7.9.26 Housing Demand; FTI Consulting’s Creighton Oswald on Capital Requirements; Higher For Longer?

Today’s episode includes a discussion on housing demand versus supply. Plus, Robbie interviews with FTI Consulting’s Creighton Oswald on how if capital treatment becomes more favorable, increased competition could drive aggressive pricing that benefits independent mortgage banks and borrowers while further compressing margins for warehouse lenders. And we close with a debate over if we are back in the "higher for longer" inflation environment.

This week’s podcasts are sponsored by FICO. As the industry's most predictive credit score, FICO Score 10T combines proven performance with deeper insight into borrower behavior to help support a stronger and more resilient housing finance system.

The Chrisman Commentary is your go-to daily mortgage news podcast, where industry insights meet expert analysis. Hosted by Robbie Chrisman, this podcast delivers the latest updates on mortgage rates, capital markets, and the forces shaping the housing finance landscape. Whether you're a seasoned professional or just looking to stay informed, you'll get clear, concise breakdowns of market trends and economic shifts that impact the mortgage world.

Transcript

Speaker 1 0:03

Welcome to the Chrisman Commentary, Daily Mortgage News Podcast. I'm your host, Robbie Chrisman. Topics on today's episode include the demand for housing, are we back in the inflation higher for longer environment? And my interview with FTI Consulting's Creighton Oswald on how if capital treatment becomes more favorable, increased competition could drive aggressive pricing that benefits independent mortgage banks and borrowers while further compressing margins for warehouse lenders. Here, take a listen, do a little preview.

Speaker 2 0:33

If I'm an originator listening to this interview today and I hear capital requirements, liquidity, the warehouse, why do I care about all this? How does this impact me on the origination side of things?

Speaker 0:45

If you are an originator for an independent mortgage banker, an independent mortgage banker relies on warehouse facility credit in order to fund the loans that you're originating. If that liquidity goes away, if those lines of credit become more expensive because of capital requirements, then that will translate into higher pricing at the street level for you and what you're offering to borrowers.

Speaker 2 1:15

In a market where every loan counts, FICO score 10T lets lenders say yes to more borrowers without added risk. As the industry's most predictive credit score, FICO score 10T combines proven performance with deeper insight into borrower behavior to help support a stronger and more resilient housing finance system. FICO has set the standard for decades, and I'm grateful for their support of today's podcast and the conversations that help bring mortgage professionals together.

Speaker 1 1:43

The Mortgage Bankers Association just released a white paper that argues any housing shortages could invert within the next decade, and that the reversal carries direct consequences for mortgage brokers and loan officers. It projects that housing supply could expand by 10.6 million to 14.6 million units between 2026 and 2035. If US fertility is dropping and immigration numbers are going down, has the problem shifted from a lack of supply to a lack of demand for housing? What about when President Trump called all the top 15 home builder CEOs in for a meeting earlier this year and explicitly threatened to either start more homes or prepare for changes you won't like in the housing finance system? Pay attention out there. One thing I'm paying attention to is the repercussions and spawn of mergers and acquisitions. Companies continue to pursue the vertical integration or customer for life strategy, and with it come various offshoots. For example, Nexa has been involved in its share of MA lately, and Mike Cortis, founder and CEO of Nexa, has launched EvoLend, a new mortgage servicing company designed to help loan officers stay connected with borrowers after closing and turn servicing into a borrower retention tool rather than simply a back office function. EvoLend has received approvals to service loans backed by Fannie, Freddie, and Jenny, and was created to address a long-standing challenge for mortgage originators, losing visibility into borrowers once servicing is transferred after funding. Separately, Synergy One and American Pacific recently made news, and now New Res announced a strategic transition of the New Res distributed retail business to support long-term growth and organizational focus. Synergy One, a division of APM, will bring in New Res' distributed retail operations, building on its existing relationship with New Res and further strengthening its purpose-built retail platform. The move further advances Synergy One's purpose-built retail platform following its merger with American Pacific Mortgage last month, increasing its national retail footprint and enhancing its position as a scaled retail lender. For New Res, the transition reflects a strategic decision to concentrate its capital and resources on a retail presence consisting of joint venture partnerships and development of its localized New Res direct strategy. Shifting to rates, treasury yields rose sharply yesterday, particularly at the front of the yield curve as the global bond sell-off, fueled by higher oil prices and renewed inflation concerns due to renewed attacks involving Iran, pushed the two-year yield near its highest level since February 2025 and the 10-year yield to its highest since late May. Investors remain cautious that persistent energy-driven inflation could prompt the Federal Reserve to keep interest rates higher for longer, putting additional upward pressure on bond yields. While crude remains below the 100-plus levels per barrel that would pose a more significant inflation threat, markets are increasingly concerned that a prolonged disruption could delay the expected decline in inflation, reducing the importance of near-term economic data, and placing greater emphasis on energy prices and the Fed's reaction. With treasury supply, elevated policy uncertainty, and concerns about persistent inflation all contributing to upward pressure on yields, the bond market is likely to remain volatile in the near term. Investors closely scrutinized the June FOMC minutes that were released yesterday for clues about Chair Walsh's policy framework after the Fed's recent move away from explicit forward guidance, though geopolitical developments may have already overtaken parts of the discussion. The minutes reinforced a cautious, inflation-focused Fed, with officials unanimously holding rates steady while emphasizing that inflation remains too high despite a resilient economy and staple labor market. Participants viewed risks to inflation, such as energy costs, tariffs, AI-driven demand, etc., as skewed to the upside and supported removing forward guidance from the policy statement to provide greater flexibility, signaling that future rate decisions will depend heavily on incoming data. Although most policymakers still expect inflation to gradually ease, there was a willingness to keep rates elevated for longer or even tighten further if inflation proves more persistent. Your takeaway? Markets remain focused on upcoming inflation data for clues on the timing of the Fed's next move. For today's interview, I wanted to welcome to the show FTI Consulting's Creighton Oswald to talk about how, if capital treatment becomes more favorable, increased competition could drive aggressive pricing that benefits independent mortgage banks and borrowers while further compressing margins for warehouse lenders. He has more than three decades of experience in mortgage and consumer lending, capital markets, risk, and regulatory compliance. Over the span of his career, he's helped lead several de novo corporate lending and servicing startups inside U.S. federally regulated financial institutions. He's also coordinated major business transitions and restructuring operations missions, both in the United States and abroad.

Speaker 2 7:00

Let's start by laying the background of Basel a little bit because Basel requirements came from the Basel Accords, international regulatory standards for banks, and they dictate minimum capital, liquidity, and leverage ratios to protect institutions against financial and economic shocks. Could you provide a little more rationale behind why it exists and how it pertains to the mortgage industry and why it's of high pertinence currently, why there's a lot of discussion going on around it?

Speaker 7:32

Absolutely. So I think the first part of your question, in terms of why it exists, it's actually existed for quite a long time. We saw some pretty dramatic changes to the Basel set of regulations after the great financial crisis. And I think from that point forward, circa 2013, there has been quite a bit of back and forth between the mortgage industry as it relates to some of the regulations under the guidelines for Basel. Second part of your question. So in terms of why it's important now, and I think it has been important, you know, really since the last draft of the final proposal endgame was put in play, you know, certainly from a mortgage perspective, the industry saw a lot of problematic language in that guidance. And so there's been quite a bit of advocacy around helping to put evidence in front of Basil as to why some of the things that they have proposed need to change. So the most recent proposal actually is quite more favorable from an industry perspective, although there are certainly aspects to it that are of top of mind and concerning to practitioners, particularly in the area of warehouse facilities and mortgage servicing.

Speaker 2 8:50

What was included in the latest proposal? I know the comment period just ended. So I guess in addition to what was included in the proposal, what was some of the chatter surrounding it in terms of what people were commenting? And then maybe we can get to what uh I don't want to ask, keep asking multi-part questions. I'll ask what you think will be the results of the comment period later. But what was the latest proposal and what what do you feel like comments were surrounding it?

Speaker 9:10

Yep. So I think in the uh the comments period, as you mentioned, ended on June 18th. And so now we are waiting to hear back from Basil in terms of you know what they uh what after they digest what industry has provided back to them. From a mortgage perspective, there's really there's really three areas that are our material for us. And I guess we could start with servicing. The servicing changes, what's most important to remember here is although the last draft of the of the guidance from Basil does eliminate the requirement to remove MSAs from core capital CET1, that really doesn't move the needle for the banks. What really will have would have an impact potentially for banks in terms of jumping back into mortgage servicing would be a reduction in the risk weight for the mortgage servicing assets, which, as most of us are aware, sits at 250%. It has sat at 250% since 2013. It was actually prior to the GFC and prior to that move at 100%. And what industry would like to see is a reversion back to that lower level. There's a lot of empirical evidence that has been provided back to Basil in terms of the asset itself, how it's performed, the changes in everything that we do from a risk and controls perspective in the industry, the fact that the asset now there's a lot of uh momentum and has been for some time around hedging the asset, which of course, you know, helps to mitigate volatility and loss. So we're very optimistic that, you know, certainly that's a consideration that Basil should give. And the fact that, you know, the Basel uh regulations themselves were really developed at an international level. And we would all agree that the United States and our mortgage markets here are very distinct from anywhere else in the world. So the impacts just do not apply here in the United States the way that uh the way that they would in other parts of the world.

Speaker 2 11:18

As a quick side note, why are we dealing with these international banking standards based on what you just said? Why do we sign up for this?

Speaker 11:27

Well, to go back in time, you know, during the great financial crisis and and and in responses to it is it's to really to create a uniform, a uniform approach to measuring and managing risks within the financial services system, particularly within banks. And I think that that's something that as risk practitioners, we all would agree is a fantastic approach. The challenges that we have, however, are in fact the distinctions that exist in the United States. We have a very robust secondary market for transactions along MBS and PLS now in the United States. The servicing industry in this country is extremely robust. It's extremely matured. MSA, MSR assets in other parts of the world do not have the same types of servicing that we have in the United States. Most assets are served by the lenders themselves. Here we know we have an entire sub-servicing industry that's that's focused on that business. So you're really comparing apples to oranges when you when you try and align on some of these things. And I think that's where educating the Basil committee here domestically around where we should look at things differently makes makes a lot of sense.

Speaker 2 12:39

Well, hopefully we can get to apples to apples, and and that's what I would like to ask now. What do you what do you expect to arise after this comment period in terms of tangible progress forward? And what are timelines for that?

Speaker 12:52

That's a great question. So I'll start with the second part of the question, timelines. Really don't have a crystal ball around that, Robbie. And I think that you know, given the given the trajectory of what has been historically, you know, the speed with which guidance changes are are put back in front of industry for review and approval or comment has been relatively slow. But I think there's a lot of speculative optimism, maybe is the right vernacular to use around what we would hope to see from the final uh draft of the guidance, particularly in the warehouse space. Again, I believe there's a body of evidence that exists that if reviewed objectively, I think it will be hard fast for the Basel committee to not look at making some material changes to what they have in the final draft and hopefully accepting a lot of industry's recommendations, like lowering the risk weight allocation for mortgage servicing. Uh on the warehouse side, you know, the biggest thing to think about there that's concerning for folks is the expanded definition of commitment under the guidance. And that essentially puts transactions, warehouse facilities that historically did not have risk weight exposure through the uh credit conversion factor uh language now absolutely would. And so that would have a dramatic impact, could potentially have a dramatic impact on liquidity uh in the warehouse space. And as we know, warehouse lending over the last decade has exploded in volume for IMBs and actually is the IMB channel itself is responsible for originating north of 60% of all mortgages in the country. So it's a it's a it's a pivotal issue, certainly there, if Basil decides to not uh listen to to what industry has said about the lack of the overstatement of risk around warehouse lending. And I can expand on what that means and what I mean by that if you like.

Speaker 2 14:59

Well, I'm I'm listening to you, and it it sounds like there are going to be clear winners and losers here. And from discussions I had heard in the past, I had thought that capital requirements were going to be lowered, and that would mean that banks would enter back into the lending space, which we haven't seen them dominating since the early 2010s, or maybe even the end of the odds. And you're telling me that's not true. You're telling me a lot of what you see going on is is a win for IMBs rather than banks. Is that correct?

Speaker 15:25

Well, no, I I think to state it differently, depending on where things land. So let's assume that in the warehouse space, the expanded definition of commitment is exactly what they end up saying. Nope, this is going to be the rules of the road and deal with it, industry. So, what that would essentially translate into is it's going to lower the yield on the warehouse business inside of banks. And so banks generally invest and deploy capital in businesses where there are attractive yield opportunities. This would be extremely punitive in that regard. And so you could asset you could effectively see institutions move away from warehouse lending if that expanded definition is accepted. On the other hand, if it is not accepted, then you know you're still operating in the same environment that you have been. The industry wants to reduce the capital weighting for warehouse lines from 100%, which it sits at today, to 50%. And there's different, depending on the types of lines and bank regs, there's there's different metrics there. But essentially a lower risk weighting there. If that happens, fantastic. There'll be more liquidity available in the market. We already have an oversupply availability of warehouse lending commitments available now because of what production volumes look like in the space overall, volumes are lower, right? So by definition, existing lines, there's overcapacity. But if the uh if the risk weight is dropped to 50%, Robbie, then banks would be able to, existing warehouse lines of business would be able to be more competitive with their rates, uh yield positions would improve. You probably see more of like a race to the bottom. You could actually see new entrants come into the space. So if that if that part of it doesn't change, then we're still operating the way we have been, and it's really a null event. Um, it would be a good event for IMBs and for borrowers if it does change. If the commitment definition changes the way it's been articulated in the new guidance, that would be punitive for the warehouse business.

Speaker 2 17:39

Yeah. In summation here, what should people be paying attention to next? Uh, how do you how do you expect things to shake out?

Speaker 17:48

I think people should be paying very close attention to what the Basil Committee comes back with regarding their expanded definition of commitment. I would hope that given the size of the IMB lending platform in the United States, I as a practitioner would hope and would actually probably strongly argue that that definition will end up being changed. Don't have a crystal ball, but you you would be doing something extremely negative, potentially very negative, to the housing finance business in the United States by doing that. If the Basel Committee does not accept industry's recommendations around the change to the expanded definition that exists in their most recent proposed guidance, then that would be a sharp blow to liquidity in the market impacting the IMB channel, which is the most volume-producing channel in the in the space and has been since banks backed out in a big way after the GFC. The thing about the warehouse stuff is depending on the type of transaction and the language in the warehouse agreement, I mean, it's kind of amazed. It's hard to hard to talk about in generality. So I, you know, some of the numbers that I was citing, like the 100 to 50 percent, I mean, depending on on the type of line, it could go from 100 to 60, right? But the nomenclature in the space, what people are generally hearing and talking about is we want to cut that RWA in half from 100 to 50. And I was trying to show that if the 100% drops to 50 and the expanded definition goes away, that's a good thing. If the 100 goes to 50 and the expanded definition stays, that's not a good thing. It's not as a good thing. And I that that that I think is really important that that comes out, right? Um and in the servicing space, it's and I've heard you know, a lot of colleagues of mine have actually used this exact language. They've said, you know, if if we don't drop the risk weight on the servicing, it's a nothing burger. It means absolutely nothing. It won't bring the banks back into the space. IMBs don't have to be concerned. And and so it is a pretty complex piece. And it's and the reality of it is what I said about the distinctions of the U.S. market, that's where a lot of this stuff is bubbling up, and that's why it's there. And hopefully the Fed and and others will be very receptive to that.

Speaker 2 20:20

Really appreciate time. Thank you very much, Creighton. Thanks so much.

Speaker 1 20:26

There's been heavier hedging demand amid renewed geopolitical tensions and the broad bond market sell-off that triggered widespread negative for prices. In the specified pool market, trading has stayed robust, while Genie May buy-down pools continued to attract strong demand as large non-bank lenders concentrated production in MJM pools to capture favorable execution, though that concentration is expected to ease as July issuance built. Early July Ginnie May issuance is tracking modestly below last month, consistent with a gradual seasonal slowdown. Separately, June prepayment activity remained largely subdued with aggregate Fannie Mae 30-year speeds rising just 2% from the prior month despite stable mortgage rates, while the share of borrowers with a refinancing incentive fell to its lowest level since at least last November. Servicer performance continued to be the biggest differentiator across pools, with Freedom Mortgage and American leading the fastest prepayment risks rankings across multiple cohorts, while Bank of America, City, and Idaho Housing Finance Association consistently ranked among the slowest, underscoring the importance of servicer behavior, not just interest rates, and shaping prepayment risk. Today's economic calendar is already underway with weekly jobless claims, and at $215,000 as expected, and about where they've been over the last month, there are $1.814 million continuing claims. Later today brings June existing home sales data, treasury auctions that will be headlined by a sale of 30-year bonds, and comments from Dallas Fed President Logan and New York Fed President Williams. We began Thursday with agents CMBS prices, little change from Wednesday's close, the two-year yielding 4.19, and the 10-year yielding 4.58 after closing yesterday at 4.58%. Let's wrap up with a joke and some housekeeping. Wild and crazy guy you are, Ole.

Speaker 2 22:27

Thanks again for FICO for sponsoring this week's podcasts. As the industry's most predictive credit score, FICO score 10T combines proven performance with deeper insight into borrower behavior to help support a stronger and more resilient housing finance system.