Lykken on Lending

In our Hot Topic this week we have Les Parker, founder of the TMSpotlight Newsletter & Managing Director at Transformational Mortgage Solutions to discuss the mortgage rate outlook….

So many people comment, they go, how does Les come up with his music parodies? And I said the most amazing part is he’s not into pulp culture, he’s not into any of this. I have no idea, but he does, do a masterful job of tying a song, and creating a music parody as he does each week on here. But today we

want to talk about interest rates. So we’re really, really excited about that!

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Rate Outlook With Les Parker

We have one of our favorite Floridians on the show in the Hot Topic segment, Mr. Les Parker, Founder of TMSpotlight Newsletter, Managing Director and Partner in Transformational Mortgage Solutions, which is my consulting firm. We’ll be talking about mortgage rates. Remember when Alex said to everyone that he writes down everything Les says because it seems to come to pass?

Anyway, it’s so good to have you all here with us. Les is going to be on in the Hot Topic segment. I want to say thank you to the Industry Syndicate. We’re grateful to be a part of that organization. They do a good job of promoting our show as well as many others out there. Check out IndustrySyndicate.com.

Also a special thank you goes out to The Mortgage Banker’s Association of America. What an an outstanding organization and how they serve our industry. I’m so grateful to them and one of the ways they will be out supporting us and allows us to help support them is the Mortgage Action Alliance app, MAA. I encourage you to get signed up for that. It’s such an important thing if you can get signed up on your mobile device and have your word heard on the hill. It’s very effective.

Also, Finastra. I’m thrilled to have them. It’s such a long-standing part of the show. I’m going to be speaking down at the ICBA Regional Conference in San Antonio. I’ll be leading a panel there. They do such a good job. They have a great reach into the banking community and more and more independent mortgage bankers are discovering the value of the many functions that they do extraordinarily well. Again, one of the things that I love most about them is their open architecture. On the 4th of October 2021, we had Karen Jenkins, who heads up of product development there and talk about it. We’ve got Chris Zingo coming on, who is the President of the Americas.

I had a chance to meet him here in Austin at their big user event. It’s great opportunity to talk to them. Also, we’re got to talk about our two co-ops. We are partners with both of them. We’re grateful to have them. Lenders One and Mortgage Collaborative does a great job of bringing competitors together. Lenders and vendors all get together in a smaller, more intimate setting, and we’re able to talk in more detail specifics of their programs. We’re in conference season entering. March is a big one. The Lenders One Winter Conference is March 6th through the 8th, 2022 in Phoenix at the JW Marriott.

Also, the Mortgage Collaborative is having their winter conference called the Days of Miami Nights Conference, and it is from March 19th through the 22nd, 2022. I’ll be at both of those conferences. I’m looking forward to seeing you there. I hope you’ll come. Both of these are going to be well attended and I encourage you to check them out.

Also, Total Expert. I’m so excited to have them as a new sponsor. They do a great job of allowing you to work and connect with your customers. I was on with their management team and I’m talking to them. I’m so impressed with the methodical approach they have their business. When you look at a technology partner, in this case, Total Expert, you have to look at the organization and how they run their business.

I can’t tell you you’ve got to get to know them if you don’t know them. Many of you already do. They’re leaders in the marketplace. Be sure to check out Total Expert. It’s really good. They do an outstanding job. We’re going to talk to you more about the specifics and what they do. I got them coming up as a gift here soon.

Also, Knowledge Coop. Ken Perry does a great job at the Coop, as we call it, the mortgage coop. On April 1st, 2022, they’re releasing a new version. If you want to take a look at it, do a Google search. It’s called TryTheCoop.com and you’ll get on the list to see all the new features that are coming out, and you’ll be updated on it. You need to check that out. It’s edutainment.

Also, Mobility MMI, Mortgage Market Intelligence as well as Modex. They both do a great job of helping you recruit. I’m just finding all these new ways to help recruit. It also supports loan offices that you already have there with you. It brings you market intelligence. Snapdocs does a great job of working backwards from the future. They help everywhere in the closing business and makes it a flawless experience. Their game is to completely eradicate errors from real estate transaction. That is a good goal.

Also, Lender Toolkit, Brent Emler does a great job. I’m going to be out at the Mortgage ICE User Conference. They’re going to be there doing some things with the Lender Toolkit event that they have out. We’re going to be out racing some Ferrari around the track and getting together. I’m excited about that. That’s coming up here at the same time as the Mortgage ICE Conference.

Also, PennyMac TPO. They’re a market leader. When you look at a company like PennyMac, they have been a leader in the correspondent space. Now they’re becoming a leader in the TPO space. They have already got some great traction, but check out the episode we did with Kimberly on November 1st, 2021. All the information is still relevant. It’s very exciting we’re going to be having her on again soon.

Also, DW Consulting, Debbie Wemyss does a great job of helping you have your story told well on LinkedIn. Check out the video that they put up on our website in the advertiser’s launcher page. Also, a special thank you goes out to Rob, Les, Alice, Allen, Matt and Jack. Welcome everybody to the Hot Topic segment. I’m excited to have you here with us. It is February 21st, 2022 and President’s Day and we have joining us, Les Parker, the Founder of the TMSpotlight Newsletter. He writes every single day. I don’t know how this guy ever sleeps. He’s also a Managing Director and Partner in the consulting firm. Les Parker, it’s good to have you here.

I’m back.

Yes, you are. I know there’s a song that you can put on that, and we need to have all these things.

I’m back. We did it back at the end of January.

Many people comment, they go, “How does Les come up with a music parody?” I said, “The most amazing part is he’s not into pulp culture and any of this.” I have no idea, but you do a masterful job of tying a song and creating a music parody as you do each week on here. Thank you, Les, for the quality that you and Gary Catrambone do to contribute. I can thank you on air, but you do a great job in producing these segments. In this episode, we want to talk about interest rates. We’re excited about this. Let’s start off with doing a review of your November 15th, 2022 when you were on the show. Let’s go back to talk a little bit about that.

I’ll make one quick comment on parody because I get asked that question a lot. How do you ever think of these songs? Don’t you run out of songs? How does it come together? First is, how many of you heard conversations before with musicians like Paul McCartney or some of the more modern people out there? In reality, it’s very difficult. How did you dream up all these things? I’m ticking on my guitar. That’s what it is here. If something comes to me, I read it. I try to connect to a word or phrase, and that’s how it happened.

You do an amazing job and I love your content.

It is nice that someone would record some of the items I said. I called in, and at that time, interest rates were 1.6% and I said, “We’re going to see 10-year go up to 2.1% in a fairly short time. We hit 2.065% on February 16th. 2021 was a tough year to predict for me. We did get the directions right and we was within it, but the volatility did not occur that I was expecting. Part of that’s because they didn’t make their announcements until November 2021.

You had predicted at one point in time that interest rates were going to be possibly the 10-year treasury could go back under 1%. I’m assuming that was your anticipation of potential geopolitical events that could rock our world and have ever there be a major flight to quality. Are you still holding that we could possibly see rates the 10-year below 1%?

It is possible. The likelihood of getting below 1% is diminished now that we’ve gone up as we have. I do expect there to be another significant drop in rates this year. In fact, we’re getting ready to turn to a bull market in the next few weeks.

Why is that, Les?

You just said it why. You answered the question. It’s because everyone thinks it’s going higher. You should never go completely against the Fed and trust but when you get too many people on one side of the boat, that’s when you start saying, “This is not about it.”

When you get too many people on one side of the boat, you realize it’s out of balance. Click To Tweet

We have a boat owner on the call here with us. Jack, let’s get over to you, Mr. Boat Owner. You know how it is if you’re trying to pull in the fish in one side and one on that side.

This doesn’t work well. A good musical parody that reflects this marketplace would be that song by REM, It’s the End of the World as We Know It, with regard to interest rates. When you talk about rates rallying and reversing course, is the only driver out there that could make that happen is the geopolitical side? We know quantitative easing is on the horizon. That’s going to be a big driver to push rates up inflation. It’s going to take a while with the Fed raising funds rates before that starts to reel back inflation. Is it the only driver that could create a rally here in the ten link to geopolitical chaos in the world?

No. I would say Fed policy would be the reason why rates could go significantly lower. If the Fed is tightening and the perception is that the economy can’t handle it, just like you couldn’t have handled the taper tantrum last time, then you could have rates go significantly lower.

What you’re saying is that the Fed tightens and continues to tighten. That soft landing that Jerome Powell was talking about several months ago becomes not a soft landing and we begin to see the early indicators of a recession raise its head.

Yes, because right now, we’ve seen the curve flatten significantly. In fact, the curve is flattened the fastest it’s ever flattened ahead of a recession. If you look at past recession, you see how the curb flattened and you look at the speed of that flattening, this is the fastest move towards flattening that we’ve ever had. I don’t have the numbers at my fingertip right now, but that movement of a flatter curve can be very indicative of lower-term treasury rates and higher short-term rates. That creates a problem for banks because now, their cost of funds is rising and they tend to be on shorter-term.

You could even get an inverted curve on the bill curve. That becomes a problem for banks but it becomes a problem for mortgage bankers where you have short-term rates high because mortgage bankers are classic. They’re borrowing short and lending long. That’s the way they do it. They get rid of it in a short time period and that’s why it works as a business model. That’s why I think you could have lower long-term rates, and the mortgages, by the way, will not keep up with a treasury move to lower rates.

They’re going to see those widening margin rates.

That’s right. We’ve already seen the mortgages widen out to treasuries. It’s in a more “normal” relationship now. It’s happened over the last few months just because the Fed is not going to be buying mortgages as much. They’re going to eliminate the purchases of mortgages. That creates a problem in itself. That means you’re very much a domestic market. Foreigners don’t like our mortgages for multiple reasons, and we don’t have as many investors.

Mortgages are now widening out to treasuries. It's in a more normal relationship now. Click To Tweet

Mortgage rates are going to be under pressure this year, that’s for sure.

I don’t think we’re going to see mortgage rates go to the lower levels of 3%.

Alice, let’s get over to you. What do you have for Les?

Thanks, Les. It’s so fascinating. I love listening to both of you as well as to you, Jack and Dave. All of you guys talk this through because I love trying to learn. That’s the mode I’m in. As you describe all of this going on, you talk about this bull market over the next few weeks possibly, what kind of timing do you see in all of this? When you say possibly lower 3%, is that much later in the year? Is that where you see us longer-term throughout the balance of the end of 2022? What’s your sense on timing with that?

Right here, near term, I do expect the 10-year to drop back down towards 1.75% on the ten-year. We are at 1.90% or whatever. Going down another 15 bits and mortgages might catch 5 or 10 of that. It’s not going to catch a lot of it, but it’s going to be the fourth quarter that we probably see that big dip in mortgage rates, and there’s going to be a lot of conditions to that. I do expect the situation by probably September or October is looking pretty dismal for 2023.

Abysmal in the sense that rates are going to be going up pretty consistently and steadily in 2023.

No, what I meant was from a GDP.

It’s set this up for what’s bad for the economy. It’s always good for mortgage rates so that does. That’s why you’re saying we’re going to see that HELOC.

By the way, Fannie Mae was looking at 5.5%. It is what we ended up with for GDP in 2021. His forecast for 2022 is 2.8% and his forecast for 2023 is 2.2%. That’s deteriorating GDP growth. It doesn’t mean you go negative or you have to have a recession. He’s not forecasting a recession as far as I know. I think we’re not going to have a recession but a scare of a recession. This flattening is going to send a scare in the market. I don’t think that the market is healthy yet. The big debate is if the global economy is healthy or not. If it is, then rates are going to be a lot higher. You could easily see you’ll break through 3%.

 

The secular bull market will end in treasuries. We will then go on up to 4% in the 10-year probably in 2023. That’s not necessarily bad. Around the globe are healthier than they were in 2008, 2012, 2016, and in 2020. If the advanced economies on demands and they are fundamentally found and healthy, then central banks around the world tightening will have a positive result. It will get inflation somewhat tempered and growth will be exciting. I am not in that cap, but that’s what the hope is and that’s how you could end up with significantly higher rates.

Allen, I’m going over to you. Any questions?

One question that I have specifically has to do with property values. When you look at rates and inflation in the overall market, you’re also considering what’s going on. Some people are scared now that rates are going to go up and they won’t be able to afford to move somewhere else even if it’s within their affordability. You have people that are afraid that there’s nothing to rent because prices have gone up so much.

In certain areas, you’re looking at almost $3 a square foot compared to a few years ago, it was $1 a square foot. You’re looking at people that are afraid to buy a higher than their price range. They’re almost forced to buy now and overbid and cause more inflation of property values because they’re afraid rates are going to go up too much and everybody is fighting for the exact same property at the current rate. I wanted to throw the property valuation angle at you and get your feedback on that.

There are underlying forces that would say the property values will continue to rise, but the 10% and 20% that we saw over a two-year period depend on where you did your marks. Essentially, over two years, we had over 20% appreciation pretty much across the board in the United States. That is not going to continue. That’s already leveling off.

It’s going to be very modest appreciation. There are a number of issues that housing is facing. They have major labor problems and are directly suffering from the bottlenecks. Within a year, I expect any pressure on rent to stabilize. 2023 might see a lot of rents increasing for a multitude of reasons that you articulated. In 2023, I would expect that to dissipate and we go back to fairly steady, not very rapid rises in rents.

That’s a good question, Allen, because a lot of people have sold and in the process of transitioning over. This is a very dynamic market. By the way, Alice deals with a very specific item and that has to do with appraisal. The appraisal items is not trivial and it’s becoming more difficult. We are seeing that the values are not being proven out and yet people still want them. Who can pay that difference? You can’t make an adjustment unless there are adverse circumstances. Go ask Alice.

 

Alice, go ahead.

I said we’ve got that product. It’s a great point about appraisals Les is trying to say, especially as they open up to do more desktop and you say even Fannie and Freddie admit they need data to feed the engine. No matter what buyers and sellers want to try, they pay desperate prices in the end. You’ve got to have the data that supports it all. That’s where the value is.

Jack and I recorded an interview with Allan Weiss. There are some things that Weiss Analytics is doing as well as Valshield is doing. You’ve got to know this. This is amazing. Allan was the Founder of the Case Shiller Index and the Case Shiller Report. Allan has done real well and he’s working on Valshield. You need to check this out. Go back and read that episode. Jack, I’ve got a bunch of comments coming in here, but several people said this is helpful.

We are anticipating possibly that because of invading Ukraine, we could see that or is that already priced in the market? Several people are asking. It is timing and what should they look at as events that could trigger it. You said the Fed. many of us have been looking at more geopolitical global events. Jack, I’ll let you guys take it because I’m going through all these questions here.

I have a question for Les. As I look at rate forecasts and I see some of the larger or more knowledgeable forecasters out in the space like the MBA, rates were forecast to be at 3.1% in Q1 2022. Now we’re at 3.9% to 4%. We’re running about 60, maybe 70 basis points ahead of that forecast by the MBA. Should we expect to continue here in the near term to see rates at this level, or is there anything on the immediate horizon that might create OL?

The only reason I’m in business is because of economists doing silly forecasts. I appreciate them very much. Economists have to deal with their models. They have this beginning interest rate and they have this ending interest rate. Guess what? Interest rates move throughout the year and they impact flows of production. The valuations of MSRs impact how housing contracts will come in and flow in. They’re trying to always give us these big pictures, basically, outlooks quarter to quarter at best. That’s not how the world operates. It doesn’t go from January 1 to March 31st. That’s not how we do it. It is day-to-day.

Particularly, if you’re talking about mortgage bankers, they get fresh longs every single day because people are locking in. They can even get fresh shorts in a sense if they have too many cancellations and not enough clothes. Mortgage bankers deal with the dynamics of the market all the time and that’s why they say, “Where are rates going?” We’ve already talked about over the last few months what it’s done and what it’s getting ready to do.

I’ve given some specifics there of what we do. In terms of when you are building scenario planning for your business and for mortgage bankers, how rates travel up and down matters to your budgets. That’s how it’s going to impact it. What you do for budgeting purposes is you say, “This is what we’re going to set our margins at. This is how we’re going to control our margins with personnel. This is what we’re going to do on how we price mortgages.”

As you get interest rate impacts to that, you have to tweak those pieces so that you still stay a profitable business. Most mortgage companies don’t do that. What they do, as soon as interest rates move a lot one direction or the other, they throw their budgets out the window and adjust everything upward or downward. They’re not addressing staffing issues fast enough. Some do and they right size very quickly. The effective ones do. That’s what they did.

I’m digressing into how you use forecasting, budgeting, and planning, but that’s what we do, Dave, you and me, and then also what I do when I’m working with customers that want to sell their businesses. That’s what we have to deal with. If these things start happening, how does it impact your business? What are you going to have to change to do that? That’s why a lot of mortgage companies are selling right now. They’re trying to get out of this business.

They want out. If they’ve had a good run, it’s time to exit. That is true. By the way, if you’re thinking about that, get a hold of Les and I. We do a great job on that part of it. The episode was February 8th, 2022 where we had Allan Weiss on and the title of it was Special Episode: The Great Migration Driving Markets And Transactions. Someone texted me that had gone and read that and they go, “That was one of those oh-wow episodes.”

Everyone needs to go read that big talk. Let’s get a couple of the questions again. The theme is, would you have him repeat, what are the events? What are the drivers? Rates are going all over so that they know what to anticipate. If you could put up some type of percentage, 20% geopolitical, 80% Feds, something to that effect, and then if you get a little more specific on that.

Those are tough questions. First, I’ll tell you what. Megatrends matter. That’s why we talk about megatrends. That migration is a big one. They should be reading that episode. There’s another trend that you address every week on the show and that’s Allen Pollack. The technology changes are driving interest rates. One of the reasons why we have such a low-interest rate environment, there are a lot of reasons, but one of the megatrends is improving productivity because of the technology gains.

 

That is getting ready to escalate, not to deteriorate. That’s another reason why rates could go a lot lower simply because we’re going to have productivity gains. People tend to forget about technology. Why do you think we left a world of 13% mortgages in the mid-‘80s to a world of 3% and 4% mortgages? What reason would there be for a 9% lower in rates over 40 years? What is it that was driving that? Technology is really what’s driving that.

It’s been a big enabler of that. That’s such a good segue because next time we got Brent Chandler coming on and Kevin Kauffman of FormFree. They’re working with blockchain technology. Some of the most innovative things that are going on in the market out there technology-wise. We can’t wait to get in that. Les, I want to talk about TMSpotlight. How people can sign up for it and give us a little more insight to that.

The PowerSeller enables us to provide the daily newsletter with the extended graphs. It also gives you technical levels. Instead of $77 a year, you’re able to get it free because of PowerSeller and you type in the code POWER. It will take it from $77 down to zero. Why don’t I first give you my forecast? For the 10-year, I am looking for the range to be about 125 basis points. I expect the high yield to be 2.45% and the low yield to be 1.20%. In mortgages, I expect mortgages will have a tough time staying above 4%, but I think we’ll have a blip up to 4.1% and we’ll go all the way back down to 3.05%. That’s going to be 105 basis points range.

In 2021, we only had 53 basis points range of mortgages. Based on the Freddie Mac survey, could we be half a low volatility again? I don’t think so because we’re in a transitionary mode in the economies with COVID and a lot of things. Generally, during transitions, you have higher volatility. I always publish my forecast usually in late February. I intend to publish my forecast. If they’re subscribers, they’re going to also get the forecast.

My outside range for the 10-year is I don’t see it going beyond 2.55%, but we tipped below one at point 0.95%. That’s in an extreme situation. I’m not sure that we’re going to see it. There are a lot of reasons why 1.20% or 1.15% is going to be hard for the 10-year to go below. Also, it’s the same on the other side. It’s going to be hard to go above 2.5%. The reasons why they can go beyond those is some of the things we’ve already talked about.

You’ve already talked about how they can sign up. Go to TMSpotlight.com and put in the word POWER. I’m going to speak to this a little bit, and get Jack to speak to it. A lot of people talk about there that you do get very technical in these newsletters. Several people that I know that are business owners have been in the industry for many years find reading it a bit of a challenge.

I had that same issue. There are issues still that come out where you get technical. I got to get them on the show to talk about that. When you’re writing this, talk about how you’re going about this. What is the purpose of your why in writing this every single day? It’s a laborious process but you do it and you do it so well. Why?

First, it takes hours to do it every day. I don’t think people probably understand that there’s an awful lot on the cutting floor every day. The first is, I designed this to not be exhausted, but there is no one that reads this that is key executive. When Jack was receiving this letter, I still remember what he liked about my newsletter. He said, “Les, you help us connect the dots.” All that means is I’m giving to someone that already gets a lot of information. He was there and still with the amount of information he consumes is a lot. Why would I ever want to get the attention of Jack Nunnery or Stan Middleman who’s one of my leading cheerleaders who’s the Owner of Freedom?

Why would I ever want to give them what Goldman Sachs and all the other brokerage companies are giving them every day? That makes zero sense. The other thing is I am not Matt Graham. I have no interest in being Matt Graham. He gives you detailed information and explains things. There are other publications out there that are designed to help people understand these different terms.

I try to make mine entertaining. I don’t put yuck yucks in here, but I try to make it fast-moving and somewhat entertaining. I do use sarcasm in here. I do ask questions that have implied answers, but there are people that take other sides to the markets. The other thing I’m trying to do is give you impressions. I do love the impressionist school of art and that’s what this is. If you don’t like impressionist art, you’re not going to like this newsletter. It is not designed to put it all nicely together in two paragraphs to MLOs.

I do love MLOs. I used to be one, but that’s not what it’s designed for. I have a surprising number of MLs to subscribe to it. I get the sense and the reason why. There are plenty of things to get confused on in here, but they focus on when I’m talking about which way rates are going and down. The other is they like the graphs. The Daily Shot is nice to me and Les over there at The Daily Shot lets me republish these graphs and that’s good, and even PowerSeller. If you want to see what’s happening with pipelines, volatility and rates, it gives you a picture form. Some people don’t like graphs and they prefer narratives.

Some people don't like graphs. They prefer narratives. Click To Tweet

We will answer one last question. This could become an ARM marketer. Are we going to see the ARMs begin to become more of a dominant thing?

No. Don’t worry about ARM loans. It’s a flatter curve. It could be because of mortgages getting out of line with the treasury. It might make some sense.

Thank you so much, readers, for joining in. Les, thank you so much for your time for being here and of course to the team. Jack, would you want to end this segment with a few words of wisdom?

I’ll give Les a plug. I was a regular reader of Les’ Newsletter. The number one reason was is I used to sit in balance sheet committees at a mid-tier bank. Les, I got to tip the hat. You always made me sound smarter in those meetings than I really am.

He’s having great Les quotes, “It’s really good.” Les, thanks so much for being here. Jack, thank you for your commentary and contribution. Same for Allen and Alice. We appreciate you as our audience. Next episode, as I mentioned earlier, we’re going to have Brent Chandler on with Kevin Kauffman of FormFree. Again, we’re doing some of the most innovative things. We’re working with blockchain and the passbook.

Folks, you’re not going to want to miss next week’s interview with Brent and Kevin. I’m looking forward to it. Special thank you to our sponsors, Finastra, Lenders One, Mobility MMI, Modex, The MBA, Mortgage Collaborative, Snapdocs, SuccessKit, Lender Toolkit, PennyMac, Total Expert, and more coming. I appreciate you all. Have a great week, everybody. See you back here next time.

 

Important Links

• TMSpotlight Newsletter
• Transformational Mortgage Solutions
• IndustrySyndicate.com
• The Mortgage Banker’s Association Of America
• Mortgage Action Alliance
• Finastra
• Karen Jenkins – previous episode
• Chris Zingo – previous episode
• Total Expert
• Knowledge Coop
• Ken Perry – previous episode
• TryTheCoop.com
• Mobility MMI
• Modex
• Snapdocs
• Brent Emler – previous episode
• Lender Toolkit
• PennyMac TPO
• Kimberly Nichols – previous episode
• DW Consulting
• Debbie Wemyss – previous episode
• November 15th, 2022 – previous episode
• Special Episode: The Great Migration Driving Markets And Transactions – Previous Episode
• Valshield
• Alice Alvey – LinkedIn
• Allen Pollack – LinkedIn
• FormFree
• Freedom Morgage
• The Daily Shot
• PowerSeller
• Next episode