1.4.24 Don't Predict Rates; STRATMOR Group's Garth Graham on Industry Forecasts; Hawkish FOMC Minutes

Thanks to the STRATMOR Group, the data-driven mortgage advisory. At STRATMOR, insights and knowledge are applied to guide mortgage clients to make sound strategic decisions and take actions that improve their success. 

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“My dad always said to me, ‘Work until your bank account looks like a phone number’ so I did. Account balance: $9.11.” You can work harder, or you can work smarter. (I have severe doubts about the validity of this clip; it gave me the willies watching it.) Swimming is certainly a competitive sport. Do you have competitors? Most businesses do. Which is a reason that hotels offer free ice, thanks to a hotel chain that began in Memphis, TN. If the Mortgage Bankers Association is right, and volume does pick up some in 2024, that doesn’t mean the competition to do that business is going to go away. Numbers game. 5 calls, 25 a week, one closed loan $4k, two loans $8k. At these rates, less competition. If rates come down, competition for inventory just increases. (Today’s podcast can be found here, and this week’s is sponsored by the STRATMOR Group, the data-driven mortgage advisory. At STRATMOR, insights and knowledge are applied to guide mortgage clients to make sound strategic decisions and take actions that improve their success. Hear an interview with the STRATMOR Group’s Garth Graham on if industry forecasts for a better market should lead to industry optimism.)

Employment & transitions

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It’s a new year and Merchants Bank, is off and running, continuing to leverage its diversified business model to grow market share and assist Merchant’s lending partners. Merchants Bank’s Correspondent channel, offering Non-Delegated and Delegated options, recently hired Liberty Tribe as Sales Executive to help grow TX and the Mid South Region. Liberty along with Dan Hastings, CMB, AMP cover the Mid-South (TX, LA, AR, MO, OK, KS). In addition, Merchants is expanding its Financial Institutions channel by adding a Mini-Correspondent offering to their TPO Wholesale platform. If you are interested in learning more, contact Rob Wilson. On the Retail front, Merchants Bank continues to grow there as well and if you are looking for stability, support and products, they want to hear from you. Contact Ron Berry for more information. Their LO centric platform along with the strength and balance sheet of the bank allows them to expand market share in their regional markets. 

Planet Home Lending’s new Vice President, Construction Sales Melony Harpe is paving the way for Planet MLOs to increase their construction loan volume in 2024. Interested in building your construction business? Join Planet and you’ll have support for calls with builders, resolving construction issues, and educating stakeholders. “I want MLOs and retail branches to feel confident and supported in their construction lending efforts,” Harpe said. “My role is to give MLOs the tools and resources needed to navigate the complexities of construction lending and expand their connections with builders.” To lay the foundation for a better 2024, contact VP of Talent Peter Briggs or 949-202-8213; all inquiries will be held in strict confidence.

Broker and lender programs and software

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Servicers know how much work it takes to release a lien once a mortgage has been paid off. That’s why they’re turning to the new Automated Lien ReleaseSM (ALR) capability in the ICE MSP® servicing system to help lighten the load at the end of a loan. ALR combines document creation and automated workflows to streamline the lien release process. It helps with eSigning and eRecording where available (and prints the release package for wet sign where it’s not) to help servicers cut through the delays and release liens faster. Read the press release to see how you can start releasing fully paid liens in days instead of weeks.

Truv is now an approved third-party service provider supporting Freddie Mac Loan Product Advisor® asset and income modeler (AIM) Revolution Mortgage estimates that they can save up to $20,000 in cost on verifications with TRUV over competitors. "Let's talk about our documentation costs and those giant monopolies that are out there and laughing at customers and increasing prices because they have a particular monopoly. You want to lower your manufacturing costs” said Femi Ayi, EVP Operations. Contact TRUV today to discuss how we can help you with your income, employment, insurance, and asset verifications. Come join us!

Be wary of relying on interest rate predictions

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I am asked all the time, “Hey Rob, where do you think rates will be in six months?” My answer, after I say that I can’t even predict where I’m going to have lunch tomorrow, is always the same, “Higher, or lower, or possibly the same.” Or sure, one can have a prediction until a ship becomes stuck in the Suez Canal, a ship is attacked in the Red Sea, or a pandemic occurs. A recent STRATMOR blog is titled, “Interest Rates are Like the Weather? Or Like Signs of the Zodiac?”

The interest rate markets have a way of humbling almost all the ‘experts’ and the very first thing you learn in Secondary Marketing is that you shouldn’t take a view on where rates are headed because half the time, you’re wrong anyway. In Q4 of 2022 the arm-chair prognosticators were predicting that we’d see rates come down by the end of 2023. After reaching a peak in October, Treasury rates did come down to where they were at the beginning of 2023. But mortgage rates were well into the 7 percent range.

The Federal Reserve, in its attempts to control inflation and cool a very strong economy, raised fed funds several times in 2023. Throughout the year, however, we heard, inside the world of mortgage banking, opinions expressed that rates will not only come down, but when to expect this to happen. Based upon what data, one should ask, are their views speculative, biased, or just hopeful?

I would challenge these prognosticators as to the reasons why mortgage rates are positioned to fall. What leads them to predict that? I’m sure some opinions are based on fundamentals: Fed raises rates to control inflation, money is taken out of the economy, the economy cools, Fed cuts rates, and mortgages come down to some predicted level. A lot of the predictions I see are not rooted in actuality, but rather rooted in exuberance for mortgage banking.

In the summer of 2023, little of the macro data even hinted at a reduction of short-term interest rates. Inflation, which has been grinding lower, was a tad north of 4 percent with the Federal Reserve’s target set at 2 percent. Economists have modeled that unemployment would need to reach as high as 7 percent in order for inflation to come down to 2 percent… Not a pretty picture. Remember, when an economy ‘slows’ jobs are not created, historically they’re lost.

The Fed was relatively “hawkish” in its monetary policy for the remainder of 2023 until the end. Anyone predicting where interest rates will be in the future would need to start by predicting where the Federal Funds rate NEEDS to be in order to see inflation that’s appealing to the Fed, and then ultimately, HOW LONG rates needs to remain there; when is it warranted to reduce borrowing rates under recessionary fears? These are two almost impossible questions to answer since the number of variables that you need to get right, coupled with unpredictable world events, play such a strong role in forecasting interest rates.

A year from now, rates will either be higher, lower or the same. So, focus on your products and services!

Capital markets: Don’t fight the Fed

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Ever wondered how to hedge a mortgage pipeline? Hedging one’s mortgage pipeline typically produces the greatest return over long-term macroeconomic cycles, which is why it is considered an essential step in the growth of a mortgage lender. In MCT’s whitepaper, Mortgage Pipeline Hedging 101, their experts explain what hedging is and why it is a valuable strategy for maximizing profitability in the secondary market. The whitepaper also reviews information on moving to mandatory loan sales, the strategy of hedging, the benefits of hedging, and how to determine if you are ready. Download the whitepaper or join MCT’s newsletter for upcoming releases.

Turning to interest rates, what’s that you say? Markets have gotten ahead of the Fed again? Gasp! Yes, markets aren’t looking all that cheerful in the new year. I don’t put much opinion in here, but I’d say it’s because of investors' own doing. The added potential for interest rates to stay high for some time is forcing investors to continue to unwind optimistic trades placed in late 2023. The Federal Reserve's policy makers poured water on predictions of early 2024 interest rate cuts, revealed the minutes from the most recent Federal Open Market Committee meeting, with several voting members seeing the potential for the fed funds rate range to stay at a peak level for longer than the market expects.

Policymakers did acknowledge that we are probably at the peak of rates and that projections show cuts by year-end. Richmond Fed President Barkin cautioned that the potential for more rate hikes remains alive, called a soft landing “increasingly conceivable but in no way inevitable,” and added that any decision on a March cut is a “long way away.” Staff projections point to rate cuts by the end of 2024, but officials do not seem to be supportive of a series of cuts at this time.

The minutes from the Federal Open Market Committee meeting hinted at hard landing concerns amongst board members while recognizing that they could “face a tradeoff between its dual-mandate goals in the period ahead.” Fortunately, there were more indications of optimism about inflation, which is supported by the latest jobs data showing cooling.

U.S. job openings fell in November to 8.79 million in November, the lowest level since early 2021 as fewer workers voluntarily quit and the number of hires fell. People who voluntarily left their jobs as a share of total employment fell to the lowest point since September 2020, signifying that Americans are feeling less confident in their ability to find new jobs or better paying jobs in the current market.

Separately, we also learned yesterday that the December ISM Manufacturing PMI indicated an ongoing contraction in the manufacturing sector, but at a slower pace than the previous month. December marked the 14th straight month the PMI reading has been in contractionary territory. The report was not devoid of good market news, as the Prices Index reflected a further easing of inflation pressures.

Today’s calendar sees some early labor market indicators ahead of tomorrow’s payrolls report. Markets have already received December job cuts from Challenger, Gray & Christmas (34,817 cuts in December, down 24 percent from the 45,510 cuts announced in November) as well as ADP employment for November (164k, higher than expected), and initial (202k, down from 218k) and continued (1.855 million) jobless claims. Later today brings the final December S&P Global services PMI, Treasury announcing the details of next week’s mini-Refunding (consisting of $52 billion 3-year notes, $37 billion reopened 10-year notes, and $21 billion 30-year bonds), and Freddie Mac’s Primary Mortgage Market Survey. We begin the day with Agency MBS prices worse .125-.250, the 10-year yielding 3.98 after closing yesterday at 3.91 percent, and the 2-year at 4.36 after a spate of employment data.

The Louisiana Land Title Legend!

A New Orleans lawyer sought an FHA (Federal Housing Administration) loan for a client.

He was told the loan would be granted if he could prove satisfactory title to a parcel of property being offered as collateral. The title to the property dated back to 1803, which took the lawyer three months to track down. After sending the information to the FHA, he received the following reply:

“Upon review of your letter adjoining your client’s loan application, we note that the request is supported by an Abstract of Title. While we compliment the able manner in which you have prepared and presented the application, we must point out that you have only cleared title to the proposed collateral back to 1803. Before final approval can be accorded, it will be necessary to clear the title back to its origin.”

Annoyed, the lawyer responded as follows:

“Your letter regarding title in Case No. 189156 has been received. I note that you wish to have title extended further than the 220 years covered by the present application. I was unaware that any educated person in this country, particularly those working in the property area, would not know that Louisiana was purchased by the U.S. from France in 1803, the year of origin identified in our application.

For the edification of uninformed FHA bureaucrats, the title to the land prior to U.S. ownership was obtained from France, which had acquired it by Right of Conquest from Spain. The land came into possession of Spain by Right of Discovery made in the year 1492 by a sea captain named Christopher Columbus, who had been granted the privilege of seeking a new route to India by the then reigning monarch, Isabelle.

The good Queen, being a pious woman and careful about titles, almost as much as the FHA, took the precaution of securing the blessing of the Pope before she sold her jewels to fund Columbus’ expedition. Now the Pope, as I’m sure you know, is the emissary of Jesus Christ, the Son of God. And God, it is commonly accepted, created this world.

Therefore, I believe it is safe to presume that He also made that part of the world called Louisiana. He, therefore, would be the owner of origin. I hope to hell you find His original claim to be satisfactory. Now, may we have our damn loan?”

They got it.

Visit www.robchrisman.com for more information on our industry partners, access archived commentaries, or to subscribe to the Daily Mortgage News and Commentary. If you’re interested, visit my periodic blog at the STRATMOR Group web site. STRATMOR’s current blog is titled, “How Treasury Auctions Influence Mortgage Rates”. The Commentary’s podcast is live and at any place you obtain your podcasts (like Apple or Spotify).

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