Lykken on Lending

The first half of the Lykken on Lending program will feature our Weekly Updates….to read more info about our regulars and weekly updates go to our website!

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Weekly Updates With Alice, Allen, Matt, Les, And Rob

Welcome, everybody. Monday, April 11, 2022. This year is going by. What is going on with the market? So much for that prediction that we hit the high a week or so ago. This show is created by mortgage professionals. It is for mortgage professionals. We’re so grateful to have you. Our commitment to you is to bring you timely information that you can tune into anytime and anywhere. Talk about relevant timely information. Jack Nunnery, my co-host, and I hooked up with Brian Montgomery.

Normally, Jack is out on the bay, but when he heard we were going to interview Brian, he said, I’ll forgo fishing and come in and join this interview.” You’ll have to tune in to this. We’re going to be talking about why it is taking so long to get the FHA commissioner and HUD nominees confirmed. That’s one of the things. We’re talking about servicing. We’re talking about how it’s been tough for first-time homebuyers. There is a lot of great information that Brian shared with us from his perspective.

Special thank you to Finastra’s Fusion Mortgagebot Solution. It sets custom decisioning parameters to help streamline the approval process. Go back and listen to Chris Zingo, who we had as a guest on March 7th. The information is relative. It’s always interesting to see what the number one Fintech company in the world is thinking. Chris did a great job of sharing their thoughts and their vision.

I want to also say a final thank you to Rob, Les, Alice, Allen, Matt, and of course, my new co-host, Jack Nunnery. It’s good to have you all with us. I appreciate it. Rob Van Raaphorst did not get in a minute to us to his MBA Mortgage Minute, but we’ve got some updates. Alice will share a little bit about that. We’ll touch on that. We wish Rob well, and can’t wait to have his segment back. Let’s get over to Les Parker with TM Spotlight and a macro view of the markets. I can’t wait for this one.

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David, it’s a little bit of everything. How are you doing?

I’m doing all right.

Last week is a pretty crazy one, and yet another week where we thought things might be starting out a little bit more on a bond-friendly note, and where things are promptly deteriorating. One of those beatings will continue until morale improves the situation. Morale obviously is not improving. Last week, coming into it, it was the second trading day of April.

As we talked about on the show, we wanted to see how the first several days of April were trading before passing judgment on whether or not the friendly little consolidation we had at the end of March was something that might be a little bit more long-lasting, but things deteriorated promptly. Tuesday morning was a key moment in that deterioration. It occurred after a prepared speech from Fed Vice Chair Brainard was released.

In that speech, if you had told me that any other Fed member, perhaps other than Evans, had said what she said, I’d just say, “The Fed has said that before.” What are we talking about? In a nutshell, it’s just the same old about faster rate hikes and a much faster pace of normalization. As a reminder for those who need it, normalization refers to balance sheet normalization or the Fed’s process of actually shrinking its balance sheet by allowing MBS and treasury reinvestments to roll off.

Weekly Updates: Normalization refers to the Fed’s process of actually shrinking its balance sheet by allowing MBS and treasury reinvestments to roll off.

They set a certain cap, and that cap will not be reinvested in that particular month, only anything over that cap. To give you an idea, last week on the show, I said it was $6 billion for the MBS. It was actually $4 billion back in 2017. That was the first round of caps for the normalization process. This time around, Brainard’s comments foreshadowed something that happened the following day in the release of the Fed minutes. Markets correctly guessed that her comments may foreshadow a little bit more specificity.

The next day in the Fed minutes, $35 billion a month would be the cap for MBS. That’s quite a bit bigger than $4 billion clearly. It’s a significant number for another very important reason, and that is when we go and look at the New York Feds’ historical MBS purchases on their website, we can go back to 2017 when we were in somewhat of a similar rate environment, and also a similar environment with respect to the Fed having fully tapered and being in the process of unwinding the balance sheet. We can see what the reinvestments were before they started normalizing the balance sheet.

If you look at those reinvestments and compare them to the number on the balance sheet total, which is like $1.7 trillion, and then look at the $2.7 trillion today, and carry the one, extrapolate all of it, it would equate to about $35 billion a month right now in reinvestments, even in a relatively refi-free environment. All that to say, the Fed is announcing a cap on MBS balance sheet roll-out that is going to effectively mean they’re not going to be buying any MBS more or less right from the start.

It’s similar stuff for the treasury. Bond markets didn’t love it. The interesting thing we’re seeing now is the long end of the bond market that’s not loving it. The 10-year, 30-year and 7-year treasuries are all significantly higher in yield, while the 2-year treasuries actually had a decent week, having a decent morning this morning. They’re slightly lower. Whereas 10-year yields are 8-plus bps higher. It’s almost 2.8 right now. That whole yield curve inversion only lasted a couple of days, and now we’re back up nearly 30 basis points. It’s a big curve steepening.

MBS benefited from that at times more or less because they are shorter in duration than 10-year treasury yield. Obviously, it didn’t get hurt as much last week, but still hurt quite a bit. Average lenders are up anywhere between 1/8 and 1/4 of a point from Friday. The average going rate is 5.25% right now. Everybody’s wondering, how high could it go? It seems like it’s incessantly incessant. One other thought as far as last week’s weakness would be that the traders understood that we’re heading into a week where we have treasury issuance.

It is a holiday-shortened week. Japan continues to buy only their own debt, and to be a big net seller of US treasuries. We don’t have super recent data for that, but we can assume that that’s the case based on the previous month’s data that we just got, as well as the news coming out of Japan on their focus on buying their own securities.

More Fed speakers. We are worried to some extent that they’re greasing the skids for a pretty hawkish announcement in May. One that at the very least, hikes the Fed funds rate by 50 bps, and quite possibly starts the balance sheet roll-off right now. The earliest guesses were June, as of January. I was one of the earlier guesses there, and people laughed at me. I tried to keep my chin up. It looks like I may have even been too late and it could be a May meeting.

Dave, I think that this is the kind of stuff that needs to happen before we can turn the corner. Markets are basically trying to keep going all in on with the Fed, call their bluff, and price in the worst possible scenario they can imagine. That way, once we have clarity of actually what’s going on, then we know when it’s time to come back and how hard it’s time to bounce back.

Until the process begins, until normalization begins, and until we see what liquidity looks like in various parts of the bond market, the path of least resistance is toward higher rates, the faster it goes higher, the more potential pressure we’re building to bounce in the other direction. Again, to reiterate what I said last week, even though people were calling for a top, it’s not something I would bet on and it’s not something I would expect or call until you actually see it materialize.

This is the last thought I have on rates and the future and all that. One thing I like to tell my audience at times like this when we’re watching rates rise very quickly is that I would much rather be wrong about rates bouncing one time and in a very big way, as opposed to being wrong multiple times on the way up as people are calling tops and rates. We could shift our stance and say, “I’m going to float my rate right now because I think we’ve seen it top.”

You might be right about that, and that might feel great. I would rather just say, “Let’s wait until we have obvious evidence that the corner has been turned before we jump on that bandwagon.” Yes, rates are a lot higher than we thought they would be while we’re having these discussions, but that’s where they are.

They are where they are. It’s so true. Jack, you’re always a big watcher of the markets. Jack Nunnery, do you want to opine to this, usually as words of wisdom?

Thanks, David. Matt, last week you were talking about resistance on the 10-year at 2.77. It looks like this morning, we’re testing that resistance. Any thoughts there?

Lucky guess. I don’t know. I usually have it when one of my technical levels gets hit. I think the other ones I’ll pencil in after this would be 2.83 and 2.91. As far as the thought as to whether 2.77 holds up as resistance or support in this case since we’re talking about yield, no major thought. I just look at those levels as the next place I would expect to see yields. It may be a target or congregate if they were to move higher or lower, not so much as firms, ceilings or floors.

David, I’m not surprised by all of this. We were talking several months ago about Jerome Powell’s challenge of landing this airplane safely. I think that’s out the window now. With concerns over inflation and rising commodity prices and the war in Ukraine and Federal Reserve’s monetary policy going forward, I think we’re on a bumpy ride.

Inflation has been up for almost a year. Oil prices have been up for some time now. All we’ve heard to date is a lot of talks and 0.25 point rise in the Fed funds rate. It doesn’t surprise me to see the Fed reacting so vigorously now. Buckle up. The next couple of months is going to be interesting. To Matt’s point, until we get some clarity, you’re going to see a really skittish market both over in the bonds and over in the equity. Here we are.

Skittish would be friendly right now. Someone in the audience wrote in the quote of the week from Matt Graham, “The beatings will continue until morale improves. How about rates?” That’s good, Matt.

Morale can improve as soon as the beating stops.

Go figure that one out. Great segment. I appreciate you so much. Check out what Matt publishes on his website. Great content. I’ve got that behind me all the time. I’m looking at it. Sometimes I keep it behind me because I don’t like what it’s saying lately, but I do turn around and look at the screen all the time. It is pretty cool to have that sitting there flashing away behind me when I’m on my conference call.

Check out how you can get the extended trial with no credit card required by putting in LOL for Lykken on Lending as the sign-up code. Matt, thanks for that extended trial period for our audience. We do appreciate that, friend. Thank you.

Alice Alvey is here with us. Alice is CMB Vice President of Education and Training at Union Home Mortgage. We’re so grateful that Bill and Al and the team there let her get away each week for about an hour to take the ball chain off a little bit, “Alice, you can go do this. Just come back here. Get back here right away. We need you so badly.” What do you get for the legislative update, Ms. Alvey?

Thanks, Dave. I’ll fill in a little bit for the MBA there. They published and talked a little bit about the fact that they have now put out a blog post to support the reduction of the FHA and MIP premiums, which I talked a little bit about last week. FHA has got a lot of liquidity. It is something that we don’t see any numbers for yet. No one is talking about an amount. If you want to know how much, no one is willing to throw that number out yet.

We definitely have to wait until the first quarter’s report is published to see where FHA stands, and how conservative they are in looking forward to some of the expenses that can be in the market and the volatility in the market. That’ll all be factored into their calculations. We’ll have some information to work on and see from there. I love the conversation about the market with Chris Bennett of Vice Capital Markets. He’s just an intelligent mortgage banker and a wonderful human being.

I’ve known Chris for a long time since he graduated college and just an amazing person who’s very knowledgeable about the bond markets. He put out a video, for those of you who can find it online, called The Category 5 Hurricane in Bondland. It’s an insightful three-minute piece where you can get a little background on what’s happening in the markets like Matt. He’s got a few more out there. There’s a video on Hedging 101 and a few others. For those of you who are wondering what the heck is going on, there are some great resources, and he’s the one I recommend. He’s a great guy.

My one piece for the legislative update, there isn’t a whole lot going on that front at the moment, knock on wood. I do want to give a quick update on some of the rumblings that are out there about the change in medical debts that are going to be impacting credit scores. Effective July 2022, paid medical collection debt will no longer be included on consumer credit reports. The keyword in that sentence is paid. I’ve read several headlines of everybody’s credit scores are going to go up by 100 points because all medical collections are going to be gone. You have to read the fine print. Anything below $500 is not going to be appearing on credit reports, but paid medical collection debt is now going to come off. That’s where the trouble starts.

Weekly Updates: Effective July 2022 this year, paid medical collection debt will no longer be included on consumer credit reports. Anything below $500 is going to not be appearing on credit reports, but it has to be paid.

It’s not that I have medical debt. When it goes on, now it’s appearing as a general collection account that’s impacting my score. Another thing that’s going to change is these collection accounts won’t be appearing for twelve months. Today, they come into a credit score at the six-month mark. Effective July 1st, they are going to be pushing that out, giving people a little more time to solve any credit misunderstanding with their collection account.

The $500 piece isn’t going to happen until the first half of next year. That’s the other piece. There are a ton of customers out there. If you go by the CFPB data, it’s something like 1.6 billion credit accounts for over 200 million adults every month are managed. We’re looking forward to this change will definitely help some consumers. That’s the facts on that, Dave. I’ll turn it back to you.

As interest rates are going up, home affordability is going down. It’s nice to know that there’s something out there that’s helping the consumers. Very good, Alice. Thank you so much. I appreciate it very much. Say hi to Bill and Allen, and the team there. It’s such a great company. We appreciate them sharing you so generously each Monday with us. Our audience loves your updates. Thank you, Alice.

You’re welcome.

Go to our website, Lykken On Lending. You can download all of the updates from each one of these segments. If you want to binge on Alice, you could go to the website and binge away, and all her updates, as well as Allen, Les, Matt, and all of it. Allen is stuck in an airport. I got a text message from him, “I want to be on the show but I can’t. I’m flying out to MBA Tech. My flight’s delayed.” He’s probably up in the air right now.

He will be back with a full update and what went on at the MBA Tech conference. We’re looking forward to that report. Safe travels. I appreciate you so much. As a result of that, that wraps up the weekly mortgage update. Next episode, we’ve got Troy Anderson with Finastra coming on. We’re getting to know Troy well. This guy has got some depth of lending experience along with technology. He’s going to enjoy this interview as we talk more about where technology is heading.

It’s appropriate seeing as the MBA Tech conference is going on. We want to say a special thank you to our sponsors, Finastra, Lenders One, Mobility MMI, Modex, the MBA, Knowledge Coop, the Mortgage Collaborative, Snapdocs, Success Kit, Lender Toolkit, Total Expert, FormFree, and SimpleNexus. I appreciate you all for being here. Share this show. We appreciate you. Have a great week, everyone. Looking forward to having you back here.

Important Links

• Julian Lumpkin – past episode
• Lender ToolKit
• FormFree
• Brent Chandler – past episode
• SimpleNexus
• Lori Brewer – past episode
• DW Consulting
• PowerSeller
• TMSpotlight.com
• MBSLive.net
• Union Home Mortgage