WHY THE HIGHEST NOTE RATES ARE BARELY PRICING AT PAR

Boca Raton, Florida

Mortgage originators competing for what little mortgage production exists in this October 2022 market are struggling to understand why they cannot earn yield spread premium on the higher note rates offered by investors. With interest rates at a 27-year high, borrowers can now expect to pay 2-3% in discount fees for a rate in the 7s. The double whammy is in full effect – higher monthly payments and thousands of additional dollars in closing costs. But why?

The Agency and Private Label MBS markets are facing major headwinds due to a limited amount of liquidity in capital markets, causing interest rates to jump well north of the historical spreads over 10-Year Treasuries. The big buyers of these bonds, mainly the Fed, have pulled back their purchasing causing MBS prices to tank and yields to soar. The result: discounted prices for bond investors and significantly higher interest rates for borrowers. So how is this impacting yield spread premium? Many of our readers know the two main drivers of prices associated with mortgage note rates are bond prices and mortgage servicing (MSR) values. ?

Currently, Agency MBS coupons with the greatest liquidity are trading at 102-102.500 prices and with rates in the 7s, MSRs are pretty much non-existent (zero). How long does anyone think a 7% note rate will remain on the books? Go back just a year ago and MSRs on note rates in the 2s were trading at 4-6 times the annual servicing yield of .250% (100-150bps). And for good reason. Certainly no one is refinancing out of a rate less than 4% any time soon, so the “MSR duration bet” from last year seems to be paying off for a lot of the largest servicing aggregators. So for now, the 102-102.500 is about as much premium as the MBS issuers are realizing in their GOS.

Originators looking for yield spread premium are going to have a tough time finding it for a while. With MSR values contributing literally zero to the highest note rate prices and the overhang of lender expenses contributing to the application of heavy lender margins, the result does not yield much premium for originators.

So what is the solution?

Getting closest to the end take out is always the best way optimize your opportunities when it comes to getting the best pricing. And while many of the big box retail lenders retain servicing and exit the mortgage asset via securitization, the amount of expense overhang and heavy margins they apply to an originators rate sheet is incredibly prohibitive for production growth. If you are working for one of these big box retailers I am sure we don’t need to remind you how “out of the market” your pricing likely is.

Dare to compare?

Loan House is a tech-based, national mortgage lender that has developed one of the only “originator-to-end investor” direct pricing models. Originators access all of Loan House’s correspondent investors and price their loans on a best-execution basis, giving them opportunities to capitalize on the volatility in the secondary mortgage markets. There are no margins baked in – this is a 100% transparent execution.

If you’re interest in learning more about Loan House, please visit https://LoanHouseUSA.com or email us at [email protected]. ????