Lykken on Lending

The first half of the Lykken on Lending program will feature our Weekly Updates. We’ve got Adam DeSanctis with his MBA Mortgage Minute, and then Les Parker’s TMSpotlight, a macroeconomic perspective on the economy with a music parody. That leads to Matt Graham of MBS Live providing you a rate and market update, followed by Alice Alvey of Union Home providing a regulatory and legislative update. Then we wrap up the first half of the program with Allen Pollack giving us a Tech Report of the latest technology impacting our industry.

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Weekly Updates From Adam, Les, Matt, Alice, And Allen

Everybody buckle up your seatbelt. Hopefully, this will be an exciting episode. What a day it has been already, but as always, this show is created by mortgage professionals for mortgage professionals and we are ever so grateful to have you as a reader. Our commitment is to bring you timely information that you can read anytime, anywhere.

In our Hot Topic, we have a session with Brandon Weiss, CoFounder of EscrowTab, and Amy Moses, Vice President of Marketing and Communication at EscrowTab. Joining David to discuss a fairly new company called EscrowTab that they started and find out what EscrowTab is bringing to the market that lenders and title agencies haven’t experienced yet. Stay tuned as we near the hot topic.

I like to take a moment to thank our sponsors, Finastra Fusion Mortgagebot, experience the power of a fully integrated approach to mortgage lending that simplifies the borrowing experience and streamlines the process for employees. FormFree, Lender Toolkit, and Snapdocs digitize your mortgage closings to offer a better experience for your closing tea, settlement partners, and borrowers. Total Expert who turns customer insights into actions to increase loyalty and drive growth for bankers, lenders, credit unions, and other financial services firms.

David Lykken is in Nashville for Total Expert’s Annual Accelerate 2022 Conference. The focus of that is going to be the retention of top-performing loan officers. That’s a subject that would be of interest to almost everyone on this show. Also, we wish to thank SimpleNexus, the Mortgage Banker’s Association of America.

Our co-ops are Lenders One, The Mortgage Collaborative, SuccessKit, Knowledge Coop, Mobility MMI, Mortgage Market Intelligence, Modex, Mortgage Advisor Tools, and DW Consulting with Debbie Wemyss. Check out our videos in the sponsorship tab. Finally, a special thank you to Adam, Les, Matt, Alice, and Allen for their contributions each week to the show. Let’s go to the MBA Mortgage Minute and let’s hear from Adam DeSanctis and the MBA Mortgage Minute.

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Welcome to the Mortgage Minute. The latest news from the Mortgage Bankers Association. The big news came from the Federal Housing Finance Agency. Their highly anticipated equitable housing finance plans for Fannie Mae and Freddie Mac were released. The plans are designed to complement the initiatives outlined in FHFA’s strategic plan and should allow for increased opportunities for minority households to secure affordable rental housing, prepare for home ownership, and obtain access to safe and affordable mortgage credit.

Plan activities include but are not limited to consumer education initiatives, expanded counseling services, technology to improve access to sustainable credit and fair home appraisals, and the implementation of special purpose credit programs or SPCPs to address barriers to sustainable home ownership.

The creation and implementation of these plans is an important step in addressing our nation’s long-standing challenges related to housing equity. Companies interested in advancing policies and industry practices that promote and sustain minority home ownership in affordable rental housing are encouraged to sign the MBA Home For All Pledge. Visit MBA.org/HomeForAll for more information now. That’s it. Thank you for reading.

Thanks for that update. You always brought great info. Next, let’s hear from Les Parker with the TMSpotlight and review of the market.

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All around the world supports the dollar, which will tame rates. The EU continuously finds ways to do little to address real issues. Japan loves its matrix. Its investors swallowed the blue pill of contented ignorance years ago. China loves its smoke-and-mirrors economy and only offers a blue pill. Will the market demand and get red pills from the governments of the largest advanced economies and China and then swallow it? These views are my own. Know what’s real at TMSpotlight.com.

There seems to be something appropriate about Les’s message. Thank you, Les. Again, go to TMSpotlight.com to subscribe for Free to Les’s newsletter and use the word POWER. Now, let’s go to Matt Graham, Founder and CEO of MBS Live, with his market updates.

Market updates are an interesting topic of conversation.

You’ve been sending out some alerts this morning, so I knew you’d be busy.

For those who haven’t already seen it, we are at new super long-term high yields. Tenure yields up 18-bit to 3.346%. That is staggering. Not the biggest loss we’ve ever had in a day, but it is one of the bigger losses we’ve had over the past few decades. Let’s talk about how we got here and what’s going on. MBS is down a point, by the way. The sky is falling to whatever extent you want to go with the pessimistic take. It ultimately paved the way for some improvement and some things that needed to happen, but it’s painful in the interim.

Mortgage Updates: MBS is down a point. It ultimately paved the way for some improvement and things that needed to happen, but it’s painful in the interim.

When we left off, we had begun the week with rates moving higher on supply concerns, issuance concerns, and corporate bonds that ended up being small potatoes by the end of the week. Things recovered a little bit after that and then the European Central Bank came out with a slightly more hawkish statement on Thursday that added a little bit of pressure to the bond market, but the biggest deal by far and away was Friday’s CPI data. The consumer price index is 1 of the 2 most important inflation reports that come out every month.

In this case, it came out hotter than expected. Here’s the rundown on that. The month-over-month index was 1% versus a 0.7% forecast and 0.3% previously which was the biggest beat. The annual index was up 8.6% versus a forecast of 8.3%. The core, which strips out food and energy, rose “only” 0.6% versus 0.5% forecast and 0.6% previously. That was a good thing that the core didn’t increase by more, but it’s still increased more than expected.

Annual core inflation is 1/10th of a percent higher than expected but 2/10ths of a percent lower than previously. The issue here wasn’t so much that core inflation remained relatively high. The issue was that the market was looking for a turning point in inflation. Sometimes we see a little bit of diversion between economists and traders as well, where the economic forecasts are saying one thing, but traders are expecting something even more.

In this case, traders were expecting to see a little bit of better recovery inflation and then they ended up getting no recovery in inflation unless they were looking at the core level and even that missed the economist forecast. It was a huge shock to the market. It was a little bit of a wake-up call with traders and investors saying, “Maybe inflation is going to stick around longer than we thought or it’d be harder to tame than we thought.”

The immediate reaction in Fed Fund’s futures was for the market to price in at least another 25 to 40 basis points of additional Fed Fund rate hikes by the end of the year. When overnight markets got ahold of the data, it was a continuation of that. More momentum in the same direction to the point where the expected Fed funds rate by the end of 2022 is now 50 basis points or higher than it was before CPI came out Friday morning.

It’s not great that mortgage rates are over 6%. It’s a little bit hard to say exactly where mortgage rates are because some people are going to quote them without as many points on the front end and those will be over 6%, and then you want to take a look at buydowns right now because premium pricing is so compressed it can make sense to buy down to lower rates for some clients. For instance, the difference between 6.375% and 5.625% is about as small as it has been since I’ve been paying attention and that’s many years.

Take a look at those buydowns if you’re in the market or an originator. The bigger question from a market-moving standpoint is, what does this do to the bigger-picture trend? Is it going to stop? Is this overdone? The answers to that will come on Wednesday afternoon with the Fed announcement. I don’t think the Fed is going to change course from its planned 50 basis point rate hike, but it’ll be interesting to see what they have to say about 50 bp hikes going forward.

The last time they said anything about it, “It was 50 bps is all we need to do. We hear your talk about 75, but that’s not something we’re discussing.” Are they going to change their tune and say, “In light of this CPI report, now we’re going to discuss 75 bps?” I don’t think they’ll rule it out if asked directly, but I don’t think they’ll come out and say, “We changed their mind. Now we’re going to hike 75 bps.” It’s a possibility. That’s my opinion that they’re not going to say that. If they did, that would be bad and it would reinforce the weakness that we’ve seen in bonds over the past few days.

As possible, if not more possible, would be for the Fed to say, “Yes, CPI was bad. It is a concern. We’re seeing other data in the market that suggests inflation will indeed calm down soon. We didn’t happen to see it in this report. Don’t freak out. We’re going to keep hiking 50 bps until things start to calm down and then we are going to move to hike 25 bps and then we’re going to wait and see.”

That’s been their stance before Friday. It will be largely their stance after Wednesday, but the specific verbiage they use and more importantly the Fed’s dot plot, which is the summary of economic projections where they forecast the Fed funds rate for each individual Fed member over the next few years, will be extraordinarily important as well.

Mark read a lot into that even though Powell likes to tell Mark, “Don’t read anything into the dot.” The dots come out at 2:00 PM at the same time as the Fed announcement and then Powell’s press conference starts at 2:30 PM, that’s Wednesday afternoon. A ton of volatility potential both before and especially after that. If you look at rates in the market between now and then, understand it’s not looking great right now. The higher we go, the closer we are to the top.

We got PPI coming out on Tuesday, don’t we, Matt?

Yes. As far as the economic data, PPI Tuesday 8:30 AM it’s expected to rise to 0.8% from 0.5% month over month. The core level is also expected to rise 0.6% for 0.4% month over month.

Powell’s been very methodical in his approach to messaging to the market and very transparent. I agree with Matt that Powell will continue to be methodical and transparent. Although some people in the market are looking for some hawkish statements coming out of the Fed. I don’t know if we get them on Wednesday.

Powell is trying to thread the needle here. That’s a hard thing to do, but you got to appreciate this month over month, 50 basis point rate hike and the clear communication to the market in advance. Matt is on the money with his analysis with regards to what we’re going to hear at 2:00 PM on Wednesday from the Fed, but we’re basically at a five-year high. Am I right about that?

We are at the highest since 2011 now. We’re pretty close to a five-year high, but we passed that up shortly after the opening. It was close.

I missed that one.

No worries. You’re right. When we woke up, the five-year high was the headline. Things have continued to deteriorate as the day progressed and now got to go back to 2011.

Thanks, Matt. To our readers, you can learn more about Matt’s great services at MBSLive.net. Use LOL as the signup code to get an extended trial and no credit card is required. Having somebody like Matt keeping an eye on both the market and the rhetoric coming from the market is essential. This is a time to be consuming as much information as you can about this very volatile market. We all are aware this volatility is not going to subside anytime soon. Thank you, Matt Graham, for your expertise on what is a very challenging market to be a mortgage banker and originator right now.

Thank you, Jack.

Next up, we have Alice Alvey. She’s got the legislative update. Alice is a CMB Vice President of Education and Training at Union Home Mortgage. Alice, would you like to give us a legislative update now?

Thanks, Jack. Great job hosting the show, by the way. It’s nice having you take the lead here. We missed Dave, but of course, it’s great having you here. I understand folks are feeling a lot of pain in the market. I wanted to focus on the other side. We don’t have a lot of legislation, so that’s the good news. We’re not faced with something in the legislative world that’s going to be changing how we do business even though the rates that we’re offering are changing a lot of who our customer base is and how we attack that qualifying.

I thought I’d take a look at qualifying. MBA did publish their mortgage credit availability index. There’s a lot of great data here. It starts to try and set a trend that measures whether credit is tight or loose. As you can all imagine, when the pandemic hit, this chart dropped dramatically. If you figure 2012, the measurement here was when MBA said, “This is par. This is where we would consider stable credit. It’s not too risky and conservative.” They set that benchmark after we’d gone through the rollercoaster of the early 2000s, where we were super loose and then had to self-correct as a result of that meltdown.

Things have been very stable. If you look at the MBA’s report month over month, there have been minor changes up and down, but nothing dramatic to pile onto this. Our mortgage credit index is staying fairly stable. The agencies haven’t thrown in any new stuff to help bring in a lot of business to the door, but they have helped a little bit.

Freddie Mac did expand accessory units. Previously it was only available on a single-family and now you can have an accessory unit on a 2 to 3-unit property. Again, it’s a very niche thing, but sometimes that’s what it takes to have more tools in your tool belt. It needs to meet some basic underwriting criteria, but that was an example.

As the agency looks in the market, they’re finding little things to clean up their guidelines, not any major changes. For some of you, perhaps in Florida, they did make a change to increase the maximum single investor concentration all the way up to 49% for condos on purchase transaction condos. This has to go with the fact, for example, if you have somebody who’s divesting from owning a group or you’ve got a developer who still owns a large chunk of the units as long as they’re selling those units down to 25%, then the agencies have an exception there.

A couple of little pieces out there to go looking at. Make sure you understand all your underwriting benefits and the comparison between Fannie and Freddie, and when one investor is better than the other, get that business in the door. We have to be sharp on our credit guides. One last thing, too, I noticed as I looked at FHA’s recent reports, too are taking on slightly higher risk. It seems more loans are falling into those lower credit score buckets. The average DTI is now up over 44%, which is the highest it’s been in the report since 2016. On the FHA side, they’re feeling it a little bit with a little bit of increased credit risk coming in their door.

Last but not least, I wanted to touch on the Equifax coding error. I want to make sure everybody sees this. This happened from March 17th to April 6th, 2022. The error may have impacted about 12% of credit reports. Every company now is going out there taking a look at where they may have relied on that for loan decisions and assessing if, for example, “Did we charge a borrower an LLPA? Is their credit score higher than what we used and do we owe them a refund?”

Fannie and Freddie, of course, are saying, “We don’t give any guidance because it was your vendor who had the problem.” You’re not getting any help from them. There isn’t consistency in this. This score could have been higher or lower. As you can tell, it’s a very small population of loans, but a project that every lender is going through right now to get to the bottom of. Not anything that your customers have to worry about. It does appear to be resolved. It was just that short couple of weeks period back in early spring. That’s my report for now. Jack, I’ll turn it back to you.

Alice, before this, you and I were talking and I want to make sure that our readers understand that you were talking about the mortgage credit accessibility index and that’s not affordability. That’s a different concept because I was trying to blend the two during the call, and you were kind enough to help me understand the segregation between accessibility and affordability. Can you talk about that for a quick second?

That’s a great clarification because sometimes I talk fast. The credit availability index that the Mortgage Bankers Association puts out is designed to serve as a barometer on the availability or the supply of mortgage credit at a point in time. That’s how Bill describes it. At this point in time, based on many variables, there’s a lot of data that goes into this. Is credit considered loose or is it considered tight by today’s standards? It’s still a little looser since it’s at 120. It’s above par, meaning it’s slightly looser than it was back in 2012. The Urban Institute has a variation on the same type of thing on credit availability. It’s not going to be related to how easy it is to buy a house. It’s how much easier it is to get my mortgage.

Mortgage Updates: The Credit Availability Index that the Mortgage Bankers Association puts out is designed to serve as a barometer on the availability or the supply of mortgage credit at a point in time.

Thank you.

You’re welcome.

I wanted to make sure we made that distinction and thank you for that very interesting update, Alice. Next, let’s go to Allen Pollack with a tech update.

How’s it going, Jack? How are you?

It’s going as well as the market will let it go.

The good thing is that you’re not sitting in the hot seat anymore, right? You’re in this hot seat instead.

This hot seat is a lot cooler, given what’s been happening in the market. Some people will say, I tied my exit.

You should play the lottery. You may win twice. Let’s talk about a couple of things going on in tech. I’ve been absent. I just came back. My oldest daughter just graduated high school and I went away on our last trip before she takes off her college. It’s been quite busy, but I’ve been thinking about technology news and I’ve got an important message about buying store credit in a moment, but let’s start with a couple of quick things.

Let’s talk about some fun news. The first thing is Amazon. Some folks may remember I was talking 1 or 2 times over the last few years about them doing packages by drones. They are finally working with the FFA and local officials of Lockeford, California. This 2022, they’re going to do their very first drone delivery. It looks like their program was not abandoned and they’re finally taken off. With the way everything’s going, it’ll be interesting to see what this does and if it works, a lot of the mom-and-pop and locally sourced stores will not be very happy about this. It is a move in technology that is futuristic and will take us to the next level. Let’s see what happens there.

The next thing I wanted to bring up and I thought this was quite interesting. Redfin’s economist predicts that the decrease in budgets will lead to a decrease in price growth by 2 to 3 months. As buyers typically search online, it says sellers are slower to adjust to the cooling market, but they’re starting to respond. They’re also saying that 21% of home sellers dropped their asking price, which is up 10% from a year earlier.

The market is making the corrections that are needed. You probably still have some of those sellers that think that it’s still the top of the market and they’re going to get 1,000 people bidding on their home within 24 hours. Some folks also probably thought, “The market’s hot, it’s a time to sell,” without doing the right renovations to their home, but data is data.

Data tells us the truth and the story, and the economist at Redfin and many other places, if you Google, you’ll start to see the same thing. The subject is the same. What does that mean for you? It means that your loan officers need the right tools in order to help their buyers understand how to be successful in their mortgage journey. We’ve always talked about that. The literacy you can provide to a borrower in that process brings me to some things in our industry.

There’s a company called Bee, like bumblebee. They raised $2.5 million. They’re the first mortgage app of its kind. That’s what they’re saying. It’s a beta trial with contactless loan applications in under ten minutes. You’ve heard all the things in the past, like mortgage in a box or mobile mortgage, and all these terms have been out there. I haven’t heard this one. If you’re interested, check it out.

The next one is helping lenders with delinquencies and other issues. A company called Earn Up received an investment. Part of that was LendingTree and KeyBank. It’s a San Francisco-based FinTech. They raised $31 million in a series C financing round. It streamlined business operations and reduced delinquent and missed payments that harm credit scores and mortgage portfolios. Check that out. It’s also pretty cool.

Also, the thing that we’re looking at is Freddie Mac. Their LPA asset and income modeler is automatically satisfying ten-day pre-closure validations. What they’re saying is the savings of a total shaving off about 15 days and 30%. We all know D12. We all know that the tech is moving throughout some of these larger institutions and LPAs been working on a number of different things, but finally, you can see the fruit of their looms. If you’re using it, hopefully, you’re getting about the same exact savings.

Let’s talk about VyStar. This is a big one. Some of our financial institutions have been worried about how to implement tech and how to do it without causing issues. It’s a financial institution. We make seven-year investments in our borrowers. Tech failed big time, but you can’t blame the tech for what happened what VyStar, you also have to blame the process around it.

VyStar was in the process of working with a different tech company or somebody new to roll out a new platform. Now marks the one-month timeframe. They said that they tested 48 hours prior. Not only did it go down, but people are still suffering, but there were a few weeks when nobody could pay bills, transfer money, and gain access to their systems or their sites. It was causing an absolute frenzy here in Florida and Georgia. People were driving hours to get to the branch to find out that nobody at the branch would even talk to them.

There was an image that I found online. The image was the website of somebody logging into their account. It’s a temporary page that says, “I am sorry, please leave this page open and it will automatically refresh your account or to the customer service area where we can help you,” and it said, “You are number 84,145 in line.”

The tech issues go way beyond this. They said that your data and accounts are secured. It’s not a cyberattack. There are tons of videos and information out there. You can Google this. You may have heard about it. Ultimately though, what happened is that VyStar, as big of a credit union as they are, and with the tens of thousands of people that used their online banking and mobile banking platforms, caused an absolute crash and backup to their systems. That caused all kinds of things that were not able to be repaired easily. With the volume of people coming back to the systems, coming back to their site and their own internal systems, it was like a giant deadlock.

Even if they were to get the systems back up and running, the number of transactions that were waiting and queued were taking the new systems down, but it is an absolute perfect example of what’s called simulation and quality assurance. It may cost you a little bit of money to put some servers in place to validate and test it or put a pilot customer on it, but it will save you from one month of outages and the number of people that are now leaving VyStar. You can see the comments all over the internet.

Mortgage Updates: It may cost you a little bit of money to put some servers in place to validate and test it or put a pilot customer on it, but it will save you from one month of outages.

People have been there for many years and multiple generations of a family are all leaving and going to different places. There’s a lot of trouble for VyStar. It’s a severe image to resolve, but super important that this can be completely avoided. It is the hands of human that causes these things. Don’t be afraid of technology, but you have to have the right people process in place in order to avoid this from happening. That’s it for now.

Allen, you and I couldn’t agree more. You and I both lived it somewhat successfully. Many people don’t put emphasis on this. It’s user acceptance testing, regression testing, negative testing, and then stress testing your technology platform before you turn the lights on. Unfortunately, all that occurs at the very end of the project life cycle when you’re under the most pressure to deliver the platform inside your institution. You may be taking shortcuts or don’t do as much as you should and then you wind up having this horrific mess like this. You can’t underestimate the value of those testing steps, whether UAT, negative, or stress testing. You’ve got to tag all of those bases at the end of the project.

Years ago, it was probably a lot easier to say, “It’s much easier to build,” but when you build, you need more people than you need to buy. You still need those people to buy. VyStar still had some of their techs, but they used someone and it’s still absolutely critical to think of this conversation the right way. There’s a certainty element as you go through part of testing. It’s not about a quick test. It’s about multiple facets and types of testing to get to a successful product launch.

Thank you, Allen, very much. This is the end of our Weekly Mortgage Update. If you’re reading this on a downloaded basis, you can check out the next episode for our hot topic segment. Allen mentioned something about the re-verification solution that Freddie Mac is bringing to the marketplace. I want to mention to our readers that our next episode’s Hot Topic segment is with Christy Moss from FormFree and Christina Randolph from Freddie Mac. I was a part of that discussion.

Readers, mark that date on your calendar. This is an excellent hot topic section and will be something that you want to hear to help streamline what is a time-consuming step at the end of the origination process right before closing. Again, I’d like to mention our sponsors, Finastra Fusion Mortgagebot Solution, FormFree, Lender Toolkit, Snapdocs, Total Expert, SimpleNexus, The Mortgage Bankers Association of America, Lenders One, The Mortgage Collaborative, Success Kit, Knowledge Coop Mobility MMI, Modex, Mortgage Advisory Tools, and DW Consulting with Debbie Wemyss. Thanks, everybody, for reading, and be sure to share this show with others.

Important Links

• EscrowTab
• Finastra Fusion Mortgagebot
• FormFree
• Lender Toolkit
• Snapdocs
• Total Expert
• SimpleNexus
• Mortgage Banker’s Association of America.
• Lenders One
• The Mortgage Collaborative
• SuccessKit
• Knowledge Coop
• Mobility MMI
• Modex
• Mortgage Advisor Tools
• DW Consulting with Debbie Wemyss
• Adam DeSanctis
• MBA.org/HomeForAll
• TMSpotlight
• MBS Live
• Union Home Mortgage
• Allen Pollack
• Bee
• Earn Up
• Freddie Mac
• VyStar