Let's Talk Loans - Vol. 71

Welcome back to Let's Talk Loans. I would like to thank the now 13k+ followers and the nearly 6.5k subscribers of this newsletter. Great stuff and I very much appreciate the feedback, engagement and success this platform has provided. Fresh off a week in Philly for MBA Annual. I thought I might share a few thoughts and themes from the conference. Next up is SFIG East / Miami. Certainly in the full throws of travel and conference season. Getting right too it!

Very much enjoyed my trip to Philadelphia for the MBA's annual convention. Each year, the mortgage industry comes together to talk about the highs and the lows of what's working in and around the mortgage market.

I went back to my post on this conference last year and grabbed a quote:

"On to the "theme". I've wrestled with this. Words I would use. "Concern", "Angst", "Nervousness". Fear is too strong but there were elements of that. You have a number of entities who are originators of mortgages and are witnessing a significant drop in mortgage volumes and horrendous pricing."

I'm reminded of the 5 stages of grief when I think about this conference. Last year we were somewhere in between stages 1 and 2. It was more shock and awe ("denial") at just how fast rates had run away from us. As we progressed through the stages by early 2023 we were firmly in stage 3. Bargaining as it comes to price. "Will you buy my 3% mortgage at par?" The answer was no but the quick follow up question was "How about 98?" The answer was still no. We could never get to the 80 dollar price the market demanded, and the trading volumes cratered.

I was expecting to walk into stage 4 this year in Philly but was pleasantly surprised to find ourselves closer to acceptance than depression. There was even a bit of optimism in the air as it relates to the psychology of the consumer. As we looked at late 2022, many consumers were convinced that rates were going to decline, so they were on the sidelines, refi's fell off a cliff and purchase money slowed. Today, consumers are resigned to the fact that rates will stay higher for longer and they are willing to act now and buy the home they want when they can find it - even at the higher rate. "Love the home, date the rate." That should lead to higher activity and purchase volume.

The mortgage forecast is starting to reflect that. The MBA projects that both count and volume should increase roughly 20% in 2024. We also recently saw an ever so slight uptick in origination volumes in Q2-Q3. It's subtle but it's not a freefall anymore.

The panel I was fortunate to moderate consisted of Kurt Johnson from Mr. Cooper , Jay Plum from Fifth Third Bank , and Becky Crain, CPA, CMB from Regions Bank . The discussion surrounded the new capital rules being proposed for those institutions north of $100bn in assets. specifically the impact to MSRs, CRA, mortgage originations, etc.

Some depositories have already backed away from investing in servicing rights for other reasons, which could contribute to downward pressure on MSR prices, noted Jay Plum, executive vice president and head of mortgage at Fifth Third Bank.

The conclusion was that much of this was going to be passed onto the consumer in the form of higher rates. It would also further push the mortgage business out of the depository space and more to the non-banks. It could create some opportunity for regional and community banks, particularly for those portfolio and relationship based products.

Shifting over to rates. The onslaught continues. We've been dancing around a 5% 10-year this week on the news of a continued strong economy. As of this writing, the 2-year has ticked down 6bps to a 5.09% and the 10-year is settling around 4.90%. Volatility remains alive and well with the 10-year having been 4.61% on October 11th.

Perhaps a chance to cheer and celebrate what I think is a significant reason that rates have come off this weeks highs. Chair Powell came out and teased us that we're done. Mission accomplished. The next meeting will be another skip / pause. That the market has done his job for him with the recent run up in rates.

“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said in prepared remarks for a Thursday lunchtime address in New York. “Incoming data over recent months show ongoing progress toward both” of the Fed’s goals to maintain stable inflation and strong employment"

“We have to let this play out and watch it, but for now, it is clearly a tightening in financial conditions,” Powell said. The whole point of raising interest rates is to “affect financial conditions, and higher bond rates are producing tighter financial conditions right now.”

Continuing the theme of optimism in the conversation. Economists are turning increasingly positive on our chances of dodging a recession.

"Fueling the optimism are three key factors: inflation continuing to decline, a Federal Reserve that is done raising interest rates, and a robust labor market and economic growth that have outperformed expectations"

Giving a quick look at credit. TransUnion just released their consumer credit industry snapshot. Their comments point to a consistent theme of the consumer bending, not breaking. As you study the numbers, you see where the delinquencies are and are not. While the commentary makes the statement "Delinquency increased within each metric across all products", the increases are far from uniform as you study the credit tiers. The best credits for cards, autos, unsecured, the super prime and prime plus (720+) segments, are experiencing next to zero delinquencies. Prime sees a slight uptick (10-20bps) but still historically low. Near prime (601-600) is where the delinquencies start to become meaningful and subprime is clearly on the rise. This is largely where the concerns reside today.

Lastly, was thrilled to do another round with Nathan Stovall and Jack Farley on Forward Guidance. Find it on YouTube or Apple. If you're looking for a deep dive into banking, recent earnings news, deposits, lending, trading - this was a great conversation.

See you in Miami! Have a great weekend!

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