 basis points of rate cuts in the latter half of this year, assuming inflation continues to trend downward. Traders are now less confident the Fed will lower rates in March than a couple of weeks ago and have been forced to walk back rate cut bets throughout January after pricing in as much as 150 basis points of easing recently.

Strong U.S. retail sales in December added to the nervousness about dovish Fed thinking. Retail sales beat expectations across the board, rising 0.6 percent month-over-month and 5.6 percent year-over-year in December, showing that the American consumer remains resilient. The robust figure also knocked down the probability of a March rate cut to that of a coin toss. Separately, the Fed’s Beige Book for January noted the resilience of consumers. Consumer spending during the holidays met expectations in most Districts, exceeding estimates in three regions. Several Districts observed increases in leisure travel while manufacturing activity decreased in nearly all Districts. High interest rates weighed on auto and real estate purchases.

Most Districts saw little or no change in employment while half of the Districts saw slight or modest price increases. Total industrial production increased 0.1 percent month-over-month in December, better than expected, after a revised unchanged reading of 0.2 percent in November. Total industrial production was up 1.0 percent year-over-year, while the capacity utilization rate was 1.1 percentage points below its long-run average. The U.S. Treasury's $13 billion 20-year bond reopening met soft demand, but the market's response was muted despite the underwhelming interest.

Today’s economic calendar is under way with weekly jobless claims (187k, much lower than expected), Philadelphia Fed manufacturing in January, and housing starts (falling to an annual rate of 1.46 million) & building permits for December. Later today brings several Treasury auctions, headlined by month-end supply consisting of $60 billion 2-year, $61 billion 5-year, and $41 billion 7-year notes, as well as $28 billion 2-year FRNs and $18 billion 10-year TIPS. Freddie Mac will release its Primary Mortgage Market Survey with the prior week’s 30-year mortgage rate ticking up 4 basis points to 6.66 percent, and Atlanta Fed President Bostic is scheduled to deliver remarks. We begin the day with Agency MBS prices are roughly unchanged from Wednesday’s close, the 10-year yielding 4.10 after closing yesterday at 4.11 percent, and the 2-year at 4.35.

A Farewell

Shifting gears, Tuesday evening saw the very untimely and very unfortunate passing of former MBA President and CEO Dave Stevens, CMB. I learned of the bad news prior to sending out yesterday’s commentary, but honored the request to let his family and the MBA make a formal announcement.

Dave’s resume included time at Long & Foster, Freddie Mac, Wells Fargo, and as FHA commissioner. Many considered him a friend. He led the MBA for seven years, from May 2011 to August 2018, during which he began treatment for prostate cancer. MBA President & CEO Bob Broeksmit, CMB, stated, “…he was instrumental in rebuilding our organization and leading the industry out of the Great Recession…” In recent years he ran Mountain Lake Consulting.

On a personal level, Dave and I shared a belief that this is a great industry filled with great people, helping the nation one loan at a time, and we texted just last week about upcoming speaking schedules. I knew Dave for many years, with a favorite memory of driving through the Michigan countryside in shorts and t-shirts comparing business travel packing tips and gossiping “off the record.”

I last saw him when we shared the stage together in September with Mitch Kider and Tony Thompson in Florida and then “hung out” at the airport waiting for our flights. He will be missed by family, friends, and the industry, as well as by the MBA’s Open Doors Foundation. If you have a remembrance of Dave, the MBA has set up a special mailbox to share notes with his friends and loved ones. For goodness’ sake, don’t shy away from prostate exams or colonoscopies as they could very well save your life. (Dave, I resisted putting in the Fletch movie clip! And kept it short.)