Category: Secondary Commentary

Secondary Commentary: December 2020

Before you read any further, I want to premise with the fact that this is an opinion, MY OPINION, and the intention of it is to help you form an opinion.  I don’t have a crystal ball, no direct line to Mr. Powell, President Trump, or President Elect Biden, no insider info, and no magic tweeting power (looking at you Trump) or even know how to tweet.  I can’t tell you what is going to happen in 2021 with rates. I can however tell you what happened in 2020 and things to be on the lookout for in 2021

1^st Quarter Table Setter

The first quarter of 2020 set the groundwork for what would be a wild ride.  We started the year looking at rates in the 4’s. By February we were seeing rates pushing into the mid to low 3s. This was driven by global news of Covid-19.  There were fears that this would be a global pandemic and money was flying to safe havens such as US treasuries and UMBS. This sudden lowering of rates caused lock volumes to increase as our past clients became refinance targets.

In the middle of the quarter the Covid fears became reality: a full-on global pandemic had arrived. The low to mid 3s evaporated overnight as Covid-19 appeared on US soil. Rates tanked in a 48hr span and it became impossible to even get a par rate. We sat in this environment for about 7-10 days before the FED stepped in and infused the market with money. This infusion quickly rallied rates back and we say the low 3s appear again. This drove lock volume to 4x normal volumes.

The quarter ended with the FED realizing they infused too much, and they slowly eased their infusion of money.  They lowered it to a reasonable range that stabilized the market and set the table for an amazing rate year.

What did this Craziness do to Secondary?

The initial rate rally was easy to handle. We saw an uptick in lock volume and were easily able to adjust our models to account for higher prepay speeds, more renegotiations, and lower pull through. When the market cratered in the middle of the quarter, that is when the fun started in secondary.

Before rates cratered, we could sell 85-90% of our loans to any one of our 12 investors. This is the model we had built over the past several years and what our pricing models were built of off. Our goal was to slowly build a servicing portfolio, while selling most loans to support origination and operational needs.  That ability vanished as soon as the global pandemic made its way to the US. In a matter of days, we had investors either stop buying loans, reduce prices to the point we would be selling at a loss, or toss on overlays that were impossible to sell to when we had already underwritten loans.

In the middle of a quarter, we had to scrap our pricing model, scrap our prepay models, scrap our loan execution models…you get where I am going. Basically any model we had was scrapped and tossed back together with band-aids and bubble gum (MacGyver would be proud). We started selling almost exclusively to agencies (Fannie, Freddie, and Ginnie). We as a company are incredibly fortunate to have this ability, as many lenders did not and suffered drastically. We owe a lot of credit to Tom and Jeanie for having the vision to obtain those approvals.

Now for some high-level shi…stuff that may go over your head. When the market has huge swings in pricing, it is a nightmare from a secondary standpoint. When we see large dips and then huge rallies like we did in the middle of Q1, it is a worst-case scenario.  In secondary, we hedge our entire locked pipeline – most companies that produce over $500-600mil/yr do the same. What this means is when the market worsens during the life of your lock, we sell the loans at a lower price – but we as a company get a positive pair-off from our hedge, meaning we get money from our Broker dealers. But when the market rallies and we sell loans at a higher price than when the loan was locked, we actually owe our broker dealers money.  Well, when you see a 400-700bps rally in the UMBS market, that causes some serious issues. These issues are known as margin calls.

In the midst of everything else that was going on, we were hit with margin calls from just about every broker dealer that we had. It wasn’t just one either, it was multiple – and was a daily occurrence while the market rallied. These margin calls were not a couple hundred dollars either – these were 6 figure margins calls that totaled 7 figures when all was said and done. Luckily, we were able to navigate through this adventure.  Every mortgage lender that hedges experienced this.  There was a huge outcry from this community when the FED started infusing endless amounts of money, as it pushed some lenders to the point where they couldn’t make the margin calls. This outcry helped to push the infusion of money down to a reasonable level.

While we were in the middle of this margin call mess, we also experienced the single largest lock month in our history, over $400mil in March. As I mentioned, we hedge our entire locked pipeline with broker dealers, but we have a limit with each of them in terms of how much capacity we can hedge.  This huge month took us to capacity. We scrambled to find a way to continue locking loans while we reached out to broker dealers trying to get new approvals and line increases. This was a big challenge, as most were not approving new clients and were weary of line increases with the pandemic in full force. We once again got some band-aids and bubble gum out to manage this.  We are better for it today, as we now have excess capacity and several more relationships with broker dealers to support origination levels for years to come.

We learned a lot about the department in the 1^st Quarter. We navigated the most stressful 45 days of most of our careers in secondary and we SURVIVED!

The Rest of 2020

The first Quarter saw rates in the low 3s, but as the year went on and the pandemic hit the US we saw more little rallies. Lockdowns across the country led to fears of a recession. More and more investors jumped to the safe haven assets, which caused rates to dip lower. The Fed continued to infuse money into the market on a daily basis, which kept stability and allowed for rallies.

As the year has moved on, we have seen rates slowly improve and now have 15 year rates in the low 2s, 30 year rates in the mid to high 2s, and government rates in the high 2s or low 3s. These are interest rates that most people thought they would never see. You have people locking interest rates at or near the FEDs inflation target of 2%.

We did see a few dips in rates for the worse as we started to see the US open back up after shutdowns, unemployment levels come down, and news of vaccines being available soon. Even with this news, the market bounced back each time as news of more Covid cases and more lock downs surfaced. News of on-again and off-again stimulus packages have also moved the market on a weekly or daily basis, but not large swings.

We enter the holiday season with more and more states starting to tighten restrictions on gatherings. We have started to see unemployment levels stop dropping or increase. There are also serious questions about when a vaccine will be available for the masses to help put an end to this pandemic.  This uncertainty has caused rates to push to the low levels we see today.

Lock Volumes have remained strong throughout the year as rates remain low. While secondary isn’t locking $400mil/month anymore, we are still 2.5-3 times our normal lock volume for this time of year. With rates at or near their lowest points, we have started to reach the point where people who refinanced at the start of the pandemic are now seeing a benefit from refinancing again. Two refinances in a 12month span… whatever saves the borrower money, right?

What does 2021 bring?

2021 should bring a very strong rate environment for at least the first half of the year. No one knows how long rates will remain at the levels they are at today. There are so many variables at play that no one wants to make these bets. What I can tell you is that the FED remains heavily involved in the UMBS market, and they have not shown signs of easing the amount they are buying. On a daily basis they are buying between $5-7billion in UMBS securities. They have recently started buying 1.5coupon UMBS 30 years which has improved pricing on the lower coupons in the previous few weeks. As long as the FED stays involved, we should see a relatively stable and low rate environment.

The pandemic does not seem to be leaving any time soon. Until we see vaccines readily available and have the population getting vaccinated, we should still see low rates. Until we as a country and we as a global economy can get back to business as usual, we should see a low rate environment. The biggest question hanging over the global economy is what the post-pandemic economy looks like. Many have questioned the length of time it will take to fully recover. The new administration and the FED will play a large role in what post pandemic US Economy looks like.

I wish I had a crystal ball to let you know the exact day/time that rates are going to turn against us. What I would advise is to stay on top of your pipeline and have the lock/float conversations early and often with your borrowers. We are at or near the lowest rate levels in the history of our country, floating for the chance to possibly get .125% lower in rate isn’t always a prudent decision but put that decision in your borrowers’ hands.

In a write up I did earlier this year, I provided a chart of where rates have been at the end of February for the last 10 years. Below is that chart and a reminder of just how great rates are today. If I were to include a rate for today it would be somewhere around 2.75-2.875%.

Normalization in 2021?

Secondary is hopeful that at some point early in 2021, we can see some normalization in the market. What I mean by this is having our investors fully jump back into the market. Right now, they are only back for A+ paper and are not paying the premiums they once were. As things stand currently, we are still retaining most of our production as we can’t just pool below A+ paper.

We are also hopeful early in 2021 we can get back into doing Jumbos in house, get back to doing Chenoa, and hopefully add a few more DPA programs. The biggest hold up for Jumbos and Chenoa is forbearance. Until we get to the point where borrowers can’t immediately apply for forbearance once a loan closes, it makes it very hard to bring these programs back. Jumbos and Chenoa loans are not saleable once they enter forbearance and can become repurchases if they enter Forbearance too soon after sale. That is a lot of risk to take on, especially when dealing with large loan balances for Jumbos.

Keep Grinding

Most of you have had incredible years. Every time I pull numbers, I am in awe of some of the locked pipelines you all are carrying. Typically, we are entering our slow period for the mortgage industry but this year seems like we might skip past that or have a very brief chance for air. Keep on grinding to the best of your ability. We have all been at this since the start of the year and are in this together. 2020 will be our best year for VanDyk Mortgage, let’s see if 2021 can top it.

Wishing you all a great Holiday season and end of year.

Brad Chatel
Secondary Manager

Secondary Commentary: Rates are Falling

Before you read any further, I want to premise with the fact that this is an opinion, MY OPINION, and the intention of it is to help you form an opinion.  I don’t have a crystal ball, no direct line to Mr. Powell or Mr. Trump, no insider info, and no magic tweeting power (looking at you Trump) or even know how to tweet.  I can’t tell you what is going to happen in 2020 with rates. I can however tell you what happened so far this year and things to be on the lookout for.

What a Start to 2020

Below is a chart of the UMBS market 3 Coupon from 01/01/2020-02/27/2020. As the chart below shows, we have seen a quick push to higher MBS prices, which translates to lower rates.  The year started at 101*13 and as of late 02/27 was at 102*16.  So we are looking at a 35/32nds move.  That can equate to roughly .25-.375% lower rates.  While that is a large movement, that hasn’t been the biggest driver of the recent rate improvement. The 2.5 Coupon is the biggest driver of that (see below).

Below is a chart of the UMBS market 2.5 Coupon from 01/01/2020-02/27/2020. As the chart below shows, we have seen a quick push to higher MBS prices, which translates to lower rates.  The 2.5coupon started the year at 98*28 and is currently is at 101*06 as of late afternoon on 02/27.  That is a 74/32nds rally in a 2 month span.  That can equate to roughly .5-.625% drop in rates.  The 2.5 coupon is what pricing is based on for the lower end of the rate spectrum (2.75-3.5/3.625).

WTF – Why the Fall…in rates

Some of you may remember this statement from the 2019 Year-End Secondary Commentary:

The general consensus from the Fed seems to be that they will leave the funds rate alone through 2020 unless something major happens domestically or abroad. 

Coronavirus is the “something major” that has caused rates to plummet to near all-time lows.  There is increasing fear that the coronavirus is going to not only impact China’s economy, but the world economy as well.  Each day that goes by, more numbers come out about who has the virus and where they are located.  As the virus continues to spread, global economies have jumped ship on “risky” assets (stocks) and pushed money into safe haven assets (like US treasuries). This is why the 10 year US treasury is at its all-time low (as of 02/27).

Coronavirus is the main reason for the fall in interest rates, but there are still other factors at play as well.  The Democratic primary continues to rage on, and there is increasing beliefs that the candidate of choice will be more social… “fiscally liberal” than ever before.  This could be seen as bad news for stocks after 4 years of a President who worked to increase the stock market with his policies. The other piece of data that is driving the push down in rates just happens to be corporate data.  Corporate earnings have been coming out to start the year and so far, those earnings have not been as good as anticipated.

How Far Will We Fall?

If I knew the answer to this, I would not be writing this commentary.  Rates are at or near historical lows. The 10-year and 30-year treasuries are also historically low.  If coronavirus continues to spread and is officially labeled a pandemic (could argue it already is), then we could see rates fall even further. The market, meaning MBS investors and our aggregators, is still trying to wrap its head around the drastic rate fall.  They likely are not pushing through all of the gains they are seeing in the market, as they are fighting off incredibly high pre-pay speeds as lenders storm ahead with refinancing databases.  I personally am of the belief that we are at (or near) the bottom of where rates can go.

Below is a chart of where rates have been, on or around February 25 for the past 10 years.  While I think there is room for rates to go even lower, I wouldn’t bank on it.  I firmly believe there is much more downside risk to floating than there is upside potential.  Locking in the mid to lower 3s is incredible – many thought we would never see this again after 2016.

Things to Monitor

Continue to monitor the coronavirus and the global impact it is having.  We also need to be on the lookout for how the Fed will respond to the virus.  With the fear of a global slowdown increasing as the virus spreads, some are thinking that the Fed may be forced to lower their rate target faster than expected.  This could potentially turn what seems to be a neutral Fed to a Dovish Fed.

We also need to keep a close eye on the Democratic primary and the general election.  Super Tuesday is next week, and we should start to see the field narrow after that.  The slimmed-down field should give us the opportunity to learn more about the fiscal policies from the Democratic side.  If there is a more liberal view in the policies, this could have an impact on the markets.

Keep Grinding

Typically the industry is “slower” in the 1^st quarter, but this year has not been slow.  I’m not sure that anyone even had a chance to come up for a breath of fresh air this year.  We are seeing record numbers of applications, and our pipelines are swelling.  It’s hard to complain when we have been given a great opportunity to help so many borrowers get low interest rates.  Keep on grinding and let’s make 2020 the best year yet.

Thanks and Happy Month End,

Brad Chatel
Secondary Manager

Before you read any further, I want to preface with the fact that this is an opinion, MY OPINION, and the intention of it is to help you form an opinion.  I don’t have a crystal ball, no direct line to Mr. Powell or Mr. Trump, no insider info, and no magic tweeting power (looking at you Trump) or even know how to tweet.  I can’t tell you what is going to happen in 2020 with rates.  However, I can tell you what happened in 2019, and what the current expectations are for 2020 in hopes that you can make more informed decisions, and have more educated conversations with your borrowers and realtor relationships.

2019

Below is a chart of the UMBS market 3 Coupon from 01/01/2019-12/10/2019. As the chart below shows, we have seen a trend of higher UMBS prices which translates to lower interest rates.  We started the year about 4pts lower on the UMBS 3 coupon market than we sit today.  4pts equates to roughly .625-1.00% in lower rates than we were quoting in January.  This was a pretty gradual rally that didn’t hit its real strides until the end of Q2.

Since 7/2, we have been hovering in a really nice resistance band on the UMBS market.  The low was reached on 9/13 at 100*17 and the high was reached on 9/4 at 102*04.  Outside of the high and lows, we have been mostly in the range of 100*24 and 101*16.  While that is a 24/32nds difference, it has allowed for some stability in the market.  We have seen the ups and downs as usual, but the last 6 months or so have been really resistant to move to much higher rates or much lower rates.

Fed Changes Course

If you review my 2018 EOY commentary, it was widely expected that 2019 would see rates in the 5s with the FED continuing to increase the Fed funds rate.  In a reversal of course, the Fed actually began reducing the fed funds rate effective on 7/31 and proceeded to reduce 2 more times throughout 2019.

The Fed cautioned against a slowing global economy along with global trade tensions as a primary reason for their reversal.  They proceeded to state that domestic data remained strong and the idea of the economic expansion period in the US ending was not an immediate risk.

As expected, the Federal Reserve left rates unchanged on 12/12/19, stating that depending on major global developments or substantial shifts in inflation, it will remain on hold. The general consensus from the Fed seems to be that they will leave the funds rate alone through 2020 unless something major happens domestically or abroad.  In Fed Chair Powell’s statement, he made it sound as if the Fed is going to keep the funds rate low a little longer to keep inflation higher to maintain a strong economy.

Don’t Call it a Comeback – Refinances

Just when everyone thought the refinance boom was over, the market took a 180 turn and decided to toss the industry a bone.  Most loans closed in 2018-early 2019 quickly became eligible for a refinance with the rally we saw to start 2019.  There were several companies on the verge of acquisition or closure that quickly realized an opportunity and pounced.  Several branches here capitalized as well and saw a production increase due to past clients.

While we are a purchase-centric company and never want to take our eyes off our bread and butter, we do realize that our past clients will be solicited whether it is by us or someone else.  Should you have excess capacity or want to supplement a pipeline that is struggling with the slower months, this may be an opportunity.  If you want us to scrub your pipeline for possible refi leads, please let me know.  I will gladly run a pipeline report for you.

2020

Interest rate outlook

I don’t have a crystal ball to predict what rates will do in 2020 – if I did, I probably wouldn’t be writing this commentary.  I can say that the FED turned Dovish in 2019 and I do not see that changing back to Hawkish any time in 2020.  The FED has made it pretty clear they are taking both the global economy and trade tensions into consideration.  Until we start to see stronger data from the Global economy and eased trade tensions, I don’t see the FED moving off their Dovish stance.

I think 2020 will remain a very strong interest rate environment.  What does very strong mean?  Likely in the 4s for most of 2020.  The FED seems to be in a holding pattern in terms of their economic policy, and unless something major happens on the global stage or domestically, they appear to be riding their current policy through November’s election.

Have the locking conversation early and often with your borrowers.  While we have been operating with some pretty concrete upper and lower bounds on the UMBS market, we are still seeing the swaying between the bounds.  We feel there is much more downside risk in the current rate market than there is upside risk.  One day, trade talks may come out positive causing the market to react negatively, and one week later we could have the complete opposite happen.  Could a rally into the mid to low 3s happen, sure, but so could a quick turn into the high 4s or even 5s.  We don’t have a way to protect against the downside risk, we do however have a way to protect against the upside risk – that being the renegotiation policy after locking.  While it is only to be used to save a deal, if push comes to shove it should allow you to keep a borrower happy if rates improve drastically.

Election year

One thing to keep on the back burner is that 2020 is an election year.  Election years tend to be relatively quiet in terms of sweeping policy changes.  The FED will also likely try to skate through the election year without pushing too many economic buttons unless completely necessary.  As election time comes, it will be important to have the lock button near.  When President Trump was elected, we saw some very drastic market swings.  You can likely expect the same if we see a change to a Democrat elected.

Opportunities

The market handed us a nice rate environment to end 2019.  It is on us as a company and industry to capitalize on this while it lasts.  No one can predict how long this low rate environment will be around.  If we take advantage, we all should have an extremely successful start to 2020.

To 2020

I truly believe this is a year to take advantage of the still historically low rates.  We are expecting to see a strong purchase market, and refinance opportunities will be there to supplement as well.  We have so many great tools at our disposal here at VanDyk – I believe we are well positioned to seize the opportunity that 2020 is providing us.

I hope everyone has a Happy New Year.  Looking forward to a strong and successful 2020.

Brad Chatel
Secondary Manager