[David] Thank you, Matt. Appreciate it very much. Also, you wanna sign up for Matt’s MBS Live.net. Do it, you do so by going over to mbslive.net and we’ll go from there. Yes, Mr. Kittle, I’m raising my hand because I wanna make sure Bill comments on this.
[David] First of all as I heard at the end why would lower inflation be negative and why would the bond market be concerned about. Almost 30 day old jobs, numbers they probably could have gotten someplace else.
[Bill] Great point. So a couple of things. we talked about this in the middle of the government shutdown, right? Clean data is going to be months down the road, right? I equate the data we’re going to see this week to you’ve shut off the water to your house while they’re doing a lot of construction on the water mains in the street. Let’s say when you turn your water back on, you’re not going to drink that water right away. You’re gonna let it run through the system for a while and clean and clean itself up.
[David] Yeah. That’s a really good analogy. That’s so true.
[Bill] And I also think. Yeah so new phrase that I have to introduce to that, forecasting mix is consensus squeeze. So if you look at the Fed’s data from last week with the dot plot, their expectations for unemployment, there are expectations for GDP and you’re seeing it in the rate markets as well. People’s projection of where things are going are getting narrower and narrower. That’s one of those it feels like when everybody starts getting too closely aligned, get ready to get whipsaw one way or the other.
[David] Exactly. That’s I was thinking. Yeah.
[Bill] And in terms of, What’s good is good. What’s bad is good. What’s bad is good. Like it’s just everybody. There’s, and I listen to Bloomberg TV a lot in the morning and they talk about in a lighthearted way. What’s good for the economy, what’s good for rates, they’re not always the same thing. I still think so we’re at the higher end of the range. There’s gonna be some bouncing around, but I think it’s gonna take a while before we really understand what’s going on. And I think so two other things. One is in last week, right? So the Fed announced the date early decision on reappointing all of the Fed regional bank Presidents. And that was expected slash required by late January or February. And they chose to do it early and it was unanimous and I think that’s the Fed as a group saying, we can have our own battles, but when there’s too much pressure from outside, we’re gonna circle the wagons. So my question, and Alice, you can put a date and timestamp on this, is how soon do the charges against Lisa Cook for mortgage fraud, which everything I’ve seen is BS. Anyway, those charges get dropped because the only reason they were trying to get her out was to get another appointment in to be able to mess with the Fed regional president’s confirmation. So now that’s done she may get an early Christmas party. Whether you like it or agree or not, doesn’t matter, but I think doesn’t matter. That totally goes away. The other thing, and this goes to an article Mr. Kittle shared over the weekend, the other big thing that was going on last week were hearings in Congress about basically what the Fed is doing with their balance sheet. And, is that appropriate? Is this, abundant reserves? The right approach because there’s arguments that it’s basically just transfer payments to the large banks. They’re great arguments for and against let me put it this way. There are very smart people that make arguments for and against it. Basel came out a couple of months ago and equated this to gain of function research that went on in Wuhan, and he’s we saw how that ended. So be careful where this goes. I’m torn this absolutely needs to see the light of day and there needs to be a lot of conversations, but I’m also not incredibly confident that Congress is capable of doing anything that involves intelligence.
[David] Oh, you skeptic you and, oh, you skeptic.
[Bill] And I take a little bit exception with Matt’s analogy of QE is a fire hose and reserve management is a trickle. To me, the problem is the fire hose is still open and the fed is so far underwater that I don’t think you can take an individual thing and justify it based on the set of rules that may be applied when the balance sheet returns were positive. I, go back to that old expression, when in doubt follow the money, right? There’s money going from us, right? Because we have to start with the basic premise of the government doesn’t have money, the government has our money, and they are giving out more of our money every month than they are taking in. I don’t know what the answer is and it’s really complicated, but I do firmly believe that what they started after the financial crisis with the, what they call abundant reserves is a hole that just gets deeper and deeper. And yes, any arguments as to how to get out of it are going to be painful, right? But when you’re getting stuck in a hole, what’s the first thing they tell you to do?
[Kittle] Stop digging.
[Bill] Stop digging.
[David] Yep. That was a great point. Good points in there. but the part is we’re in a range. we’re in the upper end of a falling range, so this range is moving macro wise, lower and lower. I’ve got a lot of optimism. I just want I hear there’s, two, possibly three more rate cuts in here coming at this point. At some point in time, we’re gonna be below four.
[Kittle] Is that a question?
[David] And I think what’s that magical point? You’re not buying that Bill. You got that. You got that. I think.
[Bill] Okay, so below four on what, let’s be clear, because somebody would take that comment as below four on mortgage rates. I don’t think there’s a lot of conviction breaking out of the range. So could the 10 year be at 4% sometime between now and the end of the year? Absolutely. Those significantly below that, then you start looking, I think you need a pattern.
[David] I’m talking about going into 2026. Yeah, I can, I think I’m looking forward into 2026. I think. I think we, we have overall a lower rate scenario developing it.
[Bill] I think there’s but having been cautious on that, there’s another phenomenon that folks need to be paying attention to and that is the yield curve, right? So the difference between a two year and a 10 year treasury is now 67 basis points. Let’s say not that long ago. Pick a day, but Alice, don’t quote me on this one. 60 days ago, that may have been 40 basis points, We all equate mortgages to 10 year treasury, but the reality mortgages depend trade somewhere between 5 and 10 year treasury yields. So as the yield curve gets steeper, even if the 10 year is not moving that much, that’s gonna tend to provide a little bit of downward movement on mortgage rates. So, even in this range, there’s a little bit of positive news, and then also, let’s make sure everybody, really pays attention when the Fed talked about, what Matt talked about is, the Fed doing one, two, maybe three cuts between 2026 and 2027. Nobody is suggesting there’s gonna be three successive fed cuts at the next three meetings.
[Kittle] A couple things that jump out there, I don’t know how anybody seriously predicts what the Fed’s gonna do until they really know who the new Fed governor is and how they all get along. To go out and start talking about all the way down the road to the end of 26 and going into 27, I think is a ludicrous waste of good air breathing and then to the article that I sent out this weekend. It raises the question, the two things jump out. In the headline it was says it, it raises quantitative easing questions as the US bank’s reserves dip. Alright. US bank reserves fell $1.4 trillion.
[David] That’s the, probably the most concerning part of that whole thing.
[Kittle] That is the most concerning part to me of the article. Yeah. So I don’t know what Bill or Marc thinks about that, but that’s, that’s real money.
[David] Yeah. It’s the stability of our banking system. I still, let’s get some thoughts on it. Marc, you used to work with Washington Mutual, one of the biggest banks out there back in the day, and they failed.
[Marc] It failed because of playing games. And I think in many respects that what we just talked about is some game playing. we have some volatility on how people are approaching things in the marketplace and that one bothers me immensely. But the other thing that bothers me that we talked about earlier is really the mortgage fraud deal. I don’t necessarily say that lady was guilty of mortgage fraud or not guilty of mortgage fraud, but we clearly don’t have regulations inside the investor community that define what real mortgage fraud is and what we ought to do about it. It is really stupid this second home deal and why it’s worded and all that. We need to cross our t’s and dot our i’s and get more of a format we’re working on rather than people just sitting in the back room. Jawing about it and saying, I think we’ll go this way or go that way. And I think all of us are frustrated with that because it continues to happen. We talk about it every week and, I wish we could have some movement on some of this to make it quit happening, but I’m not apprehensive that is a possibility. That’ll happen anytime soon. Mr. Kittle, what do you think about that?
[Kittle] I totally agree with that. I would add to it, I don’t know what everybody’s take’s gonna be on this whether it’s the fed Governor and mortgage fraud, or whether it’s Leticia James. If any one of us had done any of this, we’d be prosecuted for.
[Marc] You got it. You got it. You got it.
[Kittle] And they’re not, I see all stuff on going on in the broad spectrum about all this investigation at the FBI of everybody I wanna see, and I don’t care what party you’re on, I wanna see indictments, prosecutions, and incarcerations.
[David] I’m back from San Juan Puerto Rico, where I was at Pavan’s Christmas party over the weekend, and I had a lot of time airplane type. So I watched the movie The Big Short, again, that was a grid movie. I’m encourage everyone to go back and watch that movie. It, because it really outlined in such, in good detail what happened in the last housing crisis that was caused by our financing system and it was very interesting. But the thing that a lot of the policies we have at the Fed are to try to block some or keep some of that from ever happening again. And all along with, along the regulation, we’re easing up in regulation. We’re start seeing a lot of the products come back that we head back then. I think we’re heading into some interesting days ahead where we failed to learn from history. We’re doomed to repeat. And there are some parts of that story that were scary on how close to where we’re heading right now with some of the products that are kind to come out, especially on the West coast. And that’s where it all started the last time around.
[Marc] Yeah I agree with that, David. I really do agree with that because I lived through that at Washington Mutual. And you know that, that subprime lending was just a disaster waiting to happen way. It was only trying to figure out how to loan more. Money on less value at a higher rate. That was a recipe for disaster, actually a recipe for disaster. But lemme go back to one thing, Mr. Kittle. I’m thinking about something that I think’s gonna make a difference. And I think Mr. Lykken, I think the same thing. I’m thinking about reaching out to about four or five people and I’d like to have you guys included on this. And we’ll put together a paper to the right kind of people about mortgage fraud and say, address this now before it continues down the road and has no media in it at all. And outline what’s wrong with the current policy. They have the lack of enforcement and make sure what’s the lack of enforcement. Why have a law if you’re not gonna enforce it? Yeah. Not a law, but a regulation. But I think we need to let the powers, we need to bring industry knowledge to bear, to let the agencies know they’re not doing what they need to do. They might not like it, but if it comes from a former president of an MBA, a former president, chairman of the Loan Administration Committee for MBA, you add some of those things up it brings some credibility to it that they ought to address and do something about.
[Kittle] Let’s do it. I wanna add one thing, the start of this headline, and I’ll drop the article that I s ent to you guys this weekend. It says, US Treasury buys another 12.5 billion of its own debt. Yeah. We’re in deficit spending right now, so it doesn’t have 12.5 billion. It issues the debt. Where’s the money coming from? And that’s a simplistic question. Look at Bill smiling. So where’s it come from, Bill?
[Bill] That’s where I started. That money comes from us. And the so here’s the great accounting game that the Fed gets to play, right? Because prior to COVID, let’s say the Fed’s balance sheet looked like your classic bank. They had treasuries that they were paying out interest on, but they were borrowing in effect at less money than that. So the Fed made money every month and remitted that to the treasury. So the inverse is what’s happening now. So, this is the part that everybody will love, right? So the Fed doesn’t record a loss every month when the money going out exceeds the money coming in. What they do is they record a deferred tax liability so that when the Fed starts making money, they’re getting credit for filling back up the whole,
[Marc] We do that, we go to jail.
David] That’s exactly the point.
[Bill] The point the last guy that I remember that did that was a guy named Bernie Madoff.
[David] Yeah. That’s funny. Yeah. What interesting…
[Kittle] So Corbert just told me when I file my taxes this year, let’s see if, I think I wrote this down correctly. Can I follow that on my taxes bill? It just, yeah, sure. Yeah.
[David] The reason I bring this up is at the end of the movie, it says, and I wanna write, tell everyone that there’s a whole lot of executives went to prison over the corruption that was in our housing finance system back in back in 07, 08. And in all the years leading up to it to that debacle. And they said, and everyone who went to prison, and then they goes, and the movie does that record stop? And it goes, sadly no one. One guy went to prison for and it was, you got who is this guy? There was so much corruption, it was systemic and it’s in our system and I hate to say it, folks, we got some of that going on right now. And I’m, I get a little concerned we’re gonna see some history repeating itself, but we don’t get this corrected, that policy with some of the housing programs. But anyway, I, we could go on, on.
[Bill] but back to Mr. Kittle’s, original point with. They’re doing this. And the liquidity concerns, The liquidity concerns are growing because, it’s one thing if you make a bet, right? If I bet a hundred dollars, okay, I’ve got a hundred dollars to lose. They’re now out going out and borrowing $10,000 and putting in a hundred dollars to make the bet. And that’s where then, the numbers become so unreal. And when you start trying to manage liquidity on the bets, on top of bets, on top of bets, that’s where it becomes a house of cards. And, that’s the supporters of a lot of this, their argument is we needed to preserve stability in the financial system. Giving away money created. The outsized incentives to bring so much leverage into the system that you’ve created a house of cards.
[Kittle] I think they’re just trying to, and they are, one of the reasons is they get the interest rates lower and they’ve got a lot of debt to refinance coming up. That’s the push down. That’s exactly what this is all about.
[David] Yep. That’s which is bodes well for mortgage rates here as we head into 26.
[Kittle] Yeah. But it’s total manipulation until, last thing I’ll say is to Bill’s point, when you’re talking about betting all that money and plus a hundred dollars, they’re not betting their own money.
[David] That’s right. And that’s the part that came out again, go watch the movie. If you wanna watch the interesting movie, go back and watch the Big Short and think about what we’re going through today and ask yourself some questions. Are we soon to repeat some aspects of this? It’s not gonna be as big, but we’re playing on the fringe of that kind of scenario right now. Anyway, little bit different flavor, but it’s fascinating where we’re at. All right. Wraps up that discussion. Anything else on that, Alice, we didn’t get, let you get comment, or Allen, any comments you wanna make on this part of the topic? [Alice] I was. I was taking a bunch of notes and trying to just, wait it out. ’cause the conversation was so great. So just a couple things I wanna throw in. Yes, bill, I did write down how soon the charges against Lisa Cook will be dropped. You were saying, I know Alice will be taking notes. My thought to just circle back to that quickly is if those people did lie on an application, my thing is I wanna see it follow the same due process as with any other borrower, right? Yeah. The loan will end up being a buyback and then the lender makes the determination from there on what they’re going to do. That’s my only hope out of that is that it still follows due process. It, and as any other borrower who was misrepresented things on a loan application. I guess my only question out there goes back to the market. And I love your water analogy, Bill. I wanna throw in that too. When you turn back on the water, you know there’s a lot of air in the pipes and so every time you turn on a new faucet, there’s that spotter and everything shakes and that kind of lined up a little bit with that bits out on all about. Yeah, there was a quick give and take on the market throughout that. And I think to your point, we’ve gotta let the water run for a little bit to get all the air out the pipes. But anyway, those were my points.
[David] Yeah. Really good. That was a good point.
[Marc] Let me give you a comment. David, back to Alice. Alice, I agree with what you’re saying. I don’t think due process really exists. I think it’s a hot mess. I think it’s one way, the other way and the right way. And we just need to stabilize that and make sure everybody understands the rules should be the same for everyone. And there’s a role of the investor and there’s a role of the lender and make sure everybody understands what they are. But the last thing I wanna do is go after a borrower that the investor’s not gonna support us on. ‘ cause they’re gonna make us buy it back as soon as we indicate we think it’s a problem. My god, they need to be in the fray with us and supporting us on it. And that’s the problem with the system. Yeah. No, you’re absolutely right. Very interesting discussion.