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
It’s good to have you here on this Memorial Day holiday. It’s Monday, May 30th, 2022. We are grateful to have you here. We have a special episode on Memorial Day. We’ve got Jack, Les and myself, and we are going to be talking about the financial markets in the first half of this episode. Later on, in the second half of the episode in the Hot Topic Segment, I pre-recorded an interview with John David Mann and his wonderful wife, Ana Gabriel Mann.
They wrote a book together called The Go-Giver Marriage. John has been writing the Go-Giver series for some time. They just published The Go-Giver Marriage. You are going to learn about it. What is a book on marriage have to do with a mortgage show? It’s a holiday. As we go through life, I value my marriage and the whole concept of marriage. I’m thinking that based on how hard I work, I know what challenges I’ve had. I thought it would be a good way to remember what’s important keys are to tune up your marriage. How about that? We are giving back not only to the mortgage industry but now we are giving in to marriages. Jack, what are your thoughts on that?
David, it’s a very good topic. Crafting a healthy marriage would your life partner makes life a lot less stressful. Doesn’t it, Mr. Lykken?
One of the things I love about you is your marriage with Valerie. You guys have such an amazing marriage, and there’s such dedication. I look at our Hot Topic guest, Les Parker and his dedication to his wife, Linda, who is going through so much in her life. I love great marriages and those that are dedicated to making it work. We are going to be giving that to you in the Hot Topic Segment.
We will talk more about it afterward. Again, this show is created by mortgage professionals. It is for mortgage professionals, and we are so grateful to have you as our audience. Our commitment is to bring you timely information. Jack and I were on the phone talking here overall, looking at the whole thing on the show, what we have been doing, and how we have been doing it.
The listenership continues to explode. It’s growing so rapidly, and we continue to get many audiences. We thank all of you that have been tuning in for years, and we thank and welcome all the new audience that have joined us. Jack and I are talking. I said, “Jack, I’ve got some ideas. I want to change it up.” Now that I’ve got him underneath as a co-host, he brings a lot to that. I love his style. It’s distinctly different from mine. Variety is a great thing. He came up with some ideas for a new format. The basic format where we spend the first half of the episode running through different things, we are going to continue doing that.
In not too distant future, we are going to be launching a format for how we do that. It’s going to be much more conversational where the regulars, myself, Jack, Alice, Allen, Matt and Les, even if we get him on live, we got them live now, can talk about what’s going on in each one of the important areas of the industry. We are going to add a servicing component to this. For those that are in servicing, what should we be looking at there? I’m excited about this. Jack, I want to say thank you for coming up with this. Your thoughts?
David, I always thought that we have a lot of good talent and knowledgeable resources with the regulars on the show. If we get into more of a roundtable discussion, we can enrich the content that we are providing the audience. That’s what it’s all about. It is helping people understand directionally the market and the compliance fabric. If we go to that roundtable, we’ve got the opportunity to allow the regulars to contribute.
I’m excited about that. It was a great suggestion. It came off of the recent roundtable discussion we did here. Both Jack and I enjoyed that so much. We got to do more of that. How can we do more of that? Now I have been thinking about it. “What can we do to improve the show? How can we change things up? How can we continue to provide value and great content to our readers and do so even in a way that holds your interest?” Conversational, roundtable, and mastermind-type thinking is a way to do it.
We are excited about that. Let’s get over and say thank you to our sponsors, Mortgage Bankers Association of America, Finastra, Lenders One, The Mortgage Collaborative, Total Expert, Knowledge Coop, Mobility MMI, Modex, Snapdocs, SuccessKit, Lender Toolkit, FormFree, SimpleNexus, and DW Consulting. The list goes on and on. Thank you, sponsors, for being here. Also, a special thank you to Rob, Les, Alice, Allen, Matt and Jack for their contributions each and every week to the show. The MBA got us a report. Here we are.
I’m Adam DeSanctis. Welcome to the Mortgage Minute, the latest news from the Mortgage Bankers Association. Last time, the Senate voted to confirm Sandra Thompson as the Director of the Federal Housing Finance Agency. Thompson has been acting Director since last summer and previously served as FHFA Deputy Director of the Division of Housing Mission and Goals.
Mortgage Updates: The Senate voted to confirm Sandra Thompson as the Director of the Federal Housing Finance Agency. Thompson had been acting director since last summer and previously served as FHFA Deputy Director for the Division of Housing Mission and Goals.
Also, MBA released its monthly purchase applications payment index, which reports mortgage application data every month by loan type, geography, and raise, as well as how it compares to recent asking rents. The April report highlighted that higher home prices in an 88 basis point jump in mortgage rates led to the median application payment jumping 8.8% from March to $1,889. That amount was $569 higher than in April 2021. For more info on MBA’s Purchase Applications Index, visit MBA.org/research. That’s it. Thank you for tuning in.
We’ve got a new voice from the MBA. Adam DeSanctis does a great job. Adam, great report, and we are grateful to have you on the show with an update each and every week. Very valuable and great stuff. Let’s get over to talking to Les Parker. Normally, we would say, “Let’s get over and hear from Les Parker with the TMSpotlight this week’s back review of the market.” We are not going to do that.
We want Les live, and we have him here present with us. Les Parker, thanks for joining us on this holiday. What we want to talk about, Les is what’s going on in these capital markets. I’m looking at what we can anticipate. Have we seen the highs? We want to get an overview from you on what we can anticipate as we move into the second half of 2022.
I’m so thankful that you didn’t bring me on as an expert in marriage. I still am struggling with that after 43 years of marriage. I try to say, “Yes, dear.” I have preached sermons on married. I also have been bi-vocational all my life, so I’ve pastored a lot. I learned a long time ago that the man is the head of the house but I also want you to know that the spouse is the neck. She turns her head anywhere she wants it to go.
You are bringing up a great joke where the guy was telling a friend of his. We had this real inspirational speaker about marriage at church. We went out to this men’s retreat and talked about marriage and he said, “How did it go?” “I came home and didn’t see my wife for three days.” He says, “How is that?” “I came home and said, ‘Things are about to change around here. I’m the head of this house.’” He says, “What happened then?” He says, “I couldn’t see her for three days. Finally, the swelling in the right eye opened up just enough where I can make out where she’s at in the room.” It’s terrible. I thought it was hilarious. Anyway, so let’s move over to the markets. We may be safer there, Les.
There’s not a lot of difference between marriage and what we have to deal with in the Federal Reserve. The economy is not understandable and controllable. If people can get an understanding in relationships that there are individuals and we can influence individuals but ultimately, an individual makes their own choices. Successful marriages have to recognize that they are both individuals, and yet they have come together as one. Even in that process, you must understand that relationships are complicated and not fully understandable. The Federal Reserve thinks that everything is controllable and that it’s all understandable. That is the fundamental flaw of the Federal Reserve.
We can influence individuals, but ultimately an individual makes their own choices. Click To TweetThat is such a great point. Let’s park there for a minute. Jack, what are your thoughts on what Les laid out?
Les is right on target with that comment. We’ve got so many things going on in this marketplace right now. Some of them are domestic-driven, and some are globally-driven. For the Fed to be able to get in and start pushing buttons and turning dials, they are not in control of so many of the influencers that are impacting the market. For example, the Ukraine-Russian conflict and its impact on global oil and food supplies. How does that impact what we are paying at the grocery?
It’s certainly a major driver in what we are seeing from an inflation standpoint. The Fed isn’t in control. Maybe years ago, when this was not as much of a global economy as it is now, the Fed probably did have more control. As we’ve evolved to a global economy, there are many central banks across the world, and they are not orchestrated now. The Fed is probably leading the way on the level of how they are aggressively trying to reign inflation back down in the States. Many of the other central banks are not playing as aggressively as the Fed is.
We got some questions coming in. Les, the first one is, “Why did Les say that? I would love to get more of Les’s insights as to why he made that statement.” Les, expand on that.
Let’s look at our own individual finances. Let’s talk about the complexity of individual finance. They have assets and liabilities. They have income and expenses. That’s pretty straightforward. That’s also what businesses have. If you look at Apple, it has assets and liabilities. It has income and expenses. If you look at it into four quadrants, it looks pretty simple.
Enron got in a whole lot of trouble because of the way it dealt with its assets and liabilities and how it flowed through into income, and how it recognized expenses. In a corporate sense, most people would probably say, “It gets much more complicated than four parts.” By the way, that’s even simplistic because you also have net worth, capital structures, and things like that. I was trying to keep it in a simple box.
Think about your own personal finances. You have those four quadrants. We have income, expenses, assets, and liabilities. Do your assets change? They do. Cars depreciate, and homes appreciate. I guess it depends on what year we are talking about. If we are talking currently, our cars are appreciating, and homes were appreciating but now they are depreciating. I did that on purpose. Even in the current moment we are in, you can’t always assume cars only depreciate, and real estate only appreciates. Just in that simple statement, what about liabilities? Can liabilities change and shift? Of course, they can change and shift.
Mortgage Updates: Your personal finance has quadrants: income, expenses, assets, and liabilities.
If you buy a new house or do home improvement, you use any debt for that or financing for certain purchases of household goods. That interest rate may be variable. In fact, most consumer debt is variable. Did your liability increase in a sense? It would be on the expense side but think of it as the obligation growing. If we could fix the expense and the obligation grows, it has a total value, so now it equals a payment. It’s not that simple. We then talk about on the expense, and the income side is the same type of thing. You may have a bonus and pay more in taxes. How about on the expense side right now for what’s going on in the gas tank?
That’s a single individual or a single household economy. What in the world is it for multiple billions of people, and how does that interact if we think of them as economic units, whether the economic unit is a country, a commonwealth or maybe if it’s like in India? It may be a country but it has several different quadrants in the way its economies operate. Some are extremely ad and software-based. Even within countries or economic units, it’s complicated in the way it’s structured in assets, liabilities, and income expenses.
That’s a good way to look at it. Let’s talk a little bit about where you see interest rates going. What are some of the things that we should be paying the most attention to? Obviously, economic data, inflation, etc. When you write this excellent, probably one of the best newsletters on this, it’s so concise. It’s got an entertainment fact because you are referencing a song as you do in each of our segments, which by the way, you and Gary rocket when it comes to producing the macro market update each and every week. Thank you for the work that goes into it. It’s splendid. What I’m interested in is what we should be looking at. Is it the norm or something else?
When we think back to when we did our update, Jack and I were talking. He said, “Les, the Fed is increasing rates. Therefore, rates are going to increase.” It is true that in the historical way of viewing the Fed, you don’t fight the Fed. That’s the way we think about it. If the Fed wants to increase rates, then it’s going to increase rates. There is nothing you can do about it, certainly on the shore down but the consequences of their policies are not necessarily a straight line. It’s not a straight line because of the complexity of global economies.
If the Fed wants to increase rates, it will increase rates. There is nothing you can do about it. Click To TweetThat’s what we have been talking about here. Also, the simplicity and stupidity of the models are generated by extremely smart people that have PhDs, not stupid people but in the end, their models are way too simplistic. By the way, in a certain sense, it has to be, “How do you describe something that’s complicated without simplifying it in a model?” That’s the way it is. Jack was spot on that rates went up further than I was expecting. I thought we would stop at 310 but we went up to about 320.
I also thought that we had a good chance of reversing down hard to lower rates during that time because of the folly of the Federal Reserve. Jack’s observation of saying, “We are not going to fight the Fed,” was right on. I made a lot of caustic comments about the Fed at that time. I haven’t changed my view of the Fed because I know it is correct, and a lot of observers, even former officials, acknowledge the folly of the Fed. Jack, you were right in saying we need to go with the higher rates. You were wondering about the higher rates of mortgages. When will that create a problem? We are seeing it’s creating a problem now.
Les is right. This is not a linear world, David. The fact that Fed may increase the Fed funds rate by 50 basis points in June and another 50 basis points in July, I do not believe that we are going to see a linear increase in interest rates. At some point, bond rates detach from the Fed funds rate, and we are at that inflection point now. Do I think we are going to be looking at a 6.5%, 30-year fixed rate or a high FICO 80% LTV mortgage? No, I don’t.
I may be proven wrong but you also have to stir in a little bit both the emotion in traders and the fact that we are getting ready to have an important mid-term election here in November 2022. There’s going to be a number of blue in search that is going to impact the market of becoming five months. I don’t believe we are going to see a linear ramp-up. I hate to call where we are at now a spacious point but that 320 may have been the top but we got to peel some more time off the calendar.
Bunch of questions about that, Les. First of all, let’s start at the 320 high thoughts on that. What are you hearing? What are you sensing out there, and what could take it higher? What are the forces that are probably going to push this even lower?
Jack’s observation is spot on. When we were out of sync earlier in 2022, it was only because of the way we were looking at the pendulum. This is a historic move in mortgage rates over these last six months. This has been historic in terms of how fast it went up. Also, we saw a rapid decline by the way. Over a year and a half, we saw a significant decline in rates. It wasn’t that long ago that 4% was the norm, and we were floating around that level. It’s almost as if we blinked our eyes and we were at 2.5% or below. In a 30-year, it’s the same qualifications that Jack gave earlier. If you look at it, in the last two and a half years, mortgage rates have gone a long direction both ways.
It is interesting that those tops, back in 2018, looked like a formidable level. It turns out it was, and the market wasn’t able to push through that. FYI, back in 2013, it was a little bit lower but a lot of congestion around this 3% area, a little higher, a little lower, in the tenure treasuries, which is again a way we reference mortgages. Even that, we have to hold loosely.
If we look at mortgage spreads, mortgages were negative to treasuries. If you look at the net rate that an investor receives on a mortgage-backed security and a ten-year treasury note, you received a lower yield on a mortgage-backed security than you did on a ten-year back in 2021 during that pandemic. That’s because their duration dropped significantly very fast.
That was the reason for the out-of-balance. It meant that the 10-year wasn’t really the right fit for a 30-year mortgage. It should be five-year security or even less. There are reasons for these changes in yields. You have to take it a little bit with a grain of salt. If we look at the ten-year yield and mortgage-backed security yield and reference Fannie Mae, the relationship between mortgages and treasuries has changed 200 basis points over a little less than a year and a half.
The point of that is that things change. If your audience gains anything from this broadcast, they need to understand that as much as things look simplistically stable, they aren’t. The economic world is not a stable world. It will appear stable a lot of times but if you look at the ocean, it will appear stable. Go out there ahead of a storm and see what your waters are like or after a storm and see what it’s like and see what it’s like in the midst of a storm.
As much as things look simplistically stable, they aren't. The economic world is not a stable world. Click To TweetThat’s a sensitive topic for Jack. He just retired and moved down to the Gulf, so he looks at the weather out there a lot, and what looks stable can change dramatically. As we wrap this up, Les, what I want to talk about is something Jack brought up, and it’s the mid-terms. What, if anything, will these mid-terms do to interest rates? Are you anticipating any change?
I don’t expect a lot from the US political environment. The global political environment is what’s driving things. We will say the G10, the larger advanced economies, have somewhat resolved themself to the current administration. Even though there are certain things they like about it, some other areas have escalated where they want to try and separate more from the United States and its leadership. That was happening under Donald Trump, President Obama, and Joe Biden. For different reasons, the midterms will have little impact.
Jack, any thoughts you want to wrap up as you wrap up this first half of the show?
The watchword for the environment that we are in is volatility, whether or not it’s domestic politics or world global politics. I remember that at the beginning of the year, we were talking about what would happen if Russia were to enter Ukraine. We’ve got a similar question with China and Taiwan. There’s so much volatility now in the market. What oil was trading last time was $117 a barrel.
There are many things in the marketplace that have seemed to open themselves up to volatility now. From a capital market’s perspective, every day, this is a watchful eye in the marketplace. Recalibrating your pull through and this is a market that you don’t want to be long or short at. You want to be as neutrally hedged as possible.
Volatility is the watchword. I can say amen in multiple ways.
There are lots of reasons for it while we are going to see that, which is a good reason for every one of our audience to this episode. Your company should subscribe to Les Parker’s TMSpotlight in his back review of the markets. He does a great job every day.
Dave, I know you want to wrap this up but I want to let your audience know that Jack and I don’t look at the standard things. Jack is very much broad in his thinking and the way he looks at markets, and so do I. I want them to know that we do know what the DeFi is, the Decentralized Finance. We understand what’s happening there in the crypto markets. We’ve seen crypto down 77% since its August highs. Those things are not directly impacting interest rates per se because it is such a tiny part of the market.
It is going to be where a lot of changes are going to be taking place in disruptive markets, disruptive finance and decentralized finance. Crypto is something that people should pay attention to but not directly. It’s an indirect thing. It plays to what Jack said, volatility. Seventy-seven percent drop in less than six months, and cryptos give you a sense of volatility.
Mortgage Updates: A lot of changes will be taking place in disruptive and decentralized finance. Crypto is something that people should pay attention to but not directly.
We can see where there have been significant drops there. You can look at tech. Particularly tech is a burning tech because they are burning money. They are not actually making money. We’ve seen those drop 50% to 80% in their values if you look at biotech. With those types of numbers, that’s going to spill over into the fixed income side and the way that you are going to see responses on what people demand returns. That’s why it’s complicated. The Federal Reserve’s model is way too simplistic, and they have a simplistic approach to that. They tweak these little items. They can correct the world. They can’t but they are our huge gorilla in the market, so you have to pay attention.
Les Parker, thank you so much for being here. I want everyone to sign up for the TMSpotlight. Do so by going to TMSpotlight.com. Subscribe for free or get the paid version by putting in the word POWER for the word power seller. Also, we should put in a shout as we are talking about the markets, Matt Graham’s MBSLive.net is also an outstanding resource. It’s giving you live up to this nanosecond on what’s going on in the financial markets. Thank you so much for being here in the first half of this show. Thank you, and I wish you both a great Memorial Day holiday. That’s it for the Mortgage Market Update.